Document:

EXHIBIT 4.1

 

EXECUTION COPY

 

 

 

 

INVESTOR
RIGHTS AGREEMENT

BY AND AMONG

EVOLVING SYSTEMS, INC.,

TERTIO TELECOMS GROUP LTD.

AND

THE INVESTORS LISTED HEREIN

DATED:  NOVEMBER 2, 2004

 

 

 

 

 

TABLE OF CONTENTS

 

	
  1.

  	
  Definitions

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
  Registration Rights

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  2.1.

  	
   

  	
  Demand Registrations

  	
   

  	
   

  
	
  2.2.

  	
   

  	
  Incidental Registrations

  	
   

  	
   

  
	
  2.3.

  	
   

  	
  Shelf
  Registration.

  	
   

  	
   

  
	
  2.4.

  	
   

  	
  Registration Procedures

  	
   

  	
   

  
	
  2.5.

  	
   

  	
  Payment of Expenses.

  	
   

  	
   

  
	
  2.6.

  	
   

  	
  Indemnification and Contribution

  	
   

  	
   

  
	
  2.7.

  	
   

  	
  Other Matters with Respect to
  Underwritten Offerings.

  	
   

  	
   

  
	
  2.8.

  	
   

  	
  Information by Investor.

  	
   

  	
   

  
	
  2.9.

  	
   

  	
  Effective Date and
  Termination of Registration Rights.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
  Preemptive Rights

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.1.

  	
   

  	
  Rights of Investors.

  	
   

  	
   

  
	
  3.2.

  	
   

  	
  Excluded Transactions.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
  Board of Directors

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.1.

  	
   

  	
  Series B Director.

  	
   

  	
   

  
	
  4.2.

  	
   

  	
  Designation of Series B Director.

  	
   

  	
   

  
	
  4.3.

  	
   

  	
  Observer Rights.

  	
   

  	
   

  
	
  4.4.

  	
   

  	
  Other Covenants.

  	
   

  	
   

  
	
  4.5.

  	
   

  	
  Consent Right of Investors.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
  Additional Covenants

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.1.

  	
   

  	
  Compliance with Federal Securities
  Laws.

  	
   

  	
   

  
	
  5.2.

  	
   

  	
  Other Registration Rights.

  	
   

  	
   

  
	
  5.3.

  	
   

  	
  Financial and Business Information.

  	
   

  	
   

  
	
  5.4.

  	
   

  	
  VCOC
  Rights.

  	
   

  	
   

  
	
  5.5.

  	
   

  	
  Available
  Copy.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
  Nonpublic Information

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7.

  	
  General

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7.1.

  	
   

  	
  Use of Best Efforts

  	
   

  	
   

  
	
  7.2.

  	
   

  	
  Notices

  	
   

  	
   

  
	
  7.3.

  	
   

  	
  Amendments and Waivers

  	
   

  	
   

  
	
  7.4.

  	
   

  	
  Successors and Assigns

  	
   

  	
   

  
	
  7.5.

  	
   

  	
  Governing Law; Venue; Waiver of Jury
  Trial

  	
   

  	
   

  
	
  7.6.

  	
   

  	
  Entire Agreement

  	
   

  	
   

  
	
  7.7.

  	
   

  	
  Severability

  	
   

  	
   

  
	
  7.8.

  	
   

  	
  Headings

  	
   

  	
   

  
	
  7.9.

  	
   

  	
  Counterparts; Facsimile
  Signatures; Effectiveness

  	
   

  	
   

  

 

 

INVESTOR RIGHTS AGREEMENT

 

THIS INVESTOR RIGHTS AGREEMENT (this “Agreement”) dated
November _2_, 2004 by and among EVOLVING SYSTEMS, INC., a Delaware
corporation (the “Company”),
TERTIO TELECOMS GROUP LTD., a an entity formed and registered in England and
Wales with a company number 4419858 (“Tertio”) and the entities listed on the
signature pages hereto (such entities and Tertio are hereinafter referred to
collectively as the “Investors”).

 

BACKGROUND

 

A.      The Company and
Tertio entered into a Stock Purchase Agreement, dated as of the date hereof
(the “Purchase Agreement”),
pursuant to which the Company acquired from Tertio, its wholly owned
subsidiary, Tertio Telecoms Ltd., an entity formed and registered in England
and Wales with a company number 2325854 (the “Target”) in exchange for certain
consideration, including shares of Series B Convertible Preferred Stock, par
value $0.001 per share, of the Company and certain additional securities of the
Company which may become convertible into the Company’s Common Stock.

 

B.       Under Sections
2.4(a)(ii) and 2.4(b)(vi) of such Purchase Agreement, the delivery of this
Agreement is a condition to the sale of Target to Company.

 

C.       Following the
closing of the transactions contemplated by the Purchase Agreement, it is
intended that Tertio will be dissolved and its assets, including the Series B
Convertible Preferred Stock and the other consideration issued to Tertio
pursuant to the Purchase Agreement, will be distributed to the then
shareholders of Tertio.  The Company and
Tertio agree that the shareholders of Tertio be entitled to the benefit of this
Agreement upon such distribution.

 

AGREEMENT

 

NOW THEREFORE, in
consideration of the mutual covenants and agreements set forth herein, the
parties hereto agree as follows:

 

1.        Definitions. 
As used in this Agreement, the following terms shall have the indicated
meanings:

 

“Acceptance”
means a written notice from a holder of Series B Preferred Stock to the Company
containing the information specified in Section 3.1(b).

 

“Advent”
means Advent International Corporation, a Delaware corporation.

 

“Advent
Funds” means Global Private Equity III Limited Partnership,
Global Private Equity III-A Limited Partnership, Global Private Equity III-B
Limited Partnership, Global Private Equity III-C Limited Partnership, Advent
PGGM Global Limited Partnership, Advent Euro-Italian Direct Investment Program
Limited Partnership, Advent European Co-Investment Program Limited Partnership,
Advent Partners GPE III Limited Partnership, Advent Partners (NA) GPE III Limited
Partnership, Digital Media & Communications II Limited Partnership, Advent
Global GECC III Limited Partnership, and Advent Partners Limited Partnership,
each a Delaware limited partnership, and Advent Crown Fund II C.V, a Dutch
limited partnership.

 

“Adverse Disclosure” means public
disclosure of material non-public information, which disclosure in the good
faith judgment of the Board of Directors (after consultation with external
legal counsel) (i) would be required to be made in any Registration Statement
so that such Registration Statement would not be materially misleading, (ii)
would not be required to be made at such time but for the filing,

 

 

effectiveness or
continued use of such Registration Statement, and (iii) would be materially
detrimental to the Company’s ability to effect a material proposed merger,
acquisition or sale.

 

“Available
Unsubscribed Amount” means the difference between the total of
all of the Basic Amounts available for purchase by the Institutional
Stockholders pursuant to Section 3.1(a) and the Basic Amounts subscribed for
pursuant to Section 3.1(b).

 

“Basic
Amount” means, with respect to an Institutional Stockholder, its
pro rata portion of the Securities, determined by multiplying the number of
Securities by a fraction, the numerator of which is the aggregate number of
shares of Common Stock then held by such holder (giving effect to the
conversion into Common Stock of all shares of convertible preferred stock and
exercise or conversion of all convertible securities to purchase Securities of
the Company then held by such holder) and the denominator of which is the total
number of shares of Common Stock then outstanding (giving effect to the
conversion into Common Stock of all shares of convertible preferred stock or
exercise or conversion of other convertible securities or other rights to
purchase Securities of the Company then outstanding).

 

“Board of Directors” means the
Board of Directors of the Company.

 

“CMS Registration
Rights Agreement”  has
the meaning ascribed to it in Section 5.2(b) of this Agreement.

 

“Commission”
means the Securities and Exchange Commission.

 

“Common Stock” means the common
stock, par value $0.001 per share, of the Company, or any common stock or other
securities issued in respect of such Common Stock, or into which such Common
Stock is converted, due to stock splits, stock dividends or other
distributions, merger, consolidation, reclassifications, recapitalizations or
otherwise.

 

“Company”
has the meaning ascribed to it in the introductory paragraph hereto.

 

“Company
Election Notice” has the meaning ascribed to it in Section 4.2
of this Agreement.

 

“Company
Policies” means the Company’s (a) Insider Trading Policy, (b)
Pre-Clearance and Blackout Policy and (c) Section 16 Compliance Program, as
such policies may be amended or modified from time to time.

 

“Exchange
Act” means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.

 

“GAAP”
means generally accepted accounting principles as applied in the United States
of America.

 

“Indemnified
Person” means a Person entitled to indemnification pursuant to
Sections 2.6(a) or 2.6(b) of this Agreement.

 

“Indemnifying
Person” means a Person obligated to provide indemnification
pursuant to Sections 2.6(a) or 2.6(b) of this Agreement.

 

“Institutional
Stockholders” – shall mean Tertio, the Advent
Funds, Apax Funds Nominees Limited, an entity formed and registered in England
and Wales with company number 02140054, and Four Seasons Venture II A.S, a
Norwegian registered corporation.

 

“Investor”
has the meaning ascribed to it in the introductory paragraph hereto.

 

2

 

“Investor
Indemnified Person” has the meaning ascribed to it in Section
2.6(a) of this Agreement.

 

“Offer”
means a written notice of any proposed issuance, sale or exchange of Securities
containing the information specified in Section 3.1(a).

 

“Other
Registration Rights” means written agreements under which the
Company has agreed to include securities of the Company (other than Registrable
Shares) in a Registration Statement.

 

“Other
Registration Rights Holders” means holders of securities subject
to Other Registration Rights.

 

“Person”
means an individual or a corporation, partnership, limited liability company, association,
trust, or any other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.

 

“Prospectus”
means the prospectus included in any Registration Statement, as amended or
supplemented by an amendment or prospectus supplement, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.

 

“Purchase
Agreement” has the meaning ascribed to it in the recitals of
this Agreement.

 

“Refused
Securities” means those Securities as to which an Acceptance has
not been given by the Institutional Stockholders pursuant to Section 3.1(b).

 

“Registrable
Shares” means (a) the shares of Common Stock issued or issuable
upon conversion of the Series B Stock held by an Investor pursuant to the
Series B Certificate, (b) any other shares of Common Stock issued or issuable
upon the conversion or exercise of any other securities issued in connection
with the transactions contemplated by the Purchase Agreement (including
convertible debt instruments) held by an Investor, (c) any other shares of
Common Stock issued to the Institutional Stockholders pursuant to their
exercise of the preemptive rights arising under Section 3 of this Agreement,
(d) any Registrable Shares acquired by an Investor from another Investor; provided, however,
that shares of Common Stock that are Registrable Shares shall cease to be
Registrable Shares upon any sale pursuant to a Registration Statement or Rule
144, and, with respect to Registrable Shares held by Investors who are not
Institutional Stockholders, when such Investors may sell pursuant to Rule
144(k).

 

“Registration
Expenses” means all expenses incurred by the Company in
complying with the provisions of Section 2 of this Agreement, including (i) all
registration and filing fees, exchange listing fees, printing expenses, fees
and expenses of counsel for the Company; (ii) the reasonable fees and expenses
of Registration Selling Investor Counsel (in an aggregate amount not to exceed
$15,000 per registration); (iii) state Blue Sky fees and expenses, and (iv) the
expense of any special audits incident to or required by any such registration,
but excluding underwriting discounts, selling commissions and the fees and
expenses of Registration Selling Investors’ own counsel (other than the
Registration Selling Investor Counsel).

 

“Registration
Initiating Investors” means the Investors initiating a request
for registration pursuant to Section 2.1(a) of this Agreement.

 

“Registration
Selling Investor” means any Investor owning Registrable Shares
included in a Registration Statement.

 

3

 

“Registration
Selling Investor Counsel” means, if Investors are participating
as Registration Selling Investors with respect to a registration, counsel
selected by Advent to represent all Registration Selling Investors with respect
to such registration.

 

“Registration
Statement” means a registration statement filed by the Company
with the Commission for a public offering and sale of securities of the
Company, other than (a) a registration statement on Form S-4 or Form S-8, or
their successors, or any other form for a similar limited purpose, or (b) any
registration statement covering only securities proposed to be issued in
exchange for securities or assets of another corporation or other entity.

 

“Registration
Threshold Amount” has the meaning ascribed to it in Section
2.1(a) of this Agreement.

 

“Required
Investor Information” has the meaning ascribed to it in Section
2.3(b) of this Agreement.

 

“Rule
144” means Rule 144 promulgated under the Securities Act, and
any successor rule or regulation thereto, and in the case of any referenced
section of such rule, any successor section thereto, collectively and as from
time to time amended and in effect.

 

“Sarbanes-Oxley
Act” means the Sarbanes-Oxley Act of 2002, as amended, and the
rules and regulations promulgated thereunder.

 

“Securities
Act” means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.

 

“Securities”
means (a) any shares of Common Stock, (b) any other equity securities of the
Company, including shares of preferred stock, (c) any option, warrant or other
right to subscribe for, purchase or otherwise acquire any equity securities of
the Company, and (d) any debt securities convertible into capital stock of the
Company.

 

“Series
B Certificate” means the Certificate of Designations of Series B
Convertible Preferred Stock forming a part of the Certificate of Incorporation
of the Company, as amended from time to time in accordance with the terms
thereof.

 

“Series
B Director” means the member of the Board of Directors
designated by the holders of shares of Series B Stock pursuant to the Series B
Certificate.

 

“Series
B Stock” means the Series B Convertible Preferred Stock of the
Company issued pursuant to the Purchase Agreement.

 

“Shares”
means the shares of Series B Stock held by the Investors.

 

“Shelf
Registration Statement” means the Registration Statement filed by
the Company with the Commission pursuant to Section 2.3 of this Agreement
covering the resale of all Registrable Shares for an offering to be made on a
continuous basis pursuant to Rule 415 promulgated under the Securities Act.

 

“Subsidiary”
means any corporation or other entity of which the capital stock or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other Persons performing similar functions is at the time
directly or indirectly owned by the Company.

 

“Trading
Day” means (a) any day on which the Common Stock is listed or
quoted and traded on the Nasdaq National Market, the New York Stock Exchange,
the American Stock Exchange or the Nasdaq

 

4

 

SmallCap Market or (b) if
the Common Stock is not traded on any such market, then a day on which trading
occurs on the New York Stock Exchange (or any successor thereto).

 

“Transfer”
means, as the context requires, (a) any sale, transfer, distribution or other
disposition, whether voluntarily or by operation of law, or (b) the act of
effecting such a sale, transfer, distribution or other disposition.

 

“Unsubscribed
Amount” means, with respect to an Institutional Stockholder, any
additional portion of the Securities attributable to the Basic Amounts of other
Institutional Stockholders as such holder indicates it will purchase or acquire
should the other holders subscribe for less than their Basic Amounts.

 

2.             Registration Rights

 

2.1.          Demand Registrations

 

(a)           Subject to
the last sentence of this Section 2.1(a), if for any reason the Shelf
Registration Statement to be prepared and filed by the Company has not been
declared effective by the Commission within 120 consecutive days from the date
hereof as contemplated by Section 2.3 of this Agreement, Investors holding in
the aggregate at least a majority of the shares of Series B Stock then
outstanding may, at any time and from time to time, request, in writing, that
the Company file a Registration Statement on Form S-3 (or any successor form)
to effect the registration of an offering of Registrable Shares owned by such
Investor(s) and having an aggregate value of at least $5,000,000 based on the
last reported sale price of the Common Stock on the trading day immediately
preceding the date of such request (the “Registration Threshold Amount”); provided, however, that, if at the time of
such request the Company is not eligible to register for resale the Registrable
Shares on Form S-3, the Company shall register the Registrable Shares on such
other form as the Company is eligible to use. 
The Company shall set forth in such Form S-3 any information that may be
required in a registration that is filed on Form S-1 and that the lead underwriter
managing the offering reasonably requests (as determined by the Company) be
expressly included in the Registration Statement.  Notwithstanding the foregoing, in the event
that the Shelf Registration Statement has not become effective by the expiration
of such 120 consecutive day period as a result of an ongoing review by the
Commission, the Company shall not be deemed to be in breach of its obligations
under this Section 2.1(a) so long as it continues to diligently pursue and use
its best efforts to cause the Shelf Registration Statement to become effective
as soon as possible thereafter.

 

(b)           Upon
receipt of any request for registration pursuant to this Section 2 of this
Agreement, the Company shall promptly (but in any event within ten (10)
consecutive days of receipt of such request) give written notice of such
proposed registration to all other Investors. 
Such other Investors shall have the right, by giving written notice to
the Company within twenty (20) consecutive days after the Company provides its
notice, to elect to have included in such registration such of their
Registrable Shares as such Investors may request in such notice of election,
subject in the case of an underwritten offering to the terms of
Section 2.1(c) of this Agreement. 
Thereupon, the Company shall, as expeditiously as possible, use its best
efforts to effect the registration on an appropriate registration form of all
Registrable Shares that the Company has been requested to so register.

 

(c)           If the
Registration Initiating Investors intend to distribute the Registrable Shares
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to Section 2.1(a) of this
Agreement and the Company shall include such information in its written notice
referred to in Section 2.1(b) of this Agreement.  In such event, (i) the right of any other
Investor to include its Registrable Shares in such registration pursuant to
Section 2.1(a) of this Agreement shall be conditioned upon such other
Investor’s participation in such underwriting on the terms set forth herein,
and (ii) all Investors including Registrable Shares in such registration shall

 

5

 

enter
into an underwriting agreement upon customary terms with the underwriter or
underwriters managing the offering; provided
that such underwriting agreement shall not provide for indemnification or
contribution obligations on the part of the Investors materially greater than
the obligations of the Investors pursuant to Section 2.6 of this
Agreement.  If the Company and the
Registration Initiating Investors are unable to mutually agree on the managing
underwriter(s) for any underwritten offering pursuant to Section 2.1(a) of this
Agreement within 15 consecutive days after the Company receives the
Registration Initiating Investors’ request, the Company shall select an
underwriter out of a pool of three underwriting firms chosen by the
Registration Initiating Investors, each of which firms shall have a national
reputation and experience with software companies.  If any Investor that has requested inclusion
of its Registrable Shares in such registration as provided above disapproves of
the terms of the underwriting, such Person may elect, by written notice to the
Company, to withdraw its Registrable Shares from such Registration Statement
and underwriting; provided, however,
that, if Registration Selling Investors holding a majority of the remaining
Registrable Shares mutually agree, the Company shall continue to effect the
registration of such remaining Registrable Shares regardless of whether the
aggregate value of the remaining Registrable Shares is less than the
Registration Threshold Amount.  If the
lead managing underwriter advises the Company in writing that marketing factors
require a limitation on the number of shares to be underwritten, the number of
Registrable Shares to be included in the Registration Statement and
underwriting shall be allocated among all Investors requesting registration in
proportion, as nearly as practicable, to the respective number of Registrable
Shares each Investor has requested be included in such registration.

 

(d)           The
Company shall not be required to effect more than a total of three (3)
registrations requested pursuant to Section 2.1(a) of this Agreement (an
offering which is not consummated shall not be counted for this purpose).  The Investors shall not deliver a notice
pursuant to Section 2.1(a) of this Agreement requesting registration of any
underwritten offering until at least 6 months after the closing of any prior
underwritten offering registered pursuant to a request under Section 2.1(a) of
this Agreement.  For purposes of this
Section 2.1(d), a Registration Statement shall not be counted until such time
as such Registration Statement has been declared effective by the
Commission.  Notwithstanding the
foregoing, the first, and only the first, time any request for registration
that is withdrawn by the Registration Initiating Investors (other than at the request
of the Company) and that is primarily as a result of material adverse
information concerning the business or financial condition of the Company,
where such information is made known to the Registration Initiating Investors
after the date on which such registration statement was filed, shall not count
as a Registration Statement.  Except as
set forth in the previous sentence, all Registration Statements withdrawn by
the Investors shall count as a Registration Statement; provided however, that a
Registration Statement that is withdrawn by the Investors at the request of the
Company shall not count as a Registration Statement for purposes of this
Section 2.1.

 

(e)           If at the
time of any request to register Registrable Shares by Registration Initiating
Investors pursuant to this Section 2.1, the Company is engaged or has plans to
engage in a registered public offering or is engaged in a material proposed
acquisition, disposition, financing, reorganization, recapitalization or
similar transaction that, in the good faith determination of the Board of
Directors, could be adversely affected by the requested registration, then the
Company may at its option direct that such request be delayed for a period not
in excess of 45 consecutive days from the date of such request, such right to
delay a request to be exercised by the Company not more than once in any
12-month period.

 

2.2.          Incidental Registrations

 

(a)           Whenever
the Company proposes to file a Registration Statement covering shares of Common
Stock (other than a Registration Statement filed pursuant to Section 2.1 or 2.3
of this

 

6

 

Agreement)
at any time and from time to time, it shall, prior to such filing, give written
notice to all Investors of its intention to do so; provided that no such notice need be given if no Registrable
Shares are to be included therein as a result of a written notice from the
managing underwriter pursuant to Section 2.2(b) of this Agreement.  Upon the written request of an Investor or
Investors given within 10 consecutive days after the Company provides such
notice (which request shall state the intended method of disposition of such
Registrable Shares), the Company shall use its best efforts to cause all
Registrable Shares that the Company has been requested by such Investor or
Investors to register to be registered under the Securities Act to the extent
necessary to permit their sale or other disposition in accordance with the
intended methods of distribution specified in the request of such Investor or
Investors; provided that the
Company shall have the right to postpone or withdraw any registration effected
pursuant to this Section 2.2 without obligation upon 5 consecutive days’
advance written notice to the Investors. 
Upon receipt of any such notice, the Investors may elect to exercise
their right to demand a registration in accordance with Section 2.1 of
this Agreement.

 

(b)           If the
registration for which the Company gives notice pursuant to Section 2.2(a) of
this Agreement is a registered public offering involving an underwriting, the
Company shall so advise the Investors as a part of the written notice given
pursuant to Section 2.2(a) of this Agreement. 
In such event, (i) the right of any Investor to include its Registrable
Shares in such registration pursuant to this Section 2.2 shall be
conditioned upon such Investor’s participation in such underwriting on the
terms set forth herein and (ii) all Investors including Registrable Shares in
such registration shall enter into an underwriting agreement upon customary
terms with the underwriter or underwriters selected for the underwriting by the
Company, provided that such
underwriting agreement shall not provide for indemnification or contribution
obligations on the part of the Investors materially greater than the obligations
of the Investors pursuant to Section 2.6 of this Agreement.   If any Investor who has requested inclusion
of its Registrable Shares in such registration as provided above disapproves of
the terms of the underwriting, such Investor may elect, by written notice to
the Company, to withdraw its shares from such Registration Statement and
underwriting.  If the managing
underwriter advises the Company in writing that marketing factors require a
limitation on the number of shares to be underwritten, the shares held by
holders other than the Investors shall be excluded from such Registration
Statement and underwriting to the extent deemed advisable by the managing
underwriter, and if a further reduction of the number of shares is required,
the number of shares that may be included in such Registration Statement and
underwriting shall be allocated among all Investors requesting registration in
proportion, as nearly as practicable, to the respective number of shares of
Common Stock (on an as converted basis) held by them on the date the Company
gives the notice specified in Section 2.2(a) of this Agreement.  If any Investor would thus be entitled to
include more shares than such holder has requested to be registered, the excess
shall be allocated among other requesting Investors pro rata in the manner
described in the preceding sentence.

 

2.3.          Shelf Registration.

 

(a)           The
Company shall prepare and file with the Commission a Shelf Registration
Statement as promptly as practicable after the date hereof (and in any event by
no later than 60 consecutive days after the date hereof), and shall take such
steps as are necessary to enable the Shelf Registration to be declared
effective by the Commission as promptly as practicable after the date hereof
and in any event by no later than 90 consecutive days after the date of this
Agreement or, if the Shelf Registration Statement (including any of the
documents incorporated by reference therein) is the subject of a complete or
partial review by the Commission, in any event by no later than 120 consecutive
days after the date of this Agreement. 
Notwithstanding the foregoing, in the event that the Shelf Registration
Statement has not become effective by the expiration of such 120 consecutive
day period as a result of an ongoing review by the Commission, the Company
shall not be deemed to be in breach of its obligations under this Section
2.3(a) so long as it continues to diligently pursue and use its best efforts to
cause the

 

7

 

Shelf
Registration Statement to become effective as soon as possible thereafter.  The Shelf Registration Statement shall be on
Form S-3 (except if the Company is not then eligible to register for resale the
Registrable Shares on Form S-3, in which case such Shelf Registration Statement
shall be on such other form as the Company is eligible to use).  The Company shall notify each Investor in
writing promptly (in any event within one Trading Day) after receiving
notification from the Commission that the Shelf Registration Statement has been
declared effective.

 

(b)           Notwithstanding
any of the foregoing, in the event that the Investors do not provide the
Company with information regarding the Investors and the Target reasonably
requested by the Company in order to prepare and file the Shelf Registration
Statement (including, but not necessarily limited to, (i) a plan of
distribution of the Securities to be registered, (ii) financial statements of
Target meeting the requirements of Regulation S-X promulgated under the Securities
Act and (iii) such other information that relate to the Investors and the
Target that is both customary and necessary for the completion of the Shelf
Registration Statement that the Company may reasonably request (collectively,
the “Required Information”)
on or before the fiftieth (50th) day after the date hereof, the date
by which the Company’s obligation hereunder must be satisfied shall be extended
until that date which is ten (10) consecutive days after the delivery by the
Investors of the Required Information.

 

2.4.          Registration Procedures

 

(a)          If
and whenever the Company is required by the provisions of this Agreement to use
its best efforts to effect the registration of any Registrable Shares under the
Securities Act, the Company shall:

 

(i)            prepare and file with
the Commission a Registration Statement with respect to such Registrable Shares
and use its best efforts to cause that Registration Statement to become
effective as soon as possible;

 

(ii)           not less than (A) five
Trading Days prior to the filing of the Shelf Registration Statement or any
related Prospectus or any amendment or supplement thereto (including any
document that would be incorporated or deemed to be incorporated therein by
reference), or (B) ten (10) Trading Days prior to the filing of any
Registration Statement or any related Prospectus or any amendment or supplement
thereto (including any document that would be incorporated or deemed to be
incorporated therein by reference), the Company shall (1) furnish to each
Registration Selling Investor and the Registration Selling Investor Counsel
copies of all such documents proposed to be filed, which documents (other than
those incorporated or deemed to be incorporated by reference) will be subject
to the review of such Registration Selling Investor and Registration Selling
Investor Counsel, and (2) cause its officers and directors, counsel and
independent certified public accountants to respond to such inquiries as shall
be necessary, in the reasonable opinion of respective counsel, to conduct a
reasonable investigation within the meaning of the Securities Act; and the
Company shall not file any Registration Statement or any such Prospectus or any
amendments or supplements thereto to which the Registration Selling Investors
holding a majority of the Registrable Securities to be registered thereunder
and their counsel shall reasonably object, provided
that such objection is communicated to the Company within three Trading Days of
receipt of such documents;

 

(iii)          as expeditiously as
possible prepare and file with the Commission any amendments and supplements to
the Registration Statement and the prospectus included in the Registration
Statement as may be necessary to comply with the provisions of the Securities
Act (including the anti-fraud provisions thereof) and use its best efforts to
keep the Registration Statement continuously effective:

 

8

 

(A)          in
the case of the Shelf Registration Statement filed pursuant to Section 2.3
of this Agreement, until the date on which all of the Registrable Shares
covered by the Shelf Registration Statement have been sold; and

 

(B)           in
the case of all other registrations, for (1) 180 consecutive days from the
effective date or such greater period, up to 360 consecutive days, as an
underwriter may require, or (2) such lesser period until all such Registrable
Shares are sold; provided that
the number of days specified in this clause (B) shall not include any day on
which a Registration Selling Investor is restricted from offering or selling
Registrable Shares pursuant to Sections 2.4(a)(iv) or 2.4(a)(v) of this
Agreement;

 

(iv)          in all cases respond as
promptly as possible to any comments received from the Commission with respect
to any Registration Statement or any amendment thereto;

 

(v)           as expeditiously as
possible furnish to each Registration Selling Investor and Registration Selling
Investor Counsel, without charge, at least one conformed copy of the
applicable  Registration Statement and
each amendment thereto, including financial statements and schedules, all
documents incorporated or deemed to be incorporated therein by reference, and
all exhibits to the extent requested by such Person (including those previously
furnished or incorporated by reference) promptly after the filing of such
documents with the Commission;

 

(vi)          as expeditiously as
possible furnish to each Registration Selling Investor (with a copy to
Registration Selling Investor Counsel) such reasonable numbers of copies of the
Prospectus, including any preliminary Prospectus, in conformity with the
requirements of the Securities Act, and such other documents as such
Registration Selling Investor may reasonably request in order to facilitate the
public sale or other disposition of the Registrable Shares owned by such
Registration Selling Investor; and the Company hereby consents to the use of
any such Prospectus and each amendment or supplement thereto by each
Registration Selling Investor in connection with the offering and sale of the
Registrable Securities covered by such Prospectus and any amendment or
supplement thereto;

 

(vii)         use its best efforts to
avoid the issuance of or, if issued, obtain the withdrawal of (x) any order
suspending the effectiveness of any Registration Statement or (y) any suspension
of the qualification (or exemption from qualification) of any of the
Registrable Securities for sale in any jurisdiction as soon as reasonably
practicable;

 

(viii)        as expeditiously as
possible (and in the case of the Shelf Registration Statement, prior to the
public offering of Registrable Securities pursuant thereto) use its best
efforts to register or qualify the Registrable Shares covered by the
Registration Statement under the securities or Blue Sky laws of such states as
the Registration Selling Investors shall reasonably request, and do any and all
other acts and things that may be necessary or desirable to enable the
Registration Selling Investors to consummate the public sale or other
disposition in such states of the Registrable Shares owned by the Registration
Selling Investors; provided, however, that the Company shall not be
required in connection with this paragraph (viii) to qualify as a foreign
corporation or execute a general consent to service of process in any
jurisdiction;

 

(ix)           as expeditiously as
possible, cause all such Registrable Shares to be listed on each securities
exchange or automated quotation system on which similar securities issued by
the Company are then listed;

 

(x)            promptly provide a
transfer agent and registrar for all such Registrable Shares not later than the
effective date of such registration statement;

 

9

 

(xi)           cooperate with the
Registration Selling Investors to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be delivered to
a transferee pursuant to an effective Registration Statement, which
certificates shall be free, to the extent permitted hereunder, of all
restrictive legends, and to enable such Registrable Securities to be in such
denominations and registered in such names as any such Registration Selling
Investors may request;

 

(xii)          promptly
make available for inspection by the Registration Selling Investors, any
managing underwriter participating in any disposition pursuant to such
Registration Statement, and any attorney or accountant or other agent retained
by any such underwriter or selected by the Registration Selling Investors, all
financial and other records, pertinent corporate documents and properties of
the Company and cause the Company’s officers, directors, employees and
independent accountants to supply all information reasonably requested by any
such seller, underwriter, attorney, accountant or agent in connection with such
Registration Statement; provided
that, unless otherwise mutually agreed by the Company and the recipient
Investor, the Company will not make any material nonpublic information
available to an Investor; and provided further that, for purposes of
this Section 2.4(a)(xii), to the extent that any material non public
information is made available to the Series B Director, or any material
nonpublic information is made available to the individual designated by the
Investors to attend all meetings of the Board of Directors (and all committees
thereof) as a nonvoting observer in accordance with Section 4.3 of this
Agreement, any such material nonpublic information shall not be considered to
have been made available to or received by any of the respective Investors.

 

(xiii)         in connection with an
underwritten disposition of Registrable Shares, provide such reasonable
assistance in the marketing of the Registrable Shares as is customary of
issuers in primary underwritten public offerings (including participation by
its senior management in “road shows”).

 

(b)           At any
time when a Prospectus is required to be delivered under the Securities Act,
the Company shall promptly notify each Registration Selling Investor and
Registration Selling Investor Counsel of any of the following events: (i) the Commission
notifies the Company whether there will be a “review” of the Registration
Statement; (ii) the Commission comments in writing on the Registration
Statement (in which case the Company shall deliver to each Registration Selling
Investor a copy of such comments and of all written responses thereto); (iii)
the Registration Statement or any post-effective amendment is declared
effective or a supplement to any Prospectus forming a part of such Registration
Statement has been filed; (iv) the Commission or any other Federal or state
governmental authority requests any amendment or supplement to the Registration
Statement or Prospectus or requests additional information related thereto; (v)
the Commission issues any stop order suspending the effectiveness of the
Registration Statement or initiates any Proceeding (as defined in the Purchase
Agreement) for that purpose; (vi) the Company receives notice of any suspension
of the qualification or exemption from qualification of the Registrable
Securities for sale in any jurisdiction, or the initiation or threat of any
Proceeding for such purpose; or (vii) the financial statements included in the
Registration Statement become ineligible for inclusion therein or any statement
made in the Registration Statement or Prospectus or any document incorporated
or deemed to be incorporated therein by reference is untrue in any material
respect or any revision to the Registration Statement, Prospectus or other
document is required so that it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. 
If requested, the Registration Selling Investors shall immediately cease
making offers of Registrable Shares pursuant to the Registration Statement
until their receipt of the copies of the supplemented or amended
Prospectus.  Following receipt of the
revised Prospectuses, the Registration Selling Investors shall be free to
resume making offers of the Registrable Shares.

 

10

 

(c)           In the
event that it is advisable to suspend use of a Prospectus included in a
Registration Statement because continued use would require Adverse Disclosure,
the Company shall notify all Registration Selling Investors to such effect,
and, upon receipt of such notice, each such Registration Selling Investor shall
immediately discontinue any sales of Registrable Shares pursuant to such Registration
Statement until such Registration Selling Investor has received copies of a
supplemented or amended Prospectus or until such Registration Selling Investor
is advised in writing by the Company that the then current Prospectus may be
used and has received copies of any additional or supplemental filings that are
incorporated or deemed incorporated by reference in such Prospectus.  Notwithstanding anything to the contrary
herein, the Company shall not exercise its rights under this Section 2.4(c) to
suspend sales of Registrable Shares for a period in excess of 60 consecutive
days or a total of 90 days in any 365 consecutive day period; provided that the Company may suspend such
sales for a period of up to 90 consecutive days (and a total of 120 days in a
365 consecutive day period) if the reason for the continued suspension beyond
60 consecutive days relates solely to the preparation of financial statements
required to be filed in accordance with Item 9.01 of Form 8-K under the
Exchange Act (in which event the Company shall use its best efforts to cause
such financial statements to be prepared as promptly as reasonably practicable
in the circumstances), and such suspension period shall automatically terminate
two Trading Days after the filing of such financial statements.  In no event shall the Company’s right under
this Section 2.4(c) be exercised to suspend sales of Registrable Shares beyond
the period during which sales of Registrable Shares would require Adverse
Disclosure.  After the end of any suspension
period under this Section 2.4, the Company shall use its best efforts
(including filing any required supplemental prospectus) to restore, as promptly
as reasonably possible, the effectiveness of the Registration Statement and the
ability of the Registration Selling Investors to publicly resell their
Registrable Securities pursuant to such effective Registration Statement.

 

2.5.          Payment of Expenses.  The Company will pay all Registration
Expenses for all registrations under this Agreement.

 

2.6.          Indemnification and Contribution

 

(a)           In the
event of any registration of any of the Registrable Shares under the Securities
Act pursuant to this Agreement, the Company shall indemnify and hold harmless
each Registration Selling Investor and each underwriter of such Registrable
Shares, their respective partners, members, agents, directors, officers,
fiduciaries, investment advisors, brokers and employees of each of them, and
each other Person, if any, who controls such Registration Selling Investor or
underwriter within the meaning of the Securities Act or the Exchange Act and
the officers, directors, partners, members, agents and employees of each such
controlling Person (each such Person an “Investor Indemnified Person”), to the fullest
extent permitted by applicable law, from and against any and all losses,
claims, damages, liabilities, settlement costs and expenses, as incurred, joint
or several, that arise out of, relate to or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in any
Registration Statement under which such Registrable Shares were registered
under the Securities Act, any preliminary prospectus or final prospectus
contained in the Registration Statement or any amendment or supplement to such
Registration Statement or Prospectus, (ii) the omission or alleged
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any state securities law in connection with the
Registration Statement or the offering contemplated thereby; and the Company
will reimburse such Investor Indemnified Person for any legal or any other
expenses reasonably incurred by such Investor Indemnified Person in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company will not be
liable to any Investor Indemnified Person, in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon any
untrue statement or omission made in such Registration

 

11

 

Statement,
preliminary prospectus or prospectus, or any such amendment or supplement, in
reliance upon and in conformity with information furnished to the Company, in
writing, by such Person specifically for use in the preparation thereof.

 

(b)           In the
event of any registration of any of the Registrable Shares under the Securities
Act pursuant to this Agreement, each Registration Selling Investor, severally
and not jointly, will indemnify and hold harmless the Company, each of its
directors and officers and each underwriter (if any) and each Person, if any,
who controls the Company or any such underwriter within the meaning of the
Securities Act or the Exchange Act, against any and all losses, claims,
damages, liabilities, settlement costs and expenses arising solely out of (i)
any untrue statement or alleged untrue statement of a material fact contained
in any Registration Statement under which such Registrable Shares were
registered under the Securities Act, any preliminary prospectus or final
prospectus contained in the Registration Statement, or any amendment or
supplement to the Registration Statement or Prospectus, or (ii) any omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, if and to the extent
(and only to the extent) that the statement or omission was made in reliance
upon and in conformity with information relating to such Registration Selling
Investor furnished in writing to the Company by such Registration Selling
Investor specifically for use in connection with the preparation of such
Registration Statement, prospectus, amendment or supplement; provided, however, that the obligations of
a Registration Selling Investor hereunder shall be limited to an amount equal
to the net proceeds to such Registration Selling Investor of Registrable Shares
sold in connection with such registration.

 

(c)           Each
Indemnified Person shall give notice to the Indemnifying Person promptly after
such Indemnified Person has actual knowledge of any claim as to which indemnity
may be sought, and shall permit the Indemnifying Person to assume the defense
of any such claim or any litigation resulting therefrom; provided, that counsel for the Indemnifying
Person, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Person (whose approval shall not be unreasonably
withheld, conditioned or delayed); and
provided  further, that the failure of any Indemnified
Person to give notice as provided herein shall not relieve the Indemnifying
Person of its obligations under this Section 2.6 except to the extent that the
Indemnifying Person is actually prejudiced by such failure. The Indemnified
Person may participate in such defense at such party’s expense; provided, however,
that the Indemnifying Person shall pay such expense if the Indemnified Person
reasonably concludes that representation of such Indemnified Person by the
counsel retained by the Indemnifying Person would be inappropriate due to
actual or potential conflicts of interests between the Indemnified Person and
any other party represented by such counsel in such proceeding; and provided  further, that in no event shall the Indemnifying Person be
required to pay the expenses of more than one law firm per jurisdiction as
counsel for the Indemnified Person.  The
Indemnifying Person also shall be responsible for the expenses of such defense
if the Indemnifying Person does not elect to assume such defense.  No Indemnifying Person, in the defense of any
such claim or litigation shall, except with the consent of each Indemnified
Person, consent to entry of any judgment or enter into any settlement that does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Person of a release from all liability in respect
of such claim or litigation, and no Indemnified Person shall consent to entry
of any judgment or settle such claim or litigation without the prior written consent
of the Indemnifying Person, which consent shall not be unreasonably withheld,
conditioned or delayed.

 

(d)           In order
to provide for just and equitable contribution in circumstances in which the
indemnification provided for in this Section 2.6 is due in accordance with its
terms but for any reason is held to be unavailable to an Indemnified Person in
respect to any losses, claims, damages and liabilities referred to herein, then
the Indemnifying Person shall, in lieu of indemnifying such Indemnified Person,
contribute to the amount paid or payable by such Indemnified Person as a result
of such losses, claims, damages or liabilities to which such party may be
subject in such proportion as is appropriate to reflect

 

12

 

the
relative fault of the Company on the one hand and the Registration Selling
Investors on the other in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities.  The relative fault of the Company and the
Registration Selling Investors shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of material fact related
to information supplied by the Company or the Registration Selling Investors
and the parties’ relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.  The Company and the Registration Selling
Investors agree that it would not be just and equitable if contribution
pursuant to this Section 2.6(d) were determined by pro rata allocation or by
any other method of allocation that does not take account of the equitable
considerations referred to above. 
Notwithstanding the provisions of this Section 2.6(d), in no case shall
any one Registration Selling Investor be liable or responsible for any amount
in excess of the net proceeds received by such Registration Selling Investor
from the offering of Registrable Shares; provided,
however, that no Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation. 
Any party entitled to contribution will, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party in
respect of which a claim for contribution may be made against another party or
parties under this Section 2.6(d), notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
from whom contribution may be sought shall not relieve such party from any
other obligation it or they may have thereunder or otherwise under this Section
2.6(d).  No party shall be liable for
contribution with respect to any action, suit, proceeding or claim settled
without its prior written consent, which consent shall not be unreasonably
withheld, conditioned or delayed.

 

(e)           The
indemnity and contribution agreements contained in this Section 2.6 are in
addition to any other liability that any Indemnifying Person may have to any
Indemnified Person.

 

2.7.          Other Matters with Respect to
Underwritten Offerings.  In the event
that Registrable Shares are sold pursuant to a Registration Statement in an
underwritten offering pursuant to Section 2.1 of this Agreement, the
Company agrees to (a) enter into an underwriting agreement containing customary
representations and warranties with respect to the business and operations of
the Company and customary covenants and agreements to be performed by the
Company, including customary provisions with respect to indemnification by the
Company of the underwriters of such offering; (b) use its best efforts to
cause its legal counsel to render customary opinions to the underwriters with
respect to the Registration Statement; and (c) use its best efforts to cause
its independent public accounting firm to issue customary “cold comfort letters”
to the underwriters with respect to the Registration Statement.

 

2.8.          Information by Investor.  Without limiting anything set forth in
Section 2.3 of this Agreement, each holder of Registrable Shares included in
any registration shall furnish to the Company such customary information
regarding such holder and the distribution proposed by such holder as the Company
may reasonably request in writing and that is required under applicable laws,
rules and regulations.

 

2.9.          Effective Date and Termination of
Registration Rights.  The rights and
obligations under this Section 2 shall (a) become effective with respect to
each Investor upon the issuance or transfer of Registrable Shares to the
Investor and (b) terminate with respect to each Investor on the first date on
which such Investor no longer holds any Registrable Shares, except that the
rights and obligations of the Company and the Registration Selling Investors
under Section 2.6 of this Agreement (relating to indemnification) shall survive
any termination of this Agreement or any part thereof.

 

13

 

3.             Preemptive Rights.

 

3.1.          Rights of Investors.

 

(a)           The
Company shall not issue, sell or exchange, agree to issue, sell or exchange, or
reserve or set aside for issuance, sale or exchange, any Securities, unless in
each such case the Company shall have first complied with this Section 3.  The Company shall deliver to the
Institutional Stockholders an Offer, which shall (i) identify and describe the
Securities, (ii) describe the price (expressed in either a fixed dollar amount
or a definitive formula pursuant to which the only variable is the market price
of the Common Stock at or near the time of the proposed issuance, sale or
exchange) and other terms upon which they are to be issued, sold or exchanged,
and the number or amount of the Securities to be issued, sold or exchanged,
(iii) identify the offerees or purchasers (if known) to which or with which the
Securities are to be offered, issued, sold or exchanged, and (iv) offer to
issue and sell to or exchange with such Institutional Stockholders (1) such
holder’s Basic Amount and (2) such holder’s Unsubscribed Amount.

 

(b)           To accept
an Offer, in whole or in part, the Institutional Stockholders must deliver to
the Company, on or prior to the date fifteen (15) consecutive days after the
date of delivery of the Offer, an Acceptance indicating the portion of such
holder’s Basic Amount that such holder elects to purchase and, if such holder
shall elect to purchase all of its Basic Amount, the Unsubscribed Amount (if
any) that such holder elects to purchase. 
If the Basic Amounts subscribed for by all Institutional Stockholders
are less than the total of all of the Basic Amounts available for purchase,
then each holder who has set forth an Unsubscribed Amount in its Acceptance
shall be entitled to purchase, in addition to the Basic Amounts subscribed for,
the Unsubscribed Amount it has subscribed for; provided, however, that if the
Unsubscribed Amounts subscribed for exceed the Available Unsubscribed Amount,
each holder who has subscribed for any Unsubscribed Amount shall be entitled to
purchase only that portion of the Available Unsubscribed Amount as the
Unsubscribed Amount subscribed for by such holder bears to the total
Unsubscribed Amounts subscribed for by all Institutional Stockholders, subject
to rounding by the Board to the extent it deems reasonably necessary.

 

(c)           The
Company shall have ninety (90) consecutive days from the expiration of the
period set forth in Section 3.1(b) to issue, sell or exchange all or any part
of the Refused Securities, but only to the offerees or purchasers described in
the Offer (if so described therein) and only upon terms and conditions
(including unit prices and interest rates) that are not more favorable, in the
aggregate, to the offerees or purchasers than those set forth in the Offer.

 

(d)           In the
event the Company shall propose to sell less than all the Refused Securities,
then each Institutional Stockholder may, at its sole option and in its sole
discretion, reduce the number or amount of the Securities specified in its
Acceptance to an amount that shall be not less than the number or amount of the
Securities that the holder elected to purchase pursuant to Section 3.1(b)
multiplied by a fraction, (i) the numerator of which shall be the number or
amount of Securities the Company actually proposes to issue, sell or exchange
(including Securities to be issued or sold to the Institutional Stockholders
pursuant to Section 3.1(b) prior to such reduction) and (ii) the denominator of
which shall be the original amount of the Securities.  In the event that any of the Institutional
Stockholders so elects to reduce the number or amount of Securities specified
in its Acceptance, the Company may not issue, sell or exchange more than the
reduced number or amount of the Securities unless and until such securities
have again been offered to the Institutional Stockholders in accordance with
Section 3.1(a).

 

(e)           Upon (i)
the closing of the issuance, sale or exchange of all or less than all of the
Refused Securities or (ii) such other date agreed to by the Company, the
Institutional Stockholders who have subscribed for a majority of the Securities
subscribed for by the Institutional Stockholders, such holder or holders shall
acquire from the Company and the Company shall issue to such holder or holders,
the number or amount of Securities specified in the Acceptances, as reduced
pursuant to Section 3.1(d) if any of the holders has so elected, upon the terms
and conditions specified in the Offer.

 

14

 

(f)            The
purchase by the Institutional Stockholders of any Securities is subject in all
cases to the preparation, execution and delivery by the Company and the
Institutional Stockholders of a purchase agreement relating to such Securities
reasonably satisfactory in form and substance to the Institutional
Stockholders.

 

(g)           Securities
not acquired by the Institutional Stockholders in accordance with Section
3.1(a) and not sold pursuant to Section 3.1(b) may not be issued, sold or
exchanged until they are again offered to the Institutional Stockholders under
the procedures specified in this Section 3.

 

(h)           The
preemptive rights provided to the Institutional Stockholders under this Section
3 shall be effective (i) with respect to Tertio upon the execution of this
Agreement and with respect to all other Institutional Stockholders upon the
date on which shares of Series B Preferred Stock or Common Stock are
transferred to the Institutional Stockholders by Tertio; and (ii) only for so
long as the Institutional Stockholders continue to hold Common Stock and other
Securities convertible into Common Stock consisting no less than an aggregate
of ten (10%) percent of the aggregate number of shares of Registrable Shares
held by the Institutional Stockholders as of the date of this Agreement.

 

3.2.          Excluded Transactions.  The rights of the Institutional Stockholders
under this Section 3 shall not apply to:

 

(a)           any
issuance of securities of the Company for consideration other than cash,
including the issuance of shares (i) as a stock dividend to holders of Common
Stock, Series B Preferred Stock or any other Company securities, or upon any
subdivision or combination of shares of Common Stock, Series B Preferred Stock
or any other Company securities and (ii) upon exercise or conversion of preferred
stock, options, warrants or debt securities exercisable or convertible for
Common Stock pursuant to their terms; and

 

(b)           any
issuance of securities of the Company if such issuance (i) is excluded from the
definition of “Additional Shares of Common Stock” as set forth in the Series B
Certificate or (ii) is in connection with a merger, consolidation,
recapitalization, reorganization or other transaction in which (x) the Company
is a constituent party or (y) a subsidiary of the Company is a constituent party
and the Corporation issues shares of its capital stock pursuant to such
transaction.

 

4.             Board of Directors.

 

4.1.          Series B Director.

 

(a)           The
Company confirms that, effective contemporaneously with the execution and
delivery of this Agreement, Peter Skinner has become a director of the Company,
pursuant to the right of the Investors to designate the Series B Director under
Section 3(b) of the Series B Certificate. 
The Compensation Committee of the Board of Directors of the Company
shall include the Series B Director if requested in writing by the Investors
holding a majority of the shares of Series B Preferred Stock.

 

(b)           The
Company and the Investors agree to take any such further actions as may be
necessary or desirable to effect the election, from time to time in the future,
of the Series B Director to (i) the Board of Directors, and (ii) the
Compensation Committee of the Board of Directors, if so requested.

 

(c)           No
individual designated to serve on the Board of Directors as the Series B
Director shall be deemed to be the deputy of or otherwise required to discharge
his or her duties under the direction of, or with special attention to the
interests of, the Investors.

 

15

 

4.2.          Designation of Series B Director.  For so long as the Investors retain the right
to designate the Series B Director under Section 3(b) or Section 4(b) of the
Series B Certificate, the Company shall provide the Investors with at least 30
consecutive days’ prior written notice (a “Company Election Notice”) of any intended
mailing of a notice to stockholders for a meeting or other action relating to
an election of directors.  The Company
Election Notice shall specify (i) the date of such meeting, (ii) the date on
which such mailing is intended to be made, and (iii) the name or names of the
directors of the Company whose terms are to expire at such meeting.  If the Series B Director is one of the
directors whose term is indicated in the Company Election Notice as expiring
and the Investors retain the right to designate the Series B Director under
Section 3(b) of the Series B Certificate, then the Investors holding in the
aggregate at least a majority of the shares of Series B Stock on the record
date for such election shall give written notice to the other Investors and the
Company, no later than 15 days after receipt of the Company Election Notice, of
such individual to be designated by the Investors as the Series B Director for
election to the Board of Directors as of the date of such meeting.  It shall be a condition to including any such
individual in the applicable proxy materials that the designated Series B
Director provide the information concerning his or her history, background, or
as otherwise required under the Exchange Act. 
The individual designated pursuant to the preceding sentence or
otherwise in accordance with the Series B Certificate, shall be elected to the
Board of Directors as the Series B Director contemporaneously with such
election of directors.  If the Investors
fail to give notice to the Company provided above, then the individual then
serving as the Series B Director shall be deemed to have been designated for
reelection.

 

4.3.          Observer Rights.  For so long as the Investors hold, in the
aggregate such number of shares of Series B Preferred Stock and other
convertible securities of the Company (including convertible debt instruments)
which would, upon the conversion into Common Stock of all such shares of Series
B Preferred Stock and such other convertible securities when taken together
with that number of Common Stock then held by the Investors constitute no less
than two (2%) percent of the Company’s issued and outstanding Common Stock
after having given effect to such conversion, the Company shall give the
Investors written notice of each meeting of the Board of Directors and each
committee thereof at least at the same time and in the same manner as notice is
given to the directors, and the Company shall permit a representative of the
Investors to attend as a non-voting observer all meetings of the Board of
Directors and all committees thereof. 
The Investors shall provide the Company with written notice identifying
the individual who shall exercise board observations rights on behalf of the
Investors.  Effective upon execution and
delivery of this Agreement, the Investors hereby appoint James Brocklebank as
the initial board observer.  The Company
shall deliver to the representative of the Investors all written materials and
other information (including without limitation copies of meeting minutes)
given to directors in connection with such meetings at the same time such
materials and information are given to the directors.  The Investors understand and acknowledge that
the Board of Directors (or a committee of the Board of Directors, as the case
may be) shall have and reserve the right to exclude the observer from all or
any portion of a meeting to the extent (i) necessary to preserve attorney
client privilege or (ii) the Board of Directors (or such committee), in its sole
discretion, deems the presence of such observer to be inconsistent with the
Company’s goal of adhering to best practices of corporate governance or
otherwise inadvisable under then-current laws, rules, regulations, including
any guidelines and interpretations thereof applicable to the Company set forth
or proposed by Nasdaq, exchange or any trading quotation system on which the
Common Stock is then traded.  The Company
shall use its best efforts to provide such observer with as much advance notice
as is reasonably practicable of such need for exclusion.  If any action is proposed to be taken by
written consent in lieu of a meeting of the Board of Directors or any committee
thereof, the Company shall give written notice thereof to the Investors on or
before the effective date of such consent describing in reasonable detail the
nature and substance of such proposed action. 
Notwithstanding the foregoing, (a) the observer rights granted pursuant
to this Section 3.3 shall be subject to the Investors and the observer
complying with the Company Policies, and (b) the Investors agree, and any
observer will agree in writing, to hold in confidence all confidential
information

 

16

 

concerning the Company provided to the Investors or
learned by the Investors in connection with its rights under this Section 4.3,
using the same degree of care as the Investors use to protect their own
confidential information, except to the extent higher standards otherwise
required by law and any other regulatory process to which any Investor is
subject.

 

4.4.          Other Covenants.

 

(a)           For so
long as any Series B Director is serving on the Board of Directors pursuant to
Section 4.2 of this Agreement or otherwise in accordance with the Series B Certificate:

 

(i)            The Company shall
reimburse the Series B Director for his or her reasonable out-of-pocket
expenses incurred in attending meetings of the Board of Directors or any
committee thereof, to the extent provided in, and in accordance with, the Company’s
reimbursement policy in effect from time to time with respect to other
directors who are not employees of the Company or a Subsidiary.  The Series B Director shall be entitled to
receive such fees or other compensation as may be paid by the Company from time
to time to directors who are not employees of the Company or a Subsidiary.

 

(ii)           The Company’s
Certificate of Incorporation shall at all times provide for the indemnification
of the members of the Board of Directors to the fullest extent provided by the
Delaware General Corporation Law and to the maximum extent provided in any
indemnification agreement entered into between the Company and any of its
directors and officers.  In the event
that the Company or any of its successors or assigns (A) consolidates with or
merges into any other entity and shall not be the continuing or surviving
corporation in such consolidation or merger or (B) Transfers all or
substantially all of its properties and assets to any entity, then, and in each
such case, to the extent necessary, proper provision shall be made so that the
successors and assigns of the Company assume the obligations of the Company
with respect to indemnification of members of the Board of Directors as
contained in the Company’s Certificate of Incorporation.

 

(iii)          The Company shall use
its best efforts to carry and maintain insurance against directors’ and
officers’ liability to cover the Series B Director to the same extent as
directors elected by the holders of Common Stock in the amounts presently in
place which are set forth on Schedule 4.4(a)(iii).

 

(b)           For so
long as the representative of the Investors attends as a non-voting observer
all meetings of the Board of Directors and all committees thereof, the Company
shall reimburse the representative of the Investors for his or her reasonable
out-of-pocket expenses incurred in attending meetings of the Board of Directors
or any committee thereof, to the extent provided in, and in accordance with,
the Company’s reimbursement policy in effect from time to time with respect to
directors who are not employees of the Company or a Subsidiary.

 

(c)           By
executing the signature page to this Agreement, each of the Investors hereby
(i) acknowledges the receipt of a copy of each Company Policy as in effect on the
date hereof, (ii) agrees to comply with such Company Policies, and (iii) agrees
to use its best efforts to cause the Series B Director and the observer to
comply with such Company Policies.

 

4.5.          Consent Right of Investors.  For so long as the Investors are not entitled
to vote their shares of Series B Preferred Stock due to restrictions imposed by
the applicable rules and regulations of NASDAQ, the Company hereby agrees that
it shall not take any of the actions set forth in Section 3(c) of the Series B Certificate
without the prior written consent of the Investors holding a majority of the
then outstanding shares of Series B Preferred Stock.

 

17

 

5.             Additional Covenants.

 

5.1.          Compliance with Federal Securities Laws.  With a view to making available to the
Investors the benefits of Rule 144 and any other rule or regulation of the
Commission that may at any time permit an Investor to sell securities of the
Company to the public without registration, and with a view to making it
possible for Investors to have the Registrable Shares registered for resale
pursuant to a registration on Form S-3 (or any successor form), the Company
shall:

 

(a)           use its
best efforts to make and keep current public information about the Company
available, as those terms are understood and defined in Rule 144, at all times;

 

(b)           use its
best efforts to file with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the Exchange
Act;

 

(c)           use its
best efforts to comply with the applicable provisions of the Sarbanes-Oxley Act
that are currently in effect and to comply with any other applicable provisions
of the Sarbanes-Oxley Act not currently in effect as such provisions become
effective; and

 

(d)           furnish to
any Investor upon request (i) a written statement by the Company as to its
compliance with the reporting requirements of Rule 144 and (ii) such other
reports and documents of the Company as such Investor may reasonably request to
avail itself of any similar rule or regulation of the Commission allowing it to
sell any Registrable Shares without registration.

 

5.2.          Other Registration Rights.

 

(a)           Subsequent
to the date hereof, the Company shall not enter into any Other Registration
Rights with any Other Registration Rights Holder unless such Other Registration
Rights do not conflict with the provisions of this Agreement.  Other Registration Rights shall not be deemed
to conflict with this Agreement solely as a result of a grant of incidental
registration rights to the Other Registration Rights Holders with respect to a
Registration Statement filed pursuant to Section 2.1 of this Agreement; provided that:

 

(i)            Investors are granted
the right to exercise incidental registration rights with respect to any
registration required by such Other Registration Rights Holders to be made by
the Company;

 

(ii)           if a managing
underwriter advises the Company that marketing factors require a limitation on
the number of shares to be underwritten in an offering made at the request of
the Other Registration Rights Holders, the shares held by such Other
Registration Rights Holders shall be excluded first, before any shares of the
Investors are excluded; and

 

(iii)          if a managing
underwriter advises the Company that marketing factors require a limitation on
the number of shares to be underwritten in an offering requested under Section
2.1 of this Agreement, the shares held by such Other Registration Rights
Holders shall be excluded first, before any shares of the Investors are
excluded.

 

(b)           The
Investors hereby acknowledge that the Company has granted certain registration
rights pursuant to that certain Registration Rights Agreement, dated as of the
3rd day of November, 2003, among the Company and the former stockholders of CMS
Communications, Inc., an Ohio corporation (the “CMS Registration Rights Agreement”).  Notwithstanding anything herein to the
contrary, the Company’s satisfaction of its obligations under, and compliance
with, the CMS Registration Rights Agreement shall in no event be deemed a
breach of this Agreement.

 

18

 

5.3.          Financial and Business Information.  From and after the date hereof, in the event
(and during the continuance of the period) that the Company is no longer a
publicly reporting company, the Company shall deliver to each Investor that has
executed or otherwise has in effect a non-disclosure agreement with the
Company, the following:

 

(a)           Annual
Statements.  As soon as practicable
after the end of each fiscal year of the Company, and in any event within
ninety (90) consecutive days thereafter:

 

(i)            consolidated and
consolidating balance sheets of the Company and any subsidiaries at the end of
such year;

 

(ii)           consolidated and consolidating
statements of income, stockholders’ equity and cash flows of the Company and
any subsidiaries for such year, setting forth in each case in comparative form
the figures for the previous fiscal year, all in reasonable detail and
accompanied by an opinion thereon of independent certified public accountants
of recognized national standing selected by the Company, which opinion shall
state that such financial statements fairly present the financial position of
the Company and any subsidiaries on a consolidated basis and have been prepared
in accordance with GAAP (except as described in the notes thereto and for
changes in application in which such accountants concur) and that the
examination of such accountants in connection with such financial statements
has been made in accordance with generally accepted auditing standards, and
accordingly included such tests of the accounting records and such other
auditing procedures as were considered necessary in the circumstances; and

 

(iii)          comparisons of each pertinent
item in (i) and (ii) above to the operating and capital budget referred to in
Section 5.3(b) of this Agreement.

 

(b)           Business
Plans and Budgets.  At least thirty
(30) consecutive days prior to the end of each fiscal year, (i) an annual
business plan setting forth the anticipated strategic business activities and
goals, including an expected budget, of the Company an projections of operating
results, prepared on a quarterly basis, and (ii) an annual capital budget
describing the intended capital investment strategy of the Company that has
been approved and adopted by the Board.

 

(c)           Quarterly
Statements.  Within forty-five (45)
consecutive days after the close of each of the first three (3) fiscal quarters
of each fiscal year of the Company, a consolidated balance sheet, statement of
income and statement of cash flows of the Company and any subsidiaries as at
the close of such quarter and covering operations for such quarter and the
portion of the Company’s fiscal year ending on the last day of such quarter,
all in reasonable detail and prepared in accordance with GAAP, subject to audit
and year-end adjustments, setting forth in each case in comparative form the
figures for the comparable period of the previous fiscal year, and a summary
written analysis of such comparison.  The
Company shall also provide comparisons of each pertinent item to the operating
and capital budget referred to in Section 5.3(b) of this Agreement.

 

(d)           Monthly
Statements.  Within thirty (30)
consecutive days after the end of each month, a consolidated balance sheet,
statement of income and statement of cash flows of the Company and any
subsidiaries as at the close of such month and covering operations for such
month and the portion of the Company’s fiscal year ending on the last day of
such quarter, all in reasonable detail and prepared in accordance with GAAP,
subject to audit and year-end adjustments, setting forth in each case in
comparative form the figures for the comparable period of the previous fiscal
year, and a summary written analysis of such comparison.  The Company shall also provide comparisons of
each pertinent item to the operating and capital budget referred to in Section
5.3(b) of this Agreement.

 

19

 

(e)           Audit
Reports.  As soon as practicable
after receipt thereof, a copy of any financial report and internal control
letter submitted to the Company by independent accountants in connection with
any annual, interim or special audit made by them of the books of the Company.

 

(f)            Other
Reports.  As soon as practicable
after receipt thereof, one copy of each financial statement, report, notice of
proxy statement, if any, sent by the Company to stockholders generally, of each
written communication received by the Company from any domestic or foreign
securities exchange, the Commission or any foreign regulatory authority
performing functions similar to the Commission.

 

5.4.          VCOC Rights.

 

(a)           In order
to permit compliance with applicable laws (including, without limitation, Department
of Labor “plan asset” regulations, 29 C.F.R. §§2510.3-101) and to facilitate
the input of the Advent Funds with respect to the management of the business of
the Company, the Company agrees to grant the Advent Funds the rights described
below and the Company further agrees that it will give due consideration to
such input as may be provided by the Advent Funds in exercise of such rights:

 

(i)            at reasonable times
and on reasonable notice, the right to discuss, and provide advice with respect
to, the business operations, properties and financial and other conditions of
the Company with each of the Company’s officers, employees and managers and the
right to consult with and advise the senior management of the Company on
matters materially affecting the business and affairs of the Company;

 

(ii)           at reasonable times and
on reasonable notice, the right to submit business proposals or suggestions to
the senior management of the Company from time to time and to have such
proposals or suggestions reasonably considered; and

 

(iii)          the right: (A) to visit
the business premises and other properties of the Company during normal
business hours and on reasonable notice; (B) to receive the budgets and
financial statements of the Company; (C) to examine the books and records of
each of the Company during normal business hours and on reasonable notice; and
(D) to request such other information at reasonable times and intervals in
light of the Company’s normal business operations concerning the general status
of the Company’s business, financial condition and operations but only to the
extent such information is reasonably available to the Company and in a format
consistent with how the Company maintains such information.

 

(b)           In the
event the Advent Funds demonstrate to the Company that the above-mentioned
rights do not satisfy the requirement of management rights for the purpose of
qualifying the Advent Funds’ ownership of an equity interest in the Company as
a venture capital investment for purposes of the Department of Labor “plan
asset” regulations, 29 C.F.R. §§2510.3-101, the Company and the Advent Funds
shall reasonably cooperate in good faith to agree upon mutually satisfactory
consultation rights which satisfy such regulations.  The rights afforded by this Section 5.4 shall
be assignable to any Person who is a transferee of the Advent Funds’ interest
in the Company.

 

(c)           Any
provision of this Section 5.4 may be amended and the observance thereof may be
waived, only with the approval of Advent.

 

(d)           The rights
and obligations under this Section 5.4 shall become effective upon the issuance
or transfer of Series B Stock or Registrable Shares to any Advent Fund.

 

20

 

5.5.          Available Copy.  The Secretary of the Company shall maintain
an original copy of this Agreement, duly executed by each of the parties
hereto, at the principal executive office of the Company and shall make such
copy available for inspection by any Person requesting it.

 

6.             Nonpublic Information.  Neither the Company nor any Person acting on
its behalf shall provide any Investor with any material, nonpublic information
about the Company unless, in advance of the delivery of such information, the
Investor consents to the receipt of such information and agrees to maintain the
confidentiality of such information in writing, regardless of whether the
delivery of such information is otherwise required pursuant to the terms of
this Agreement or any other Transaction Document (as defined in the Purchase
Agreement).  The Company understands and
confirms that each of the Investors will rely on the foregoing covenant in
effecting transactions in securities of the Company.

 

7.             General.

 

7.1.          Use of Best Efforts.  Where this Agreement requires the “best
efforts” of the Company, it is understood and agreed that the Company shall not
be required by its obligation to undertake “best efforts” to incur any
extraordinary expense or undertake or engage in any litigation.

 

7.2.          Notices. 
All notices, requests and other communications to any party hereunder
shall be in writing (including facsimile or similar writing) and shall be given
to such party at its address or facsimile number set forth on the signature
page hereof, or such other address or facsimile number as such party may hereinafter
specify for the purpose of this Section 7.2 to the party giving such
notice.  Each such notice, request or
other communication shall be effective (a) if given by facsimile transmission,
when such facsimile is transmitted to the facsimile number specified on the
signature pages of this agreement and the appropriate confirmation is received
or, (b) if given by mail, 72 hours after such communication is deposited in the
mails with first class postage prepaid, addressed as aforesaid or, (c) if given
by any other means, when delivered at the address specified on the signature
pages of this Agreement.

 

7.3.          Amendments and Waivers.

 

(a)           Other than
with regard to the provisions of Section 2 and Section 5.4 of this Agreement,
this Agreement may be amended or terminated and the observance of any term of
this Agreement may be waived with respect to all parties to this Agreement
(either generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and Investors holding
at least a majority of the Series B Stock then held by Investors.

 

(b)           The
provisions of Section 2 of this Agreement may be amended or terminated and the
observance of any term of Section 2 of this Agreement may be waived with
respect to all parties to this Agreement (either generally or in a particular
instance and either retroactively or prospectively), with the written consent
of the Company and Investors holding at least two-thirds of the Series B Stock
then held by Investors.

 

(c)           The provisions
of Section 5.4 of this Agreement may be amended and the observance thereof may
be waived, only with the approval of Advent.

 

(d)           Notwithstanding
the foregoing, this Agreement may not be amended or terminated and the
observance of any term hereunder may not be waived with respect to any Investor
without the written consent of such Investor unless such amendment, termination
or waiver applies to all Investors in the same fashion.

 

21

 

(e)           The
Company shall give prompt written notice of any amendment or termination of
this Agreement or waiver hereunder to any party hereto that did not consent in
writing to such amendment, termination or waiver.  Any amendment, termination or waiver effected
in accordance with this Section 7.3 shall be binding on all parties hereto,
even if they do not execute such consent. 
No waivers of or exceptions to any term, condition or provision of this
Agreement, in any one or more instances, shall be deemed to be, or construed as,
a further or continuing waiver of any such term, condition or provision.

 

7.4.          Successors and Assigns.  The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided that
the Company may not assign, delegate or otherwise transfer any of its rights or
obligations under this Agreement without the written consent of Investors
holding at least a majority of the Series B Stock then held by Investors.  For purposes of clarity and without limiting
any of the foregoing, to the extent not otherwise provided herein (or, to the
extent applicable, in the Series B Certificate), any Investor may assign,
delegate or otherwise transfer any of its respective rights or obligations
under this Agreement.  Notwithstanding
anything contained herein to the contrary, the rights and privileges set forth
in Sections 4.1, 4.2 and 4.3 are personal to the Investors and may not be
assigned without the prior written consent of the Company.

 

7.5.          Governing Law; Venue; Waiver of Jury Trial.  All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State of
Delaware.  Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting
in the State of Delaware, for the adjudication of any dispute hereunder or in
connection with any transaction contemplated hereby or discussed herein, and
hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, or that such suit, action or proceeding is improper.  Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit,
action or proceeding by mailing a copy thereof via registered or certified mail
or overnight delivery (with evidence of delivery) to such party at the address
in effect for notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice
thereof.  Nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner
permitted by law.  Each of the parties
hereby waives all rights to a trial by jury.

 

7.6.          Entire Agreement.  This Agreement constitutes the entire
agreement and understanding among the parties hereto with respect to the
subject matter of this Agreement and supersedes any and all prior agreements
and understandings, written or oral, relating to such subject matter.

 

7.7.          Severability. 
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.

 

7.8.          Headings. 
The headings in this Agreement are included for convenience of reference
only and shall be ignored in the construction or interpretation hereof.

 

7.9.          Counterparts; Facsimile Signatures;
Effectiveness.  This Agreement may be
executed in any number of counterparts (including facsimile signature) each of
which shall be an original with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement shall become effective
when each party hereto shall have received a counterpart hereof signed by the
other party hereto.

 

22

 

[signature pages follow]

 

23

 

IN
WITNESS WHEREOF, the parties hereto have caused this Investor Rights Agreement
to be duly executed by their respective authorized signatories as of the date first
above written.

 

	
   

  	
  EVOLVING
  SYSTEMS, INC.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Stephen K. Gartside, Jr.

  	
   

  
	
   

  	
  Name:

  	
  Stephen K. Gartside, Jr.

  
	
   

  	
  Title:

  	
  President and CEO

  
	
   

  	
   

  	
   

  
	
   

  	
  Address for notices:

  
	
   

  	
   

  	
   

  
	
   

  	
  Evolving Systems, Inc.

  
	
   

  	
  9777 Mt. Pyramid Ct., Suite 100

  
	
   

  	
  Englewood, CO 80112

  
	
   

  	
  Attn: Anita Moseley, General
  Counsel

  
	
   

  	
  Tel.: (303) 802-2599

  
	
   

  	
  Fax: (303) 802-1138

  
	
   

  	
   

  
	
   

  	
  with a copy to:

  
	
   

  	
   

  
	
   

  	
  Holme Roberts & Owen LLP

  
	
   

  	
  1700 Lincoln St., Suite 4100

  
	
   

  	
  Denver, CO 80203-4541

  
	
   

  	
  Attention: Charles D. Maguire,
  Jr., Esq.

  
	
   

  	
  Tel: (303) 861-7000

  
	
   

  	
  Fax: (303) 866-0200

  
					

 

[Investor signature pages follow]

 

 

	
  INVESTORS:

  	
  TERTIO TELECOMS GROUP LIMITED

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Nigel Clifford

  	
   

  
	
   

  	
  Name:  Nigel
  Clifford

  
	
   

  	
  Title:   Director

  
	
   

  	
   

  
	
   

  	
  c/o Apax Partners Ltd.

  
	
   

  	
  15 Portland Place

  
	
   

  	
  London W1B 1PT

  
	
   

  	
  United Kingdom

  
	
   

  	
  Attn: Peter Skinner

  
	
   

  	
   

  
	
   

  	
  Tel: +44 (0)20 7872 6300

  
	
   

  	
  Fax: + 44(0)20 7666 6441

  
	
   

  	
   

  
	
   

  	
  With a copy to:

  
	
   

  	
   

  
	
   

  	
  Pepper Hamilton LLP

  
	
   

  	
  3000 Two Logan Square

  
	
   

  	
  18th and Arch Streets

  
	
   

  	
  Philadelphia, Pennsylvania 19103

  
	
   

  	
  Attention:    Cary
  Levinson, Esquire

  
	
   

  	
  Tel: (215) 981-4091

  
	
   

  	
  Fax: (215) 981-4750

  
	
   

  	
   

  
	
   

  	
  FOUR SEASONS VENTURE II AS

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Gunnar Rydning

  	
   

  
	
   

  	
  Name:   Gunnar Rydning

  
	
   

  	
  Title:     Senor Partner

  
	
   

  	
   

  
	
   

  	
  Four Seaons Venture

  
	
   

  	
  Postboks 1216 Vika

  
	
   

  	
  0110 Oslo

  
	
   

  	
  Norway

  
	
   

  	
   

  
	
   

  	
  Tel: +47 2283 0660

  
	
   

  	
  Fax: +47 2283 8518

  
					

 

 

	
   

  	
  ADVENT INTERNATIONAL CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
  Global Private Equity III Limited
  Partnership

  
	
   

  	
  Global Private Equity III-A Limited
  Partnership

  
	
   

  	
  Global Private Equity III-B Limited
  Partnership

  
	
   

  	
  Global Private Equity III-C Limited
  Partnership

  
	
   

  	
  Advent PGGM Global Limited
  Partnership

  
	
   

  	
  Advent Euro-Italian Direct
  Investment Program Limited Partnership

  
	
   

  	
  Advent Co-Investment Program
  Limited Partnership

  
	
   

  	
  Digital Media & Communications
  II Limited Partnership

  
	
   

  	
  Advent Crown Fund II C.V.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Advent International Limited Partnership,

  General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  Advent International Corporation,

  General Partner

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Janet L. Hennessy,

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Janet L. Hennessy, Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
  Advent
  Partners Limited Partnership

  
	
   

  	
  Advent
  Partners(NA) GPE III Limited Partnership

  
	
   

  	
  Advent
  Partners GPE III Limited Partnership

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Advent International Corporation, General

  Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Janet L. Hennessy,

  	
   

  
	
   

  	
   

  	
   

  	
  Janet L. Hennessy, Vice President

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Advent Global GECC III Limited
  Partnership

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Advent Global
  Management Limited

  Partnership, General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  Advent
  International Limited

  Partnership, General Partner

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  Advent
  International Corporation,

  General Partner

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Janet L. Hennessey,

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Janet L. Hennessy, Vice

  President

  	
   

  
								

 

 

	
   

  	
   

  	
  Address
  for notices:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  c/o Advent International Company

  
	
   

  	
   

  	
  75 State Street

  
	
   

  	
   

  	
  Boston, Massachusetts 02109

  
	
   

  	
   

  	
  Attention: Janet L. Hennessy

  
	
   

  	
   

  	
  Fax: 617.951.0566

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  With
  a copy to:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Advent International
  plc

  
	
   

  	
   

  	
  123 Buckingham Palace
  Road

  
	
   

  	
   

  	
  London SW1W 9SL

  
	
   

  	
   

  	
  Attention: James L.
  Brocklebank

  
	
   

  	
   

  	
  Tel: 44.20.7333.5516

  
	
   

  	
   

  	
  Fax: 44.20.7333.0801

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Pepper Hamilton LLP

  
	
   

  	
   

  	
  3000 Two Logan Square

  
	
   

  	
   

  	
  18th and Arch Streets

  
	
   

  	
   

  	
  Philadelphia,
  Pennsylvania 19103

  
	
   

  	
   

  	
  Attention: Cary
  Levinson, Esquire

  
	
   

  	
   

  	
  Tel: (215) 981-4091

  
	
   

  	
   

  	
  Fax: (215) 981-4750

  

 

 

	
   

  	
  APAX
  PARTNERS LIMITED

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Apax
  WW Nominees Limited

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Director

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Director

  
	
   

  	
   

  	
   

  
	
   

  	
  Apax
  Europe IV – A, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Apax Europe IV
  GP, L.P., Managing General

  Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  Apax Europe IV
  GP Company Limited.,

  Managing General Partner

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Connie A.E.
  Helyar,

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Connie A.E.
  Helyar, Director

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Apax
  Europe IV – B, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Apax Europe IV
  GP, L.P., Managing General

  Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  Apax Europe IV
  GP Company Limited.,

  Managing General Partner

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Connie A.E.
  Helyar,

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Connie A.E.
  Helyar, Director

  
	
   

  	
   

  	
   

  
	
   

  	
  Apax
  Europe IV – C GmbH & Co. KG

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Apax Europe IV
  GP, L.P., Managing General

  Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  Apax Europe IV
  GP Company Limited.,

  Managing General Partner

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Connie A.E.
  Helyar,

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Connie A.E.
  Helyar, Director

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Apax
  Europe IV – D, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Apax Europe IV
  GP, L.P., Managing General

  Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  Apax Europe IV
  GP Company Limited.,

  Managing General Partner

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Connie A.E.
  Helyar,

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Connie A.E.
  Helyar, Director

  
																

 

 

	
   

  	
  Apax
  Europe IV – E, L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Apax Europe IV
  GP, L.P., Managing General

  Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  Apax Europe IV
  GP Company Limited.,

  Managing General Partner

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Connie A.E.
  Helyar,

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Connie A.E.
  Helyar, Director

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Apax
  Europe IV – F, C.V.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Apax Europe IV
  GP, L.P., Managing General

  Partner

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  Apax Europe IV
  GP Company Limited.,

  Managing General Partner

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Connie A.E.
  Helyar,

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Connie A.E.
  Helyar, Director

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Apax
  Europe IV – G, C.V.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Apax Europe IV
  GP, L.P., Managing General

  Partner

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  Apax Europe IV GP Company Limited.,

  Managing General Partner

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Connie A.E. Helyar,

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Connie A.E. Helyar, Director

  
	
   

  	
   

  	
   

  
	
   

  	
  Address
  for notices:

  
	
   

  	
   

  	
   

  
	
   

  	
  c/o Apax Partners Ltd.

  
	
   

  	
  15 Portland Place

  
	
   

  	
  London W1B 1PT

  
	
   

  	
  United Kingdom

  
	
   

  	
  Attn: Peter Skinner

  
	
   

  	
   

  
	
   

  	
  Tel: +44 (0)20 7872 6300

  
	
   

  	
  Fax: + 44(0)20 7666 6441

  

 

 

Schedule 4.4 (a) (iii)

Directors’ and Officers’

Liability Insurance Coverage

[Attach Insurance Binders]EXHIBIT 4.2(a)

 

Long Term Note/Note A

 

THIS NOTE CONTAINS ORIGINAL ISSUE DISCOUNT, AS
DEFINED IN SECTION 1273 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.  PLEASE CONTACT ANITA MOSELEY, SECRETARY OF
THE COMPANY, AT PHONE NUMBER (303) 802-2599 FOR THE ISSUE DATE OF THE NOTE, THE
ORIGINAL ISSUE DISCOUNT IN THE NOTE AND THE YIELD TO MATURITY.

 

	
  $1,595,000 Principal Amount

  	
  November 2, 2004

  

 

SENIOR SECURED NOTE

 

EVOLVING SYSTEMS,
INC.

 

FOR VALUE RECEIVED, EVOLVING
SYSTEMS, INC., a Delaware corporation (the “Maker”), having its
principal place of business at 9777 Mount Pyramid Court, Englewood, Colorado
80112, hereby promises to pay to the order of Tertio Telecoms Group Ltd., an
entity formed and registered in England and Wales with a company number 4419858
(“Payee”), having an address at One Angel Square, Torrens Street, London
EC1V 1NY, United Kingdom, the principal sum of ONE MILLION, FIVE HUNDRED
NINETY-FIVE THOUSAND DOLLARS ($1,595,000) in lawful money of the United States
of America.

 

1.             Definitions; Interpretations. 
In addition to other terms defined elsewhere in this Note, the
capitalized terms set forth in Schedule 1 attached hereto and incorporated
herein by reference shall have the meanings set forth therein unless defined
elsewhere herein or the context otherwise clearly requires.  Except as otherwise provided herein,
financial and accounting terms used elsewhere in this Note shall be defined in
accordance with GAAP.

 

2.             Payments of Principal.  The
outstanding principal (including amounts added to principal pursuant to Section
3 below)under this Note shall be due and payable in installments as set forth
below at the aforesaid address of Payee or such other place as Payee may
designate:

 

	
  Payment Date

  	
   

  	
  Amount

  	
   

  
	
  March 31, 2006

  	
   

  	
  $178,853

  	
   

  
	
  June 30, 2006

  	
   

  	
  $415,100

  	
   

  
	
  December 31, 2006

  	
   

  	
  $190,866

  	
   

  
	
  March 31, 2007

  	
   

  	
  $249,594

  	
   

  
	
  June 30, 2007

  	
   

  	
  $415,100

  	
   

  
	
  Maturity Date

  	
   

  	
  All
  outstanding amounts hereunder, whether principal, interest or otherwise

  	
   

  

 

 

3.             Pre-Default Interest Rate. 
So long as no Event of Default (as hereinafter defined) has occurred and
is continuing, and subject to the provisions of Section 4 of this Note, the
outstanding principal balance of this Note shall bear interest at a rate per
annum equal to Eleven Percent (11%) (the “Pre-Default Interest Rate”).  From the date of this Note until December 31,
2005, on each Payment Date the principal balance of this Note shall be
increased by an amount equal to the amount of interest that would be payable at
the Pre-Default Interest Rate with respect to this Note accruing on and after
the issuance of this Note.  Commencing
with and including March 31, 2006, the amount of interest accruing at the
Pre-Default Interest Rate shall be paid in cash on a quarterly basis on each
Payment Date.  To the extent not paid,
all interest shall be compounded quarterly.

 

4.             Additional Interest. 
From and after the second anniversary of this Note, the outstanding
principal balance of this Note shall bear interest at a rate per annum equal to
Fourteen Percent (14%).

 

5.             Post-Default Interest Rate. 
Following the occurrence and during the continuance of an Event of
Default the outstanding principal balance of this Note shall bear interest at
the rate per annum equal to Fourteen Percent (14%) (the “Default Rate”).  However, if at any time the Libor Adjusted
Rate shall ever exceed the Default Rate, then following the occurrence and
during the continuance of an Event of Default, the outstanding principal
balance of this Note shall bear interest at the rate per annum equal to the Adjusted
Libor Rate.

 

6.             Optional Prepayment. 
From and after the date hereof, if there is:  (a) no Convertible Note outstanding or (b) a
Convertible Note outstanding and the holder thereof declines to accept a
prepayment under the corresponding section of the Convertible Note, then Maker
may prepay this Note in whole or in part at any time.  There shall be no premium or penalty in
connection with any prepayment.  Such
prepayment shall include all accrued and unpaid interest on the principal
amount of such prepayment.  Each such
prepayment shall be applied first against accrued and unpaid interest, if any,
and then against principal outstanding under this Note in inverse order of
maturity.

 

7.             Mandatory Prepayments.

 

(a)           Within forty-five (45) days after the end
of each fiscal quarter of Maker, starting with the fiscal quarter ending March
31, 2005, Maker shall deliver to Payee a certificate of the chief financial
officer of Maker in the form attached hereto as Exhibit A, specifying
the closing balance for each of the deposit accounts of Maker set forth thereon
on the last day of the most recently completed fiscal quarter (the aggregate of
such closing balance for all such accounts is the “Aggregate Quarterly
Closing Balance”).  Maker shall at
all times maintain, and such certificate of the chief financial officer of the
Maker shall state that the Maker has during the fiscal quarter to which such
certificate relates maintained, such deposit accounts in good faith, and made
all payments drawn against such deposit accounts in accordance with past
practices or current and owing obligations of Maker incurred in the ordinary
course of business.  Payee may in its
sole discretion within ten (10) days after receipt of such certificate, request
that Maker make a prepayment on this Note in an amount up to the amount by
which the Aggregate Quarterly Closing Balance exceeds $7,000,000 (the “Account
Prepayment Amount”) to the extent, if any, in excess of the amount paid to
the Convertible Notes or B-1 Notes under the corresponding sections of the
Convertible Notes or B-1 Notes, as applicable, such payment to be allocated pro
rata among the A Notes held by Payees who have requested such payment, and
Maker shall make such prepayment on this Note within two (2) business days following
receipt of written demand from 

 

2

 

Payee.  Such prepayment shall be applied first
against  accrued interest, if any, and
then against principal outstanding under this Note in inverse order of maturity.

 

(b)           On or before the date that is ten (10)
business days prior to Maker’s mailing of a stockholder proxy and notice of a
stockholder meeting in connection with a stockholder meeting called for the
purpose of approving a Capital Transaction, Maker shall provide the Payee with
written notice (the “Transaction Notice”).  The Transaction Notice shall describe in
reasonable detail the terms and conditions of the Capital Transaction and the
consideration to be paid upon the consummation of the Capital Transaction.  In the event the Capital Transaction would
result in a Change of Control of Maker, then as a condition of such Capital
Transaction, provision shall be made in the definitive documentation to be
executed by the parties to such Capital Transaction whereby Payee may exercise
its rights at set forth in this Section 7(b). 
Upon a Change of Control of Maker, the Payee, in its sole discretion,
shall have the right to declare the entire unpaid principal balance of this
Note, together with interest accrued thereon and with all other sums due or
owed by Maker hereunder, due and payable immediately.  Upon receipt of written notice from Payee,
Maker shall pay to Payee said amounts within two (2) business days; provided
that Payee must exercise the payment option set forth in this Section 7(b)
within forty-five (45) days after receipt of a written notice from Maker
regarding the Change of Control, which notice shall describe in reasonable
detail the terms and conditions of the Change of Control and the consideration
to be paid upon the consummation of the Change of Control.

 

8.             Security.

 

(a)           As security for the repayment of all
liabilities arising under this Note, the Maker hereby grants to Payee a first
priority security interest in and a lien on: 
(i) all of the Collateral (as that term is defined in the Security
Agreement) and (ii) all of the Collateral (as that term is defined in the
Pledge Agreement).  Payee shall have all
rights provided to a secured party under the Security Agreement and Pledge
Agreement under the Uniform Commercial Code of the State of Delaware.  The Maker shall execute and deliver such
documentation as Payee may reasonably request to evidence and perfect Payee’s
security interest granted in this Section 8 and under the Security Agreement and
Pledge Agreement.

 

(b)           The security interest securing the
repayment of all liabilities arising under this Note, and any guaranties
executed by the Maker or any of its Subsidiaries in favor of Payee (or any
collateral agent appointed for the benefit of Payee) in connection with this
Note, shall be automatically released and terminated on the date that the
aggregate outstanding balance of all of the Consideration Notes is equal to or
less than ten percent (10%) of the original aggregate principal amount of all
of the Consideration Notes at the time of issuance.  Upon the occurrence of such an event and
written notice thereof to the Payee:

 

(i)            the Maker
is hereby authorized to terminate all applicable security interests and liens
encumbering the Collateral;

 

(ii)           the
negative covenants set forth in Sections 10(b), 10(c), 10(d), 10(f), 10(j) and 10(k)
of this Note shall terminate;

 

(iii)          the
negative covenants set forth in Section 10(e) of this Note shall be deemed
modified by adding (in addition to, and not in lieu of, all other Permitted
Indebtedness described in Section 10(e)) Indebtedness of the Maker and all
Subsidiaries in an amount not to exceed in 

 

3

 

the aggregate the
principal amount of $3,000,000 at any given time outstanding to the definition
of Permitted Indebtedness;

 

(iv)          the
negative covenant in Section 10(g) of this Note shall be deemed modified to
increase the limitation on Capital Expenditures to $5,000,000 in any fiscal
year; and

 

(v)           the negative
covenant in Section 10(i) of this Note shall be deemed modified to provide that
Investments by Maker in a minority equity interest of Persons engaged in the
Maker’s Business are Permitted Investments (in addition to, and not in lieu of,
all other Permitted Investments described in Section 10(i)), provided that such
investments do not exceed 5% of the Maker’s net worth at the time of such
Investments.

 

The
Payee agrees to take such actions and to execute and deliver such documents and
instruments, as may be reasonably requested by Maker and at the Maker’s
expense, in order to evidence the terminations described herein and to release
any lien or security interest in any collateral securing repayment of the
liabilities arising under this Note.

 

9.             Affirmative Covenants. 
Maker covenants and agrees that, so long as any Indebtedness is
outstanding hereunder, it shall comply, and shall cause its Subsidiaries (to
the extent applicable) to comply, with each of the following:

 

(a)           Upon the request of Payee from time to
time, (i) provide Payee and its representatives (at the Maker’s expense) access
to its books and records and to any of its and its Subsidiaries’ properties or
assets upon three (3) days’ advance notice and during regular business hours in
order that Payee or its representatives may make such audits and examinations
and make abstracts from such books, accounts, records and other papers of Maker
and its subsidiaries pertaining to their deposit accounts, provided, however,
that the Payee may conduct such inspections and examinations no more frequently
than twice in any 12-month period, unless an Event of Default has occurred and
is continuing, in which case the Payee shall not be so limited, and (ii) upon
reasonable advance notification to Maker, permit Payee or its representatives
to discuss the affairs, finances and accounts with, and be advised as to the
same by, officers and independent accountants, all as Payee may deem
appropriate, including without limitation, for the purpose of verifying any
certificate delivered by Maker to Payee under Section 7 hereof, provided that
any such parties are a party to, or bound by, an acceptable non-disclosure
agreement.  The Payee shall conduct at
least one meeting with an executive officer of the Maker in the course of each
such inspection and examination or discussion with officers or independent
accountants.

 

(b)           Comply with all laws, ordinances or
governmental rules or regulations to which it is subject, and shall obtain and
maintain in effect all licenses, certificates, permits, franchises and other
governmental authorizations necessary to the ownership of its properties or to
the conduct of its businesses, except where the failure to so comply or obtain
or maintain would not reasonably be expected to have a Material Adverse Effect.

 

(c)           Except as otherwise permitted under
Section 10 of this Note, at all times preserve and keep in full force and
effect (i) its corporate existence and (ii) take all reasonable action to
maintain all rights and franchises necessary or desirable in the normal conduct
of its business, except to the extent that failure to do so in the case of
clause (ii) of this Section 9(c) would not reasonably be expected to have a
Material Adverse Effect.

 

4

 

(d)           Furnish to Payee notice of the occurrence
of any Event of Default within five (5) business days after it becomes known to
any of Maker’s Authorized Officers.

 

(e)           File all income tax or similar tax
returns required to be filed in any jurisdiction and to pay and discharge all
taxes shown to be due and payable on such returns and all other taxes,
assessments, governmental charges, or levies payable by any of them, to the
extent such taxes and assessments have become due and payable and before they have
become delinquent, provided that Maker need not pay any such tax or assessment
if the amount, applicability or validity thereof is contested by Maker on a
timely basis in good faith and in appropriate proceedings, and Maker has
established adequate reserves therefor in accordance with GAAP on it books.

 

(f)            Operate Maker’s Business (as defined in
Section 10(m) of this Note) in the ordinary course of business except as
provided herein.

 

(g)           In any fiscal year, increase the
Compensation of Executive Officers of Maker only with the unanimous consent of
the Compensation Committee.

 

10.           Negative Covenants. 
Maker covenants and agrees that so long as any Indebtedness is
outstanding hereunder, neither it nor any of its Subsidiaries shall undertake
any of the following without obtaining the prior written consent of the Payee:

 

(a)           voluntarily liquidate, dissolve or wind
up, except for the liquidation, dissolution and winding-up of CMS
Communications, Inc. and Telecom Software Enterprises, LLC (“TSE”);

 

(b)           pay, declare or set aside any sums for
the payment of any dividends, or make any distributions on, any shares of its
capital stock or other securities or make prepayments of principal on any
Indebtedness except in the case of the following (each, a “Permitted Payment”):

 

(i)            prepayments
of principal or payments of interest on (A) any of the Consideration Notes, (B)
any Indebtedness incurred under the Working Capital Exclusion as provided in
Section 10(e)(x) of this Note and promissory notes issued to Peter McGuire and
Lisa Marie Maxson pursuant to the Acquisition Agreement dated October 15, 2004
by and among Maker, Peter McGuire and Lisa Marie Maxson (collectively, the “TSE
Promissory Notes”); provided that there is no Event of Default under this
Note and the collateral securing any such Indebtedness shall be added to the
Collateral (as defined in the Security Agreement) or (C) any Indebtedness of
Evolving Systems Holdings Limited (“ESHL”) or its Subsidiaries in favor
of Royal Bank of Scotland PLC and disclosed in Schedule 2 of this Note;

 

(ii)           dividends
or distributions payable in the common stock of Maker or any of its
Subsidiaries;

 

(iii)          payments
in accordance with any Series B Approved Plan (as such term is defined in the
Series B Designation);

 

(iv)          dividends or
distributions payable by any of Maker’s Subsidiaries to the Maker;

 

5

 

(v)           dividends
or distributions by (A) any Permitted Subsidiary to another Permitted
Subsidiary or (B) any Non-Permitted Subsidiary to a Permitted Subsidiary;

 

(vi)          dividends
or distributions by a Subsidiary of ESHL to ESHL or another Wholly Owned
Subsidiary of ESHL;

 

(vii)         regularly
scheduled payments of principal on Indebtedness permitted under Section 10(e)
(excluding Sections 10(e)(iii) through 10(e)(viii)) of this Note; and

 

(viii)        payments
(whether regularly scheduled, upon demand or otherwise) of Indebtedness
permitted under Sections 10(e)(iii) through 10(e)(viii) to the extent such
payments are made to or received by Maker or a Subsidiary that is a guarantor;

 

(c)           purchase, acquire or obtain (i) any
capital stock or other proprietary interest, directly or indirectly, in any
other entity or (ii) all or a substantial portion of the business or assets of
another Person for consideration (including assumed liabilities) other than
Investments permitted under Section 10(i) and Permitted Acquisitions;

 

(d)           (i) sell or transfer all or a substantial
portion of its assets to another Person; (ii) sell, transfer or otherwise
dispose of any notes receivable or accounts receivable, with or without
recourse; or (iii) sell, lease, transfer or otherwise dispose of any asset or
group of assets (other than as described in clause (ii) above), except:

 

(i)            sales of
inventory in the ordinary course of business;

 

(ii)           sales or
liquidations of Investments permitted by Section 10(i);

 

(iii)          (A)
sales or other dispositions of property by any Subsidiary of Maker to the Maker
or to any other Subsidiary and (B) sales or other dispositions of property by
the Maker to any if its Subsidiaries, so long as the security interests granted
to the Payee pursuant to the Security Agreement in such assets shall remain in
full force and effect and perfected (to at least the same extent as in effect
immediately prior to such sale or other disposition) and provided that any such
Subsidiaries to whom such sales or dispositions are made are guarantors of the
Consideration Notes;

 

(iv)          sales or
other dispositions of obsolete, surplus or worn out property, whether now owned
or hereafter acquired, in the ordinary course of business, or other assets not
practically usable in the business of the Maker or its Subsidiaries; provided
that the aggregate amount of such sales or dispositions does not exceed
$250,000 in any fiscal year of the Maker;

 

(v)           Licenses
of intellectual property of Maker or its Subsidiaries in the ordinary course of
business and which would not otherwise reasonably result in a Material Adverse
Effect; or

 

(vi)          sales,
transfers or other dispositions that constitute a Change of Control;

 

6

 

(e)           create, incur, assume or suffer to exist
any Indebtedness, except, so long as no Event of Default then exists or would
exist as a result thereof, the following (“Permitted Indebtedness”):

 

(i)            Indebtedness
outstanding on the date of this Note and listed on Schedule 2 hereto,  and any refinancings, refundings, renewals or
extensions thereof; provided that the amount of such Indebtedness is not
increased at the time of such refinancing, refunding, renewal or extension;

 

(ii)           obligations
under the Consideration Notes and the TSE Promissory Notes;

 

(iii)          inter-company
Indebtedness between Maker or any Permitted Subsidiary and Evolving Systems
Networks India Private Limited (“ESN”); provided that the aggregate
amount of all inter-company loans made by Maker or any Permitted Subsidiary to
ESN, when taken together with the aggregate amount of Permitted Investments in
ESN under Section 10(i)(ii) of this Note, does not exceed $750,000 in any
fiscal quarter;

 

(iv)          inter-company
Indebtedness between Maker or any Permitted Subsidiary and TSE; provided that
the aggregate amount of all inter-company loans made by Maker or any Permitted
Subsidiary to TSE, when taken together with the aggregate amount of Permitted
Investments in TSE under Section 10(i)(iii) of this Note, does not exceed
$125,000 in any year;

 

(v)           inter-company
Indebtedness between (A) Maker and its Permitted Subsidiaries or (B) a
Permitted Subsidiary with another Permitted Subsidiary;

 

(vi)          inter-company
Indebtedness owing by Maker or a Permitted Subsidiary to a Non-Permitted
Subsidiary;

 

(vii)         inter-company
Indebtedness between (A) ESHL and any of its Wholly Owned Subsidiaries or (B) a
Wholly Owned Subsidiary of ESHL with another Wholly Owned Subsidiary of ESHL;

 

(viii)        inter-company
Indebtedness owing by ESHL or any Subsidiary of ESHL to Maker or a Permitted
Subsidiary, provided that such Indebtedness shall be incurred solely to (A)
supplement the internally generated working capital required to fund the
operation of the business of ESHL or ESHL’s Wholly Owned Subsidiaries in the
ordinary course or (B) fund Capital Expenditures permitted under Section 10(g)
of this Note, and provided further that promptly upon the incurrence of such
Indebtedness, Maker shall give the Payees written notice of the making thereof
and the amount thereof;

 

(ix)           purchase
money Indebtedness to fund the purchase of property otherwise permitted under
Section 10(g) of this Note and Indebtedness constituting Capital Leases
permitted under Section 10(g);

 

(x)            Indebtedness
in the form of an unsecured line of credit in an amount not to exceed in the
aggregate the principal amount of $2,000,000 at any time outstanding (the “Working
Capital Exclusion”);

 

(xi)           Accrual of
interest, accretion or amortization of original issue discount or
payment-in-kind interest in connection with Indebtedness otherwise permitted
under this Section 10(e);

 

7

 

(xii)          (A)
Indebtedness incurred in connection with a Permitted Acquisition and (B)
Indebtedness for Capital Leases assumed pursuant to a Permitted Acquisition,
provided that the aggregate Indebtedness of clause (A) and (B) of this Section 10(e)(xii)
outstanding at any time does not exceed $1,000,000;

 

(xiii)         to
the extent under GAAP, the Series B Preferred Stock would be treated as debt or
mezzanine financing on the financial statements of Maker;

 

(xiv)        Indebtedness
incurred in connection with the financing of insurance premiums in the ordinary
course of business in an amount not to exceed $500,000 in any fiscal year; and

 

(xv)         Indebtedness
owing from ESHL to Maker for the sole purpose of consummating the transactions
contemplated by the Stock Purchase Agreement, provided
that, the aggregate amount of such Indebtedness, when taken together
with the aggregate amount of Permitted Investments by Maker in ESHL under
Section  10(i)(vii) of this Note does not
exceed $12,500,000.

 

(f)            mortgage, encumber, or create or suffer
to exist Liens on any of its assets, other than the following (each, a “Permitted
Lien”);

 

(i)            encumbrances
or Liens in favor of Payee or any holder of the Consideration Notes;

 

(ii)           Liens that
arise out of operation of law;

 

(iii)          easements,
rights-of-way, restrictions (including zoning restrictions) and other similar
encumbrances affecting real property which, in the aggregate, are not
substantial in amount, and which do not in any case materially detract from the
value of the property subject thereto or materially interfere with the ordinary
conduct of the business of the applicable Person and none of which is violated
by existing or proposed restrictions on land use;

 

(iv)          Liens
securing Indebtedness permitted under Section 10(e)(xii); provided that (A)
such Liens do not at any time encumber any property other than the property
financed by such Indebtedness and (B) the Indebtedness secured thereby does not
exceed the cost of property being acquired on the date of acquisition and (C)
such Liens are granted substantially contemporaneously with the acquisition of
such property;

 

(v)           Liens
existing on the date hereof and listed on Schedule 2 hereto and any renewals or
extensions thereof, provided that (A) the property covered thereby is not
changed, 

 

8

 

(B) the amount secured or
benefited thereby is not increased, and (C) any renewal or extension of the
obligations secured or benefited thereby is not prohibited by this Note; and

 

(vi)          Liens on
insurance policies and the proceeds thereof incurred in connection with the
financing of insurance premiums in the ordinary course of business in an amount
not to exceed $500,000 in any fiscal year;

 

(g)           make or commit to make any Capital
Expenditures (whether by expenditure of cash or the incurrence of Indebtedness
for Capital Leases to fund the acquisition of property pursuant to any
permitted Capital Expenditure); provided that, the cash paid for the Capital
Expenditure, when taken together with the aggregate liability required by GAAP
consistently applied and in accordance with the Maker’s past practice, to be
reflected in Maker’s financial statements in respect of any Capital Lease (“Lease
Liability”) plus the sum of (i) any cost incurred by Maker in connection
with the acquisition, delivery or installation of the property which is the
subject of the Capital Lease, but which cost is not included in the Lease
Liability and (ii) to the extent not otherwise reflected in the Capital Lease
payments, interest expense incurred in respect of the Capital Lease for the
relevant fiscal year will be deemed a Capital Expenditure made or committed
during the fiscal year in which the Capital Lease is signed or becomes
effective, whichever first occurs, does not exceed $2,000,000 in any fiscal
year;

 

(h)           enter into any transaction with any of
its Affiliates that is less favorable to Maker or any of its Subsidiaries than
would have been the case if such transaction had been effected on an arms
length basis with a Person other than an Affiliate, except for transactions between
and among Maker and its Subsidiaries otherwise permitted under this Note;

 

(i)            enter into or make any Investments, other
than the following (each, a “Permitted Investment”):

 

(i)            Cash
Equivalents;

 

(ii)           (A) equity
Investments existing as of the date hereof in ESN and (B) equity Investments
made after the date hereof by Maker or any Permitted Subsidiary in ESN provided
that any such Investments, when taken together with all inter-company loans
made by Maker or any Permitted Subsidiary to ESN permitted under Section 10(e)(iii)
of this Note, does not exceed $750,000 in any fiscal quarter;

 

(iii)          (A)
equity Investments existing as of the date hereof in TSE and (B) equity
Investments made after the date hereof in TSE provided that any such
Investments, when taken together with all inter-company loans made by Maker or
any Permitted Subsidiary to TSE permitted under Section 10(e)(iv) of this Note,
does not exceed $125,000 in any fiscal year;

 

(iv)          equity
Investments (A) existing as of the date hereof in any Permitted Subsidiary and
(B) equity Investments made after the date hereof in any Permitted Subsidiary;

 

(v)           (A) equity
Investments existing as of the date hereof in ESHL or any of ESHL’s Wholly
Owned Subsidiaries, (B) equity Investments made after the date hereof by Maker
in ESHL, provided that such Investments shall be made solely to (1) supplement
the internally generated working capital required to fund the operation of the
business of ESHL or ESHL’s Wholly Owned 

 

9

 

Subsidiaries in the
ordinary course or (2) fund Capital Expenditures permitted under Section 10(g)
of this Note, and provided further that promptly upon the making of any such
Investments, Maker shall give the Payees written notice of the making thereof
and the amount thereof, and (C) equity Investments made after the date hereof
by ESHL or a Wholly Owned Subsidiary of ESHL in any of ESHL’s Wholly Owned
Subsidiaries;

 

(vi)          equity
Investments by a Non-Permitted Subsidiary in a Permitted Subsidiary;

 

(vii)         equity
Investments by Maker in ESHL for the sole purpose of consummating the
transactions contemplated by the Stock Purchase Agreement, provided that, the aggregate amount of
such Investments, when taken together with the aggregate amount of Permitted
Indebtedness under Section 10(e)(xv) of this Note, does not exceed $12,500,000;
provided further that, the amount
of such equity Investment shall not exceed 50% of the aggregate amount of the
equity Investment made pursuant to this Section 10(i)(vii) plus the aggregate
amount of Permitted Indebtedness permitted under Section 10(e)(xv) of this
Note;

 

(viii)        Investments
consisting solely of appreciation in value of existing Investments permitted
hereunder;

 

(ix)           any
Permitted Payments under Section 10(b) of this Note, without duplication;

 

(x)            any
Permitted Indebtedness under Section 10(e) of this Note, without duplication;
and

 

(j)            change its fiscal year;

 

(k)           establish any bank accounts into which
accounts receivable are deposited, other than those listed on Exhibit B unless
such bank accounts shall be pledged to Payee and the other secured parties
pursuant to the Security Agreement;

 

(l)            change or amend its Certificate of
Incorporation or Bylaws in a manner adverse to Payee’s rights and remedies
under this Note, any Consideration Note, the Security Agreement or the Pledge
Agreement; or

 

(m)          engage in any material line of business
not related to the OSS communications industry or any business reasonably
related or incidental thereto (the “Maker’s Business”).

 

11.           Determination of Accretive.  In the event the Maker proposes to enter into an
agreement to acquire another Person (the “Proposed Acquisition”), the
Maker shall mail written notice of such event, together with the Financial
Projections, to the Payee, no later than twenty (20) calendar days prior to the
contemplated effective date of the Proposed Acquisition.  The Financial Projections shall be deemed
accepted and conclusive and binding upon the Payee, unless the Payee shall give
written notice to the Maker of the items in the Financial Projections with
which the Payee disagrees (the “Accretive Calculation Disagreement Notice”)
within twenty (20) calendar days of the receipt by the Payee of the 

 

10

 

Financial
Projections.  The Accretive Calculation
Disagreement Notice shall specify each item disagreed with by the Payee (or the
Payee’s calculation thereof) and the dollar amount of such disagreement.  The Maker may, within twenty (20) calendar
days of its receipt of the Accretive Calculation Disagreement Notice, advise
the Payee that the Maker has accepted the position of the Payee as set forth on
the Accretive Calculation Disagreement Notice, whereupon the Proposed
Acquisition shall be considered a Permitted Acquisition Event for all purposes
of this Note.  If the Maker does not
notify the Payee of the Maker’s acceptance of the Payee’s position, then the
Maker and the Payee shall, during the twenty (20) calendar days after receipt
by the Maker of the Accretive Calculation Disagreement notice, negotiate in
good faith to resolve any such disagreements. 
If at the end of such twenty (20) calendar days, the Maker and Payee
have been unable to resolve their disagreements, either the Maker or the Payee
may engage on behalf of the Maker and the Payee, Grant Thornton LLP (or such
other Person mutually agreed to in writing by the Maker and Payee) (the “Unaffiliated
Firm”) to resolve the matters set forth in the Accretive Calculation
Disagreement Notice.  The Unaffiliated
Firm shall (i) resolve the disagreement as to the Financial Projections as
promptly as possible after its engagement by the parties; (ii) thereby consider
and resolve only those items in the Accretive Calculation Disagreement Notice
which remain unresolved between the Maker and the Payee; and (iii) shall
otherwise employ such procedures as it, in its sole discretion, deems necessary
or appropriate in the circumstances.  The
Unaffiliated Firm shall submit to the Maker and the Payee a report of its
review of the items in the Accretive Calculation Disagreement Notice as quickly
as practicable and shall include in such report its determination as to whether
the effect of the proposed merger or consolidation is Accretive.  The determination so made by the Unaffiliated
Firm shall be conclusive, binding on, and non-appealable by, the Maker and the
Payee.  The fees and disbursements of the
Unaffiliated Firm shall be borne one half by the Maker and one half by the
Payee.  Notwithstanding all of the
foregoing, the Maker may elect, at any time, not to comply with this Section 11
with respect to a Proposed Transaction (or if the Maker otherwise fails to
properly comply with the terms of this Section 11) in which event, the
transaction shall be deemed not to be Accretive.

 

12.           Events of Default.

 

(a)           For purposes of this Note, an “Event
of Default” shall have occurred hereunder if:

 

(i)            Maker
shall fail to pay within one (1) business day after the date when due any
payment of principal, interest, fees, costs, expenses or any other sum payable
to Payee hereunder or otherwise, including the other Consideration Notes;

 

(ii)           Maker
shall default in the performance of any other agreement or covenant contained
herein (other than as provided in Section 12(a)(i) of this Note) or under any
Consideration Note or in the Security Agreement or Pledge Agreement, and such
default shall continue uncured for twenty (20) consecutive days after notice
thereof to Maker given by Payee;

 

(iii)          Maker
becomes insolvent or generally fails to pay its debts as such debts become due
or admits in writing its inability to pay its debts as such debts become due;
or shall suffer a custodian, receiver or trustee for it or substantially all of
its property to be appointed and if appointed without its consent, not be
discharged within ninety (90) consecutive days; makes a general assignment for
the benefit of creditors; or suffers proceedings under any law related to
bankruptcy, insolvency, liquidation or the reorganization, readjustment or the
release of debtors to be instituted against it and if contested by it not
dismissed or stayed within ninety (90) consecutive days; if proceedings under 

 

11

 

any law related to
bankruptcy, insolvency, liquidation, or the reorganization, readjustment or the
release of debtors is instituted or commenced by or against Maker and, in the
case of proceedings not instituted or commenced by Maker, if contested by
Maker, and not dismissed or stayed within ninety (90) consecutive days; if any
order for relief is entered relating to any of the foregoing proceedings which
order is not stayed; if Maker shall call a meeting of its creditors with a view
to arranging a composition or adjustment of its debts; or if Maker shall by any
act or failure to act indicate its consent to, approval of or acquiescence in
any of the foregoing;

 

(iv)          (A)  This Note, any of the other Consideration
Notes or the Security Agreement or the Pledge Agreement shall, for any reason
(other than payment or satisfaction in full of the obligations represented
thereby) not be or shall cease to be in full force and effect (other than in
accordance with its terms) or shall be declared null and void or (B) Payee or
any other secured party under the Security Agreement or the Pledge Agreement
shall not give or shall cease to have a valid and perfected Lien in any
collateral under such Security Agreement or Pledge Agreement (other than by
reason of a release of collateral in accordance with the terms hereof or
thereof) with the priority required by the Security Agreement or Pledge
Agreement, as applicable, or (C) the validity or enforceability of any of the
Consideration Notes or the liens granted, to be granted, or purported to be
granted, by the Security Agreement or the Pledge Agreement shall be contested
by the Maker;

 

(v)           If Maker
shall be in default with respect to any payment, when due (subject in each case
to applicable grace or cure periods), of any Indebtedness in excess of $175,000
(other than under this Note or any other Consideration Note), or any other
default shall occur under any agreement or instrument evidencing such
Indebtedness, if the effect of such non-payment default is to accelerate the
maturity of such Indebtedness or to permit the holder thereof to cause such
Indebtedness to become due prior to its stated maturity, and such default shall
not be remedied, cured, waived or consented to within the period of grace with
respect thereto, or any other circumstance which arises (other than the mere
passage of time) by reason of which any such Indebtedness shall become or be
declared to be due and payable prior to its stated maturity; or

 

(vi)          If:  (i) as of June 30, 2005, Maker’s EBITDA for
the most recently ended fiscal half year shall not exceed $0, or (ii) beginning
with the fiscal half year ending December 31, 2005, as of the last day of any
fiscal half year ending in any June or December, Maker’s Ratio of Indebtedness
to EBITDA shall be greater than 4-to-1. 
For purposes of calculating EBITDA for this Section 12(a)(vi), (x) all
non-cash charges for goodwill impairment resulting from the transactions
contemplated by the Stock Purchase Agreement shall be added back to Net Income;
and (y) Net Income shall not be modified as a result of any “mark to market”
adjustments resulting from any anti-dilution or other adjustments with respect
to this Note or the Maker’s Series B Preferred Stock.  For the purposes of calculating Indebtedness
for this Section 12(a)(vi), Indebtedness shall not be modified as a result of
any “mark to market” adjustments resulting from any anti-dilution or other
adjustments with respect to this Note or the Maker’s Series B Preferred Stock.

 

(vii)         If
Maker shall have breached its covenant under the Stock Purchase Agreement to
duly convene a Stockholder Meeting (as defined in the Stock Purchase Agreement)
within the time period set forth therein.

 

12

 

(viii)        subject
to Section 12(b) of this Note, if Maker shall have failed to have a Shelf
Registration Statement filed and declared and maintained effective as provided
under Section 5 of the Series B Designation (a “Registration Event of
Default”).

 

Notwithstanding anything
contained herein to the contrary, no Event of Default shall be deemed to have
occurred under this Note if the Event of Default resulted solely form a breach
of any representation, warranty or covenant of Tertio Telecoms Group Limited
under the Stock Purchase Agreement.

 

(b)           In the event that Payee transfers any
portion of the outstanding principal balance of this Note to any Person (other
than the Payee’s shareholders and Affiliates of such shareholders) and, at the
time of transfer, Payee does not also transfer the greater of (i) a number of
Registrable Shares at least equal to the product of the number of Registrable
Shares then held by Payee, its shareholders or Affiliates of such shareholders
multiplied by a fraction, the numerator of which is the amount of the
outstanding principal balance of this Note transferred to such Person, and the
denominator of which is the aggregate principal amount of all Consideration
Notes held by Payee or (ii) at least 50,000 Registrable Shares (the “Share
Transfer Minimum”) to such Person, Section 12(a)(viii) of this Note shall
terminate with respect to the portion of this Note so transferred.  In the event Payee transfers any of the
outstanding principal of this Note to any Person (other than Payee’s
shareholders and Affiliates of such shareholders) and, at the time of transfer,
also transfers to such Person at least the Share Transfer Minimum, the
occurrence of a Registration Event of Default shall continue to constitute an
Event of Default and such Person shall be entitled to exercise the remedies
arising under this Note upon the occurrence and during the continuance of a
Registration Event of Default.  Without
limiting any of the foregoing and for purposes of clarity, for so long as this
Note is held by Payee, its shareholders or the Affiliates of such shareholders
(regardless of whether in the event of a transfer of this Note to any of Payee’s
shareholders or the Affiliates of such shareholders the Payee simultaneously
transfers the Share Transfer Minimum) the occurrence of a Registration Event of
Default shall constitute an Event of Default and the remedies available to
Payee upon the occurrence and during the continuance of an Event of Default
shall continue unaffected with respect to the portion of this Note held by
Payee, Payee’s shareholders and Affiliates of such shareholders.

 

13.           Consequences of Default.

 

(a)           Upon the occurrence and during the
continuance of an Event of Default:

 

(i)            if there
is:  (A) no Convertible Note outstanding
or (B) a Convertible Note outstanding and the Payee thereof does not request a
payment under the corresponding section of the Convertible Note, then, upon
receipt of notice from the Payee (at Payee’s option), Maker shall immediately
pay to Payee (to the extent not previously paid) any Account Prepayment Amount
(calculated as of the most recent test date), regardless of whether the holders
of A Notes requested any such payment at the time of calculation; and

 

(ii)           the entire
unpaid principal balance of this Note, together with interest accrued thereon
and with all other sums due or owed by Maker hereunder, as well as all out-of-pocket
costs and expenses (including but not limited to attorneys’ fees and
disbursements) incurred by 

 

13

 

Payee in connection with
the collection or enforcement of this Note, the Security Agreement or the
Pledge Agreement, shall at Payee’s option, and by notice to Maker (except if an
Event of Default described in Section 12(a)(iii) shall occur in which case
acceleration shall occur automatically without notice) be declared to be due
and payable immediately, and payment of the same may be enforced and recovered
by the entry of judgment of this Note and the issuance of execution thereon.

 

(b)           In addition to all of the sums payable
hereunder, Maker agrees to pay the Payee all reasonable costs and expenses incurred
by Payee in connection with any and all actions taken to enforce collection of
this Note, the Security Agreement and the Pledge Agreement upon the occurrence
of an Event of Default, including all reasonable attorneys’ fees.

 

14.           Remedies not Exclusive. 
The remedies of Payee provided herein or otherwise available to Payee at
law or in equity shall be cumulative and concurrent, and may be pursued singly,
successively and together at the sole discretion of Payee, and may be exercised
as often as occasion therefor shall occur; and the failure to exercise any such
right or remedy shall in no event be construed as a waiver or release of the
same.

 

15.           Additional Notes.

 

(a)           Allocation Notice. 
On or before the date that is ten (10) business days prior to Maker’s
mailing of a stockholder proxy and notice of a stockholder meeting in
connection with the Initial Stockholder Meeting (as such term is defined in the
Series B Designation), the Payee shall provide the Maker with written notice
(the “Allocation Notice”) of its election to reallocate the aggregate
outstanding principal amount and accrued interest of the A Notes (collectively,
the “Allocable Amount”).  The
Allocation Notice shall set forth the amounts of the Allocable Amount which (i)
shall be allocated to Convertible Note, (ii) shall be allocated to B-1 Note and
(iii) shall remain as outstanding principal of A Notes, as the case may
be.  Subject to the limitations set forth
in Section 15(b) of this Note, Payee shall have the sole discretion to allocate
the Allocable Amount to the Convertible Note and to the B-1 Note and to leave
outstanding as principal of the A Notes such amounts at they deem appropriate;
provided that Payee shall allocate at least thirty percent (30%) of the
Allocable Amount to the Convertible Note.

 

(b)           Limitation on Issuance of Convertible
Note.  If the Payee allocates a portion of the
Allocable Amount to the Convertible Note and such allocation would result in
the Payee, meeting or exceeding the Ownership Threshold, then the Payee shall
allocate only that portion of the Allocable Amount to the Convertible Note that
would not result in the Payee meeting or exceeding the Ownership Threshold and
the portion of the Allocable Amount that is not allocable to the Convertible
Note shall remain as outstanding principal of the A Notes.  If the Payee allocates a portion of the
Allocable Amount to the Convertible Note and such allocation would not result
in the Payee meeting or exceeding the Ownership Threshold, then such portion of
the Allocable Amount shall be allocated to the Convertible Note and the balance
of the Allocable Amount shall be allocated to the B-1 Note.  The aggregate principal amount and accrued
interest allocated to the Convertible Note and the B-1 Note and remaining
outstanding as A Notes shall be equal to the Allocable Amount at the time of
delivery of the Allocation Notice.

 

(c)           Shareholder Vote. 
Upon the occurrence of the Conversion Approval, Maker shall promptly
execute and deliver to Payee: (x)
if any principal amount of the A Note is to remain outstanding, an allonge to
this Note, in form and substance acceptable to Payee, reducing the original 

 

14

 

principal amount of this
Note to the pro rata amount to
remain outstanding (without adjustment to the amortization schedule); (y) if an amount is allocated to the B-1
Note, B-1 Note reflecting a pro rata portion of the principal allocated to the
B-1 Note and (z) Convertible Note
reflecting the pro rata portion of principal amount allocated to the
Convertible Note in the Allocation Notice (subject to the limitations set forth
in Section 15(b)).  Delivery of the
allonges and notes referenced in this Section 15(c) shall be accompanied by an
opinion of counsel of Maker in form and substance satisfactory to Payee and its
legal counsel.  If the Conversion
Approval is not obtained, this Note shall remain issued and outstanding in
accordance with the terms set forth herein and there shall be no conversion of
the Allocable Amount to the Convertible Note or the B-1 Note.

 

(d)           Cancellation of A Notes. 
If no principal amount is to remain outstanding under this Note, then
this Note shall be cancelled upon receipt of duly executed Convertible Note and
B-1 Note by Payee, and Payee shall mark this Note “cancelled” and return it to
Maker.

 

(e)           Tax Characterization. 
Maker and Payee agree that for Federal income tax purposes, the issuance
of the Convertible Note and B-1 Note shall not be treated as a modification of
the A Notes or as a taxable exchange under Section 1001 of the Internal Revenue
Code, and Maker and Payee shall not take any position inconsistent therewith.

 

16.           Notices.  All notices
required to be given to any of the parties hereunder shall be in writing and
shall be deemed to have been sufficiently given for all purposes when presented
personally to such party or sent by certified or registered mail, return
receipt requested, to such party at its address set forth below:

 

	
  If to the Maker:

  	
  Evolving Systems, Inc.

  9777 Mount Pyramid Court, Suite 100

  Englewood, Colorado 80112

  Attention: Anita Moseley, General Counsel

  Tel: (303) 802-2599

  Fax: (303) 802-1138

  
	
   

  	
   

  
	
  With copy to:

  	
  Holme Roberts & Owen LLP

  1700 Lincoln St., Suite 4100

  Denver, CO 80203-4541

  Attention: Charles D. Maguire, Jr., Esq.

  Tel: (303) 861-7000

  Fax: (303) 866-0200

  
	
   

  	
   

  
	
  If to the Payee:

  	
  Tertio
  Telecoms Group Ltd.

  c/o Apax Partners Ltd.

  15 Portland Place

  London W1B 1PT

  United Kingdom

  

  Attn: Peter Skinner

  Tel: 44.20.7843.4000

  Fax: 44.20.7843.4001

  

 

15

 

	
  With copies to:

  	
  Advent
  International plc

  123 Buckingham Palace Road

  London SW1W 9SL

  United Kingdom

  

  Attn: James Brocklebank

  Tel: 44.20.7333.5516

  Fax: 44.20.7333.0801

  

  Pepper Hamilton LLP

  3000 Two Logan Square

  18th and Arch Streets

  Philadelphia, Pennsylvania 19103

  Attention: Cary S. Levinson, Esq.

  Tel: (215) 981-4091

  Fax: (215) 981-4750

  

 

Such notice shall be deemed
to be given when received if delivered personally or five (5) business days
after the date mailed.  Any notice mailed
shall be sent by certified or registered mail. 
Any notice of any change in such address shall also be given in the
manner set forth above.  Whenever the
giving of notice is required, the giving of such notice may be waived in
writing by the party entitled to receive such notice.

 

17.           Severability. 
In the event that any provision of this Note is held to be invalid,
illegal or unenforceable in any respect or to any extent, such provision shall
nevertheless remain valid, legal and enforceable in all such other respects and
to such extent as may be permissible. 
Any such invalidity, illegality or unenforceability shall not affect any
other provisions of this Note, but this Note shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.

 

18.           Successors and Assigns; Assignment. 
This Note inures to the benefit of the Payee and binds the Maker, and
its successors and assigns, and the words “Payee” and “Maker” whenever
occurring herein shall be deemed and construed to include such respective
successors and assigns.  Maker may not
assign or transfer this Note, without the consent of Payee.  At any time and from time to time, the Payee,
in its sole discretion, may transfer to any Person all or a portion of the
outstanding principal and/or accrued interest hereunder without the consent of
the Maker, provided, however, this Note may not be assigned, transferred
or sold by Payee to any Person that engages in, or controls an entity that
engages in, a business competitive with the Maker’s business.  Furthermore, as a condition of the transfer,
any transferee of Payee of this Note must agree to become bound by the
provisions of this Note, the Security Agreement and the Pledge Agreement.

 

19.           Entire Agreement. 
This Note (together with the other Consideration Notes, the Security
Agreement and the Pledge Agreement) contains the entire agreement between the
parties with respect to the subject matter hereof and thereof.

 

16

 

20.           Modification of Agreement. 
This Note may not be modified, altered or amended, except by an
agreement in writing signed by both the Maker and the Payee.

 

21.           Releases by Maker. 
Maker hereby releases Payee from all technical and procedural errors,
defects and imperfections whatsoever in enforcing the remedies available to
Payee upon a default by Maker hereunder and hereby waives all benefit that
might accrue to Maker by virtue of any present or future laws exempting any
property, real or personal, or any part of the proceeds arising from any sale
of any such property, from attachment, levy or sale under execution, or
providing for any stay of execution, exemption from civil process or extension
of time, and agrees that such property may be sold to satisfy any judgment entered
on this Note, in whole or in part and in any order as may be desired by Payee.

 

22.           Waivers by Maker. 
Maker (and all endorsers, sureties and guarantors) hereby waives
presentment for payment, demand, notice of demand, notice of nonpayment or
dishonor, protest and notice of protest of this Note, and all other notices in
connection with the delivery, acceptance, performance, default or enforcement
of the payment of this Note (other than notices expressly required by the terms
of this Note, the Security Agreement or the Pledge Agreement); liability
hereunder shall be unconditional and shall not be affected in any manner by an
indulgence, extension of time, renewal, waiver or modification granted or
consented to by Payee.

 

23.           Revenue and Stamp Tax. 
Maker shall pay all reasonable out-of-pocket expenses incurred by the
Payee in connection with any revenue, tax or other stamps now or hereafter
required by law at any time to be affixed to this Note.

 

24.           Governing Law. 
This Note shall be governed by and construed in accordance with the laws
of the State of Delaware, without reference to conflict of laws principles.

 

25.           Limitations of Applicable Law. 
Notwithstanding any provision contained herein, Maker’s liability for
the payment of interest shall not exceed the limits now imposed by any
applicable usury law.  If any provision
of this Note requires interest payments in excess of the highest rate permitted
by law, the provision in question shall be deemed to require only the highest
such payment permitted by law.  Any
amounts theretofore received by Payee hereunder in excess of the maximum amount
of interest so permitted to be collected by Payee shall be applied by Payee in
reduction of the outstanding balance of principal or, if this Note shall
theretofore been paid in full, the amount of such excess shall be promptly
returned by Payee to the Maker.

 

26.           Consent to Jurisdiction and Service of
Process.  Maker irrevocably appoints each of Maker’s
Authorized Officers as its attorneys-in-fact upon whom may be served any
notice, process or pleading in any action or proceeding against it arising out
of or in connection with this Note. 
Maker hereby consents that any action or proceeding against it may be
commenced and maintained in any court within the State of Delaware or in the
United States District Court of Delaware by service of process on any such
officer.  Maker further agrees that the
courts of the State of Delaware and the United States District Court of
Delaware shall have jurisdiction with respect to the subject matter hereof and
the person of Maker and the collateral securing Maker’s obligations
hereunder.  Notwithstanding the
foregoing, Payee, in its absolute discretion, may also initiate proceedings in
the courts of any other jurisdiction in which Maker may be found or in which
any of its properties or any such collateral may be located.

 

27.           Headings.  The headings
of the sections of this Note are inserted for convenience only and do not
constitute a part of this Note.

 

17

 

28.           WAIVER OF JURY TRIAL. 
MAKER HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS
IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY COLLATERAL
SECURITY DOCUMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER ORAL OR WRITTEN) OR ACTIONS OF PAYEE. 
THIS PROVISION IS A MATERIAL INDUCEMENT FOR PAYEE’S ADVANCING THE FUNDS
UNDER THIS NOTE.

 

29.           ACKNOWLEDGEMENTS. 
MAKER ACKNOWLEDGES THAT IT HAS HAD THE ASSISTANCE OF COUNSEL IN THE
REVIEW AND EXECUTION OF THIS NOTE, AND FURTHER ACKNOWLEDGES THAT THE MEANING
AND EFFECT OF THE FOREGOING WAIVER OF JURY TRIAL SET FORTH IN SECTION 28 HAVE
BEEN FULLY EXPLAINED TO MAKER BY SUCH COUNSEL.

 

 

[Signature Page Follows]

 

18

 

IN WITNESS WHEREOF, the
Maker has duly executed this Note as of the date first set forth above.

 

	
   

  	
  EVOLVING SYSTEMS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Stephen K. Gartside, Jr.

  	
   

  
	
   

  	
  Name:

  	
  Stephen K. Gartside, Jr.

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
					

 

 

Acknowledged and Agreed:

 

PAYEE:

 

Tertio Telecoms Group Ltd.

 

	
  By:

  	
  /s/ James Brocklebank

  	
   

  	
   

  
	
  Name:  James Brocklebank

  	
   

  
	
  Title:    Director

  	
   

  

 

19

 

SCHEDULE 1

DEFINITIONS

 

“A Notes” means the
Senior Secured Promissory Notes dated as of November 2, 2004, by Maker in favor
of Payees in the original aggregate principal amount of $11,950,000, each as
they may be amended, restated, modified or replaced in substitution in whole or
in part by any other note or notes from time to time, including, but not
necessarily limited to, the Senior Secured Notes by Maker in favor of Payees
which may be issued in substitution for or in addition to the A Notes issued to
Payee by Maker under the terms of such A Notes.

 

“Accretive” shall
mean that the projected pro forma consolidated EBITDA (calculated on a per
share basis) of the Maker and the other constituent entity(ies) in such
transaction, and the respective Consolidated Subsidiaries of the Maker and such
constituent entity(ies) for the twelve calendar month period immediately
following such transaction, is not less than the projected EBITDA (calculated
on a per share basis), on a consolidated basis, of the Maker and its
Consolidated Subsidiaries for the same period, all as presented in the
Financial Projections.

 

“Adjusted Libor Rate”
means the London Interbank Offering Rate for three-month deposits as reported
under the heading “Money Rates” in the Eastern edition of the Wall Street Journal plus 800 basis points.

 

“Affiliate” shall
mean, with respect to any Person, any other Person which directly or indirectly
Controls, is Controlled by or is under common Control with such Person.

 

“Affiliated Group”
shall mean a group of Persons, each of which is an Affiliate of some other
Person in the group.

 

“Authorized Officer”
shall mean, with respect to Maker, the chief executive officer, chief financial
officer, any vice president, treasurer, comptroller, or general counsel.

 

“B-1 Note” means the
Senior Secured Note of Maker in favor of Payee in such aggregate principal
amount Maker may issue as a result of the outcome of the stockholder vote on
the matters presented for their approval at the Initial Stockholders Meeting (as
such term is defined in the Series B Designation) in effect from time to time
in the form attached hereto as Exhibit B-1, as it may be amended,
restated, modified or replaced in substitution in whole or in part by any other
note or notes from time to time, including, but not necessarily limited to, the
Senior Secured Note by Maker in favor of Payee which may be issued in
substitution for or in addition to the B-1 Note issued to Payee by Maker under
the terms of such B-1 Note.

 

“Capital Expenditures”
shall mean, with respect to any Person for any period, the aggregate of all
expenditures (whether paid in cash, or incurred by entering into a synthetic
lease arrangement or a Capital Lease, or otherwise accrued as a liability) by
such Person during that period which, in accordance with GAAP, are or should be
included in “additions to property, plant or equipment” or similar items
reflected in the statement of cash flows of such Person, and all research and
development expenditures which in accordance with GAAP are or should be
accounted for as a capital expenditure in the balance sheet of that Person, but
excluding expenditures to the extent reimbursed or financed from insurance
proceeds paid on account of the loss of or the damage to the assets being 

 

 

replaced or restored, or from awards of
compensation arising from the taking by condemnation or eminent domain of such
assets being replaced.

 

“Capital Lease”, as
applied to any Person, shall mean any lease of any property (whether real,
personal or mixed) by that Person as lessee which, in accordance with GAAP, is
or should be accounted for as a capital lease on the balance sheet of that
Person.

 

“Capital Transaction”
means any consolidation or merger of Maker with another entity, or the sale of
all or substantially all of its assets to another entity, or any reorganization
or reclassification of the Common Stock or other equity securities of Maker.

 

“Cash Equivalents”
shall mean any of the following: (i) full faith and credit obligations of the
United States of America, or fully guaranteed as to interest and principal by
the full faith and credit of the United States of America, maturing in not more
than one year from the date such investment is made; (ii) time deposits and
certificates of deposit, Eurodollar time deposits, overnight bank deposits and
other interest bearing deposits or accounts (other than securities accounts) or
bankers’ acceptances having a final maturity of not more than one year after
the date of issuance thereof of any commercial bank incorporated under the laws
of the United States of America or any state thereof or the District of
Columbia, which bank is a member of the Federal Reserve System and has a
combined capital and surplus of not less than $500,000,000.00 and with a senior
unsecured debt credit rating of at least “A-2” by Moody’s or “A” by S&P;
(iii) commercial paper of companies, banks, trust companies or national banking
associations incorporated or doing business under the laws of the United States
of America or one of the States thereof or the District of Columbia, in each
case having a remaining term until maturity of not more than two hundred
seventy (270) days from the date such investment is made and rated at least P-1
by Moody’s or at least A-1 by S&P; (iv) repurchase agreements with any
financial institution having combined capital and surplus of not less than
$500,000,000.00 with a term of not more than seven (7) days for underlying
securities of the type referred to in clause (i) above; and (v) money market
funds which invest primarily in the Cash Equivalents set forth in the preceding
clauses (i) - (iv).

 

“Change in Control”
shall mean (i) any Person, Affiliated Group or group (such term being used as
defined in the Securities Exchange Act of 1934, as amended), other than a
Primary Holder (as such term is defined in the Series B Designation) acquiring
ownership or control of in excess of 50% of equity securities having voting
power to vote in the election of the Board of Directors of Maker either on a
fully diluted basis or based solely on the voting stock then outstanding, (ii)
if at any time, individuals who at the date hereof constituted the Board of
Directors of Maker (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders of
Maker, as the case may be, was approved by a vote of the majority of the
directors then still in office who were either directors at the date hereof or
whose election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of Maker then in
office, (iii) the direct or indirect sale, transfer, conveyance or other
disposition, in one or a series of related transactions, of all or
substantially all of the properties or assets of Maker to any Person or (iv)
the adoption of a plan relating to the liquidation or dissolution of Maker.

 

“Compensation” means
all salary and bonuses, but excludes any compensation under any equity
incentive plan.

 

I-2

 

“Consideration Notes”
means the collective reference to this Note, B-1 Note, Convertible Note and the
Short Term Note.

 

“Consolidated
Subsidiaries” shall mean all Subsidiaries of a Person which are required or
permitted to be consolidated with such Person for financial reporting purposes
in accordance with GAAP.

 

“Control” shall mean,
as to any Person, the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of greater than 50%
of the voting securities of such Person or by acting as the general partner of
a limited partnership (the terms “Controlled by” and “under common Control with”
shall have correlative meanings.)

 

“Conversion Approval”
means the affirmative vote of the Maker’s stockholders at the Initial
Stockholder Meeting (as defined in Section 4(b)(i) of the Series B Designation,
approving (i) the issuance of twenty percent (20%) or more of the Common Stock
of Maker to Payee and its stockholders in accordance with the terms of that
certain Stock Purchase Agreement and (ii) an amendment to the Maker’s
Certificate of Incorporation increasing the number of authorized shares of
Common Stock of Maker.

 

“Convertible Note”
shall mean the Senior Secured Convertible Note of Maker in favor of Payee in
such aggregate principal amount Maker may issue as a result of the outcome of
the stockholder vote on the matters presented for their approval at the Initial
Stockholders Meeting (as such term is defined in the Series B Designation) in
effect from time to time in the form attached hereto as Exhibit B-2,
as it may be amended, restated or modified from time to time.

 

“Convertible Securities”
shall mean any evidences of indebtedness, shares or other securities directly
or indirectly convertible into or exchangeable for Common Stock, but excluding
Options.

 

“EBITDA” shall mean
for any period, Net Income for such period plus, without duplication, the
aggregate amounts deducted in determining Net Income during such period, the
sum of (A) interest paid on indebtedness for such period, (B) income taxes for
such period, (C) depreciation expense for such period and (D) amortization
expense for such period, all as determined in accordance with GAAP as applied
in accordance with past practice.

 

“Executive Officer”
means any officer of Maker whose compensation is determined by the Compensation
Committee of the Board of Directors of Maker.

 

“Financial Projections”
shall mean written financial projections prepared by Maker and certified by
Maker’s chief financial officer, prepared in good faith and based upon
reasonably assumptions and estimates regarding the economic, business, industry
market, legal and regulatory circumstances and conditions relevant to the
Maker.

 

“GAAP” means
generally accepted accounting principles set forth in the Opinions of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and in statements of the Financial Accounting Standards Board; and
such principles observed in a current period shall be comparable in all
material respects to those applied in a preceding period.

 

I-3

 

“Guaranty” shall
mean, as to any Person, any direct or indirect obligation of such Person
guaranteeing or intending to guarantee, or otherwise providing credit support,
for any Indebtedness, Capital Lease, dividend or other monetary obligation (“primary
obligation”) of any other Person (the “primary obligor”) in any manner, whether
directly or indirectly, by contract, as a general partner or otherwise,
including, without limitation, any obligation of such Person, whether or not
contingent, (a) to purchase any such primary obligation or any property
constituting direct or indirect security therefor, (b) to advance or supply
funds (i) for the purchase or payment of any such primary obligation or (ii) to
maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency of the primary obligor, or (c) to
purchase property, securities or services from the primary obligor or other
Person, in each case, primarily for the purpose of assuring the performance of
the primary obligor of any such primary obligation or assuring the owner of any
such primary obligation of the repayment of such primary obligation.  The amount of any Guaranty shall be deemed to
be an amount equal to (x) the stated or determinable amount of the primary
obligation in respect of which such Guaranty is made (or, if the amount of such
primary obligation is not stated or determinable, the maximum reasonably
anticipated liability in respect thereof (assuming such Person is required to
perform thereunder)) or (y) the stated maximum liability under such Guaranty,
whichever is less.

 

“Indebtedness” shall
mean (without double counting), at any time and with respect to any Person, (i)
indebtedness of such Person for borrowed money (whether by loan or the issuance
and sale of debt securities) or for the deferred purchase price of property or
services purchased (other than amounts constituting trade payables arising in
the ordinary course of business and payable in accordance with customary
trading terms not in excess of 90 days or, if overdue for more than 90 days, as
to which a dispute exists and adequate reserves in conformity with GAAP have
been established on the books of such Person); (ii) all indebtedness of such
Person evidenced by a note, bond, debenture or similar instrument (whether or
not disbursed in full in the case of a construction loan); (iii) indebtedness of
others which such Person has directly or indirectly assumed or guaranteed or
otherwise provided credit support therefore (other than for collection or
deposit in the ordinary course of business); (iv) indebtedness of others
secured by a Lien on assets of such Person, whether or not such Person shall
have assumed such indebtedness (provided, that if such Person has not assumed
such indebtedness of another Person then the amount of indebtedness of such
Person pursuant to this clause (iv) for purposes of this Note shall be equal to
the lesser of the amount of the indebtedness of the other Person or the fair
market value of the assets of such Person which secures such other
indebtedness); (v) obligations of such Person relative to the face amount of
letters of credit, acceptance facilities, or drafts or similar instruments
issued or accepted by banks and other financial institutions for the account of
such Person; (vi) that portion of obligations of such Person under Capital
Leases that is properly classified as a liability on a balance sheet in
conformity with GAAP; (vii) all obligations of such Person under any Interest
Rate Protection Agreement; (viii) deferred payment obligations of such Person
resulting from the adjudication or settlement of any litigation; and (ix) any
Guaranty by such Person in respect of any of the foregoing.

 

“Interest Rate Protection
Agreement” shall mean any interest rate swap agreement, interest rate cap
agreement, synthetic cap, collar or floor or other financial agreement or
arrangement designed to protect a Maker or any of its Subsidiaries against
fluctuations in interest rates or to reduce the effect of any such
fluctuations.

 

“Investment” shall
mean any investment in any Person, whether by means of acquiring or holding
securities, capital contribution, loan, time deposit, guaranty or otherwise.

 

I-4

 

“Lien” shall mean any
mortgage, pledge, security interest, encumbrance, lien or charge of any kind
whatsoever (including, without limitation, any conditional sale or other title
retention agreement, any agreement to grant a security interest at a future
date, any lease in the nature of security, and the filing of, or agreement to
give, any financing statement under the Uniform Commercial Code of any
jurisdiction).

 

“Material Adverse Effect”
shall mean a (i) a material adverse effect upon the business, operations,
properties, assets or condition (financial or otherwise) of the Maker or (ii)
the material impairment of the ability of the Maker to perform its obligations
under the Consideration Notes or of the Payee to enforce the obligations of the
Maker under the Consideration Notes.

 

“Maturity Date” means
December 31, 2007.

 

“Net Income” shall
mean for any period, net income on a consolidated basis for that period
determined in accordance with GAAP applied consistently with past practice.

 

“Ownership Threshold”
means the minimum principal amount of Convertible Notes at which a conversion
at the option of the holders of the Convertible Notes under the terms of the
Convertible Notes of the entire outstanding principal amount of the Convertible
Notes into fully paid and non-assessable shares of the Maker’s common stock,
$.001 par value per share (the “Common Stock”), would permit the Payee,
on a fully diluted basis, after assuming the conversion into Common Stock of
all other Convertible Securities then held by the Payee, to hold an amount
equal to or greater than 33% of all of the issued and outstanding Common Stock
of the Maker.

 

“Non-Permitted Subsidiary”
means any direct or indirect Wholly Owned Subsidiary of Maker that is not a
Permitted Subsidiary.

 

“Note Issue Date”
shall mean the date on which this Note is issued.

 

“Option” shall mean
any rights, options or warrants to subscribe for, purchase or otherwise acquire
Common Stock or Convertible Securities.

 

“Payment Date” means
each December 31, March 31, June 30 and September 30; provided that if any such
Payment Date falls on a day which is not a business day, the applicable payment
shall not be due until the next following business day.

 

“Permitted Acquisitions”
means any acquisition of fifty percent (50%) or more of the equity interests or
all or substantially all of the assets of a third party so long as (i) such
acquisition is Accretive, and approved by the Maker’s board of directors, (ii)
following the consummation of the acquisition the Maker has a cash balance of
at least $5,000,000, on a consolidated basis, and (iii) the Maker does not
incur any Indebtedness in connection with such acquisition.

 

“Permitted Subsidiary”
means any direct or indirect Wholly Owned Subsidiary of Maker that is
domesticated or incorporated in a jurisdiction of the United States, Canada,
the United Kingdom or a country that is a member of the European Union and is a
guarantor of Maker’s obligations under the Consideration Notes.

 

I-5

 

“Person” shall mean
any natural person, corporation, division of a corporation, partnership,
limited liability partnership, limited liability company, trust, joint venture,
association, company, estate, unincorporated organization or government or any
agency or political subdivision thereof.

 

“Pledge Agreement”
means the Pledge Agreement executed by Maker in favor of the Payee and dated
the date hereof, as it may be amended, restated or modified from time to time,
together with all schedules and exhibits thereto.

 

“Registrable Shares”
shall have the meaning set forth with respect thereto in the Investor Rights
Agreement of even date herewith.

 

“Security Agreement”
means the Security Agreement executed by the Maker in favor of the Payee and
dated as of the date hereof, as it may be amended, restated or modified from
time to time, together with all schedules and exhibits thereto.

 

“Series B Designation”
shall mean the Certificate of Designation of Maker’s Series B Convertible
Preferred Stock, as filed with the Secretary of State of the State of Delaware.

 

“Short Term Note”
means the Senior Secured Note dated as of November 2, 2004 by Maker in favor of
Payee in the original aggregate principal amount of $4,000,000, as it may be
amended, restated, modified or replaced in substitution by any other note or
notes from time to time.

 

“Stock Purchase Agreement”
means the Stock Purchase Agreement dated as of November 2, 2004 by and among
the Maker, Tertio Telecoms Group, Ltd. and the parties listed therein.

 

“Stockholders” shall
have the meaning given to such term in the Stock Purchase Agreement.

 

“Subsidiary” shall
mean with respect to any Person, any corporation, association, joint venture,
partnership or other business entity (whether now existing or hereafter
organized) of which at least a majority of the voting stock or other ownership
interests having ordinary voting power for the election of directors (or the
equivalent) is, at the time as of which any determination is being made, owned
or controlled by such Person or one or more subsidiaries of such Person or by
such Person and one or more subsidiaries of such Person.

 

“UCC” shall mean the
Uniform Commercial Code as in effect from time to time in the State of
Delaware.

 

“Wholly Owned Subsidiary”
of a Person means (a) any Subsidiary all of the outstanding voting securities
(other than directors qualifying shares and/or other nominal amounts of shares required
to be held by directors or other Persons under applicable law) of which shall
at the time be owned or controlled, directly or indirectly, by such Person or
one or more Wholly Owned Subsidiaries of such Person, or by such Person and one
or more Wholly Owned Subsidiaries of such Person, or (b) any partnership,
limited liability company, association, joint venture or similar business
organization 100% of the ownership interests having ordinary voting power of
which shall at the time be so owned or controlled.

 

I-6

 

NOTE B-1

 

EXHIBIT B-1

B-1 NOTE

 

THIS NOTE CONTAINS ORIGINAL ISSUE DISCOUNT, AS
DEFINED IN SECTION 1273 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.  PLEASE CONTACT ANITA MOSELEY, SECRETARY OF
THE MAKER, AT PHONE NUMBER (303) 802-2599 FOR THE ISSUE DATE OF THE NOTE, THE
ORIGINAL ISSUE DISCOUNT IN THE NOTE AND THE YIELD TO MATURITY.

 

	
  $                      Principal Amount

  	
                 
       , 2004

  

 

SENIOR SECURED NOTE

 

EVOLVING SYSTEMS, INC.

 

FOR VALUE RECEIVED, EVOLVING
SYSTEMS, INC., a Delaware corporation (the “Maker”), having its
principal place of business at 9777 Mount Pyramid Court, Englewood, Colorado
80112, hereby promises to pay to the order of Tertio Telecoms Group Ltd., an
entity formed and registered in England and Wales with a company number 4419858
(“Payee”), having an address at One Angel Square, Torrens Street, London
EC1V 1 NY, United Kingdom, the principal sum of                                        
Dollars ($                      )
in lawful money of the United States of America.

 

1.             Definitions; Interpretations. 
In addition to other terms defined elsewhere in this Note, the
capitalized terms set forth in Schedule 1 attached hereto and incorporated
herein by reference shall have the meanings set forth therein unless defined
elsewhere herein or the context otherwise clearly requires.  Except as otherwise provided herein,
financial and accounting terms used elsewhere in this Note shall be defined in
accordance with GAAP.

 

2.             Payments of Principal.  The
outstanding principal (including amounts added to principal pursuant to Section
3 below)under this Note shall be due and payable in installments as set forth
below at the aforesaid address of Payee or such other place as Payee may
designate:(1)

 

	
  Payment Date

  	
   

  	
  Amount

  	
   

  
	
  March 31, 2006

  	
   

  	
  $1,340,000

  	
   

  
	
  June 30, 2006

  	
   

  	
  $3,110,000

  	
   

  
	
  December 31, 2006

  	
   

  	
  $1,430,000

  	
   

  
	
  March 31, 2007

  	
   

  	
  $1,870,000

  	
   

  
	
  June 30, 2007

  	
   

  	
  $3,110,000

  	
   

  
	
  Maturity Date

  	
   

  	
  all
  outstanding amounts hereunder, whether principal, interest or otherwise

  	
   

  

 

(1) If the
principal amount of the loan is less than $11,950,000, the amortization
schedule set forth in Section 2 shall apply regardless of the actual amount of
the loan until full payment on the Note is made.

 

B-1-1

 

3.             Pre-Default Interest Rate. 
So long as no Event of Default (as hereinafter defined) has occurred and
is continuing, and subject to the provisions of Section 4 of this Note, the
outstanding principal balance of this Note shall bear interest at a rate per
annum equal to Nine Percent (9%) (the “Pre-Default Interest Rate”).  From the date of this Note until December 31,
2005, on each Payment Date the principal balance of this Note shall be
increased by an amount equal to the amount of interest that would be payable at
the Pre-Default Interest Rate with respect to this Note accruing on and after
the issuance of this Note.  Commencing
with and including March 31, 2006, the amount of interest accruing at the Pre-Default
Interest Rate shall be paid in cash on a quarterly basis on each Payment
Date.  To the extent not paid, all
interest shall be compounded quarterly.

 

4.             Additional Interest. 
From and after the second anniversary of this Note, the outstanding principal
balance of this Note shall bear interest at a rate per annum equal to Twelve
Percent (12%).

 

5.             Post-Default Interest Rate. 
Following the occurrence and during the continuance of an Event of
Default, the outstanding principal balance of this Note shall bear interest at
the rate per annum equal to Twelve Percent (12%) (the “Default Rate”).  However, if at any time the Libor Adjusted
Rate shall ever exceed the Default Rate, then following the occurrence and
during the continuance of an Event of Default, the outstanding principal
balance of this Note shall bear interest at the rate per annum equal to the
Adjusted Libor Rate.

 

6.             Optional Prepayment. 
From and after the date hereof, if there is:  (a) no Convertible Note outstanding or (b) a
Convertible Note outstanding and the holder thereof declines to accept a
prepayment under the corresponding Section of the Convertible Notes, then Maker
may prepay this Note in whole or in part at any time.  There shall be no premium or penalty in
connection with any prepayment.  Such
prepayment shall include all accrued and unpaid interest on the principal
amount of such prepayment.  Each such
prepayment shall be applied first against accrued and unpaid interest, if any,
and then against principal outstanding under this Note in inverse order of
maturity.

 

7.             Mandatory Prepayments.

 

(a)           Within forty five (45) days after the end
of each fiscal quarter of Maker, starting with the fiscal quarter ending March
31, 2005, Maker shall deliver to Payee a certificate of the chief financial
officer of Maker in the form attached hereto as Exhibit A, specifying
the closing balances for each of the deposit accounts of Maker as set forth
thereon on the last day of the most recently completed fiscal quarter (the
aggregate of such closing balances for all such accounts is the “Aggregate
Quarterly Closing Balance”).  Maker
shall at all times maintain, and such certificate of the chief financial
officer of the Maker shall state that the Maker has during the fiscal quarter
to which such certificate relates maintained, such deposit accounts in good
faith, and made all payments drawn against such deposit accounts in accordance
with past practices or current and owing obligations of Maker incurred in the
ordinary course of business.  Payee may
in its sole discretion within ten (10) days after receipt of such certificate,
request that Maker make a prepayment on this Note in an amount up to the amount
by which the Aggregate Quarterly Closing Balance exceeds $7,000,000 (the “Account
Prepayment Amount”) to the extent, if any, in excess of the amount paid to
Convertible Notes under the corresponding section of the Convertible Notes,
such payment to be allocated pro rata among the B-1 Notes held by Payees who
have 

 

B-1-2

 

requested such payment,
and Maker shall make such prepayment on this Note within two (2) business days
following receipt of written demand from Payee. 
Such prepayment shall be applied first, against accrued interest, if
any, and then against principal outstanding under this Note in inverse order of
maturity.

 

(b)           On or before the date that is ten (10)
business days prior to Maker’s mailing of a stockholder proxy and notice of a
stockholder meeting in connection with a stockholder meeting called for the
purpose of approving a Capital Transaction, Maker shall provide the Payee with
written notice (the “Transaction Notice”).  The Transaction Notice shall describe in
reasonable detail the terms and conditions of the Capital Transaction and the consideration
to be paid upon the consummation of the Capital Transaction.  In the event the Capital Transaction would
result in a Change of Control of Maker, then as a condition of such Capital
Transaction, provision shall be made in the definitive documentation to be
executed by the parties to such Capital Transaction whereby Payee may exercise
its rights at set forth in this Section 7(b). 
Upon a Change of Control of Maker, the Payee, in its sole discretion,
shall have the right to declare the entire unpaid principal balance of this
Note, together with interest accrued thereon and with all other sums due or
owed by Maker hereunder, due and payable immediately.  Upon receipt of written notice from Payee,
Maker shall pay to Payee said amounts within two (2) business days; provided
that Payee must exercise the payment option set forth in this Section 7(b)
within forty-five (45) days after receipt of a written notice from Maker
regarding the Change of Control, which notice shall describe in reasonable
detail the terms and conditions of the Change of Control and the consideration
to be paid upon the consummation of the Change of Control.

 

8.             Security.

 

(a)           As security for the repayment of all
liabilities arising under this Note, the Maker hereby grants to Payee a first
priority security interest in and a lien on: 
(i) all of the Collateral (as that term is defined in the Security
Agreement) and (ii) all of the Collateral (as that term is defined in the
Pledge Agreement).  Payee shall have all
rights provided to a secured party under the Security Agreement and Pledge
Agreement under the Uniform Commercial Code of the State of Delaware.  The Maker shall execute and deliver such
documentation as Payee may reasonably request to evidence and perfect Payee’s
security interest granted in this Section 8 and under the Security Agreement
and Pledge Agreement.

 

(b)           The security interest securing the
repayment of all liabilities arising under this Note, and any guaranties
executed by the Maker or any of its Subsidiaries in favor of Payee (or any
collateral agent appointed for the benefit of Payee) in connection with this
Note, shall be automatically released and terminated on the date that the
aggregate outstanding balance of all of the Consideration Notes is equal to or
less than ten percent (10%) of the original aggregate principal amount of all
of the Consideration Notes at the time of issuance.  Upon the occurrence of such an event and
written notice thereof to the Payee:

 

(i)            the Maker
is hereby authorized to terminate all applicable security interests and liens
encumbering the Collateral;

 

(ii)           the
negative covenants set forth in Sections 10(b), 10(c), 10(d), 10(f), 10(j) and 10(k)
of this Note shall terminate;

 

(iii)          the
negative covenants set forth in Section 10(e) of this Note shall be deemed
modified by adding (in addition to, and not in lieu of, all other Permitted
Indebtedness 

 

B-1-3

 

described in Section 10(e))
Indebtedness of the Maker and all Subsidiaries in an amount not to exceed in
the aggregate the principal amount of $3,000,000 at any given time outstanding
to the definition of Permitted Indebtedness;

 

(iv)          the
negative covenant in Section 10(g) of this Note shall be deemed modified to
increase the limitation on Capital Expenditures to $5,000,000 in any fiscal
year, and

 

(v)           the
negative covenant in Section 10(i) of this Note shall be deemed modified to
provide that Investments by Maker in a minority equity interest of Persons
engaged in the Maker’s Business are Permitted Investments (in addition to, and
not in lieu of, all other Permitted Investments described in Section 10(i)),
provided that such investments do not exceed 5% of the Maker’s net worth at the
time of such Investments.

 

The
Payee agrees to take such actions and to execute and deliver such documents and
instruments, as may be reasonably requested by Maker and at the Maker’s
expense, in order to evidence the terminations described herein and to release
any lien or security interest in any collateral securing repayment of the
liabilities arising under this Note.

 

9.             Affirmative Covenants. 
Maker covenants and agrees that, so long as any Indebtedness is
outstanding hereunder, it shall comply, and shall cause its Subsidiaries (to
the extent applicable) to comply, with each of the following:

 

(a)           Upon the request of Payee from time to
time, (i) provide Payee and its representatives (at the Maker’s expense) access
to its books and records and to any of its and its Subsidiaries’ properties or
assets upon three (3) days’ advance notice and during regular business hours in
order that Payee or its representatives may make such audits and examinations
and make abstracts from such books, accounts, records and other papers of Maker
and its subsidiaries pertaining to their deposit accounts, provided, however,
that the Payee may conduct such inspections and examinations no more frequently
than twice in any 12-month period, unless an Event of Default has occurred and
is continuing, in which case the Payee shall not be so limited, and (ii) upon
reasonable advance notification to Maker, permit Payee or its representatives
to discuss the affairs, finances and accounts with, and be advised as to the
same by, officers and independent accountants, all as Payee may deem appropriate,
including without limitation, for the purpose of verifying any certificate
delivered by Maker to Payee under Section 7 hereof, provided that any such
parties are a party to, or bound by, an acceptable non-disclosure
agreement.  The Payee shall conduct at
least one meeting with an executive officer of the Maker in the course of each
such inspection and examination or discussion with officers or independent
accountants.

 

(b)           Comply with all laws, ordinances or
governmental rules or regulations to which it is subject, and shall obtain and
maintain in effect all licenses, certificates, permits, franchises and other
governmental authorizations necessary to the ownership of its properties or to
the conduct of its businesses, except where the failure to so comply or obtain
or maintain would not reasonably be expected to have a Material Adverse Effect.

 

(c)           Except as otherwise permitted under
Section 10 of this Note, at all times preserve and keep in full force and
effect (i) its corporate existence and (ii) take all reasonable action to
maintain all rights and franchises necessary or desirable in the normal conduct
of its business, except to the extent that failure to do so in the case of
clause (ii) of this Section 9(c) would not reasonably be expected to have a Material
Adverse Effect.

 

B-1-4

 

(d)           Furnish to Payee notice of the occurrence
of any Event of Default within five (5) business days after it becomes known to
any of Maker’s Authorized Officers.

 

(e)           File all income tax or similar tax
returns required to be filed in any jurisdiction and to pay and discharge all
taxes shown to be due and payable on such returns and all other taxes,
assessments, governmental charges, or levies payable by any of them, to the extent
such taxes and assessments have become due and payable and before they have
become delinquent, provided that Maker need not pay any such tax or assessment
if the amount, applicability or validity thereof is contested by Maker on a
timely basis in good faith and in appropriate proceedings, and Maker has
established adequate reserves therefor in accordance with GAAP on it books.

 

(f)            Operate Maker’s Business (as defined in
Section 10(m) of this Note) in the ordinary course of business except as
provided herein.

 

(g)           In any fiscal year, increase the
Compensation of Executive Officers of Maker only with the unanimous consent of
the Compensation Committee.

 

10.           Negative Covenants. 
Maker covenants and agrees that so long as any Indebtedness is
outstanding hereunder, neither it nor any of its Subsidiaries shall undertake
any of the following without obtaining the prior written consent of the Payee:

 

(a)           voluntarily liquidate, dissolve or wind
up, except for the liquidation, dissolution and winding-up of CMS Communications,
Inc. and Telecom Software Enterprises, LLC (“TSE”);

 

(b)           pay, declare or set aside any sums for
the payment of any dividends, or make any distributions on, any shares of its
capital stock or other securities or make prepayments of principal on any
Indebtedness except in the case of the following (each, a “Permitted Payment”):

 

(i)            prepayments
of principal or payments of interest on (A) any of the Consideration Notes, (B)
any Indebtedness incurred under the Working Capital Exclusion as provided in
Section 10(e)(x) of this Note and promissory notes issued to Peter McGuire and
Lisa Marie Maxson pursuant to the Acquisition Agreement dated October 15, 2004
by and among Maker, Peter McGuire and Lisa Marie Maxson (collectively, the “TSE
Promissory Notes”); provided that there is no Event of Default under this
Note and the collateral securing any such Indebtedness shall be added to the
Collateral (as defined in the Security Agreement) or (C) any Indebtedness of
Evolving Systems Holdings Limited (“ESHL”) or its Subsidiaries in favor
of Royal Bank of Scotland PLC and disclosed in Schedule 2 of this Note;

 

(ii)           dividends
or distributions payable in the common stock of Maker or any of its
Subsidiaries;

 

(iii)          payments
in accordance with any Series B Approved Plan (as such term is defined in the
Series B Designation);

 

(iv)          dividends
or distributions payable by any of Maker’s Subsidiaries to the Maker;

 

B-1-5

 

(v)           dividends
or distributions by (A) any Permitted Subsidiary to another Permitted
Subsidiary or (B) any Non-Permitted Subsidiary to a Permitted Subsidiary;

 

(vi)          dividends
or distributions by a Subsidiary of ESHL to ESHL or another Wholly Owned
Subsidiary of ESHL;

 

(vii)         regularly
scheduled payments of principal on Indebtedness permitted under Section 10(e)
(excluding Sections 10(e)(iii) through 10(e)(viii)) of this Note; and

 

(viii)        payments
(whether regularly scheduled, upon demand or otherwise) of Indebtedness
permitted under Sections 10(e)(iii) through 10(e)(viii) to the extent such
payments are made to or received by Maker or a Subsidiary that is a guarantor;

 

(c)           purchase, acquire or obtain (i) any
capital stock or other proprietary interest, directly or indirectly, in any
other entity or (ii) all or a substantial portion of the business or assets of
another Person for consideration (including assumed liabilities) other than
Investments permitted under Section 10(i) and Permitted Acquisitions;

 

(d)           (i) sell or transfer all or a substantial
portion of its assets to another Person; (ii) sell, transfer or otherwise
dispose of any notes receivable or accounts receivable, with or without
recourse; or (iii) sell, lease, transfer or otherwise dispose of any asset or
group of assets (other than as described in clause (ii) above), except:

 

(i)            sales of
inventory in the ordinary course of business;

 

(ii)           sales or
liquidations of Investments permitted by Section 10(i);

 

(iii)          (A)
sales or other dispositions of property by any Subsidiary of Maker to the Maker
or to any other Subsidiary and (B) sales or other dispositions of property by
the Maker to any if its Subsidiaries, so long as the security interests granted
to the Payee pursuant to the Security Agreement in such assets shall remain in
full force and effect and perfected (to at least the same extent as in effect
immediately prior to such sale or other disposition) and provided that any such
Subsidiaries to whom such sales or dispositions are made are guarantors of the
Consideration Notes;

 

(iv)          sales or
other dispositions of obsolete, surplus or worn out property, whether now owned
or hereafter acquired, in the ordinary course of business, or other assets not
practically usable in the business of the Maker or its Subsidiaries; provided
that the aggregate amount of such sales or dispositions does not exceed
$250,000 in any fiscal year of the Maker;

 

(v)           Licenses
of intellectual property of Maker or its Subsidiaries in the ordinary course of
business and which would not otherwise reasonably result in a Material Adverse
Effect; or

 

(vi)          sales,
transfers or other dispositions that constitute a Change of Control;

 

B-1-6

 

(e)           create, incur, assume or suffer to exist
any Indebtedness, except, so long as no Event of Default then exists or would
exist as a result thereof, the following (“Permitted Indebtedness”):

 

(i)            Indebtedness
outstanding on the date of this Note and listed on Schedule 2 hereto,  and any refinancings, refundings, renewals or
extensions thereof; provided that the amount of such Indebtedness is not
increased at the time of such refinancing, refunding, renewal or extension;

 

(ii)           obligations
under the Consideration Notes and the TSE Promissory Notes;

 

(iii)          inter-company
Indebtedness between Maker or any Permitted Subsidiary and Evolving Systems
Networks India Private Limited (“ESN”); provided that the aggregate
amount of all inter-company loans made by Maker or any Permitted Subsidiary to
ESN, when taken together with the aggregate amount of Permitted Investments in
ESN under Section 10(i)(ii) of this Note, does not exceed $750,000 in any
fiscal quarter;

 

(iv)          inter-company
Indebtedness between Maker or any Permitted Subsidiary and TSE; provided that
the aggregate amount of all inter-company loans made by Maker or any Permitted
Subsidiary to TSE, when taken together with the aggregate amount of Permitted
Investments in TSE under Section 10(i)(iii) of this Note, does not exceed
$125,000 in any year;

 

(v)           inter-company
Indebtedness between (A) Maker and its Permitted Subsidiaries or (B) a
Permitted Subsidiary with another Permitted Subsidiary;

 

(vi)          inter-company
Indebtedness owing by Maker or a Permitted Subsidiary to a Non-Permitted
Subsidiary;

 

(vii)         inter-company
Indebtedness between (A) ESHL and any of its Wholly Owned Subsidiaries or (B) a
Wholly Owned Subsidiary of ESHL with another Wholly Owned Subsidiary of ESHL;

 

(viii)        inter-company
Indebtedness owing by ESHL or any Subsidiary of ESHL to Maker or a Permitted
Subsidiary, provided that such Indebtedness shall be incurred solely to (A)
supplement the internally generated working capital required to fund the
operation of the business of ESHL or ESHL’s Wholly Owned Subsidiaries in the
ordinary course or (B) fund Capital Expenditures permitted under Section 10(g)
of this Note, and provided further that promptly upon the incurrence of such
Indebtedness, Maker shall give the Payees written notice of the making thereof
and the amount thereof;

 

(ix)           purchase
money Indebtedness to fund the purchase of property otherwise permitted under
Section 10(g) of this Note and Indebtedness constituting Capital Leases
permitted under Section 10(g);

 

(x)            Indebtedness
in the form of an unsecured line of credit in an amount not to exceed in the
aggregate the principal amount of $2,000,000 at any time outstanding (the “Working
Capital Exclusion”);

 

B-1-7

 

(xi)           Accrual of
interest, accretion or amortization of original issue discount or
payment-in-kind interest in connection with Indebtedness otherwise permitted
under this Section 10(e);

 

(xii)          (A)
Indebtedness incurred in connection with a Permitted Acquisition and (B)
Indebtedness for Capital Leases assumed pursuant to a Permitted Acquisition,
provided that the aggregate Indebtedness of clause (A) and (B) of this Section 10(e)(xii)
outstanding at any time does not exceed $1,000,000;

 

(xiii)         to
the extent under GAAP, the Series B Preferred Stock would be treated as debt or
mezzanine financing on the financial statements of Maker;

 

(xiv)        Indebtedness
incurred in connection with the financing of insurance premiums in the ordinary
course of business in an amount not to exceed $500,000 in any fiscal year; and

 

(xv)         Indebtedness
owing from ESHL to Maker for the sole purpose of consummating the transactions
contemplated by the Stock Purchase Agreement, provided
that, the aggregate amount of such Indebtedness, when taken together
with the aggregate amount of Permitted Investments by Maker in ESHL under
Section 10(i)(vii) of this Note, does not exceed $12,500,000;

 

(f)            mortgage, encumber, or create or suffer
to exist Liens on any of its assets, other than the following (each, a “Permitted
Lien”);

 

(i)            encumbrances
or Liens in favor of Payee or any holder of the Consideration Notes;

 

(ii)           Liens that
arise out of operation of law;

 

(iii)          easements,
rights-of-way, restrictions (including zoning restrictions) and other similar
encumbrances affecting real property which, in the aggregate, are not
substantial in amount, and which do not in any case materially detract from the
value of the property subject thereto or materially interfere with the ordinary
conduct of the business of the applicable Person and none of which is violated
by existing or proposed restrictions on land use;

 

(iv)          Liens
securing Indebtedness permitted under Section 10(e)(vi); provided that (A) such
Liens do not at any time encumber any property other than the property financed
by such Indebtedness and (B) the Indebtedness secured thereby does not exceed
the cost of property being acquired on the date of acquisition and (C) such
Liens are granted substantially contemporaneously with the acquisition of such
property;

 

(v)           Liens
existing on the date hereof and listed on Schedule 2 hereto and any renewals or
extensions thereof, provided that (A) the property covered thereby is not
changed, (B) the amount secured or benefited thereby is not increased, and (C)
any renewal or extension of the obligations secured or benefited thereby is not
prohibited by this Note; and

 

B-1-8

 

(vi)          Liens on
insurance policies and the proceeds thereof incurred in connection with the
financing of insurance premiums in the ordinary course of business in an amount
not to exceed $500,000 in any fiscal year;

 

(g)           make or commit to make any Capital
Expenditures (whether by expenditure of cash or the incurrence of Indebtedness
for Capital Leases to fund the acquisition of property pursuant to any
permitted Capital Expenditure); provided that, the cash paid for the Capital
Expenditure, when taken together with the aggregate liability required by GAAP
consistently applied and in accordance with the Maker’s past practice, to be
reflected in Maker’s financial statements in respect of any Capital Lease (“Lease
Liability”) plus the sum of (i) any cost incurred by Maker in connection
with the acquisition, delivery or installation of the property which is the
subject of the Capital Lease, but which cost is not included in the Lease
Liability and (ii) to the extent not otherwise reflected in the Capital Lease
payments, interest expense incurred in respect of the Capital Lease for the
relevant fiscal year will be deemed a Capital Expenditure made or committed
during the fiscal year in which the Capital Lease is signed or becomes
effective, whichever first occurs, does not exceed $2,000,000 in any fiscal
year;

 

(h)           enter into any transaction with any of
its Affiliates that is less favorable to Maker or any of its Subsidiaries than
would have been the case if such transaction had been effected on an arms
length basis with a Person other than an Affiliate, except for transactions
between and among Maker and its Subsidiaries otherwise permitted under this
Note;

 

(i)            enter into or make any Investments, other
than the following (each, a “Permitted Investment”):

 

(i)            Cash
Equivalents;

 

(ii)           (A) equity
Investments existing as of the date hereof in ESN and (B) equity Investments
made after the date hereof by Maker or any Permitted Subsidiary in ESN provided
that any such Investments, when taken together with all inter-company loans
made by Maker or any Permitted Subsidiary to ESN permitted under Section 10(e)(iii)
of this Note, does not exceed $750,000 in any fiscal quarter;

 

(iii)          (A)
equity Investments existing as of the date hereof in TSE and (B) equity
Investments made after the date hereof in TSE provided that any such
Investments, when taken together with all inter-company loans made by Maker or
any Permitted Subsidiary to TSE permitted under Section 10(e)(iv) of this Note,
does not exceed $125,000 in any fiscal year;

 

(iv)          equity
Investments (A) existing as of the date hereof in any Permitted Subsidiary and
(B) equity Investments made after the date hereof in any Permitted Subsidiary;

 

(v)           (A) equity
Investments existing as of the date hereof in ESHL or any of ESHL’s Wholly
Owned Subsidiaries, (B) equity Investments made after the date hereof by Maker
in ESHL, provided that such Investments shall be made solely to (1) supplement
the internally generated working capital required to fund the operation of the
business of ESHL or ESHL’s Wholly Owned Subsidiaries in the ordinary course or
(2) fund Capital Expenditures permitted under Section 10(g) of this Note, and
provided further that promptly upon the making of any such Investments, Maker
shall give the Payees written notice of the making thereof and the amount
thereof, and (C) equity Investments made 

 

B-1-9

 

after the date hereof by
ESHL or a Wholly Owned Subsidiary of ESHL in any ESHL Wholly Owned Subsidiaries;

 

(vi)          equity
Investments by a Non-Permitted Subsidiary in a Permitted Subsidiary;

 

(vii)         equity
Investments by Maker in ESHL for the sole purpose of consummating the
transactions contemplated by the Stock Purchase Agreement, provided that, the aggregate amount of
such Investments, when take together with the aggregate amount of Permitted
Indebtedness under Section 10(e)(xv) of this Note, does not exceed $12,500,000;
provided further that the amount
of such equity Investments shall not exceed 50% of the aggregate amount of the
equity Investment made pursuant to this Section 10(i)(vii) plus the aggregate
amount of the Permitted Indebtedness permitted under Section10(e)(xv) of this
Note;

 

(viii)        Investments
consisting solely of appreciation in value of existing Investments permitted
hereunder;

 

(ix)           any
Permitted Payments under Section 10(b) of this Note, without duplication;

 

(x)            any
Permitted Indebtedness under Section 10(e) of this Note, without duplication;
and

 

(j)            change its fiscal year;

 

(k)           establish any bank accounts into which
accounts receivable are deposited, other than those listed on Exhibit B unless
such bank accounts shall be pledged to Payee and the other secured parties
pursuant to the Security Agreement;

 

(l)            change or amend its Certificate of
Incorporation or Bylaws in a manner adverse to Payee’s rights and remedies
under this Note, any Consideration Note, the Security Agreement or the Pledge
Agreement; or

 

(m)          engage in any material line of business
not related to the OSS communications industry or any business reasonably
related or incidental thereto (the “Maker’s Business”).

 

11.           Determination of Accretive. 
In the event the Maker proposes to enter into an agreement to acquire
another Person (the “Proposed Acquisition”), the Maker shall mail
written notice of such event, together with the Financial Projections, to the
Payee, no later than twenty (20) calendar days prior to the contemplated
effective date of the Proposed Acquisition. 
The Financial Projections shall be deemed accepted and conclusive and
binding upon the Payee, unless the Payee shall give written notice to the Maker
of the items in the Financial Projections with which the Payee disagrees (the “Accretive
Calculation Disagreement Notice”) within twenty (20) calendar days of the
receipt by the Payee of the Financial Projections.  The Accretive Calculation Disagreement Notice
shall specify each item disagreed with by the Payee (or the Payee’s calculation
thereof) and the dollar amount of such disagreement.  The Maker may, within twenty (20) calendar
days of its receipt of the Accretive Calculation Disagreement Notice, advise
the Payee that the Maker has accepted the position of the Payee as set forth on
the 

 

B-1-10

 

Accretive Calculation
Disagreement Notice, whereupon the Proposed Acquisition shall be considered a
Permitted Acquisition Event for all purposes of this Note.  If the Maker does not notify the Payee of the
Maker’s acceptance of the Payee’s position, then the Maker and the Payee shall,
during the twenty (20) calendar days after receipt by the Maker of the
Accretive Calculation Disagreement notice, negotiate in good faith to resolve
any such disagreements.  If at the end of
such twenty (20) calendar days, the Maker and Payee have been unable to resolve
their disagreements, either the Maker or the Payee may engage on behalf of the
Maker and the Payee, Grant Thornton LLP (or such other Person mutually agreed
to in writing by the Maker and Payee) (the “Unaffiliated Firm”) to resolve
the matters set forth in the Accretive Calculation Disagreement Notice.  The Unaffiliated Firm shall (i) resolve the
disagreement as to the Financial Projections as promptly as possible after its
engagement by the parties; (ii) thereby consider and resolve only those items
in the Accretive Calculation Disagreement Notice which remain unresolved
between the Maker and the Payee; and (iii) shall otherwise employ such
procedures as it, in its sole discretion, deems necessary or appropriate in the
circumstances.  The Unaffiliated Firm
shall submit to the Maker and the Payee a report of its review of the items in
the Accretive Calculation Disagreement Notice as quickly as practicable and
shall include in such report its determination as to whether the effect of the
proposed merger or consolidation is Accretive. 
The determination so made by the Unaffiliated Firm shall be conclusive,
binding on, and non-appealable by, the Maker and the Payee.  The fees and disbursements of the
Unaffiliated Firm shall be borne one half by the Maker and one half by the
Payee.  Notwithstanding all of the
foregoing, the Maker may elect, at any time, not to comply with this Section 11
with respect to a Proposed Transaction (or if the Maker otherwise fails to
properly comply with the terms of this Section 11) in which event, the
transaction shall be deemed not to be Accretive.

 

12.           Events of Default.

 

(a)           For purposes of this Note, an “Event
of Default” shall have occurred hereunder if:

 

(i)            Maker shall fail to
pay within one (1) business day after the date when due any payment of
principal, interest, fees, costs, expenses or any other sum payable to Payee
hereunder or otherwise, including the other Consideration Notes;

 

(ii)           Maker shall default in
the performance of any other agreement or covenant contained herein (other than
as provided in Section 12(a)(i) of this Note) or under any Consideration Note
or in the Security Agreement or Pledge Agreement, and such default shall
continue uncured for twenty (20) consecutive days after notice thereof to Maker
given by Payee;

 

(iii)          Maker becomes insolvent
or generally fails to pay its debts as such debts become due or admits in
writing its inability to pay its debts as such debts become due; or shall
suffer a custodian, receiver or trustee for it or substantially all of its
property to be appointed and if appointed without its consent, not be
discharged within ninety (90) consecutive days; makes a general assignment for
the benefit of creditors; or suffers proceedings under any law related to bankruptcy,
insolvency, liquidation or the reorganization, readjustment or the release of
debtors to be instituted against it and if contested by it not dismissed or
stayed within ninety (90) consecutive days; if proceedings under any law
related to bankruptcy, insolvency, liquidation, or the reorganization,
readjustment or the release of debtors is instituted or 

 

B-1-11

 

commenced by
or against Maker and, in the case of proceedings not instituted or commenced by
Maker, if contested by Maker, and not dismissed or stayed within ninety (90)
consecutive days; if any order for relief is entered relating to any of the
foregoing proceedings which order is not stayed; if Maker shall call a meeting
of its creditors with a view to arranging a composition or adjustment of its
debts; or if Maker shall by any act or failure to act indicate its consent to,
approval of or acquiescence in any of the foregoing;

 

(iv)         (A)  This Note, any of the other Consideration
Notes or the Security Agreement or the Pledge Agreement shall, for any reason
(other than payment or satisfaction in full of the obligations represented
thereby) not be or shall cease to be in full force and effect (other than in
accordance with its terms) or shall be declared null and void or (B) Payee or
any other secured party under the Security Agreement or the Pledge Agreement
shall not give or shall cease to have a valid and perfected Lien in any
collateral under such Security Agreement or Pledge Agreement (other than by
reason of a release of collateral in accordance with the terms hereof or
thereof) with the priority required by the Security Agreement or Pledge
Agreement, as applicable, or (C) the validity or enforceability of any of the
Consideration Notes or the liens granted, to be granted, or purported to be
granted, by the Security Agreement or the Pledge Agreement shall be contested
by the Maker;

 

(v)          If Maker shall be in
default with respect to any payment, when due (subject in each case to
applicable grace or cure periods), of any Indebtedness in excess of $175,000
(other than under this Note or any other Consideration Note), or any other
default shall occur under any agreement or instrument evidencing such
Indebtedness, if the effect of such non-payment default is to accelerate the
maturity of such Indebtedness or to permit the holder thereof to cause such
Indebtedness to become due prior to its stated maturity, and such default shall
not be remedied, cured, waived or consented to within the period of grace with
respect thereto, or any other circumstance which arises (other than the mere
passage of time) by reason of which any such Indebtedness shall become or be
declared to be due and payable prior to its stated maturity; or

 

(vi)         If:  (i) as of June 30, 2005, Maker’s EBITDA for
the most recently ended fiscal half year shall not exceed $0, or (ii) beginning
with the fiscal half year ending December 31, 2005, as of the last day of any
fiscal half year ending in any June or December, Maker’s Ratio of Indebtedness
to EBITDA shall be greater than 4-to-1. 
For purposes of calculating EBITDA for this Section 12(a)(vi), (x) all
non-cash charges for goodwill impairment resulting from the transactions
contemplated by the Stock Purchase Agreement shall be added back to Net Income;
and (y) Net Income shall not be modified as a result of any “mark to market”
adjustments resulting from any anti-dilution or other adjustments with respect
to this Note or the Maker’s Series B Preferred Stock.  For the purposes of calculating Indebtedness
for this Section 12(a)(vi), Indebtedness shall not be modified as a result of
any “mark to market” adjustments resulting from any anti-dilution or other
adjustments with respect to this Note or the Maker’s Series B Preferred Stock.

 

B-1-12

 

(vii)        If Maker shall have
breached its covenant under the Stock Purchase Agreement to duly convene a
Stockholder Meeting (as defined in the Stock Purchase Agreement) within the
time period set forth therein.

 

(viii)       subject to Section 12(b) of
this Note, if Maker shall have failed to have a Shelf Registration Statement
filed and declared and maintained effective as provided under Section 5 of the
Series B Designation (a “Registration Event of Default”).

 

Notwithstanding anything
contained herein to the contrary, no Event of Default shall be deemed to have
occurred under this Note if the Event of Default resulted solely from a breach
of any representation, warranty or covenant of Tertio Telecoms Group Limited
under this Stock Purchase Agreement.

 

(b)           In the event that Payee transfers any
portion of the outstanding principal balance of this Note to any Person (other
than the Payee’s shareholders and Affiliates of such shareholders) and, at the
time of transfer, Payee does not also transfer the greater of (i) a number of
Registrable Shares at least equal to the product of the number of Registrable
Shares then held by Payee, its shareholders or Affiliates of such shareholders
multiplied by a fraction, the numerator of which is the amount of the
outstanding principal balance of this Note transferred to such Person, and the
denominator of which is the aggregate principal amount of all Consideration
Notes held by Payee or (ii) at least 50,000 Registrable Shares (the “Share
Transfer Minimum”) to such Person, Section 12(a)(viii) of this Note shall
terminate with respect to the portion of this Note so transferred.  In the event Payee transfers any of the
outstanding principal of this Note to any Person (other than Payee’s
shareholders and Affiliates of such shareholders) and, at the time of transfer,
also transfers to such Person at least the Share Transfer Minimum, the
occurrence of a Registration Event of Default shall continue to constitute an
Event of Default and such Person shall be entitled to exercise the remedies arising
under this Note upon the occurrence and during the continuation of a
Registration Event of Default.  Without
limiting any of the foregoing and for purposes of clarity, for so long as this
Note is held by Payee, its shareholders or the Affiliates of such shareholders
(regardless of whether in the event of a transfer of this Note to any of Payee’s
shareholders or the Affiliates of such shareholders the Payee simultaneously
transfers the Share Transfer Minimum) the occurrence of a Registration Event of
Default shall constitute an Event of Default and the remedies available to
Payee upon the occurrence and during continuation of an Event of Default shall
continue unaffected with respect to the portion of this Note held by Payee,
Payee’s shareholders and Affiliates of such shareholders.

 

13.           Consequences of Default.

 

(a)           Upon the occurrence and during the
continuance of an Event of Default:

 

(i)            if there is (a) no
Convertible Note outstanding or (b) a Convertible Note outstanding and the
holder thereof declines to accept a prepayment under the corresponding section
of the Convertible Note, then, upon receipt of notice from the Payee (at Payee’s
option), Maker shall immediately pay to Payee (to the extent not previously
paid) any Account Prepayment Amount (calculated as of the most recent test
dates), regardless of whether the holders of B-1 Notes requested any such
payment at the time of calculation; and

 

B-1-13

 

(ii)           the entire unpaid
principal balance of this Note, together with interest accrued thereon and with
all other sums due or owed by Maker hereunder, as well as all out-of-pocket
costs and expenses (including but not limited to attorneys’ fees and
disbursements) incurred by Payee in connection with the collection or
enforcement of this Note, the Security Agreement or the Pledge Agreement, shall
at Payee’s option, and by notice to Maker (except if an Event of Default
described in Section 12(a)(iii) of this Note shall occur in which case
acceleration shall occur automatically without notice) be declared to be due
and payable immediately, and payment of the same may be enforced and recovered
by the entry of judgment of this Note and the issuance of execution thereon.

 

(b)           In addition to all of the sums payable
hereunder, Maker agrees to pay the Payee all reasonable costs and expenses
incurred by Payee in connection with any and all actions taken to enforce
collection of this Note, the Security Agreement and the Pledge Agreement upon
the occurrence of an Event of Default, including all reasonable attorneys’
fees.

 

14.           Remedies not Exclusive. 
The remedies of Payee provided herein or otherwise available to Payee at
law or in equity shall be cumulative and concurrent, and may be pursued singly,
successively and together at the sole discretion of Payee, and may be exercised
as often as occasion therefor shall occur; and the failure to exercise any such
right or remedy shall in no event be construed as a waiver or release of the
same.

 

15.           Notices.  All notices required
to be given to any of the parties hereunder shall be in writing and shall be
deemed to have been sufficiently given for all purposes when presented
personally to such party or sent by certified or registered mail, return
receipt requested, to such party at its address set forth below:

 

	
  If to the Maker:

  	
  Evolving Systems, Inc.

  9777 Mount Pyramid Court, Suite 100

  Englewood, Colorado 80112

  Attention: Anita Moseley, General Counsel

  Tel: (303) 802-2599

  Fax: (303) 802-1138

  
	
   

  	
   

  
	
  With copies to:

  	
  Holme Roberts & Owen LLP

  1700 Lincoln St., Suite 4100

  Denver, CO 80203-4541

  Attention: Charles D. Maguire, Jr., Esq.

  Tel: (303) 861-7000

  Fax: (303) 866-0200

  
	
   

  	
   

  
	
  If to the Payee:

  	
  Tertio Telecoms Group Ltd.

  c/o Apax Partners Ltd.

  15 Portland Place

  London W1B 1PT

  United Kingdom

  

 

B-1-14

 

	
   

  	
  Attn: Peter Skinner

  Tel: 44.20.7843.4000

  Fax: 44.20.7843.4001

  
	
   

  	
   

  
	
  With copies to:

  	
  Advent International plc

  123 Buckingham Palace Road

  London SW1W 9SL

  United Kingdom

  

  Attn: James Brocklebank

  Tel: 44.20.7333.5516

  Fax: 44.20.7333.0801

  

  Pepper Hamilton LLP

  3000 Two Logan Square

  18th and Arch Streets

  Philadelphia, Pennsylvania 19103

  Attention: Cary S. Levinson, Esq.

  Tel: (215) 981-4091

  Fax: (215) 981-4750

  

 

Such notice shall be deemed
to be given when received if delivered personally or five (5) business days
after the date mailed.  Any notice mailed
shall be sent by certified or registered mail. 
Any notice of any change in such address shall also be given in the
manner set forth above.  Whenever the
giving of notice is required, the giving of such notice may be waived in
writing by the party entitled to receive such notice.

 

16.           Severability. 
In the event that any provision of this Note is held to be invalid,
illegal or unenforceable in any respect or to any extent, such provision shall
nevertheless remain valid, legal and enforceable in all such other respects and
to such extent as may be permissible. 
Any such invalidity, illegality or unenforceability shall not affect any
other provisions of this Note, but this Note shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.

 

17.           Successors and Assigns; Assignment. 
This Note inures to the benefit of the Payee and binds the Maker, and
its successors and assigns, and the words “Payee” and “Maker” whenever
occurring herein shall be deemed and construed to include such respective
successors and assigns.  Maker may not
assign or transfer this Note, without the consent of Payee.  At any time and from time to time, the Payee,
in its sole discretion, may transfer to any Person all or a portion of the
outstanding principal and/or accrued interest hereunder without the consent of
the Maker, provided, however, this Note may not be assigned, transferred
or sold by Payee to any Person that engages in, or controls an entity that
engages in, a business competitive with the Maker’s business.  Furthermore, as a condition of the transfer,
any transferee of Payee of this Note must agree to become bound by the
provisions of this Note, the Security Agreement and the Pledge Agreement.

 

18.           Entire Agreement. This Note (together with the other
Consideration Notes, the Security Agreement and the Pledge Agreement) contains
the entire agreement between the parties with respect to the subject matter
hereof and thereof.

 

B-1-15

 

19.           Modification of Agreement. This Note may not be modified, altered
or amended, except by an agreement in writing signed by both the Maker and the
Payee.

 

20.           Releases by Maker. 
Maker hereby releases Payee from all technical and procedural errors,
defects and imperfections whatsoever in enforcing the remedies available to
Payee upon a default by Maker hereunder and hereby waives all benefit that
might accrue to Maker by virtue of any present or future laws exempting any
property, real or personal, or any part of the proceeds arising from any sale
of any such property, from attachment, levy or sale under execution, or
providing for any stay of execution, exemption from civil process or extension
of time, and agrees that such property may be sold to satisfy any judgment
entered on this Note, in whole or in part and in any order as may be desired by
Payee.

 

21.           Waivers by Maker. 
Maker (and all endorsers, sureties and guarantors) hereby waives
presentment for payment, demand, notice of demand, notice of nonpayment or
dishonor, protest and notice of protest of this Note, and all other notices in
connection with the delivery, acceptance, performance, default or enforcement
of the payment of this Note (other than notices expressly required by the terms
of this Note, the Security Agreement or the Pledge Agreement); liability
hereunder shall be unconditional and shall not be affected in any manner by an
indulgence, extension of time, renewal, waiver or modification granted or
consented to by Payee.

 

22.           Revenue and Stamp Tax. 
Maker shall pay all reasonable out-of-pocket expenses incurred by the
Payee in connection with any revenue, tax or other stamps now or hereafter required
by law at any time to be affixed to this Note.

 

23.           Governing Law. 
This Note shall be governed by and construed in accordance with the laws
of the State of Delaware, without reference to conflict of laws principles.

 

24.           Limitations of Applicable Law. 
Notwithstanding any provision contained herein, Maker’s liability for
the payment of interest shall not exceed the limits now imposed by any
applicable usury law.  If any provision
of this Note requires interest payments in excess of the highest rate permitted
by law, the provision in question shall be deemed to require only the highest
such payment permitted by law.  Any
amounts theretofore received by Payee hereunder in excess of the maximum amount
of interest so permitted to be collected by Payee shall be applied by Payee in
reduction of the outstanding balance of principal or, if this Note shall
theretofore been paid in full, the amount of such excess shall be promptly
returned by Payee to the Maker.

 

25.           Consent to Jurisdiction and Service of
Process.  Maker irrevocably appoints each of Maker’s
Authorized Officers as its attorneys-in-fact upon whom may be served any
notice, process or pleading in any action or proceeding against it arising out
of or in connection with this Note. 
Maker hereby consents that any action or proceeding against it may be
commenced and maintained in any court within the State of Delaware or in the
United States District Court of Delaware by service of process on any such
officer.  Maker further agrees that the
courts of the State of Delaware and the United States District Court of
Delaware shall have jurisdiction with respect to the subject matter hereof and
the person of Maker and the collateral securing Maker’s obligations
hereunder.  Notwithstanding the
foregoing, Payee, in its absolute discretion, may also initiate proceedings in
the courts of any other jurisdiction in which Maker may be found or in which
any of its properties or any such collateral may be located.

 

26.           Headings.  The headings
of the sections of this Note are inserted for convenience only and do not
constitute a part of this Note.

 

B-1-16

 

27.           WAIVER OF JURY TRIAL. 
MAKER HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS
IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY COLLATERAL
SECURITY DOCUMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER ORAL OR WRITTEN) OR ACTIONS OF PAYEE. 
THIS PROVISION IS A MATERIAL INDUCEMENT FOR PAYEE’S ADVANCING THE FUNDS
UNDER THIS NOTE.

 

28.           ACKNOWLEDGEMENTS. 
MAKER ACKNOWLEDGES THAT IT HAS HAD THE ASSISTANCE OF COUNSEL IN THE
REVIEW AND EXECUTION OF THIS NOTE, AND FURTHER ACKNOWLEDGES THAT THE MEANING AND
EFFECT OF THE FOREGOING WAIVER OF JURY TRIAL SET FORTH IN SECTION 27 HAVE BEEN
FULLY EXPLAINED TO MAKER BY SUCH COUNSEL.

 

29.           Partial Substitution and Replacement. 
This Note evidences and constitutes a partial substitution and
replacement of the A Notes.  The
execution and delivery of this Note shall not in any circumstances be deemed to
have terminated, extinguished, released or discharged Maker’s Indebtedness
under the A Notes and the security therefore. 
Such Indebtedness shall continue under and be governed by this
Note.  THIS
NOTE IS NOT A NOVATION.

 

[Signature Page Follows]

 

B-1-17

 

IN WITNESS WHEREOF, the
Maker has duly executed this Note as of the date first set forth above.

 

	
   

  	
  EVOLVING SYSTEMS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

Acknowledged and Agreed:

 

PAYEE:

 

Tertio Telecoms Group Ltd.

 

	
  By:

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  

 

B-1-18

 

SCHEDULE 1

DEFINITIONS

 

“A Notes” means the
Senior Secured Promissory Notes dated as of November 2, 2004, by Maker in favor
of Payees in the original aggregate principal amount of $11,950,000, each as
they may be amended, restated, modified or replaced in substitution in whole or
in part by any other note or notes from time to time, including, but not
necessarily limited to, the Senior Secured Notes by Maker in favor of Payees
which may be issued in substitution for or in addition to the A Notes issued to
Payee by Maker under the terms of such A Notes.

 

“Accretive” shall
mean that the projected pro forma consolidated EBITDA (calculated on a per
share basis) of the Maker and the other constituent entity(ies) in such
transaction, and the respective Consolidated Subsidiaries of the Maker and such
constituent entity(ies) for the twelve calendar month period immediately
following such transaction, is not less than the projected EBITDA (calculated
on a per share basis), on a consolidated basis, of the Maker and its
Consolidated Subsidiaries for the same period, all as presented in the Financial
Projections.

 

“Adjusted Libor Rate”
means the London Interbank Offering Rate for three-month deposits as reported
under the heading “Money Rates” in the Eastern edition of the Wall Street Journal plus 600 basis points.

 

“Affiliate” shall
mean, with respect to any Person, any other Person which directly or indirectly
Controls, is Controlled by or is under common Control with such Person.

 

“Affiliated Group”
shall mean a group of Persons, each of which is an Affiliate of some other
Person in the group.

 

“B-1 Note” means the
Senior Secured Note by Maker in favor of Payee in such aggregate principal
amount Maker may issue as a result of the outcome of the stockholder vote of
the matters presented for their approval at the Initial Stockholder Meeting (as
such term is defined in the Series B Designation), as it may be amended,
restated, modified or replaced in substitution in whole or in part by any other
note or notes from time to time, including, but not necessarily limited to, the
Senior Secured Notes by Maker in favor of Payee which may be issued in
substitution for or in addition to the B-1 Note issued to Payee by Maker under
the terms of such B-1 Note.

 

“Capital Expenditures”
shall mean, with respect to any Person for any period, the aggregate of all
expenditures (whether paid in cash, or incurred by entering into a synthetic
lease arrangement or a Capital Lease, or otherwise accrued as a liability) by
such Person during that period which, in accordance with GAAP, are or should be
included in “additions to property, plant or equipment” or similar items
reflected in the statement of cash flows of such Person, and all research and
development expenditures which in accordance with GAAP are or should be
accounted for as a capital expenditure in the balance sheet of that Person, but
excluding expenditures to the extent reimbursed or financed from insurance
proceeds paid on account of the loss of or the damage to the assets being
replaced or restored, or from awards of compensation arising from the taking by
condemnation or eminent domain of such assets being replaced.

 

“Capital Lease”, as
applied to any Person, shall mean any lease of any property (whether real,
personal or mixed) by that Person as lessee which, in accordance with GAAP, is
or should be accounted for as a capital lease on the balance sheet of that
Person.

 

B-1-19

 

“Capital Transaction”
means any consolidation or merger of Maker with another entity, or the sale of
all or substantially all of its assets to another entity, or any reorganization
or reclassification of the Common Stock or other equity securities of Maker.

 

“Cash Equivalents”
shall mean any of the following: (i) full faith and credit obligations of the
United States of America, or fully guaranteed as to interest and principal by
the full faith and credit of the United States of America, maturing in not more
than one year from the date such investment is made; (ii) time deposits and
certificates of deposit, Eurodollar time deposits, overnight bank deposits and
other interest bearing deposits or accounts (other than securities accounts) or
bankers’ acceptances having a final maturity of not more than one year after
the date of issuance thereof of any commercial bank incorporated under the laws
of the United States of America or any state thereof or the District of
Columbia, which bank is a member of the Federal Reserve System and has a
combined capital and surplus of not less than $500,000,000.00 and with a senior
unsecured debt credit rating of at least “A-2” by Moody’s or “A” by S&P;
(iii) commercial paper of companies, banks, trust companies or national banking
associations incorporated or doing business under the laws of the United States
of America or one of the States thereof or the District of Columbia, in each
case having a remaining term until maturity of not more than two hundred
seventy (270) days from the date such investment is made and rated at least P-1
by Moody’s or at least A-1 by S&P; (iv) repurchase agreements with any
financial institution having combined capital and surplus of not less than
$500,000,000.00 with a term of not more than seven (7) days for underlying
securities of the type referred to in clause (i) above; and (v) money market
funds which invest primarily in the Cash Equivalents set forth in the preceding
clauses (i) - (iv).

 

“Change in Control”
shall mean (i) any Person, Affiliated Group or group (such term being used as
defined in the Securities Exchange Act of 1934, as amended), other than a
Primary Holder (as such term is defined in the Series B Designation) acquiring
ownership or control of in excess of 50% of equity securities having voting
power to vote in the election of the Board of Directors of Maker either on a
fully diluted basis or based solely on the voting stock then outstanding, (ii)
if at any time, individuals who at the date hereof constituted the Board of
Directors of Maker (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders of Maker,
as the case may be, was approved by a vote of the majority of the directors
then still in office who were either directors at the date hereof or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors of Maker then in
office, (iii) the direct or indirect sale, transfer, conveyance or other
disposition, in one or a series of related transactions, of all or
substantially all of the properties or assets of Maker to any Person or (iv)
the adoption of a plan relating to the liquidation or dissolution of Maker.

 

“Compensation” means
all salary and bonuses, but excludes any compensation under any equity
incentive plan.

 

“Consideration Notes”
means the collective reference to this Note, A Notes, Convertible Note and the
Short Term Note.

 

“Consolidated
Subsidiaries” shall mean all Subsidiaries of a Person which are required or
permitted to be consolidated with such Person for financial reporting purposes
in accordance with GAAP.

 

“Control” shall mean,
as to any Person, the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of greater than 50%
of the 

 

B-1-20

 

voting securities of such Person or by acting
as the general partner of a limited partnership (the terms “Controlled by” and “under
common Control with” shall have correlative meanings.)

 

“Convertible Note”
shall mean the Senior Secured Convertible Note of Maker in favor of Payee in
such aggregate principal amount Maker may issue as a result of the outcome of
the stockholder vote on the matters presented for their approval at the Initial
Stockholders Meeting (as such term is defined in the Series B Designation) in
effect from time to time in the form attached to A Notes as Exhibit B 2,as
it may be amended, restated or modified from time to time.

 

“EBITDA” shall mean
for any period, Net Income for such period plus, without duplication, the
aggregate amounts deducted in determining Net Income during such period, the
sum of (A) interest paid on indebtedness for such period, (B) income taxes for
such period, (C) depreciation expense for such period and (D) amortization
expense for such period, all as determined in accordance with GAAP as applied
in accordance with past practice.

 

“Executive Officer”
means any officer of Maker whose compensation is determined by the Compensation
Committee of the Board of Directors of Maker.

 

“Financial Projections”
shall mean written financial projections prepared by Maker and certified by
Maker’s chief financial officer, prepared in good faith and based upon
reasonably assumptions and estimates regarding the economic, business, industry
market, legal and regulatory circumstances and conditions relevant to the
Maker.

 

“GAAP” means
generally accepted accounting principles set forth in the Opinions of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and in statements of the Financial Accounting Standards Board; and
such principles observed in a current period shall be comparable in all
material respects to those applied in a preceding period.

 

“Guaranty” shall
mean, as to any Person, any direct or indirect obligation of such Person
guaranteeing or intending to guarantee, or otherwise providing credit support,
for any Indebtedness, Capital Lease, dividend or other monetary obligation (“primary
obligation”) of any other Person (the “primary obligor”) in any manner, whether
directly or indirectly, by contract, as a general partner or otherwise,
including, without limitation, any obligation of such Person, whether or not
contingent, (a) to purchase any such primary obligation or any property
constituting direct or indirect security therefor, (b) to advance or supply
funds (i) for the purchase or payment of any such primary obligation or (ii) to
maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency of the primary obligor, or (c) to
purchase property, securities or services from the primary obligor or other
Person, in each case, primarily for the purpose of assuring the performance of
the primary obligor of any such primary obligation or assuring the owner of any
such primary obligation of the repayment of such primary obligation.  The amount of any Guaranty shall be deemed to
be an amount equal to (x) the stated or determinable amount of the primary
obligation in respect of which such Guaranty is made (or, if the amount of such
primary obligation is not stated or determinable, the maximum reasonably
anticipated liability in respect thereof (assuming such Person is required to
perform thereunder)) or (y) the stated maximum liability under such Guaranty,
whichever is less.

 

“Indebtedness” shall
mean (without double counting), at any time and with respect to any Person, (i)
indebtedness of such Person for borrowed money (whether by loan or the issuance
and sale of debt securities) or for the deferred purchase price of property or
services purchased (other than amounts 

 

B-1-21

 

constituting trade payables arising in the
ordinary course of business and payable in accordance with customary trading
terms not in excess of 90 days or, if overdue for more than 90 days, as to
which a dispute exists and adequate reserves in conformity with GAAP have been
established on the books of such Person); (ii) all indebtedness of such Person
evidenced by a note, bond, debenture or similar instrument (whether or not
disbursed in full in the case of a construction loan); (iii) indebtedness of
others which such Person has directly or indirectly assumed or guaranteed or
otherwise provided credit support therefore (other than for collection or
deposit in the ordinary course of business); (iv) indebtedness of others
secured by a Lien on assets of such Person, whether or not such Person shall
have assumed such indebtedness (provided, that if such Person has not assumed
such indebtedness of another Person then the amount of indebtedness of such
Person pursuant to this clause (iv) for purposes of this Note shall be equal to
the lesser of the amount of the indebtedness of the other Person or the fair
market value of the assets of such Person which secures such other
indebtedness); (v) obligations of such Person relative to the face amount of
letters of credit, acceptance facilities, or drafts or similar instruments
issued or accepted by banks and other financial institutions for the account of
such Person; (vi) that portion of obligations of such Person under Capital
Leases that is properly classified as a liability on a balance sheet in
conformity with GAAP; (vii) all obligations of such Person under any Interest
Rate Protection Agreement; (viii) deferred payment obligations of such Person resulting
from the adjudication or settlement of any litigation; and (ix) any Guaranty by
such Person in respect of any of the foregoing.

 

“Interest Rate Protection
Agreement” shall mean any interest rate swap agreement, interest rate cap
agreement, synthetic cap, collar or floor or other financial agreement or
arrangement designed to protect a Maker or any of its Subsidiaries against
fluctuations in interest rates or to reduce the effect of any such
fluctuations.

 

“Investment” shall
mean any investment in any Person, whether by means of acquiring or holding
securities, capital contribution, loan, time deposit, guaranty or otherwise.

 

“Lien” shall mean any
mortgage, pledge, security interest, encumbrance, lien or charge of any kind
whatsoever (including, without limitation, any conditional sale or other title
retention agreement, any agreement to grant a security interest at a future
date, any lease in the nature of security, and the filing of, or agreement to
give, any financing statement under the Uniform Commercial Code of any
jurisdiction).

 

“Material Adverse Effect”
shall mean a (i) a material adverse effect upon the business, operations,
properties, assets or condition (financial or otherwise) of the Maker or (ii)
the material impairment of the ability of the Maker to perform its obligations
under the Consideration Notes or of the Payee to enforce the obligations of the
Maker under the Consideration Notes.

 

“Maturity Date” means
December 31, 2007.

 

“Net Income” shall
mean for any period, net income on a consolidated basis for that period
determined in accordance with GAAP applied consistently with past practice.

 

“Non-Permitted Subsidiary”
means any direct or indirect Wholly Owned Subsidiary of Maker that is not a
Permitted Subsidiary.

 

“Note Issue Date” shall
mean the date on which this Note is issued.

 

B-1-22

 

“Payment Date” means
each December 31, March 31, June 30 and September 30; provided that if any such
Payment Date falls on a day which is not a business day, the applicable payment
shall not be due until the next following business day.

 

“Permitted Acquisitions”
means any acquisition of fifty percent (50%) or more of the equity interests or
all or substantially all of the assets of a third party so long as (i) such
acquisition is Accretive, and approved by the Maker’s board of directors, (ii)
following the consummation of the acquisition the Maker has a cash balance of
at least $5,000,000, on a consolidated basis, and (iii) the Maker does not
incur any Indebtedness in connection with such acquisition.

 

“Permitted Subsidiary”
means any direct or indirect Wholly Owned Subsidiary of Maker that is
domesticated or incorporated in a jurisdiction of the United States, Canada,
the United Kingdom or a country that is a member of the European Union and is a
guarantor of Maker’s obligations under the Consideration Notes.

 

“Person” shall mean
any natural person, corporation, division of a corporation, partnership,
limited liability partnership, limited liability company, trust, joint venture,
association, company, estate, unincorporated organization or government or any
agency or political subdivision thereof.

 

“Pledge Agreement”
means the Pledge Agreement executed by Maker in favor of Payee and dated the
date hereof, as it may be amended, restated or modified from time to time,
together with all schedules and exhibits thereto.

 

“Registrable Shares”
shall have the meaning set forth with respect thereto in the Investor Rights
Agreement of even date herewith.

 

“Security Agreement”
means the Security Agreement executed by the Maker in favor of the Payee and
dated as of the date hereof, as it may be amended, restated or modified from
time to time, together with all schedules and exhibits thereto.

 

“Series B Designation”
shall mean the Certificate of Designation of Maker’s Series B Convertible
Preferred Stock, as filed with the Secretary of State of the State of Delaware.

 

“Short Term Note”
means the Senior Secured Note dated as of November 2, 2004 by Maker in favor of
Payee in the original aggregate principal amount of $4,000,000, as it may be
amended, restated, modified or replaced in substitution by any other note or
notes from time to time.

 

“Stock Purchase Agreement”
means the Stock Purchase Agreement dated as of November 2, 2004 by and among
the Maker, Tertio Telecom Group, Ltd. and the parties listed therein.

 

“Stockholders” shall
have the meaning given to such term in the Stock Purchase Agreement.

 

“Subsidiary” shall
mean with respect to any Person, any corporation, association, joint venture,
partnership or other business entity (whether now existing or hereafter
organized) of which at least a majority of the voting stock or other ownership
interests having ordinary voting power for the election of directors (or the
equivalent) is, at the time as of which any determination is being made, 

 

B-1-23

 

owned or controlled by such Person or one or
more subsidiaries of such Person or by such Person and one or more subsidiaries
of such Person.

 

“UCC” shall mean the
Uniform Commercial Code as in effect from time to time in the State of
Delaware.

 

“Wholly Owned Subsidiary”
of a Person means (a) any Subsidiary all of the outstanding voting securities
(other than directors qualifying shares and/or other nominal amounts of shares
required to be held by directors or other Persons under applicable law) of
which shall at the time be owned or controlled, directly or indirectly, by such
Person or one or more Wholly Owned Subsidiaries of such Person, or by such
Person and one or more Wholly Owned Subsidiaries of such Person, or (b) any
partnership, limited liability company, association, joint venture or similar
business organization 100% of the ownership interests having ordinary voting
power of which shall at the time be so owned or controlled.

 

B-1-24

 

LT Note/Note B-2

 

EXHIBIT B-2

CONVERTIBLE NOTE

 

NEITHER THIS NOTE NOR THE SHARES OF COMMON STOCK ISSUABLE UPON THE
CONVERSION OF THIS NOTE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE “ACT”) OR ANY APPLICABLE STATE SECURITIES LAW, AND NEITHER MAY
BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND
UNTIL REGISTERED UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAW OR
UNLESS THE MAKER HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE
REASONABLY SATISFACTORY TO THE MAKER THAT SUCH REGISTRATION IS NOT REQUIRED.

 

	
  $[                      ]
  Principal Amount

  	
                 
       , 200   

  

 

SENIOR SECURED
CONVERTIBLE NOTE

 

EVOLVING SYSTEMS,
INC.

 

FOR VALUE RECEIVED, EVOLVING
SYSTEMS, INC., a Delaware corporation (the “Maker”), having its
principal place of business at 9777 Mount Pyramid Court, Englewood, Colorado
80112, hereby promises to pay to the order of Tertio Telecoms Group Ltd., an
entity formed and registered in England and Wales with a company number 4419858
(“Payee”), having an address at One Angel Square, Torrens Street, London
EC1V 1NY, United Kingdom, the principal sum of [                                                      
Dollars ($                  )]
in lawful money of the United States of America.

 

1.             Definitions; Interpretations. 
In addition to other terms defined elsewhere in this Note, the
capitalized terms set forth in Schedule 1 attached hereto and incorporated
herein by reference shall have the meanings set forth therein unless defined
elsewhere herein or the context otherwise clearly requires.  Except as otherwise provided herein,
financial and accounting terms used elsewhere in this Note shall be defined in
accordance with GAAP.

 

2.             Payments of Principal and Interest. 
The outstanding principal under this Note and accrued but unpaid
interest thereon shall be due and payable at the aforesaid address of Payee or
such other place as Payee may designate on the Maturity Date.  The outstanding principal balance of this
Note shall bear interest at a rate per annum equal to [Insert here the “Applicable Federal Rate” for the
month in which this Note is issued], and shall be paid on each Payment
Date, commencing with the first Payment Date to occur after the date of this
Note.   To the extent not paid when due
hereunder, interest shall be compounded quarterly.

 

3.             Optional Prepayment. 
From and after the date hereof, Maker may, with the prior written
consent of the Payee, subject to Section 4, prepay this Note in whole or in
part.  There shall be no premium or
penalty in connection with any prepayment. 
Such prepayment shall include all accrued and unpaid interest on the
principal amount of such prepayment and be applied first against accrued and
unpaid interest, if any and then against principal outstanding under this Note.

 

B-2-1

 

4.             Mandatory Prepayments.

 

(a)           Within forty five (45) days after the end
of each fiscal quarter of Maker, starting with the fiscal quarter ending March
31, 2005, Maker shall deliver to Payee a certificate of the chief financial
officer of Maker in the form attached hereto as Exhibit A, specifying
the closing balance for each of the deposit accounts of Maker set forth thereon
on the last day of the most recently completed fiscal quarter (the aggregate of
such closing balance for all such accounts is the “Aggregate Quarterly
Closing Balance”).  Maker shall at
all times maintain, and such certificate of the chief financial officer of the
Maker shall state that the Maker has during the fiscal quarter to which such
certificate relates maintained, such deposit accounts in good faith, and made
all payments drawn against such deposit accounts in accordance with past
practices or current and owing obligations of Maker incurred in the ordinary
course of business.  Payee may in its
sole discretion within ten (10) days after receipt of such certificate, request
that Maker make a prepayment on this Note in the amount up to such amount by
which the Aggregate Quarterly Closing Balance exceeds $7,000,000 (the “Account
Prepayment Amount”), such payment to be allocated pro rata among the
Convertible Notes held by Payees who have requested such payment and Maker
shall make such prepayment on this Note within two (2) business days following
receipt of written demand from Payee. 
Such prepayment shall be applied first against accrued interest, if any,
and then against principal outstanding under this Note.

 

(b)           Upon a Change of Control of Maker, the
Payee, in its sole discretion, shall have the right to declare the entire
unpaid principal balance of this Note, together with interest accrued thereon
and with all other sums due or owed by Maker hereunder, due and payable
immediately.  Maker shall pay to Payee
said amounts within two (2) business days following receipt of written demand
from Payee; provided that Payee must exercise the payment option set forth in
this Section 4(b) within forty-five (45) days after receipt of a written notice
from Maker regarding the Change of Control, which notice shall describe in
reasonable detail the terms and conditions of the Change of Control and the
consideration to be paid upon the consummation of the Change of Control.

 

5.             Optional Conversion. 
At any time, and from time to time, prior to repayment of all amounts
due under this Note, all or any portion of the principal amount of this Note,
and any accrued but unpaid interest thereon, shall be convertible at the option
of the Payee into fully paid and non-assessable shares of the Maker’s common
stock, $0.001 par value per share (the “Common Stock”).  The number of shares of Common Stock (“Common
Shares”) that Payee shall be entitled to receive upon such conversion shall
be equal to the number attained by dividing the principal amount, including any
accrued but unpaid interest thereon, being converted by the Conversion
Price.  The term “Conversion Price”
shall mean $             ,(2)
as revised from time to time pursuant to Schedule 2 hereto.

 

6.             Mandatory Conversion. 
At any time prior to repayment of all amounts due under this Note all of
the principal amount of this Note, and any accrued but unpaid interest thereon,
shall be convertible at the option of the Maker into fully paid and
non-assessable shares of Common Stock, in the 

 

(2) The term “Conversion Price”
shall mean the product of:  (x) the
average closing price per share of the Common Stock on the Nasdaq Stock Market
(or such other applicable exchange) as reported by Bloomberg or another
reputable reporting service, determined over the ninety (90) calendar-day
period immediately following the joint public announcement by the Maker and the
Payee of the transactions contemplated by the Stock Purchase Agreement,
multiplied by (y) ninety (90%) percent.

 

B-2-2

 

event that, at any time
after the second anniversary of the issuance of this Note, the average of the
closing price per share of the Common Stock on the Nasdaq Stock Market (or
other applicable stock market exchange) as reported by Bloomberg or another
reputable reporting service, for a period of forty-five (45) day consecutive
days is equal to or greater than the product of the Conversion Price multiplied
by two and a half (2.5); provided that Maker must exercise the conversion
option set forth in this Section 6 within ten (10) consecutive days after the
last day of such forty-five (45) day period. 
The number of Common Shares that Payee shall be entitled to receive upon
such conversion shall be equal to the number attained by dividing the principal
amount, and any accrued but unpaid interest thereon, being converted by the
Conversion Price.

 

7.             Mechanics of Conversion.

 

(a)           In order to exercise the conversion
privilege, Payee shall surrender this Note, duly endorsed, to Maker’s address
set forth above, and shall give written notice of conversion to Maker stating
Payee’s election to convert this Note or the portion thereof specified in said
notice.  As promptly as practicable after
the surrender of this Note as aforesaid, Maker shall issue and shall deliver to
Payee a certificate or certificates for the number of full Common Shares
issuable upon the conversion of this Note or portion thereof registered in the
name of Payee in accordance with the provisions of this Section 7, and a check
or cash for the Fair Market Value of any fraction of a Common Share arising
upon such conversion.  For purposes of
this Note, the “Fair Market Value” of a share of Common Stock as of a
particular date shall be determined as follows: (i) if the Common Stock is
listed for trading on the Nasdaq Stock Market (or other applicable stock market
exchange), then the current value shall be the closing price per share of
Common Stock on Nasdaq Stock Market (or other applicable stock market
exchange), as reported by Bloomberg or other reputable reporting service, on
the last business day prior to the date of conversion of this Note, or if no
such sale is made on such day, the average of the closing bid prices for the
Common Stock for such day on such exchange or system; or (ii) if the Common
Stock is not so listed on an exchange or system or admitted to unlisted trading
privileges, the current value shall be the average of the last reported bid
prices reported by the National Quotation Bureau, Inc. on the last business day
prior to the date of the conversion of this Note; or (iii) if the Common Stock
is not so listed or admitted to unlisted trading privileges and if bid and
asked prices are not so reported, the current value shall be an amount, not
less than book value, determined in such reasonable manner as may be prescribed
by the Board of Directors of the Maker.

 

(b)           In case this Note shall be surrendered
for partial conversion, the Maker shall execute and deliver to Payee, without
charge, a new Note in an aggregate principal amount equal to the unconverted
principal amount of the surrendered Note.

 

(c)           Each conversion shall be deemed to have
been effected on the date on which this Note shall have been surrendered and
the conversion notice shall have been received by Maker, as aforesaid, and
Payee shall be deemed to have become on said date the holder of record of the
Common Shares issuable upon such conversion.

 

8.             Adjustment Provisions.  Whenever
the Conversion Price shall be adjusted pursuant to Schedule 2, the Maker
shall forthwith file in the custody of its Secretary or an Assistant Secretary
at its office, and with its stock transfer, if any, an officer’s certificate
showing the adjusted Conversion Price determined as herein provided and setting
forth in reasonable detail the facts requiring such adjustment.  

 

B-2-3

 

Each such officer’s
certificate shall be made available at all reasonable times for inspection by
the Payee and the Maker shall, forthwith after each such adjustment, deliver a
copy of such certificate to the Payee.

 

9.             Mergers, Consolidations, Sales.

 

(a)           Subject to Section 4(b) of this Note, in
the case of any consolidation or merger of Maker with another entity, or the
sale of all or substantially all of its assets to another entity, or any
reorganization or reclassification of the Common Stock or other equity
securities of Maker (each of the foregoing, a “Capital Transaction”),
then, as a condition of such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made in the definitive
documentation to be executed by the parties to such Capital Transaction whereby
Payee shall thereafter have the right to receive upon the basis and upon the
terms and conditions specified herein and in lieu of the Common Shares
immediately theretofore issuable upon conversion of this Note, such shares of
stock, securities or assets as may (by virtue of such consolidation, merger,
sale, reorganization or reclassification) be issued or payable with respect to
or in exchange for a number of outstanding Common Shares equal to the number of
Common Shares immediately theretofore issuable upon conversion of this Note had
such consolidation, merger, sale, reorganization or reclassification not taken
place, and in any such case appropriate provisions shall be made with respect
to the rights and interests of Payee to the end that the provisions hereof
shall thereafter be applicable, as nearly as may be, in relation to any shares
of stock, securities or assets thereafter deliverable upon conversion of this
Note.  Maker shall not effect any such
consolidation, merger or sale, unless prior to or simultaneously with the
consummation thereof, the successor entity (if other than Maker) resulting from
such consolidation or merger or the entity purchasing such assets shall assume
by written instrument executed and mailed or delivered to Payee, the obligation
to deliver to Payee such shares of stock, securities or assets as, in
accordance with this Section 9, Payee may be entitled to receive.

 

(b)           On or before the date that is ten (10)
business days prior to Maker’s mailing of a stockholder proxy and notice of a
stockholder meeting in connection with a stockholder meeting called for the
purpose of approving a Capital Transaction, Maker shall provide the Payee with
written notice (the “Transaction Notice”).  The Transaction Notice shall describe in
reasonable detail the terms and conditions of the Capital Transaction and the
consideration to be paid upon the consummation of the Capital Transaction.  In the event the Capital Transaction would
result in a Change of Control of Maker, then as a condition of such Capital
Transaction, provision shall be made in the definitive documentation to be
executed by the parties to such Capital Transaction whereby (i) Payee may
exercise its rights as set forth in Section 9 and Section 4(b) of this Note and
(ii) the outstanding balance of
this Note be paid to the extent Payee has elected to have this Note be paid
pursuant to Section 4(b) of this Note.

 

10.           Registration Under the Securities Act of
1933.   The
Payee is entitled to the benefits of that certain Investor Rights Agreement (as
such term is defined in the Series B Designation), relating to registration of
the Common Shares issuable upon any conversion of this Note, and such agreement
is incorporated by reference into this Note.

 

11.           Security.

 

(a)           As security for the repayment of all liabilities
arising under this Note, the Maker hereby grants to Payee a first priority
security interest in and a lien on: (i) all of the Collateral (as that term is
defined in the Security Agreement) and (ii) all of the Collateral (as that term
is defined in the 

 

B-2-4

 

Pledge Agreement).  Payee shall have all rights provided to a
secured party under the Security Agreement and Pledge Agreement under the
Uniform Commercial Code of the State of Delaware.  The Maker shall execute and deliver such
documentation as Payee may reasonably request to evidence and perfect Payee’s
security interest granted in this Section 11 and under the Security Agreement
and Pledge Agreement.

 

(b)           The security interest securing the repayment
of all liabilities arising under this Note, and any guaranties executed by the
Maker or any of its Subsidiaries in favor of Payee (or any collateral agent
appointed for the benefit of Payee) in connection with this Note, shall be
automatically released and terminated on the date that the aggregate
outstanding balance of all of the Consideration Notes is equal to or less than
ten percent (10%) of the original aggregate principal amount of all of the
Consideration Notes at the time of issuance. 
Upon the occurrence of such an event and written notice thereof to the
Payee:

 

(i)             the
Maker is hereby authorized to terminate all applicable security interests and
liens encumbering the Collateral;

 

(ii)            the
negative covenants set forth in Sections 13(b), 13(c), 13(d), 13(f), 13(j), and
13(k) of this Note shall terminate;

 

(iii)           the
negative covenants set forth in Section 13(e) of this Note shall be deemed
modified by adding (in addition to, and not in lieu of, all other Permitted
Indebtedness described in Section 13(e)) Indebtedness of the Maker and all
Subsidiaries in an amount not to exceed in the aggregate the principal amount
of $3,000,000 at any given time outstanding to the definition of Permitted
Indebtedness;

 

(iv)           the
negative covenant in Section 13(g) of this Note shall be deemed modified to
increase the limitation on Capital Expenditures to $5,000,000 in any fiscal
year; and

 

(v)            the
negative covenant in Section 13(i) of this Note shall be deemed modified to
provide that Investments by Maker in a minority equity interest of Persons
engaged in the Maker’s Business are Permitted Investments (in addition to, and
not in lieu of, all other Permitted Investments described in Section 13(i)),
provided that such investments do not exceed 5% of the Maker’s net worth at the
time of such Investments.

 

The Payee agrees
to take such actions and to execute and deliver such documents and instruments,
as may be reasonably requested by Maker and at the Maker’s expense, in order to
evidence the terminations described herein and to release any lien or security
interest in any collateral securing repayment of the liabilities arising under
this Note.

 

12.           Affirmative Covenants. 
Maker covenants and agrees that, so long as any Indebtedness is
outstanding hereunder, it shall comply, and shall cause its Subsidiaries (to
the extent applicable) to comply, with each of the following:

 

(a)           Upon the request of Payee from time to
time, (i) provide Payee and its representatives (at the Maker’s expense) access
to its books and records and to any of its and its Subsidiaries’ properties or
assets upon three (3) days’ advance notice and during regular business hours in
order that Payee or its representatives may make such audits and examinations
and make abstracts from 

 

B-2-5

 

such books, accounts,
records and other papers of Maker and its subsidiaries pertaining to their
deposit accounts, provided, however, that the Payee may conduct such
inspections and examinations no more frequently than twice in any 12-month
period, unless an Event of Default has occurred and is continuing, in which
case the Payee shall not be so limited, and (ii) upon reasonable advance
notification to Maker, permit Payee or its representatives to discuss the
affairs, finances and accounts with, and be advised as to the same by, officers
and independent accountants, all as Payee may deem appropriate, including
without limitation, for the purpose of verifying any certificate delivered by
Maker to Payee under Section 4 hereof, provided that any such parties are a
party to, or bound by, an acceptable non-disclosure agreement.  The Payee shall conduct at least one meeting
with an executive officer of the Maker in the course of each such inspection
and examination or discussion with officers or independent accountants.

 

(b)           Comply with all laws, ordinances or
governmental rules or regulations to which it is subject, and shall obtain and
maintain in effect all licenses, certificates, permits, franchises and other
governmental authorizations necessary to the ownership of its properties or to
the conduct of its businesses, except where the failure to so comply or obtain
or maintain would not reasonably be expected to have a Material Adverse Effect.

 

(c)           Except as otherwise permitted under
Section 13 of this Note, at all times preserve and keep in full force and
effect (i) its corporate existence and (ii) take all reasonable action to
maintain all rights and franchises necessary or desirable in the normal conduct
of its business, except to the extent that failure to do so in the case of
clause (ii) of this Section 12(c) would not reasonably be expected to have a
Material Adverse Effect.

 

(d)           Furnish to Payee notice of the occurrence
of any Event of Default within five (5) business days after it becomes known to
any of Maker’s Authorized Officers.

 

(e)           File all income tax or similar tax
returns required to be filed in any jurisdiction and to pay and discharge all
taxes shown to be due and payable on such returns and all other taxes, assessments,
governmental charges, or levies payable by any of them, to the extent such
taxes and assessments have become due and payable and before they have become
delinquent, provided that Maker need not pay any such tax or assessment if the
amount, applicability or validity thereof is contested by Maker on a timely
basis in good faith and in appropriate proceedings, and Maker has established
adequate reserves therefor in accordance with GAAP on it books.

 

(f)            Operate Maker’s Business (as defined in
Section 13(m) of this Note) in the ordinary course of business except as
provided herein.

 

(g)           In any fiscal year, increase the
Compensation of Executive Officers of Maker only with the unanimous consent of
the Compensation Committee.

 

13.           Negative Covenants. 
Maker covenants and agrees that so long as any Indebtedness is
outstanding hereunder, neither it nor any of its Subsidiaries shall undertake
any of the following without obtaining the prior written consent of the Payee:

 

(a)           voluntarily liquidate, dissolve or wind
up, except for the liquidation, dissolution and winding-up of CMS
Communications, Inc. and Telecom Software Enterprises, LLC (“TSE”);

 

B-2-6

 

(b)           pay, declare or set aside any sums for
the payment of any dividends, or make any distributions on, any shares of its
capital stock or other securities or make prepayments of principal on any
Indebtedness except in the case of the following (each, a “Permitted Payment”):

 

(i)             prepayments
of principal or payments of interest on (A) any of the Consideration Notes, (B)
any Indebtedness incurred under the Working Capital Exclusion as provided in
Section 13(e)(x) of this Note and promissory notes issued to Peter McGuire and
Lisa Marie Maxson pursuant to the Acquisition Agreement dated October 15, 2004
by and among Maker, Peter McGuire and Lisa Marie Maxson (collectively, the “TSE
Promissory Notes”); provided that there is no Event of Default under this
Note and the collateral securing any such Indebtedness shall be added to the
Collateral (as defined in the Security Agreement) or (C) any Indebtedness of
Evolving Systems Holdings Limited (“ESHL”) or its Subsidiaries in favor
of Royal Bank of Scotland PLC and disclosed in Schedule 3 of this Note;

 

(ii)            dividends
or distributions payable in the common stock of Maker or any of its
Subsidiaries;

 

(iii)           payments
in accordance with any Series B Approved Plan (as such term is defined in the
Series B Designation);

 

(iv)           dividends
or distributions payable by any of Maker’s Subsidiaries to the Maker;

 

(v)            dividends
or distributions by (A) any Permitted Subsidiary to another Permitted
Subsidiary or (B) any Non-Permitted Subsidiary to a Permitted Subsidiary;

 

(vi)           dividends
or distributions by a Subsidiary of ESHL to ESHL or another Wholly Owned
Subsidiary of ESHL;

 

(vii)          regularly
scheduled payments of principal on Indebtedness permitted under Section 13(e)
(excluding Sections 13(e)(iii) through 13(e)(viii)) of this Note; and

 

(viii)         payments
(whether regularly scheduled, upon demand or otherwise) of Indebtedness
permitted under Sections 13(e)(iii) through 13(e)(viii) to the extent such
payments are made to or received by Maker or a Subsidiary that is a guarantor;

 

(c)           purchase, acquire or obtain (i) any
capital stock or other proprietary interest, directly or indirectly, in any
other entity or (ii) all or a substantial portion of the business or assets of
another Person for consideration (including assumed liabilities) other than
Investments permitted under Section 13(i) and Permitted Acquisitions;

 

(d)           (i) sell or transfer all or a substantial
portion of its assets to another Person; (ii) sell, transfer or otherwise
dispose of any notes receivable or accounts receivable, with or without
recourse; or (iii) sell, lease, transfer or otherwise dispose of any asset or
group of assets (other than as described in clause (ii) above), except:

 

(i)             sales of
inventory in the ordinary course of business;

 

B-2-7

 

(ii)            sales or
liquidations of Investments permitted by Section 13(i);

 

(iii)           (A)
sales or other dispositions of property by any Subsidiary of Maker to the Maker
or to any other Subsidiary and (B) sales or other dispositions of property by
the Maker to any if its Subsidiaries, so long as the security interests granted
to the Payee pursuant to the Security Agreement in such assets shall remain in
full force and effect and perfected (to at least the same extent as in effect
immediately prior to such sale or other disposition) and provided that any such
Subsidiaries to whom such sales or dispositions are made are guarantors of the
Consideration Notes;

 

(iv)           sales or
other dispositions of obsolete, surplus or worn out property, whether now owned
or hereafter acquired, in the ordinary course of business, or other assets not
practically usable in the business of the Maker or its Subsidiaries; provided
that the aggregate amount of such sales or dispositions does not exceed
$250,000 in any fiscal year of the Maker;

 

(v)            Licenses
of intellectual property of Maker or its Subsidiaries in the ordinary course of
business and which would not otherwise reasonably result in a Material Adverse
Effect; or

 

(vi)           sales,
transfers or other dispositions that constitute a Change of Control;

 

(e)           create, incur, assume or suffer to exist
any Indebtedness, except, so long as no Event of Default then exists or would
exist as a result thereof, the following (“Permitted Indebtedness”):

 

(i)            Indebtedness
outstanding on the date of this Note and listed on Schedule 3 hereto, and
any refinancings, refundings, renewals or extensions thereof; provided that the
amount of such Indebtedness is not increased at the time of such refinancing,
refunding, renewal or extension;

 

(ii)           obligations
under the Consideration Notes and the TSE Promissory Notes;

 

(iii)          inter-company
Indebtedness between Maker or any Permitted Subsidiary and Evolving Systems
Networks India Private Limited (“ESN”); provided that the aggregate
amount of all inter-company loans made by Maker or any Permitted Subsidiary to
ESN, when taken together with the aggregate amount of Permitted Investments in
ESN under Section 13(i)(ii) of this Note, does not exceed $750,000 in any
fiscal quarter;

 

(iv)         inter-company
Indebtedness between Maker or any Permitted Subsidiary and TSE; provided that
the aggregate amount of all inter-company loans made by Maker or any Permitted
Subsidiary to TSE, when taken together with the aggregate amount of Permitted
Investments in TSE under Section 13(i)(iii) of this Note, does not exceed
$125,000 in any year;

 

(v)          inter-company
Indebtedness between (A) Maker and its Permitted Subsidiaries or (B) a
Permitted Subsidiary with another Permitted Subsidiary;

 

B-2-8

 

(vi)         inter-company
Indebtedness owing by Maker or a Permitted Subsidiary to a Non-Permitted
Subsidiary;

 

(vii)        inter-company
Indebtedness between (A) ESHL and any of its Wholly Owned Subsidiaries or
(B) a Wholly Owned Subsidiary of ESHL with another Wholly Owned Subsidiary of
ESHL;

 

(viii)       inter-company
Indebtedness owing by ESHL or any Wholly Owned Subsidiary of ESHL to Maker or a
Permitted Subsidiary, provided that such
Indebtedness shall be incurred solely to (A) supplement the internally
generated working capital required to fund the operation of the business of
ESHL or ESHL’s Wholly Owned Subsidiaries in the ordinary course or (B) fund
Capital Expenditures permitted under Section 13(g) of this Note, and provided further that promptly upon the
incurrence of such Indebtedness, Maker shall give the Payees written notice of
the making thereof and the amount thereof;

 

(ix)          purchase
money Indebtedness to fund the purchase of property otherwise permitted under
Section 13(g) of this Note and Indebtedness constituting Capital Leases
permitted under Section 13(g);

 

(x)           Indebtedness
in the form of an unsecured line of credit in an amount not to exceed in the
aggregate the principal amount of $2,000,000 at any time outstanding (the “Working
Capital Exclusion”);

 

(xi)          Accrual of
interest, accretion or amortization of original issue discount or
payment-in-kind interest in connection with Indebtedness otherwise permitted
under this Section 13(e);

 

(xii)         (A)
Indebtedness incurred in connection with a Permitted Acquisition and (B)
Indebtedness for Capital Leases assumed pursuant to a Permitted Acquisition,
provided that the aggregate Indebtedness of clause (A) and (B) of this Section 13(e)(xii)
outstanding at any time does not exceed $1,000,000;

 

(xiii)        to
the extent under GAAP, the Series B Preferred Stock would be treated as debt or
mezzanine financing on the financial statements of Maker;

 

(xiv)        Indebtedness
incurred in connection with the financing of insurance premiums in the ordinary
course of business in an amount not to exceed $500,000 in any fiscal year; and

 

(xv)         Indebtedness
owing from ESHL to Maker for the sole purpose of consummating the transactions
contemplated by the Stock Purchase Agreement, provided
that, the aggregate amount of such Indebtedness, when taken together
with the aggregate amount of Permitted Investments by Maker in ESHL under
Section 13(i)(vii) of this Note, does not exceed $12,500,000;

 

(f)            mortgage, encumber, or create or suffer
to exist Liens on any of its assets, other than the following (each, a “Permitted
Lien”);

 

B-2-9

 

(i)             encumbrances
or Liens in favor of Payee or any holder of the Consideration Notes;

 

(ii)            Liens
that arise out of operation of law;

 

(iii)           easements,
rights-of-way, restrictions (including zoning restrictions) and other similar
encumbrances affecting real property which, in the aggregate, are not
substantial in amount, and which do not in any case materially detract from the
value of the property subject thereto or materially interfere with the ordinary
conduct of the business of the applicable Person and none of which is violated
by existing or proposed restrictions on land use;

 

(iv)           Liens
securing Indebtedness permitted under Section 10(e)(vi); provided that (A) such
Liens do not at any time encumber any property other than the property financed
by such Indebtedness and (B) the Indebtedness secured thereby does not exceed
the cost of property being acquired on the date of acquisition and (C) such
Liens are granted substantially contemporaneously with the acquisition of such
property;

 

(v)            Liens
existing on the date hereof and listed on Schedule 3 hereto and any
renewals or extensions thereof, provided
that (A) the property covered thereby is not changed,
(B) the amount secured or benefited thereby is not increased, and
(C) any renewal or extension of the obligations secured or benefited
thereby is not prohibited by this Note; and

 

(vi)           Liens on
insurance policies and the proceeds thereof incurred in connection with the
financing of insurance premiums in the ordinary course of business in an amount
not to exceed $500,000 in any fiscal year;

 

(g)           make or commit to make any Capital
Expenditures (whether by expenditure of cash or the incurrence of Indebtedness
for Capital Leases to fund the acquisition of property pursuant to any permitted
Capital Expenditure); provided that, the cash paid for the Capital Expenditure,
when taken together with the aggregate liability required by GAAP consistently
applied and in accordance with the Maker’s past practice, to be reflected in
Maker’s financial statements in respect of any Capital Lease (“Lease
Liability”) plus the sum of (i) any cost incurred by Maker in connection
with the acquisition, delivery or installation of the property which is the
subject of the Capital Lease, but which cost is not included in the Lease
Liability and (ii) to the extent not otherwise reflected in the Capital Lease
payments, interest expense incurred in respect of the Capital Lease for the
relevant fiscal year will be deemed a Capital Expenditure made or committed during
the fiscal year in which the Capital Lease is signed or becomes effective,
whichever first occurs, does not exceed $2,000,000 in any fiscal year;

 

(h)           enter into any transaction with any of
its Affiliates that is less favorable to Maker or any of its Subsidiaries than
would have been the case if such transaction had been effected on an arms
length basis with a Person other than an Affiliate, except for transactions
between and among Maker and its Subsidiaries otherwise permitted under this
Note;

 

(i)            enter into or make any Investments, other
than the following (each, a “Permitted Investment”):

 

(i)             Cash
Equivalents;

 

B-2-10

 

(ii)            (A)
equity Investments existing as of the date hereof in ESN and (B) equity
Investments made after the date hereof by Maker or any Permitted Subsidiary in
ESN provided that any such Investments, when taken together with all
inter-company loans made by Maker or any Permitted Subsidiary to ESN permitted
under Section 13(e)(iii) of this Note, does not exceed $750,000 in any fiscal
quarter;

 

(iii)           (A)
equity Investments existing as of the date hereof in TSE and (B) equity
Investments made after the date hereof in TSE provided that any such
Investments, when taken together with all inter-company loans made by Maker or
any Permitted Subsidiary to TSE permitted under Section 13(e)(iv) of this Note,
does not exceed $125,000 in any fiscal year;

 

(iv)           equity
Investments (A) existing as of the date hereof in any Permitted Subsidiary and
(B) equity Investments made after the date hereof in any Permitted Subsidiary;

 

(v)            (A)
equity Investments existing as of the date hereof in ESHL or any of ESHL’s
Wholly Owned Subsidiaries, (B) equity Investments made after the date hereof by
Maker in ESHL, provided that such
Investments shall be made solely to (1) supplement the internally generated
working capital required to fund the operation of the business of ESHL or ESHL’s
Wholly Owned Subsidiaries in the ordinary course or (2) fund Capital
Expenditures permitted under Section 13(g) of this Note, and provided further that promptly upon the
making of any such Investments, Maker shall give the Payees written notice of
the making thereof and the amount thereof, and (C) equity Investments made
after the date hereof by ESHL or a Wholly Owned Subsidiary of ESHL in any of
ESHL’s Wholly Owned Subsidiaries;

 

(vi)         equity
Investments by a Non-Permitted Subsidiary in a Permitted Subsidiary;

 

(vii)          equity
Investments by Maker in ESHL for the sole purpose of consummating the
transactions contemplated by the Stock Purchase Agreement, provided
that, the aggregate amount of such Investments, when taken together
with the aggregate amount of Permitted Indebtedness under Section 13(e)(xv) of
this Note, does not exceed $12,500,000, provided
further that, the amount of such equity Investments shall not exceed
fifty percent (50%) of the aggregate amount of the equity Investments made
pursuant to this Section 13(i)(vii) plus the aggregate amount of Permitted
Indebtedness permitted under Section 13(e)(xv) of this Note;

 

(viii)         Investments
consisting solely of appreciation in value of existing Investments permitted
hereunder;

 

(ix)           any
Permitted Payments under Section 13(b) of this Note, without duplication;

 

(x)            any
Permitted Indebtedness under Section 13(e) of this Note, without duplication;
and

 

(j)            change its fiscal year;

 

B-2-11

 

(k)           establish any bank accounts into which
accounts receivable are deposited, other than those listed on Exhibit B
unless such bank accounts shall be pledged to Payee and the other secured
parties pursuant to the Security Agreement;

 

(l)            change or amend its Certificate of
Incorporation or Bylaws in a manner adverse to Payee’s rights and remedies
under this Note, any Consideration Note, the Security Agreement or the Pledge
Agreement; or

 

(m)          engage in any material line of business
not related to the OSS communications industry or any business reasonably
related or incidental thereto (the “Maker’s Business”).

 

14.           Determination of Accretive. 
In the event the Maker proposes to enter into an agreement to acquire
another Person (the “Proposed Acquisition”), the Maker shall mail
written notice of such event, together with the Financial Projections, to the
Payee, no later than twenty (20) calendar days prior to the contemplated
effective date of the Proposed Acquisition. 
The Financial Projections shall be deemed accepted and conclusive and
binding upon the Payee, unless the Payee shall give written notice to the Maker
of the items in the Financial Projections with which the Payee disagrees (the “Accretive
Calculation Disagreement Notice”) within twenty (20) calendar days of the
receipt by the Payee of the Financial Projections.  The Accretive Calculation Disagreement Notice
shall specify each item disagreed with by the Payee (or the Payee’s calculation
thereof) and the dollar amount of such disagreement.  The Maker may, within twenty (20) calendar
days of its receipt of the Accretive Calculation Disagreement Notice, advise
the Payee that the Maker has accepted the position of the Payee as set forth on
the Accretive Calculation Disagreement Notice, whereupon the Proposed
Acquisition shall be considered a Permitted Acquisition Event for all purposes
of this Note.  If the Maker does not
notify the Payee of the Maker’s acceptance of the Payee’s position, then the
Maker and the Payee shall, during the twenty (20) calendar days after receipt
by the Maker of the Accretive Calculation Disagreement notice, negotiate in
good faith to resolve any such disagreements. 
If at the end of such twenty (20) calendar days, the Maker and Payee
have been unable to resolve their disagreements, either the Maker or the Payee
may engage on behalf of the Maker and the Payee, Grant Thornton LLP (or such
other Person mutually agreed to in writing by the Maker and Payee) (the “Unaffiliated
Firm”) to resolve the matters set forth in the Accretive Calculation
Disagreement Notice.  The Unaffiliated
Firm shall (i) resolve the disagreement as to the Financial Projections as
promptly as possible after its engagement by the parties; (ii) thereby consider
and resolve only those items in the Accretive Calculation Disagreement Notice
which remain unresolved between the Maker and the Payee; and (iii) shall otherwise
employ such procedures as it, in its sole discretion, deems necessary or
appropriate in the circumstances.  The
Unaffiliated Firm shall submit to the Maker and the Payee a report of its
review of the items in the Accretive Calculation Disagreement Notice as quickly
as practicable and shall include in such report its determination as to whether
the effect of the proposed merger or consolidation is Accretive.  The determination so made by the Unaffiliated
Firm shall be conclusive, binding on, and non-appealable by, the Maker and the
Payee.  The fees and disbursements of the
Unaffiliated Firm shall be borne one half by the Maker and one half by the
Payee.  Notwithstanding all of the
foregoing, the Maker may elect, at any time, not to comply with this Section 14
with respect to a Proposed Transaction (or if the Maker otherwise fails to
properly comply with the terms of this Section 14) in which event, the
transaction shall be deemed not to be Accretive.

 

B-2-12

 

15.           Events of Default. 
For purposes of this Note, an “Event of Default” shall have
occurred hereunder if:

 

(a)            Maker shall fail to pay within one (1)
business day after the date when due any payment of principal, interest, fees,
costs, expenses or any other sum payable to Payee hereunder or otherwise,
including the other Consideration Notes;

 

(b)            Maker shall default in the performance of
any other agreement or covenant contained herein (other than as provided in
Section 15(a) of this Note) or under any Consideration Note or in the Security
Agreement or Pledge Agreement, and such default shall continue uncured for
twenty (20) consecutive days after notice thereof to Maker given by Payee;

 

(c)            Maker becomes insolvent or generally
fails to pay its debts as such debts become due or admits in writing its
inability to pay its debts as such debts become due; or shall suffer a
custodian, receiver or trustee for it or substantially all of its property to
be appointed and if appointed without its consent, not be discharged within
ninety (90) consecutive days; makes a general assignment for the benefit of
creditors; or suffers proceedings under any law related to bankruptcy,
insolvency, liquidation or the reorganization, readjustment or the release of
debtors to be instituted against it and if contested by it not dismissed or
stayed within ninety (90) consecutive days; if proceedings under any law
related to bankruptcy, insolvency, liquidation, or the reorganization,
readjustment or the release of debtors is instituted or commenced by or against
Maker and, in the case of proceedings not instituted or commenced by Maker, if
contested by Maker, and not dismissed or stayed within ninety (90) consecutive
days; if any order for relief is entered relating to any of the foregoing
proceedings which order is not stayed; if Maker shall call a meeting of its
creditors with a view to arranging a composition or adjustment of its debts; or
if Maker shall by any act or failure to act indicate its consent to, approval
of or acquiescence in any of the foregoing;

 

(d)            (i) 
This Note, any of the other Consideration Note or the Security Agreement
or the Pledge Agreement shall, for any reason (other than payment or
satisfaction in full of the obligations represented thereby) not be or shall
cease to be in full force and effect (other than in accordance with its terms)
or shall be declared null and void or (ii) Payee or any other secured party
under the Security Agreement or the Pledge Agreement shall not give or shall
cease to have a valid and perfected Lien in any collateral under such Security
Agreement or Pledge Agreement (other than by reason of a release of collateral
in accordance with the terms hereof or thereof) with the priority required by
the Security Agreement or Pledge Agreement, as applicable, or (iii) the
validity or enforceability of any of the Consideration Notes or the liens
granted, to be granted, or purported to be granted, by the Security Agreement
or the Pledge Agreement shall be contested by the Maker;

 

(e)            If Maker shall be in default with respect
to any payment, when due (subject in each case to applicable grace or cure
periods), of any Indebtedness in excess of $175,000 (other than under this Note
or any other Consideration Note), or any other default shall occur under any
agreement or instrument evidencing such Indebtedness, if the effect of such
non-payment default is to accelerate the maturity of such Indebtedness or to
permit the holder thereof to cause such Indebtedness to become due prior to its
stated maturity, and such default shall not be remedied, cured, waived or
consented to within the period of grace with respect thereto, or any other
circumstance which arises (other than the mere passage of time) by reason of
which any such Indebtedness shall become or be declared to be due and payable
prior to its stated maturity; or

 

(f)             If: 
(i) as of June 30, 2005, Maker’s EBITDA for the most recently ended
fiscal half year shall not exceed $0, or (ii) beginning with the fiscal half
year ending December 31, 2005, 

 

B-2-13

 

as of the last day of any
fiscal half year ending in any June or December, Maker’s Ratio of Indebtedness
to EBITDA shall be greater than 4-to-1. 
For purposes of calculating EBITDA for this Section 15(f), (x) all
non-cash charges for goodwill impairment resulting from the transactions
contemplated by the Stock Purchase Agreement shall be added back to Net Income;
and (y) Net Income shall not be modified as a result of any “mark to market”
adjustments resulting from any anti-dilution or other adjustments with respect
to this Note or the Maker’s Series B Preferred Stock.  For the purposes of calculating Indebtedness
for this Section 15(f), Indebtedness shall not be modified as a result of any “mark
to market” adjustments resulting from any anti-dilution or other adjustments
with respect to this Note or the Maker’s Series B Preferred Stock.

 

(g)            If Maker shall have breached its covenant
under the Stock Purchase Agreement to duly convene a Stockholder Meeting (as
defined in the Stock Purchase Agreement) within the time period set forth
therein.

 

(h)            If Maker or shall have failed to have a
Shelf Registration Statement filed and declared effective as provided under
Section 5 of the Series B Designation.

 

Notwithstanding anything
contained herein to the contrary, no Event of Default shall be deemed to have
occurred under this Note if the Event of Default resulted solely from a breach
of any representation, warranty or covenant of Tertio Telecoms Group Limited
under the Stock Purchase Agreement.

 

16.           Consequences of Default. 
Upon the occurrence and during the continuance of an Event of Default:

 

(a)           upon receipt of notice from Payee, at
Payee’s option, Maker shall immediately pay to Payee (to the extent not
previously paid) any Account Prepayment Amount (calculated as of the most
recent test dates), regardless of whether Payee requested any such payment at
the time of calculation (provided, that so long as there remains any amount
outstanding under the terms of any Consideration Notes held by Payee, Maker
shall allocate payments of the Account Prepayment Amount to this Note and the
other Consideration Notes in the amounts and priorities determined by Payee in
its sole discretion; and

 

(b)           the entire unpaid principal balance of
this Note, together with interest accrued thereon and with all other sums due
or owed by Maker hereunder, as well as all out-of-pocket costs and expenses
(including but not limited to attorneys’ fees and disbursements) incurred by
Payee in connection with the collection or enforcement of this Note, the
Security Agreement or the Pledge Agreement, shall at the option of Payee, and
by notice to Maker (except if an Event of Default described in Section 15(c)
shall occur in which case acceleration shall occur automatically without
notice) be declared to be due and payable immediately, and payment of the same
may be enforced and recovered by the entry of judgment of this Note and the
issuance of execution thereon.

 

In addition to all of the sums payable hereunder,
Maker agrees to pay the Payee all reasonable costs and expenses incurred by
Payee in connection with any and all actions taken to enforce collection of
this Note, the Security Agreement and the Pledge Agreement upon the occurrence
of an Event of Default, including all reasonable attorneys’ fees.

 

B-2-14

 

17.           Remedies not Exclusive. 
The remedies of Payee provided herein or otherwise available to Payee at
law or in equity shall be cumulative and concurrent, and may be pursued singly,
successively and together at the sole discretion of Payee, and may be exercised
as often as occasion therefor shall occur; and the failure to exercise any such
right or remedy shall in no event be construed as a waiver or release of the
same.

 

18.           Notices.  All notices
required to be given to any of the parties hereunder shall be in writing and
shall be deemed to have been sufficiently given for all purposes when presented
personally to such party or sent by certified or registered mail, return
receipt requested, to such party at its address set forth below:

 

	
  If to the Maker:

  	
  Evolving Systems, Inc.

  9777 Mt. Pyramid Ct., Suite 100

  Englewood, CO 80112

  Attention: Anita Moseley, General Counsel

  Tel.: (303) 802-2599

  Fax: (303) 802-1138

  

  with a copy to:

  

  Holme Roberts & Owen LLP

  1700 Lincoln St., Suite 4100

  Denver, CO 80203-4541

  Attention: Charles D. Maguire, Jr., Esq.

  Tel: (303) 861-7000

  Fax: (303) 866-0200

  
	
   

  	
   

  
	
  If to the Payee:

  	
  Tertio
  Telecoms Group Ltd.

  c/o Apax Partners Ltd.

  15 Portland Place

  London W1B 1PT

  United Kingdom

  

  Attn: Peter Skinner

  Tel: 44.20.7843.4000

  Fax: 44.20.7843.4001

  
	
   

  	
   

  
	
  With copies to:

  	
  Advent International plc

  123 Buckingham Palace Road

  London SW1W 9SL

  United Kingdom

  

  Attn: James Brocklebank

  Tel: 44.20.7333.5516

  Fax: 44.20.7333.0801

  

 

B-2-15

 

	
   

  	
  Pepper Hamilton LLP

  3000 Two Logan Square

  18th and Arch Streets

  Philadelphia, Pennsylvania 19103

  Attn: Cary S. Levinson, Esq.

  Tel: (215) 981-4091

  Fax: (215) 981-4750

  

 

Such notice shall be deemed
to be given when received if delivered personally or five (5) business days
after the date mailed.  Any notice mailed
shall be sent by certified or registered mail. 
Any notice of any change in such address shall also be given in the
manner set forth above.  Whenever the
giving of notice is required, the giving of such notice may be waived in
writing by the party entitled to receive such notice.

 

19.           Severability. 
In the event that any provision of this Note is held to be invalid,
illegal or unenforceable in any respect or to any extent, such provision shall
nevertheless remain valid, legal and enforceable in all such other respects and
to such extent as may be permissible. 
Any such invalidity, illegality or unenforceability shall not affect any
other provisions of this Note, but this Note shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.

 

20.           Successors and Assigns; Assignments. 
This Note inures to the benefit of the Payee and binds the Maker, and
its successors and assigns, and the words “Payee” and “Maker” whenever
occurring herein shall be deemed and construed to include such respective
successors and assigns.  Maker may not
assign or transfer this Note, without the consent of Payee.  At any time and from time to time, the Payee,
in its sole discretion, may transfer to any Person all or a portion of the
outstanding principal and/or accrued interest hereunder without the consent of
the Maker, provided, however, this Note may not be assigned, transferred
or sold by Payee to any Person that engages in, or controls an entity that
engages in, a business competitive with the Maker’s business.  Furthermore, as a condition of the transfer,
any transferee of Payee of this Note must agree to become bound by the
provisions of this Note, the Security Agreement and the Pledge Agreement.

 

21.           Entire Agreement. 
This Note (together with the other Consideration Notes, the Security
Agreement and the Pledge Agreement) contains the entire agreement between the
parties with respect to the subject matter hereof and thereof.

 

22.           Modification of Agreement. 
This Note may not be modified, altered or amended, except by an
agreement in writing signed by both the Maker and the Payee.

 

23.           Releases by Maker. 
Maker hereby releases Payee from all technical and procedural errors,
defects and imperfections whatsoever in enforcing the remedies available to
Payee upon a default by Maker hereunder and hereby waives all benefit that
might accrue to Maker by virtue of any present or future laws exempting any
property, real or personal, or any part of the proceeds arising from any sale
of any such property, from attachment, levy or sale under execution, or
providing for any stay of execution, exemption from civil process or extension
of time, and agrees that such property may be sold to satisfy any judgment
entered on this Note, in whole or in part and in any order as may be desired by
Payee.

 

B-2-16

 

24.           Waivers by Maker. 
Maker (and all endorsers, sureties and guarantors) hereby waives
presentment for payment, demand, notice of demand, notice of nonpayment or
dishonor, protest and notice of protest of this Note, and all other notices in
connection with the delivery, acceptance, performance, default or enforcement
of the payment of this Note (other than notices expressly required by the terms
of this Note, the Security Agreement or the Pledge Agreement); liability
hereunder shall be unconditional and shall not be affected in any manner by an
indulgence, extension of time, renewal, waiver or modification granted or
consented to by Payee.

 

25.           Revenue and Stamp Tax. 
Maker shall pay all reasonable out-of-pocket expenses incurred by the
Payee in connection with any revenue, tax or other stamps now or hereafter
required by law at any time to be affixed to this Note.

 

26.           Governing Law. 
This Note shall be governed by and construed in accordance with the laws
of the State of Delaware, without reference to conflict of laws principles.

 

27.           Consent to Jurisdiction and Service of
Process.  Maker irrevocably appoints each of Maker’s
Authorized Officers as its attorneys-in-fact upon whom may be served any
notice, process or pleading in any action or proceeding against it arising out
of or in connection with this Note. 
Maker hereby consents that any action or proceeding against it may be
commenced and maintained in any court within the State of Delaware or in the
United States District Court of Delaware by service of process on any such
officer.  Maker further agrees that the
courts of the State of Delaware and the United States District Court of
Delaware shall have jurisdiction with respect to the subject matter hereof and
the person of Maker and the collateral securing Maker’s obligations hereunder.  Notwithstanding the foregoing, Payee, in its
absolute discretion, may also initiate proceedings in the courts of any other
jurisdiction in which Maker may be found or in which any of its properties or
any such collateral may be located.

 

28.           Headings.  The headings
of the sections of this Note are inserted for convenience only and do not
constitute a part of this Note.

 

29.           WAIVER OF JURY TRIAL. 
MAKER HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS
IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY COLLATERAL
SECURITY DOCUMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER ORAL OR WRITTEN) OR ACTIONS OF PAYEE. 
THIS PROVISION IS A MATERIAL INDUCEMENT FOR PAYEE’S ADVANCING THE FUNDS
UNDER THIS NOTE.

 

30.           ACKNOWLEDGEMENTS. 
MAKER ACKNOWLEDGES THAT IT HAS HAD THE ASSISTANCE OF COUNSEL IN THE
REVIEW AND EXECUTION OF THIS NOTE, AND FURTHER ACKNOWLEDGES THAT THE MEANING
AND EFFECT OF THE FOREGOING WAIVER OF JURY TRIAL SET FORTH IN SECTION 29 HAVE
BEEN FULLY EXPLAINED TO MAKER BY SUCH COUNSEL.

 

 

[Signature Page Follows]

 

B-2-17

 

IN WITNESS WHEREOF, the
Maker has duly executed this Note as of the date first set forth above.

 

	
   

  	
  EVOLVING SYSTEMS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

 

Acknowledged and Agreed:

 

PAYEE:

 

Tertio Telecoms Group Ltd.

 

	
  By:

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  

 

B-2-18

 

SCHEDULE 1

DEFINITIONS

 

“Accretive” shall
mean that the projected pro forma consolidated EBITDA (calculated on a per
share basis) of the Maker and the other constituent entity(ies) in such
transaction, and the respective Consolidated Subsidiaries of the Maker and such
constituent entity(ies) for the twelve calendar month period immediately
following such transaction, is not less than the projected EBITDA (calculated
on a per share basis), on a consolidated basis, of the Maker and its
Consolidated Subsidiaries for the same period, all as presented in the
Financial Projections.

 

“Additional Shares of
Common Stock” shall mean all shares of Common Stock issued (or, pursuant to
Section (ii) of Schedule 2, deemed to be issued) by the Maker after the Note
Issue Date, other  than shares of Common Stock issued, issuable or
deemed issued:

 

(i)             by
reason of a dividend, stock split, split-up or other distribution on shares of
Common Stock that is covered by Section (c), (d) or (e) of Schedule 2;

 

(ii)            by reason
of Options granted or stock issued with the approval of the Board to employees,
independent contractors, officers or directors of the Corporation or any
Corporation Subsidiary pursuant to an equity incentive plan approved by the
stockholders of the Corporation; or

 

(iii)           by
reason of the conversion of any capital stock, convertible or exchangeable
notes or any other instruments issued by the Corporation in connection with the
Stock Purchase Agreement.

 

“Affiliate” shall
mean, with respect to any Person, any other Person which directly or indirectly
Controls, is Controlled by or is under common Control with such Person.

 

“Affiliated Group”
shall mean a group of Persons, each of which is an Affiliate of some other
Person in the group.

 

“A Notes” means the
Senior Secured Notes dated as of November 2, 2004 by Maker in favor of Payee in
the original aggregate principal amount of $11,950,000, each as they may be
amended, restated, modified or replaced in substitution in whole or in part by
any other note or notes from time to time, including, but not necessarily
limited to, the Senior Secured Notes by Maker in favor of Payee which may be
issued in substitution for or in addition to the A Notes issued to Payee by
Maker under the terms of such A Notes.

 

“Authorized Officer”
shall mean, with respect to Maker, the chief executive officer, chief financial
officer, any vice president, treasurer, comptroller, or general counsel.

 

“B-1 Note” means the
Senior Secured Note by Maker in favor of Payee in such aggregate principal
amount Maker may issue as a result of the outcome of the stockholder vote of
the matters presented for their approval at the Initial Stockholder Meeting (as
such term is defined in the Series B Designation), as it may be amended,
restated, modified or replaced in substitution in whole or in part by any other
note or notes from time to time, including, but not necessarily limited to, the
Senior Secured 

 

B-2-19

 

Note by Maker in favor of Payee which may be
issued in substitution for or in addition to the B-1 Note issued to Payee by
Maker under the terms of such B-1 Note.

 

“Capital Expenditures”
shall mean, with respect to any Person for any period, the aggregate of all
expenditures (whether paid in cash, or incurred by entering into a synthetic
lease arrangement or a Capital Lease, or otherwise accrued as a liability) by
such Person during that period which, in accordance with GAAP, are or should be
included in “additions to property, plant or equipment” or similar items
reflected in the statement of cash flows of such Person, and all research and
development expenditures which in accordance with GAAP are or should be
accounted for as a capital expenditure in the balance sheet of that Person, but
excluding expenditures to the extent reimbursed or financed from insurance
proceeds paid on account of the loss of or the damage to the assets being
replaced or restored, or from awards of compensation arising from the taking by
condemnation or eminent domain of such assets being replaced.

 

“Capital Lease”, as
applied to any Person, shall mean any lease of any property (whether real,
personal or mixed) by that Person as lessee which, in accordance with GAAP, is
or should be accounted for as a capital lease on the balance sheet of that
Person.

 

“Cash Equivalents”
shall mean any of the following: (i) full faith and credit obligations of the
United States of America, or fully guaranteed as to interest and principal by
the full faith and credit of the United States of America, maturing in not more
than one year from the date such investment is made; (ii) time deposits and
certificates of deposit, Eurodollar time deposits, overnight bank deposits and
other interest bearing deposits or accounts (other than securities accounts) or
bankers’ acceptances having a final maturity of not more than one year after
the date of issuance thereof of any commercial bank incorporated under the laws
of the United States of America or any state thereof or the District of
Columbia, which bank is a member of the Federal Reserve System and has a
combined capital and surplus of not less than $500,000,000.00 and with a senior
unsecured debt credit rating of at least “A-2” by Moody’s or “A” by S&P;
(iii) commercial paper of companies, banks, trust companies or national banking
associations incorporated or doing business under the laws of the United States
of America or one of the States thereof or the District of Columbia, in each
case having a remaining term until maturity of not more than two hundred
seventy (270) days from the date such investment is made and rated at least P-1
by Moody’s or at least A-1 by S&P; (iv) repurchase agreements with any
financial institution having combined capital and surplus of not less than
$500,000,000.00 with a term of not more than seven (7) days for underlying
securities of the type referred to in clause (i) above; and (v) money market
funds which invest primarily in the Cash Equivalents set forth in the preceding
clauses (i) - (iv).

 

“Change in Control”
shall mean (i) any Person, Affiliated Group or group (such term being used as
defined in the Securities Exchange Act of 1934, as amended), other than a
Primary Holder (as such term is defined in the Series B Designation) acquiring
ownership or control of in excess of 50% of equity securities having voting
power to vote in the election of the Board of Directors of Maker either on a
fully diluted basis or based solely on the voting stock then outstanding, (ii)
if at any time, individuals who at the date hereof constituted the Board of
Directors of Maker (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders of
Maker, as the case may be, was approved by a vote of the majority of the
directors then still in office who were either directors at the date hereof or
whose election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of Maker then in
office, (iii) the direct or indirect sale, transfer, conveyance or other
disposition, in one or a series of related 

 

B-2-20

 

transactions, of all or substantially all of
the properties or assets of Maker to any Person or (iv) the adoption of a plan
relating to the liquidation or dissolution of Maker.

 

“Closing Share Price”
means the product of (i) the Conversion Price multiplied by (ii) 111.1%.

 

“Compensation” means
all salary and bonuses, but excludes any compensation under any equity
incentive plan.

 

“Consideration Notes”
means the collective reference to this Note, A Notes, B-1 Note, and the Short
Term Note.

 

“Consolidated
Subsidiaries” shall mean all Subsidiaries of a Person which are required or
permitted to be consolidated with such Person for financial reporting purposes
in accordance with GAAP.

 

“Control” shall mean,
as to any Person, the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of greater than 50%
of the voting securities of such Person or by acting as the general partner of
a limited partnership (the terms “Controlled by” and “under common Control with”
shall have correlative meanings.)

 

“Convertible Securities”
shall mean any evidences of indebtedness, shares or other securities directly
or indirectly convertible into or exchangeable for Common Stock, but excluding
Options.

 

“EBITDA” shall mean
for any period, Net Income for such period plus, without duplication, the
aggregate amounts deducted in determining Net Income during such period, the sum
of (A) interest paid on indebtedness for such period, (B) income taxes for such
period, (C) depreciation expense for such period and (D) amortization expense
for such period, all as determined in accordance with GAAP as applied in
accordance with past practice.

 

“Executive Officer”
means any officer of Maker whose compensation is determined by the Compensation
Committee of the Board of Directors of Maker.

 

“Financial Projections”
shall mean written financial projections prepared by Maker and certified by
Maker’s chief financial officer, prepared in good faith and based upon
reasonably assumptions and estimates regarding the economic, business, industry
market, legal and regulatory circumstances and conditions relevant to the
Maker.

 

“GAAP” means generally
accepted accounting principles set forth in the Opinions of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
in statements of the Financial Accounting Standards Board; and such principles
observed in a current period shall be comparable in all material respects to
those applied in a preceding period.

 

“Guaranty” shall
mean, as to any Person, any direct or indirect obligation of such Person
guaranteeing or intending to guarantee, or otherwise providing credit support,
for any Indebtedness, Capital Lease, dividend or other monetary obligation (“primary
obligation”) of any other Person (the “primary obligor”) in any
manner, whether directly or indirectly, by contract, as a general partner or
otherwise, including, without limitation, any obligation of such Person,
whether or not contingent, (a) to 

 

B-2-21

 

purchase any such primary obligation or any
property constituting direct or indirect security therefor, (b) to advance
or supply funds (i) for the purchase or payment of any such primary obligation
or (ii) to maintain working capital or equity capital of the primary
obligor or otherwise to maintain the net worth or solvency of the primary
obligor, or (c) to purchase property, securities or services from the primary
obligor or other Person, in each case, primarily for the purpose of assuring
the performance of the primary obligor of any such primary obligation or
assuring the owner of any such primary obligation of the repayment of such
primary obligation.  The amount of any
Guaranty shall be deemed to be an amount equal to (x) the stated or
determinable amount of the primary obligation in respect of which such Guaranty
is made (or, if the amount of such primary obligation is not stated or
determinable, the maximum reasonably anticipated liability in respect thereof
(assuming such Person is required to perform thereunder)) or (y) the
stated maximum liability under such Guaranty, whichever is less.

 

“Indebtedness” shall
mean (without double counting), at any time and with respect to any Person, (i)
indebtedness of such Person for borrowed money (whether by loan or the issuance
and sale of debt securities) or for the deferred purchase price of property or
services purchased (other than amounts constituting trade payables arising in
the ordinary course of business and payable in accordance with customary
trading terms not in excess of 90 days or, if overdue for more than 90 days, as
to which a dispute exists and adequate reserves in conformity with GAAP have
been established on the books of such Person); (ii) all indebtedness of
such Person evidenced by a note, bond, debenture or similar instrument (whether
or not disbursed in full in the case of a construction loan); (iii) indebtedness
of others which such Person has directly or indirectly assumed or guaranteed or
otherwise provided credit support therefore (other than for collection or
deposit in the ordinary course of business); (iv) indebtedness of others
secured by a Lien on assets of such Person, whether or not such Person shall
have assumed such indebtedness (provided, that if such Person has not
assumed such indebtedness of another Person then the amount of indebtedness of
such Person pursuant to this clause (iv) for purposes of this Note shall be
equal to the lesser of the amount of the indebtedness of the other Person or
the fair market value of the assets of such Person which secures such other
indebtedness); (v) obligations of such Person relative to the face amount
of letters of credit, acceptance facilities, or drafts or similar instruments
issued or accepted by banks and other financial institutions for the account of
such Person; (vi) that portion of obligations of such Person under Capital
Leases that is properly classified as a liability on a balance sheet in
conformity with GAAP; (vii) all obligations of such Person under any Interest
Rate Protection Agreement; (viii) deferred payment obligations of such
Person resulting from the adjudication or settlement of any litigation; and
(ix) any Guaranty by such Person in respect of any of the foregoing.

 

“Interest Rate Protection
Agreement” shall mean any interest rate swap agreement, interest rate cap
agreement, synthetic cap, collar or floor or other financial agreement or
arrangement designed to protect a Maker or any of its Subsidiaries against
fluctuations in interest rates or to reduce the effect of any such
fluctuations.

 

“Investment” shall
mean any investment in any Person, whether by means of acquiring or holding securities,
capital contribution, loan, time deposit, guaranty or otherwise.

 

“Lien” shall mean any
mortgage, pledge, security interest, encumbrance, lien or charge of any kind
whatsoever (including, without limitation, any conditional sale or other title retention
agreement, any agreement to grant a security interest at a future date, any
lease in the nature of security, and the filing of, or agreement to give, any
financing statement under the Uniform Commercial Code of any jurisdiction).

 

B-2-22

 

“Material Adverse Effect”
shall mean a (i) a material adverse effect upon the business, operations,
properties, assets or condition (financial or otherwise) of the Maker or (ii)
the material impairment of the ability of the Maker to perform its obligations
under the Consideration Notes or of the Payee to enforce the obligations of the
Maker under the Consideration Notes.

 

“Maturity Date” means
December 31, 2007.

 

“Net Income” shall
mean for any period, net income on a consolidated basis for that period
determined in accordance with GAAP applied consistently with past practice.

 

“Non-Permitted Subsidiary”
means any direct or indirect Wholly Owned Subsidiary of Maker that is not a
Permitted Subsidiary.

 

“Note Issue Date”
shall mean the date on which this Note is issued.

 

“Option” shall mean
any rights, options or warrants to subscribe for, purchase or otherwise acquire
Common Stock or Convertible Securities.

 

“Payment Date” means
each December 31, March 31, June 30 and September 30; provided that if any such
Payments Date falls on a day which is not a business day, the applicable
payment shall not be due until the next following business day.

 

“Permitted Acquisitions”
means any acquisition of fifty percent (50%) or more of the equity interests or
all or substantially all of the assets of a third party so long as (i) such
acquisition is Accretive, and approved by the Maker’s board of directors, (ii)
following the consummation of the acquisition the Maker has a cash balance of
at least $5,000,000, on a consolidated basis, and (iii) the Maker does not
incur any Indebtedness in connection with such acquisition.

 

“Permitted Subsidiary”
means any direct or indirect Wholly Owned Subsidiary of Maker that is
domesticated or incorporated in a jurisdiction of the United States, Canada,
the United Kingdom or a country that is a member of the European Union and is a
guarantor of Maker’s obligations under the Consideration Notes.

 

“Person” shall mean
any natural person, corporation, division of a corporation, partnership,
limited liability partnership, limited liability company, trust, joint venture,
association, company, estate, unincorporated organization or government or any
agency or political subdivision thereof.

 

“Pledge Agreement” means
the Pledge Agreement executed by Maker in favor of Payee and dated the date
hereof, as it may be amended, restated or modified from time to time, together
with all schedules and exhibits thereto.

 

“Security Agreement”
means the Security Agreement executed by the Maker in favor of the Payee and
dated as of the date hereof, as it may be amended, restated or modified from
time to time, together with all schedules and exhibits thereto.

 

“Series B Designation”
means the Certificate of Designation of Maker’s Series B Convertible Preferred
Stock, as filed with the Secretary of State of the State of Delaware.

 

B-2-23

 

“Short Term Note”
means the Senior Secured Note dated as of November 2, 2004 by Maker in favor of
Payee in the original aggregate principal amount of $4,000,000, as it may be
amended, restated, modified or replaced in substitution by any other note or
notes from time to time.

 

“Stock Purchase Agreement”
means the Stock Purchase Agreement dated as of November 2, 2004 by and among
the Maker, Tertio Telecom Group, Ltd. and the parties listed therein.

 

“Stockholders” shall
have the meaning given to such term in the Stock Purchase Agreement.

 

“Subsidiary” shall
mean with respect to any Person, any corporation, association, joint venture,
partnership or other business entity (whether now existing or hereafter
organized) of which at least a majority of the voting stock or other ownership
interests having ordinary voting power for the election of directors (or the
equivalent) is, at the time as of which any determination is being made, owned
or controlled by such Person or one or more subsidiaries of such Person or by
such Person and one or more subsidiaries of such Person.

 

“UCC” shall mean the
Uniform Commercial Code as in effect from time to time in the State of
Delaware.

 

“Wholly
Owned Subsidiary” of a Person means (a) any Subsidiary all of the
outstanding voting securities (other than directors qualifying shares and/or
other nominal amounts of shares required to be held by directors or other
Persons under applicable law) of which shall at the time be owned or
controlled, directly or indirectly, by such Person or one or more Wholly Owned
Subsidiaries of such Person, or by such Person and one or more Wholly Owned
Subsidiaries of such Person, or (b) any partnership, limited liability
company, association, joint venture or similar business organization 100% of
the ownership interests having ordinary voting power of which shall at the time
be so owned or controlled.

 

B-2-24

 

SCHEDULE 2

 

CONVERSION PRICE
ADJUSTMENT PROVISIONS

 

(a)           No Adjustment
of Conversion Price.

 

(i)            No adjustment
in the Conversion Price shall be made as the result of the issuance of
Additional Shares of Common Stock if the consideration per share (determined
pursuant to Section (a)(iv) below) for such Additional Shares of Common Stock
issued or deemed to be issued by the Maker is at least equal to the Closing
Share Price.   In addition, no adjustment
in the Conversion Price shall be made if, prior to such issuance or deemed
issuance of Additional Shares of Common Stock, the Maker receives written
notice from the Payee agreeing that no such adjustment shall be made as a
result of such issuance or deemed issuance.

 

(ii)           Issue of
Securities to be a Deemed Issue of Additional Shares of Common Stock.

 

(A)         If the Maker at
any time or from time to time after the Note Issue Date shall issue any Options
or Convertible Securities (excluding Options or Convertible Securities that,
upon exercise, conversion or exchange thereof, would entitle the holder thereof
to receive shares of Common Stock that are specifically excepted from the
definition of Additional Shares of Common Stock) or shall fix a record date for
the determination of holders of any class of securities entitled to receive any
such Options or Convertible Securities, then the maximum number of shares of
Common Stock (as set forth in the instrument relating thereto without regard to
any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued as
of the time of such issue or, in case such a record date shall have been fixed,
as of the close of business on such record date.

 

(B)         If the terms of
any Option or Convertible Security, the issuance of which resulted in an adjustment
to the Conversion Price pursuant to the terms of Section (iv) below, are
revised (either automatically pursuant to the provisions contained therein or
as a result of an amendment to such terms) to provide for either (1) any
increase or decrease in the number of shares of Common Stock issuable upon the
exercise, conversion or exchange of any such Option or Convertible Security or
(2) any increase or decrease in the consideration payable to the Maker upon
such exercise, conversion or exchange, then, effective upon such increase or
decrease becoming effective, the Conversion Price computed upon the original
issue of such Option or Convertible Security (or upon the occurrence of a
record date with respect thereto) shall be readjusted prospectively to such
Conversion Price as would have obtained had such revised terms been in effect
upon the original date of issuance of such Option or Convertible Security.  Notwithstanding the foregoing, no adjustment
pursuant to this clause (B) shall have the effect of increasing the Conversion
Price to an amount that exceeds the lower of (i) the Conversion Price on the
original adjustment date, or (ii) the Conversion Price that would have resulted
from any issuances of Additional Shares of Common Stock between the original
adjustment date and such readjustment date.

 

(C)         If the terms of
any Option or Convertible Security (excluding Options or Convertible Securities
that, upon exercise, conversion or exchange thereof, would entitle the holder
thereof to receive shares of Common Stock that are specifically excepted from
the definition of 

 

B-2-25

 

Additional Shares of Common Stock), the
issuance of which did not result in an adjustment to the Conversion Price
pursuant to the terms of Section (a)(iii) below (either because the
consideration per share (determined pursuant to Section (a)(iv) below) of the
Additional Shares of Common Stock subject thereto was equal to or greater than
the Conversion Price then in effect, or because such Option or Convertible
Security was issued before the Note Issue Date), are revised after the Note
Issue Date (either automatically pursuant the provisions contained therein or
as a result of an amendment to such terms) to provide for either (1) any increase
or decrease in the number of shares of Common Stock issuable upon the exercise,
conversion or exchange of any such Option or Convertible Security or (2) any
increase or decrease in the consideration payable to the Maker upon such
exercise, conversion or exchange, then such Option or Convertible Security, as
so amended, and the Additional Shares of Common Stock subject thereto
(determined in the manner provided in Section (ii)(A) above) shall be deemed to
have been issued effective upon such increase or decrease becoming effective.

 

(D)         Upon the
expiration or termination of any unexercised Option or unconverted or
unexchanged Convertible Security that resulted (either upon its original
issuance or upon a revision of its terms) in an adjustment to the Conversion
Price pursuant to the terms of Section (e)(iii) below, the Conversion Price
shall be readjusted prospectively to such Conversion Price as would have been
obtained had such Option or Convertible Security never been issued.

 

(E)          No adjustment
in the Conversion Price shall be made upon the issue of shares of Common Stock
or Convertible Securities upon the exercise of Options or the issue of shares
of Common Stock upon the conversion or exchange of Convertible Securities.

 

(iii)          Adjustment of
Conversion Price Upon Issuance of Additional Shares of Common Stock.  In the event the Maker shall at any time
after the Note Issue Date issue Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Section (a)(ii)
above), without consideration or for a consideration per share less than the
Closing Share Price, then the Conversion Price shall be reduced, concurrently
with such issue, to a price determined by multiplying the Conversion Price in
effect immediately prior to such issuance by a fraction, (A) the numerator of
which shall be (1) the number of shares of Common Stock outstanding immediately
prior to such issue plus (2) the number of shares of Common Stock that the
aggregate consideration received or to be received by the Maker for the total
number of Additional Shares of Common Stock so issued would purchase at the
Conversion Price in effect immediately prior to such issuance; and (B) the
denominator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of such Additional Shares of
Common Stock so issued; provided, however, that, (i) all shares of Common Stock
issuable upon conversion  or exercise of
shares of Series B Preferred Stock, Options or Convertible Securities
outstanding immediately prior to such issue or upon exercise of such securities
shall be deemed to be outstanding, and (ii) the number of shares of Common
Stock deemed issuable upon conversion of such outstanding shares of Series B Preferred
Stock shall be determined without giving effect to any adjustments to the
Conversion Price resulting from the issuance of Additional Shares of Common
Stock that is the subject of this calculation.

 

(iv)          Determination
of Consideration.  For
purposes of this Schedule 2, the consideration received by the Maker for the
issue of any Additional Shares of Common Stock shall be computed as follows:

 

(A)          Cash and Property.  Such consideration shall:

 

B-2-26

 

(I)            insofar as it
consists of cash, be computed at the aggregate amount of cash received by the
Maker, excluding amounts paid or payable for accrued interest;

 

(II)           insofar as it
consists of property other than cash, be computed at the fair market value thereof
at the time of such issue, as determined in good faith by the members of the
Board other than any member who will receive such property; and

 

(III)          in the event
Additional Shares of Common Stock are issued together with other shares or
securities or other assets of the Maker for consideration that covers both, be
the proportion of such consideration so received, computed as provided in
clauses (I) and (II) above, as determined in good faith by the members of the
Board of Maker other than any member who will receive such consideration.

 

(B)           Options and
Convertible Securities.  The
consideration per share received by the Maker for Additional Shares of Common
Stock deemed to have been issued pursuant to Section (iii) above, relating to
Options and Convertible Securities, shall be determined by dividing:

 

(I)           the total
amount, if any, received or receivable by the Maker as consideration for the
issue of such Options or Convertible Securities, plus the minimum aggregate
amount of additional consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for a subsequent
adjustment of such consideration) payable to the Maker upon the exercise of
such Options or the conversion or exchange of such Convertible Securities, or
in the case of Options for Convertible Securities, the exercise of such Options
for Convertible Securities and the conversion or exchange of such Convertible
Securities; by

 

(II)          the maximum
number of shares of Common Stock (as set forth in the instruments relating
thereto, without regard to any provision contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.

 

(v)           Multiple
Closing Dates.  In the
event the Maker shall issue on more than one date Additional Shares of Common
Stock that are comprised of shares of the same series or class of Preferred
Stock and that would result in an adjustment to the Conversion Price pursuant
to the terms of Section (a)(iii) above, and such issuance dates occur within a
period of no more than sixty (60) consecutive days, then, upon the final such
issuance, the Conversion Price shall be readjusted prospectively to give effect
to all such issuances as if they occurred on the date of the final such
issuance (and without giving effect to any adjustments as a result of such
prior issuances within such period).

 

B-2-27

 

(b)           Adjustment for
Stock Splits and Combinations.  If the Maker shall at any time or from time
to time after the Note Issue Date effect a subdivision of the outstanding
Common Stock (whether by stock split, stock dividend or otherwise), the
Conversion Price in effect immediately before the subdivision shall be
proportionately decreased.  If the Maker
shall at any time or from time to time after the Note Issue Date combine the
outstanding shares of Common Stock (whether by reverse stock split or
otherwise), the Conversion Price in effect immediately before the combination
shall be proportionately increased.  Any
adjustment under this Section (b) shall become effective at the close of
business on the date the subdivision or combination becomes effective.

 

(c)           Adjustment for
Certain Dividends and Distributions.  In the event the Maker at any time, or from
time to time after the Note Issue Date shall make or issue, or fix a record
date for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in additional shares of Common Stock,
then and in each such event the Conversion Price in effect immediately before
such event shall be decreased, as of the time of such issuance or, in the event
such a record date shall have been fixed, as of the close of business on such
record date, by multiplying the Conversion Price then in effect by a fraction:

 

(i)           the numerator
of which shall be the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date; and

 

(ii)          the denominator
of which shall be the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of Common Stock issuable
in payment of such dividend or distribution;

 

provided, however, that if
such record date shall have been fixed and such dividend is not fully paid or
if such distribution is not fully made on the date fixed therefor, the
Conversion Price shall be recomputed accordingly as of the close of business on
such record date and thereafter the Conversion Price shall be adjusted pursuant
to this paragraph as of the time of actual payment of such dividends or
distributions.

 

(d)           Adjustments for
Other Dividends and Distributions.  In the event the Maker at any time or from
time to time after the Note Issue Date shall make or issue, or fix a record
date for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in securities of the Maker (other than
shares of Common Stock) or in cash or other property, then and in each such
event provision shall be made so that the Payee shall receive upon conversion
of the Note, in addition to the number of shares of Common Stock to be received
upon such conversion, the kind and amount of securities of the Maker, cash or
other property that the Payee would have been entitled to receive had the Note
been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
conversion date, retained such securities receivable by them as aforesaid
during such period, giving application to all adjustments called for during
such period under this paragraph with respect to the rights of the Payee.

 

(e)           Adjustment for
Merger or Reorganization, etc.  Subject to the provisions of Section 2(c) of
the Series B Designation, if there shall occur a change in Control in which the
Common Stock is converted into or exchanged for securities, cash or other
property (other than a transaction covered by Sections (b), (c) or (d) of this
Schedule 2), then, subject to the provisions of Section 4(b) of the Note,
following any such reorganization, recapitalization, reclassification,
consolidation or merger, the outstanding principal amount of the Note, and any
accrued but unpaid interest thereon, shall be convertible into the kind and
amount of securities, cash or other property that a holder of the number of 

 

B-2-28

 

shares of Common Stock of the Maker issuable
upon conversion of this Note immediately prior to such reorganization,
recapitalization, reclassification, consolidation or merger would have been
entitled to receive pursuant to such transaction; and, in such case,
appropriate adjustment (as determined in good faith by the Board) shall be made
in the application of the provisions in this Schedule 2 with respect to the
rights and interests thereafter of the holders of the Common Stock, to the end
that the provisions set forth in this Schedule 2 (including provisions with
respect to changes in and other adjustments of the Conversion Price) shall
thereafter be applicable, as nearly as reasonably may be, in relation to any
securities or other property thereafter deliverable upon the conversion of this
Note.

 

(f)            Rounding of
Calculations; Minimum Adjustments.  All calculations under this Schedule 2 shall
be made to the nearest one tenth of a cent ($0.001), with five one hundredths
of a cent ($0.0005) rounded down.  No
adjustment in the Conversion Price is required if the amount of such adjustment
would be less than one cent ($0.01); provided, however, that any adjustments
which by reason of this Section (f) are not required to be made will be carried
forward and given effect in any subsequent adjustment.  The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Maker, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.

 

B-2-29

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