Edgar Filing: EVOLVING SYSTEMS INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K/A

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR

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

FOR THE TRANSITION PERIOD FROM TO
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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 (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
9777 MT. PYRAMID CT., ENGLEWOOD, COLORADO 80112
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES) (ZIP CODE)

(303) 802-1000
(REGISTRANT'S TELEPHONE NUMBER)

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE

SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:

COMMON STOCK, PAR VALUE $0.001 PER SHARE
(TITLE OF CLASS)

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

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

The approximate aggregate market value of the Common Stock held by
non-affiliates of the registrant, based upon the last sale price of the
Common Stock reported on the National Association of Securities Dealers
Automated Quotation National Market System was $2.56 as of March 1, 2001.

The number of shares of Common Stock outstanding was 12,953,442 as
of March 1, 2001.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III (Items 10, 11, 12 and 13) is
incorporated by reference to portions of the registrant's definitive proxy
statement for the 2000 Annual Meeting of Stockholders, which will be filed,
with the Securities and Exchange Commission within 120 days after the close
of the 2000 year.

EXPLANATORY NOTE

Evolving Systems, Inc. is filing this Amendment to its Form 10-K, to
correct a clerical error contained on page F-16 of the Form 10-K filed with
the SEC on March 23, 2001. The Net Income (loss) per common share reported
for the Third Quarter should have been reported as a loss of $0.25. The
actual dollar amount of the loss for the Third Quarter is reported correctly
directly above the per share information and the financial information for
the year is correctly reported elsewhere in the Form 10-K. The Company is
filing this Amendment for clarification purposes.

EVOLVING SYSTEMS, INC.
1ST AMENDMENT TO
ANNUAL REPORT ON FORM 10-K/A
DECEMBER 31, 2000
TABLE OF CONTENTS

PAGE

PART I

Item 1 Business................................................................................. 3
Item 2 Properties............................................................................... 14
Item 3 Legal Proceedings........................................................................ 14
Item 4 Submission of Matters to a Vote of Security Holders...................................... 14

PART II

Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.................... 15
Item 6 Selected Financial Data.................................................................. 15
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.... 16
Item 8 Consolidated Financial Statements and Supplementary Data................................. 21
Item 9 Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure................................................................. 21

PART III

Item 10 Directors and Executive Officers of the Registrant....................................... 22
Item 11 Executive Compensation................................................................... 22
Item 12 Security Ownership of Certain Beneficial Owners and Management........................... 22
Item 13 Certain Relationships and Related Transactions........................................... 22

PART IV

Item 14 Exhibits, Financial Statement Schedule and Reports on Form 8-K........................... 23

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED IN THIS DOCUMENT,
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO; THOSE DISCUSSED IN THIS SECTION,
IN THE SECTIONS ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "RISK FACTORS."

PART I

ITEM 1. BUSINESS

INTRODUCTION

Evolving Systems is a leading provider of telecommunications
software solutions for complex wireline and wireless data applications.
Customers include Regional Bell Operating Companies, InterExchange Carriers,
and several of the nation's largest wireless carriers. We are the nation's
leading provider of Local Number Portability (LNP) solutions and are
expanding our presence in the high-growth wireless data communications
market. We possess special expertise in operations system support software
(OSS) that encompasses order management, complex provisioning, service
activation and customer care systems. We deliver solutions to our customers
that include combinations of our LNP and OSS software products, consulting,
system integration, custom software development, training and customer
support.

From our inception in 1985 through 1996, Evolving Systems focused on
providing custom software development services to a limited number of
telecommunications companies. Beginning in 1996, we made a strategic decision
to expand our focus to include development of Local Number Portability (LNP)
software products. Our LNP software solutions enable carriers to meet the FCC
requirement that customers retain their local phone numbers when changing
service providers, and is in use by all but one of the Regional Bell
Operating Companies (RBOC's), a major long distance carrier, and a local
broadband services provider. Over time we have expanded our LNP product
features and developed other LNP related OSS software products.

We developed and continue to maintain the software currently in use
by all Number Portability Administration Centers (NPAC's) in the United
States and Canada. The software receives ported telephone number information
as changes occur and distributes the data to all subscribing carriers in the
region. This software is provided under contract to NeuStar, Inc., formerly a
division of Lockheed Martin IMS.

We also provide several custom solutions to incumbent local exchange
carriers (ILEC's) for the provisioning and fulfillment of customer orders.
These solutions focus on the flow-through provisioning of Advanced
Intelligent Network (AIN) services within a carrier's network environment.

We developed and continue to maintain and enhance software for
wireless data network elements, which are owned and marketed by Lucent
Technologies (Lucent). In the year 2000 we added new wireless customers and
have expanded our R&D for new wireless products that are expected to be
released in 2001.

At the end of 2000 we began development of a Presence and
Availability Management (PAM) server software product. It will be offered
initially to the wireless instant messaging market. We continue to use our
technical strengths to position us as a leading provider of OSS and wireless
data solutions.

INDUSTRY BACKGROUND

THE TELECOMMUNICATIONS INDUSTRY

Historically, telecommunications carriers have operated in a highly
regulated environment, with local and long distance telephone service
providers operating as near monopolies with little competition. Deregulation
and the widespread adoption of new telecommunications technologies, such as
fiber optics, packet-data networks, digital wireless telephony and
Internet-based services, have significantly increased the number of
telecommunications carriers and created an increasingly competitive market.
New entrants to the telecommunications service market include CLEC's,
alternate access providers, internet service providers (ISPs) and wireless
service providers.

COMPETITION AND DEREGULATION

The U.S. long distance market was opened to competition beginning in
the early 1970s. More recently, the Telecommunications Act of 1996 (the Act)
provides for the introduction of competition in local telephone service,
allowing long distance, wireless and other carriers to enter local telephone
markets. The Act, among other things, requires RBOCs and other ILEC's to
offer LNP, which allows customers to retain their local phone numbers
regardless of the carrier providing local telephone service.

OPERATIONS SUPPORT SYSTEMS

OSS encompasses a broad array of software and systems that perform
critical functions for telecommunications carriers, including ordering,
provisioning, service assurance and billing. Ordering systems allow carriers
to collect customer information, retrieve current service information,
capture and validate new service requests, verify the availability of
selected services and transmit completed orders to one or more provisioning
OSS. Carriers use provisioning systems to install services for new customers
and to change or add services for existing customers. Service assurance
systems allow carriers to perform the testing, monitoring and reporting
necessary to maintain network availability and feed operational data to other
business systems. Carriers use billing systems to collate, manage and report
billing information. Some industry trade press also include customer care
systems in the OSS market segment.

Historically, as existing carriers have added new services, such as
wireless or Internet-based services, they have developed multiple, distinct
OSS. These legacy, proprietary OSS have typically been mainframe-based
systems that in many cases utilize incompatible software and technologies,
making communication among systems difficult. These OSS are further strained
by the many incremental changes that have been made in order to accommodate
new technologies, such as client/server technology and advancements in data
networking, and the proliferation of value-added services, such as call
waiting, call forwarding and voice mail. Despite these difficulties, carriers
are unable to completely replace existing OSS due to the large investments
and vast amounts of historical data contained in these systems. As a result,
carriers continue to make incremental modifications to these OSS, further
increasing their complexity and interoperability difficulties.

LNP CHALLENGES TO CURRENT OSS

The LNP requirements of the Act pose significant technological
challenges to existing carriers' OSS, which are already strained by the
changes caused by increasing competition, new technologies and the
introduction of value-added services. LNP invalidates a fundamental design
assumption of many existing OSS, which is the association between a
customer's telephone number and the geographic location of a carrier's
particular physical switch. Provisioning systems now must be able to receive
and distribute on a real-time basis, certain customer data in order to assure
proper call handling, routing and completion. If the LNP data from ported
numbers are not properly distributed to all involved

carriers, any call to and from that number will not be routed correctly,
causing service problems for customers. With LNP, the phone number can be
associated with a different switch each time the customer changes carriers.

After altering provisioning systems, carriers must then implement
changes throughout many of their other OSS. These OSS are "hard-coded" in
that each telephone number corresponds to a physical switch for the ordering,
service assurance and billing systems. The implementation of LNP also
requires new systems to pool, allocate and assign telephone numbers. Changes
will be required to existing billing systems, which currently associate a
telephone number with a fixed geographic location. As a result of these
challenges, we believe a significant market opportunity exists for providing
solutions to carriers that must address these OSS problems. LNP is in
operation now in the wireline service provider networks. The FCC has mandated
that LNP must be in operation for wireless networks by November 24, 2002. The
wireless service providers have plans to begin testing their LNP solutions
during 2001.

NEW TECHNOLOGIES AND EXPERIENCE

The telecommunications industry is continually developing new
technology in all aspects of telephony. One of the newer technologies is
instant messaging (IM). IM is a service in which a consumer can send a text
message to other individuals if they are logged into the network. In order
for IM to work, it is necessary for a database to have the current presence
state (i.e., logged on or logged off) of all individuals that wish to
communicate with IM. This is a specific instance of a class of data called
presence data. Other examples would be data indicating if a cell phone were
on or off.

Members of the communication industry recognize that there is value
associated with establishing standards for storing, updating, and accessing
data about presence and availability data. As a result, the Presence and
Availability Forum (PAM) was created as a non-profit organization dedicated
to creating and promoting PAM standards. The PAM Forum specification is
designed to allow communications systems to share authorized information
about subscribers' identity, presence and availability across telephony and
IP technologies while providing the capability to protect privacy. George
Hallenbeck, our CEO, is the current Chairman of the PAM Forum Board.

EVOLVING SYSTEMS' STRATEGY

Recognizing the opportunity created by the ongoing deregulation of
local telephone service, we have capitalized on our historic strength as a
leading architect and developer of solutions for technically challenging OSS
requirements. We position ourselves as a leading provider of LNP solutions
across the entire telecommunications industry. As LNP expands to include
wireless carriers, we are positioned to enable them with LNP capabilities.
Our knowledge of OSS applications, wireless technology and LNP provides a
base of domain expertise necessary to continue our leadership position in the
industry.

We have greatly expanded our sales force over the last two years and
have added considerable analytical talent to our marketing department. The
combination of more market research data and well-focused sales staff has
resulted in an increase of 33% in our customer base in 2000. Our strategy is
to better understand our customers' overall OSS requirements and propose
solutions beyond our dominant LNP product line. With our expanded group of
technical analysts and improved knowledge of our customers' competitive
challenges, we have expanded our presence into other OSS solutions for our
customers.

EVOLVING SYSTEMS' BUSINESS STRUCTURE

We are organized into two main business groups that build on our
core competencies and domain expertise to form an end-to-end solution for
each customer's specific requirements. The business groups combine domain
expertise with product components and professional services to create next
generation OSS solutions for the carrier.

OSS PRODUCTS GROUP

Our LNP products enable carriers to accommodate customer requests to
change service providers while retaining the same phone number, and to
exchange call routing data to carriers' networks via the NPAC. Evolving
Systems' LNP products Order Path-Registered Trademark- (a Local Service Order
Administration component) and Number Manager-Registered Trademark- (a Local
Service Management System component) were introduced in 1997. Since then, we
have introduced numerous additional products, adapters and interfaces. We
generally license our LNP products, separately or bundled, as a complete
solution. Our group is also responsible for ongoing maintenance of these
products and is responsible for the development and support of integration
software needed to integrate the products with customers' legacy systems.

We are expanding the ways we offer our LNP solutions and we have
entered into agreements with application service providers (ASP) who will
offer our solutions on a recurring revenue basis. We will share in the
monthly recurring revenue stream that is produced. Customers typically engage
Evolving Systems to provide installation, integration and testing of the LNP
products in connection with these licenses. Customers also rely on us for
ongoing support and enhancement of these solutions. General software upgrades
and enhancements for all products are under development as well as new
features being continually planned.

NPAC BUSINESS UNIT. We developed and continue to maintain the software
currently in use by all NPAC's in the United States and Canada. The software
receives ported telephone number information as changes occur and distributes
the data to all subscribing carriers in the region. The software is provided
under contract to Neustar, Inc.

SERVICE ACTIVATION AND FULFILLMENT UNIT. The Service Activation unit
provides a wide range of custom solutions to ILEC's and CLEC's for the
provisioning and fulfillment of customer orders. The solutions focus on the
flow-through provisioning of Advanced Intelligent Network (AIN) services
within a carrier's network environment. We are developing new components of
the solutions developed in the Service Activation business group for sale as
products to the general marketplace. The products will provide interfaces to
available order management OSS and network elements for seamless integration.

WIRELESS DATA GROUP

This business group provides custom software infrastructure products
for Lucent, a leading equipment supplier. The infrastructure products enable
Cellular Digital Packet Data (CDPD), CDMA, and Over-the-Air-Service
Provisioning (OTASP) in wireless network environments. Evolving Systems
provides full lifecycle support for these products including the development
and ongoing maintenance releases. The Wireless Data Group also maintains a
service bureau offering for the billing of wireless data. We are developing a
family of wireless telecom products based on a new technology, called
Presence and Availability Management (PAM). PAM is a response to the
tremendous proliferation of both the volume of communications and modes of
communication in today's world. As a telecommunications management
technology, PAM is designed to provide individuals with control over the flow
of communications to them. It will enable people to manage when, where and
how others may communicate with them.

MARKETING AND SALES

The primary objectives of our marketing efforts are to build
Evolving Systems' expanded capabilities image, generate market awareness and
produce qualified leads. Our marketing efforts include direct sales to
targeted accounts, participation in selected trade shows, a strong website

presence, print and electronic advertising, story placement in telecom
industry trade media, presentations at industry conferences and forums, press
releases to the industry, and certain other marketing initiatives.

Evolving Systems' sales activities are conducted through a direct
sales force, complemented by other sales channels. We rely on resellers and
alternate channels to further penetrate the LNP market with the smaller
carriers while focusing our direct sales efforts on Tier 1 customers and
prospects. We assign a dedicated account manager to each major customer to
ensure that both the sales relationship and the business relationship are
managed well. The sales closing cycle can be quite long in the
telecommunications business due to both the complexity of products and
integration issues that make major systems decisions difficult. Typically,
the sales cycle takes three to twelve months.

The alternate channels, such as strategic distribution partners,
help to identify and qualify leads. We increased the focus on resellers and
alternate sales channels in 2000 to further penetrate the LNP market. As a
result of this expanded focus and our strategic goal to increase recurring
revenue, we have added strategic partners to offer our software through
ASP's. Our marketing and sales efforts have been focused primarily on
facility-based local exchange, interexchange and wireless service providers
in the United States, and this group has comprised the majority of our
customers.

RESEARCH AND DEVELOPMENT

Evolving Systems' research and development efforts are focused on
identifying market requirements and performing design and development
functions. These activities follow our product development process that
governs the focus of providing new feature sets into existing product lines
in order to meet near-term customer needs. This process provides our senior
management with a series of decision milestones that allows the evaluation of
ongoing projects on a regular basis. Normally, we do not fund significant
development efforts without first having a customer to buy the resulting
product. With our expansion into new wireless technologies, we have increased
our R&D efforts, which should result in an increased stream of new product
releases. We believe our R&D expenditures will continue to show a significant
increase, that we believe will drive revenue growth.

COMPETITION

The market for telecommunications software is intensely competitive
and is subject to rapid technological change, changing industry standards and
regulatory developments. Evolving Systems faces 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 certain of our
customers, that have substantially greater financial, manufacturing,
technological, marketing, distribution and other resources, larger installed
customer bases and longer-standing relationships with telecommunications
customers than we do. Although we concentrate on providing software and
services for the telecommunications industry, the market for
telecommunications software is extremely large and we currently hold only a
very small portion of the market share outside of the LNP segment. We
differentiate ourselves from competitors through our combination of products,
services and strategic alliances. Evolving Systems consults, develops
software, integrates third party software and interconnects customers
existing operating systems. Very few competitors can offer all of these
capabilities and depth of knowledge.

The principal competitors in the LNP space include Telcordia
(formerly known as Bellcore) and Tekelec, Inc. (Tekelec). We expect
competition to increase in the future from existing suppliers 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.

Many telecommunications companies have large internal development
organizations, which develop software solutions and provide services similar
to our products and services. ILEC's that have implemented LNP solutions are
well suited to provide LNP services for smaller CLEC's within their regions.
Recent independent market research data indicate that more telecommunications
companies are outsourcing their software solutions due to time to market
considerations. We have addressed this market segment by partnering to
provide our software through the ASP model.

We believe that our ability to compete successfully depends on a
wide range of internal and externally controlled factors. Evolving Systems
plans to compete by providing quality solutions that are tailored
specifically to the customer. We are organized to provide core products and
complimentary services that provide a total solution for the application
area. We create a long-term relationship with the customer by providing
ongoing support, extensions of the original solution, and new related
solutions.

INTELLECTUAL PROPERTY

Evolving Systems relies on a combination of copyright, trademark and
trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect its proprietary rights. We presently
have U.S. patents on elements of our three LNP products:
NumberManager-Registered Trademark-, OrderPath-Registered Trademark-and
NodeMaster-Registered Trademark-.

EMPLOYEES

As of December 31, 2000, Evolving Systems employed 317 people, of
which 70% were involved in service provisioning, consulting practices and
product development. Additionally, 10% of our staff is in marketing and
sales, and 20% in general administration.

RISK FACTORS

FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS

Evolving Systems' operating results have fluctuated significantly in
the past and are likely to continue to fluctuate significantly in the future.
Fluctuations in operating results may cause volatility in the price of our
Common Stock. These quarterly fluctuations may result from a number of
factors, including the size of new contracts and when they are signed; our
rate of progress under our contracts; the timing of customer and market
acceptance of our products and service offerings; 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 Act; 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 renewal rate of support
agreements; how much we spend and the timing of expenses for research and
development and sales, general and administrative expenses; competition by
existing and emerging competitors in the telecommunications software markets;
our success in developing and marketing new products, controlling cost,
attracting and retaining qualified personnel and expanding our sales and
marketing programs; regional office expansion; software defects and other
product quality problems; changes in our strategy; the extent of industry
consolidation and general economic conditions. In the past, we earned a
significant portion of our revenue from a small number of customers. We
expect that will continue. As a result, the loss of any significant customer,
delays in delivery or acceptance of any of our products by a customer or
delays in the performance of services for a customer could be materially
harmful to Evolving Systems' business, financial condition, results of
operations, and cash flows.

Evolving Systems' expense levels are based in significant part on
our expectations regarding future revenue. Our revenue is difficult to
forecast because the market for our products and services is rapidly
changing, and our sales cycle and the size and timing of large contracts vary
substantially among customers. As a result, we may be unable to adjust
spending in a timely manner to compensate for any unexpected shortfall in
revenue.

Based on all of the things described above, we believe that future
revenue, expenses and operating results are likely to vary significantly from
quarter to quarter. Because of this, quarter-to-quarter comparisons of
operating results are not necessarily meaningful nor do they indicate what
our future performance will be. Furthermore, we believe it is likely that in
some future quarter our operating results will be below the expectations of
public market analysts or investors. If that occurs, the market price of our
Common Stock would likely go down.

DEPENDENCE UPON TELECOMMUNICATIONS INDUSTRY; REGULATORY UNCERTAINTIES

The market for our OSS products was created and has primarily been
driven by the adoption of regulations under the Act requiring 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 Act, or any
legal challenges to the Act, could hurt the market for our products and
services. For example, when the FCC delayed implementation of the Act with
respect to wireless carriers until November 2002, these delays had an impact
on our revenue from our LNP products and services. Additional delays in the
deadlines imposed by the Act or the FCC, or any invalidation, repeal or
modification in the requirements imposed by the 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.

RELIANCE ON SIGNIFICANT CUSTOMERS

Historically, a substantial portion of Evolving Systems' revenue
came from a limited number of customers. During the years ending December 31,
2000, 1999, and 1998, we recognized approximately 93%, 84%, and 87%, of total
revenue from ten, five, and six, customers, respectively, all in the
telecommunications industry. Although we are striving to sell more of our
software solutions on a recurring revenue basis, where we share in the
revenue generated by our customers when they use our software, the impact of
this effort is still not certain and we cannot predict how successful it will
be. We may continue to depend on large contracts with a small number of
significant customers. This can cause our revenue and earnings to fluctuate
between quarters based on the timing of contracts and when our customers
install our products. None of our major customers have any obligation to
purchase additional products or services beyond annual maintenance contracts
that they may or may not renew each year. As a result, our failure to
maintain relationships with our existing customers or to develop
relationships with significant new customers would materially harm our
business, financial condition and results of operations.

LENGTHY IMPLEMENTATION PROCESS; CUSTOMER ACCEPTANCE OF COMPANY SOLUTIONS

Implementing our solutions can be a relatively complex and lengthy
process to adapt and 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 before the contract is considered complete. Although
we have not experienced difficulties in obtaining customer acceptance,
unanticipated difficulties or delays in the customer acceptance process could
result in higher costs and delayed payments. In addition, if we 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 previously paid or other amounts as liquidated 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

LENGTHY SALES CYCLE / CONSOLIDATIONS IN THE INDUSTRY

Large telecommunications service providers for enterprise-wide,
mission-critical purposes, involving significant capital expenditures and
lengthy implementation plans, generally use Evolving Systems' software
products and services. 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 12
months, making it difficult for us to forecast the timing and magnitude of
sales contracts. Delays associated with customers' internal approval and
contracting procedures, procurement practices, and testing and acceptance
process are common. 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 or results of
operations and cause our operating results to vary significantly from quarter
to quarter.

The telecommunications industry is currently experiencing
significant reorganization and consolidation. Mergers and acquisitions of
large telecommunications companies, as well as the formation of new
alliances, have resulted in a constantly changing marketplace for our
products and services. Delays associated with these changes are common. It is
also possible that we could lose customers as a result of these
consolidations. 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.

FIXED-PRICE CONTRACTS

Evolving Systems historically derived a majority of its revenue from
contracts that were billed on a time-and-materials basis. This changed in
1996, when we began doing more projects on a fixed-price basis. We anticipate
that customers will continue to request that we provide software and
implementation 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, which has occurred on certain fixed-price
contracts, resulting in lower than anticipated margins. We can give no
assurance that we will not incur similar budget overruns in the future. If we
incur budget overruns, our gross margins and results of operations may be
materially harmed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

RAPID TECHNOLOGICAL CHANGE; RISKS ASSOCIATED WITH NEW VERSIONS AND NEW
PRODUCTS; RISKS OF SOFTWARE DEFECTS

The market for Evolving Systems' products and services is subject to
rapid technological changes, evolving industry standards, changes in carrier
requirements and preferences and frequent new product introductions and
enhancements. The introduction of products that incorporate new technologies
and emergence of new industry standards can render 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. There can be no assurance that 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 and
results of operations could be materially harmed.

We intend to periodically issue interim and new releases of our
family of software products. In addition, we intend to develop new products.
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.

COMPETITION; RISKS ASSOCIATED WITH RECRUITING AND RETAINING PERSONNEL

Evolving Systems' 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 market include
Telcordia and Tekelec. In addition, NeuStar has retained rights to the NPAC
software we developed for NeuStar, and NeuStar potentially could compete with
us with respect to LNP products and related services. There also can be no
assurance that other 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 to increase in the future from ASPs,
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, 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 are
all factors that affect our ability to compete successfully. Some of these
factors are within our control, and others are not. A variety of potential
actions by our competitors, including a reduction of product prices or
increased promotion, announcement or accelerated introduction of new or
enhanced products, or cooperative relationships among competitors, could harm
our business, financial condition and results of operations. 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, such as in the wireless data area where we are participating in
an industry forum to establish standards to manage the presence and
availability of wireless communications. Our failure to adapt to emerging
market demands, respond to regulatory and technological changes or compete
successfully with existing and new competitors would materially harm our
business, financial condition and results of operations.

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. We
anticipate that we will need to hire additional development personnel.
Competition for development and other technical personnel is intense, and
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, and continue to experience,
difficulty in recruiting and retaining such personnel. Our failure to retain
personnel or to hire qualified personnel on a timely basis could materially
harm our business, financial condition and results of operations.

We continue to put new financial, project accounting and sales
tracking software packages in place. Our ability to implement these new
systems is likely to place substantial demands on certain of our managerial
resources. In addition, if we are unable to implement these software packages
effectively, we may not be able to accurately forecast and manage our
business. Our failure to manage any expansion effectively, including any
failure to integrate new management and employees or failure to continue to
implement and improve financial, operations and management controls, systems
and procedures, could materially harm our business, financial condition and
results of operations.

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 from Company funds. 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; RISKS OF INFRINGEMENT

Our success and ability to compete are dependent to a significant
degree on our proprietary technology. We rely on a combination of copyright,
trademark and trade secret laws, as well as confidentiality agreements and
licensing arrangements, to establish and protect our proprietary rights. We
have U.S. patents on elements of our three LNP products,
NumberManager-Registered Trademark-, OrderPath-Registered Trademark- and
NodeMaster-Registered Trademark-. 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 do 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. It
is also possible that we will inadvertently infringe upon the intellectual
property rights of a third party. Litigation may also be necessary in the
future to enforce our intellectual property rights, to determine the validity
and scope of the proprietary rights of others or to defend against claims of
infringement or invalidity. Such litigation could result in substantial costs
and diversion of management time and resources and could materially harm our
business, financial condition and results of operations.

POSSIBLE VOLATILITY OF STOCK PRICE

In the past, the trading price of Evolving Systems' 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, changes in financial estimates by securities
analysts, the operating and stock price performance of other companies that
investors may deem comparable to Evolving Systems, 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 that 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 Evolving Systems' Common Stock will trade at or
higher than its current price.

ITEM 2. PROPERTIES

During fiscal year 2000, we leased office space at three locations
including one in Englewood, Colorado, one in Louisville, Colorado and one in
Santa Maria, California. We also lease sales offices in New Jersey, St. Louis,
Missouri and Vienna, Virginia. Our leases are shown below:

SQUARE LEASE
LOCATION FOOTAGE EXPIRATION

Meridian...................................................................... 120,281 2/13/16
Santa Maria................................................................... 6,600 8/31/01
Louisville.................................................................... 10,992 10/31/02
Virginia...................................................................... 1,871 10/31/04
New Jersey.................................................................... 2,951 1/31/05
Missouri...................................................................... 2460 4/30/03

ITEM 3. LEGAL PROCEEDINGS

In June 1998, four securities class action complaints were filed
against Evolving Systems and certain of its current and former officers and
directors in the U.S. District Court for the District of Colorado alleging
violations of the federal securities laws. The complaints were consolidated.
The plaintiffs claimed to represent a class of persons who purchased our
securities during the period of May 12, 1998 through July 23, 1998. The
complaints alleged that Evolving Systems and certain of its officers misled
the investing public regarding our financial prospects. We denied these
allegations. The parties reached a settlement of $10 million, of which we
paid $2.5 million in April 1999. The Court approved the settlement on October
4, 1999. We had approximately $719,000 in legal costs associated with the
lawsuit.

From time to time we are involved in various legal proceedings
arising in the normal course of business operations. We do not expect that
any such proceedings will have a material adverse effect on our financial
position, results of operations, or cash flows.

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

On March 23, 2001, the Company solicited the written consent of its
security holders with respect to (a) Election of Directors; (b) Amendment of
the Company's Stock Option Plan; (c) Amendment to the Company's Employee
Stock Purchase Plan; and (d) Ratification of PricewaterhouseCoopers LLP as
the independent accountants of the Company.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

Our Common Stock began trading publicly through the NASDAQ National
Market under the symbol "EVOL" on May 12, 1998. Prior to that date, there was
no public market for the Common Stock. The closing price of our Common Stock
as reported on the NASDAQ National Market as of March 1, 2001 was $2.56 per
share. The following table sets forth for the periods indicated the high and
low closing sale quotations for the Common Stock as reported on the NASDAQ
National Market. The prices reported do not include retail mark-ups,
markdowns or commissions.

HIGH LOW HIGH LOW
2000 1999
---- ----
FOR THE FISCAL YEARS
ENDED DECEMBER 31,

First Quarter................................................... $15.22 $7.75 $8.75 $3.63
Second Quarter.................................................. $12.00 $3.00 $6.13 $3.88
Third Quarter................................................... $8.69 $4.75 $7.13 $3.75
Fourth Quarter.................................................. $6.94 $2.16 $10.50 $5.00

As of March 1, 2001, there were approximately 215 holders of record
of the Company's Common Stock.

We have not declared or paid a cash dividend on its Common Stock. We
currently intend to retain any future earnings, if any, to finance the growth
and development of our business and, therefore, do not anticipate paying cash
dividends in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below for each of the years in
the five-year period ended December 31, 2000, have been derived from our
consolidated financial statements and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the financial statements and the notes thereto and other
financial information included elsewhere in this Annual Report on Form 10-K.

2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Revenue.............................................................. $52,842 $40,487 $37,238 $42,720 $36,918
Cost of revenue...................................................... 33,603 26,935 27,104 25,224 24,531
Sales and marketing.................................................. 8,491 4,516 5,739 5,065 2,913
General and administrative........................................... 12,105 9,705 8,566 8,635 8,587
Research and development............................................. 370 1,064 7,197 2,914 641
Income (loss) from operations........................................ (1,727) (1,732) (11,368) 882 246
Other income (expense)............................................... 682 (2,415) (60) (1,395) (1,422)
Provision for (benefit from) income taxes............................ - - (601) (791) 81
Net income (loss) (1)(2)............................................. (1,045) (4,148) (11,273) 278 (1,257)
Basic income (loss) per share........................................ (0.08) (0.34) (1.43) 0.18 (0.82)
Diluted earning (loss) per share..................................... (0.08) (0.34) (1.43) 0.03 (0.82)
Working capital...................................................... 30,150 28,904 31,009 5,366 6,390
Total assets......................................................... 47,934 49,628 47,479 27,859 24,356
Long-term debt, net of current portion............................... 0 170 825 16,465 18,096
Stockholders equity.................................................. 36,838 36,541 39,362 1,698 996

-----------

(1) Prior to January 6, 1996, Evolving Systems was an S corporation for
federal and state income tax purposes, and, accordingly, our income was
taxed directly to our stockholders at that time.

Net loss for 1996 does not reflect the estimated federal and state income
taxes that would have been payable if we had not been an S corporation
prior to January 6, 1996.

(2) Included in the net loss for 1998 is an extraordinary loss on early
extinguishment of debt of approximately $446,000, net of $220,000 in
income tax benefit.

The following table presents, for the periods indicated, certain
items contained in our statement of operations reflected as a percentage of
total revenue:

1998 1999 2000
---- ---- ----
YEAR ENDED DECEMBER 31,

Revenue:
License fees and related services........................................... 27.3% 20.1% 38.6%
Other services.............................................................. 72.7 79.9 61.4
Total revenue............................................................... 100.0 100.0 100.0
Cost of revenue:
License fees and related services........................................... 22.2 20.3 17.8
Other services.............................................................. 50.6 46.2 45.7
Total cost of revenue....................................................... 72.8 66.5 63.5
Gross margin.................................................................. 27.2 33.5 36.5
Operating expenses:
Sales and marketing......................................................... 15.4 11.2 16.1
General and administrative.................................................. 23.0 24.0 22.9
Research and development.................................................... 19.3 2.6 0.7
Total operating expenses...................................................... 57.7 37.8 39.7
Operating loss................................................................ (30.5) (4.3) (3.2)
Other income (expense), net................................................... (0.2) (6.0) 1.3
Loss before income taxes...................................................... (30.7) (10.3) (1.9)
Provision for (benefit from) income taxes..................................... (1.6) 0.0 0.0
Net loss before extraordinary item............................................ (29.1) (10.3) (1.9)
Extraordinary item, net of taxes.............................................. 1.2 - -

Net loss...................................................................... (30.3) (10.3) (1.9)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH IN THIS SECTION AND IN THE SECTION
ENTITLED "RISK FACTORS."

INTRODUCTION

Evolving Systems, Inc. was formed in 1985, with the purpose of
designing and integrating software systems for the telecommunications
industry. Software projects are bid on either a fixed price or time and
materials basis. From our inception in 1985 through 1996, we focused on
providing custom software development services, primarily to two large
customers. Beginning in 1996, we broadened our focus to include the
development and licensing of proprietary software products in response to
declining demand from key customers for custom software development services
that reflected the changing industry patterns for software procurement.

The Company had an excellent market for its LNP products in 1997 as
a result of the mandated requirements for LNP capabilities in the Act.
License fees and related services revenues for 1997 were over $20,000,000.
Other services of the business also increased due to considerable integration
support needed to implement LNP. This market demand did not carry forward
into 1998 or 1999 for those LNP products. We refocused our LNP products sales
efforts to other market segments such as wireless and infrastructure
providers but these segments were much smaller than the wire line portion of
the telecommunications market and FCC approved delays in implementation of
LNP for the wireless industry had an impact on sales of LNP products to
wireless carriers. The result was a substantial decline in license fee and
related services in 1998 and 1999. With the pressure from the FCC back on to
comply with the Act, the demand has again increased for LNP software and we
have experienced significant sales of LNP licenses and related services
during the year ended December 31, 2000.

REVENUE RECOGNITION

Evolving Systems recognizes revenue in accordance with the
provisions of Statement of Position 97-2, "Software Revenue Recognition," as
amended. We derive revenue from license fees and services under the terms of
both fixed price and time and materials contracts. License fees and related
services revenue consists of revenue from contracts involving our LNP
software products and related services. Other services revenue consists of
revenue from custom programming, systems integration of third party products,
annual maintenance contracts and training.

License fees and related services revenue is generated from
fixed-price contracts that provide for both licenses and services. Revenue
under these arrangements, where the services are essential to the
functionality of the delivered software, is generally recognized using the
percentage-of-completion method of accounting. The percentage-of-completion
for each contract is determined based on the ratio of direct labor hours
incurred to total estimated direct labor hours. Amounts billed in advance of
services being performed are recorded as unearned revenue. Unbilled
work-in-progress represents revenue earned but not yet billable under the
terms of the fixed-price contracts and all such amounts are expected to be
billed and collected during the succeeding 12 months.

In arrangements where the services are not essential to the
functionality of the delivered software, we recognize license revenue when a
license agreement has been signed, delivery has occurred, the fee is fixed or
determinable and collectibility is probable. 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") exists. If VSOE does not exist, fees from such arrangements are
deferred until the earlier of the date that VSOE does exist, or all of the
elements are delivered.

Services revenue provided under fixed-price contracts is generally
recognized using the percentage-of-completion method of accounting described
above. Revenue from other services provided pursuant to time-and-materials
contracts is recognized as the services are performed.

Annual maintenance revenue is recorded as deferred revenue and is
recognized ratably over the service period, which is generally 12 months.
Revenue from training services is recognized as the training services are
performed. When warranty or training services are bundled with the original
license fee arrangement, their fair value is deferred and recognized during
the periods such services are provided.

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

RESULTS OF OPERATIONS-YEAR ENDED DECEMBER 31, 2000
COMPARED TO THE YEAR ENDED DECEMBER 31, 1999

REVENUE. Total revenue increased 31% from $40.5 million in 1999 to $52.8
million in 2000. License fees and related services revenue increased 151%
primarily because of the increased demand for LNP systems and the FCC's
requirement to implement the Act. Other services revenue, consisting
primarily of custom system development revenue remained flat with $32.3
million in 1999 versus $32.4 million in 2000. As a percentage of revenue,
license fees and related services revenue increased from 20% in 1999 to 39%
in 2000. Other services revenue decreased on a relative basis from 80% in
1999 to 61% in 2000.

COST OF REVENUE. Cost of revenue consists primarily of personnel costs,
equipment depreciation, facilities costs and the cost of third party
software. Cost of license fees and related services increased by $1.2
million, or 15%, with the related revenue increasing by 151% for the year
ended December 31, 2000. Cost of revenue was favorably impacted as a result
of increased LNP sales for which less services are now required related to
implementation and customization on a proportionate basis as the licensed
software becomes more mature. As a result, the gross margin on license fees
and related services increased substantially to 54% for the year ended
December 31, 2000 compared to a negative 1% for the year ended December 31,
1999. The cost of revenue for other services increased 29% in 2000 compared
to 1999 with revenue remaining essentially consistent in 2000 with 1999. We
made an investment early in 2000 in staff to provide integration services to
customers purchasing licensed software. However, the demand anticipated for
integration services was not realized in 2000 resulting in gross margin for
other services declining from 42% to 26% for the years ended December 31,
1999 and December 31, 2000, respectively.

SALES AND MARKETING. Sales and marketing expenses consist primarily of
compensation costs (including commissions), travel expenses, field sales
office expenses and marketing communication expenses. Sales and marketing
expenses increased by $4 million, or 88%, to $8.5 million for the year ended
December 31, 2000 from $4.5 million for the year ended December 31, 1999. The
increase was primarily due to our addition of sales staff in the fourth
quarter of 1999 and the implementation of a new commission structure.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
principally of compensation costs for administration, facilities, finance,
legal, human resources, quality assurance and general management personnel.
General and administrative expenses increased by $2.4 million, or 25%, to
$12.1 million for the year ended December 31, 2000 from $9.7 million for the
year ended December 31, 1999. The increased costs in 2000 were related
primarily to an increase in depreciation on equipment, annual salary
increases and related fringe benefits and an increase to the bad debt reserve
of approximately $603,630. General and administrative expenses as a
percentage of revenue declined 1% to 23% in 2000 from 24% in 1999.

RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of compensation costs, equipment and software development tools.
Research and development expenses decreased 65%, or $694,442 to $369,950 in
the year ended December 31, 2000, from $1.1 million in the year ended
December 31, 1999. As a percentage of revenue, research and development
decreased to 1% in 2000 from 3% in 1999. This decrease resulted from the
termination of several R&D efforts for next generation software products in
2000.

OTHER INCOME (EXPENSE), NET. Other expense, net of other income, includes
interest expense on our capital leases and interest income on cash and cash
equivalents and short-term investments. Net other income increased to
$699,555 in the year ended December 31, 2000, from a net other expense of
$2.4 million in the year ended December 31, 1999 as a result of the $3.2
million settlement of the shareholder lawsuit including $719,000 in
associated legal fees in 1999. (See Item 3, Legal Proceedings.)

PROVISION FOR (BENEFIT FROM) INCOME TAXES. We recorded a partial
valuation allowance against our carryforward tax benefits to the extent that
we believe that it is more likely than not that all of such benefits will not
be realized in the foreseeable future. Our assessment of this valuation
allowance was made using all available evidence, both positive and negative.
In particular, we considered both our historical results and our projections
of profitability for only reasonably foreseeable future periods. We recorded
no income tax benefit related to 2000 operating losses as we deem it
inappropriate to book such benefits until projected operating results reflect
greater certainty of profitability and the ability to realize such benefits.
Our realization of recorded net deferred tax assets is dependent on future
taxable income and, therefore, we cannot assure that such benefits will be
realized.

RESULTS OF OPERATIONS-YEAR ENDED DECEMBER 31, 1999
COMPARED TO THE YEAR ENDED DECEMBER 31, 1998

REVENUE. Total revenue increased 9% from $37.2 million in 1998 to $40.5
million in 1999. License fees and related services revenue declined 20%
although we added new customers in fourth quarter of 1999, primarily because
the demand for LNP systems declined as the wire line portion of the
telecommunications industry substantially completed implementation of LNP in
1998. Other services revenue, consisting primarily of custom system
development revenue, increased 19% from $27.1 million in 1998 to $32.3
million in 1999 as we focused on other services to counteract the software
revenue shortfall. As a percentage of revenue, license fees and related
services revenue declined from 27% in 1998 to 20% in 1999. Other services
revenue increased from 73% in 1998 to 80% in 1999.

COST OF REVENUE. Cost of revenue consists primarily of personnel costs,
equipment depreciation, facilities costs and the cost of third party
software. Cost of license fees and related services decreased by $54,000, or
1%, even though the related revenue declined by 20% for the year ended
December 31, 1999. Cost of revenue was favorably impacted as a result of
lower cost of sales for certain arrangements where services were minimal.
This favorable impact was offset as we maintained a relatively consistent
labor base and facilities compared to the prior year. As a result of the
consistent cost base and declining revenues, the gross margin on license fees
and related services declined to a negative 1% for the year ended December
31, 1999 compared to 19% for the year ended December 31, 1998. In the fourth
quarter of 1998, we recorded $302,000 in additional costs in connection with
a contract for which all revenue had previously been recorded. The cost of
revenue for other services decreased 1% in 1999 even though revenue increased
19%. The gross margin for other services improved from 30% to 42% for the
years ending December 31, 1998 and December 31, 1999, respectively, as staff
utilization rates improved.

SALES AND MARKETING. Sales and marketing expenses consist primarily of
compensation costs (including commissions), travel expenses, field sales
office expenses and marketing communication expenses. Sales and marketing
expenses decreased by $1.2 million, or 21%, to $4.5 million for the year
ended December 31, 1999 from $5.7 million for the year ended December 31,
1998. The decrease was primarily due to our refocus of sales plans that
reduced promotional expenses. In the second half of 1999, we increased the
sales staff, causing the fourth quarter 1999 expenses to increase
substantially.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
principally of compensation costs for administration, facilities, finance,
legal, human resources, quality assurance and general management personnel.
General and administrative expenses increased by $1.1 million, or 13%, to
$9.7 million for the year ending December 31, 1999 from $8.6 million for the
year ended December 31, 1998. The increase in cost was attributable to
increased real estate rents, property taxes and insurance premium costs.

ended December 31, 1998. As a percentage of revenue, research and development
decreased from 19% in 1998 to 3% in 1999. This decrease resulted from our
reduction in product development costs for next generation software products,
as well as significant research and development cost being recorded in 1998
to complete the LNP product line.

OTHER INCOME (EXPENSE), NET. Other expense, net of other income, includes
interest expense on our debt financing and capital leases and interest income
on cash. The net expense increased to $2.4 million in the year ended December
31, 1999, from $60,000 in the year ended December 31, 1998 as a result of the
$3.2 million settlement of the shareholder lawsuit including $719,000 in
associated legal fees. (See Item 3, Legal Proceedings.)

EXTRAORDINARY ITEM. We recorded an extraordinary item of $445,702 net of
taxes relating to early retirement penalties and the write-off of capitalized
debt issue costs resulting from the repayment of debt associated with
completion of our initial public offering in the year ended December 31,
1998. We recorded a tax benefit of $220,000 relating to the extraordinary
item.

PROVISION FOR (BENEFIT FROM) INCOME TAXES. We have recorded a partial
valuation allowance against our carryforward tax benefits to the extent that
we believe that it is more likely than not that all of such benefits will not
be realized in the foreseeable future. Our assessment of this valuation
allowance was made using all available evidence, both positive and negative.
In particular, we considered both our historical results and our projections
of profitability for only reasonably foreseeable future periods. We recorded
no income tax benefit related to 1999 operating losses as we deem it
inappropriate to book such benefits until projected operating results reflect
greater certainty of profitability and the ability to realize such benefits.
Our realization of recorded net deferred tax assets is dependent on future
taxable income and, therefore, we are not assured that such benefits will be
realized.

LIQUIDITY AND CAPITAL RESOURCES

Evolving Systems has historically financed operations through a
combination of cash flow from operations and borrowings. At December 31,
2000, our principal sources of liquidity included $4.4 million in cash and
cash equivalents, and $5.9 million in short-term investments. A $5.0 million
secured bank line of credit expired in September 2000 and was not replaced.

Net cash used in operating activities was $10.5 million in the year
ended December 31, 2000 compared to cash provided by operating activities of
$5.9 million in the year ended December 31, 1999. The main uses of cash for
the year ended December 31, 2000 were an increase in contract receivables of
$6.2 million, unbilled work-in-progress of $5.8 million and a decrease in
unearned revenue and customer deposits of $3.4 million. Offsetting increases
to cash for the year ended December 31, 2000 were depreciation and
amortization of $3.2 million and an increase in accounts payable and accrued
liabilities of $2.1 million.

Net cash provided by investing activities during the year ended
December 31, 2000 was $9.9 million compared to cash used in investing
activities during the year ended December 31, 1999 of $13.2 million. During
2000, we sold $12.1 million, net of purchases, of short-term investments to
fund operations and purchased $2.2 million in property and equipment to
support operations.

Financing activities provided $644,000 in the year ended December
31, 2000 compared to the use of $155,000 in cash in the year ended December
31, 1999. During 2000, proceeds from the issuance of common stock under our
option and Employee Stock Purchase Plan (ESPP) provided funding offset by
repayments of capital lease obligations.

We believe that our current cash and short-term investments,
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. Thereafter, we may require additional funds to

support such activity through public or private equity financing or from
other sources. 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.

IMPACT OF INFLATION. Inflation has not had a significant effect on our
operations during the past three years ended December 31, 2000.

COSTS: Funding of all Year 2000 efforts were expensed as incurred. We
have spent approximately $1 million dollars. We believe that any additional
resources needed to address Year 2000 issues will not be material.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
methods of accounting for derivative financial instruments, and hedging
activities related to those instruments, as well as other hedging activities.
SFAS No. 133, as amended, is effective for our first quarter beginning
January 1, 2001. To date, we have not entered into any derivative financial
instruments or hedging activities.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements required pursuant to this item
are included in Item 14 of this Annual Report on Form 10-K and are presented
beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not Applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by reference to the section of Evolving Systems' 2001
Proxy Statement, anticipated to be filed within 120 days of December 31,
2000, entitled "Proposal 1-Election of Directors," and the section entitled
"Management."

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference to the section of the Company's 2001 Proxy
Statement, anticipated to be filed within 120 days of December 31, 2000,
entitled "Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference to the section of the Company's 2001 Proxy
Statement, anticipated to be filed within 120 days of December 31, 2000,
entitled "Security Ownership of Certain Beneficial Owners and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference to the section of the Company's 2001 Proxy
Statement, anticipated to be filed within 120 days of December 31, 2000,
entitled "Certain Relationships and Related Transactions."

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this Annual Report on
Form 10-K.

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

Report of Independent Accountants........................................................ F-1
Balance Sheets at December 31, 1999 and 2000............................................. F-2
Statements of Operations for the years ended December 31, 1998, 1999 and 2000............ F-3
Statement of Changes in Stockholders' Equity for the years ended December 31,
1998, 1999 and 2000...................................................................... F-4
Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000............ F-5
Notes to Financial Statements............................................................ F-6

2. Financial Statement Schedule. The following financial statement schedule
for each of the years ended December 31, 2000, 1999 and 1998 is filed as part
of this Annual Report on Form 10-K and should be read in conjunction with the
Financial Statements and the related notes thereto.

Schedule II-Valuation and Qualifying Accounts............................................ S-1
Schedules other than the one listed above have been omitted since they are not applicable.

3. Exhibits.

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------

3.1^ Restated Certificate of Incorporation.
3.2^ Amended and Restated Bylaws.
4.1^ Reference is made to Exhibits 3.1 and 3.2.
4.2^ Specimen stock certificate representing shares of Common Stock.
Indemnification Agreement, entered into by the Registrant and each
of its directors and executive officers, dated
10.1^ as of January 1, 1998.
10.2^* Amended and Restated Stock Option Plan.
10.3^* Employee Stock Purchase Plan.
Software Development Agreement, by and between the Registrant and
American Telephone and Telegraph Company, dated as of May 1, 1993.
(The division of American Telephone & Telegraph Company responsible
10.10^ for this Agreement has split off from AT&T and is now known as Lucent
Technologies, Inc.).
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney (included on signature page).

-----------
^ Incorporated by reference to the Registrant's Registration Statement on Form
S-1 No. 333-43973.

* Indicates each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.

(b) Reports on Form 8-K.

We filed a current report on Form 8-K dated November 3, 1999 describing
the appointment of James M. Ross to President and Chief Operating Officer and
also naming him as a director of Evolving Systems.

We filed a current report on Form 8-K dated July 8, 1999 describing
the adoption of a Rights Plan.

We filed a current report on Form 8-K dated February 8, 2001
describing a material transaction with Qwest Communications International, Inc.

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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, ON
THE 20TH DAY OF MARCH, 2001.

EVOLVING SYSTEMS, INC.

GEORGE A. HALLENBECK
CHIEF EXECUTIVE OFFICER
By: (PRINCIPAL EXECUTIVE OFFICER)

POWER OF ATTORNEY

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

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND
ON THE DATES INDICATED HAVE SIGNED THIS REPORT BELOW.

SIGNATURE TITLE DATE
--------- ----- ----

Chief Executive Officer, Chairman of the Board of
Directors (Principal
GEORGE A. HALLENBECK Executive Officer) , 2001

President, Chief Operating
JAMES M. ROSS Officer, Director , 2001
Senior Vice President, Chief
Financial Officer (Principal
Financial and Accounting
DAVID R. JOHNSON Officer) , 2001

DAVID J. MOLNY Director , 2001

HARRY B. FAIR Director , 2001

DONALD R. DIXON Director , 2001

ROBERT J. LOARIE Director , 2001

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the financial statements listed in the index appearing under
Item 14(a) (1) on page 23 present fairly, in all material respects, the
financial position of Evolving Systems, Inc. at December 31, 1999 and 2000,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the index
appearing under Item 14(a) (2) on page 23 present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

PRICEWATERHOUSECOOPERS LLP

Broomfield, Colorado
February 22, 2001

F-1

EVOLVING SYSTEMS, INC.
BALANCE SHEETS

DECEMBER 31, DECEMBER 31,
1999 2000
---- ----

ASSETS
Current assets:
Cash and cash equivalents................................................................. $4,265,956 $4,381,874
Short-term investments-unrestricted....................................................... 12,086,926 5,930,784
Short-term investments-restricted......................................................... 5,920,111 -
Contract receivables net of allowance of $39,006 and $642,637 at December 31, 1999 and
December 31, 2000, respectively........................................................ 9,623,555 15,202,052
Unbilled work-in-progress................................................................. 8,349,436 14,109,994
Prepaid and other current assets.......................................................... 1,574,906 1,621,636

Total current assets................................................................... 41,820,890 41,246,340
Property and equipment, net................................................................. 6,259,939 5,140,909
Deferred tax assets......................................................................... 1,547,007 1,547,007

Total assets........................................................................... $49,627,836 $47,934,256

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations.................................................. $640,010 $162,523
Accounts payable and accrued liabilities.................................................. 2,998,514 5,053,637
Unearned revenue and customer deposits.................................................... 9,278,058 5,880,343

Total current liabilities.............................................................. 12,916,582 11,096,503
Long-term obligations....................................................................... 169,960 -
Commitments and contingencies (Notes 3 and 8)
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares authorized, no shares issued or
outstanding............................................................................... - -
Common stock, $.001 par value; 25,000,000 shares authorized; 12,446,965 and 12,950,620
shares issued and outstanding as December 31, 1999 and December 31, 2000, respectively.... 12,447 12,951
Additional paid-in capital................................................................ 51,774,076 53,062,824
Deferred compensation..................................................................... (89,454) (37,165)
Accumulated deficit....................................................................... (15,155,775) (16,200,857)

Total stockholders' equity............................................................. 36,541,294 36,837,753

Total liabilities and stockholders' equity............................................. $49,627,836 $47,934,256

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

F-2

EVOLVING SYSTEMS, INC.
STATEMENTS OF OPERATIONS

1998 1999 2000
---- ---- ----
YEAR ENDED DECEMBER 31,
-----------------------

REVENUE:
License fees and related services...................................... $10,183,533 $8,137,972 $20,404,543
Other services......................................................... 27,054,063 32,349,270 32,437,846

Total revenue....................................................... 37,237,596 40,487,242 52,842,389
Cost of revenue:
License fees and related services...................................... 8,270,718 8,216,897 9,444,924
Other services......................................................... 18,833,172 18,718,018 24,157,779

Total cost of revenue............................................... 27,103,890 26,934,915 33,602,703

Gross margin............................................................. 10,133,706 13,552,327 19,239,686
Operating expenses:
Sales and marketing.................................................... 5,738,827 4,515,561 8,490,940
General and administrative............................................. 8,565,620 9,704,785 12,105,433
Research and development............................................... 7,197,309 1,064,392 369,950

Total operating expenses............................................ 21,501,756 15,284,738 20,966,323

Loss from operations..................................................... (11,368,050) (1,732,411) (1,726,637)
Other income (expense):
Interest income........................................................ 935,053 907,197 828,886
Interest expense....................................................... (994,989) (171,814) (147,331)
Litigation settlement and expenses..................................... - (3,150,699) -

Total............................................................... (59,936) (2,415,316) 681,555

Loss before income taxes................................................. (11,427,986) (4,147,727) (1,045,082)
Provision for (benefit from) income taxes................................ (600,564) - -

Loss before extraordinary item........................................... (10,827,422) (4,147,727) (1,045,082)

Extraordinary item, net of taxes......................................... 445,702 - -

Net loss................................................................. $(11,273,124) $(4,147,727) $(1,045,082)

Basic and diluted loss per common share before extraordinary item........ $(1.37) $(0.34) $(0.08)
Extraordinary item....................................................... $(0.06) - -

Basic and diluted loss per common share.................................. $(1.43) $(0.34) $(0.08)

Basic and diluted weighted average common shares outstanding............. 7,887,000 12,137,783 12,672,633

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

F-3

EVOLVING SYSTEMS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ADDITIONAL
SERIES A $.001 PAR PAID-IN
PREFERRED STOCK COMMON STOCK CAPITAL
--------------- ------------ ----------

Balance, December 31, 1997........ 8,160 $8 1,620,760 $1,621 $2,423,060
Issuance of shares in initial
public offering, net, and
conversion of preferred stock... (8,160) (8) 9,918,000 9,918 47,946,839
Stock option exercises............ 283,118 283 226,211
Compensation related to stock
options......................... 65,421
Amortization of deferred
compensation.................... (231,056)
Common Stock issued pursuant to the
Employee Stock Purchase Plan.... 66,143 66 272,610
Net loss..........................

Balance, December 31, 1998........ - - 11,888,021 11,888 50,703,085

Stock option exercises............ 464,567 465 698,164
Compensation related to stock
options.........................
Amortization of deferred
compensation....................
Common Stock issued pursuant to the
Employee Stock Purchase Plan.... 94,377 94 372,827
Net loss..........................

Balance, December 31, 1999........ - - 12,446,965 12,447 51,774,076

Stock option exercises............
Compensation related to stock
options......................... 349,820 350 855,794
Amortization of deferred
compensation....................
Common Stock issued pursuant to the
Employee Stock Purchase Plan.... 153,835 154 432,954
Net loss..........................

Balance, December 31, 2000........ 0 $0 12,950,620 $12,951 $53,062,824

RETAINED TOTAL
DEFERRED EARNINGS STOCKHOLDERS'
COMPENSATION (DEFICIT) EQUITY
------------ --------- -------------

Balance, December 31, 1997........ $(992,188) $265,076 $1,697,577
Issuance of shares in initial
public offering, net, and
conversion of preferred stock... 47,956,749
Stock option exercises............ 226,494
Compensation related to stock
options......................... 65,421
Amortization of deferred
compensation.................... 647,719 416,663
Common Stock issued pursuant to the
Employee Stock Purchase Plan.... 272,676
Net loss.......................... (11,273,124) (11,273,124)

Balance, December 31, 1998........ (344,469) (11,008,048) 39,362,456

Stock option exercises............ 698,629
Compensation related to stock
options.........................
Amortization of deferred
compensation.................... 255,015 255,015
Common Stock issued pursuant to the
Employee Stock Purchase Plan.... 372,921
Net loss.......................... (4,147,727) (4,147,727)

Balance, December 31, 1999........ (89,454) (15,155,775) 36,541,294

Stock option exercises............
Compensation related to stock
options......................... 52,289 856,144
Amortization of deferred
compensation.................... 52,289
Common Stock issued pursuant to the
Employee Stock Purchase Plan.... 433,108
Net loss.......................... (1,045,082) (1,045,082)

Balance, December 31, 2000........ $(37,165) $(16,200,857) $36,837,753

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

F-4

EVOLVING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS

1998 1999 2000
---- ---- ----
YEAR ENDED DECEMBER 31,
-----------------------

OPERATING ACTIVITIES:
Net loss................................................................ $(11,273,124) $(4,147,727) $(1,045,082)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Provision for uncollectible accounts.................................. (211,890) - 603,631
Amortization of deferred compensation................................. 416,663 255,015 52,289
Depreciation and amortization......................................... 4,379,307 3,511,132 3,214,435
Loss on disposal of property and equipment............................ 132,984 13,049 52,416
Benefit from deferred income taxes.................................... (671,218) - -
Change in operating assets and liabilities:
Contract receivables................................................ (683,567) 4,884,945 (6,182,128)
Unbilled work in-progress........................................... (2,533,477) (5,244,071) (5,760,558)
Prepaid and other assets............................................ (737,218) 456,322 (46,730)
Accounts payable and accrued liabilities............................ (240,652) (3,193) 2,055,123
Unearned revenue and customer deposits.............................. (2,975,680) 6,199,317 (3,397,715)

Net cash provided by (used in) operating activities..................... (14,397,872) 5,924,789 (10,454,319)

INVESTING ACTIVITIES:
Purchases of property and equipment..................................... (2,300,743) (2,153,221) (2,181,806)
Proceeds from sale of property and equipment............................ 25,604 - 33,985
Purchases of short-term investments..................................... (6,818,617) (45,885,623) (33,709,198)
Sales of short-term investments......................................... - 34,828,190 45,785,451

Net cash provided by (used in) investing activities..................... (9,093,756) (13,210,654) 9,928,432

FINANCING ACTIVITIES:
Repayments of long-term obligations..................................... (14,428,387) (1,226,292) (647,447)
Borrowings from line of credit.......................................... 6,686,000 - -
Repayments of line of credit............................................ (6,686,000) - -
Proceeds from issuance of common stock, net............................. 48,455,919 1,071,550 1,289,252

Net cash provided by (used in) financing activities..................... 34,027,532 (154,742) 641,805

Net increase (decrease) in cash and cash equivalents.................... 10,535,904 (7,440,607) 115,918
Cash and cash equivalents at beginning of period........................ 1,170,659 11,706,563 4,265,956

Cash and cash equivalents at end of period.............................. $11,706,563 $4,265,956 $4,381,874

SUPPLEMENTAL DISCLOSURE OF OTHER CASH AND NON-CASH INVESTING AND
FINANCING TRANSACTIONS
Interest paid........................................................... $920,450 $171,814 $79,641
Income taxes paid....................................................... - - 18,000
Assets acquired under capital lease..................................... 86,839 - -

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

F-5

EVOLVING
SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Evolving Systems designs, develops, markets and supports OSS
products and solutions for the telecommunications industry and provides a
broad range of both fixed price and time and materials software solutions. We
provide these systems and software products through a combination of our own
proprietary software integrated with software packages purchased from other
companies to form complete software solutions for our customers.

INITIAL PUBLIC OFFERING

In May 1998, Evolving Systems completed an initial public offering
(IPO). Of the 5.3 million shares of common stock sold to the public at $14.00
per share, we issued 3.8 million shares and selling shareholders sold 1.5
million shares. We realized approximately $48 million from the offering after
deducting expenses of the offering of approximately $5.2 million.

USE OF ESTIMATES

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

REVENUE RECOGNITION

Evolving Systems recognizes revenue in accordance with the
provisions of Statement of Position 97-2, "Software Revenue Recognition". We
derive revenue from license fees and services under the terms of both
fixed-price and time-and-materials contracts. License fees and related
services revenue consists of revenue from contracts involving our LNP
software products and related services. Other services revenue consists of
revenue from custom programming, systems integration of third party products,
annual maintenance contracts and training.

License fees and related services revenue is generated from
fixed-price contracts that provide for both licenses and services. Revenue
under these arrangements, where the services are essential to the
functionality of the delivered software, is generally recognized using the
percentage-of-completion method of accounting. The percentage of completion
for each contract is determined based on the ratio of direct labor hours
incurred to total estimated direct labor hours. Amounts billed in advance of
services being performed are recorded as unearned revenue. Unbilled
work-in-progress represents revenue earned but not yet billable under the
terms of the fixed-price contracts and all such amounts are expected to be
billed and collected during the succeeding 12 months.

In arrangements where the services are not essential to the
functionality of the delivered software, we recognize license revenue when a
license agreement has been signed, delivery has occurred, the fee is fixed or
determinable and collectibility is probable. 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
of fair value ("VSOE") exists. If VSOE does not

F-6

EVOLVING
SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)

exist, fees from such arrangements are deferred until the earlier of the date
that VSOE does exist or all of the elements are delivered.

Annual maintenance revenue is recorded as deferred revenue and is
recognized ratably over the service period, which is generally 12 months.
Revenue from training services is recognized as the training services are
performed. When maintenance or training services are bundled with the
original license fee arrangement, their fair value is deferred and recognized
during the periods such services are provided.

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

SOFTWARE RESEARCH AND DEVELOPMENT COSTS

Expenditures for software research and development are expensed as
incurred. Such costs are required to be expensed until the point that
technological feasibility of the product is established after which time such
costs are capitalized until general availability of the product. The period
between achieving technological feasibility and the general availability of
such software has historically been short. Consequently, costs otherwise
capitalizable after technological feasibility is achieved are expensed
because they are insignificant.

CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

All highly liquid investments and investments with a maturity of
three months or less when purchased are considered to be cash equivalents.
All cash equivalents are carried at cost, which approximates fair value.
Short-term investments consist of high-grade commercial paper, maturing
within one year. Such short-term investments are classified as
held-to-maturity and, accordingly, carried at amortized cost.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject Evolving Systems to
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and accounts receivable. We have cash investment
policies that limit investments to investment grade securities and
certificates of deposit. We perform ongoing evaluations of its customers'
financial condition and, generally, requires no collateral from our
customers. During the years ending December 31, 1998, 1999 and 2000, we
recognized approximately 87%, 84% and 93% of total revenue from six, five and
ten customers, respectively, all in the telecommunications industry. As of
December 31, 1999 and 2000, these customers accounted for 78% and 95% of
contract receivables, respectively. Customers providing the largest revenues
for the year ended December 31, 1999 were Lockheed Martin (23%), Lucent
(23%), GTE (18%) and SBC (12%). Customers providing the largest revenues for
the year ended December 31, 2000 were Lucent (20%), SBC (17%), Neustar (15%)
and Qwest (15%).

F-7

EVOLVING
SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)

FAIR VALUE OF FINANCIAL INSTRUMENTS

For certain of our financial instruments, including cash and cash
equivalents, certificates of deposit, contract receivables, accounts payable
and accrued expenses, management believes that the carrying amounts
approximate fair value due to their short maturities.

PROPERTY AND EQUIPMENT AND LONG-LIVED ASSETS

Property and equipment are stated at cost and are depreciated over
their estimated useful lives, generally four to seven years or the lease
term, if shorter, using the straight-line method. Leasehold improvements are
stated at cost and are depreciated over the shorter of the lease term or
useful life of the asset.

We evaluate the carrying value of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In performing the evaluation, we estimate the future
undiscounted cash flows of the operations to which the long-lived assets
relate to ensure the carrying value has not been impaired.

STOCK-BASED COMPENSATION

We apply Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25), in accounting for stock-based
compensation arrangements. We have included the pro-forma disclosures
required under SFAS No. 123, "Accounting for Stock-Based Compensation," in
Note 4.

INCOME TAXES

Deferred tax assets and liabilities are recorded for the estimated
future tax effects of temporary differences between the tax bases of assets
and liabilities and amounts reported in the accompanying balance sheets, as
well as operating loss and tax credit carryforwards. Deferred tax assets may
be reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that these benefits will not be realized.

EARNINGS PER COMMON SHARE

Basic earnings per share (EPS) is computed by dividing net loss by
the weighted average number of shares outstanding during the period. Diluted
EPS is computed using the weighted average number of shares outstanding plus
all dilutive potential common shares outstanding. The following is

F-8

EVOLVING
SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)

the reconciliation of the numerators and denominators of the basic and
diluted EPS computations for the years ended December 31:

1998 1999 2000
---- ---- ----

BASIC EARNINGS PER SHARE
Net loss................................................................ $(11,273,124) $(4,147,727) $(1,045,082)
Basic weighted average common shares outstanding........................ 7,887,000 12,137,783 12,672,633
Basic earnings per common share......................................... $(1.43) $(0.34) $(0.08)

DILUTED EARNINGS PER SHARE
Net loss................................................................ $(11,273,124) $(4,147,727) $(1,045,082)

Basic weighted average number of shares outstanding..................... 7,887,000 12,137,783 12,672,633
EFFECT OF DILUTIVE SECURITIES
Options and warrants.................................................... - - -
Diluted weighted average common shares outstanding...................... 7,887,000 12,137,783 12,672,633

Diluted earnings per share.............................................. $(1.43) $(0.34) $(0.08)

All options and warrants outstanding during all periods were excluded from
computation of diluted EPS because of their anti-dilutive effect on the net
loss per share.

2. BALANCE SHEET COMPONENTS

Certain balance sheet components are as follows:

1999 2000
---- ----
DECEMBER 31,

PROPERTY AND EQUIPMENT:
Computer equipment and purchased software......................... $20,112,423 $21,775,012
Furniture, fixtures and leasehold improvements.................... 4,321,859 4,090,347

24,434,282 25,865,359
Less: accumulated depreciation.................................... (18,174,343) (20,724,450)

$6,259,939 $5,140,909

Included in property and equipment at December 31, 1999 and 2000 are
assets under capital lease of $2,786,429 and $2,786,429, respectively.
Related accumulated depreciation is $2,400,813 and $2,611,056 as of December
31, 1999 and 2000, respectively.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable.......................................................... $730,286 $1,259,978
Accrued compensation and related expenses................................. 1,216,310 2,884,224
Other..................................................................... 1,051,918 909,435

$2,998,514 $5,053,637

F-9

EVOLVING
SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)

3. LONG-TERM OBLIGATIONS, INCLUDING RELATED PARTY OBLIGATIONS AND COMMITMENTS

LINE OF CREDIT

Under a borrowing arrangement with a bank, we had a revolving line
of credit with $5,000,000 of maximum available credit at December 31, 1999
bearing interest at the bank's prime rate. The line of credit expired in
September 2000 and was not subsequently renewed or replaced with another line
of credit. The line of credit was collateralized by short-term commercial
paper investments of $5,920,111.

We also had a term debt facility under which we could draw up to a
maximum of $5,000,000. The term debt facility expired September 16, 1999 and
there were no borrowings against the facility at the time of termination.

LEASE COMMITMENTS

We lease our office and operating facilities and various equipment
under non-cancelable operating leases. Rent expense was $3,804,613,
$1,916,912 and $1,906,757 for the years ended December 31, 1998, 1999 and
2000, respectively. Rent expense is net of sublease rental income of
$515,638, $1,110,826 and $929,695 for the years ended December 31, 1998, 1999
and 2000, respectively. In connection with our obligations under certain of
our office facility leases, we have letters of credit totaling and $100,000
and $0 at December 31, 1999 and 2000, respectively.

Future minimum non-cancelable commitments as of December 31, 2000
for capital leases and non-cancelable operating leases with initial terms in
excess of one year are as follows:

Future minimum non-cancelable commitments under these leases as of December
31, 2000, are as follows:

OPERATING LEASES CAPITAL LEASES

2001......................................................... $1,742,497 $168,542
2002......................................................... 1,673,864
2003......................................................... 1,487,505
2004......................................................... 1,460,436
2005......................................................... 1,358,008
Thereafter................................................... 14,745,993

22,468,303 168,542
Less: interest............................................... - (6,019)

$22,468,303 $162,523

F-10

EVOLVING
SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)

4. STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN

STOCK OPTIONS

On January 19, 1996, the Company's Board of Directors approved a
stock option plan. Under the stock option plan, 5,850,000 shares of the
Company's common stock are reserved for issuance, of which 1,532,632 shares
are available for grant as of December 31, 2000. The Company has also
reserved 910,633 shares of common stock for the issuance of warrants. Options
issued under the stock option plan shall be at the discretion of the Board of
Directors, including the provisions of each stock option granted, which need
not be identical. Options generally vest over four years and expire no more
than ten years from the date of grant. Certain options were automatically
vested upon the effectiveness of the IPO. On September 25, 1998, 61,734 stock
options for non-officer employees were repriced to $2.75, the fair market
value at that date. On November 5, 1998, 238,250 options for officers were
repriced to $2.75, a price above the fair value at that date but equal to the
price set for non-officer employees. No compensation expense was recorded, as
the options were repriced to an exercise price greater than or equal to fair
market.

Generally, stock options are granted with an exercise price not less
than fair value of the Company's common stock as determined by the Board of
Directors at the date of grant, and accordingly, no compensation cost was
recognized prior to 1997. During the year ended December 31, 1997, the
Company recorded $1,347,534 as deferred compensation, representing the excess
of the deemed fair value of the Company's common stock over the exercise
price of options granted during 1997. Such deferred compensation cost is
being amortized over the vesting period of the options. Of the total amount,
$416,663, $255,015 and $52,289 were recognized as expense during the years
ended December 31, 1998, 1999 and 2000, respectively.

Based on calculations using the Black-Scholes option-pricing model,
the weighted average grant date fair value of options and warrants was $1.76,
$3.40, and $4.25 in 1998, 1999 and 2000, respectively. The fair value has
been estimated using the Black-Scholes option-pricing model with the
following assumptions used for grants in 1998, 1999 and 2000, respectively:
no dividend yield for all periods; an expected life of 3 years for all
periods; volatility of 104%, 91% and 134%; and weighted average risk free
interest rates of 4.7%, 5.8% and 6.5%.

The pro forma impact on the Company's net loss per share had
compensation cost been recorded at the date of grant based on the method
prescribed by SFAS No. 123 is shown below:

YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- ----------------- -----------------

Net loss:
As reported.......................................... $(11,273,124) $(4,147,727) $(1,045,082)
SFAS No. 123 Pro forma............................... $(11,889,569) $(4,669,255) $(3,832,512)
Net loss per common share:
As reported.......................................... $(1.43) $(0.34) $(0.08)
SFAS No. 123 Pro forma............................... $(1.51) $(0.38) $(0.30)

F-11

EVOLVING
SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)

The status of total stock options and warrants outstanding and
exercisable under the Plan as of December 31, 2000 follows:

WEIGHTED
AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE
EXERCISE PRICES OF SHARES LIFE (YEARS) EXERCISE PRICE OF SHARES PRICE
--------------- --------- ------------ -------------- --------- -----
STOCK OPTIONS AND STOCK OPTIONS AND
WARRANTS OUTSTANDING WARRANTS EXERCISABLE

Options.................... $0.80 135,545 4.35 $0.80 112,646 $0.80
$2.00-$3.00 1,046,593 7.14 $2.69 656,575 $2.71
$3.19-$4.50 287,535 8.97 $4.02 63,595 $4.15
$4.88-$7.19 1,393,719 9.06 $5.59 276,830 $5.60
$7.50-$11.13 268,533 9.09 $9.09 47,846 $8.95

3,131,925 8.21 $4.51 1,157,492 $3.56

Warrants................... $0.80 910,633 3.40 $0.80 910,633 $0.80

The following is a summary of stock option activity:

WEIGHTED WEIGHTED
AVERAGE OPTIONS AND AVERAGE
EXERCISE WARRANTS EXERCISE
OPTIONS WARRANTS PRICE EXERCISABLE PRICE
NUMBER OF SHARES

Options and warrants outstanding December 31, 1997.... 1,887,401 910,633 $3.58 1,249,894 $0.80
Options granted..................................... 2,349,723 - 4.16
Less options forfeited.............................. (1,609,055) - 8.49
Less options exercised.............................. (283,118) - 0.80

Options and warrants outstanding December 31, 1998.... 2,344,951 910,633 $1.85 1,293,130 $0.85
Options granted..................................... 1,485,875 - 5.63
Less options forfeited.............................. (379,235) - (3.09)
Less options exercised.............................. (464,567) - (1.50)

Options and warrants outstanding December 31, 1999.... 2,987,024 910,633 $3.21 1,500,978 $1.43
Options granted..................................... 1,132,567 - 6.13
Less options forfeited.............................. (637,846) - 5.49
Less options exercised.............................. (349,820) - 2.59

Options and warrants outstanding December 31, 2000.... 3,131,925 910,633 $3.72 2,068,125 $2.34

Included in total options and warrants exercisable at December 31,
1998, 1999 and 2000, are 910,633 warrants issued in connection with a 1996
debt financing. The warrants are exercisable at $.80 per share and expire May
31, 2003. Subsequent to December 31, 2000, the Company granted options to
purchase 757,000 shares of common stock at a weighted average exercise price
of $2.19 per share.

EMPLOYEE STOCK PURCHASE PLAN

Under the Employee Stock Purchase Plan, the Company is authorized to
issue up to 450,000 shares of common stock to its full-time employees, nearly
all of whom are eligible to participate. Under the terms of the plan,
employees may elect to have up to 15% of their gross salaries withheld by
payroll deduction to purchase the Company's common stock. The purchase price
of the stock is 85% of the lower of market price at the beginning or end of
each six-month participation period. Under the plan, employees purchased
94,377 and 153,835 shares in 1999 and 2000, respectively.

F-12

EVOLVING
SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)

The fair value of each stock purchase plan grant was estimated on
the date of grant using the Black-Scholes model with the following
assumptions for 1999 and 2000, respectively: no dividend yield for all
periods; an expected life of .5 years and .5 years; volatility of 91% and
134%; and a risk free interest rate of 5.62% and 5.93%.

5. INCOME TAXES

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

1998 1999 2000
---- ---- ----
YEAR ENDED DECEMBER 31,

Current:
Federal................................................................. $(156,797) $- $-
State................................................................... 7,451 - -
Deferred:
Federal................................................................. (611,834) - -
State................................................................... (59,384) - -

Total..................................................................... $(820,564) $- $-

Of the total 1998 benefit from income taxes, $220,000 is reflected
in the extraordinary item on the income statement.

Components of the Company's deferred tax assets and liabilities are
as follows as of December 31:

1999 2000
---- ----

Deferred tax assets:
Deferred revenue................................................... $112,105 $297,654
Research and development credit carryforwards...................... 1,701,244 1,401,244
Allowance for doubtful accounts.................................... 14,549 239,704
Net operating loss carryforwards................................... 5,966,596 5,941,119
Other.............................................................. 48,125 30,945

Total deferred tax assets.......................................... 7,842,619 7,910,666

Deferred tax liabilities:
Accumulated depreciation........................................... (413,237) (297,404)

Total deferred tax liabilities..................................... (413,237) (297,404)

Net deferred tax asset before valuation allowance.................... 7,429,382 7,613,262
Valuation allowance.................................................. (5,882,375) (6,066,255)

Net deferred tax asset............................................... $1,547,007 $1,547,007

F-13

EVOLVING
SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)

The provision for (benefit from) income taxes differs from the
amounts computed by applying the federal statutory rate to loss before income
taxes and extraordinary item. The amounts are reconciled as follows for the
years ended December 31:

1998 1999 2000
---- ---- ----

Federal income taxes benefit at statutory rate.............................. $(3,885,515) $(1,410,227) $(355,328)
State income tax, net of federal benefit.................................... (390,335) (128,160) (41,660)
Increase in valuation allowance............................................. 3,822,877 2,059,498 183,880
Research and development tax credits........................................ (300,000) (300,000) -
Amortization of deferred compensation....................................... 141,665 (135,599) 437
Prior year filing effects................................................... - - 300,000
Other....................................................................... 10,744 (85,512) (87,329)

Provision for (benefit from) income taxes................................... $(600,564) $- $-

The tax effect of $220,000 related to the extraordinary item in 1998
approximates the federal statutory rate.

As of December 31, 2000, the Company has research and development
tax credit carryforwards for federal income tax purposes of $1,401,244, which
begin to expire in 2011. Additionally, the Company has net operating loss
carryforwards of $15,891,943 which expire beginning in 2018.

The Company has recorded a partial valuation allowance against its
carryforward tax benefits to the extent that it believes that it is more
likely than not all of such benefits will not be realized in the foreseeable
future. 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 only the reasonably foreseeable future periods. The
Company's realization of its recorded net deferred tax assets is dependent on
future taxable income and, therefore, the Company is not assured that such
benefits will be realized.

6. BENEFIT PLANS

Evolving Systems has established a 401(k) Plan that is available to
all employees 21 years of age or older with one-quarter year service.
Employees may contribute up to 15% of gross compensation not to exceed the
maximum statutory contribution amount. The Company may make discretionary
matching contributions and has done so. All employee contributions are fully
vested immediately and employer contribution vest 100% after completion of
three years service. During 1998, 1999 and 2000, the Company contributed
$1,244,842, $1,250,480 and $1,478,969, respectively, under the 401(k) Plan.

7. SEGMENT INFORMATION

In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," we define operating segments as
components of an enterprise for which discrete financial information is
available and is reviewed regularly by the chief operating decision-maker, or
decision-making group, to evaluate performance and make operating decisions.
We identified our chief operating decision-makers as three key executives-the
Chief Executive Officer, Chief Operating Officer, and Chief Financial
Officer. This chief operating decision-making group reviews the revenue and
overall results of operations by the nature of the products and services
provided. The accounting policies of the operating segments presented below
are the same as those described in the summary of significant accounting
policies. We develop products and solutions for the telecommunications
industry and provide a broad range of both fixed-price and time-and-materials
software solutions.

F-14

EVOLVING
SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)

The groupings presented below represent an aggregation of financial
information for business segments meeting certain criteria, including
economic characteristics, similar customers, and the same products and
services. The OSS Products Group encompasses a broad array of software and
systems that perform critical functions for telecommunications carriers,
including ordering, provisioning, service assurance and billing. The Wireless
Data Group provides custom software infrastructure products for Lucent, a
leading equipment supplier. The infrastructure products enable Cellular
Digital Packet Data (CDPD), CDMA, and Over-the-Air-Service Provisioning
(OTASP) in wireless network environments. Our Company provides services and
products solely within the United States geographic area. Total assets and
gross margins have not been specified by segment as it is impractical to do
so as this information is not available to the decision-making group.
Further, 1998 data is not provided as it is also impractical to obtain. The
following table provides revenue by segment for the years ended December 31,
1999 and December 31, 2000, respectively:

1999 2000
---- ----
YEAR ENDED DECEMBER 31,

REVENUE
OSS Products Group:
LNP................................................................... $12,308,280 $25,990,041
NPAC.................................................................. 7,400,119 7,578,037
OSS Solutions......................................................... 10,735,899 7,444,163
Wireless Data Group:
Wireless.............................................................. 10,042,944 11,830,148

Total Revenue........................................................... $40,487,242 $52,842,389

8. LEGAL PROCEEDINGS

In June 1998, four securities class action complaints were filed
against Evolving Systems and certain of our current and former officers and
directors in the Federal Court for the District of Colorado alleging
violations of the federal securities laws. The complaints were consolidated.
The plaintiffs purported to represent a class of persons who purchased our
securities during the period of May 12, 1998 through July 23, 1998. The
complaints alleged that the Company and certain of our officers misled the
investing public regarding our financial prospects. We denied these
allegations. The parties reached a settlement of $10 million, of which the
Company paid $2.5 million in April 1999. The settlement was approved by the
Court on October 4, 1999. We incurred approximately $719,000 in legal costs
associated with the lawsuit.

From time to time we are involved in various legal proceedings
arising in the normal course of business operations. Management does not
expect that any such proceedings will have a material adverse effect on our
financial position, results of operations or cash flows.

F-15

EVOLVING
SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)

9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Our quarterly financial information for fiscal 1999 and fiscal 2000
is as follows (in thousands, except per share data):

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER

YEAR ENDED DECEMBER 31, 1999
Total revenue.................................................................... $8,859 $9,805 $10,782 $11,041
Less: cost of revenue.......................................................... 6,788 7,156 6,353 6,638
Gross margin..................................................................... 2,071 2,649 4,429 4,403
Less: operating expenses....................................................... 3,489 3,302 4,320 4,174
Operating income (loss).......................................................... (1,418) (653) 109 229
Income (loss) before income taxes................................................ (4,491) (532) 380 495
Net income (loss)................................................................ $(4,491) $(532) $380 $495

Net income (loss) per common share
Basic.......................................................................... $(0.37) $(0.04) $0.03 $0.04
Diluted........................................................................ $(0.37) $(0.04) $0.03 $0.04
YEAR ENDED DECEMBER 31, 2000
Total revenue.................................................................... $11,689 $14,101 $11,414 $15,638
Less: cost of revenue.......................................................... 7,168 8,513 9,337 8,585
Gross margin..................................................................... 4,521 5,588 2,077 7,053
Less: operating expenses....................................................... 4,450 5,199 5,356 5,961
Operating income (loss).......................................................... 71 389 (3,279) 1,092
Income (loss) before income taxes................................................ 313 600 (3,166) 1,208
Net income (loss)................................................................ $313 $600 $(3,166) $1,208

Net income (loss) per common share
Basic.......................................................................... $0.03 $0.05 $(0.25) $0.09
Diluted........................................................................ $0.02 $0.05 $(0.25) $0.09

FINANCIAL STATEMENT SCHEDULE

THE FOLLOWING FINANCIAL STATEMENT SCHEDULE IS FILED AS A PART OF THIS REPORT
UNDER SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE FISCAL
YEARS ENDED DECEMBER 31, 2000. ALL OTHER SCHEDULES CALLED FOR BY FORM 10-K
ARE OMITTED BECAUSE THEY ARE INAPPLICABLE OR THE REQUIRED INFORMATION IS
SHOWN IN THE FINANCIAL STATEMENTS OF NOTES THERETO, INCLUDED HEREIN.

BALANCE AT CHARGED TO
FISCAL BEGINNING BAD DEBT
YEAR DESCRIPTION OF PERIOD EXPENSE
---- ----------- --------- -------
VALUATION AND QUALIFYING ACCOUNTS

2000.............................. Allowance for doubtful accounts $39,007 $603,630
1999.............................. Allowance for doubtful accounts $308,110
1998.............................. Allowance for doubtful accounts $520,000

WRITE-OFFS
MANAGEMENT CHARGED BALANCE
FISCAL REDUCTION TO AT END OF
YEAR IN ALLOWANCE ALLOWANCE PERIOD
---- ------------ --------- ------

2000.............................. $642,637
1999.............................. $263,304 $5,799 $39,007
1998.............................. $211,890 $308,110

F-16