Evolving Systems, Inc. (Nasdaq: EVOL), a provider of software solutions and services to the wireless, wireline and IP carrier market, today reported financial results for its second quarter and six month period ended June 30, 2006.

Second quarter revenue was $8.2 million, down 17% from $9.9 million in the same quarter last year. For the comparative second quarters, license fees and services revenue was $4.0 million versus $4.7 million while customer support revenue declined to $4.3 million from $5.2 million. The decline in revenue in the second quarter was in line with management’s expectations based on the effects of industry consolidation, pricing pressures and longer customer buying cycles. Revenue mix in the period included $4.3 million in Service Activation, $2.6 million in Numbering Solutions and $1.3 million in Mediation.

Total costs of revenue and operating expenses in the second quarter of 2006 included a non-cash impairment charge of $16.5 million, or $0.87 per share. This included charges of $5.8 million for impairment of intangible assets and $10.7 million for impairment of goodwill balances. Delays in closing new business, industry consolidation and continued pressures on pricing have impacted the Company’s revenue and cash flows, resulting in a reduction in the Company’s share price and market capitalization. These factors indicated a potential impairment of goodwill in accordance with Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” as well as potential impairment of finite-lived intangible assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.” Based on these indications, the Company conducted a goodwill impairment analysis and reviewed its finite-lived assets for impairment. This resulted in the above noted impairments of goodwill and intangible assets which stemmed from the Company’s acquisitions of CMS in November 2003, Telecom Software Enterprises (TSE) in October 2004 and Tertio Telecoms (Tertio) in November 2004. As a result of the impairment of intangible assets, future forecasted amortization expenses will be $5.8 million lower.

In the second quarter, total costs of revenue and operating expenses increased to $25.3 million from $10.2 million in the second quarter a year ago. This increase was primarily the result of the goodwill and intangible asset impairment charges noted above. While increased investment in Activation and Numbering Solutions products increased product development expense, the Company achieved reductions in all other expense categories. These reductions are a result of synergies from the successful integration of Tertio. In addition, the Company continues to benefit from lower costs achieved through its India-based software development subsidiary. Intangible amortization also decreased by $502,000 as certain intangible assets from acquisitions became fully amortized.

Evolving Systems reported a second quarter operating loss of $17.1 million compared with $277,000 in the second quarter a year ago. Excluding the non- cash impairment charge of $16.5 million, the operating loss for the second quarter was $556,000, which reflects an improvement from the first quarter 2006 operating loss of $1.3 million. This sequential improvement reflects higher second quarter revenue and a lower cost base in most expense categories. In addition to the impairment charge, the second quarter operating loss included $1.4 million in non-cash charges, including $1.2 million in depreciation and amortization and $207,000 in charges related to implementing FAS 123R, which requires the Company to recognize share-based compensation expense in its financial statements. Expense categories impacted by FAS 123R included costs of license fees and services ($15,000), costs of customer support ($2,000), product development ($11,000), sales and marketing ($51,000), and general and administrative ($128,000). Evolving Systems incurred $489,000 in net other expense — primarily interest expense — in the second quarter versus $428,000 in the same quarter last year. The net loss in the second quarter was $16.2 million, or $0.85 per basic and diluted share, versus a net loss of $689,000, or $0.04 per basic and diluted share, in the same quarter a year ago.

Evolving Systems booked $6.1 million in new orders in the second quarter, including $3.8 million in license fees and services and $2.3 million in customer support compared with $3.0 million in license fees and services and $4.1 million in customer support in the second quarter last year. Bookings by product mix included $3.6 million in Activation, $1.6 million in Numbering Solutions and $900,000 in Mediation. Bookings are defined as new, non- cancelable orders expected to be recognized as revenue during the ensuing 12 months. Backlog at June 30, 2006, was $14.6 million, including $3.7 million in license fees and services and $10.9 million in customer support, up from the 2005 year-end backlog but down as compared with the first quarter of 2006.

Evolving Systems closed the second quarter with cash and cash equivalents of $6.4 million, up from $5.8 million at the end of the first quarter and $3.9 million at year-end. The Company had a working capital deficit at June 30, 2006, of $1.2 million, which includes $9.2 million in unearned revenue.

Effective June 30, 2006, the Company amended the financial covenants associated with its senior debt. Both the EBITDA and fixed coverage ratios were reduced in order to give the Company more flexibility in managing the business. In July, the Company paid down its senior term loan by an additional $1.0 million as part of the amendment. The Company has $2.3 million available on its revolving credit facility in addition to the $6.4 million in cash and cash equivalents reported for June 30, 2006.

“We are a more capable company than we were a year ago, despite the year over year revenue decline. With a global footprint, a growing international sales capability and a low-cost onshore/offshore development and deployment organization, we are able to provide greater value to carriers seeking OSS efficiencies,” said Stephen Gartside, president and CEO. “We are now focusing our investments in growth areas for our Activation and Number Management Solutions. The Yankee Group recently identified Evolving Systems as the world market leader in packaged wireless service activation solutions, which is our fastest growing product line. Also of note, during the third quarter we plan to release the first international production version of our NumeriTrack(R) number management solution. Our NumeriTrack product is deployed in the U.S. today, with customers such as Cingular, Comcast and Qwest.

“We believe we are well positioned to expand our presence in the global wireless market with Activation and Number Management solutions, as we extend our direct and indirect sales reach in wireless growth regions such as Central and Latin America, Asia, Eastern Europe and Africa,” Gartside added. “In our target growth areas, we are experiencing delays in closing significant contracts, but we expect to win deals. We firmly believe we can generate strong profitability through modest incremental revenue growth.”

Six Month Results
Revenue through six months was $16.4 million versus $19.8 million in the same period a year ago. License fees and services revenue was $7.9 million as compared with $9.8 million while customer support revenue was $8.5 million versus $9.9 million in the comparable period last year. Revenue in the first half included $8.6 million from Service Activation, $5.3 million from Numbering Solutions and $2.5 million from Mediation. The decline in overall revenue from the comparable six-month period was attributable to industry consolidation, pricing pressures and other factors.

Total costs of revenue and operating expenses was $34.7 million for the six months ended June 30, 2006. Excluding the impairment charge of $16.5 million, total costs of revenue and operating expenses was $18.2 million, which reflected a decline of 17% from $22.0 million in the same period last year. The Company recognized cost reductions in most expense categories as a result of synergies from the Tertio acquisition and savings from its India-based development subsidiary. Intangible amortization through six months decreased by $1.0 million as certain intangible assets from three acquisitions became fully amortized. Product development — the only expense category that increased — grew by $941,000 as the Company expanded investments in its Activation and Numbering Solutions products, including the internationalization of the NumeriTrack product.

The operating loss through six months was $18.3 million compared with $2.2 million in the same period of 2005. In addition to the $16.5 million impairment charge, the operating loss included $2.8 million in non-cash charges, including $2.4 million in depreciation and amortization and $443,000 in charges related to implementing FAS 123R, share-based compensation expense. The FAS 123R expense was apportioned to costs of license fees and services ($32,000), costs of customer support ($4,000), product development ($22,000), sales and marketing ($106,000), and general and administrative ($279,000). Evolving Systems incurred $961,000 in net other expense (primarily interest expense) in the six month period as compared with $944,000 in the same period last year. Net loss through the first six months was $17.8 million, or $0.93 per basic and diluted share, versus a net loss of $2.8 million, or $0.15 per basic and diluted share, in the same period a year ago. The Company generated $3.2 million in cash from operations in the first half of 2006.

About Evolving Systems
Evolving Systems, Inc. (Nasdaq: EVOL) is a provider of software and services to more than 50 network operators in over 40 countries worldwide. Its portfolio includes market-leading products for Activation, Number Portability, Number Inventory and Mediation. Founded in 1985, the Company has headquarters in Englewood, Colorado, with offices in the United States, United Kingdom, Germany, India and Malaysia. Further information is available on the web at http://www.evolving.com.

Consolidated Statements of Operations
(In thousands except per share data)

(Unaudited) Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
Revenue:
License fees and services $3,966 $4,741 $7,865 $9,822
Customer support 4,274 5,185 8,503 9,942
Total revenue 8,240 9,926 16,368 19,764
Costs of revenue and
operating expenses:
Costs of license fees
and services, excluding
depreciation and
amortization 1,657 2,393 3,532 5,369
Costs of customer support,
excluding depreciation
and amortization 1,551 1,636 3,177 3,667
Sales and marketing 2,241 2,423 4,796 4,815
General and administrative 1,381 1,481 2,788 3,982
Product development 799 495 1,546 605
Depreciation 283 384 576 760
Amortization 893 1,395 1,790 2,816
Impairment of goodwill
and intangible assets 16,516 — 16,516 —
Restructuring and other (9) (4) (23) (63)
Total costs of revenue
and operating expenses 25,312 10,203 34,698 21,951
Loss from operations (17,072) (277) (18,330) (2,187)
Other expense, net (489) (428) (961) (944)
Loss before income taxes (17,561) (705) (19,291) (3,131)
Income tax expense
(benefit) (1,375) (16) (1,454) (294)
Net loss $(16,186) $(689) $(17,837) $(2,837)
Basic and diluted loss
per common share $(0.85) $(0.04) $(0.93) $(0.15)
Weighted average basic
and diluted shares
outstanding 19,090 18,639 19,078 18,619

Consolidated Balance Sheets
(In thousands)
(Unaudited) June 30 December 31
2006 2005
ASSETS
Current Assets:
Cash and cash equivalents $6,442 $3,883
Current portion of restricted cash 300 —
Contract receivables, net 5,853 10,766
Unbilled work-in-progress 1,143 1,147
Prepaid and other current assets 1,878 1,340
Total current assets 15,616 17,136
Property and equipment, net 1,564 1,775
Intangible assets, net 6,256 13,350
Goodwill 24,798 34,073
Long-term restricted cash — 300
Other long-term assets 547 764
Total assets $48,781 $67,398
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
and capital lease obligations 2,536 1,034
Accounts payable and accrued liabilities 5,084 6,001
Unearned revenue 9,174 9,654
Total current liabilities 16,794 16,689
Long-term liabilities:
Long-term debt and other obligations 12,825 14,527
Deferred foreign income tax 1,098 2,777
Total liabilities 30,717 33,993
Preferred stock 11,281 11,281
Stockholders’ equity:
Common stock 16 16
Additional paid-in capital 68,420 67,891
Other comprehensive loss (450) (2,417)
Accumulated deficit (61,203) (43,366)
Total stockholders’ equity 6,783 22,124
Total liabilities and stockholders’ equity $48,781 $67,398