8-K/A

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 8-K/A

Amendment No. 1

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

Date of Report (Date of earliest event reported)
November 03, 2003

Evolving Systems, Inc.

(Exact name of registrant as specified in its charter)

Delaware	0-24081	84-1010843
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

9777 Mt. Pyramid Court, Suite 100
Englewood, Colorado 80112

(Address of principal executive offices)

Registrant’s telephone number, including area code (303) 802-1000

N/A
Former Name or Former Address, if Changed Since Last Report

The undersigned registrant hereby amends the following items, financial statements, exhibits or other portions of its Current Report on Form 8-K, originally filed with the Securities and Exchange Commission on November 18, 2003.

ITEM 7.                  FINANCIAL STATEMENTS AND EXHIBITS

The following financial statements required by Item 7 with respect to the acquisition of CMS Communications, Inc. by Evolving Systems, Inc. are filed as part of this report:

(a) Pro Forma Financial Information

The pro forma financial information with respect to the transaction described in Item 2 of the Company’s Form 8-K originally filed with the Securities and Exchange Commission on November 18, 2003, is filed as Exhibit 99.2 to this Amendment and incorporated herein by this reference.

(b) Financial Statements of Business Acquired

The financial statements of CMS Communications, Inc. as of September 30, 2003 (Unaudited), December 31, 2002 and 2001 and for the nine months ended September 30, 2003 and 2002 (Unaudited), the year ended December 31, 2002, and the period from November 26, 2001 (date of inception) to December 31, 2001, are filed as Exhibit 99.3 to this Amendment and incorporated herein by this reference.

c) Exhibits. The following exhibits are filed with this report.

Exhibit Number	Description
2.1	Agreement and Plan of Merger, dated as of November 3, 2003 among Evolving Systems, Inc., CMS Communications, Inc, a merger subsidiary wholly owned by Evolving Systems and all of the shareholders of CMS Communications, Inc. (incorporated by reference to Exhibit 2.1 to Evolving Systems, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 18, 2003)
4.1	Registration Rights Agreement among the Evolving Systems and all of the shareholders of CMS Communications, Inc. (incorporated by reference to Exhibit 4.1 to Evolving Systems, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 18, 2003).
23.1	Consent of PricewaterhouseCoopers LLP, independent accountants.
99.1	Press release dated November 3, 2003, “Evolving Systems Acquires CMS Communications In An All Stock Transaction.” (incorporated by reference to Exhibit 99.1 to Evolving Systems, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 18, 2003)
99.2	Unaudited Pro Forma Combined Financial Statements
99.3	CMS Communications, Inc. Financial Statements

2

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated:  December 8, 2003
	Evolving Systems, Inc.
	By:	/s/	George A. Hallenbeck
			George A. Hallenbeck
			Chief Executive Officer

3

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-103655, 333-89438, 333-61446, 333-82473, 333-60779 and 333-58285) of Evolving Systems, Inc. of our report dated December 8, 2003, relating to the financial statements of CMS Communications, Inc. which are included in this Current Report on Form 8-K/A of Evolving Systems, Inc.

/s/PricewaterhouseCoopers LLP

Denver, Colorado

December 8, 2003

EX-99.2

Exhibit 99.2

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma combined financial statements give effect to the completed merger of Evolving Systems, Inc. (“Evolving Systems”) and CMS Communications, Inc. (“CMS”).

As of November 3, 2003, Evolving Systems completed the acquisition of all of the outstanding CMS stock in exchange for Evolving Systems common stock valued at approximately $11.0 million.  The merger with CMS has been accounted for using the purchase method of accounting and, accordingly, the assets acquired and liabilities assumed were recorded at their fair values as of the date of the merger.  Both Evolving Systems and CMS operate on a calendar year.

The unaudited pro forma combined balance sheet gives effect to the merger of Evolving Systems and CMS as if it occurred as of September 30, 2003.  The final purchase price allocation will be based on CMS’ closing balance sheet as of November 3, 2003. The unaudited pro forma combined balance sheet reflects the issuance of 1,146.7496 shares of Evolving Systems common stock in exchange for each share of CMS stock as provided in the merger agreement.  The unaudited pro forma combined statement of operations for the year ended December 31, 2002 combines the historical results for Evolving Systems and CMS for the year ended December 31, 2002, as if the merger had occurred on January 1, 2002.

The unaudited pro forma combined statement of operations for the nine months ended September 30, 2003 combines the historical results for Evolving Systems and CMS for the nine months ended September 30, 2003 as if the merger of Evolving Systems and CMS had occurred on January 1, 2002.

The unaudited pro forma combined financial statements presented are based on the assumptions and adjustments described in the accompanying notes.  The unaudited pro forma combined statements of operations are presented for illustrative purposes and do not purport to represent what our results of operations actually would have been if the events described above had occurred as of the dates indicated or what such results would be for any future periods.  The unaudited pro forma combined financial statements, and the accompanying notes, should be read in conjunction with the historical financial statements and related notes of Evolving Systems in the Company’s annual report on Form 10-K and quarterly reports on Form 10-Q and with the CMS historical financial statements and related notes included in this Form 8-K.

EVOLVING SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
SEPTEMBER 30, 2003
(in thousands)

	Evolving Systems			CMS			Pro Forma Adjustments			Pro Forma Combined
ASSETS
Current assets:
Cash and cash equivalents	$	17,345		$	1,262		$	—		$	18,607
Contract receivables, net	2,574			650			—			3,224
Unbilled work-in-progress	420			—			—			420
Prepaid and other current assets	901			62			—			963
Total current assets	21,240			1,974			—			23,214
Property and equipment, net	1,385			329			—			1,714
Goodwill	—			—			6,237		(A)	6,237
Intangible assets, net	—			—			4,200		(A)	4,200
Capitalized software and licenses, net	—			950			(950		)(B)	—
Other assets	500			23			—			523
Total assets	$	23,125		$	3,276		$	9,487		$	35,888
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term obligations	$	37		$	—		$	—		$	37
Accounts payable and accrued liabilities	3,166			376			275		(C)	3,817
Note payable - related party	—			367			—			367
Unearned revenue	6,331			1,822			(1,055		)(D)	7,098
Total current liabilities	9,534			2,565			(780		)	11,319
Long-term obligations	155			—			—			155
Total liabilities	9,689			2,565			(780		)	11,474
Stockholders’ equity:
Common stock	14			—			1		(E)	15
Additional paid-in capital	54,742			1			10,977		(E)	65,719
							(1		)(F)
Stockholder distribution	—			(154		)	154		(F)	—
Retained earnings (deficit)	(41,320		)	864			(864		)(F)	(41,320		)
Total stockholders’ equity	13,436			711			10,267			24,414
Total liabilities and stockholders’ equity	$	23,125		$	3,276		$	9,487		$	35,888

See accompanying notes to unaudited pro forma combined financial statements.

EVOLVING SYSTEMS, INC.

UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003

(in thousands except per share data)

	Evolving Systems		CMS			Pro Forma Adjustments			Pro Forma Combined
REVENUE
License fees and services	$	12,133	$	248		$	—		$	12,381
Customer support	10,045		2,255			—			12,300
Total revenue	22,178		2,503			—			24,681
COSTS OF REVENUE AND OPERATING EXPENSES
Cost of license fees and services, excluding depreciation and amortization	4,321		124			(48		)(G)	4,445
						48		(H)
Cost of customer support, excluding depreciation and amortization	4,401		1,510			(136		)(G)	6,353
						578		(H)
Sales and marketing	2,109		459			—			2,568
General and administrative	2,742		219			—			2,961
Product development	1,224		—			—			1,224
Depreciation and amortization	918		37			—			955
Restructuring and other expenses	38		—			—			38
Total costs of revenue and operating expenses	15,753		2,349			442			18,544
Income from operations	6,425		154			(442		)	6,137
Other income (expense), net	137		(15		)	—			122
Income before income taxes	$	6,562	$	139		$	(442	)	$	6,259
Provision for income taxes	126		—			—			126
Net income	$	6,436	$	139		$	(442	)	$	6,133
Basic earnings per common share	$	0.46							$	0.42
Diluted earnings per common share	$	0.41							$	0.38
Weighted average basic shares outstanding	13,880					660			14,540
Weighted average diluted shares outstanding	15,556					733			16,289

See accompanying notes to unaudited pro forma combined financial statements.

EVOLVING SYSTEMS, INC.

UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2002

(in thousands except per share data)

	Evolving Systems			CMS			Pro Forma Adjustments			Pro Forma Combined
REVENUE
License fees and services	$	10,388		$	350		$	—		$	10,738
Customer support	12,575			2,965			—			15,540
Total revenue	22,963			3,315			—			26,278
COSTS OF REVENUE AND OPERATING EXPENSES
Cost of license fees and services, excluding depreciation and amortization	3,926			—			—			3,926
Cost of customer support, excluding depreciation and amortization	13,093			1,872			(166		)(G)	15,505
							706		(H)
Sales and marketing	4,907			403			—			5,310
General and administrative	5,420			276			—			5,696
Product development	1,209			—			—			1,209
Depreciation and amortization	1,771			32			—			1,803
Restructuring and other expenses	5,079			—			—			5,079
Total costs of revenue and operating expenses	35,405			2,583			540			38,528
Income (loss) from operations	(12,442		)	732			(540		)	(12,250		)
Other income (expense), net	35			(28		)	—			7
Income (loss) before income taxes	$	(12,407	)	$	704		$	(540	)	$	(12,243	)
Provision for income taxes	—			—			—			—
Net income (loss)	$	(12,407	)	$	704		$	(540	)	$	(12,243	)
Basic earnings (loss) per common share	$	(0.93	)							$	(0.88	)
Diluted earnings (loss) per common share	$	(0.93	)							$	(0.88	)
Weighted average basic shares outstanding	13,295						660			13,955
Weighted average diluted shares outstanding	13,295						660			13,955

See accompanying notes to unaudited pro forma combined financial statements.

EVOLVING SYSTEMS, INC.

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

(1) Basis of pro forma presentation

The unaudited pro forma combined balance sheets are based on historical balance sheets of Evolving Systems, Inc. (“Evolving Systems”) and CMS Communications, Inc. (“CMS”) and have been prepared to reflect the merger as if it had been consummated on September 30, 2003.

The unaudited pro forma combined statements of operations combine the results of operations of Evolving Systems and CMS for the year ended December 31, 2002 and the nine months ended September 30, 2003.  The unaudited pro forma combined statements of operations have been prepared to reflect the merger as if it had occurred on January 1, 2002.

You should not rely on the selected unaudited pro forma combined financial information as being indicative of the historical results that would have occurred had Evolving Systems and CMS been combined during these time periods or the future results that may be achieved after the merger.

On a combined basis, there were no transactions between Evolving Systems and CMS during the periods presented.

(2) Preliminary purchase price

The unaudited pro forma combined financial statements reflect an estimated purchase price of approximately $11.3 million, including acquisition related costs.  The fair value of Evolving Systems common stock was determined using an average price of approximately $14.98, in accordance with EITF 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination,” which was the average closing price a few days before and after the merger agreement.

The estimated purchase price of $11.3 million assumes that all CMS stockholders receive consideration of 1,146.7496 shares of Evolving Systems common stock in exchange for each share of CMS’ 639 outstanding shares of common stock, resulting in the issuance of 732,773 shares of Evolving Systems common stock.

The estimated acquisition-related costs consist primarily of legal and accounting fees and other external costs related directly to the merger.  The estimated total purchase price of CMS is as follows (in thousands):

Fair value of Evolving Systems common stock to be issued	$	10,978
Acquisition-related costs	275
Aggregate preliminary purchase price	$	11,253

(3) Preliminary purchase price allocation

Under the purchase method of accounting, the total estimated purchase price will be allocated to CMS’ net tangible and identifiable intangible assets based on their estimated fair values as of the date of the completion of the merger.  The excess of the purchase price over the net tangible and identifiable intangible assets will be recorded as goodwill.  Based upon the estimated purchase price and preliminary valuation, the following represents the preliminary allocation of the aggregate purchase price to the acquired net assets of CMS as of September 30, 2003 (in thousands):

Net tangible assets	$	816
Goodwill	6,237
Identifiable intangible assets	4,200
Aggregate preliminary purchase price	$	11,253

The preliminary allocation of purchase price was based upon estimates and assumptions which are subject to change upon the finalization of the valuation.  The Company will obtain a third party purchase price allocation and expects it to be complete by the filing of the Company’s 2003 Form 10-K.

Net tangible assets were primarily valued at their respective carrying amounts, except for unearned revenue, as these amounts approximate their current fair values.  CMS’ historical unearned revenue balance of $1.8 million as of September 30, 2003 is comprised of $752,000 related to customer support revenue and $1.1 million of license revenue.

In accordance with EITF No. 01-03, “Accounting in a Business Combination for Deferred Revenue of an Acquiree,” Evolving Systems records a liability related to the unearned revenue of CMS only if the unearned revenue represents a legal obligation to be assumed by Evolving Systems (a legal performance obligation).  This legal performance obligation has been valued based on the remaining estimated costs and an appropriate profit margin of Evolving Systems to achieve the legal performance obligation.

For the unearned revenue related to customer support, Evolving Systems has assumed a legal performance obligation to perform under the customer support contracts.  The estimated costs and an appropriate profit margin resulted in a reduction of the carrying value of unearned revenue of $125,000.

For the unearned revenue related to license fees and services, the value of the legal performance obligation totaling is based on the estimated costs to deliver certain software elements plus an appropriate profit margin.  Evolving Systems will recognize the remaining deferred revenue when the legal performance obligation is achieved.  This accounting treatment results in a reduction of unearned revenue of $930,000.  This reduction results from a license and services sale that was significantly complete and over $1.1 million was collected, but in accordance with Statement of Position No. 97-2 (SOP 97-2), “Software Revenue Recognition”, the revenue could not be recognized due to the contract containing multiple elements.  Since vendor-specific objective evidence (“VSOE”) of each of the elements did not exist, all revenue from the arrangement was deferred at September 30, 2003, and as a result of purchase accounting rules the revenue will be written off and not recognized by Evolving Systems.

CMS’ net tangible assets, which excludes capitalized software and licenses, takes into consideration the reduction of $1.1 million to deferred revenue.

Goodwill represents the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired.  The unaudited pro forma combined statements of operations do not reflect the amortization of goodwill acquired in the merger consistent with the guidance in Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

Identifiable intangible assets as of September 30, 2003 represent capitalized software and licenses owned by CMS plus other identifiable intangible assets such as contractual relationships that CMS held with its customers.  Such intangible assets will be specifically identified and valued as part of the third party valuation.  Amortization of capitalized software and licenses is shown within costs of license and services and costs of customer support.  The estimated annual amortization as shown below does not agree to the pro forma adjustment to record amortization due to purchased software and licenses being acquired on various dates in 2002 and 2003.

	Estimated Fair Value		Useful Life	Estimated Annual Amortization
Identifiable intangible assets:
Purchased software	$	200	3 yrs	$	67
Purchased licenses	1,500		3-5 yrs	320
Maintenance agreements and related relationships	2,500		5 yrs	500
	$	4,200

(4) Pro forma net income (loss) per share

The pro forma basic and diluted income (loss) per share are based on the weighted average number of shares of Evolving Systems common stock outstanding during each period and the number of shares of Evolving Systems common stock to be issued in connection with the merger.  Of the 732,773 shares issued related to the merger, 73,279 shares will be held in escrow to secure certain indemnity obligations of the former CMS shareholders pursuant to the merger agreement.  Although the escrow shares are classified as issued and outstanding at September 30, 2003 and December 31, 2002, they are considered contingently returnable until the restrictions lapse and are not included in the basic net income (loss) per share calculation until the shares are vested. Diluted net income (loss) per share gives effect to all potentially dilutive securities. The Company’s unvested escrow shares and stock options are included in the diluted shares outstanding calculation during the nine months ended September 30, 2003 but not for the twelve months ended December 31, 2002, as a result of their anti-dilutive effect due to the net loss for the period.  The following table shows the pro forma combined basic and diluted shares at the end of the period presented (in thousands):

	Evolving Systems Weighted Average Shares	Adjustment for Shares Issued to CMS	Pro Forma Weighted Average Shares
Weighted Average Shares outstanding for the year ended December 31, 2002
Basic	13,295	660	13,955
Diluted	13,295	660	13,955
Weighted Average Shares outstanding for the nine months ended September 30, 2003
Basic	13,880	660	14,540
Diluted	15,556	733	16,289

(5) Pro forma adjustments

The following pro forma adjustments to the unaudited pro forma combined balance sheets and statements of operations are based on preliminary estimates which may change as additional information is obtained:

(A)	To record goodwill and intangible assets related to the merger.
(B)	To eliminate CMS’ existing capitalized software and licenses
(C)	To accrue for acquisition-related costs related to the legal, accounting and other direct costs.
(D)	To adjust CMS’ unearned revenue balance based on Evolving Systems estimated costs and appropriate profit margins related to delivery of CMS’ license and services and customer support contracts.
(E)	To record Evolving Systems common stock issued related to the merger.
(F)	To eliminate CMS’ stockholders’ equity accounts.
(G)	To eliminate CMS’ amortization of capitalized software and licenses as all intangible assets would have been eliminated had the acquisition occurred on January 1, 2002.
(H)	To record the amortization expenses related to identifiable intangible assets acquired as part of the merger.

EX-99.3

Exhibit 99.3

CMS Communciations, Inc.

September 30, 2003

Table of Contents

	Page No.
Report of Independent Auditors	F-1
Balance Sheets as of September 30, 2003 (Unaudited), December 31, 2002 and 2001	F-2
Statements of Operations for the Nine Months Ended September 30, 2003 and 2002 (Unaudited), the Year Ended December 31, 2002 and the period from November 26, 2001 (Date of Inception) to December 31, 2001	F-3
Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2003 (Unaudited), the Year Ended December 31, 2002 and the period from November 26, 2001 (Date of Inception) to December 31, 2001	F-4
Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (Unaudited), the Year Ended December 31, 2002 and the period from November 26, 2001 (Date of Inception) to December 31, 2001	F-5
Notes to Financial Statements	F-6

REPORT OF INDEPENDENT AUDITORS

To the Stockholders of CMS Communications, Inc.

In our opinion, the accompanying balance sheets and related statements of operations, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of CMS Communications, Inc. at December 31, 2002 and 2001, and the results of its operations and its cash flows for the year ended December 31, 2002 and the period from November 26, 2001 (date of inception) to December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP

Denver, Colorado

December 8, 2003

F-1

CMS COMMUNICATIONS, INC.

BALANCE SHEETS

(in thousands except share data)

	September 30, 2003			December 31, 2002		December 31, 2001
	(unaudited)
ASSETS
Current assets:
Cash	$	1,262		$	600	$	1
Contract receivables, net	650			2,097		357
Prepaid and other current assets	62			20		3
Total current assets	1,974			2,717		361
Property and equipment, net	329			152		—
Capitalized software and licenses, net	950			739		—
Other assets	23			17		—
Total assets	$	3,276		$	3,625	$	361
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	376		$	535	$	163
Note payable - related party	367			969		177
Unearned revenue - current	1,822			1,225		—
Total current liabilities	2,565			2,729		340
Unearned revenue - long-term	—			170		—
Total liabilities	2,565			2,899		340
Commitments and contingencies (Note 7)	—			—		—
Stockholders’ equity:
Common stock, $0.10 par value; 800 shares authorized; 639, 639 and 100 shares issued and outstanding as of September 30, 2003 (unaudited), December 31, 2002 and December 31, 2001, respectively.	—			—		—
Additional paid-in capital	1			1		—
Stockholder distribution	(154		)	—		—
Retained earnings	864			725		21
Total stockholders’ equity	711			726		21
Total liabilities and stockholders’ equity	$	3,276		$	3,625	$	361

The accompanying notes are an integral part of the financial statements.

F-2

CMS COMMUNICATIONS, INC.

STATEMENTS OF OPERATIONS

(in thousands)

	Nine Months Ended September 30,				Year Ended December 31,		Period from inception (November 26, 2001) through December 31, 2001
	2003		2002		2002
	(unaudited)
REVENUE
License fees and services	$	248	$	50	$	350	$	357
Customer support	2,255		2,237		2,965		—
Total revenue	2,503		2,287		3,315		357
COSTS OF REVENUE AND OPERATING EXPENSES
Cost of license fees and services, excluding depreciation	124		—		—		178
Cost of customer support, excluding depreciation	1,510		1,411		1,872		—
Sales and marketing	459		237		403		—
General and administrative	219		227		276		158
Depreciation and amortization	37		27		32		—
Total costs of revenue and operating expenses	2,349		1,902		2,583		336
Income from operations	154		385		732		21
Other expenses, net	15		—		28		—
Net income	$	139	$	385	$	704	$	21

The accompanying notes are an integral part of the financial statements.

F-3

CMS COMMUNICATIONS, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

	$.10 Par Common Stock			Additional Paid-in Capital		Stockholder Distribution			Retained Earnings		Total Stockholders’ Equity
	Shares	Amount
Balance at inception (November 26, 2001)	—	$	—	$	—	$	—		$	—	$	—
Common stock sold	100	—		—		—			—		—
Net income	—	—		—		—			21		21
Balance, December 31, 2001	100	—		—		—			21		21
Common stock sold	539	—		1		—			—		1
Net income	—	—		—		—			704		704
Balance, December 31, 2002	639	—		1		—			725		726
Stockholder distribution	—	—		—		(154		)	—		(154		)
Net income	—	—		—		—			139		139
Balance, September 30, 2003 (unaudited)	639	$	—	$	1	$	(154	)	$	864	$	711

The accompanying notes are an integral part of the financial statements.

F-4

CMS COMMUNICATIONS, INC.

STATEMENTS OF CASH FLOWS

(in thousands)

	Nine Months Ended September 30,						Year Ended December 31,			Period from inception (November 26, 2001) through December 31, 2001
	2003			2002			2002
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	139			385			704			21
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	221			177			198			—
Change in operating assets and liabilities:
Contract receivables	1,447			273			(1,740		)	(357		)
Prepaid and other assets	(48		)	(27		)	(34		)	(3		)
Accounts payable and accrued liabilities	(159		)	347			372			163
Unearned revenue	427			121			1,395			—
Net cash provided by (used in) operating activities	2,027			1,276			895			(176		)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment	(214		)	(180		)	(184		)	—
Purchase of licensed software	(395		)	(905		)	(905		)	—
Net cash used in investing activities	(609		)	(1,085		)	(1,089		)	—
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from related party	175			174			838			187
Repayment of borrowings from related party	(777		)	(8		)	(46		)	(10		)
Distribution to stockholder	(154		)	—			—			—
Proceeds from the issuance of stock	—			—			1			—
Net cash provided by (used in) financing activities	(756		)	166			793			177
Net increase in cash and cash equivalents	662			357			599			1
Cash at beginning of period	600			1			1			—
Cash at end of period	$	1,262		$	358		$	600		$	1

The accompanying notes are an integral part of the financial statements.

F-5

CMS COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

(all information as of and for the nine months ended
September 30, 2003 and 2002 is unaudited)

(1) Organization

CMS Communications, Inc. (the “Company”) was incorporated in Ohio on November 26, 2001.  The Company was formed to provide network and management solutions for assurance and fulfillment which helps telecommunications service providers maximize their networks by enhancing the service delivery process and turning network data into useful information.

Effective November 3, 2003, Evolving Systems, Inc. purchased all of the outstanding shares of the Company. In accordance with the merger agreement, all CMS stockholders receive consideration of 1,146.7496 shares of Evolving Systems common stock in exchange for each share of CMS’ 639 outstanding shares of common stock.  The fair value of Evolving Systems common stock was determined using an average price of $14.98, in accordance with EITF 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination,” which was the average closing price a few days before and after the merger agreement.  An aggregate of 73,279 of such shares was deposited in escrow, such deposit constituting the stock escrow fund, with Wells Fargo Bank West, N.A. to secure certain indemnity obligations of the former CMS shareholders pursuant to the Merger Agreement.

(2) Summary of significant accounting policies

Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates

Unaudited interim results. Data and information as of September 30, 2003 and for the nine months ended September 30, 2003 and 2002, and related notes, are unaudited.  In the opinion of our management, the unaudited interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for those periods.  The nine months results are not necessarily indicative of the expected results for the year ending December 31, 2003.

Cash.  Cash is held in checking and an interest bearing savings account.

Fair value of financial instruments. The carrying amounts of the Company’s financial instruments, which include accounts receivable, accounts payable and other accrued expenses approximate their fair values due to their short maturities.

Research and development costs.  Costs associated with the development of computer software in accordance with the Statement of Financial Accounting Standard No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”, are expensed prior to the establishment of technological feasibility and capitalized thereafter until the product is available for general release to customers.  No software development costs were capitalized during the nine months ended September 30, 2003, during the year ended December 31, 2002 or the period from November 26, 2001 (date of inception) to December 31, 2001, since costs incurred subsequent to establishment of technological feasibility were not material.

Acquired software and license agreements are valued at cost and amortized over the greater of: (a) the amount determined by ratio of the product’s current revenue to its total expected future revenue; or (b) the straight-line method over the product’s estimated useful life. During all periods presented herein, the Company has used the straight-line method to amortize such acquired software.  Amortization of capitalized software and licenses are shown within costs of license fees and services and costs of customer support.

Property and equipment and long-lived assets.Property and equipment are stated at cost, less accumulated depreciation, and are depreciated over their estimated useful lives, generally three to ten years or the lease term, if shorter, using the straight-line method. Leasehold improvements are stated at cost, less accumulated amortization, and are amortized over the shorter of the lease term or estimated useful life of the asset. Maintenance and repair costs are expensed as incurred.

Advertising. All advertising and promotion costs are expensed as incurred.

Revenue recognition.  The Company’s revenue is generated primarily by licensing our software systems and providing support services for those systems.  The Company recognizes revenue in accordance with Statement of Position (SOP) No. 97-2, “Software Revenue Recognition,” as amended and interpreted by SOP No. 98-9, “Modification of SOP 97-2, Software Revenue

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Recognition, with Respect to Certain Transactions,” as well as Technical Practice Aids (TPA) issued from time to time by the American Institute of Certified Public Accountants.

License fee revenue.  The Company generally recognizes license fees when (a) persuasive evidence of an arrangement exists (b) products are delivered or services are rendered (c) the sales price is fixed or determinable and (d) collectibility is reasonably assured.

The Company allocates the total software arrangement fee among each element where the arrangement includes rights to multiple software products, customer support and/or services.  The amount of revenue allocated to each element is based on the sales price of those elements when sold separately (vendor-specific objective evidence or “VSOE”).  For arrangements in which VSOE does not exist for each element, revenue is deferred and not recognized until delivery of all of the elements without VSOE has occurred.

Services revenue.  License fees and services include consulting revenue.  Consulting revenue is charged on a time and materials basis and is recognized as the services are performed.  Customer support revenue is recognized ratably over the term of the maintenance agreement, typically one year.

Unearned revenue.  Unearned revenue represents (1) license fees where VSOE does not exist and all elements have not been delivered and (2) payments received for customer support in advance of performing services.  Customer support is normally billed quarterly or annually in advance.  The principal components of unearned revenue at September 30, 2003, and December 31, 2002 and 2001 were as follows (in thousands):

	September 30,		December 31,
Unearned revenue:	2003		2002		2001
License fees	$	1,070	$	400	$	—
Customer support	752		995		—
	$	1,822	$	1,395	$	—

Recent accounting pronouncements. In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF No. 00-21”). This issue addresses how revenue arrangements with multiple deliverables should be divided into separate units of accounting and how the arrangement consideration should be allocated to the identified separate accounting units. EITF No. 00-21 is effective for fiscal periods beginning after June 15, 2003. Where multiple elements exist in an arrangement, the arrangement fee is allocated to the different elements based upon verifiable objective evidence of the fair value of the elements. The adoption of EITF No. 00-21 did not have a material impact on the Company’s results of operations or financial condition.

Also in May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  This new statement changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity.  It requires that those instruments be classified as liabilities in the balance sheets.  Most of the guidance in SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the Company’s first interim period beginning after June 15, 2003.  The adoption of SFAS 150 did not have a material impact on the Company’s results of operations or financial condition.

(3)  Balance sheet components

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

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	September 30,			December 31,
Property and equipment:	2003			2002			2001
Computer equipment and software	$	127		$	123		$	—
Furniture, fixtures and leasehold improvements	271			61			—
	398			184			—
Less: accumulated depreciation and amortization	(69		)	(32		)	—
	$	329		$	152		$	—

Assets are depreciated from 3 to 10 years.  Depreciation expense for the year ended December 31, 2002 was $32,000.

		September 30,			December 31,
Capitalized software and licenses:	Useful Life	2003			2002			2001
Acquired software	3 yrs	$	225		$	—		$	—
Purchased licenses	3-5 yrs	1,075			905			—
		1,300			905			—
Less: accumulated amortization		(350		)	(166		)	—
		$	950		$	739		$	—

The Company entered into a technology license agreement with Lucent Technologies, Inc. on April 17, 2002 for technical information and licensed software.  The Company also acquired additional technical information and licensed software from BellSouth Corporation during August 2002.  During May 2003, the Company acquired a software license from Softalia India, LTD., and software assets from Astracon, Inc.

(4) Concentration of Credit Risk

For the period from November 26, 2001 (date of inception) to December 31, 2001, the Company recognized all of its revenue from one customer in the telecommunications industry.

For the year ended December 31, 2002, the Company recognized 88% (33%, 29%, 16% and 10%) of total revenue from four significant customers (greater than 10%), all in the telecommunications industry.

For the nine months ended September 30, 2003, the Company recognized 94% (31%, 30%, 21% and 12%) of total revenue from four significant customers (greater than 10%), all in the telecommunications industry.  For the nine months ended September 30, 2002, the Company recognized 86% (34%, 27%, 15% and 10%) of total revenue from four significant customers (greater than 10%), all in the telecommunications industry.

As of September 30, 2003, three significant customers (greater than 10%) accounted for 100% (63%, 22% and 15%) of contract receivables.  As of December 31, 2002 five significant customers (greater than 10%) accounted for 86% (23%, 22%, 17%, 13% and 11%) of contract receivables. As of December 31, 2001, one customer accounted for 100% of the contract receivables balance.

(5) Note payable - related parties

During 2001, the Company entered into a line of credit agreement with the principal stockholder.  The loan accrued interest at 6%, was not collateralized and there were no required principal payments.  As of September 30, 2003, December 31, 2002 and 2001 the balance owed was $367,000, $969,000, and $177,000, respectively.  The line of credit was repaid in full on October 31, 2003.

In December 2002, the Company entered into a line of credit agreement with various stockholders for $600,000.  The loan was non-interest bearing, not collateralized and there were no required principal payments.  The line of credit was repaid in full on January 15, 2003.

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(6) Income taxes

The Company qualifies as an S Corporation in the U.S. for federal and state income tax purposes.  Individual stockholders report their share of the U.S. taxable income on their respective individual income tax returns.  Accordingly no provision for income taxes has been reported for the Company.

(7) Commitments and contingencies

The following summarizes our contractual obligation as of December 31, 2002, which is comprised of an operating lease for office space:

Year ending December 31,	Operating Leases
2003	$	152
2004	167
2005	175
2006	182
2007	142
Total minimum lease payments	$	818

Rent expense was $112,00 and $2,600 for the year ended December 31, 2003 and the period from November 26, 2001 (date of inception) to December 31, 2001, respectively.

We are subject to legal proceedings and claims that may arise in the normal course of business.

In November 2002, the FASB issued FASB Interpretation, FIN, No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34,” or FIN No. 45. The Interpretation requires that a guarantor is required to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken by issuing the guarantee. The accounting requirements for the initial recognition of guarantees are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Interpretation also requires disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain other guarantees it has issued, even where those guarantees do not fall within the scope of liability provisions of the Interpretation. The following is a summary of our agreements that we have determined are within the liability provisions and the disclosure provisions of FIN No. 45.

We enter into standard indemnification terms with our customers, as discussed below, in our ordinary course of business. Because we subcontract some of the development of our deliverables under our customer contracts, we could be required to indemnify our customers for work performed by our subcontractors. Depending upon the nature of the customer indemnification, the potential amount of future payments we could be required to make under these indemnification agreements may be unlimited. We may be able to recover damages from a subcontractor if the indemnification to our customers results from the subcontractor’s failure to perform. To the extent we are unable to recover damages from our subcontractors, the Company could be required to reimburse the indemnified party for the full amount. We have never incurred costs to defend lawsuits or settle claims relating to indemnification arising out of our subcontractors’ failure to perform. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of December 31, 2002.

We enter into standard indemnification terms with our customers in the ordinary course of business under which we agree to indemnify our customers for certain claims arising out of our performance under our contracts. As these represent guarantees of our own performance, no liability has been recognized under FIN 45:

We have entered into a lease for our corporate headquarters. Under the terms of the lease, we agree to indemnify, hold harmless and agree to reimburse the landlords for personal injury and property damage suffered or incurred by them in connection with our occupancy of the premises. The terms of this indemnification agreement is for the term of the leases. We carry general commercial liability insurance which may limit our exposure under these indemnification agreements. Because these are guarantees of our own future

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performance, we are not required to record a liability for these obligations under FIN No. 45. We currently do not have any pending claims under these indemnification provisions.

(8) Subsequent event

On October 29, 2003, the Company’s shareholders were distributed $620,000 in cash.

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