10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended March 31, 2005
	OR
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from               to

Commission File Number: 0-24081

EVOLVING SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware	84-1010843
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
9777 Pyramid Court, Suite 100 Englewood, Colorado	80112
(Address of principal executive offices)	(Zip Code)
(303) 802-1000
(Registrant’s telephone number)

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

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

As of May 9, 2005 there were 16,024,102 shares outstanding of Registrant’s Common Stock (par value $0.001 per share).

EVOLVING SYSTEMS, INC.

Quarterly Report on Form 10-Q

March 31, 2005

Table of Contents

PART I – FINANCIAL INFORMATION
Item 1	Financial Statements
	Consolidated Balance Sheets (Unaudited) as of March 31, 2005 and December 31, 2004
	Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2005 and 2004
	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2005 and 2004
	Notes to Unaudited Consolidated Financial Statements
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3	Quantitative and Qualitative Market Risk Disclosures
Item 4	Controls and Procedures
PART II – OTHER INFORMATION
Item 1	Legal Proceedings
Item 2	Changes in Securities
Item 3	Defaults of Senior Securities
Item 4	Submission of Matters to a Vote of Security Holders
Item 5	Other Information
Item 6	Exhibits
Signature

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

EVOLVING SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands except share data)

	March 31, 2005			December 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	6,479		$	11,386
Current portion of restricted cash	100			100
Contract receivables, net of allowance of $44 at March 31, 2005 and December 31, 2004	8,529			11,296
Unbilled work-in-progress	967			1,323
Prepaid and other current assets	1,896			1,832
Total current assets	17,971			25,937
Property and equipment, net	2,323			2,563
Intangible assets, net	18,202			19,993
Goodwill	36,868			37,698
Long-term restricted cash	300			300
Total assets	$	75,664		$	86,491
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of notes payable and long-term obligations	$	1,372		$	31
Short-term notes payable	1,995			4,880
Accounts payable and accrued liabilities	6,872			8,357
Payable to Tertio sellers	—			2,664
Deferred foreign income taxes	115			265
Unearned revenue	12,426			13,083
Total current liabilities	22,780			29,280
Long-term liabilities:
Long-term obligations	98			125
Notes payable	11,063			11,849
Deferred foreign income taxes	4,208			4,642
Total liabilities	38,149			45,896
Commitments and contingencies
Series B convertible redeemable preferred stock; $.001 par value; 966,666 shares issued and outstanding as of March 31, 2005 and December 31, 2004.	11,281			11,281
Stockholders’ equity:
Common stock, $0.001 par value; 25,000,000 shares authorized; 16,024,102 and 15,987,217 shares issued and outstanding as of March 31, 2005 and December 31, 2004, respectively.	16			16
Additional paid-in capital	67,821			67,765
Other comprehensive income	1,006			1,994
Accumulated deficit	(42,609		)	(40,461		)
Total stockholders’ equity	26,234			29,314
Total liabilities and stockholders’ equity	$	75,664		$	86,491

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

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EVOLVING SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share data)

	Three Months Ended March 31,
	2005			2004
REVENUE
License fees and services	$	5,081		$	3,219
Customer support	4,757			2,547
Total revenue	9,838			5,766
COSTS OF REVENUE AND OPERATING EXPENSES
Costs of license fees and services, excluding depreciation and amortization	2,976			1,070
Costs of customer support, excluding depreciation and amortization	2,031			1,663
Sales and marketing	2,392			936
General and administrative	2,501			935
Product development	110			491
Depreciation	376			274
Amortization	1,421			218
Restructuring and other expenses (recovery)	(48		)	—
Total costs of revenue and operating expenses	11,759			5,587
Income (loss) from operations	(1,921		)	179
Other income (expense):
Interest income (expense), net	(390		)	57
Other expense	(115		)	—
Total other income (expense), net	(505		)	57
Income (loss) before income taxes	(2,426		)	236
Benefit from income taxes	278			8
Net income (loss)	$	(2,148	)	$	244
Basic income (loss) per common share	$	(0.12	)	$	0.02
Diluted income (loss) per common share	$	(0.12	)	$	0.01
Weighted average basic shares outstanding	18,598			15,837
Weighted average diluted shares outstanding	18,598			17,939

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

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EVOLVING SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Three Months Ended March 31,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(2,148	)	$	244
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	376			274
Amortization of intangible assets	1,421			219
Amortization of debt issuance costs	13			—
Interest expense added to debt principal	317			—
Gain on impairment and disposal of property and equipment	(11		)	—
Benefit from deferred foreign income taxes	(465		)	—
Change in operating assets and liabilities:
Contract receivables	2,684			4,250
Unbilled work-in-progress	394			546
Prepaid and other assets	(86		)	(230		)
Accounts payable and accrued liabilities	(553		)	(293		)
Unearned revenue	(441		)	(1,395		)
Long-term obligations	(19		)	(10		)
Net cash provided by operating activities	1,482			3,605
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(158		)	(568		)
Proceeds from sale of property and equipment	11			—
Business combinations, net of cash acquired	(676		)	41
Net cash used in investing activities	(823		)	(527		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease payments	(8		)	(7		)
Principal payments on notes payable	(2,889		)	—
Payment of amount due to Tertio sellers	(2,616		)	—
Proceeds from the issuance of stock	56			210
Net cash (used in) provided by financing activities	(5,457		)	203
Effect of exchange rate changes on cash	(109		)	1
Net (decrease) increase in cash and cash equivalents	(4,907		)	3,282
Cash and cash equivalents at beginning of period	11,386			17,999
Cash and cash equivalents at end of period	$	6,479		$	21,281
Supplemental disclosure of other cash and non-cash financing transactions:
Interest paid	$	114		$	7

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

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EVOLVING SYSTEMS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1)Basis of Presentation

Interim Consolidated Financial Statements. The accompanying consolidated financial statements of Evolving Systems, Inc. (“Evolving Systems” or the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, management believes that the disclosures included in these financial statements are adequate to make the information presented not misleading. The unaudited consolidated financial statements included in this document have been prepared on the same basis as the annual consolidated financial statements, and in management’s opinion, reflect all adjustments, which include normal recurring adjustments, necessary for a fair presentation in accordance with GAAP. The results for the three months ended March 31, 2005 are not necessarily indicative of the results that the Company will have for any subsequent quarter or full fiscal year.  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes to those statements for the year ended December 31, 2004 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

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

Foreign Currency Translation. The Company’s foreign subsidiaries use as their functional currency the local currency of the countries in which they operate. Their assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenues, expenses, and cash flows are translated at the average rates of exchange prevailing during the period. Translation gains and losses are included in comprehensive income (loss) within stockholders’ equity. Realized and unrealized transaction gains and losses resulting from the remeasurement of non-functional currency financial instruments are included in the determination of net income (loss). Transaction gains for the three months ended March 31, 2005 and 2004 were approximately $125,000 and $3,000, respectively.

Comprehensive Income. The Company’s comprehensive income (loss) is comprised of its net income (loss) and foreign currency translation adjustment.  For the three months ended March 31, 2005 and 2004, total comprehensive income (loss) was ($3.1) million and $246,000, respectively.

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

Reclassification. As a result of the significance of the intangible assets and the related amortization expense from the acquisitions of Tertio Telecoms Limited (“Tertio”) and Telecom Software Enterprises LLC. (“TSE”), the Company is now reporting amortization expense as a separate line item on the statements of operations. In prior periods amortization of intangibles was shown within costs of license fees and services and costs of customer support. Prior period balances have been reclassified to conform with the current period’s presentation.

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

The majority of the Company’s license fees and services revenue is generated from fixed-price contracts which provide for both licenses to its software products and services. Revenue under these arrangements, where the services are determined to be essential to the functionality of the delivered software, is recognized using the percentage-of-completion method of accounting, in accordance with SOP

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97-2 and SOP 81-1, “Accounting for Long-Term Construction Type Contracts,” once a license agreement has been signed, the fee is fixed or determinable and collectibility is reasonably assured.  The percentage of completion for each contract is estimated based on the ratio of direct labor hours incurred to total estimated direct labor hours.  The estimated percentage of completion on contracts entered into by the Company’s United Kingdom (“U.K.”) subsidiary, Tertio, are based upon the ratio of project costs incurred to total estimated project costs.  The use of project costs approximates what would have resulted had direct labor hours been used since the majority of project costs consist of direct labor.  Due to the fact that the estimated direct labor hours and project costs, and changes thereto, can have a significant impact on revenue recognition, these estimates are critical and are reviewed by management regularly. Amounts billed in advance of services being performed are recorded as unearned revenue. Unbilled work-in-progress represents revenue earned but not yet billable under the terms of the fixed-price contracts. All such amounts are expected to be billed and collected during the succeeding 12 months.

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

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

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

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

(2) Business Combinations

Tertio

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

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

In January 2005, Tertio changed its name to Evolving Systems Limited and is sometimes referred to in the Form 10-Q as “Evolving Systems U.K.”.

TSE

On October 15, 2004, the Company acquired all of the outstanding ownership interests in privately-held TSE. Total GAAP consideration for TSE approximated $2.4 million, consisting of $1.5 million in cash, a note payable of $889,000 and approximately $55,000 in transaction-related costs.  The note payable was due and paid on March 31, 2005. Of the total purchase price, $250,000

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was deposited in escrow for one year with Wells Fargo Bank, N.A. as escrow agent to secure the sellers’ representations and warranties under the purchase agreement.  The Company agreed to pay additional consideration of up to $3.5 million contingent upon the achievement of certain specified revenue and gross margin results. Up to $2.5 million of the contingent consideration may be payable over a 24 month period from the closing date and additional contingent consideration of up to $1.0 million may be paid through the year 2011 if certain specified sales of TSE products occur. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 141, the contingent consideration will not be recorded until the contingency is resolved and the additional consideration is distributable. The Company paid $447,000 of contingent consideration recorded at December 31, 2004 during the first quarter of 2005.  During the three months ended March 31, 2005, the Company recorded additional contingent consideration and resulting goodwill of approximately $56,000, which will be paid in the second quarter of 2005, related to certain specified gross margin results achieved by the sale of TSE products during the period. The acquisition was treated as a purchase business combination and the results of TSE’s operations have been combined with Evolving Systems’ from the acquisition date forward. Both Evolving Systems and TSE operate on a calendar year.

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

Pro Forma Financial Information

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

	Three Months Ended March 31, 2004
Revenues	$	12,291
Net loss	$	(63	)
Basic loss per share	$	(0.00	)
Diluted loss per share	$	(0.00	)

(3) Goodwill and Intangible Assets

The Company has recorded goodwill and intangible assets from its acquisitions of CMS in 2003 and TSE and Tertio in 2004.  In accordance with SFAS No. 142, goodwill is not amortized but is subject to an impairment test at least annually.  Goodwill is assessed on an annual basis for impairment at the reporting unit level by applying a fair-value-based test. Changes in the carrying amounts of goodwill by reporting unit for the three months ended March 31, 2005 are as follows (in thousands):

	License and Services			Customer Support			Total Goodwill
Balance as of December 31, 2004	$	20,689		$	17,009		$	37,698
Adjustments to goodwill	(52		)	(67		)	(119		)
Effects of foreign currency exchange rates	(390		)	(321		)	(711		)
Balance as of March 31, 2005	$	20,247		$	16,621		$	36,868

The Company recorded goodwill adjustments during the period related to the finalization of the Tertio purchase price, which is expected to be completed in the second quarter of 2005 and contingent consideration and resulting goodwill of approximately $56,000 related to certain specified gross margin results achieved by the sale of TSE products during the period.

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The Company’s annual goodwill impairment test was conducted as of July 31, 2004, and it was determined that goodwill, at that time related solely to the CMS acquisition, was not impaired as of the test date. Additionally, goodwill is assessed for impairment at each reporting period end if certain events have occurred indicating that an impairment may have occurred. From July 31, 2004 through March 31, 2005, no events have occurred that management believes may have impaired goodwill.

Identifiable intangible balances include the cumulative effects of changes in foreign currency exchange rates since the acquisition date and were as follows as of March 31, 2005 (in thousands):

	Gross Amount			Accumulated Amortization			Useful Life
Identifiable intangible assets:
Purchased software	$		8,990	$	829		5 yrs
Customer contracts	2,151			940			1 yr
Purchased licenses	1,335			376			5 yrs
Trademarks and tradenames	1,167			80			6 yrs
Business partnerships	1,455			86			7 yrs
Customer relationships	6,308			893			2-7 yrs
	$	21,406		$		3,204

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

	Gross Amount		Accumulated Amortization		Estimated Useful Life
Identifiable intangible assets:
Purchased software	$	9,180	$	326	5 yrs
Customer contracts	1,859		305		1 yr
Purchased licenses	1,335		309		5 yrs
Trademarks and tradenames	1,196		33		6 yrs
Business partnerships	1,491		35		7 yrs
Customer relationships	6,740		800		2-7 yrs
	$	21,801	$	1,808

Amortization expense of identifiable intangible assets was $1.4 million and $219,000 for the three months ended March 31, 2005 and 2004, respectively.

(4)  Earnings Per Common Share

Basic earnings per share (“EPS”) is computed by dividing net income or loss available to common stockholders by the weighted average number of shares outstanding during the period, including common stock issuable under participating securities, such as the Series B Convertible, Redeemable Preferred Stock (“Series B Preferred Stock”). Diluted EPS is computed using the weighted average number of shares outstanding, including participating securities, plus all potentially dilutive common stock equivalents. Common stock equivalents consist of stock options, warrants and shares held in escrow. The following is the reconciliation of the numerators and denominators of the basic and diluted EPS computations for the three months ended March 31 (in thousands except per share data):

	Three Months Ended March 31,
	2005	2004
Weighted average common shares outstanding	15,988	15,837
Participating securities	2,610	—
Basic weighted average common shares outstanding	18,598	15,837
Effect of dilutive securities - options, warrants and escrow shares	—	2,102
Diluted weighted average common shares outstanding	18,598	17,939

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Weighted average options to purchase 1.7 million and 313,000 shares of common stock were excluded from the dilutive stock calculation for the three months ended March 31, 2005 and 2004, respectively, because their exercise prices were greater than the average fair value of the Company’s stock for the period.

Weighted average options to purchase 1.9 million shares of common stock were excluded from the dilutive stock calculation for the three months ended March 31, 2005, as their effect would have been anti-dilutive as a result of the net loss for the period.

The participating securities reflect 2.9 million shares of Series B Preferred Stock less the 290,000 shares that are held in escrow.  In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128 “Earnings Per Share”, shares that are contingently issuable are not included in the computation of basic EPS until all necessary conditions have been satisfied (in essence, when issuance of the shares are no longer contingent).

(5) Stock-Based Compensation

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

SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123,” established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123, as amended. The following table illustrates the effect on net income (loss) if the fair-value-based method had been applied to all outstanding and unvested awards in each period (in thousands, except per share data):

	Three Months Ended March 31,
	2005			2004
Net income (loss), as reported	$	(2,148	)	$	244
Stock based compensation expense under the fair value method	(608		)	(579		)
Pro forma net loss	$	(2,756	)	$	(335	)
Earnings (loss) per common share as reported:
Basic	$	(0.12	)	$	0.02
Diluted	$	(0.12	)	$	0.01
Pro forma loss per common share:
Basic	$	(0.15	)	$	(0.02	)
Diluted	$	(0.15	)	$	(0.02	)

(6) Concentration of Credit Risk

For the three months ended March 31, 2005, the Company recognized 26% (14% and 12%) of total revenue from two significant customers (defined as contributing at least 10%), in the telecommunications industry.  For the three months ended March 31, 2004, the Company recognized 76% (34%, 18%, 13% and 11%), of total revenue from four significant customers, all in the telecommunications industry.

As of March 31, 2005, five significant customers accounted for approximately 64% (18%, 12%, 12%, 11% and 11%) of contract receivables.  At December 31, 2004, three significant customers accounted for approximately 58% (30%, 17% and 11%) of contract receivables.

In the past, and currently, the Company earns a significant portion of its revenue from a small number of customers in the communications industry. This has been mitigated somewhat by the expansion of the Company’s customer base through recent acquisitions. However, the loss of any significant customer, delays in delivery or acceptance of any of our products by a customer, delays in the performance of services for a customer, or delays in collection of customer receivables could be materially harmful to the Company’s business, financial condition, results of operations and cash flows.

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(7) Notes Payable

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

	As of March 31, 2005
Long-term seller financed notes payable, interest at weighted average rate of 11.62%, due in varying quarterly principal installments beginning March 31, 2006, with final maturity on December 31, 2007	$	12,496
Short-term seller financed note payable, interest at 5.50%, due June 30, 2005	2,000
Debt issuance costs	(97		)
Total notes payable	14,399
Less current portion, net	(3,336		)
Long-term debt, excluding current installments, net	$	11,063

The Company entered into the long-term seller-financed notes payable (“Long-Term Notes”) on November 2, 2004, in conjunction with the acquisition of Tertio.  From the acquisition date through November 2, 2006, the Long-Term Notes bear interest at 11.0% per annum. From November 2, 2006 through the maturity date of December 31, 2007, the notes will bear interest at 14.0% per annum. For accounting purposes, interest is recognized using an effective rate of 11.62% for the term of the notes. Interest is accrued and added to the principal balance through December 31, 2005, and beginning March 31, 2006, interest is payable in cash on a quarterly basis in addition to the scheduled principal payments. Accrued interest of approximately $546,000 has been added to the principal balance of the Long-Term Notes from their inception through March 31, 2005. The Long-Term Notes payable may be prepaid at any time without penalty. Beginning in March 2005, if the Company’s quarterly cash balances exceed $7.0 million, the holder of the Long-Term Notes may require a prepayment on the note equal to the amount by which the quarterly cash balance exceeds $7.0 million. Based on its projections of cash balances, the Company believes that these additional payments will not be required through March 31, 2006. The scheduled principal payments on the Long-Term Notes are as follows (in thousands):

Payment date	Amount
March 31, 2006	$	1,340
June 30, 2006	3,110
December 31, 2006	1,430
March 31, 2007	1,870
June 30, 2007	3,110
December 31, 2007	1,636
	$	12,496

The Long-Term Notes have an effective interest rate of approximately 11.62% and a maturity date of December 31, 2007. In the 2005 proxy, the Company is asking stockholders to approve the exchange of the long-term notes into convertible notes. The outstanding principal balance on the notes plus accrued interest through May 16, 2005 will total approximately $12.7 million, and upon stockholder approval, would be exchanged for notes that would be convertible into approximately 3.8 million shares of the Company’s common stock at $3.296 per share. The convertible notes would bear interest at the Federal Applicable Rate, which is approximately 3.5% as of May 2005. In addition, all principal and unpaid interest would be due and payable on December 31, 2007 under the convertible notes. If the Company’s quarterly cash balances exceed $7.0 million the holder of the convertible note may require a prepayment on the note equal to the amount by which the quarterly cash balance exceeds $7.0 million. The notes are secured by substantially all of the assets of Evolving Systems and a pledge, subject to certain limitations, of the shares of its subsidiaries.

The Long-Term Notes subject the Company to certain affirmative and negative covenants, including a financial covenant indexed to the Company’s computation of EBITDA, as defined. The Company will be required to comply with such covenants beginning June 30, 2005.

Evolving Systems has agreed to convene a meeting of its stockholders to seek the approval from its stockholders of the exchange of the Long-Term Notes into convertible notes. The Company’s inability to convene the Initial Shareholders’ Meeting, as

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defined, by May 16, 2005, constitutes an event of default under this note. The Company believes it will be able to convene this meeting by the appointed time.

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

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

The promissory note payable, which was issued in conjunction with the acquisition of TSE, was paid in full on March 31, 2005 in accordance with the acquisition agreement. Interest expense of $427,000 was recognized during the three months ended March 31, 2005 related to notes payable issued in the TSE and Tertio acquisitions.

(8) Income Taxes

The Company recorded a net income tax benefit of $278,000 and $8,000 for the three months ended March 31, 2005 and 2004, respectively. The net benefit during the three months ended March 31, 2005 consists of current income tax expense of approximately $190,000 and a deferred tax benefit of $468,000 both of which are related to the Company’s UK-based operations.

In conjunction with the acquisition of Tertio, certain identifiable intangible assets were recorded.  Since the amortization of these identifiable intangibles is not deductible for income tax purposes, a long-term deferred tax liability of $4.6 million was established at the acquisition date for the expected difference between what would be expensed for financial reporting purposes and what would be deductible for income tax purposes. As of March 31, 2005, this deferred tax liability was $4.2 million. This deferred tax liability is carried on the books of the Company’s United Kingdom subsidiary, and has no impact on the Company’s ability to recover its U.S.-based deferred tax assets.

In conjunction with the acquisition of Tertio, future revenue under contracts in existence at the acquisition dates was reduced to an amount equal to the Company’s estimated costs to fulfill its obligations under the contracts plus a reasonable profit margin on the Company’s estimated fulfillment effort.  The resulting reduction of future revenue recorded for financial reporting purposes is not deductible for income tax purposes and thus, a current deferred tax liability of approximately $600,000 was established at the acquisition date. As of March 31, 2005, this deferred tax liability was $115,000.  Both of the aforementioned deferred tax liabilities will be recognized as a reduction of current income tax expense as the identifiable intangibles are amortized and the contract revenue is recognized.

As of March 31, 2005 and December 31, 2004, the Company continued to maintain a full valuation allowance on the domestic net deferred tax asset due to uncertainties related to the Company’s ability to utilize its domestic deferred tax assets, primarily consisting of certain net operating loss carryforwards, before they expire.  The Company’s assessment of this valuation allowance was made using all available evidence, both positive and negative.  In particular, the Company considered both its historical results and its projections of profitability for the reasonably foreseeable future periods.  The Company’s realization of its recorded net deferred tax assets is dependent on future taxable income and, therefore, the Company is not reasonably assured that such benefits will be realized.  The Company is required to reassess its conclusions regarding the realization of its deferred tax assets at each financial reporting date. It is reasonably possible that future evaluation could result in a conclusion that all or a portion of the valuation allowance is no longer necessary which could have a material impact on the Company’s results of operations and financial position.

(9) Restructuring and Other Expenses

In early 2002, management implemented a restructuring plan (the “Plan”) due to the downturn in the U.S. telecommunications industry, the Company’s sharp decline in revenue, the FCC’s delay in ruling on wireless number portability and other factors.  The Plan included workforce reductions, restructuring of the Company’s headquarters building lease, the closure of its satellite field offices and the write down of certain fixed assets, all of which were executed in 2002. At March 31, 2005 and December 31, 2004, the remaining accrual related to the closure of the satellite offices.

Closure of satellite offices.  The Company closed all of its satellite field offices during 2002.  Because the costs to sublease or terminate these lease commitments are based on estimates, the Company may incur additional costs related to the satellite office closures.  During the three months ended March 31, 2005 the Company recorded a recovery of $48,000 related to the closure of the satellite offices as the actual costs to close these facilities were less than its original estimate.  As of March 31, 2005 approximately $15,000 was included

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in accounts payable and accrued liabilities, and approximately $1,000 was included in long-term obligations, related to the closure of the satellite offices.

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

	Closure of Satellite Offices
Accrual balance December 31, 2004	$	79
1st quarter adjustments	(48		)
1st quarter cash payments, net	(15		)
Accrual balance March 31, 2005	$	16

(10) Segment Information

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

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

Segment information is as follows (in thousands):

	Three Months Ended March 31,
	2005			2004
Revenue
License fees and services	$	5,081		$	3,219
Customer support	4,757			2,547
	9,838			5,766
Segment profit, excluding depreciation and amortization
License fees and services	2,105			2,149
Customer support	2,726			884
	4,831			3,033
Other operating expenses	5,003			2,362
Depreciation and amortization	1,797			492
Restructuring and other	(48		)	—
Income (loss) from operations	$	(1,921	)	$	179

Geographic Regions

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

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	Three Months Ended March 31,
	2005		2004
Revenue
United States	$	5,016	$	5,766
Europe, Middle East, Africa and Asia	4,822		—
Total revenues	$	9,838	$	5,766

	As of March 31, 2005		As of December 31, 2004
Long-lived assets, net
United States	$	14,208	$	14,681
Europe, Middle East, Africa and Asia	43,185		45,573
Total long-lived assets	$	57,393	$	60,254

(11) Commitments and Contingencies

As permitted under Delaware law, the Company has agreements with its officers and directors under which it agrees to indemnify them for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in this capacity. The term of the indemnification period is indefinite. There is no limit on the amount of future payments the Company could be required to make under these indemnification agreements; however, the Company maintains Director and Officer insurance policies, as well as an Employment Practices Liability Insurance Policy, that may enable it to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, it believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of March 31, 2005 and December 31, 2004.

The Company enters into standard indemnification terms with its customers, as discussed below, in the ordinary course of business. Because the Company subcontracts some of the development of its deliverables under its customer contracts, the Company could be required to indemnify its customers for work performed by its subcontractors. Depending upon the nature of the customer indemnification, the potential amount of future payments the Company could be required to make under these indemnification agreements may be unlimited. The Company may be able to recover damages from a subcontractor if the indemnification to its customers results from the subcontractor’s failure to perform. To the extent the Company is unable to recover damages from its subcontractors; the Company could be required to reimburse the indemnified party for the full amount. The Company has never incurred costs to defend lawsuits or settle claims relating to indemnification arising out of its subcontractors’ failure to perform. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of March 31, 2005 and December 31, 2004.

The Company’s standard license agreements contain a warranty provision that the software will be free of material defects and will operate in accordance with the stated requirements.  The warranty provisions require the Company to cure any defects through any reasonable means.  To date, no claims under the warranty provisions have been brought to the Company’s attention.  The Company’s customers typically purchase annual maintenance services as well and as a matter of course, the Company provides fixes for known defects through the provision of such maintenance services.  As a result, the Company believes the estimated fair value of the warranty provisions in the license agreements in place with its customers is minimal.  Accordingly, the Company has not recorded liabilities for these warranty provisions as of March 31, 2005 and December 31, 2004.

The Company’s software arrangements generally include a product indemnification provision that will indemnify and defend a client in actions brought against the client that claim the Company’s products infringe upon a copyright, trade secret, or valid patent. Historically, the Company has not incurred any significant costs related to product indemnification claims. Accordingly, the Company has no liabilities recorded as of March 31, 2005 and December 31, 2004.

In relation to the acquisitions of Tertio, TSE and CMS, the Company agreed to indemnify certain parties of and from any losses, actions, claims, damages or liabilities (or actions in respect thereof) resulting from any claim raised by a third party. The Company does not believe that there will be any claims related to these indemnifications. Accordingly, the Company has no liabilities recorded for these agreements as of March 31, 2005 and December 31, 2004.

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

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(12) Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(Revised), “Share-Based Payment.” This statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Under the modified prospective method of adoption, SFAS No. 123(R) requires companies to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees and to record compensation cost for all stock awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. In addition, the Company is required to record compensation expense (as awards previously granted continue to vest) for the unvested portion of those awards that remain outstanding at the date of adoption. In accordance with adoption provisions released by the SEC, SFAS 123(R) will be effective for the Company on January 1, 2006. Management has not yet determined the impact that SFAS 123(R) will have on its financial position and results of operations, but expects that the stock incentive plans’ pro forma disclosure provides a reasonable measure of the expected annual impact.

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

OVERVIEW

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are based on current expectations, estimates, and projections about Evolving Systems’ industry, management’s beliefs, and certain assumptions made by management.  Forward-looking statements include our expectations regarding product, services, and maintenance revenue, annual savings associated with the organizational changes effected in prior years, and short- and long-term cash needs.  In some cases, words such as “anticipates”, expects”, “intends”, “plans”, “believes”, “estimates”, variations of these words, and similar expressions are intended to identify forward-looking statements.  The statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any forward-looking statements.  Risks and uncertainties of our business include those set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 under “Risk Factors” on pages 9 through 22 as well as additional risks described in this Form 10-Q.  Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.  However, readers should carefully review the risk factors set forth in other reports or documents the Company files from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

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

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

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Company Background

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

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

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application.  Our senior management has reviewed these critical accounting policies and related disclosures with our Audit Committee.  We have identified the policies below as critical to our business operations and the understanding of our results of operations.

•Revenue recognition

•Allowance for doubtful accounts

•Income taxes

•Intangible assets

•Business combinations

•Capitalization of internal software development costs

For a detailed discussion on the application of these accounting policies, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2004.

Recent Developments

Acquisition of TSE

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

Acquisition of Tertio

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

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

In January 2005, we changed Tertio’s name to Evolving Systems Limited (“Evolving Systems U.K.”). We also renamed the Provident activation product “Tertio”, to build on the strong recognition of the Tertio brand in the service activation market. The name changes are reflected in this filing where appropriate.

Expansion of Offshore Development Subsidiary

In February 2004, we formed Evolving Systems Networks India Private Limited, a wholly owned subsidiary of Evolving Systems (“Evolving Systems India”).  For several years, offshore development, through a subcontractor, had been a key aspect of our low-cost, accelerated-deployment strategy. With the formation of Evolving Systems India we now have more control and flexibility and lower costs than with our previous outsourced development, which used an offshore third party contractor. As of March 31, 2005, we had approximately 65 employees in our Indian office with plans for further expansion as demand dictates.

Customer Support Revenue Deferral

During the first quarter of 2004, we deferred the recognition of customer support revenue for one of our largest customers. Under this maintenance arrangement, the customer purchased professional services, specified licensed software upgrades and support services.  Since fair value of the undelivered specified licensed software upgrades did not exist, all of the revenue related to this contract was deferred until the specified licensed software upgrades were delivered and accepted by the customer.  During the third quarter of 2004, we delivered and obtained acceptance of the specified licensed software upgrades. Since vendor specific objective evidence of fair value existed for all of the remaining undelivered elements in the arrangement, we recognized the residual amount of revenue for all delivered elements at that time.  Our 2005 customer support contract with the same customer did not contain these additional accounting elements, and was not deferred. Accordingly, we recognized approximately $1.0 million of customer support revenue related to this contract in the first quarter of 2005.

Results of Operations

The following table presents the Company’s consolidated statements of operations reflected as a percentage of total revenue.

	Three Months Ended March 31,
	2005		2004
REVENUE
License fees and services	52	%	56	%
Customer support	48	%	44	%
Total revenue	100	%	100	%
COSTS OF REVENUE AND OPERATING EXPENSES
Costs of license fees and services, excluding depreciation and amortization	30	%	18	%
Costs of customer support, excluding depreciation and amortization	21	%	29	%
Sales and marketing	24	%	16	%
General and administrative	25	%	16	%
Product development	1	%	9	%
Depreciation	4	%	5	%
Amortization	15	%	4	%
Restructuring and other expenses	—		—
Total costs of revenue and operating expenses	120	%	97	%
Income (loss) from operations	(20	)%	3	%
Other (expense) income, net	(5	)%	1	%
Income (loss) before income taxes	(25	)%	4	%
Benefit from income taxes	3	%	—
Net income (loss)	(22	)%	4	%

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The three months ended March 31, 2005 compared to the three months ended March 31, 2004

Revenue

Revenue is comprised of license fees/services and customer support.  License fees and services revenue represent the fees we receive from the licensing of our software products and those services directly related to the delivery of the licensed product as well as integration services and time and materials work.  Customer support revenue includes annual support fees, recurring maintenance fees, maintenance upgrades and warranty fees.  Warranty services are typically bundled with a license sale and the related revenue, based on VSOE, is deferred and recognized ratably over the warranty period.  Total revenue was $9.8 million and $5.8 million for the three months ended March 31, 2005 and 2004, respectively. The following table presents the Company’s revenue by product group (in thousands).

	Three Months Ended March 31,
	2005		2004
Numbering solutions	$	3,790	$	5,101
Mediation	1,855		665
Activation	4,193		—
	$	9,838	$	5,766

License Fees and Services

License fees and services revenue increased 58% to $5.1 million for the three months ended March 31, 2005, from $3.2 million for the three months ended March 31, 2004.  The increase in license fees and services revenue is due to activation sales related to products acquired in the Tertio acquisition and increased mediation revenue, offset by lower revenue from our number portability and inventory products.  The decline in number portability and inventory products is due to industry consolidation and smaller overall license sales which is reflective of the maturity of the narrowband numbering solutions market in the U.S.

Customer Support

Customer support revenue increased 87% to $4.8 million for the three months ended March 31, 2005, from $2.5 million for the three months ended March 31, 2004.  The increase in customer support revenue during the first quarter of 2005 is due to increased revenue related to the support of activation products acquired in the Tertio acquisition as well as increased customer support revenue related to numbering solutions products, partially offset by price reductions in certain customer support contracts. Numbering solutions customer support revenue was lower in the first quarter of 2004 due to a large customer support contract that was deferred until the acceptance of specified upgrades, which occurred during the third quarter of 2004.

Costs of Revenue, Excluding Depreciation and Amortization

Costs of revenue, excluding depreciation and amortization, consist primarily of personnel costs, facilities costs, the costs of third-party software and all other direct costs associated with these personnel. Total costs of revenue, excluding depreciation and amortization, were $5.0 million and $2.7 million for the three months ended March 31, 2005 and 2004, respectively.

Costs of License Fees and Services, Excluding Depreciation and Amortization

Costs of license fees and services, excluding depreciation and amortization, were $3.0 million and $1.1 million for the three months ended March 31, 2005 and 2004, respectively.  The increase of $1.9 million, or 178%, is due to more projects in delivery as a result of the Tertio acquisition, as well as additional costs related to the U.K. development transition to our off-shore development model which utilizes Evolving Systems India. As a percentage of license fees and services revenue, costs of license fees and services, excluding depreciation and amortization, increased to 59% for the three months ended March 31, 2005 from 33% for the three months ended March 31, 2004.  The increase as a percentage of license fees and services revenues was due to the aforementioned increased costs related to the U.K. development transition to our off-shore development model and the increased costs from Evolving Systems U.K. and TSE which exceeded the increase in revenue during the period.

Costs of Customer Support, Excluding Depreciation and Amortization

Costs of customer support, excluding depreciation and amortization, were $2.0 million and $1.7 million for the three months ended March 31, 2005 and 2004, respectively.  The increase of $368,000, or 22%, is due to increased hours worked on customer support projects to support products acquired in the Tertio and TSE acquisitions.  As a percentage of customer support revenue, costs of customer support, excluding depreciation, decreased to 43% for the three months ended March 31, 2005 from 65% for the three months ended March 31, 2004.  The decrease as a percentage of customer support revenue is due to increased revenue in the first quarter of 2005 related to the aforementioned large support contract that was deferred during the first quarter of 2004, but the related costs were expensed during the period and increased revenue from Evolving Systems U.K. and TSE customer support contracts.

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Sales and Marketing

Sales and marketing expenses primarily consist of compensation costs, including bonuses and commissions, travel expenses, advertising and occupancy expenses.  Sales and marketing expenses were $2.4 million and $936,000 for the three months ended March 31, 2005 and 2004, respectively. The increase of $1.5 million, or 156%, is due to additional costs from Evolving Systems U.K. and TSE as well as increased expenses in the U.S. related to increased headcount for sales initiatives designed to penetrate new markets.  As a percentage of total revenue, sales and marketing expenses increased to 24% for the three months ended March 31, 2005 from 16% for the three months ended March 31, 2004.  The increase as a percentage of revenue is due to the combination of increased expenses from Evolving Systems U.K. and the increased expenses in the U.S., which exceeded the increase in revenue during the period.

General and Administrative

General and administrative expenses consist principally of employee related costs and professional fees for the following departments; facilities, finance, legal, human resources, and executive management.  General and administrative expenses were $2.5 million and $935,000 for the three months ended March 31, 2005 and 2004, respectively.  The increase of $1.6 million or 167%, is primarily due to costs from Evolving Systems U.K. as well as increased expenses in the U.S. related to significantly higher levels of professional fees.  As a percentage of total revenue, general and administrative expenses increased to 25% for the three months ended March 31, 2005 from 16% for the three months ended March 31, 2004.  The increase as a percentage of revenue is due to the combination of increased  expenses from Evolving Systems U.K. and increased professional fees in the U.S., which was greater than the increase in revenue during the period.

Product Development

Product development expenses consist primarily of employee related costs, offshore development subcontractor expenses and costs to start up our offshore Indian facility.  Product development expenses were $110,000 and $491,000 for the three months ended March 31, 2005 and 2004, respectively. The decrease of $381,000, or 78%, is due to decreased hours spent on development of our ServiceXpress™ toolkit, which ended in 2004. In addition, development in 2005 was principally focused on customer specific projects rather than general research and development efforts. Costs for customer-specific projects are reflected as costs of the related revenue.  As a percentage of revenue, product development expenses decreased to 1% for the three months ended March 31, 2005 from 9% for the three months ended March 31, 2004.  The decrease as a percentage of revenue is due to the decreased hours worked on product development versus customer specific projects and the increased revenue in the first quarter of 2005 compared to 2004.

Amortization

Amortization expense consists of amortization of identifiable intangibles from our acquisitions of CMS, TSE and Tertio. Amortization expense was $1.4 million and $218,000 for the three months ended March 31, 2005 and 2004, respectively.  The increase in amortization expense of $1.2 million or 552% is due to amortization related to identifiable intangibles from the acquisitions of Tertio and TSE.  As a percentage of revenue amortization expense increased to 15% for the three months ended March 31, 2005 from 4% for the three months ended March 31, 2004. The increase as a percentage of revenue is due to the aforementioned increase in expenses which was greater than the increase in revenue during the period.

Restructuring and Other Expense

During the three months ended March 31, 2005, we recorded a restructuring recovery of $48,000 in accordance with the Company’s restructuring plan, as follows:

•Closure of satellite offices.  We closed all of our satellite field offices during 2002.  Because the costs to sublease or terminate these lease commitments are based on estimates, we may incur additional costs related to the satellite office closures.  During the three months ended March 31, 2005 we recorded a recovery of $48,000 related to the closure of the satellite offices as the actual costs to close this facilities were less than our original estimate. As of March 31, 2005 approximately $15,000 was included in accounts payable and accrued liabilities, and approximately $1,000 was included in long-term obligations, related to the closure of the satellite offices.

Other Income (Expense), Net

Other income (expense), net, was ($505,000) and $57,000 for the three months ended March 31, 2005 and 2004, respectively.  The expense during 2005 is primarily due to interest expense from the notes payable issued in the acquisitions of TSE and Tertio.

Income Taxes

We recorded net income tax benefits of $278,000 and $8,000 for the three months ended March 31, 2005 and 2004, respectively.  The net benefit during the three months ended March 31, 2005 consists of current income tax expense of approximately $190,000 and a deferred tax benefit of $468,000 both of which are related to the Company’s UK-based operations. This represents an

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11% effective tax rate, reflecting the blend of the estimated effective tax rate of our domestic pretax income of approximately 2% and the estimated effective tax rate related to our U.K. pretax income of approximately 30%.

In conjunction with the acquisition of Tertio, certain identifiable intangible assets were recorded.  Since the amortization of these identifiable intangibles is not deductible for income tax purposes, a long-term deferred tax liability of $4.6 million was established at the acquisition date for the expected difference between what would be expensed for financial reporting purposes and what would be deductible for income tax purposes. As of March 31, 2005, this deferred tax liability was $4.2 million. This deferred tax liability is carried on the books of the Company’s United Kingdom subsidiary, and has no impact on the Company’s ability to recover its U.S.-based deferred tax assets.

In conjunction with the acquisition of Tertio, future revenue under contracts in existence at the acquisition dates was reduced to an amount equal to the Company’s estimated costs to fulfill its obligations under the contracts plus a reasonable profit margin on the Company’s estimated fulfillment effort.  The resulting reduction of future revenue recorded for financial reporting purposes is not deductible for income tax purposes and thus, a current deferred tax liability of approximately $600,000 was established at the acquisition date. As of March 31, 2005, this deferred tax liability was $115,000.  Both of the aforementioned deferred tax liabilities will be recognized as a reduction of current income tax expense as the identifiable intangibles are amortized and the contract revenue is recognized.

Liquidity and Capital Resources

We have historically financed operations through cash flows from operations and equity transactions.  At March 31, 2005, our principal source of liquidity was $6.5 million in cash and cash equivalents.

Net cash provided by operating activities was $1.5 million in the three months ended March 31, 2005. The main factors in the cash provided by operating activities for the three months ended March 31, 2005 were decreases in accounts receivables of $2.7 million and unbilled work-in-progress of $394,000, interest expense added to debt principal of $317,000 and depreciation and amortization of $1.8 million. Offsetting increases to cash flows from operating activities for the three months ended March 31, 2005 was the net loss of $2.1 million, the deferred foreign income tax benefit of $465,000 and the decreases in accounts payable and accrued liabilities of $553,000 and unearned income of $441,000.

Net cash provided by operating activities was $3.6 million for the three months ended March 31, 2004.  The cash generated from operating activities is mainly due to collections of our contract receivables.  The cash flow generated from the collection of contract receivables was partially offset by a decrease in our unearned revenue balance due to recognition of revenue on our annual customer support agreements and delivery of licensed software and services.

Net cash used by investing activities during the three months ended March 31, 2005 was $823,000. Cash used by investing activities for the three months ended March 31, 2005 consisted of additional consideration paid to the sellers of TSE and Tertio of $676,000 and capital expenditures primarily related to the Tertio integration of $158,000.

Net cash used by investing activities during the three months ended March 31, 2004 of $527,000 was primarily due to capital expenditures for internal hardware that improved performance and reliability of our product development environment.

Financing activities used $5.5 million in cash for the three months ended March 31, 2005. During the first quarter of 2005, we made payments of $5.5 million on notes payable and an acquired dividend payable assumed in the Tertio acquisition. We received proceeds of $56,000 during the three months ended March 31, 2005, from the issuance of stock related to our stock option and employee stock purchase plans.

Financing activities provided $203,000 for the three months ended March 31, 2004, related to the exercise of approximately 100,000 stock options.

Working capital (deficit) at March 31, 2005 was ($4.8) million compared to ($3.3) million at December 31, 2004. As previously mentioned, we acquired two companies, TSE and Tertio, during the fourth quarter of 2004. We made payments of approximately $6.2 million during the three months ended March 31, 2005 related to notes payable, an acquired dividend obligation assumed and contingent consideration related to the TSE and Tertio acquisitions. The acquisition of Tertio also includes the issuance of long-term seller-financed notes (“Long-Term Notes”) of approximately $11.9 million of which $1.3 million is due within the next twelve months.

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

•Our cash and cash equivalents balance at March 31, 2005 of $6.5 million.

•Our ability to generate positive cash flows from operations. During 2003, 2004 and the three months ended March 31, 2005 we generated cash flows from operations of $6.9 million, $4.3 million and $1.5 million, respectively.

•Our backlog of approximately $16.9 million, including $4.7 million in license fees and services and $12.2 million in customer support at March 31, 2005.

•Our cash forecast indicates that we will have sufficient liquidity to cover anticipated operating costs as well as debt service payments.

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

Notwithstanding these assessments, if the timing of cash generated from operations is insufficient to satisfy our liquidity requirements, or an unexpected adverse event, or combination of events, occurs that is beyond management's control, we may require access to additional funds to support our business objectives through a credit facility or possibly the issuance of additional equity. There can be no assurance that additional financing will be available at all or that if available, such financing will be obtainable on terms favorable to us and would not be dilutive.

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

Payment date	Amount
March 31, 2006	$	1,340
June 30, 2006	3,110
December 31, 2006	1,430
March 31, 2007	1,870
June 30, 2007	3,110
December 31, 2007	1,636
	$	12,496

In the upcoming annual stockholders’ meeting we are asking stockholders to approve the exchange of the Long-Term Notes into convertible notes (“Convertible Notes”). The currently outstanding notes plus accrued interest through May 16, 2005 totaling approximately $12.7 million, upon stockholder approval, would be exchanged for notes that could be convertible into approximately 3.8 million shares of our common stock at $3.296 per share. The Convertible Notes would bear interest at the Federal Applicable Rate, which is currently approximately 3.5%. In addition, all principal and unpaid interest would be due and payable on December 31, 2007 under such Convertible Notes. If we do not obtain stockholder approval to permit holders to exchange some or all of the Long-Term Notes into Convertible Notes, and such notes are not converted, we will be required to service the full amount of the Long-Term Notes and related interest payments. Our inability to convene the Initial Shareholders’ Meeting, as defined, by May 16, 2005, constitutes an event of default under this note. We believe we will be able to convene this meeting by the appointed time.

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The Long-Term Notes subject us to certain affirmative and negative covenants, including a financial covenant indexed to our computation of EBITDA, as defined.  We will be required to comply with such covenants beginning June 30, 2005.

Factors That Might Affect Operating Results

These results should be read in conjunction with the risk factors defined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Statements contained in this Quarterly Report with respect to future revenue and expenses are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may differ. Among the factors that could cause actual results to differ are those described below and in more detail in our Annual Report on Form 10-K.

Risks related to Tertio Acquisition

We are subject to financial and operating risks associated with international sales and services.

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

• unexpected changes in, or impositions of, legislative or regulatory requirements;

• difficulties in maintaining effective controls over financial reporting across geographically dispersed entities, including those related to different business practices in foreign countries;

• internal control related risks of operating a foreign subsidiary;

• changes in demand of our products and services due to the perception that we are an “American” company in countries where the United States’ foreign policy is not viewed favorably;

• fluctuating exchange rates, tariffs, currency repatriation restrictions and other barriers;

• difficulties in staffing and managing foreign subsidiary operations;

• import or export restrictions;

• greater difficulties in accounts receivable collection and longer payment cycles;

• potentially adverse tax consequences and additional tax considerations such as foreign withholding taxes and payment of value added tax (“VAT”);

• potential hostilities and changes in diplomatic and trade relationships;

• changes in a country’s economic or political conditions; and

• differing customer and/or technology standards requirements.

Our stockholders will be diluted by the conversion of outstanding Series B Convertible Preferred Stock and, if approved by our stockholders, the exchange of the long-term notes into convertible notes.

In consideration for our acquisition of Tertio, we made a cash payment of $11.0 million, issued 966,666 shares of Series B Convertible Preferred Stock (“Series B Preferred Stock”), issued a short-term secured note with a principal amount of $4.0 million bearing interest at 5.5% per annum and issued Long-term Notes with an aggregate principal amount of approximately $11.9 million bearing interest initially at 11% per annum (increasing to 14% on the second anniversary).  Subject to stockholder approval, the holders of the Long-Term Notes have elected to exchange these notes for convertible notes, convertible into shares of our common stock, and bearing interest at the applicable federal rate at the time the Convertible Notes are issued, currently about 3.5%.

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

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

The holders of our Series B Preferred Stock have preferential rights that may be adverse to holders of our common stock.

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

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

The indebtedness incurred in connection with the Tertio acquisition may limit our ability to grow and could adversely affect our financial condition.

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

•make it difficult for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;

•limit our flexibility in planning for, or reacting to changes in, our business; and

•make us more vulnerable in the event of a downturn in our business.

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

Nasdaq Rule 4350(i)(1)(C) requires that a company whose stock is traded on Nasdaq obtain stockholder approval in connection with the acquisition of another company involving the issuance or potential issuance of common stock equal to twenty percent or more of its common stock.  The issuance of the Series B Preferred Stock alone, does not exceed this twenty percent

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

The terms and conditions of the Series B Preferred Stock and the indebtedness incurred in connection with the Tertio acquisition may have an adverse impact on our results of operations and financial performance.

There is a potential that the Company will incur additional charges in the future related to various provisions of the financial instruments issued in connection with the acquisition of Tertio.  Subject to stockholder approval and election by the note holders, the Long-Term Notes initially bearing interest at 11% per annum could be exchanged for a combination (based on the allocation election of the note holders) of convertible notes bearing interest at the applicable federal rate at the time the convertible notes are issued (currently about 3.5%), and fixed rate, non-convertible notes bearing interest initially at 9% per annum. The holders of the Long-Term Notes have elected to exchange the full principal of those notes, and accrued interest, for Convertible Notes. Such exchange is dependent upon the approval by the Company’s stockholders to increase the number of authorized shares and to approve such exchange.  When and if such exchange occurs, the extinguishment of the Long-Term Notes and the issuance of the Convertible Notes will be recorded at their fair value, which could result in a charge reducing our income which in turn could negatively affect our stock price.  Fair value assessments are dependent upon market factors in existence at the time of measurement.

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

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

Certain provisions of the notes payable issued in conjunction with the Tertio acquisition call for the acceleration of payments if certain covenants are breached or cash flow thresholds are achieved.

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

•Convene a stockholders’ meeting on or before May 16, 2005 to request approval of (a) the exchange of the Long-Term Notes for Convertible Notes and (b) an amendment to our Certificate of Incorporation increasing the authorized common stock;

•comply with applicable laws and licensing requirements;

•file and pay all applicable taxes as they become due; and

•operate in the ordinary course of business.

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

•liquidate, dissolve or wind-up operations;

•pay any dividends or make prepayments on any indebtedness;

•acquire any other businesses or entities or make investments in third parties;

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•sell or transfer a substantial portion of the Company’s assets;

•incur additional indebtedness or permit any liens on the Company’s assets;

•make capital expenditures beyond established thresholds; or

•take certain other operational actions.

The covenants may limit the Company’s flexibility in planning for, or reacting to changes in, its business.  Failure to comply with such covenants, if not waived, could result in the acceleration of the notes. If the Company is required to pay the notes on an accelerated basis, it would have a significant adverse impact on the Company’s liquidity and financial condition and could cause us to incur additional indebtedness.

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

Risks Related to Our Business

Fluctuations in Quarterly Results of Operations

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

•the size of new contracts and when the related revenue is recognized;

•our rate of progress under our contracts;

•acquisition and integration costs;

•the timing of customer and market acceptance of our products and service offerings;

•our ability to effectively manage offshore software development in India;

•actual or anticipated changes in government laws and regulations related to the telecommunications market;

•judicial or administrative actions about these laws or regulations;

•the nature and pace of enforcement of the Telecom Act as well as other similar foreign statutes, regulations and acts;

•product lifecycles;

•the mix of products and services sold;

•changes in demand for our products and services;

•the timing of third-party contractors’ delivery of software and hardware;

•budgeting cycles of our customers;

•changes in the terms and rates related to the renewal of support agreements;

•level and timing of expenses for product development and sales, general and administrative expenses;

•competition by existing and emerging competitors in the communications software markets;

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•our success in developing and selling new products, controlling cost, attracting and retaining qualified personnel and expanding our sales and customer focused programs;

•software defects and other product quality problems;

•changes in our strategy;

•the extent of industry consolidation;

•foreign exchange fluctuations; and

•general economic conditions.

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

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

Liquidity

Our cash forecast indicates that we will have sufficient liquidity to cover anticipated operating costs as well as debt service payments, but to the extent we are unable to invoice and collect in a timely manner under our customer revenue arrangements, or an unexpected adverse event, or combination of events, occurs that is beyond management's control, it could have an adverse impact on our ability to meet our intended business objectives. Therefore, if the timing of cash generated from operations is insufficient to satisfy our liquidity requirements, we may require access to additional funds to support our business objectives through a credit facility or possibly the issuance of additional equity. There can be no assurance that additional financing will be available at all or that if available, such financing will be obtainable on terms favorable to us and would not be dilutive.

Regulatory Uncertainties

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

Reliance on Significant Customers

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

Integration of Tertio, TSE or Future Acquisitions

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

• we may have difficulty assimilating the operations and personnel of the acquired company;

• we may have difficulty effectively integrating the acquired technologies or products with our current products and technologies;

• we may incur unanticipated liabilities that are not covered by our indemnification rights under the applicable acquisition agreements;

• we may have difficulty in maintaining controls, procedures and policies during the transition and integration, as well as successfully completing in 2005 management’s assessment of its internal controls over financial reporting as required by Section 404(a) of the Sarbanes-Oxley Act and our independent registered public accounting firm’s examination thereon as required by Section 404(b) of the Sarbanes-Oxley Act;

• customers of the acquired company may decide not to renew their contracts with the combined entity and other ongoing business may be disrupted by transition and integration issues;

• we may not be successful in cross-selling products between Evolving Systems’ and the acquired companies’ customer bases;

• the financial and strategic goals for the acquired and combined businesses may not be achieved;

• due diligence processes may have failed to identify significant issues with product quality, intellectual property ownership, product architecture, legal and financial contingencies, and product development;

• significant impairment charges may be recorded if intangible assets, including goodwill, acquired in business combinations are determined to be unrecoverable or impaired;

• acquisitions and their subsequent integration require considerable time and commitment of management, which can distract management from day-to-day operations and result in additional costs which reduce profits;

• we do not know if we have or will be able to identify and purchase assets and/or companies that will complement our business;

• our stockholders may experience additional dilution of their interests in Evolving Systems as a result of the issuance of convertible preferred stock, other convertible instruments and/or common stock in connection with our acquisitions;

• certain management and other employees of Tertio and TSE, or future acquisitions, may be critical to the success of the acquired company, and we do not know if we will be successful in retaining these individuals in the combined companies; and

• the price of our stock may go down as stockholders who received stock in the CMS transaction, and those receiving stock in connection with the Tertio transaction, or any future transaction, elect to sell their shares, or the marketplace does not favorably view the transaction.

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

Lengthy Implementation Process; Customer Acceptance of Our Solutions, Risk of Software Defects

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

The majority of our existing contracts provide for acceptance testing by the customer, which can be a lengthy process. Unanticipated difficulties or delays in the customer acceptance process could result in higher costs, delayed payments, and deferral of

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revenue recognition. In addition, if our software contains defects or we otherwise fail to satisfy acceptance criteria within prescribed times, the customer may be entitled to cancel its contract and receive a refund of all or a portion of amounts paid or other amounts as damages, which could exceed related contract revenue and which could result in a future charge to earnings. Any failure or delay in achieving final acceptance of our software and services could have a material harmful effect on our business, financial condition, results of operations and cash flows.

Lengthy Sales Cycle

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

Consolidations and Budget Cutbacks in the Industry

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

Fixed-Price Contracts

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

Rapid Technological Change; Risks Associated with New Versions and New Products

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

Mature Market for Number Portability Products

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

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Risks Associated with Managing Expense

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

Risks Associated with Offshore Development

In February 2004, we formed Evolving Systems India, a wholly owned subsidiary of Evolving Systems, to transfer the services provided by our Indian subcontractor, Infosys, to Evolving Systems India.  If Evolving Systems India fails to provide quality software in a timely fashion, this could negatively affect our ability to satisfy our customer contracts.  Furthermore, political changes and uncertainties in India could negatively impact the business climate there.  As a result, we may be unable to satisfactorily perform our customer contracts and our business, financial condition and results of operations could be materially harmed.

Competition

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

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

•how well we respond to our customers’ needs;

•the quality and reliability of our products and services and our competitors’ products and services;

•the price for our products and services, as well as the price for our competitors’ products and services;

•how well we manage our projects;

•our technical subject matter expertise;

•the quality of our customer service and support;

•the emergence of new industry standards;

•the development of technical innovations;

•our ability to attract and retain qualified personnel;

•regulatory changes; and

•general market and economic conditions.

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

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successfully with existing and new competitors would materially harm our business, financial condition, results of operations and cash flows.

Risks Associated with Recruiting and Retaining Personnel

Our ability to manage future expansion, if any, effectively will require us to attract, train, motivate and manage new employees successfully, to integrate new management and employees into our overall operations and to continue to improve our operations, financial and management systems. There can be no assurance that we will be able to retain personnel or to hire additional personnel on a timely basis, if at all. Because of the complexity of our software solutions, a significant time lag exists between the hiring date of technical and sales personnel and the time when they become fully productive. We have at times experienced difficulty in recruiting and retaining such personnel. In addition, our stock option plan terminates on January 19, 2006 and under Nasdaq rules we will be required to obtain stockholder approval to establish a new equity compensation plan. If we are unsuccessful in obtaining this approval, our ability to attract or retain employee may be harmed. Our failure to retain personnel or to hire qualified personnel on a timely basis could materially harm our business, financial condition, results of operations and cash flows.

Product Liability

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

Protection of Intellectual Property

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

Risks of Infringement

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

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

•Such open source software may be made available under a license such as the GNU General Public License (“GPL”) or GNU Lesser General Public License (“LGPL”) which imposes certain obligations on us in the event we were to distribute derivative works based on the open source software.  These obligations may require us to make source code for these derivative works available to the public or license the derivative works under a particular type of open source software license, rather than the license terms we customarily use to protect our software.

•There is little or no legal precedent for interpreting the terms of certain of these open source licenses, including the terms addressing the extent to which a derivative work based on open source software may be subject to these licenses.  We

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believe we have complied with our obligations under the various applicable open source licenses.  However, if the owner of any open source software were to successfully establish that we had not complied with the terms of an open source license for a particular derivative work based on that open source software, we may be forced to release the source code for that derivative work to the public or cease distribution of that work.

•We generally prohibit the combination of our proprietary software with open source software.  Despite these restrictions, parties may combine our proprietary software with open source software without our authorization, in which case such parties could be forced to release to the public the source code of our proprietary software.

International Terrorism

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

Possible Volatility of Stock Price

The trading price of our common stock has been subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors, merger and acquisition activity, changes in financial estimates by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to us, general stock market and economic considerations and other events or factors. This may continue in the future.

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

Effects of Future Sales of Our Common Stock in the Public Market

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

Reporting Requirements

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

We Have Never Paid Cash Dividends

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

Certain Anti-Takeover Provisions

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

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

Based on all of the foregoing, we believe it is possible for future revenue, expenses and operating results to vary significantly from quarter to quarter. As a result, quarter-to-quarter comparisons of operating results are not necessarily meaningful or indicative of future performance. Furthermore, we believe that it is possible that in any given quarter, including the current quarter, our operating results could differ from the expectations of public market analysts or investors. In such event, or in the event that adverse conditions prevail, or are perceived to prevail, with respect to our business or generally, the market price of our common stock would likely go down.

ITEM  3.  QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES

Foreign Exchange Risk

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

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

Interest Rate Risk

In the ordinary course of business we are exposed to the risk of changes in interest rates.  Our cash balances are subject to interest rate fluctuations and as such, interest income amounts may fluctuate from current levels.

For additional information about Evolving Systems’ risk factors see Evolving Systems’ Annual Report on Form 10-K for the year ended December 31, 2004.

ITEM 4.  CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. As of March 31, 2005, the end of the period covered by this report, we evaluated, under the supervision of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 are recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

(b) Changes in internal controls. During the period covered by this report, there were no significant changes in our internal

controls or in other factors that could significantly affect our internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time we are involved in various legal proceedings arising in the normal course of business operations.We are currently not aware of any legal proceedings that would have a material effect on our business, financial condition or results of operations.

ITEM 2. CHANGES IN SECURITIES

None

ITEM 3. DEFAULTS ON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

As we reported on our Form 8-K filed on May 3, 2005, Evolving Systems Limited, a wholly-owned subsidiary of Evolving Systems Holdings Limited, which is our wholly-owned subsidiary, entered into a lease agreement (the “Lease”) with Balfour Beatty PLC on March 30, 2005 for office space in London, England.  A copy of the Lease is attached hereto as Exhibit 10.1.

ITEM 6. EXHIBITS

(a)Exhibits

Exhibit 10.1 – Lease agreement dated as of March 30, 2005, by and between Evolving Systems Limited and Balfour Beatty PLC

Exhibit 31.1 - Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 - Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 - Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

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SIGNATURE

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

Date: May 16, 2005	/s/ BRIAN R. ERVINE
	Brian R. Ervine
	Executive Vice President, Chief
	Financial and Administrative Officer,
	Treasurer and Assistant Secretary
	(Principal Financial and Accounting Officer)

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EX-10.1

Exhibit 10.1

DATED 30 March 2005

(1)BALFOUR BEATTY PLC

(2)EVOLVING SYSTEMS LIMITED (FORMERLY CALLED TERTIO TELECOMS LIMITED)

LEASE

of

Premises on the

Fourth Floor

Block 1

Angel Square

City Road

London EC1

CONTENTS

Clause
1.	DEFINITIONS AND INTERPRETATION
2.	DEMISE
3.	TENANT’S COVENANTS
3.1	Payment of rents
3.2	Rent Review
3.3	Outgoings
3.4	Statutory Services
3.5	Value Added Tax
3.6	Landlord’s costs on breach
3.7	Costs of Distress
3.8	Costs of consents
3.9	Tenant’s repair and redecoration
3.10	To decorate
3.11	Repairs after Landlord’s notice
3.12	Yielding up
3.13	Waste and alterations
3.14	Items used in common
3.15	To view
3.16	To inspect
3.17	To permit entry to repair
3.18	Statutory obligations
3.19	Planning
3.20	Advertisements and display of goods
3.21	Compliance with Landlord’s regulations
3.22	Compliance with fire regulations
3.23	To observe covenants
3.24	User
3.25	Prohibitions on use
3.26	Obstruction
3.27	Refuse disposal
3.28	Encroachments
3.29	Indemnity for the Landlord
3.30	Assignment and Underletting
3.31	Registration
3.32	Covenants in the Superior Lease
3.33	Information

3.34	Keyholders
3.35	New guarantor
3.36	Landlord’s rights
3.37	2002 Act
4.	INSURANCE
4.1	Landlord to insure
4.2	Landlord to produce evidence of insurance
4.3	Destruction of the Building
4.4	Option to determine by the Landlord or the Tenant
4.5	Frustration
4.6	Payment of insurance monies refused/excess
4.7	Benefit of other insurances
4.8	Insurance becoming void
4.9	Requirements of insurers
4.10	Notice by Tenant
4.11	Cesser of rent
5.	LANDLORD’S COVENANTS
5.1	Quiet enjoyment
5.2	Services
5.3	Superior lease
6.	PROVISOS AND AGREEMENTS
6.1	Re-entry
6.2	Exclusion of Landlord’s liability
6.3	Landlord not responsible for goods
6.4	Disputes
6.5	Notices
6.6	Value Added Tax
6.7	Exclusion of statutory compensation
6.8	No rights of light etc
6.9	Landlord free to develop
6.10	Landlord free to build into Structure
6.11	Exclusion of use warranty
6.12	Entire understanding
6.13	Representations
6.14	Licences etc under hand
6.15	Tenant’s property
6.16	Enforcement of Landlord’s covenants
6.17	Entry for Distress
6.18	Acceptance of rent no waiver

6.19	Interference with easements
6.20	Rights easements etc
6.21	Jurisdiction
6.22	Covenants relating to Adjoining or Neighbouring Premises
6.23	Effect of waiver
6.24	Perpetuity period
7.	GUARANTOR’S COVENANTS
7.1	To pay observe and perform
7.2	To take lease following disclaimer
7.3	To make payments following disclaimer
7.4	Tenant’s Covenants
7.5	AGA
8.	DETERMINATION
9.	LANDLORD AND TENANT ACT 1954
10.	CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999

SCHEDULE 1  -  TENANT’S RIGHTS

SCHEDULE 2  -  EXCEPTIONS AND RESERVATIONS TO THE LANDLORD

SCHEDULE 3  -  DESCRIPTION OF DOCUMENTS CONTAINING MATTERS SUBJECT
TO WHICH THE DEMISE IS MADE

SCHEDULE 4  -  PROVISIONS RELATING TO THE SERVICE CHARGE

PART 1  -  THE ESTATE CHARGE

PART 2  -  THE BLOCK CHARGE

PART 3  -  CAR PARKING CHARGE

PART 4  -  SERVICE CHARGE

SCHEDULE 5  -  THE SUPERIOR LEASE

THIS LEASE is made 30 March 2005

BETWEEN

(1)BALFOUR BEATTY PLC a company incorporated in England under number 395826 whose registered office is at 130 Wilton Road London SW1V 1LQ (“the Landlord” which expression where appropriate includes any estate owner for the time being of the immediate reversion to this lease)

(2)EVOLVING SYSTEMS LIMITED (FORMERLY CALLED TERTIO TELECOMS LIMITED) a company incorporated in England under number 02325854 whose registered office is at 1 Angel Square Torrens Street London EC1V 1PL (“the Tenant” which expression where appropriate includes any person deriving title through or under the Tenant)

1.DEFINITIONS AND INTERPRETATION

The Landlord and the Tenant agree that this lease shall be subject to the following:

1.1In this lease all words shown in inverted commas in clause 1.2 are to be defined terms for the purposes of this lease and any reference in this lease to a clause paragraph or a schedule means a reference to a clause paragraph or schedule of this lease

1.2Definitions

“Adjoining or Neighbouring Premises”	the Estate the Car Park the Building the buildings known as Blocks 2 and 3 Angel Square and all other property adjoining or neighbouring the Building in which the Landlord or a company in the same group as the Landlord or any person holding on trust for the Landlord has a freehold or leasehold interest
“Block Charge”	17.3% (or such other percentage as the Landlord shall from time to time reasonably determine) of the expenses incurred in each Service Charge Year in connection with the provision of the Services set out in part 2 of schedule 4 hereto
“Building”	the premises known as Block 1 Angel Square the location of which is shown for identification purposes only on the Lease Plan numbered 1 and each and every part thereof together with the appurtenances thereto belonging together with all additions alterations and improvements thereto which may be carried out during the Term or reinstatements thereof or building(s) substituted therefor and shall also include all landlord’s fixtures and fittings from time to time in and about the same but for the avoidance of doubt excluding the Car Park
“Car Park”	the area shown for identification purposes edged green on the Lease Plans numbered 2 and 3 from and including at basement level the surface finishes to the basement slab up to but not including the basement slab or the underside of the slab at Lower Ground Floor Level

“Car Parking Charge”	8% (or such other percentage as the Landlord shall from time to time reasonably determine on the basis of the number of the car parking spaces which the Tenant is entitled to occupy bears to the total number of car parking spaces within the car park) of the expenses incurred in each Service Charge Year in connection with the provision of the Services set out in part 3 of schedule 4 hereto
“Common Accessways”	the accessways courtyards and footpaths shown hatched brown on the Lease Plans
“Common Parts”	any entrances entrance halls lifts (including lift shafts) stairs passage ways landings lavatory accommodation cleaners’ cupboards boiler rooms and other parts of the Building available or intended to be available either for use in common by or for the provision of services to two or more of the Landlord’s tenants of the Building or their premises
“Conduits”	all pipes wires drains cables ducts and mains and other conducting media of any kind
“Demised Premises”	ALL THOSE premises situate on level four of the Building shown edged red on Lease Plan numbered 5 together with:
	(a)the internal faces of the walls and columns which enclose the said premises including the plaster paint paper and other decorative finishes thereof
	(b)the entirety of all walls and columns within the said premises (other than those which are structural or load bearing) and one half of the thickness of any non structural walls dividing the said premises from other parts of the Building and the internal faces of all structural or load bearing walls and columns within the said premises including the plaster paint paper and other decorative finishes thereof
	(c)the screed and finish of the floors within the said premises and all carpets therein
	(d)the internal faces of the ceilings of the said premises including the plaster paint paper and other decorative finishes thereof and all suspended ceilings and light fittings therein
	(e)all doors door furniture door frames and glass in such doors of or within the said premises
	(f)all sanitary and hot and cold water apparatus and the radiators within the said premises

2

	(g)all Conduits in or upon over or under and exclusively serving the said premises save those of statutory undertakers
	(h)all landlord’s fixtures and fittings (including any air-conditioning units machinery and apparatus and any fire detection fire alarm fire precaution and sprinkler systems) which may at any time be in or upon the said premises
	but excluding the Structure and all window frames window furniture and sash cords (if any) and all glass in the windows within the said premises
“Estate”	the development known as Angel Square City Road London EC1 of which the Demised Premises form part and shown for the purpose of identification only edged orange on the Lease Plans but excluding the Building and the buildings known as Blocks 2 and 3
“Estate Charge”	6.43% (or such other percentage as the Landlord shall from time to time reasonably determine) of the expenses incurred in each Service Charge Year in connection with the provision of the Services set out in part 1 of schedule 4 hereto
“Higher Rate Interest”	where specified in this lease as applying to any sum interest upon such sum calculated on a daily basis at the rate of four per centum per annum above the Base Rate from time to time of Barclays Bank PLC (or such other equivalent rate as the Landlord may notify to the Tenant in writing) from the date on which such sum falls due until the date on which such sum is paid and whether before or after judgment
“Insurance Rent”	a due proportion (to be properly determined by the Landlord as being attributable to the Demised Premises) of all sums (including any insurance valuation fees) which the Landlord may from time to time pay for insuring and keeping insured the Building against loss or damage by the Insured Risks and the other matters referred to in clause 4 of this lease such rent to be paid within ten days of written demand therefor
“Insured Risks”	fire storm tempest flood earthquake aircraft and other aerial devices and articles dropped therefrom riot and civil commotion and malicious damage bursting or overflowing of water tanks apparatus or pipes and impact and such other risks as the Landlord or any superior landlord may in its absolute discretion from time to time determine (but does not include terrorist activities unless actually insured against by the Landlord) subject to such exclusions excesses and limitations as may be imposed by the insurers
“Lease Plans”	the plans annexed hereto

3

“Lower Rate Interest”	where specified in this lease as applying to any sum interest upon such sum calculated on a daily basis at the Base Rate from time to time of Barclays Bank PLC (or such other equivalent rate as the Landlord may notify to the Tenant in writing) whether before or after judgment
“Permitted Part”	any part of the Demised Premises which is capable (having regard to its location and extent and to the rights intended to be appurtenant thereto) of providing self-contained accommodation and which the Landlord has first approved in writing (such approval not to be unreasonably withheld or delayed)
“Planning Acts”	the Town and Country Planning Act 1990 and any other statutes relating to town and country planning in force from time to time
“Service Charge”	the total of the Block Charge and the Estate Charge and the Car Parking Charge as hereinafter defined
“Service Charge Year”	every year of the Term ending on 24 December or such other date as the Landlord may notify to the Tenant in writing
“Services”	the services set out in parts 1 2 and 3 of schedule 4 to this lease
“Structure”	the exterior and the structure of the Building including its foundations roof (including roof structure and coverings) external walls and internal load-bearing walls and its main columns beams timbers slabs or frame and all window frames furniture and sash cords (if any) and all glass in the windows
“Superior Lease”	the lease and all other supplemental deeds and documents brief particulars of which are set out in schedule 5
“Term”	a term of years from and including 30 March 2005 and expiring on 24 March 2015 subject to the right of earlier determination set out in this lease
“Value Added Tax”	value added tax and any other tax of a like nature
“1927 Act”	the Landlord and Tenant Act 1927 and all statutes regulations and orders included by virtue of clause 1.3.13
“1954 Act”	the Landlord and Tenant Act 1954 and all statutes regulations and orders included by virtue of clause 1.3.13
“1995 Act”	the Landlord and Tenant (Covenants) Act 1995 and all statutes regulations and orders included by virtue of clause 1.3.13

4

“2002 Act”	the Land Registration Act 2002
“2003 Rules”	the Land Registration Rules 2003 or any statutory modification or replacement thereof

1.3Interpretation

1.3.1Unless otherwise specified any reference in this lease to any statute by-law directive order or other legislation is to be deemed to include reference to any amendment or re-enactment of the same

1.3.2The index and clause headings in this lease are for ease of reference only and have no other significance

1.3.3Any reference in this lease to the end or expiration of the Term shall mean the expiration or earlier termination of this lease for whatever reason and references to ‘the last year of the Term’ include the last year of the Term if the Term shall determine otherwise than by effluxion of time

1.3.4Except in connection with the review of rent where provision is made in this lease for arbitration in respect of any dispute between the Tenant and any other person as to their respective rights or obligations in connection with any matter relating to this lease such matter shall be referred (if the parties are unable to agree within two months of the dispute arising) to a single arbitrator (if the parties are able to agree on one) or (if they are not able so to agree) to two arbitrators one to be appointed by each party or their umpire in accordance with the provisions of the Arbitration Act 1996

1.3.5There shall be implied in every Tenant’s obligation in this lease a covenant by the Tenant (as far as it is able) to prevent any person under its control from breaking such obligation

1.3.6Unless otherwise provided any consent or approval required from the Landlord under this lease shall be given at the Landlord’s absolute discretion and subject to any conditions it may choose to impose

1.3.7All the covenants contained in clause 3 are covenants made by the Tenant unless otherwise specified

1.3.8Words importing one gender include all other genders and words importing the singular include the plural and vice versa

1.3.9The expression ‘Guarantor’ includes not only the third party to this lease (if any) but also any person who enters into covenants with the Landlord pursuant to clauses 3.30.8 and/or 3.35

1.3.10Where the Landlord the Tenant or the Guarantor for the time being are two or more persons obligations expressed or implied to be made by or with such party are deemed to be made by or with such persons jointly and severally and references herein to the Landlord the Tenant or the Guarantor shall include reference to any one of such persons

1.3.11References to any right of the Landlord to have access to the Demised Premises shall be construed as extending to any superior landlord and any mortgagee of the Demised Premises and to all persons authorised by the Landlord and any superior landlord or mortgagee (including agents professional advisers contractors workmen and others) and the expressions “superior landlord” and “superior landlords” mean

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any person or persons now or hereafter having a title to the Demised Premises in reversion mediately or immediately expectant upon the termination of the Landlord’s title

1.3.12Any provisions in this lease referring to the consent or approval of the Landlord shall be construed as also requiring the consent or approval of any mortgagee of the Demised Premises and any superior landlord where such consent shall be required but nothing in this lease shall be construed as implying that any obligation is imposed upon any mortgagee or any superior landlord not unreasonably to refuse any such consent or approval

1.3.13Any references to a specific statute include any statutory extension or modification amendment or re-enactment of such statute (except the Town and Country Planning (Use Classes) Order 1987) and any regulations or orders made under such statute (including the said Order) and any general reference to ‘statute’ or ‘statutes’ or ‘Act of Parliament’ or ‘Acts of Parliament’ includes any regulations or orders made under such statute or statutes

2.DEMISE

IN consideration of the rents and other obligations on the Tenant’s part contained in this lease the Landlord demises the Demised Premises to the Tenant TOGETHER WITH the rights specified in schedule 1 and EXCEPTING AND RESERVING to the Landlord (including its successors in title) and all persons authorised by the Landlord and/or who have or to whom the Landlord may grant the same or similar rights the rights specified in schedule 2 TO HOLD the Demised Premises for a term of years commencing on 30 March 2005 and expiring (subject to the earlier determination as hereinafter provided) on 24 March 2015 (“the Contractual Term”) SUBJECT to the matters contained or referred to in the documents specified in schedule 3 YIELDING AND PAYING for the Demised Premises for the period beginning on the commencement of the Term to 29 March 2006  the rent of a peppercorn if demanded and thereafter during the Term (and by way of bankers standing order if so required by the Landlord) the principle yearly rent of ONE HUNDRED AND SIXTY THOUSAND THREE HUNDRED POUNDS (£160,300) or such other amount as shall become payable under the provisions of clause 3.2 such yearly rent to be paid by equal quarterly payments in advance on the four usual quarter days in every year during the Term the first such payment (or due proportion) being payable on 30 March 2006  in respect of the period from 30 March 2006  to the quarter day next following AND ALSO PAYING as further rent during the Term and so in proportion for any fraction of a year to the Landlord the Insurance Rent the Service Charge and any other sums payable pursuant to the terms of this lease AND in the event of any of the above rents being in arrear ten days after they have become due the Tenant shall pay Higher Rate Interest on the amount outstanding from the relevant due date until the actual date of payment

3.TENANT’S COVENANTS

The Tenant COVENANTS with the Landlord as follows:

PAYMENTS

3.1Payment of rents

During the continuance of the Term to pay the rents reserved by this lease as and when stipulated without any deduction or set-off save as may be required by statute

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3.2Rent Review

3.2.1In this clause 3.2 the following expressions shall have the meanings assigned to them hereunder:

“rent review date” means 30 March 2010

“open market rent” means the yearly rent (being the rent payable following the expiry of any period at the beginning of the term which might reasonably be negotiated in the open market for the purpose or purposes of the fitting out of the Demised Premises by the willing tenant during which no rent or a concessionary or discounted rent is payable) at which the Demised Premises might reasonably be expected to be let with vacant possession on the rent review date in the open market (without the willing landlord taking a premium or any other consideration for the grant thereof) by a willing landlord to a willing tenant for a term of ten years commencing on the rent review date and otherwise upon the terms and conditions (save as to the amount of rent payable but including these provisions for the review of rent) contained in this lease and on the assumptions (if not facts) that:

3.2.1.1the Demised Premises are suitable and fit for immediate occupation and use and are ready for and fitted out and equipped for immediate occupation and use and beneficial trading for the purpose or purposes required by the willing tenant

3.2.1.2no work has been carried out to the Demised Premises by or on behalf of the Tenant or any undertenant during the Term which has diminished the rental value of the Demised Premises

3.2.1.3if the Demised Premises or the Building or the Estate or the Adjoining or Neighbouring Premises or any part or parts thereof have been destroyed or damaged they have been fully rebuilt and reinstated

3.2.1.4all the covenants on the part of the Landlord (but not in relation to any subsisting and material breaches of any of its covenants) and the Tenant contained in this lease have been fully performed and observed

3.2.1.5all Value Added Tax payable by the Tenant under the provisions of this lease is recoverable by the Tenant in full and would be recoverable by any/every prospective willing tenant

3.2.1.6that no reduction is or ought to be made to take account of any rent free period or period of rental concession or discount which on a new letting with vacant possession might be granted to the incoming tenant it being assumed that any such period has been given to the willing tenant and has expired and/or any such discount has been given to the willing tenant

THERE being disregarded:

3.2.1.7any effect on rent of the fact that the Tenant or any undertenant has been in occupation of the Demised Premises

3.2.1.8any goodwill attached to the Demised Premises by reason of the carrying on of the business of the Tenant or any undertenant

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3.2.1.9any increase in the rental value of the Demised Premises attributable to the existence at the rent review date of any improvement (shown to be such by the Tenant) to the Demised Premises and which is:

3.2.1.9.1completed not more than 21 years before the rent review date regardless of whether carried out pursuant to the terms of this lease or during the term of any previous lease and

3.2.1.9.2carried out with the consent (where required) of the Landlord by the Tenant or any undertenant

3.2.1.10the effect on rent of the works authorised by a licence to underlet and to alter dated 9 June 1995 and made between (1) Mesongage Limited (2) BICC Developments Limited (3) BICC Plc and (4) Tertio Limited shall be disregarded at the rent review date

3.2.2any inability of the Tenant or any/every prospective willing tenant to recover Value Added Tax

3.2.3From and after the rent review date the yearly rent payable hereunder shall be whichever is the higher of:

3.2.3.1the yearly rent reserved hereunder immediately before the rent review date and

3.2.3.2the open market rent

3.2.4If the Landlord and the Tenant have not agreed the open market rent by a date one month prior to the rent review date the open market rent may at the option of either the Landlord or the Tenant be determined by a Chartered Surveyor of not less than ten years’ standing being experienced in the valuation and leasing of property similar to the Demised Premises in the location of the Demised Premises (“the Appointed Surveyor”) to be agreed upon in writing by the Landlord and the Tenant or in default of such agreement by the rent review date to be nominated by the President for the time being of the Royal Institution of Chartered Surveyors (or his duly appointed deputy or any person authorised by the President to make appointments on his behalf) upon the application of either the Landlord or the Tenant

3.2.5The Appointed Surveyor shall at the sole and absolute discretion of the Landlord act either as an independent expert or as an arbitrator and his award or determination of the open market rent by the Appointed Surveyor shall be final and binding on the Landlord and the Tenant (and without recourse to the provisions for arbitration contained in this lease) and the fees of the Appointed Surveyor shall be borne as he directs or failing direction by the Landlord and the Tenant in equal shares and paid without undue delay and if one party pays them all that party shall be entitled to recover such proportion of them (if any) as the other party is to pay as herein provided

3.2.6If the Appointed Surveyor is to act as an expert:

3.2.6.1he shall invite the Landlord and the Tenant to submit to him within such time limits (not being less than fifteen working days) as he shall consider appropriate a valuation accompanied if desired by a statement of reasons and such representations and cross representations as to the amount of the open market rent with such supporting evidence as they may respectively wish

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3.2.6.2he shall if required by the Landlord or Tenant give written reasons for his determination and

3.2.6.3if the Appointed Surveyor does not give written notice of his determination within two months of his appointment or if he shall die or become unwilling to act or incapable of acting or if for any other reason he is unable to act then either the Landlord or the Tenant may request the said President to discharge the Appointed Surveyor and appoint another surveyor in his place which procedure may be repeated as many times as necessary

3.2.7If the Appointed Surveyor is to act as an arbitrator the arbitration shall be conducted in accordance with the Arbitration Act 1996 except that if any Appointed Surveyor shall die or decline to act or become incapable of acting the President may on the application of either party discharge the Appointed Surveyor and appoint another in his place

3.2.8If on the rent review date the open market rent shall not have been agreed or determined as set out above the yearly rent reserved under this lease immediately before the rent review date shall continue to be payable until agreement is reached or the determination of the open market rent by the Appointed Surveyor is made and the demand payment and/or acceptance thereof shall not be or be construed to be a waiver by the Landlord of any of its rights and benefits under this clause 3.2 but so that immediately on demand after such agreement or determination the difference (if any) over the amount actually so paid and the amount which would have been payable had the agreement or determination been made before the rent review date shall be paid by the Tenant to the Landlord as rent recoverable in arrear together with Lower Rate Interest on such difference for each instalment of rent due on and after the rent review date (such interest being payable from the date on which the instalment was due to the date of demand)

3.2.9After any substituted rent has been ascertained under this clause 3.2 memoranda recording the amount of such rent signed by or on behalf of the parties shall be exchanged Such memoranda shall (if the Landlord so requires) be prepared by the Landlord’s solicitors whose proper and reasonable costs shall be paid by the Tenant

3.2.10For the avoidance of all doubt (and in particular but without limitation notwithstanding clause 8) it is agreed by the Landlord and the Tenant that time shall not be of the essence in relation to the provisions contained above for the review of the yearly rent

3.3Outgoings

3.3.1Whenever required during the Term to pay and discharge and indemnify the Landlord against all monetary obligations of any kind (including rates and taxes) (whether parliamentary parochial local or of any other description and whether or not of a recurring nature but excluding any tax payable by the Landlord occasioned by any disposition in dealing with or ownership of the reversion of this lease) which may at any time be payable in respect of the Demised Premises at any time during the Term or by the owner or occupier in respect of the Demised Premises and an apportioned part as properly determined by the Landlord of any such obligations which may be payable in respect of the Demised Premises in common with other premises

3.3.2If the Landlord shall suffer any loss of rating relief which may be applicable to empty premises after the end of the Term by reason of such relief being allowed to the

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Tenant in respect of any period before the end of the Term to make good such loss to the Landlord

3.4Statutory Services

To pay for all gas electricity and water consumed on the Demised Premises together with all connection and standing charges and to comply at the Tenant’s expense with all requirements of the relevant supply Boards insofar as such requirements relate to or affect the Demised Premises

3.5Value Added Tax

In addition to all rents service charges insurance costs fees disbursements expenses and other sums payable by the Tenant from time to time hereunder to pay also on demand and indemnify the Landlord from and against:

3.5.1Value Added Tax chargeable in respect of any rents or other payments made by the Tenant under any of the terms of or in connection with this lease and/or in respect of any supply of goods or services by the Landlord to the Tenant and

3.5.2a sum equal to the amount of any Value Added Tax (and/or any tax of a similar nature that may be substituted for it or levied in addition to it) chargeable on any payments fees charges or costs where the Tenant is obliged to reimburse the Landlord or indemnify the Landlord against such payments fees charges or costs

3.6Landlord’s costs on breach

To pay to the Landlord all costs fees charges disbursements and expenses (including without prejudice to the generality of the above those payable to counsel solicitors surveyors bailiffs and any superior landlord and mortgagee) properly and reasonably incurred by the Landlord for the purpose of or incidental to or in contemplation of the recovery of arrears of rent or the preparation and service of a notice under section 146 or 147 of the Law of Property Act 1925 requiring the Tenant to remedy a breach of any of the covenants in this lease even if forfeiture for such breach is avoided otherwise than by relief granted by the Court or incidental to the preparation and service of a schedule of dilapidations

3.7Costs of Distress

To pay to the Landlord all costs charges and expenses (including all sheriffs’ and bailiffs’ fees) properly incurred by the Landlord in exercising any right of distress against the Tenant

3.8Costs of consents

To pay to the Landlord all reasonable costs fees charges disbursements and expenses properly incurred resulting from any applications by the Tenant for any consent required by this lease including cases where the application is withdrawn or consent is refused

REPAIRS AND ALTERATIONS

3.9Tenant’s repair and redecoration

To keep the Demised Premises in good and substantial repair decorative order and condition and (insofar as the cost thereof does not properly form part of the Service Charge) as often as may be necessary for the purpose of repair to renew any of the

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landlord’s fixtures and fittings in the Demised Premises or substitute new ones of equivalent quality and value to the Landlord’s reasonable satisfaction (damage by the Insured Risks excepted unless payment of the insurance monies is withheld in whole or in part by reason of any act neglect or default of the Tenant or any person under its control)

3.10To decorate

In the fifth year and also during the last quarter of the last year of the Term (however determined) to paint all the inside walls wood and metalwork and other previously painted inside parts of the Demised Premises and all additions thereto with two coats of good quality paint and in the case of redecoration in the last quarter of the last year of the Term in a colour previously approved in writing by the Landlord (such approval not to be unreasonably withheld or delayed) in a proper and workmanlike manner to the reasonable satisfaction of the Landlord and with every such inside painting the Tenant will clean and treat the inside of all aluminium doors and windows and grain varnish and colour the inside wood of the Demised Premises previously so grained varnished and coloured

3.11Repairs after Landlord’s notice

Without prejudice to any other obligation upon the Tenant within two months after any notice from the Landlord of defects in the state of repair and condition of the Demised Premises for which the Tenant is responsible (or immediately in case of emergency) to make good all such defects at the Tenant’s cost PROVIDED ALWAYS that if the Tenant fails to comply with the requirements of any such notice it shall be lawful for the Landlord (but without prejudice to the right of re-entry under this Lease) or its agents employees and licensees to enter the Demised Premises at any time after the expiration of such two months (or immediately in case of emergency) to execute such repairs and works the cost of which (including any surveyors fees) shall be repaid by the Tenant to the Landlord on demand and in default shall be immediately recoverable by action or by distress as rent in arrear and shall carry Higher Rate Interest

3.12Yielding up

3.12.1At the end of the Term to yield up to the Landlord the Demised Premises duly kept in accordance with the Tenant’s obligations under this lease together with all additions and improvements made in the meantime and all fixtures Provided however that the Tenant shall be entitled to remove (and upon written notice from the Landlord at any time shall be obliged to remove) all tenant’s or trade fixtures making good nevertheless at the expense of the Tenant and to the reasonable satisfaction of the Landlord any damage to the Building caused by such removal

3.12.2If at such time as the Tenant has vacated the Demised Premises after the expiration of the Term the Demised Premises shall not be in a condition consistent with clause 3.12.1 the Landlord shall be entitled to carry out the works necessary to put the Demised Premises into such condition consistent with clause 3.12.1 at the entire cost of the Tenant

3.13Waste and alterations

3.13.1Not to:

3.13.1.1commit any waste

3.13.1.2make any addition to the Demised Premises

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3.13.1.3unite the Demised Premises with any adjoining premises

3.13.1.4make any alteration to the Demised Premises save as permitted by the following provisions of this clause

3.13.2Not to make internal non-structural alterations to the Demised Premises without:

3.13.2.1obtaining and complying with all necessary consents (if any) of any competent authority and paying all charges of any such authority in respect of such consents

3.13.2.2making an application to the Landlord supported by drawings and where appropriate a specification in duplicate prepared by an architect or member of some other appropriate profession

3.13.2.3paying the proper and reasonable fees of the Landlord any superior landlord any mortgagee and their respective professional advisers

3.13.2.4entering into such covenants as the Landlord may require as to the execution and reinstatement of the alterations and

3.13.2.5ensuring that the mechanical and electrical services in the Building and the Adjoining or Neighbouring Premises remain unaffected thereby

3.13.3Subject to the provisions of clause 3.13.2 not to make any internal non-structural alterations to the Demised Premises without the prior written consent of the Landlord such consent not to be unreasonably withheld or delayed

3.13.4To remove any additional buildings additions alterations or improvements made to the Demised Premises at the expiration of the Term if so reasonably requested by the Landlord and reinstate the Demised Premises to their former state and condition in all respects and to make good any part or parts of the Demised Premises which may be damaged by such removal in all respects to the reasonable satisfaction of the Landlord

3.13.5Save as expressly provided for elsewhere in this lease not to make connection with the Conduits that serve the Demised Premises

3.14Items used in common

Insofar as such matters are not recoverable as part of the Service Charge to pay to the Landlord on demand a proper proportion of the proper and reasonable expenses (including proper and reasonable professional fees and a reasonable management charge) of cleansing repairing maintaining or rebuilding and lighting as appropriate any thing used or enjoyed or capable of being used or enjoyed by the Tenant or the Demised Premises in common with any other person or premises including (without prejudice to the generality of the foregoing) any boundary walls fences gutters sewers drains and party structures and any dispute shall be referred to arbitration

ENTRY ON THE DEMISED PREMISES BY THE LANDLORD

3.15To view

To permit the Landlord and its agents employees and licensees after at least two working days notice and at reasonable times (except in cases of urgency or emergency when entry can be at any time without notice) to enter the Demised Premises to view (and to open up parts of the Demised

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Premises where such opening up is required in order to view) the state and condition of the same or any other part of the Building and to give the Tenant notice of any defects in the state of repair and condition of the Demised Premises which are its responsibility Provided that any such opening up shall be made good by and at the expense of the Landlord unless it reveals a breach of the Tenant’s covenants (in which case it shall be paid for by the Tenant) or is required or desirable for the maintenance of the Structure of the Building (in which case it shall be recoverable as part of the Service Charges)

3.16To inspect

3.16.1To permit the Landlord and all persons authorised by it to enter the Demised Premises after not less than two working days prior written notice at all reasonable times for taking schedules or inventories of the fixtures and things to be yielded up at the end of the Term and during the six months immediately preceding the end of the Term for the purpose of fixing upon any part of the Demised Premises (but not to unduly interfere with the Tenant’s business) a notice for reletting or selling the same and to permit all persons with authority from the Landlord at all reasonable times during the daytime to enter and view the Demised Premises

3.16.2To permit at any time upon not less than two working days prior written notice during the Term prospective purchasers of or agents instructed in connection with the sale of the Landlord’s reversion or of any other interest superior to the Term to view the Demised Premises without interruption and to permit the Landlord at any time upon reasonable notice and by prior appointment (the Tenant not to unreasonably withhold consent to the making of such an appointment) during the Term to enter upon the Demised Premises and affix and retain anywhere upon the Demised Premises a notice for any such sale

3.17To permit entry to repair

To permit the Landlord and any person authorised by the Landlord to enter the Demised Premises at reasonable times upon reasonable notice (except in cases of urgency or emergency when entry can be at any time without notice) to execute repairs or alterations (so far as they cannot conveniently be done outside the Demised Premises) to other parts of any Adjoining or Neighbouring Premises the person so entering causing as little inconvenience to the Tenant as practicable and making good forthwith all damage which may be so caused to the Demised Premises

OBLIGATIONS AND REGULATIONS

3.18Statutory obligations

3.18.1To do anything required by virtue of or deriving validity from any Act of Parliament for the time being in force which may be required to be done in respect of the Demised Premises or their use whether by the landlord or tenant or any occupier

3.18.2To give full particulars to the Landlord of any notice direction order or proposal for the Demised Premises made given or issued to the Tenant by any local or public authority (including but without limitation a proposal for alteration of the Valuation List in respect of the Demised Premises) within seven days of receipt and if so required by the Landlord to produce it to the Landlord and without delay to take all necessary steps to comply with the notice direction or order and at the request of the Landlord but at the joint cost of the Landlord and the Tenant to make or join with

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the Landlord in making such objection or representation against or in respect of any notice direction order or proposal as the Landlord shall deem expedient

3.18.3To give notice to the Landlord of any defect in the Demised Premises which might give rise to an obligation on the Landlord to do or refrain from doing any act or thing in order to comply with the provisions of this lease or the duty of care imposed on the Landlord pursuant to the Defective Premises Act 1972 and at all times to display and maintain all notices which the Landlord may from time to time reasonably require to be displayed at the Demised Premises

3.19Planning

3.19.1At all times during the Term to comply in all respects with the provisions and requirements of the Planning Acts and all consents permissions and conditions (if any) granted or imposed or having effect under the Planning Acts so far as the same respectively relate to or affect the Demised Premises or any part thereof or any operations works acts or things to be done or omitted on the Demised Premises or the use of the Demised Premises for any purpose

3.19.2During the Term whenever required at the expense of the Tenant to obtain from (as the case may be) the local planning authority or the First Secretary of State at the Office of the Deputy Prime Minister or such other authority as may from time to time be appropriate all such consents and permissions (if any) as may be required for the carrying out of any operations on the Demised Premises or the institution or continuance on the Demised Premises of any use which may constitute development within the meaning of the Planning Acts but so that no application for planning permission shall be made without the previous written consent of the Landlord

3.19.3Without prejudice to any consent which may be granted by the Landlord or any obligation upon the Tenant under this lease not to carry out or make any alteration or addition to the Demised Premises or any change of use of the Demised Premises (being an alteration or change of use which is prohibited by or for which the Landlord’s consent is required to be obtained under this lease and for which a planning permission needs to be obtained) before a planning permission for such work or change of use has been produced to the Landlord and acknowledged by it in writing as satisfactory to it and the Landlord may refuse to express its satisfaction with any such planning permission inter alia on the ground that the period of it or any condition contained in it or omitted from it or to which it is subject would in the reasonable opinion of the Landlord be likely to be prejudicial to its interest in the Demised Premises and/or any Adjoining or Neighbouring Premises

3.19.4Unless the Landlord shall otherwise direct to carry out before the end of the Term any works stipulated to be carried out to the Demised Premises by a date subsequent to such determination as a condition of any planning permission which may have been granted on any application made by or on behalf of the Tenant or any undertenant

3.19.5If and when called upon so to do to produce to the Landlord or its surveyor all such plans and documents as the Landlord may reasonably require in order to satisfy itself that the provisions of this covenant have been complied with in all respects

3.19.6Not to serve any purchase notice under the Planning Acts requiring any local or other authority to purchase the Tenant’s interest in the Term

3.19.7If the Tenant receives any compensation with respect to its interest under this lease because of a restriction placed upon the user of the Demised Premises under or by

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virtue of the Planning Acts then if and when its interest hereunder is surrendered or assigned or determined under the power of re-entry contained in this lease immediately to make such provision as is just and equitable for the Landlord to receive its due benefit from such compensation

3.20Advertisements and display of goods

3.20.1Not at any time to advertise audibly or visibly on or from the Demised Premises

3.20.2Unless otherwise agreed in writing by the Landlord not to leave place fix or suspend anything outside the Demised Premises or to block the access of light to the Demised Premises

3.20.3Not to erect any signs on the exterior elevations of the Demised Premises facing Islington High Street City Road or Torrens Street or on any glass in the Demised Premises or without the previous consent in writing of the Landlord to erect any signs elsewhere on the exterior of the Demised Premises

3.21Compliance with Landlord’s regulations

To observe all reasonable regulations made by the Landlord from time to time and notified in writing to the Tenant having as their object the maintenance and general amenity of the Adjoining or Neighbouring Premises or any part of them Provided That such regulations shall not prevent the beneficial occupation and use of the Demised Premises

3.22Compliance with fire regulations

3.22.1To comply with all requirements and recommendations from time to time of the appropriate authority the insurers of the Demised Premises and the Landlord in relation to fire precautions affecting the Demised Premises and in particular to keep all requisite log-books up to date

3.22.2To keep the Demised Premises sufficiently supplied and equipped with such fire fighting and extinguishing appliances as shall from time to time be required by any statute or by the fire or other competent authority or insurers of the Demised Premises or as shall be reasonably required by the Landlord or (at the Landlord’s option) to pay to the Landlord on demand the cost of providing and installing any of the same and such appliances shall be open to inspection and shall be maintained to the reasonable satisfaction of the Landlord

3.22.3If so required by the Landlord to connect any fire alarm system for the Demised Premises into any fire alarm system for the Building generally

3.23To observe covenants

To observe and perform the agreements covenants and other matters contained or referred to in the documents specified in schedule 3 in so far as the same are substantially and capable of being enforced relate to or affect the Demised Premises and to keep the Landlord indemnified against all actions proceedings costs claims demands expenses and liability in any way relating thereto

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USE OF THE DEMISED PREMISES

3.24User

Not to use the Demised Premises otherwise than as business commercial or professional offices (but not as diplomatic offices or as a betting office or bookmaker’s office or passport office or a Social Security or other welfare benefits office or a Job Centre or employment agency or exchange or for any sales of goods on the Demised Premises to visiting members of the public or as a public caller office for either the payment of welfare benefits or the processing of immigration applications) or for such other use within Class B1 of the Town and Country Planning (Use Classes) Order 1987 (notwithstanding any re-enactment or substitution or amendment or revocation of the same) as shall first be approved by the Landlord in writing (such approval not to be unreasonably withheld or delayed) Provided Always that nothing in this sub-clause 3.24 shall prohibit Evolving Systems Limited (formerly called Tertio Telecoms Limited) from using the Demised Premises for the purposes of the recruitment of Software Consultants but only on the basis that such recruitment of Software Consultants is ancillary to their main office use)

3.25Prohibitions on use

3.25.1Not to do or allow any of the following from or on the Demised Premises:

3.25.1.1any auction sale

3.25.1.2storage of any specially inflammable or explosive substance or material

3.25.1.3any activity which the Landlord reasonably considers inappropriate to the amenity or good order of the Building and/or the Adjoining or Neighbouring Premises or which is or which may become illegal or immoral or causes any nuisance damage or loss to any other person

3.25.1.4the playing of any music or the making of any other sound audible from outside the Demised Premises

3.25.1.5any thing whatsoever which may invalidate any insurance or render any increased or extra premium payable for the insurance of the Demised Premises or other parts of the Adjoining or Neighbouring Premises against the Insured Risks and in case of any increase in any such premium so caused by the Tenant to repay to the Landlord upon demand all sums paid by way of increased premiums and all expenses incurred by it in consequence of a breach of any of the provisions contained in this clause 3.25.1.5 and all such payments shall be added to the rents reserved by this lease and be recoverable as rent in arrear together with Higher Rate Interest on such sum

3.25.2Not to use the Demised Premises or allow them to be used in conjunction with any adjoining premises without the prior written consent of the Landlord

3.25.2.1not to install or use in or upon the Demised Premises any machinery or apparatus which will cause noise or vibration which can be heard or felt in nearby premises or outside the Demised Premises or which may cause structural damage

3.25.2.2to keep all machinery and equipment upon the Demised Premises properly maintained and in good working order and for that purpose to employ reputable contractors to be first approved in writing by the

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Landlord such approval not to be unreasonably withheld or delayed for the regular periodic inspection and maintenance of them to renew all working and other parts as and when necessary or when recommended by such contractors to ensure by directions to the Tenant’s staff and otherwise that such plant apparatus and machinery are properly operated and to avoid damage to the Demised Premises and any Adjoining or Neighbouring Premises by vibration or otherwise

3.25.3Not to discharge into any of the Conduits serving the Demised Premises any oil grease or other deleterious matter or any substance which might be or become a source of danger or injury to the drainage system

3.25.4.1Not to bring or permit to remain on the Demised Premises any safes machinery goods or other articles which shall or may strain or damage the Building or any part of it

3.25.4.2Not without the prior written consent of the Landlord to suspend anything from any ceiling or roof of the Building

3.25.4.3On any application by the Tenant for the Landlord’s consent under clause 3.25.4.2 the Landlord shall be entitled to consult and obtain the advice of an engineer or other person in relation to the ceiling loading proposed by the Tenant and the Tenant shall repay to the Landlord on demand the reasonable and proper fees of such engineer or other person

3.26Obstruction

Not to impede the use by any other person of any area used by the Tenant in common with any other person

3.27Refuse disposal

Not to allow rubbish to accumulate on the Demised Premises or in the immediate vicinity

3.28Encroachments

Not in any way to obstruct the access of light to the Demised Premises or the Building nor to permit any third person to acquire any rights in respect of the Demised Premises and to give immediate notice to the Landlord of any attempt by such third person so to do and on the request of the Landlord but at the cost of the Tenant take such action as may be reasonably required for preventing any such rights from being acquired AND the Landlord may enter upon the Demised Premises to take such action if the Tenant fails to do so

3.29Indemnity for the Landlord

To indemnify the Landlord from and against liability in respect of all loss damage actions proceedings claims demands costs damages liability and expenses in respect of any breach non-observance or non-performance of the tenants covenants within this lease

3.30Assignment and Underletting

Alienation

In this clause 3.30 the following expressions shall have the following meanings.

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“Application”the application made by the Tenant for the Landlord’s consent to the Proposed Assignment

“Current Tenant”the Tenant in whom the Term is vested at the date of the Application

“Proposed Assignee”the person to whom the Current Tenant wishes to assign this lease as stated in the Application

“Proposed Assignment”the assignment for which Landlord’s consent is requested by the Application

“Proposed Guarantor”the person who will guarantee to the Landlord the obligations of the Proposed Assignee but this expression shall not include the Current Tenant

3.30.1Not to hold on trust for another or (save pursuant to a transaction permitted by and effected in accordance with the provisions of this lease) part with or share the possession of the whole or any part of the Demised Premises or permit another to occupy the whole or any part of the Demised Premises

3.30.2Not to assign part only of the Demised Premises

3.30.3Not to mortgage or charge the whole or any Permitted Part of the Demised Premises save at arm’s length to a bona fide bank or other substantial financial institution and then only with the prior written consent of the Landlord (such consent not to be unreasonably withheld or delayed) save that no consent shall be required for the creation of any floating charges

3.30.4Not to underlet any part of the Demised Premises save a Permitted Part in accordance with this clause 3.30

3.30.5For the purposes of section 19(1A) of the 1927 Act it is agreed that the Landlord may withhold its consent to an assignment of the whole of the Demised Premises in the following circumstances:

3.30.5.1where the Proposed Assignee enjoys diplomatic or state immunity

3.30.5.2where the Proposed Assignee:

3.30.5.2.1is incorporated established or ordinarily resident or

3.30.5.2.2primarily operates its business or

3.30.5.2.3predominantly holds its assets

otherwise than in the United Kingdom or a jurisdiction where reciprocal arrangements exist for the enforcement of judgements of the Courts of the United Kingdom

3.30.5.3where in the reasonable opinion of the Landlord the Proposed Assignee is not of sufficient financial standing to enable it to comply with the covenants on the part of the Tenant and the conditions contained in this lease

3.30.5.4where it is proposed that the Proposed Guarantor shall act as guarantor for the Proposed Assignee pursuant to clause 3.30.7 and the circumstances described in clauses 3.30.5.1  3.30.5.2 and 3.30.5.3 but

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with the substitution of references to the Proposed Guarantor for references to the Proposed Assignee or any of them exist PROVIDED that if there is a Proposed Guarantor and none of the said circumstances exist in relation to the Proposed Guarantor then the Landlord shall not be entitled to withhold itsconsent pursuant to this clause 3.30.5 only on the grounds that any of the said circumstances exist in relation to the Proposed Assignee

3.30.6For the purposes of section 19(1A) of the 1927 Act it is further agreed that:

3.30.6.1any consent of the Landlord to an assignment of the whole of the Demised Premises shall be subject to the payment to the Landlord of all rents and other sums which have become due and payable under this lease prior to the date of completion of the Proposed Assignment

3.30.6.2the Landlord may withhold its consent to the Proposed Assignment until the Landlord has received certified copies of the audited accounts of the Proposed Assignee and (if applicable) the Proposed Guarantor for each of the three financial years of the Proposed Assignee and (if applicable) the Proposed Guarantor immediately preceding the date of the Application or where the Proposed Assignee or (as the case may be) the Proposed Guarantor is a limited company and either its accounts for the financial year immediately preceding the date of the Application have not been audited or it has not been trading for the three years immediately preceding the date of the Application such audited management or other accounts as are available for each of those three years and has had a reasonable opportunity to consider the same

3.30.6.3the Proposed Assignee shall covenant with the Landlord to comply with section 6(1) of the 2002 Act in respect of the assignment and indemnify and keep indemnified the Landlord from and against all actions proceedings costs claims losses and liabilities arising as a result of any failure to do so

3.30.7For the purposes of section 19(1A) of the 1927 Act and section 16 of the 1995 Act it is agreed that any consent of the Landlord to an assignment of the whole of the Demised Premises shall be subject to a condition that the Current Tenant shall prior to such assignment being completed execute and deliver to the Landlord an authorised guarantee agreement which shall be prepared by the Landlord’s solicitors containing covenants on the part of the Current Tenant in such form as the Landlord may reasonably require and in compliance with section 16 of the 1995 Act

3.30.8If the Landlord reasonably so requires the Tenant shall obtain a guarantor (who shall be a person who is reasonably acceptable to the Landlord) for any person to whom this lease is to be assigned and such guarantor shall execute and deliver to the Landlord a deed containing covenants by that guarantor (or if more than one joint and several covenants) with the Landlord as a primary obligation in the terms set out in clause 7 (with any necessary changes) or in such other terms as the Landlord may reasonably require

3.30.9Without prejudice to the foregoing provisions of this clause the Tenant shall not assign the whole of the Demised Premises without the prior written consent of the Landlord and (save in relation to the circumstances set out in clause 3.30.5 and the conditions mentioned in clauses 3.30.6and 3.30.7 which shall have effect in accordance with section 19 of the 1927 Act and the 1995 Act) the Landlord shall not unreasonably withhold or delay such consent and the parties hereby agree that in

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considering whether or not the Landlord is reasonably withholding such consent due and proper regard shall be had to the provisions and effect of the 1995 Act

3.30.10The Landlord may at any time or times during the Term abandon any of the circumstances set out in clause 3.30.5 and/or any of the conditions referred to in clause 3.30.6 by serving written notice to that effect on the Tenant and upon service of any such notice the circumstance(s) or condition(s) therein specified shall be deemed to be deleted from this lease and of no further effect

3.30.11Not to underlet the whole of the Demised Premises or a Permitted Part save in accordance with the provisions of clauses 3.30.12 and 3.30.13 hereof and then only with the prior written consent of the Landlord which consent shall not be unreasonably withheld or delayed

3.30.12That each and every permitted underlease shall be granted without any fine or premium at a rent not less than the then open market rental value of the premises to be underlet (“the underlet premises”) such rent being payable in advance on the usual quarter days and shall contain provisions:

3.30.12.1for the upwards only review of the rent reserved by such underlease on the bases and on the dates on which the yearly rent is to be reviewed under this lease

3.30.12.2prohibiting the undertenant from doing or allowing any act or thing in relation to the underlet premises inconsistent with or in breach of the provisions of this lease

3.30.12.3for re-entry by the Landlord on breach of any covenant by the undertenant

3.30.12.4imposing an absolute prohibition against all dispositions of or other dealings whatever with the underlet premises other than an assignment or charge of the whole

3.30.12.5prohibiting any assignment of the whole without the prior consent of the Landlord which shall not be unreasonably withheld or delayed under this lease and any mortgage or charge of the whole save at arm’s length to a bona fide bank or other substantial institution and then only with the prior written consent of the Landlord under this lease which shall not be unreasonably withheld or delayed

3.30.12.6prohibiting the undertenant from permitting another to occupy the whole or any part of the underlet premises

3.30.12.7providing that for the purposes of section 19(1A) of the 1927 Act and section 16 of the 1995 Act any consents to an assignment of the underlease shall be subject to a condition that the undertenant of the underlease shall prior to such assignment being completed execute and deliver to the Tenant and the Landlord of this lease a deed which shall be prepared by the Landlord’s solicitors containing covenants on the part of the then undertenant with the Tenant and as separate covenants with the Landlord in such form as the Landlord may reasonably require

3.30.12.8excluding the operation of sections 24 to 28 (inclusive) of the 1954 Act in relation to the tenancy created by such underlease

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3.30.12.9requiring the undertenant to comply with section 6(1) of the 2002 Act in respect of the underlease and to indemnify and keep indemnified the Landlord from and against all actions proceedings costs claims losses and liabilities arising as a result of any failure to do so

3.30.13Prior to any permitted underletting to procure that:

3.30.13.1the undertenant enters into direct covenants with the Landlord to perform the covenants on the part of the Tenant contained in this lease (except payment of all the rents reserved by the lease) insofar as the same affect or relate to the premises comprised in such underlease

3.30.13.2if the Landlord shall reasonably so require at least two directors of the undertenant (if the permitted undertenant is a limited company) or some other guarantor or guarantors reasonably acceptable to the Landlord enter into direct covenants with the Landlord in similar form to the Guarantor’s covenants in this lease but with such amendments as shall be necessary to make them applicable to an underlease

3.30.13.3an order of the court authorising an agreement between the parties to such underlease excluding the operation of sections 24 to 28 (inclusive) of the 1954 Act in relation to the tenancy created by such underlease has been obtained and produced to the Landlord

3.30.14To enforce the performance and observance by every such undertenant of the provisions of the underlease and not at any time either expressly or by implication to waive any of the covenants or conditions on the part of any undertenant or assignee of any underlease or any breach thereof nor (without the consent of the Landlord) vary the terms of any permitted underlease insofar as such terms were required in order to comply with the provisions of this lease and not to be party or privy to any agreement or arrangement for the commutation in whole or in part of any annual rent to be reserved and made payable by any underletting and no rent reserved by an underlease shall be payable more than one quarter in advance

3.30.15In relation to any permitted underlease:

3.30.15.1to ensure that the rent is reviewed in accordance with the terms of the underlease

3.30.15.2not to agree the reviewed rent with the undertenant without the prior written approval of the Landlord (such approval not to be unreasonably withheld or delayed)

3.30.15.3to give notice to the Landlord of the details of the agreement or determination of every rent review within fourteen days

3.30.16Prior to the assignment of any permitted underlease the Tenant shall procure that there are delivered:

3.30.16.1to the Landlord a deed containing covenants by the assignee with the Landlord in such form as the Landlord may reasonably require to perform and observe all the tenant’s covenants in and all other provisions of the underlease during the residue of the term of the underlease (including any continuation thereof) and

3.30.16.2to the Landlord and separately to the Tenant a deed containing covenants by the assignor with the Landlord in such form as the

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Landlord may reasonably require if the Landlord’s consent to such assignment is subject to a condition that the undertenant enters into a deed as contemplated by clause 3.30.12.7

3.30.16.3to the Landlord a deed containing covenants by the assignee with the Landlord to comply with section 6(1) of the 2002 Act in respect of the assignment and indemnify and keep indemnified the Landlord from and against all actions proceedings costs claims losses and liabilities arising as a result of any failure to do so

3.30.17Prior to the grant of an underlease of any Permitted Part the Tenant will obtain any planning permission and other consents or approvals required and subject to the Landlord first approving in writing any such permission and consents (such approval only to be withheld on the basis that in the Landlord’s reasonable opinion any condition does or might prejudice the Landlord’s interest in the Demised Premises or the Adjoining or Neighbouring Premises or any part or parts thereof) the Tenant will carry out all necessary works (which have been approved by the Landlord in accordance with clause 3.13) to enable such Permitted Part and the remainder of the Demised Premises to form separate self-contained accommodation all such works to be carried out in a good and workmanlike manner and in accordance with plans and specifications which shall have first been approved by the Landlord the approval of the Landlord being subject to the same conditions and provisions and as set out in clause 3.13

3.30.18Notwithstanding anything herein contained at no time during the Term shall more than one Permitted Part be underlet at any time

3.30.19Within 21 days of any written request by the Landlord to supply to the Landlord such information as the Landlord may reasonably require in respect of any application made pursuant to this clause 3.30 and in respect of any tenants or undertenants or occupiers of the Demised Premises including copies of any leases or other documents relating thereto and in respect of any expenditure (incurred by the Tenant within twelve months of such request) on repair and maintenance of the Demised Premises

3.30.20Notwithstanding anything herein contained it is hereby agreed and declared that the Tenant may without any consent of the Landlord share occupation of the Demised Premises or any part or parts thereof with (as licensee only)

3.30.20.1any wholly owned subsidiary (as defined by section 736 of the Companies Act 1985) for the time being of the Tenant

3.30.20.2any holding company (as defined by the said section 736) for the time being of the Tenant (not being the Tenant itself)

PROVIDED THAT no relationship of landlord and tenant is thereby created and that any such company or body immediately vacates the Demised Premises on its ceasing to be a company as described in clauses 3.30.20.1 and 3.30.20.2

3.31Registration

3.31.1To register with the Landlord within 21 days’ notice of any dealing or devolution whatsoever with the interest and estate created by this lease (or any review of the rent payable under an underlease) together with the identity and address of any person (whether mediate or intermediate) to whom any interest or estate has passed and produce to the Landlord’s solicitors a certified copy of the assurance

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underlease or other relevant deed or document (including a rent review memorandum) and to pay to them their reasonable fees for such registration

3.31.2Within seven days of completion of the registration of such assignment or underlease or other disposition or devolution pursuant to the 2002 Act to provide to the Landlord official copies showing the registration thereof

3.32Covenants in the Superior Lease

To observe and perform the covenants on the part of the Landlord as tenant under the Superior Lease (save for the payment of rents) insofar as the same relate to or affect the Demised Premises

3.33Information

If called upon to do so to furnish to the Landlord or any person acting as the third party determining any rent in default of agreement between the parties under any provisions for rent review contained in this lease such information as may reasonably be requested in writing in relation to the implementation of any provisions for rent review

3.34Keyholders

To ensure that at all times the Landlord has written notice of the name home address and home telephone number of at least one keyholder of the Demised Premises

3.35New guarantor

Within fourteen days of the death during the Term of any Guarantor or of such person having a receiver appointed under the Mental Health Act 1983 or there occurring in relation to any Guarantor a Terminating Event as defined in clause 6.1.2 to give notice of this to the Landlord and if so required by the Landlord at the expense of the Tenant to procure some other person acceptable to the Landlord to execute a guarantee in respect of the Tenant’s obligations contained in this lease in the form of the Guarantor’s covenants contained in this lease within 28 days of being so required by the Landlord

3.36Landlord’s rights

To permit the Landlord and all others authorised by it at all times subject to the prescribed notice periods set out in this lease during the Term to exercise without interruption or interference any of the rights granted to it by virtue of the provisions of this lease

3.372002 Act

3.37.1To comply with section 6(1) of the 2002 Act in respect of the grant of this lease or a subsequent assignment thereof and to indemnify and keep indemnified the Landlord from and against all actions proceedings costs claims losses and liabilities arising as a result of any failure to do so

3.37.2If this lease or any easement or any other matters therein are registered or noted in any registers pursuant to the 2002 Act then on the expiration or sooner determination of the Term to deliver to the Landlord the original of this lease and any other documentation in the Tenant’s possession or control necessary to procure

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the closure of the registered title thereto and the cancellation of any such noting thereof

4.INSURANCE

4.1Landlord to insure

The Landlord covenants with the Tenant during the period whilst it is the Landlord and without liability in respect of any subsequent period to use all reasonable endeavours to ensure that the landlord under the Superior Lease keeps the Building insured with some publicly quoted insurance company or with Lloyds’ Underwriters and through such agency as the superior landlord shall from time to time decide subject to such exclusions excesses and limitations as may be imposed by the insurers in accordance with the covenant to insure contained in the Superior Lease:

4.1.1in the full reinstatement cost of the Building against loss or damage by the Insured Risks including architects’ surveyors’ and other professional fees (and Value Added Tax thereon) and expenses incidental thereto the cost of shoring up demolition and site clearance and similar expenses

4.1.2the breakdown and explosion of any engineering and electrical plant and machinery to the extent that they are not covered by clause 4.1.1

AND to use all reasonable endeavours to ensure that the landlord under the Superior Lease and/or the Landlord insures (subject to such exclusions excesses and limitations as may be imposed by the insurers) the loss of rent (excluding Service Charge and Insurance Rent but including any Value Added Tax chargeable on the rent firstly reserved) or rental value from time to time payable or reasonably estimated to be payable for such period (being four years) as may be reasonably required by the Landlord from time to time having regard to the likely period required for reinstatement of the Building in the event of partial or total destruction and property owners’ liability and such other insurances as the Landlord or any superior landlord may from time to time deem necessary to effect

4.2Landlord to produce evidence of insurance

At the request of the Tenant the Landlord shall as soon as reasonably practicable produce to the Tenant reasonable evidence from the insurers of the terms of the policy of such insurance and the fact that the policy is subsisting and in effect

4.3Destruction of the Building

If the Demised Premises or any part of the Building is destroyed or damaged by any of the Insured Risks but subject always to the provisions of clause 4.4 hereof then:

4.3.1unless payment of the insurance monies shall be refused in whole or in part by reason of any act or default of the Tenant or any undertenant or any person under its or their control and

4.3.2subject to the Landlord being able to obtain any necessary planning consents and all other necessary licences approvals and consents which the Landlord shall use its reasonable endeavours to obtain but shall not be obliged to institute any appeals and

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4.3.3subject to the necessary labour and materials being and remaining available which the Landlord shall use its reasonable endeavours to obtain as soon as practicable

the Landlord shall use its reasonable endeavours to procure that the superior landlord under the Superior Lease lays out the net proceeds of such insurance (other than any in respect of loss of rent) in the rebuilding and reinstatement of the premises so destroyed or damaged substantially as the same were prior to any such destruction or damage

4.4Option to determine by the Landlord or the Tenant

If any destruction or damage shall render the Building or the Demised Premises or the means of access thereto or the plant and equipment serving the Demised Premises unfit for use or occupation and such destruction or damage is not reinstated within three years and six months of such destruction or damage then either the Landlord or the Tenant may determine this lease by giving to the other not less than six months’ notice in writing but in the case of the Tenant it shall not be entitled to give notice where the insurance monies are wholly or partially irrecoverable by reason solely or in part of any act default or neglect of the Tenant its servants agents or licensees and such determination shall be without prejudice to any claim by either party against the other in respect of any antecedent breach of covenant PROVIDED ALWAYS that if such option shall be exercised then the Landlord shall be relieved from the obligation to lay out the net proceeds of such insurance as aforesaid and shall be solely entitled to all monies payable under or by virtue of any such insurance

4.5Frustration

If for any reason whatsoever the obligation by the Landlord to rebuild or reinstate as set out in this lease or that of the superior landlord under the Superior Lease becomes impossible to perform such obligation shall immediately be deemed to have been discharged and the Landlord shall be solely entitled to all monies payable by virtue of any such insurances and the Landlord may at any time thereafter by notice in writing given to the Tenant determine this lease but without prejudice to any claim by either party against the other in respect of any antecedent breach of covenant

4.6Payment of insurance monies refused/excess

4.6.1If the payment of any insurance monies is refused in whole or in part as a result of some act or default of the Tenant or any undertenant or any person under its control the Tenant shall pay to the Landlord on demand the amount so refused together with Higher Rate Interest on such amount from the date of such demand

4.6.2If at any time any claim shall be made under the insurance policy effected by the Landlord against the Insured Risks the Tenant shall repay to the Landlord on demand any amount (or a proportion thereof as properly determined by the Lessor where the claim relates to the Demised Premises and other premises) which may be deducted or disallowed by the insurers pursuant to any excess provision in the insurance policy upon settlement of any claim

4.7Benefit of other insurances

If the Tenant becomes entitled to the benefit of any insurance on the Demised Premises which is not effected or maintained in pursuance of the obligations contained in this lease then the Tenant shall apply all monies received by virtue of

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such insurance in making good the loss or damage in respect of which such monies were received

4.8Insurance becoming void

The Tenant shall not do anything to cause any policy of insurance in respect of the Demised Premises or the Building and against damage by any of the Insured Risks to become void or voidable or to cause the rate of premium payable to be increased and shall repay on demand to the Landlord all sums paid by way of increased premiums and all expenses incurred by the Landlord

4.9Requirements of insurers

The Tenant shall at all times comply with all requirements of the superior landlord’s and/or the Landlord’s insurers so far as such requirements are known to the Tenant

4.10Notice by Tenant

The Tenant shall immediately upon becoming aware of the same give notice to the Landlord of the occurrence of any event against which insurance is likely to have been effected by the Landlord or any superior landlord

4.11Cesser of rent

If the Demised Premises or the Building or any part of either of them is destroyed or damaged by any of the Insured Risks so as to render the Demised Premises unfit for occupation and use or inaccessible and the policy or policies of insurance have not been vitiated or payment of the policy monies refused in whole or in part in consequence of some act or default of the Tenant or any undertenant or any person under the Tenant’s and/or the undertenant’s control then the rent first reserved under this lease (or a fair proportion according to the nature and extent of the damage sustained) shall be suspended until the Demised Premises shall be again rendered fit for occupation and use and accessible or until the expiration of four years commencing on the date of the destruction or damage (whichever shall be the earlier) any dispute regarding the cesser of rent shall be referred to arbitration PROVIDED ALWAYS that under no circumstances shall the amount of the rent which ceases to be payable hereunder exceed the amount received by the Landlord in respect of the loss of rent insurance relating to the Demised Premises

5.LANDLORD’S COVENANTS

5.1Quiet enjoyment

The Landlord covenants that the Tenant may peaceably and quietly hold and enjoy the Demised Premises for the Contractual Term without any interruption from the Landlord or any person lawfully claiming through under or in trust for the Landlord

5.2Services

Subject to the payment by the Tenant of the Service Charge the Landlord covenants with the Tenant to provide or procure the provision of such Services as the Landlord considers appropriate and desirable for the proper management maintenance and operation of the Estate the Building and/or the Car Park acting at all times in accordance with the principles of good estate management (it being expressly agreed that the principles of good estate management require the lifts of the Building to be in working order and for the Demised Premises to be supplied as appropriate with heating and air conditioning) Provided Nevertheless that the

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Landlord shall not be responsible for any breakdown or delay in the provision of any of the Services due to circumstances beyond the entire control of the Landlord

5.3Superior lease

The Landlord with the Tenant by way of indemnity only to observe and perform the covenants on the part of the tenant contained in the Superior Lease but only insofar as they are not the responsibility of the Tenant pursuant to the terms of this lease

6.PROVISOS AND AGREEMENTS

PROVIDED ALWAYS IT IS HEREBY AGREED AND DECLARED as follows:

6.1Re-entry

6.1.1If and whenever during the Term:

6.1.1.1the rents (or any of them or any part of them) under this lease are outstanding for 21 days after becoming due whether formally demanded or not or

6.1.1.2there is a breach by the Tenant or the Guarantor of any covenant or other term of this lease or any document supplemental to this lease or

6.1.1.3there occurs in relation to the Tenant or any Guarantor a Terminating Event as defined in clause 6.1.2

the Landlord may re-enter the Demised Premises (or any part of them in the name of the whole) at any time (and even if any previous right of re-entry has been waived) and then the Term will absolutely cease but without prejudice to any rights or remedies which may have accrued to the Landlord against the Tenant or the Guarantor in respect of any breach of covenant or other term of this lease (including the breach in respect of which the re-entry is made)

6.1.2For the purposes hereof “Terminating Event” means any of the following:

6.1.2.1in relation to an individual:

6.1.2.1.1the individual failing to pay a debt or debts which is or are in the aggregate equal to or in excess of the bankruptcy level from time to time and a statutory demand in respect thereof having been neither complied with nor set aside

6.1.2.1.2the making of an application to the Court for an interim order under part VIII of the Insolvency Act 1986

6.1.2.1.3the presentation of a bankruptcy petition in respect of the individual

6.1.2.1.4the appointment of an interim receiver in respect of the individual’s property or any of it

6.1.2.1.5the making of a bankruptcy order in respect of the individual (whether in England or elsewhere)

6.1.2.2in relation to a company:

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6.1.2.2.1the presentation of a petition for the winding up of the company

6.1.2.2.2the passing of a resolution to wind up the company (other than in connection with a member’s voluntary winding up for the purposes of an amalgamation or reconstruction which has the prior written consent of the Landlord) or the convening of a meeting of the company’s creditors for the purposes of considering a resolution that the company be wound up voluntarily

6.1.2.2.3the making of a winding up order in relation to the company (whether in England or elsewhere)

6.1.2.2.4any person becoming entitled to appoint an administrative receiver of the undertaking of the company or any part of it

6.1.2.2.5the appointment of such an administrative receiver

6.1.2.2.6the passing of a resolution to present a petition for an administration order in respect of the company

6.1.2.2.7the presentation of a petition for the making of an administration order in respect of the company

6.1.2.2.8the making of an administration order in respect of the company

6.1.2.2.9the directors of the company or a nominee convening a meeting of the company’s creditors or any of them or submitting a proposal in respect of a voluntary arrangement to the company’s creditors or any of them pursuant to part I of the Insolvency Act 1986

6.1.2.2.10the company making an application to the Court under section 425 of the Companies Act 1985

6.1.2.2.11the publication of a notice pursuant to section 652 of the Companies Act 1985 in the Gazette with a view to the Company’s name being struck off the Register of Companies (whether or not the Company is struck off or is subsequently re-stored on such Register)

6.1.2.3in relation to any person (whether an individual or a company):

6.1.2.3.1the convening of a meeting of the person’s creditors or any of them or the entering into of any arrangement scheme compromise moratorium or composition with the person’s creditors or any of them (whether pursuant to part I or part VIII of the Insolvency Act 1986 or otherwise)

6.1.2.3.2the appointment of a receiver in respect of any of the person’s assets

6.1.2.3.3any steps being taken to enforce any security over the person’s property or to repossess goods in the person’s possession under any hire purchase agreement

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6.1.2.3.4any distress attachment execution or other legal process being levied on or enforced against any of the person’s assets

6.2Exclusion of Landlord’s liability

The Landlord shall be under no liability for or in respect of any loss or damage which may be caused to the Tenant its employees or visitors or to the Demised Premises by reason of any act neglect or default of any third party on any part of the Building and/or the Adjoining or Neighbouring Premises or in respect of any breach of any obligation on the part of the Landlord herein contained for repair or maintenance unless the Landlord has received notice in writing that repair is necessary unless it knows of the necessity for such work and then only if it is able to obtain all necessary permissions or consents to the carrying out of such work and if the necessary labour and materials are available

6.3Landlord not responsible for goods

The Landlord shall be under no responsibility whatsoever in respect of any goods or articles left for the Tenant with the Landlord’s employees

6.4Disputes

Any dispute arising between the Tenant and any third party as to any easement or rights whatsoever in connection with the use or occupation of the Demised Premises and any other part of the Building or as to the Common Parts the Common Accessways and/or any Adjoining or Neighbouring Premises shall be decided by the Landlord or whom it may direct whose decision shall be final and binding on the Tenant

6.5Notices

The provisions of section 196 of the Law of Property Act 1925 as amended by the Recorded Delivery Service Act 1962 shall apply to the giving and service of all notices and documents under or in connection with this lease except that section 196 shall be deemed to be amended as follows:

6.5.1the final words of section 196 (4) ’... and that service .... be delivered’ shall be deleted and there shall be substituted ‘... and that service shall be deemed to be made on the second Working Day after the registered letter has been posted “Working Day” meaning any day from Monday to Friday (inclusive) other than Christmas Day Good Friday and any statutory bank or public holiday’

6.5.2any notice or document shall also be sufficiently served if sent by telephonic facsimile transmission or any other means of electronic written transmission to the party to be served and that service shall be deemed to be made on the day of transmission if transmitted before 4 pm on a Working Day but otherwise on the next following Working Day (as defined above)

and in this clause ‘party’ includes any Guarantor

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6.6Value Added Tax

All sums payable by the Tenant hereunder which are from time to time subject to Value Added Tax shall be considered to be tax exclusive sums and Value Added Tax at the appropriate rate shall be payable by the Tenant in addition thereto

6.7Exclusion of statutory compensation

Any statutory right of the Tenant to claim compensation from the Landlord on vacating the Demised Premises shall be excluded to the extent that the law allows

DEVELOPMENT BY THE LANDLORD

6.8No rights of light etc

The Tenant shall not be entitled to any rights of access of light or air to the Demised Premises which would restrict or interfere with the free use of any of the Adjoining or Neighbouring Premises for building or any other purpose

6.9Landlord free to develop

Nothing herein contained or implied by this lease shall impose any restriction on the use or development of any land or buildings of the Landlord (other than the Demised Premises) whether or not comprised within the Building and/or any Adjoining or Neighbouring Premises or give the Tenant the right to enforce or to prevent the release or modification of any obligation entered into by any tenant of the Landlord in respect of property other than the Demised Premises or shall operate to prevent or restrict in any way the development and use of any such land

6.10Landlord free to build into Structure

Nothing in this lease shall restrict the right of the Landlord at any time to build into under or upon the Structure and/or any Adjoining or Neighbouring Premises so long as the services and amenities properly adequate to permit the Tenant’s use and enjoyment of the Demised Premises for the purpose permitted hereunder remain available at all times

6.11Exclusion of use warranty

Nothing in this lease or in any consent granted by the Landlord under this lease shall imply or warrant that the Demised Premises may lawfully be used under the Planning Acts for the purpose authorised in this lease (or any purpose subsequently authorised)

6.12Entire understanding

This Lease embodies the entire understanding of the parties relating to the Demised Premises and to all the matters dealt with by any of the provisions of this lease

6.13Representations

The Tenant acknowledges that this lease has not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the Landlord except any such statement or representation that is expressly set out in this lease or is given in writing by the Landlord’s solicitors or in written replies of the Landlord’s solicitors given in response to preliminary enquiries raised by the Tenant’s solicitors

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6.14Licences etc under hand

Whilst the Landlord is a limited company or other corporation all licences consents approvals and notices required to be given by the Landlord shall be sufficiently given if given under the hand of a director the secretary or other duly authorised officer of the Landlord

6.15Tenant’s property

If after the Tenant has vacated the Demised Premises on the expiry of the Term any property of the Tenant remains in or on the Demised Premises and the Tenant fails to remove it within seven days after being requested in writing by the Landlord to do so or if after using its reasonable endeavours the Landlord is unable to make such a request to the Tenant within fourteen days from the first attempt so made by the Landlord:

6.15.1the Landlord may as the agent of the Tenant sell such property and the Tenant will indemnify the Landlord against any liability incurred by it to any third party whose property shall have been sold by the Landlord in the mistaken belief held in good faith (which shall be presumed unless the contrary be proved) that such property belonged to the Tenant

6.15.2if the Landlord having made reasonable efforts is unable to locate the Tenant the Landlord shall be entitled to retain such proceeds of sale absolutely unless the Tenant shall claim them within three months of the date upon which the Tenant vacated the Demised Premises and

6.16Enforcement of Landlord’s covenants

The covenants on the part of the Landlord contained in or obligations on its part implied by this lease shall be binding in full upon the owner of the reversion expectant upon the expiration of the Term but shall not be enforceable against any person firm or company who has owned such reversion after he or it shall have parted with all interest therein

6.17Entry for Distress

That if the whole or any part of any payments to be made by the Tenant to the Landlord hereunder shall be in arrear for 21 days (whether any legal demand therefor shall have been made or not) it shall be lawful for the Landlord to enter into and upon the Demised Premises at any time by any means not involving assaulting any person and distrain and to dispose of the distress or distresses then and there found and to apply the produce thereof in or towards payment of the said payments in arrear and so that the power of the Landlord to distrain upon the Demised Premises shall extend to and include any tenant’s fixtures or fittings not otherwise by Law distrainable which may from time to time be thereon

6.18Acceptance of rent no waiver

That no demand for acceptance of or receipt for rent by the Landlord after knowledge or notice received by the Landlord or its agents or the Landlord’s surveyor of any breach of any of the Tenant’s covenants hereunder shall operate as a waiver of any such breach

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6.19Interference with easements

The Landlord shall not have any liability in damages or otherwise in respect of the manner of the exercise of the Landlord’s absolute discretion to take or refrain from taking steps in respect of any obstruction of or interference with any easements rights or privileges appurtenant to the Demised Premises by any third parties

6.20Rights easements etc

The operation of section 62 of the Law of Property Act 1925 shall be excluded from this lease and the only rights granted to the Tenant are those (if any) expressly set out in this lease and the Tenant shall not by virtue of this lease be deemed to have acquired or be entitled to and the Tenant shall not during the Term acquire or become entitled to by any means whatever any easement from or over or affecting any other land or premises now or at any time after the date of this lease belonging to the Landlord and not comprised in this lease

6.21Jurisdiction

The English Courts shall have exclusive jurisdiction regarding all matters appertaining to this lease and the parties hereto (including any Guarantor) and all other persons or companies concerned with regard to this lease shall submit to such jurisdiction

6.22Covenants relating to Adjoining or Neighbouring Premises

Nothing contained in or implied by this lease shall give the Tenant the benefit of or the right to enforce or to prevent the release or modification of any covenant agreement or condition entered into by any tenant of the Landlord in respect of any part of any Adjoining or Neighbouring Premises

6.23Effect of waiver

Each of the Tenant’s covenants shall remain in full force both at law and in equity notwithstanding that the Landlord shall have waived or released temporarily any such covenant or waived or released temporarily or permanently revocably or irrevocably any similar covenant or covenants affecting any Adjoining or Neighbouring Premises

6.24Perpetuity period

The perpetuity period applicable to this lease shall be 80 years from the commencement of the Contractual Term and whenever in this lease either party is granted a future interest there shall be deemed to be included in respect of every such grant a provision requiring that future interest to vest within the stated period and for it to be void for remoteness if it shall not have so vested

7.GUARANTOR’S COVENANTS

The Guarantor covenants with the Landlord that:

7.1To pay observe and perform

During the Term the Tenant shall punctually pay the rents and observe and perform the Tenant’s Covenants (as hereinafter defined) and other terms of this lease and if at any such time the Tenant shall make any default in payment of the rents or in observing or performing any of the Tenant’s Covenants (as hereinafter defined) or

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other terms of this lease the Guarantor will pay the rents and observe or perform the Tenant’s Covenants (as hereinafter defined) or terms in respect of which the Tenant shall be in default and make good to the Landlord on demand and indemnify the Landlord against all losses damages costs and expenses arising or incurred by the Landlord as a result of such non-payment non-performance or non-observance (including but without limitation any costs and expenses incurred by the Landlord in obtaining payment of any monies due from the Guarantor pursuant to this covenant) notwithstanding:

7.1.1Any time or indulgence granted by the Landlord to the Tenant or any neglect or forbearance of the Landlord in enforcing the payment of the rents or the observance or performance of the Tenant’s Covenants or other terms of this lease or any refusal by the Landlord to accept rents tendered by or on behalf of the Tenant at a time when the Landlord was entitled (or would after the service of a notice under the Law of Property Act 1925 section 146 have been entitled) to re-enter the Demised Premises

7.1.2That the terms of this lease may have been varied by agreement between the parties

7.1.3That the Tenant shall have surrendered part of the Demised Premises in which event the liability of the Guarantor under this lease shall continue in respect of the part of the Demised Premises not so surrendered after making any necessary apportionments under the Law of Property Act 1925 section 140 and

7.1.4Any other act or thing by which but for this provision the Guarantor would have been released

7.2To take lease following disclaimer

If at any time during the Term the Tenant (being an individual) shall become bankrupt or (being a company) shall enter into liquidation and the trustee in bankruptcy or liquidator shall disclaim this lease or if the Crown shall disclaim this lease or if this lease shall be forfeited by the Landlord under the right in that behalf herein contained the Guarantor shall if the Landlord shall by notice within 90 days after such disclaimer or forfeiture so require take from the Landlord a lease of the Demised Premises for the residue of the Contractual Term which would have remained had there been no disclaimer or forfeiture at the rents then being paid under this lease and subject to the same covenants and terms as in this lease (except that the Guarantor shall not be required to procure that any other person is made a party to that lease as guarantor) such new/lease to take effect from the date of such disclaimer or forfeiture and in such case the Guarantor shall pay the costs of such new lease and execute and deliver to the Landlord a counterpart of it

7.3To make payments following disclaimer

If this lease shall be disclaimed or forfeited and for any reason the Landlord does not require the Guarantor to accept a new lease of the Demised Premises in accordance with clause 7.2 the Guarantor shall pay to the Landlord on demand an amount equal to the rents for the period commencing with the date of such disclaimer or forfeiture and ending on whichever is the earlier of the following dates:

7.3.1the date of the expiration of a period of twelve months from the date of the forfeiture or disclaimer and

7.3.2the date (if any) upon which the Demised Premises are relet

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7.4Tenant’s Covenants

The expression “Tenant’s Covenants” used in this clause 7 means the covenants on the part of the Tenant contained in this lease

7.5AGA

7.5.1In this clause 7 “the AGA Obligations” means the covenants on the part of the Current Tenant (as defined in clause 3.30 of this lease) and conditions (if any) contained in any authorised guarantee agreement (as defined in the 1995 Act) (the “Authorised Guarantee Agreement”) which the Tenant (here meaning only the person who will be the Tenant upon the execution of this lease) may be required to enter into pursuant to clause 3.30.7 of this lease

7.5.2The Guarantor hereby covenants with the Landlord with effect from the entering into of such Authorised Guarantee Agreement in the terms of clauses 7.1 to 7.3 inclusive but with the substitution of “the AGA Obligations” for “the Tenant’s Covenants” throughout

7.5.3The parties hereby record their understanding that the AGA Obligations do not constitute tenant covenants for the purposes of the 1995 Act because they fall to be performed by a person who by reason of assignment has ceased to be the person for the time being entitled to the Term of this lease

8.DETERMINATION

If the Tenant wishes to determine this lease on the fifth anniversary of the commencement of the Term (“the Determination Date”) and shall give not less than six months’ prior written notice to the Landlord to that effect and shall at the time of the service of that notice pay the sum of Forty thousand and seventy five pounds (£40,075) and up to and including the Determination Date pay the principal yearly rent reserved by this lease and at the Determination Date deliver up the Demised Premises to the Landlord free from sub-tenancies and/or any other occupiers then upon the expiration of such notice this lease shall absolutely cease and determine but without prejudice to the rights of any party hereunder in respect of any antecedent claim or breach of covenant

9.LANDLORD AND TENANT ACT 1954

9.1The Landlord and the Tenant have agreed that the provisions of sections 24 to 28 (inclusive) of the Landlord and Tenant Act 1954 shall not apply to the tenancy created by this lease

9.2The Tenant hereby confirms that before the date of this lease:

9.2.1the Landlord served on the Tenant a notice dated 22 March 2005 in relation to the tenancy created by this lease (“the Notice”) in a form complying with the requirements of schedule 1 to the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 (“the Order”) and

9.2.2the Tenant or a person duly authorised by the Tenant in relation to the Notice made a statutory declaration (“the Declaration”) dated 23 March 2005 in a form complying with the requirements of schedule 2 of the Order

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9.3The Tenant further confirms that where the Declaration was made by a person other than the Tenant the declarant was duly authorised by the Tenant to make the Declaration on the Tenant’s behalf

9.4The Landlord and the Tenant confirm that this lease was not granted pursuant to any agreement for lease

10.CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999

10.1Unless the right of enforcement is expressly provided for in this lease a person who is not a party to this lease may not by virtue of the Contracts (Rights of Third Parties) Act 1999 enforce any of its terms

10.2Except to the extent that there is express provision in this lease to the contrary the parties may by agreement rescind or vary this lease without the consent of any such person

IN WITNESS whereof the parties to this lease have caused this document to be executed as a deed the day and year first before written

SCHEDULE 1
Tenant’s rights

1.The free passage and running of all services whatsoever from and to the Demised Premises through the Conduits serving the Demised Premises which are now or may at any time during the Term be in upon over or under or which may pass through the Building and/or any Adjoining or Neighbouring Premises

2.The right (subject to the rights reserved in schedule 2) to support for the Demised Premises from other parts of the Building and the Car Park

3.The right for the Tenant (in common with the Landlord and all others from time to time having similar rights and subject to the rights as set out in schedule 2) to use at all times of the day and night seven days a week such of the Common Parts as may be reasonably necessary for the use and enjoyment of the Demised Premises for the purposes permitted by this lease

4.The right for the Tenant (in common as aforesaid) to pass and re-pass with or without vehicles at all times during the day and night seven days a week over and along the Common Accessways for the purpose of obtaining access to and egress from the Building and Demised Premises

5.The right to use for the parking of two private motor cars only two car parking spaces which the Landlord shall from time to time designate in writing for the use of the Tenant in the Car Park

6.The right to load and unload vehicles delivering and picking up materials equipment and other items for use by the Tenant in the said parking space or such other area of the basement as shall from time to time be reasonably designated by the Landlord for the purpose subject to the Tenant making good any damage caused in the exercise of this right or by the delivery or collection of materials equipment and other items to and from the said parking space or basement from and to the Demised Premises

7.The right to connect into the network termination points and communications equipment and cabling of British Telecom or Mercury Telephone or any other provider of telecommunications services and which is now within the basement of

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the Building or within the Estate so as to provide telephone communications from and to the Demised Premises through the conduits which may serve the same

8.The right to use for the disposal of rubbish the area shown coloured purple on the Lease Plan numbered 3

9.The right (at the Tenant’s own cost) to have displayed the name of the Tenant and any other authorised occupier of the Demised Premises on the directory boards (if any) maintained for that purpose by the Landlord

SCHEDULE 2
Exceptions and Reservations to the Landlord

1.The right to support for the remainder of the Building the Car Park the Estate and/or any other Adjoining or Neighbouring Premises from the Demised Premises

2.The free and uninterrupted passage and running of all services whatsoever through the Conduits which are now or may during the Term be in upon over or under or which may run through the Demised Premises

3.The full right and liberty at all times during the Term to enter upon the Demised Premises by reasonable prior notice in order to carry out any works whatsoever which are required for the drainage of or for the supply of any services from and to any part of the Adjoining or Neighbouring Premises causing as little inconvenience or disturbance as reasonably practicable and making good all damage caused to the Demised Premises in the exercise of such right

4.Full right and liberty to enter by reasonable prior notice upon the Demised Premises at any time during the Term in order to erect scaffolding and/or to build on under or into any part of the Adjoining or Neighbouring Premises including (without prejudice to the generality of the foregoing) the Structure of the Building or to build over the Building making good all damage caused to the Demised Premises in the exercise of such right

5.The right and liberty to pull down alter divert stop-up or otherwise deal with any buildings constructions or areas (whether inside or outside the Building or the Estate) now or at any time standing upon any adjoining or adjacent land and to make or allow any excavation in any such land and to undermine underpin and shore up the Demised Premises in such manner as the owner of such land may think fit with full rights (after giving except in the case of emergency reasonable previous written notification) to enter into and upon the Demised Premises at all reasonable times for the purpose of carrying out any works whatsoever in connection with any such buildings constructions or areas or underpinning or shoring up or any of such purposes without obtaining the consent of the Tenant or anyone deriving title from the Tenant as the case may be PROVIDED ALWAYS that the person exercising this right shall make good all damage caused to the Demised Premises in the exercise of such right

6.Full right and liberty at all reasonable times during the Term by reasonable prior notice to enter on the Demised Premises to view the state and condition of and to execute any other works whatsoever upon the Adjoining or Neighbouring Premises or for any reasonable purpose in connection with the Adjoining or Neighbouring Premises or management of the Building causing as little inconvenience or disturbance as reasonably possible and making good all damage caused to the Demised Premises in the exercise of such right

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7.The right with the Appointed Surveyor determining the rent in default of agreement between the parties under any provisions for rent review contained in this lease at any time to enter at all reasonable times during the Term by reasonable prior notice and inspect and measure the Demised Premises for all purposes connected with the implementation of the provisions for rent review

8.Exclusive right and liberty to use the exterior of the Demised Premises for the purpose of erecting placing or fixing and working maintaining removing renewing and/or replacing by day and by night any lamps lamp brackets advertisements signs notices forms of display or any other fixtures or fittings required by the Landlord but so that access of light or air to the Demised Premises is not thereby substantially interfered with and that all damage thereby caused to the Demised Premises in the exercise of such rights is made good

SCHEDULE 3
Description of documents containing matters
subject to which the demise is made

The Superior Lease and the entries on the Registers of the registered title of the freehold of the Estate

SCHEDULE 4
Provisions relating to the Service Charge

Part 1
The Estate Charge

1.The maintenance repair and insofar only as the same is necessary for the purposes of repair renewal decoration cleaning and treatment of all external parts of the Estate

2.The maintenance repair and insofar only as the same is necessary for the purposes of repair renewal painting decoration cleaning and treatment of all the Common Accessways

3.The provision of lighting and floodlighting as appropriate and signage throughout the Estate from time to time

4.Refuse collection and pest control

5.The provision maintenance and operation of all apparatus plant machinery and equipment as the Landlord may reasonably require for the purposes of security maintenance or management of the Estate and whether or not provided at the date of this lease

6.The provision of appropriate security services and personnel (including equipment for the purposes of surveillance and supervision of users of the Estate)

7.The provision and maintenance of reasonable numbers of horticultural plants and ornamental features to all landscaped areas now or at any time in the future provided within the Estate

8.The maintenance cleansing and treatment as may be required of the Statue in the Estate

9.Rates water rates taxes duties charges assessments impositions and outgoings whatsoever payable in respect of the Estate including but without limitation any charges for electricity gas water and other services

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10.Insurance of the Estate or ancillary to the Estate services to the extent that the same is not provided for elsewhere in this lease

11.The provision of any other services not expressly mentioned above (whether or not ancillary to the items referred to above whether or not available or contemplated at the date of this lease) which the Landlord reasonably considers necessary or desirable for the benefit of the Estate or in the interests of good estate management and which shall be reasonably calculated to be for the benefit of two or more tenants of the Estate or be reasonably necessary for the maintenance upkeep or cleanliness of the Estate and in keeping with the principles of good estate management

Part 2
The Block Charge

1.The maintenance repair and insofar only as the same is necessary for the purposes of repair renewal decoration cleaning and treatment of the Structure and the Common Parts

2.The maintenance repair and insofar only as the same is necessary for the purposes of repair renewal decoration cleaning and lighting of the Common Parts including the carpeting re-carpeting as necessary or otherwise covering of the floors in the Common Parts

3.The inspection maintenance repair renewal replacement and insurance from time to time of the lifts within the Building

4.Refuse collection and pest control within the Building

5.The provision maintenance and operation of all apparatus plant machinery and equipment as the Landlord may reasonably require for the purposes of maintenance or management of the Building

6.The provision of security services and personnel and including equipment for the purposes of surveillance and supervision of the Building

7.The provision and maintenance of appropriate fire alarms fire prevention fire detection and fire fighting equipment and apparatus throughout the Building

8.The provision of air-conditioning ventilation and heating to the Building and including its Common Parts intended to be air-conditioned ventilated and/or heated including the supply of all fuel for such purpose and the inspection maintenance repair replacement and renewal from time to time of all equipment plant and machinery used in connection with the heating air conditioning and ventilation of the Building

9.The maintenance repair renewal decoration cleaning and treatment of window frames window furniture and sash cords (if any) and all glass in the windows within the Building

10.The provision of hot and cold water to each level of the Building

11.The maintenance and repair of the Conduits

12.Business rates water rates taxes duties charges assessments impositions and outgoings whatsoever payable in respect of the Common Parts including but without limitation any charges for electricity gas water and other services

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13.Caretaking commissionaire security and maintenance services as the Landlord may provide from time to time including salaries uniforms and other employee benefits of the staff employed by the Landlord from time to time in the provision of such services

14.Insurance of the Building or ancillary to the Building services to the extent that the same is not provided for elsewhere in this lease

15.The provision of any other services not expressly mentioned above (whether or not ancillary to the items referred to above and whether or not available or contemplated at the date of this lease) which the Landlord reasonably considers necessary or desirable for the benefit of the Building or in the interests of good estate management and which shall be reasonably calculated to be for the benefit of two or more tenants in the Building or be reasonably necessary for the maintenance upkeep and cleanliness of the Building and in keeping with the principles of good estate management

Part 3
Car Parking Charge

1.Maintenance repair and insofar only as the same is necessary for the purposes of repair renewal decoration cleaning and treatment as appropriate of all parts of the Car Park

2.Provision of lighting (including emergency lighting) throughout the Car Park

3.Refuse collection and pest control within the Car Park

4.The provision of signage and other means of traffic control throughout the Car Park

5.The provision of machinery plant and equipment as the Landlord may reasonably require in connection with the proper management and maintenance of the Car Park

6.Security and surveillance facilities and equipment (including items to control entry to and exit from the Car Park) as the Landlord may in its absolute discretion from time to time install in the Car Park

7.The provision and maintenance of fire alarms fire prevention fire detection and fire fighting equipment and apparatus in the Car Park

8.Insurance of the Car Park or ancillary to services provided in the Car Park (to the extent that the same is not provided for elsewhere in this lease)

9.Business rates water rates taxes duties charges assessments impositions and outgoings whatsoever payable in respect of the Car Park

10.The provision of any other services not expressly mentioned above (whether or not ancillary to the items referred to above and whether or not available or contemplated at the date of this lease) which the Landlord reasonably considers necessary or desirable for the benefit of the Car Park or in the interests of good estate management and which shall be reasonably calculated to be for the benefit of two or more users of the Car Park or be reasonably necessary for the maintenance upkeep or cleanliness of the Car Park and in keeping with the principles of good estate management

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Part 4
Service Charge

1.1As soon as practical after the end of each Service Charge Year the Landlord will furnish the Tenant with a statement (which shall be conclusive and binding except in the case of manifest error) of the management fee charged by the Landlord and the expenditure incurred in respect of the Services for the immediately preceding Service Charge Year (or part)

1.2The Tenant shall pay to the Landlord within fourteen days after the issue to the Tenant of such statement any balance shown by such statement to be due from the Tenant as being in excess of the aggregate amount of the quarterly payments paid by the Tenant on account of the Service Charge during the immediately preceding Service Charge Year (or lesser period if appropriate) and if the aggregate amount so paid by the Tenant on account of the Service Charge during the immediately preceding Service Charge Year (or lesser period if appropriate) exceeds the Service Charge for the immediately preceding Service Charge Year the Landlord shall credit the amount of the excess by way of set off against the next quarterly payment (and successive quarterly payments if necessary) due from the Tenant on account of the Service Charge except in the case of an amount owing at the end of the Term which shall be paid or repaid as the case may be

1.3Pending the ascertainment of the Service Charge for each Service Charge Year the Tenant shall pay by equal quarterly payments in advance on the four usual quarter days in every year such provisional sum by way of Service Charge as the Landlord shall specify in writing as being the amount of Service Charge reasonably required to enable the provision of the Services for such Service Charge Year PROVIDED THAT the Landlord shall have the right to vary the amount of any such quarterly payments to take account of any material changes in the estimated costs of providing the Services for such Service Charge Year

1.4Any Service Charge payment not made within a period of fourteen days of the demand therefor shall carry Higher Rate Interest on such sum

1.5For the avoidance of doubt the following expenses and costs incurred in connection with the provision of the services as set out in parts 1 2 and 3 of this schedule 4 (and the expression service or services where it occurs in this schedule shall apply to all or any of such services as the context may admit) shall from part of the Service Charge apportioned as the case may be between the Estate Charge the Block Charge and the Car Parking Charge for the purposes of calculation of the Service Charge and payment of the Service Charge or on account of the Service Charge by the Tenant:

1.5.1the proper and reasonable costs charges expenses and disbursements of the Landlord’s Surveyor for or in connection with the performance of the duties ascribed to him under the provisions of this lease

1.5.2the proper and reasonable fees of any accountant or surveyor employed to determine the cost of the Services

1.5.3the proper and reasonable fees of any firm of managing agents or other appointed agents employed or retained for or in connection with the general overall management and administration and supervision of the Estate and the Building and Car Park provided that in the event that the Landlord undertakes such functions in-house or through an associated or subsidiary company so that there is no firm of managing or appointed agents the Landlord shall be entitled to charge a management

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administration or supervision fee not exceeding 10% of the Service Charge

1.5.4the cost of carrying out any works required to comply with any statutory requirements

1.5.5all proper and reasonable costs in connection with the provision of staff the Landlord may deem appropriate for the provision of any of the Services including but not limited to:

1.5.5.1salaries National Insurance health care pension and other employee benefits

1.5.5.2uniforms working clothes tools utensils furniture equipment and other sundries as may be required for the proper performance of the duties of any such staff

1.5.5.3the provision of administrative or residential accommodation as may be required from time to time whether within or outside of the Estate for such staff and including any notional rent for such accommodation

1.5.6all proper costs of leasing or hiring any items of equipment which may be required from time to time for the better provision of the Services

1.5.7a reasonable allowance in respect of depreciation of plant equipment and machinery used for the provision of the Services

1.5.8taking any steps deemed necessary in the interests of good estate management by the Landlord in enforcing covenants of other tenants within the Building or making representations against third parties

1.5.9any proper and reasonable costs and expenses (not specifically referred to above) which may be incurred in providing other services and in carrying out the Landlord’s obligations under this lease as the Landlord may in its reasonable discretion but subject to the principles of good estate management deem desirable or necessary for the benefit of the Estate the Building and its tenants and occupiers

1.5.10Value Added Tax on any of the services

1.5.11There is to be excluded from the Service Charge any liability or expense for which the Tenant or other tenants or occupiers of the Building and of Buildings 2 and 3 Angel Square may individually be exclusively responsible to the Landlord under the terms of the lease pursuant to which they are in occupation

1.5.12The percentage payable by the Tenant of the Service Charge may not be increased or altered by reason only that any part of the Building and of Blocks 2 and 3 Angel Square may be vacant or be occupied by the Landlord or that any tenant or occupier of another part of them may default in payment or be responsible to pay less than the percentage of the Service Charge attributable to that part

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SCHEDULE 5
The Superior Lease

Date	Document	Parties
31.03.1995	Lease	Mesongage Limited (1) BICC Developments Limited (2) BICC plc (3)

as varied by:

(a)a deed made 25 March 1997 between (1) Helical Properties Investment Limited (2) BICC Developments Limited and (3) BICC plc

(b)a Licence to Assign and Deed of Variation made 23 December 1997 between (1) Helical Properties Investment Limited (2) BICC Developments Limited and (3) BICC plc

Executed as a deed by

BALFOUR BEATTY PLC by the

affixing of its common seal in the

presence of:

Director

Secretary

Signed by DAVID KEITH CHRISTOPHER GIBBON

As attorney (without personal liability) for

EVOLVING SYSTEMS LIMITED (FORMERLY CALLED TERTIO TELECOMS LIMITED)

by the affixing of its common seal

in the presence of:

/S/ DKC Gibbon as attorney
Witness:	/s/ Shona Kelly

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Stephen K. Gartside, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Evolving Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 16, 2005

/s/ STEPHEN K. GARTSIDE, JR.

Stephen K. Gartside, Jr.

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Brian R. Ervine, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Evolving Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 16, 2005

/s/ BRIAN R. ERVINE

Brian R. Ervine

Executive Vice President and Chief Financial and Administrative Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Stephen K. Gartside, Jr., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Evolving Systems, Inc. on Form 10-Q for the quarterly period ended March 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Evolving Systems, Inc.

/s/ STEPHEN K. GARTSIDE, JR.

Stephen K. Gartside, Jr.

President and Chief Executive Officer

May 16, 2005

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Brian R. Ervine, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Evolving Systems, Inc. on Form 10-Q for the quarterly period ended March 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Evolving Systems, Inc.

/s/ BRIAN R. ERVINE

Brian R. Ervine

Executive Vice President and Chief Financial and Administrative Officer

May 16, 2005