EVOLVING SYSTEMS INC
S-1/A, 1998-04-17
COMPUTER PROGRAMMING SERVICES
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<PAGE>
 
     
  AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1998     
 
                                                     REGISTRATION NO. 333-43973
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
                               
                            AMENDMENT NO. 2 TO     
                                    
                                 FORM S-1     
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
 
                               ----------------
                            EVOLVING SYSTEMS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                               ----------------
        DELAWARE                     7389                    84-1010843
     (STATE OR OTHER     (PRIMARY STANDARD INDUSTRIAL     (I.R.S. EMPLOYER
      JURISDICTION        CLASSIFICATION CODE NUMBER)  IDENTIFICATION NUMBER)
   OF INCORPORATION OR
      ORGANIZATION)
 
                            9777 MT. PYRAMID COURT
                           ENGLEWOOD, COLORADO 80112
                                (303) 802-1000
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
                               ----------------
                              J. RICHARD ABRAMSON
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                            EVOLVING SYSTEMS, INC.
                            9777 MT. PYRAMID COURT
                           ENGLEWOOD, COLORADO 80112
                                (303) 802-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)
 
                               ----------------
                                  COPIES TO:
     JAMES C. T. LINFIELD, ESQ.                   S. MICHAEL DUNN, P.C.
         REX R. O'NEAL, ESQ.                   JEREMY W. MAKARECHIAN, ESQ.
         COOLEY GODWARD LLP                  BROBECK, PHLEGER & HARRISON LLP
  2595 CANYON BOULEVARD, SUITE 250         1125 SEVENTEENTH STREET, SUITE 2525
    BOULDER, COLORADO 80302-6737                 DENVER, COLORADO 80202
           (303) 546-4000                            (303) 293-0760
 
                               ----------------
  APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
 
  If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
 
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
 
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
 
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
 
                        CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                  PROPOSED
                                                     PROPOSED      MAXIMUM
                                      AMOUNT         MAXIMUM      AGGREGATE   AMOUNT OF
     TITLE OF EACH CLASS OF           TO BE       OFFERING PRICE  OFFERING   REGISTRATION
  SECURITIES TO BE REGISTERED     REGISTERED(1)    PER SHARE(2)  PRICE(1)(2)     FEE
- -----------------------------------------------------------------------------------------
<S>                              <C>              <C>            <C>         <C>
Common Stock, $.001 par value... 4,600,000 shares     $12.00     $55,200,000   $16,284
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
(1) Includes 600,000 shares of Common Stock which may be purchased by the
    Underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
    registration fee in accordance with Rule 457 under the Securities Act of
    1933.
 
                               ----------------
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
 
                                              METOSS--EVOLVING SYSTEMS' NEXT
                                              GENERATION OPERATIONAL SUPPORT
                                              SYSTEMS
 
                                              "MetOSS is Evolving Systems'
                                              family of current and planned
                                              OSS offerings, incorporating an
                                              enterprise database, a gateway
                                              to external systems, and a
                                              shared services platform upon
                                              which a range of OSS
                                              applications provided by the
                                              Company and third parties can
                                              operate".
 
             GATEWAY
 
"The Gateway is designed to
provide inter- and intra-carrier
communications and interfaces
and to support most common
external and legacy OSS".
 
                                              [Color graphic appears here
                                              representing the relationship of
                                              the Company's current LNP
                                              products and planned OSS
                                              application products to the
                                              planned OSS platform products]
 
                              CURRENT APPLICATIONS
 
                       "Current MetOSS LNP applications
                       include OrderPath, NumberManager
                       and NodeMaster, applications
                       designed to address carriers'
                       LNP requirements. These products
                       enable carriers to meet
                       regulatory requirements and
                       rapidly address competition".
<PAGE>
 
 
 
                THIRD-PARTY APPLICATIONS
 
            "Additional OSS applications for
            ordering, service assurance and
            billing are targeted for development
            by third-party software developers
            utilizing the MetOSS Application
            Development Environment, expanding the
            range of OSS offerings available to
            MetOSS customers".
 
       FUTURE APPLICATIONS
 
"Future MetOSS applications under
development include MetOSS-Local
Service Exchange, which addresses
carriers' requirements for responding
to increased local competition and
corresponding inter-carrier
transactions, and MetOSS-Number
Exchange, which enables carriers to
address telephone number pooling,
number allocation and call origination
and termination requirements created as
a result of LNP".
<PAGE>
 
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY  +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE      +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE    +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF  +
+ANY SUCH STATE.                                                               +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                   
                SUBJECT TO COMPLETION, DATED APRIL 17, 1998     
 
                                4,000,000 SHARES
                   [LOGO OF EVOLVING SYSTEMS APPEARS HERE]
                                  COMMON STOCK
                          (PAR VALUE $.001 PER SHARE)
 
                                  -----------
  Of the 4,000,000 shares of Common Stock offered hereby, 3,090,909 shares are
being sold by Evolving Systems, Inc. and 909,091 shares are being sold by the
Selling Stockholders. See "Principal and Selling Stockholders". The Company
will not receive any proceeds from the sale of shares by the Selling
Stockholders.
   
  Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $10 and $12 per share. For factors to be considered in
determining the initial public offering price, see "Underwriting". Of the
4,000,000 shares being sold in this offering, the Company has reserved up to
150,000 shares to offer directly to the Morgan Stanley Funds and the
Information Associates Funds (as defined herein), each of which is an affiliate
of the Company, and 200,000 shares to offer directly to persons having
relationships with the Company. All such sales shall be made on the same terms
and conditions available to the public. See "Principal and Selling
Stockholders" and "Underwriting".     
 
  SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE COMMON STOCK.
 
  Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "EVOL".
                                  -----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                  -----------
 
<TABLE>   
<CAPTION>
                    INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
                    OFFERING PRICE DISCOUNT(1)  COMPANY(2)     STOCKHOLDERS
                    -------------- ------------ ----------- -------------------
<S>                 <C>            <C>          <C>         <C>
Per Share..........      $             $            $              $
Total(3)........... $              $            $           $
</TABLE>    
- -----
(1) The Company and the Selling Stockholders have agreed to indemnify the
    Underwriters against certain liabilities, including liabilities under the
    Securities Act of 1933.
(2) Before deducting estimated expenses of $875,000 payable by the Company.
(3) The Company and the Selling Stockholders have granted to the Underwriters
    an option for 30 days to purchase up to an additional 600,000 shares at the
    initial public offering price per share, less the underwriting discount,
    solely to cover over-allotments. If such option is exercised in full, the
    total initial public offering price, underwriting discount, proceeds to
    Company and proceeds to Selling Stockholders will be $    , $    , $    and
    $   , respectively. See "Principal and Selling Stockholders" and
    "Underwriting".
 
                                  -----------
  The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about         , 1998, against payment therefor in immediately available
funds.
 
GOLDMAN, SACHS & CO.
           
        BANCAMERICA ROBERTSON STEPHENS     
                                              HAMBRECHT & QUIST
                                                                 UBS SECURITIES
                                  -----------
                  The date of this Prospectus is      , 1998.
<PAGE>
 
            STRATEGIC ARCHITECTURE FOR OPERATIONAL SUPPORT SYSTEMS
 
"OSS encompass a broad array of software and systems that perform critical
functions for telecommunications carriers, including ordering, provisioning,
service assurance and billing. Competition and regulations are driving the
need for telecommunications carriers to implement enterprise-wide, standards-
based data sharing among multiple, interoperable OSS. Evolving Systems'
approach to these requirements is through a strategic MetOSS architecture that
includes a common database, a shared services platform, applications and an
application development environment".
 
            DATABASE                                    APPLICATIONS
 
 
"The MetOSS-GEM Enterprise In-                "MetOSS applications provide and
formation Model provides a data-              enhance OSS functionality and
base designed to enable data                  are designed to be implemented
sharing across all OSS applica-               as modular, plug-and-play car-
tions operating on the MetOSS-                tridges. Applications will in-
GEM Shared Services Platform".                clude Evolving Systems' and
                                              third-party products for order-
                                              ing, provisioning, service as-
                                              surance and billing".
 
     [Color graphic appears here depicting the relationship of the
     functional elements of the typical OSS and the Company's
     current and future products]
 
    SHARED SERVICES PLATFORM                      APPLICATIONS DEVELOPMENT
                                                         ENVIRONMENT
 
 
"The MetOSS-GEM Shared Services
Platform provides common servic-              "The MetOSS-GEM Development En-
es, such as transaction process-              vironment is designed to provide
ing and security, among all ap-               the application development
plications, enabling                          rules, standards and application
interoperability".                            programming interfaces which
                                              govern how applications are de-
                                              veloped in order to be
                                              interoperable and compliant with
                                              the MetOSS-GEM Shared Services
                                              Platform and database".
 
                               ----------------
 
                                       2
<PAGE>
 
  CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN
CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
 
                               PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus. The discussion in this
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" as well as those discussed elsewhere in this
Prospectus.
 
  Unless otherwise indicated, all information contained in this Prospectus (i)
reflects the conversion of all outstanding shares of Non-voting Common Stock
(the "Non-voting Common Stock") and Preferred Stock of the Company into shares
of voting Common Stock (the "Common Stock") of the Company and (ii) assumes no
exercise of the Underwriters' over-allotment option. Certain terms used herein
are defined under the heading "Glossary of Terms".
 
                                  THE COMPANY
 
  Evolving Systems, Inc. ("Evolving Systems" or the "Company") is a leading
provider of selected software solutions and services that enable
telecommunications carriers to address the technical challenges to their
operational support systems created by the industry's rapidly changing
competitive and regulatory environment. The Company develops, markets, sells
and supports standard software products that enable established and new
telecommunications companies to address local number portability ("LNP")
requirements and the impact of LNP on such companies' support systems. The
Company also provides custom software development services to leading
telecommunications companies. The Company's first-to-market LNP software
solution, which enables carriers to meet the requirement that customers retain
their local phone number when changing service providers, has been selected for
use by two of the five Regional Bell Operating Companies ("RBOCs") and two
leading local and long distance carriers. The Company believes that the
implementation of LNP will require significant changes in a broad range of
carriers' software and systems that perform mission-critical functions such as
ordering, provisioning, service assurance and billing, collectively known as
Operational Support Systems ("OSS").
 
  Historically, telecommunications carriers operated in a highly regulated
environment with both local and long distance telephone service providers
operating as monopolies with little competition. The Telecommunications Act of
1996 and regulations promulgated thereunder (collectively, the "Act") provide
for the introduction of competition in local telephone service, allowing long
distance, wireless and other carriers to enter local telephone markets. The Act
requires RBOCs, wireless and other incumbent local exchange carriers
(collectively, "ILECs") to offer LNP. The Act also mandates that carriers
unbundle local services and facilities, thereby allowing competing
telecommunications carriers access to ILECs' OSS. These requirements pose
significant technological challenges to existing OSS, which are already
strained by the incremental changes necessitated by long distance deregulation
and the introduction of value-added services such as voice mail and call
waiting. Existing carriers must develop new systems that are interoperable with
their legacy systems, not only to support the LNP and unbundling requirements
of the Act but also to enable them to respond to increasing competitive
 
                                       3
<PAGE>
 
challenges. In addition, carriers entering local telephone markets require LNP
solutions that do not depend on an existing OSS infrastructure and that can be
deployed quickly and cost-effectively. Thus, the Company believes that
carriers' OSS are evolving from back-office legacy systems to strategic
business systems that play an increasingly important role in enhancing
competitiveness as well as enabling compliance with the requirements of the
Act.
 
  Recognizing the opportunity created by the ongoing deregulation of local
telephone service, the Company has capitalized on its historic strength as a
leading architect and developer of solutions to satisfy technically challenging
OSS requirements to position itself as a provider of next-generation OSS
solutions while continuing to provide custom software development services.
From its inception in 1985 through 1996, the Company focused on providing
custom software development services to a limited number of telecommunications
companies. In order to capitalize on the market demand for OSS solutions to
implement LNP, the Company made a strategic decision in 1996 to expand its
focus to include development of standard software products to address a variety
of needs created by LNP. The Company's current LNP software products,
OrderPath, NumberManager and NodeMaster, allow carriers to accommodate customer
requests to change carriers while retaining the same telephone number and to
obtain and disseminate call routing data to the carriers' networks. To date,
customers for the Company's LNP solutions include Ameritech Corporation
("Ameritech"), Pacific Bell, Inc. ("Pacific Bell")/SBC Communications, Inc.
("Southwestern Bell"), Sprint Corporation ("Sprint") and WorldCom, Inc.
("WorldCom"). The Company's primary custom software development customers
include GTE Corporation ("GTE"), Lockheed-Martin IMS Corporation ("Lockheed")
and Lucent Technologies, Inc. ("Lucent"), formerly part of American Telephone &
Telegraph Company ("AT&T").
 
  The Company intends to leverage its initial LNP success and substantial
custom software expertise to address the evolving needs of carriers and
telecommunications service providers by developing and providing a family of
innovative OSS solutions. The Company's LNP and future OSS products are being
designed to provide comprehensive, flexible, reliable and scalable solutions to
meet the rapidly changing needs of today's multi-carrier environment. The
Company is developing its OSS platform, an OSS environment that supports
multiple applications and includes a scalable, extensible database, application
program interfaces ("APIs") for third-party developers to write compatible
applications, business logic that governs the data dissemination throughout
other OSS platforms and standard legacy application interfaces to facilitate
rapid implementation. The Company's approach seeks to offer carriers time-to-
market advantages, protection of legacy system investments and cost-effective
OSS deployment, staffing, operation and maintenance.
 
                                       4
<PAGE>
 
                                 
                              RECENT RESULTS     
    
   The Company's unaudited results of operations for the three months ended
 March 31, 1998 reflect an increase in revenue of 63% to $13.1 million from
 $8.1 million for the three months ended March 31, 1997 and an increase in
 net income to $440,000 from a net loss of $191,000 for the three months
 ended March 31, 1997. Results of operations for the three months ended
 March 31, 1998 include all adjustments, consisting only of normal
 recurring adjustments, which management considers necessary for a fair
 presentation and should not be considered indicative of results to be
 expected for any future period. See "Risk Factors--Fluctuations in
 Quarterly Results of Operations" and "Management's Discussion and Analysis
 of Financial Condition and Results of Operations--Quarterly Results of
 Operations".     
 
                                  THE OFFERING
 
<TABLE>   
  <S>                                              <C>
  Common Stock offered by the Company............. 3,090,909 shares
  Common Stock offered by the Selling
   Stockholders................................... 909,091 shares
  Common Stock to be outstanding after this
   offering....................................... 10,831,656 shares(1)
  Proposed Nasdaq National Market symbol.......... EVOL
  Use of proceeds................................. Repayment of indebtedness, working
                                                   capital and other general corporate
                                                   purposes. See "Use of Proceeds".
</TABLE>    
 --------
 (1) Based on the number of shares outstanding as of December 31, 1997.
     Excludes (i) 1,887,401 shares of Common Stock issuable upon exercise
     of options outstanding as of December 31, 1997 under the Company's
     Amended and Restated Stock Option Plan, at a weighted average exercise
     price of $4.92 per share, and (ii) 910,633 shares of Common Stock
     issuable upon exercise of warrants outstanding as of December 31,
     1997, at a weighted average exercise price of $.80 per share. Assumes
     no other exercise of stock options or warrants after December 31,
     1997. See "Management--Employee Benefit Plans", "Description of
     Capital Stock--Warrants" and Note 4 of Notes to Financial Statements.
       
                                       5
<PAGE>
 
                             SUMMARY FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                              YEAR ENDED DECEMBER 31,
                                      ----------------------------------------
                                       1993    1994    1995    1996     1997
                                      ------- ------- ------- -------  -------
<S>                                   <C>     <C>     <C>     <C>      <C>
Revenue:
 License fees and related services..  $    -- $    -- $    -- $   882  $20,034
 Other services.....................   17,810  33,032  45,355  36,036   22,686
                                      ------- ------- ------- -------  -------
 Total revenue......................   17,810  33,032  45,355  36,918   42,720
Cost of revenue:
 License fees and related services..       --      --      --     450    6,339
 Other services.....................   11,327  18,181  26,589  24,081   18,885
                                      ------- ------- ------- -------  -------
 Total cost of revenue..............   11,327  18,181  26,589  24,531   25,224
                                      ------- ------- ------- -------  -------
Gross margin........................    6,483  14,851  18,766  12,387   17,496
Operating income ...................    4,109   8,150   6,815     246      882
Income (loss) before income taxes...    4,062   8,014   6,126  (1,176)    (513)
Provision for (benefit from) income
 taxes..............................       --      --      --      81     (791)
                                      ------- ------- ------- -------  -------
Net income (loss)...................  $ 4,062 $ 8,014 $ 6,126 $(1,257) $   278
                                      ======= ======= ======= =======  =======
Pro forma (1):
 Income (loss) before income taxes..  $ 4,062 $ 8,014 $ 6,126 $(1,176)
 Provision for (benefit from) income
  taxes.............................    1,626   3,007   2,301    (298)
                                      ------- ------- ------- -------
 Net income (loss)..................  $ 2,436 $ 5,007 $ 3,825 $  (878)
                                      ======= ======= ======= =======
Net income (loss) per common share
 (2)(3).............................  $  2.65 $  5.24 $  4.00 $ (0.82) $  0.18
                                      ======= ======= ======= =======  =======
Diluted net income (loss) per common
 share (2)..........................  $  2.65 $  5.24 $  4.00 $ (0.82) $  0.03
                                      ======= ======= ======= =======  =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31, 1997
                                                         -----------------------
                                                                    PRO FORMA
                                                         ACTUAL  AS ADJUSTED (4)
                                                         ------- ---------------
<S>                                                      <C>     <C>
BALANCE SHEET DATA:
 Cash and cash equivalents.............................. $ 1,171    $ 19,553
 Working capital........................................   5,366      24,098
 Total assets...........................................  27,859      46,242
 Long-term obligations..................................  16,465       4,579
 Stockholders' equity...................................   1,698      32,443
</TABLE>
- --------
(1) Prior to January 6, 1996, the Company was an S corporation for federal and
    state income tax purposes, and accordingly, the Company's income was taxed
    directly to the Company's stockholders. Pro forma adjustments reflect the
    federal and state income tax expense if the Company had not been an S
    corporation prior to January 6, 1996.
(2) See Note 1 of Notes to Financial Statements for a discussion of the
    computation of net income (loss) per common share and weighted average
    common shares outstanding.
   
(3) Supplemental net income (loss) per share for the year ended December 31,
    1996 and 1997, assuming the subordinated debt with stockholders was not
    outstanding during any of the periods, would have been $(.25) and $.32,
    respectively. See "Use of Proceeds".     
   
(4) Pro forma as adjusted to reflect the receipt of the estimated net proceeds
    from the sale of 3,090,909 shares of Common Stock offered by the Company
    hereby at an assumed initial public offering price of $11.00 per share,
    after deducting estimated underwriting discounts and commissions and
    estimated offering expenses payable by the Company. The pro forma as
    adjusted balances also reflect the anticipated application of the net
    proceeds, excluding any loss on extinguishment of debt on the repayment of
    the Subordinated Notes and the Stockholder Notes (as defined herein), as
    well as the conversion of all shares of Preferred Stock into Common Stock.
    See "Capitalization" and "Use of Proceeds".     
 
                                ----------------
 
  MetOSS(TM), OrderPath(TM), NumberManager(TM) and NodeMaster(TM) are
trademarks of the Company. All other trademarks, service marks or trade names
referred to in this Prospectus are the property of the respective owners
thereof.
 
                                       6
<PAGE>
 
                                 RISK FACTORS
 
  In addition to other information contained in this Prospectus, the following
risk factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. All
statements, trend analysis and other information contained in this Prospectus
relative to markets for the Company's products and trends in revenue, gross
margin and anticipated expense levels, as well as other statements including
such words as "anticipate", "believe", "plan", "estimate", "expect" and
"intend" and other similar expressions, constitute forward-looking statements.
These forward-looking statements are subject to business and economic risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below and
in the section entitled "Business", as well as those discussed elsewhere in
this Prospectus.
 
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
 
  The Company's operating results have fluctuated significantly in the past
and are likely to continue to fluctuate significantly in the future.
Fluctuations in operating results may result in volatility in the price of the
Company's Common Stock. Although the Company was profitable in each of the
last three quarters, there can be no assurance that the Company will continue
to be profitable in the future or that the Company's level of profitability
will not vary significantly between quarters. These quarterly fluctuations may
result from a number of factors, including the magnitude, timing and signing
of new contracts; the Company's rate of progress under such contracts; the
timing of customer and market acceptance of the Company's product and service
offerings; actual or anticipated changes in government laws and regulations
related to the telecommunications market or judicial or administrative actions
with respect to such laws or regulations; the nature and pace of enforcement
of the Act; product lifecycles; the Company's success in effecting its planned
transition to a product-based business; the mix of products and services sold;
changes in demand for the Company's products and services; the timing of
third-party contractors' delivery of software and hardware; budgeting cycles
of the Company's customers; changes in the renewal rate of support agreements;
the timing and amount of expenditures made by the Company for research and
development and sales, general and administrative expenses; competition by
existing and emerging competitors in the telecommunications software markets;
the Company's success in developing and marketing new products, controlling
costs, attracting and retaining qualified personnel and expanding its sales
and marketing programs; regional office expansion; software defects and other
product quality problems; changes in the Company's strategy; the extent of
industry consolidation; expansion of the Company's international operations;
and general economic conditions.
 
  A significant portion of the Company's revenue has been and is expected to
continue to be derived from a small number of customers. Accordingly, the loss
of any significant customer, delays in delivery or acceptance of any of the
Company's products or delays in the performance of services could have a
material adverse effect on the Company's business, financial condition and
results of operations. Historically, the Company has recognized both license
fees and service fee revenue under its customer contracts using the
percentage-of-completion method. The Company is broadening its strategy to
include the development and sale of software products. To the extent that the
Company is successful in doing so, the Company expects that it may be able to
record future revenue from license fees upon the delivery of a software
product to a customer. The Company's ability to recognize revenue on software
licenses as packaged software solutions at the time of delivery depends on its
ability to engage third parties to implement its software and to separately
license the software and separately sell implementation services, as well as
technical factors and customer expectations and requirements. There can be no
assurance that the Company will be able to achieve or maintain a sales model
that allows the Company to record license fees when software products are
delivered to customers. Software companies that account for revenue from
license fees upon delivery of software
 
                                       7
<PAGE>
 
products may be exposed to increased risk of quarterly fluctuations. To the
extent that this pattern develops at the Company, any failure or delay in the
delivery of orders during any given quarter could have a material adverse
effect on the Company's business, financial condition and results of
operations. The timing of revenue recognition from the Company's contracts has
caused, and may continue to cause, material fluctuations in the Company's
operating results, particularly on a quarterly basis.
   
  The Company's expense levels are based in significant part on its
expectations regarding future revenue. The Company's revenue is difficult to
forecast because the market for the Company's products and services is rapidly
evolving, and the Company's sales cycle and the size and timing of significant
contracts vary substantially among customers. Accordingly, the Company may be
unable to adjust spending in a timely manner to compensate for any unexpected
shortfall in revenue. For example, GTE, which had been the Company's largest
customer from 1991 through 1995, significantly reduced its demand for the
Company's services in 1995. Although the Company reduced its workforce in late
1995, the Company incurred operating losses during the quarter ended March 31,
1996. The Company also sustained an operating loss in the quarter ended March
31, 1997 as the Company incurred higher development costs as it expanded its
focus to include the development and sale of standard software products. More
recently, in anticipation of expected growth, the Company increased its
workforce by 54 new employees in 1997 and expects to continue hiring
additional consulting, support and development employees during 1998. Any
significant shortfall from anticipated levels of demand for the Company's
products and services could have a material adverse effect on the Company's
business, financial condition and results of operations.     
 
  Based on all of the foregoing, the Company believes that future revenue,
expenses and operating results are likely to vary significantly from quarter
to quarter. As a result, quarter-to-quarter comparisons of operating results
are not necessarily meaningful or indicative of future performance.
Furthermore, the Company believes it is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts or investors. In such event, or in the event that adverse conditions
prevail, or are perceived to prevail, with respect to the Company's business
or generally, the market price of the Company's Common Stock would likely be
materially adversely affected. See "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
   
  The Company has experienced and is expected to continue to experience a
significant degree of seasonality, with a lower percentage of the Company's
revenue and net income being recognized in its first quarter. The Company
believes that such seasonality is the result of buying patterns that are
linked to the capital appropriation process of companies in the
telecommunications industry. The Company's costs, particularly personnel and
infrastructure, are largely fixed and are based on projected annual revenue
levels. As a result, quarter-to-quarter shortfalls or increases in revenue may
affect quarterly operating results.     
 
DEPENDENCE UPON TELECOMMUNICATIONS INDUSTRY; REGULATORY UNCERTAINTIES
 
  The market for the Company's LNP 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 such regulations, or the adoption of new
regulations by federal or state regulatory authorities under the Act, or any
legal challenges to the Act, could have a material adverse effect upon the
market for the Company's products and services. Although the Act was designed
to expand competition in the telecommunications industry, the realization of
the objectives of the Act is subject to many uncertainties, including judicial
and administrative proceedings designed to define rights and obligations
pursuant to the Act, actions or inactions by ILECs and other carriers that
affect the pace at which the changes contemplated by the Act occur, resolution
of questions concerning which parties will finance such changes and other
regulatory, economic and political factors.
 
                                       8
<PAGE>
 
   
  The Company is aware of certain litigation challenging the validity of the
Act and the local telephone competition rules adopted by the Federal
Communications Commission ("FCC") to implement the Act. The U.S. Eighth
Circuit Court of Appeals has invalidated the pricing methodology and
unbundling requirements adopted by the FCC while upholding a portion of the
FCC's local competition rules. The U.S. Supreme Court has recently granted the
petitions of certioriari filed by both the United States government and the
ILECs in such case. In December 1997, a U.S. District Court in Texas held that
the provisions of the Act which require RBOCs to comply with certain
conditions, including LNP, in order to receive regulatory approval to enter
long distance markets are unconstitutional. The U.S. Justice Department,
representing the FCC, has appealed this decision. In February 1998, the U.S.
District Court in Texas stayed its decision pending appellate review. Such
litigation may serve to delay implementation of the Act, which could adversely
affect demand for the Company's products and services. Any 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 have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, customers may require, or the Company
otherwise may deem it necessary or advisable, that the Company modify its
products or services to address actual or anticipated changes in the
regulatory environment. Any other delay in implementation of the Act, or other
regulatory changes, could materially adversely affect the Company's business,
financial condition and results of operations.     
 
  Virtually all of the Company's revenue is derived from sales of products and
services for telecommunications and data communications applications. These
markets are characterized by intense competition, regulatory and legal
uncertainty, rapid technological change and short product life cycles. In
addition, the telecommunications market has undergone a period of rapid growth
and consolidation in the last few years. The Company's business, financial
condition and results of operations would be materially adversely affected in
the event of a significant slowdown in these markets. See "Business--Industry
Background--The Telecommunications Industry".
 
EXPANSION OF STRATEGIC FOCUS
 
  The Company is expanding its strategic focus from its historic business of
consulting services to also offer standard software products, related
integration services and custom development services. This expansion of the
Company's strategic focus entails a number of risks. Prior to the introduction
of the Company's initial LNP products, the Company derived virtually all of
its revenue from contracts for consulting services for telecommunications
companies, including requirements definition, system design, project
management and other professional services and custom development services.
Although the Company intends to continue to offer such services, the Company
anticipates that such services will represent a declining percentage of the
Company's total revenue if the Company's expansion strategy is successful.
Approximately one-half of the Company's revenue for the year ended December
31, 1997 was attributable to its LNP products and related services, and the
Company believes that its revenue, at least through 1999, will continue to be
substantially dependent upon LNP products and related services. In addition,
the potential for future revenue growth is substantially dependent upon market
acceptance of the Company's LNP products and of the Company's MetOSS products
under development. The Company's principal customers for its LNP products to
date have been major telecommunications service providers, which historically
have developed or purchased highly customized solutions. Such customers may
resist the use of standardized products and product modules. In addition, such
customers historically have sought to be exclusive licensees of the Company's
solutions. Such customers may resist licensing products on a non-exclusive
basis, which may lengthen the Company's sales cycle and affect the Company's
ability to enter into contracts with new customers. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--MetOSS Products".
 
  Many of the Company's initial LNP customers are ILECs, which have been
implementing LNP systems due to the requirements of the Act. Accordingly, once
such providers have complied with the provisions of the Act, demand for the
Company's LNP products may fall. Although a number of new carriers have
entered the local telephone market, the decisions by potentially competitive
carriers to
 
                                       9
<PAGE>
 
enter the local telephone service market depend on a number of competitive,
regulatory and business factors, and the extent and pace of competitive entry
cannot be predicted. Recently, several large telecommunications carriers have
announced that they are deferring plans to enter the local telephone service
market. The Company's future revenue opportunities depend to a significant
extent on the Company's success in broadening the customer base for its LNP
products and services, successfully completing the development of new MetOSS
products and gaining acceptance of such products by existing and new
customers. If, as a result of judicial or regulatory action, carriers no
longer believe that it is necessary to implement LNP in a timely manner, the
market for the Company's LNP and related products and services would be
materially adversely affected. There can be no assurance that the Company will
successfully expand its base of LNP customers, that its new MetOSS products
will be successfully developed in a timely manner or that such products will
achieve acceptance by existing or new customers. If the Company's current or
future competitors release new products that have more advanced features,
offer better performance or are more price competitive than the Company's
products, demand for the Company's products may decline. Moreover, delays in
entry to the local telephone service market by competitive carriers could
adversely affect demand for the Company's products. Any decline in demand for
the Company's products as a result of competition, technological change or
other factors would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Competition".
 
  The Company has made a number of changes in its management and is making
extensive changes in its business processes in connection with the expansion
of its strategic focus. During 1996 and 1997, the Company experienced
significant employee turnover as it underwent this strategic change, and there
can be no assurance that the Company will retain key personnel as it continues
this process. Development and implementation of new business processes can be
time-consuming and expensive. There can be no assurance that the Company will
successfully complete this expansion of its strategic focus, or that it will
not incur unanticipated difficulties or costs in doing so, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "--Changes in Management; Management of Growth;
Dependence on Key Personnel".
 
RELIANCE ON SIGNIFICANT CUSTOMERS
 
  Historically, a substantial portion of the Company's revenue has been
derived from a limited number of customers. Ameritech, GTE, Lockheed, Lucent,
Southwestern Bell and Sprint accounted for approximately 15%, 13%, 12%, 20%,
19% and 10%, respectively, of the Company's revenue in 1997. AT&T, BellSouth
Telecommunications, Inc. ("BellSouth"), GTE, Lockheed and Lucent accounted for
approximately 10%, 17%, 16%, 10% and 20% respectively, of the Company's
revenue in 1996. In addition, GTE and Lucent accounted for 58% and 20%,
respectively, of the Company's total revenue in 1995. The Company expects to
continue to depend on large contracts with a small number of significant
customers, which can cause its revenue and earnings to fluctuate between
quarters based on the timing of contracts and installation of the Company's
products by these customers. None of the Company's major customers has any
obligation to purchase additional products or services. Consequently, the
failure by the Company to develop relationships with significant new customers
would have a material adverse effect on the Company's business, financial
condition and results of operations. Additionally, business or marketplace
consolidations affecting one or more of the Company's major customers could
result in the loss of that customer, which also could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations", "Business--Customers" and Note 1 of Notes to
Financial Statements.
 
LENGTHY IMPLEMENTATION PROCESS; CUSTOMER ACCEPTANCE OF LNP PRODUCTS
 
  Implementation of the Company's software is a relatively complex and lengthy
process that involves significant allocation of resources by the Company in
order to adapt and customize such
 
                                      10
<PAGE>
 
software for each customer's unique environment. Moreover, certain of the
Company's customers may require rapid deployment of the Company's software
products, resulting in pressure on the Company to meet demanding delivery and
implementation schedules. Delays in implementation may result in customer
dissatisfaction and/or damage to the Company's reputation and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
  The Company's existing contracts, including LNP contracts, provide for
acceptance testing by the customer before the contract is considered complete.
To date, none of the Company's LNP customers has notified the Company of their
final acceptance of the Company's software. Unanticipated difficulties or
delays in the customer acceptance process could result in higher costs and
delayed payments. Moreover, if the Company fails 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 the Company's software and services
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
 
LENGTHY SALES CYCLE
 
  The Company's software products and services are generally used by large
telecommunications service providers for enterprise-wide, mission-critical
purposes, involving significant capital expenditures and lengthy
implementation plans. Prospective customers typically commit significant
resources to the technical evaluation of the Company's products and services
and require the Company to expend substantial time, effort and money providing
education regarding the Company's solutions. This evaluation process often
results in an extensive and lengthy sales cycle, typically ranging between six
and 12 months, making it difficult for the Company 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 have a material adverse effect on the Company's business,
financial condition or results of operations and cause the Company's operating
results to vary significantly from quarter to quarter. See "Business--
Marketing and Sales".
 
FIXED-PRICE CONTRACTS
   
  The Company historically derived a majority of its revenue from contracts
that were billed on a time-and-materials basis. Beginning in mid-1996, a
majority of the Company's revenue has been derived from contracts that were
billed on a fixed-price basis. The Company in the past has incurred budget
overruns on certain fixed-price contracts, resulting in lower than anticipated
margins, and there can be no assurance that the Company will not incur such
budget overruns in the future. If the Company incurs such budget overruns, the
Company's gross margins and results of operations may be materially adversely
affected. To the extent that the Company continues to provide custom software
development or consulting services, it anticipates that customers will
continue to request that the Company provide software and implementation
services as a total solution on a fixed-price basis. These contracts specify
certain obligations and deliverables to be met by the Company regardless of
actual costs incurred by the Company. There can be no assurance that the
Company can successfully complete these contracts on budget, and the Company's
inability to do so could have a material adverse effect on its business,
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations".     
 
 
                                      11
<PAGE>
 
RAPID TECHNOLOGICAL CHANGE; RISKS ASSOCIATED WITH NEW VERSIONS AND NEW
PRODUCTS; RISKS OF SOFTWARE DEFECTS
   
  The market for the Company's 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, the Company 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 the
Company will successfully identify new product opportunities or will achieve
market acceptance of new products brought to market. Products developed by
others may render the Company's products obsolete or noncompetitive. Any
failure by the Company to anticipate or respond adequately to changes in
technology and customer preferences, any failure of the Company's products to
perform satisfactorily or any significant delay in product development or
introductions could have a material adverse effect on its business, financial
condition and results of operations.     
 
  The Company intends to issue interim and new releases of its family of
software products periodically. 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. There can be no assurance that delays will not occur in the future.
   
  The Company's products consist of software developed by the Company and
others. Errors or compatibility problems in the Company's products, including
those in licensed third-party software, which are detected prior to a new
product release could cause the Company to delay the introduction of new
products and incur additional expense. The Company's new products and new
versions of existing products also may contain errors or compatibility
problems which may not be discovered until after the product has been
installed and used by customers. There can be no assurance that errors will
not be found in new versions of the Company's products before or after
commencement of commercial use, or that any such errors will not result in
adverse customer reaction, negative publicity regarding the Company and a loss
of or delay in market acceptance, any of which could have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company currently has errors and omissions insurance which,
subject to customary exclusions, covers claims resulting from failure of the
Company's 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 such insurance, the Company's business, financial
condition and results of operations may be materially adversely affected.     
 
COMPETITION
 
  The Company's primary markets are intensely competitive and are subject to
rapid technological change, evolving industry standards and regulatory
developments. The Company 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.
The Company's existing and potential competitors include many large domestic
and international companies, including certain of the Company's customers,
that have substantially greater financial, manufacturing, technological,
marketing, distribution and other resources, larger installed customer bases
and longer-standing relationships with customers than the Company. The
Company's principal competitors in the LNP market include Bell Communications
Research, Inc. ("Bellcore"), Lucent, Northern Telecom, Inc. ("Nortel") and
Tekelec, Inc. ("Tekelec"). The Company believes that competitors of its MetOSS
products will include AG Communications Systems Corporation ("AG
Communications"), Bellcore, Cincinnati Bell Information Systems, Inc.
("CBIS"), Ericcson, Inc.
 
                                      12
<PAGE>
 
("Ericcson") and Lucent. One of the Company's principal customers, Lucent,
competes with the Company with respect to certain of the Company's products
and services, and there can be no assurance that Lucent will not expand the
range of products and services that it offers in competition with the Company.
In addition, Lockheed has retained rights to the NPAC software developed for
Lockheed by the Company, and Lockheed potentially could compete with the
Company 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. The Company expects competition to increase in the
future from existing competitors and from other companies that may enter the
Company's existing or future markets with solutions which may be less costly,
provide higher performance or additional features or be introduced earlier
than the Company's solutions. Many telecommunications companies have large
internal development organizations which develop software solutions and
provide services similar to the Company's products and services. Moreover,
customers who have purchased custom software solutions from the Company are
not precluded from competing with the Company.
 
  Although the Company developed certain NPAC software for Lockheed, Lockheed
is under no obligation to utilize the Company as a vendor on future LNP-
related projects. In addition, there can be no assurance that carriers will
look to the Company for future LNP software products.
   
  The Company believes that its ability to compete successfully depends on
numerous factors, both within and outside of its control, including
responsiveness to service providers' needs, quality and reliability of the
Company's and its competitors' products and services, price, project
management capabilities, technical subject matter expertise, quality of
customer service and support, the emergence of new industry standards, the
development of technical innovations, the attraction and retention of
qualified personnel, regulatory changes and general market and economic
conditions. A variety of potential actions by the Company's 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 have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that the Company will be able to compete successfully with
existing or new competitors or will properly identify and address the demands
of new markets. The failure by the Company to adapt to emerging market
demands, respond to regulatory and technological changes or compete
successfully with existing and new competitors would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Competition".     
 
CHANGES IN MANAGEMENT; MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL
 
  Most of the senior management team joined the Company recently and have
worked together at the Company for only a brief period. J. Richard Abramson,
President and Chief Executive Officer, Jeffrey J. Finn, Senior Vice President
and General Manager of Product Development and Distribution, James M. Ross,
Senior Vice President and General Manager of Services, and Roger A. Barnes,
Senior Vice President of Finance and Chief Financial Officer, joined the
Company in August 1996, July 1996, June 1997 and November 1997, respectively.
The loss of one or more key employees could have a material adverse effect on
the Company. The Company does not maintain key man insurance policies on any
members of senior management.
 
  The Company is currently experiencing a period of rapid growth in license
fees and related services revenue, placing significant demands on its
administrative, operations and financial personnel and systems. The Company's
ability to manage future expansion, if any, effectively will require it to
attract, train, motivate and manage new employees successfully, to integrate
new management and employees into its overall operations and to continue to
improve its operational, financial and management systems. The Company
anticipates that it will need to hire additional research and development
personnel. Competition for research and development and other technical
personnel is intense, and there can be no assurance that the Company will be
able to hire additional personnel on a timely basis, if at all. Because of the
complexity of the Company's software products, a significant
 
                                      13
<PAGE>
 
time lag exists between the hiring date of technical and sales personnel and
the time at which they become fully productive. Although the Company has
increased the number of its sales, marketing, service and support personnel in
recent years, the Company has at times experienced and continues to experience
difficulty in recruiting such personnel. Any failure by the Company to hire
qualified personnel on a timely basis could materially adversely affect the
Company's business, financial condition and results of operations.
 
  The Company is currently in the process of implementing new financial and
project accounting software packages. The Company's ability to implement these
new systems is likely to place substantial demands on certain of the Company's
managerial resources. In addition, if the Company is unable to implement these
software packages in a timely manner, the Company's ability to accurately
forecast and manage its business may be adversely affected. The Company's
failure to manage any expansion effectively, including any failure to
integrate new management and employees or failure to continue to implement and
improve financial, operational and management controls, systems and
procedures, could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
RISKS OF PLANNED INTERNATIONAL EXPANSION
 
  Although the Company derived no revenue from international markets in 1997
or prior years, the Company has recently begun to pursue such opportunities.
Regulatory standards and the pace of adoption of new telecommunications
technologies vary widely from country to country and may be different from
those in the U.S. To the extent that such regulatory standards and market
conditions do not encourage the deployment of products similar to the
Company's, the Company may not be able to develop international markets for
its products or services, which could have an adverse impact on the Company's
future marketing prospects. International expansion of the Company's business
may cause an increased portion of the Company's revenue, cost of revenue and
operating expenses to be denominated in foreign currencies. To the extent that
revenue or expenses are denominated in foreign currencies, the Company will be
exposed to increased risk associated with currency exchange fluctuations.
Adverse currency exchange fluctuations could have a material adverse effect on
the Company's business, financial condition and results of operations. In
order to manage such exposure, the Company may undertake foreign exchange
hedging transactions, although none are currently contemplated. There can be
no assurance that any such hedging transactions will adequately hedge the
Company's foreign currency exposure, or that such transactions will not result
in losses to the Company.
   
  International expansion of the Company's business will require significant
management attention and financial resources. Traditionally, international
operations may be characterized by higher operating expenses, largely
resulting from the establishment of foreign offices, the hiring of additional
personnel, the localization and marketing of products for particular foreign
markets and the development of relationships with international service
providers. As a result, if international revenue is generated, operating
margins may be adversely affected. Moreover, in order to expand
internationally, the Company will be required to establish relationships with
distributors and third-party integrators. There can be no assurance that the
Company will be able to effectively establish such relationships. If
international revenue is not adequate to offset the additional expense of
expanding foreign operations, the Company's business, financial condition and
results of operations could be materially adversely affected.     
 
PRODUCT LIABILITY
   
  The Company's agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential liability for damages
arising out of the use of or defects in the Company's products. The nature and
extent of such limitations, however, tend to vary from customer     
 
                                      14
<PAGE>
 
to customer and it is possible that such limitations of liability provisions
may not be effective as a result of federal, state or local laws or ordinances
or unfavorable judicial decisions. In addition, the Company currently has
errors and omissions insurance which, subject to customary exclusions, covers
claims resulting from failure of the Company's 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 such insurance, the
Company's business, financial condition and results of operations may be
materially adversely affected, particularly since the Company's software
products may be used in critical business applications. Defending such a suit,
regardless of its merits, could involve substantial expense and require the
time and attention of key management personnel, either of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company's business reputation could be
adversely affected by product liability claims, regardless of their merit or
the eventual outcome of such claims.
 
YEAR 2000 CAPABILITY
 
  Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance.
 
  The Company believes that the purchasing patterns of customers and potential
customers may be significantly affected by Year 2000 issues. Many companies
are expending significant resources to correct or patch their current software
systems for Year 2000 compliance. These expenditures may result in reduced
funds available to purchase software products such as those offered by the
Company. Many potential customers may also defer purchasing Year 2000
compliant products until they believe it is absolutely necessary, thus
resulting in potentially deferred sales. Conversely, Year 2000 issues may
cause other companies to accelerate purchases, thereby causing an increase in
short-term demand and a consequent decrease in long-term demand for software
products. Additionally, Year 2000 issues could cause a significant number of
companies, including current customers of the Company, to reevaluate their
current system needs and as a result consider switching to other systems or
suppliers. This could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
  The Company currently offers software products that are designed to be Year
2000 compatible, and the Company's current contracts with its customers
require that the Company warrant Year 2000 capability. Although the Company
has designed its products to be Year 2000 capable and tests third-party
software that is incorporated with the Company's products, there can be no
assurance that the Company's software products, particularly when such
products incorporate third-party software, contain all necessary date code
changes.
 
  The Company utilizes off-the-shelf and custom software developed internally
and by third parties. To the extent that such software and systems do not
comply with Year 2000 requirements, there can be no assurance that potential
systems interruptions or the cost necessary to update such software will not
have a material adverse effect on the Company's business, financial condition
and results of operations.
 
PROTECTION OF INTELLECTUAL PROPERTY; RISKS OF INFRINGEMENT
 
  The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology. The Company relies on a combination of
copyright, trademark and trade secret laws, as well as confidentiality
agreements and licensing arrangements, to establish and protect its
 
                                      15
<PAGE>
 
proprietary rights. The Company presently has no patents, but has patent
applications pending in the U.S. on elements of its three LNP products,
NumberManager, OrderPath and NodeMaster. In addition, the Company has
registered or filed for registration of certain of its trademarks. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use the Company's 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 the Company's proprietary rights. There can be no assurance that the
Company's means of protecting its 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 the Company's technology, duplicate the
Company's technology or design around any patent of the Company. Moreover,
litigation may be necessary in the future to enforce the Company's
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 have a material adverse effect on the
Company's business, financial condition and results of operations.
   
  There has been substantial litigation in the software industry regarding
intellectual property rights, and there can be no assurance that third parties
will not claim infringement by the Company of their intellectual property
rights. If the Company were found to have infringed the intellectual property
rights of any third party, the Company could be subject to liabilities for
such infringement, which liabilities could be material. The Company could be
required to seek licenses from other companies or to refrain from using or
selling certain products or using certain processes. Although holders of
patents and other intellectual property rights may offer licenses to their
patent or other intellectual property rights, no assurance can be given that
licenses would be offered or that the terms of any offered license would be
acceptable to the Company. Any need on the part of the Company to redesign its
products or to enter into any royalty or licensing agreement could have a
material adverse effect on the Company's business, financial condition and
results of operations.     
   
  The Company currently distributes software upgrades, enhancements and
patches to its customers through its internal Website. Although the Company
attempts to ensure that access to such material is limited to customers, there
can be no assurance that these protective measures will be sufficient to
prevent unauthorized persons from gaining access to portions of the Company's
products, allowing them to copy or use the materials.     
 
  The Company also relies on certain other technology which it licenses from
third parties, including software that is integrated with internally developed
software and used in the Company's products to perform certain key functions.
There can be no assurances that such third-party products do not infringe the
intellectual property rights of others. Although the licenses provided to the
Company by such third parties typically contain intellectual property
warranties and indemnification clauses, such clauses often are not as broad as
those required by the Company's customers. Even when the indemnity that the
Company received from a third-party licensor is as broad as the indemnity that
the Company provides to its customers, the third-party licensors from which
the Company would be receiving indemnity are often not well-capitalized and
may not be able to indemnify the Company in the event that such third-party
technology infringes the proprietary rights of others. Accordingly, the
Company could have substantial exposure in the event that the technology
licensed from a third party infringes another party's proprietary rights. In
addition, the Company's LNP products, OrderPath, NumberManager and NodeMaster,
all contain certain core software licensed from a current customer under a
non-exclusive license, which may be licensed to other parties, including
competitors of the Company. This license is terminable by the customer if the
Company fails to meet certain contractual obligations.
 
                                      16
<PAGE>
 
SECURITY
 
  The Company has included security features in certain of its products that
are intended to protect the privacy and integrity of customer data. Despite
the existence of these security features, the Company's software products may
be vulnerable to breaches in security due to defects in the security
mechanisms, as well as vulnerabilities inherent in the operating system or
hardware platform on which the product runs, and/or the networks attached to
that platform. Security vulnerabilities, regardless of origin, could
jeopardize the security of information stored in and transmitted through the
computer systems of the Company's customers. On all projects to date, the
Company's customers have accepted responsibility for security issues
associated with the operating system, hardware platform and network
configuration; however, this may change in the future. Solving any future
security problems may require significant capital expenditures and affect the
Company's reputation and product acceptance, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
CONTROL BY EXISTING STOCKHOLDERS
 
  Upon completion of this offering, the Company's current directors and
executive officers and their respective affiliates will beneficially own
approximately 55.7% of the outstanding Common Stock. As a result, these
stockholders will be able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. Such concentration of
ownership may also have the effect of delaying or preventing a change in
control of the Company. See "Principal and Selling Stockholders".
 
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
 
  Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for
the Company's Common Stock will develop or be sustained after this offering.
The initial public offering price will be determined by negotiations among the
Company, the Selling Stockholders and the Underwriters. See "Underwriting" for
a discussion of the factors to be considered in determining the initial public
offering price. The trading price of the Company's Common Stock could be
subject to wide fluctuations in response to quarterly variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, changes in financial estimates by securities
analysts, the operating and stock price performance of other companies that
investors may deem comparable to the Company, general stock market and
economic considerations and other events or factors. In addition, the stock
market has experienced volatility that has particularly affected the market
prices of equity securities of many technology companies and that often has
been unrelated to the operating performance of such companies. These broad
market fluctuations may adversely affect the trading price of the Company's
Common Stock. As a result of the foregoing factors, there can be no assurance
that the Company's Common Stock will trade at or higher than the initial
public offering price.
 
IMMEDIATE AND SUBSTANTIAL DILUTION
   
  Purchasers of the Common Stock will suffer immediate and substantial
dilution in the net tangible book value per share of the Common Stock from the
proposed initial public offering price. To the extent that options or warrants
to purchase the Company's Common Stock are exercised, there will be further
dilution. See "Dilution".     
 
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
   
  Upon completion of this offering, the Company will have 10,843,254 shares of
Common Stock outstanding, of which the 3,090,909 shares offered hereby by the
Company and the 909,091 shares offered hereby by the Selling Stockholders will
be freely tradable without restriction or registration     
 
                                      17
<PAGE>
 
   
under the Securities Act of 1933, as amended (the "Securities Act"), unless
purchased by "affiliates" of the Company as that term is defined under the
Securities Act and the regulations promulgated thereunder. The remaining
6,843,254 shares of Common Stock are "restricted securities" as that term is
defined by Rule 144 promulgated under the Securities Act. Beginning 90 days
from the date of this Prospectus, approximately 33,902 shares will be eligible
for sale in the public market pursuant to the provisions of Rule 144 and Rule
701 under the Securities Act. The Company, the Selling Stockholders, the
directors, executive officers and certain other stockholders and optionees of
the Company, who will hold in the aggregate approximately 6,809,352 shares of
Common Stock following this offering, have agreed that they will not, directly
or indirectly, offer to sell, dispose of or transfer any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for
Common Stock for a period of 180 days from the date of this Prospectus without
the prior written consent of Goldman, Sachs & Co. on behalf of the
Underwriters. Upon the expiration of this 180-day lock-up period, all of such
shares will become available for sale in the public market subject to
compliance with Rule 144, Rule 144(k) or Rule 701. Holders of 6,740,909 shares
of Common Stock have the right, under certain conditions, to participate in
future Company registrations or to cause the Company to register certain
shares of Common Stock owned by them. Additionally, holders of the Company's
outstanding warrants to purchase 910,633 shares of Common Stock are entitled
to registration rights upon the exercise of such warrants. In addition, the
Company intends to file a registration statement on Form S-8, which will
result in registration of a total of approximately 3,313,011 shares of Common
Stock reserved for issuance under the Company's Amended and Restated Stock
Option Plan (the "Stock Option Plan") and Employee Stock Purchase Plan (the
"Purchase Plan"), of which options to purchase 1,887,401 shares were
outstanding at December 31, 1997. Sales of substantial amounts of Common Stock
in the public market may have an adverse impact on its market price. See
"Description of Capital Stock--Warrants", "--Registration Rights", "Shares
Eligible for Future Sale" and "Underwriting".     
 
CERTAIN ANTI-TAKEOVER PROVISIONS
 
  Upon completion of this offering, the Company's Board of Directors will have
the authority to issue up to 2,000,000 shares of Preferred Stock and to
determine the price, rights, preferences and privileges of those shares
without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. Such issuance of Preferred Stock, while providing desired flexibility
in connection with possible acquisitions and other corporate purposes, could
make it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no current plans to
issue shares of Preferred Stock. In addition, the Company is subject to the
anti-takeover provisions of Section 203 of Delaware General Corporation Law,
which prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in the prescribed manner. The application of
Section 203 and certain provisions of the Company's Restated Certificate of
Incorporation, including a classified Board of Directors, may have the effect
of delaying or preventing changes in control of management of the Company,
which could adversely affect the market price of the Company's Common Stock by
discouraging or preventing takeover attempts that might result in the payment
of a premium price to the Company's stockholders. See "Description of Capital
Stock--Delaware Anti-Takeover Law and Certain Charter Provisions".
 
SUBSTANTIAL DISCRETION IN USE OF PROCEEDS
 
  The Company currently has no specific plans for a portion of the net
proceeds of this offering. As a consequence, the Company's management will
have the discretion to allocate this portion of the net proceeds of this
offering to uses that the stockholders may not deem desirable, and there can
be no assurance that these proceeds can or will be invested to yield a
significant return. See "Use of Proceeds".
 
 
                                      18
<PAGE>
 
                                USE OF PROCEEDS
 
  The net proceeds to the Company from the sale of the 3,090,909 shares of
Common Stock offered by the Company hereby are estimated to be $30,744,999
($32,730,550 if the Underwriters' over-allotment option is exercised in full),
based on an assumed public offering price of $11.00 per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company. The Company will not receive any
proceeds from the sale of the shares being sold by the Selling Stockholders.
See "Principal and Selling Stockholders".
 
  The Company intends to use the net proceeds of this offering primarily for
repayment of its obligations under the Subordinated Notes and Stockholder
Notes (as defined herein), working capital and other general corporate
purposes. The respective principal amounts (exclusive of $56,517 in accrued
interest) outstanding under the Subordinated Notes and the Stockholder Notes
are $6,792,885 and $5,092,859 and bear interest at the rates of 9% (with
deferred interest accrued at the rate of 12%) and 7.25%, respectively, with
respective maturity dates of June 1, 2004 and January 2, 2006. The amounts
actually expended by the Company for working capital purposes will depend upon
a number of factors, including future revenue growth, the amount of cash
generated by the Company's operations and the progress of the Company's
product development efforts. The Company may also use a portion of such net
proceeds to acquire or invest in businesses, products and technologies that
are complementary to those of the Company, although no specific acquisitions
are planned as of the date of this Prospectus, and no portion of the net
proceeds has been allocated for any particular acquisition.
 
  Pending the uses described above, the Company intends to invest the net
proceeds from this offering in short-term, interest-bearing, investment-grade
securities.
 
                   DIVIDEND POLICY AND S CORPORATION STATUS
 
  From June 7, 1985 to January 5, 1996, the Company was, for federal income
tax purposes, an S corporation under the Internal Revenue Code of 1986, as
amended (the "Code"), and was also an S corporation for state income tax
purposes under comparable state laws. As a result, the Company's net income
during this period was taxed for federal and certain state income tax purposes
directly to the Company's existing stockholders at that time at their
individual federal and state income tax rates, rather than to the Company.
During the fiscal years ended December 31, 1995 and December 31, 1996, the
Company made aggregate S corporation distributions to its stockholders in the
amounts of $5,811,810 and $7,257,623, respectively.
 
  Since January 5, 1996, at which time the Company ceased to be an S
corporation, the Company has not declared or paid any cash dividends. The
Company currently intends to retain future earnings, if any, to finance the
growth and development of its business and does not anticipate paying any cash
dividends in the foreseeable future.
 
                                      19
<PAGE>
 
                                   DILUTION
 
  The pro forma net tangible book value (deficit) of the Company, as of
December 31, 1997, was approximately $(1,041,000) or $(0.13) per share. Pro
forma net tangible book value (deficit) per share is equal to the Company's
total tangible assets less its total liabilities, divided by the number of pro
forma outstanding shares of Common Stock. After giving effect to the sale of
the 3,090,909 shares of Common Stock offered by the Company hereby (at an
assumed initial public offering price of $11.00 per share), the pro forma net
tangible book value of the Company at December 31, 1997 would have been
approximately $29,704,000 or $2.74 per share. This represents an immediate
increase in such net tangible book value of $2.87 per share to existing
stockholders and an immediate dilution of $8.26 per share to new investors
purchasing shares in this offering. The following table illustrates this per
share dilution:
 
<TABLE>
<S>                                                               <C>     <C>
Assumed initial public offering price per share..................         $11.00
  Pro forma net tangible book value (deficit) per share.......... $(0.13)
  Increase per share attributable to new investors(2)............   2.87
                                                                  ------
Pro forma net tangible book value per share after this
 offering(3).....................................................           2.74
                                                                          ------
Dilution per share to new investors..............................         $ 8.26
                                                                          ======
</TABLE>
 
  The following table summarizes, on a pro forma basis, as of December 31,
1997, the difference between the number of shares purchased from the Company,
the total consideration paid and the average price paid per share by the
existing holders of Common Stock and by the new investors at an assumed
initial public offering price of $11.00 per share:
 
<TABLE>   
<CAPTION>
                            SHARES PURCHASED(1)    TOTAL CONSIDERATION  AVERAGE
                            ------------------------------------------   PRICE
                              NUMBER     PERCENT     AMOUNT    PERCENT PER SHARE
                            ------------ --------------------- ------- ---------
<S>                         <C>          <C>       <C>         <C>     <C>
Existing stockholders......    7,740,747     71.5% $    72,650    0.2%  $ 0.01
New investors..............    3,090,909     28.5   33,999,999   99.8    11.00
                            ------------  -------  -----------  -----   ------
  Totals...................   10,831,656    100.0% $34,072,649  100.0%
                            ============  =======  ===========  =====
</TABLE>    
- --------
(1) Excludes 1,887,401 shares of Common Stock reserved for issuance upon
    exercise of options outstanding as of December 31, 1997 under the
    Company's Stock Option Plan, at a weighted average exercise price of $4.92
    per share, and 910,633 shares of Common Stock reserved for issuance upon
    exercise of warrants outstanding as of December 31, 1997, at a weighted
    average exercise price of $.80 per share. In addition, in December 1997,
    the Board of Directors adopted an Employee Stock Purchase Plan and
    reserved an aggregate of 250,000 shares for issuance thereunder. To the
    extent that outstanding options and warrants are exercised in the future,
    there will be further dilution to new investors. See "Management--Employee
    Benefit Plans" and "Description of Capital Stock--Warrants".
(2) Does not give effect to the exercise of the Underwriters' over-allotment
    option.
(3) After deducting estimated underwriting discounts and commissions and
    estimated offering expenses of approximately $875,000 payable by the
    Company.
 
                                      20
<PAGE>
 
                                CAPITALIZATION
 
  The following table sets forth the long-term obligations and capitalization
of the Company as of December 31, 1997, (i) on an actual basis, (ii) on a pro
forma basis after giving effect to the conversion of all outstanding shares of
Non-voting Common Stock and Preferred Stock into Common Stock and (iii) pro
forma as adjusted to give effect to the sale of 3,090,909 shares of Common
Stock offered by the Company hereby at an assumed initial public offering
price of $11.00 per share (after deducting the estimated underwriting
discounts and commissions and estimated offering expenses) and the application
of the estimated net proceeds therefrom. This table should be read in
conjunction with the Financial Statements and Notes thereto appearing
elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                            DECEMBER 31, 1997
                                    ----------------------------------------
                                                                PRO FORMA
                                     ACTUAL      PRO FORMA     AS ADJUSTED
                                    -----------  -----------   -------------
                                    (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                 <C>          <C>           <C>            
Current portion of long-term
 obligations....................... $     3,178  $     3,178    $     2,885
                                    ===========  ===========    ===========   
Long-term obligations.............. $    13,287  $    13,287    $     1,694
                                    -----------  -----------    -----------
Stockholders' equity:
  Preferred Stock, $.001 par value;
   8,160 shares authorized, 8,160
   shares outstanding actual; no
   shares outstanding pro forma and
   pro forma as adjusted........... $       --   $       --     $       --
  Common Stock, $.001 par value;
   4,930,000 non-voting shares
   authorized and 1,620,760 shares
   outstanding actual; 10,070,000
   voting shares authorized and
   7,740,747 shares outstanding pro
   forma; 25,000,000 shares
   authorized and 10,831,656
   outstanding pro forma as
   adjusted(1).....................           2            8             11
  Additional paid-in capital.......       2,423        2,417         33,159
  Deferred compensation............        (992)        (992)          (992)
  Retained earnings................         265          265            265
                                    -----------  -----------    -----------
    Total stockholders' equity.....       1,698        1,698         32,443
                                    -----------  -----------    -----------
    Total capitalization........... $    14,985  $    14,985    $    34,137
                                    ===========  ===========    ===========
</TABLE>
- --------
(1) Excludes 1,887,401 shares of Common Stock reserved for issuance upon
    exercise of options outstanding as of December 31, 1997 under the
    Company's Stock Option Plan, at a weighted average exercise price of $4.92
    per share, and 910,633 shares of Common Stock reserved for issuance upon
    exercise of warrants outstanding as of December 31, 1997, at a weighted
    average exercise price of $.80 per share. In addition, in December 1997,
    the Board of Directors adopted an Employee Stock Purchase Plan and
    reserved an aggregate of 250,000 shares for issuance thereunder. To the
    extent that outstanding options and warrants are exercised in the future,
    there will be further dilution to new investors. See "Management--Employee
    Benefit Plans" and "Description of Capital Stock--Warrants".
 
                                      21
<PAGE>
 
                            SELECTED FINANCIAL DATA
 
  The following selected financial data 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 Prospectus. The statement of
operations data set forth below for the years ended December 31, 1995, 1996
and 1997 and the balance sheet data as of December 31, 1996 and 1997 are
derived from, and are qualified by reference to, the audited financial
statements of the Company appearing elsewhere in this Prospectus. The
statements of operations data for the years ended December 31, 1993 and 1994
and the balance sheet data as of December 31, 1993, 1994 and 1995 are derived
from audited financial statements of the Company not included in this
Prospectus. Historical results are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
                                  YEAR ENDED DECEMBER 31,
                          -------------------------------------------
                           1993     1994     1995     1996     1997
                          -------  -------  -------  -------  -------
                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                       <C>      <C>      <C>      <C>      <C>      
Revenue:
 License fees and
  related services......  $    --  $    --  $    --  $   882  $20,034
 Other services.........   17,810   33,032   45,355   36,036   22,686
                          -------  -------  -------  -------  -------
 Total revenue..........   17,810   33,032   45,355   36,918   42,720
                          -------  -------  -------  -------  -------
Cost of revenue:
 License fees and
  related services......       --       --       --      450    6,339
 Other services.........   11,327   18,181   26,589   24,081   18,885
                          -------  -------  -------  -------  -------
 Total cost of revenue..   11,327   18,181   26,589   24,531   25,224
                          -------  -------  -------  -------  -------
Gross margin............    6,483   14,851   18,766   12,387   17,496
Operating expense:
 Sales and marketing....      881    1,898    3,405    2,913    5,065
 General and
  administrative........    1,280    4,321    7,725    8,587    8,635
 Research and
  development...........      213      482      821      641    2,914
                          -------  -------  -------  -------  -------
 Total operating
  expense...............    2,374    6,701   11,951   12,141   16,614
                          -------  -------  -------  -------  -------
Operating income .......    4,109    8,150    6,815      246      882
Other income (expense),
 net....................      (47)    (136)    (689)  (1,422)  (1,395)
                          -------  -------  -------  -------  -------
Income (loss) before
 income taxes...........    4,062    8,014    6,126   (1,176)    (513)
Provision for (benefit
 from) income taxes.....       --       --       --       81     (791)
                          -------  -------  -------  -------  -------
Net income (loss).......  $ 4,062  $ 8,014  $ 6,126  $(1,257) $   278
                          =======  =======  =======  =======  =======
Pro forma(1):
 Income (loss) before
  income taxes..........  $ 4,062  $ 8,014  $ 6,126  $(1,176)
 Provision for (benefit
  from) income taxes....    1,626    3,007    2,301     (298)
                          -------  -------  -------  -------
 Net income (loss)......  $ 2,436  $ 5,007  $ 3,825  $  (878)
                          =======  =======  =======  =======
Net income (loss) per
 common share(2)(3).....  $  2.65  $  5.24  $  4.00  $ (0.82) $  0.18
                          =======  =======  =======  =======  =======
Diluted net income
 (loss) per common share
 (2)....................  $  2.65  $  5.24  $  4.00  $ (0.82) $  0.03
                          =======  =======  =======  =======  =======
</TABLE>
 
<TABLE>
<CAPTION>
                                      DECEMBER 31,
                         --------------------------------------
                          1993   1994    1995    1996               1997
                         ------ ------- ------- -------             ----
                                     (IN THOUSANDS)
<S>                  <C> <C>    <C>     <C>     <C>     <C>         <C>
BALANCE SHEET DATA:
 Cash and cash
  equivalents..........  $3,964 $ 8,186 $ 1,269 $ 3,184 $ 1,171
 Working capital.......   2,484   4,728   3,174   6,390   5,366
 Total assets..........   8,527  17,901  19,203  24,356  27,859
 Long-term obligations.   1,128   2,610   6,059  18,096  16,465
 Stockholders' equity..   3,863   8,859   9,173     996   1,698
</TABLE>
- -------
(1) Prior to January 6, 1996, the Company was an S corporation for federal and
    state income tax purposes, and accordingly, the Company's income was taxed
    directly to the Company's stockholders at that time. Pro forma adjustments
    reflect the estimated federal and state income taxes that would have been
    payable if the Company had not been an S corporation prior to January 6,
    1996.
(2) See Note 1 of Notes to Financial Statements for a discussion of the
    computation of net income (loss) per common share and weighted average
    common shares outstanding.
   
(3) Supplemental basic net income (loss) per share for the year ended December
    31, 1996 and 1997, assuming the subordinated debt with stockholders was
    not outstanding during any of the periods, and using the net proceeds of
    the offering, would have been $(.25) and $.32, respectively. See "Use of
    Proceeds".     
 
                                      22
<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
  All statements, trend analysis and other information contained in the
following discussion and elsewhere in this Prospectus relative to markets for
the Company's products and services, and trends in revenue, gross margin and
anticipated expense levels, as well as other statements including words such
as "anticipate", "believe", "plan", "estimate", "expect" and "intend" and
other similar expressions, constitute forward-looking statements. These
forward-looking statements are subject to business and economic risks and
uncertainties, and the Company's actual results of operations may differ
materially from those contained in the forward-looking statements. Factors
that could cause or contribute to such differences include, but are not
limited to, those discussed in "Risk Factors" as well as other risks and
uncertainties referenced in this Prospectus.
 
OVERVIEW
 
  The Company designs, develops, markets and supports OSS products for the
telecommunications industry and provides a broad range of both fixed-price and
time-and-materials custom software solutions. From its inception in 1985
through 1996, the Company focused on providing custom software development
services, primarily to two telecommunications companies. Beginning in mid-
1995, one of the Company's major customers substantially reduced its purchases
of custom software development services. The Company sought additional
contracts to replace the lost business and deferred reducing staffing and
related expenditures pending results of such efforts, resulting in a
percentage decline of gross margins in 1995.
   
  In May 1996, the Company obtained financing from new investors and
reconstituted its Board of Directors. The new Board of Directors replaced the
Company's senior management team beginning in July 1996. Under the direction
of new management, the Company reduced its headcount to 270 employees by the
end of 1996, representing a decrease of 44% from a high of 480 employees in
the second quarter of 1995. Because the Company's cost structure is
predominantly tied to personnel-related expenses, the Company did not begin to
realize benefits from staff reductions until the fourth quarter of 1996, and,
thus, the shortfall of expected new contracts in 1996 resulted in a
significant decline in gross margins in 1996. The Company also made a
strategic decision to broaden its emphasis from being a time-and-materials
based custom software developer to a provider of both time-and-materials and
fixed-price custom software development services and standard software
products and related services in order to capitalize on the market opportunity
for LNP solutions. In the fourth quarter of 1996, the Company began marketing
its first LNP products and generating license and related services revenue
that accounted for 47% of the Company's total revenue for 1997. As the Company
increasingly focuses on licensing standard software products, the Company
believes that license and related services revenue as well as associated
maintenance revenue will modestly increase, and other services revenue will
decline proportionately, as a percentage of total revenue. See "Risk Factors--
Expansion of Strategic Focus".     
   
  The Company recognizes revenue in accordance with the provisions of
Statement of Position 91-1, "Software Revenue Recognition". The Company
derives revenue from license fees and services under the terms of both fixed-
price and time-and-materials contracts. License fees and related services
revenue during 1996 consisted of fees from non-LNP software products.
Subsequent to 1996, license fees and related services revenue consists of
revenue from contracts involving the Company's LNP 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 and is recognized using
the percentage-of-completion method of accounting. The percentage-of-
completion for each contract is determined based on the ratio of direct
 
                                      23
<PAGE>
 
labor hours incurred to total estimated direct labor hours. Amounts billed and
collected 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-month period.
   
  Services revenue provided under fixed-price contracts is 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 recognized ratably over the service period,
which is generally 12 months. Revenue from training is recognized as the
training is performed. When maintenance and training services are bundled with
the original license fee arrangement, their fair value is deferred and
recognized during the period such services are performed.     
 
  The Company 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, should they occur, would be recorded
in the period in which current estimates of total contract revenue and
contract cost indicate a loss. The Company does not anticipate a change in the
timing of revenue recognition upon adoption of Statement of Position 97-2,
"Software Revenue Recognition". See "Risk Factors--Lengthy Implementation
Process; Customer Acceptance of LNP Products" and "--Fixed-Price Contracts".
 
 
  During the years ended December 31, 1995, 1996 and 1997, the Company
recognized approximately 78%, 73% and 89% of total revenue from two, five and
six customers, respectively, each of which accounted for greater than 10% of
the Company's revenue in such periods. As of December 31, 1995, 1996 and 1997,
these customers accounted for 65%, 75% and 85% of contract receivables,
respectively. The Company's payment terms generally range from 30 to 60 days
from the date of invoice following achievement of specified contractual
milestones. See "Risk Factors--Reliance on Significant Customers".
 
                                      24
<PAGE>
 
RESULTS OF OPERATIONS
 
  The following table presents, for the periods indicated, certain items
contained in the Company's statement of operations reflected as a percentage
of total revenue:
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                                    --------------------------
                                                     1995     1996      1997
                                                    -------  -------   -------
<S>                                                 <C>      <C>       <C>
Revenue:
  License fees and related services................     -- %     2.4%     46.9%
  Other services...................................   100.0     97.6      53.1
                                                    -------  -------   -------
    Total revenue..................................   100.0    100.0     100.0
                                                    -------  -------   -------
Cost of revenue:
  License fees and related services................     --       1.2      14.8
  Other services...................................    58.6     65.2      44.2
                                                    -------  -------   -------
    Total cost of revenue..........................    58.6     66.4      59.0
                                                    -------  -------   -------
Gross margin.......................................    41.4     33.6      41.0
Operating expenses:
  Sales and marketing..............................     7.5      7.9      11.9
  General and administrative.......................    17.0     23.3      20.2
  Research and development.........................     1.8      1.7       6.8
                                                    -------  -------   -------
    Total operating expenses.......................    26.3     32.9      38.9
                                                    -------  -------   -------
Operating income...................................    15.1      0.7       2.1
Other income (expense), net........................    (1.5)    (3.9)     (3.3)
                                                    -------  -------   -------
Income (loss) before income taxes..................    13.6     (3.2)     (1.2)
Provision for (benefit from) income taxes..........     --       0.2      (1.9)
                                                    -------  -------   -------
Net income (loss)..................................    13.6%    (3.4)%     0.7%
                                                    =======  =======   =======
Pro forma provision for (benefit from) income
 taxes.............................................     5.1     (0.8)
                                                    -------  -------
Pro forma net income (loss)........................     8.5%    (2.4)%
                                                    =======  =======
</TABLE>
 
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
 
  REVENUE. Total revenue increased $5.8 million, or 16%, to $42.7 million in
the year ended December 31, 1997 from $36.9 million in the year ended December
31, 1996. License fees and related services revenue increased by $19.1
million, or 2,171%, to $20.0 million in the year ended December 31, 1997 from
$882,000 in the year ended December 31, 1996, reflecting the Company's
progress toward the successful introduction of the Company's initial LNP
products. Other services revenue, a majority of which was attributable to
custom development projects for the Company's telecommunications customers,
decreased by $13.3 million, or 37%, to $22.7 million in the year ended
December 31, 1997 from $36.0 million for the year ended December 31, 1996,
reflecting the Company's expanded focus in 1997 to encompass both standard
software products as well as custom development projects. License fees and
related services revenue as a percentage of total revenue increased to 47% for
the year ended December 31, 1997 from 2% for the year ended December 31, 1996.
 
  COST OF REVENUE. Cost of revenue consists primarily of personnel-related
costs, equipment depreciation and facilities costs and the cost of third-party
software. Cost of license fees and related services increased by $5.9 million,
or 1,309%, to $6.3 million for the year ended December 31, 1997 from $450,000
for the year ended December 31, 1996. As a percentage of revenue, cost of
license fees and related services increased to 15% for the year ended December
31, 1997 from 1% for the
 
                                      25
<PAGE>
 
year ended December 31, 1996. These increased costs reflected the Company's
expanded focus to include standard software products and associated
integration services. Cost of other services decreased $5.2 million, or 22%,
to $18.9 million for the year ended December 31, 1997 compared to $24.1
million for the year ended December 31, 1996. As a percentage of total
revenue, cost of other services decreased to 44% for the year ended December
31, 1997 from 65% for the year ended December 31, 1996. The absolute amount of
other services costs decreased in connection with the reduction in the
Company's lease commitments, increased productivity of Company personnel and a
shift of personnel from custom development projects to provide necessary
integration services for the Company's standard software products.
 
  SALES AND MARKETING. Sales and marketing expenses consist principally of
compensation costs (including commissions), travel expenses, field sales
office expenses and marketing communication expenses. Sales and marketing
expenses increased by $2.2 million, or 74%, to $5.1 million in the year ended
December 31, 1997 from $2.9 million in the year ended December 31, 1996. As a
percentage of revenue, sales and marketing expenses increased to 12% in the
year ended December 31, 1997 from 8% in the year ended December 31, 1996. This
increase was attributable to the Company's expansion of its direct sales force
by 12 persons to 16 to support sales of the Company's new standard software
products and an increase in the Company's marketing activities.
 
  GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation costs for administration, facilities, finance, human
resources, quality assurance and general management personnel, as well as
legal and accounting expenses. General and administrative expenses totaled
$8.6 million in the years ended December 31, 1997 and December 31, 1996. As a
percentage of revenue, general and administrative expenses decreased to 20% in
the year ended December 31, 1997 from 23% in the year ended December 31, 1996.
On a percentage basis, this decrease reflected increased revenue. In late 1996
and in 1997, the Company implemented cost and headcount controls and made
additional investments to improve the Company's operational, financial,
management information and software development processes.
 
  RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of compensation costs, equipment and software development tools.
Research and development expenses increased by $2.3 million, or 355%, to $2.9
million in the year ended December 31, 1997 from $641,000 in the year ended
December 31, 1996. As a percentage of revenue, research and development
expenses increased to 7% in the year ended December 31, 1997 from 2% in the
year ended December 31, 1996. This increased cost resulted from additional
staffing and associated costs in connection with the Company's strategic
commitment to the development of MetOSS software product offerings. In
addition, significant research and development expenses were recorded as cost
of revenue in the year ended December 31, 1997. This resulted from the Company
entering into a license with a major customer prior to the completion of the
development effort. No research and development expenses were recorded as cost
of revenue in the year ended December 31, 1996.
 
  OTHER INCOME (EXPENSE), NET. Other income (expense), net, includes interest
expense on the Company's debt financing and capital lease obligations and
interest income on cash. Other expense, net of other income, totaled $1.4
million in both of the years ended December 31, 1997 and December 31, 1996. As
a percentage of revenue, other expense declined to 3% in the year ended
December 31, 1997 from 4% in the year ended December 31, 1996, reflecting
increased revenue in 1997.
 
  PROVISION FOR (BENEFIT FROM) INCOME TAXES. The Company recorded an income
tax benefit in the year ended December 31, 1997 of $791,000 which resulted
primarily from the Company's pretax loss coupled with significant research and
development tax credits generated during this period. The change from the
provision for income taxes recorded in 1996 was a result of such research and
development tax credits and the effect of converting to taxable status in
1996. Prior to January 6, 1996, the Company operated as an S corporation for
tax purposes and did not pay taxes at the corporate
 
                                      26
<PAGE>
 
level. On a pro forma basis, assuming the Company had been a taxable entity
since its inception, the income tax benefit would have been approximately
$298,000 for the year ended December 31, 1996, resulting in an effective
income tax rate of 25%. The pro forma rate was lower than the federal
statutory rate primarily because of a permanent difference associated with the
conversion to a C corporation for tax purposes and the cancellation of certain
indebtedness.
 
 YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
 
  REVENUE. Total revenue decreased by $8.5 million, or 19%, to $36.9 million
in 1996 from $45.4 million in 1995. The decrease was primarily the result of a
significant reduction in custom software consulting revenue from a major
customer and the inability of the Company to replace the lost revenue with new
customer contracts.
 
  COST OF REVENUE. Cost of revenue decreased by $2.1 million, or 8%, in 1996
to $24.5 million from $26.6 million in 1995. As a percentage of revenue, cost
of revenue increased to 66% in 1996 from 59% in 1995. The Company incurred
budget overruns on certain fixed-price contracts in 1996; however, none of
these budget overruns resulted in losses on these contracts. The Company also
experienced a significant decline in gross profit margins and operating income
in 1996 as compared to 1995, which resulted largely from overstaffing and
infrastructure investments made in late 1995 in anticipation of contracts that
were not realized in 1996. Costs did not decrease proportionately with the
decrease in revenue as commitments that had been made in prior periods under
facilities, equipment and consulting contracts contributed to higher-than-
desired expense levels.
 
  SALES AND MARKETING. Sales and marketing expenses decreased by $492,000, or
14%, to $2.9 million in 1996 from $3.4 million in 1995. As a percentage of
revenue, sales and marketing expenses remained constant at 8% for 1996 and
1995. The decrease in absolute dollars was primarily due to the transfer of
marketing personnel to custom software development projects.
 
  GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$862,000, or 11%, in 1996 to $8.6 million from $7.7 million in 1995. As a
percentage of revenue, general and administrative expenses increased to 23% in
1996 from 17% in 1995. This increase as a percentage of revenue was
attributable to a decline in revenue and the opening of a new development
facility, offset by a reduction in headcount and related expenditures.
 
  RESEARCH AND DEVELOPMENT. Research and development expenses decreased by
$180,000, or 22%, to $641,000 in 1996 from $821,000 in 1995. As a percentage
of revenue, research and development expenses remained constant at 2% in 1996
and 1995. This absolute dollar decrease reflected management's decision to
reduce staff and support costs in response to the loss of revenue.
 
  OTHER INCOME (EXPENSE), NET. Net other expense increased by $733,000, or
106%, to $1.4 million in 1996 from $689,000 in 1995. As a percentage of
revenue, other expense increased to 4% in 1996 from 2% in 1995. The increase
resulted primarily from the interest expense incurred on subordinated debt
issued by the Company in May 1996.
 
  PROVISION FOR (BENEFIT FROM) INCOME TAXES. Prior to January 6, 1996, the
Company operated as an S corporation for tax purposes and, accordingly, no
income tax provision or liability was recorded because the results of the
Company's operations were included in the returns of the individual
stockholders. The tax benefit in 1996 differed from expected income tax rates
primarily as a result of the conversion to a taxable corporation. On a pro
forma basis, assuming the Company had been a taxable entity since its
inception, income tax benefit would have been approximately $298,000 in 1996
compared to income tax expense in 1995 of $2.3 million, for an effective pro
forma income tax rate of 25% and 38%, respectively. The pro forma effective
rate for the year ended December 31, 1996 was lower than the federal statutory
rate primarily because of a permanent difference associated with cancellation
of indebtedness.
 
                                      27
<PAGE>
 
QUARTERLY RESULTS OF OPERATIONS
   
  The Company has experienced quarterly fluctuations in its operating and
financial results due to many factors, including fluctuating demand for custom
software development projects, the timing and magnitude of new projects,
cancellations or delays of projects, the timing of the introduction and market
acceptance of its LNP products and fluctuations in costs, particularly
personnel, equipment and facilities costs, associated with the Company's
infrastructure. The Company expects quarterly fluctuations to continue as the
Company introduces new software releases, new products and continues its
expansion. Quarterly fluctuations may also result from the timing of
introduction of products and services by the Company's competitors and other
market factors. See "Risk Factors--Fluctuations in Quarterly Results of
Operations".     
 
  The tables below present unaudited quarterly statement of operations data
for each of the eight quarters through December 31, 1997. This information has
been derived from unaudited financial statements that have been prepared on
the same basis as the audited financial statements contained elsewhere in this
Prospectus and, in the opinion of the Company, includes all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the information. These unaudited
quarterly results should be read in conjunction with the Financial Statements
and Notes thereto appearing elsewhere in this Prospectus. The operating
results for any quarter are not necessarily indicative of results for any
future period.
 
<TABLE>
<CAPTION>
                                                         QUARTER ENDED
                          ----------------------------------------------------------------------------
                          MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,  SEPT. 30, DEC. 31,
                            1996      1996     1996      1996     1997      1997      1997      1997
                          --------- -------- --------- -------- --------- --------  --------- --------
                                                          (UNAUDITED)
                                                        (IN THOUSANDS)
<S>                       <C>       <C>      <C>       <C>      <C>       <C>       <C>       <C>     
STATEMENT OF OPERATIONS
 DATA:
Revenue:
 License fees and
  related services......   $   500   $   --   $  335    $   47   $ 2,200  $ 5,370    $ 6,912  $ 5,552
 Other services.........     8,258    9,665    8,664     9,449     5,873    4,924      4,755    7,134
                           -------   ------   ------    ------   -------  -------    -------  -------
 Total revenue..........     8,758    9,665    8,999     9,496     8,073   10,294     11,667   12,686
                           -------   ------   ------    ------   -------  -------    -------  -------
Cost of revenue:
 License fees and
  related services......       300       --      150        --     1,555    1,964      1,550    1,270
 Other services.........     5,939    6,524    5,879     5,739     4,205    4,267      5,561    4,852
                           -------   ------   ------    ------   -------  -------    -------  -------
 Total cost of revenue..     6,239    6,524    6,029     5,739     5,760    6,231      7,111    6,122
                           -------   ------   ------    ------   -------  -------    -------  -------
Gross margin............     2,519    3,141    2,970     3,757     2,313    4,063      4,556    6,564
Operating expenses:
 Sales and marketing....       690      512      718       993       618      977      1,396    2,074
 General and
  administrative........     2,373    1,738    2,240     2,236     2,008    2,265      2,072    2,290
 Research and
  development...........       419      205       10         7       741      364        506    1,303
                           -------   ------   ------    ------   -------  -------    -------  -------
 Total operating
  expenses..............     3,482    2,455    2,968     3,236     3,367    3,606      3,974    5,667
                           -------   ------   ------    ------   -------  -------    -------  -------
Operating income (loss).      (963)     686        2       521    (1,054)     457        582      897
Other expense, net......      (290)    (384)    (455)     (293)     (365)    (404)      (310)    (316)
                           -------   ------   ------    ------   -------  -------    -------  -------
Income (loss) before
 income taxes...........    (1,253)     302     (453)      228    (1,419)      53        272      581
Provision for (benefit
 from) income taxes.....       (82)     117      (44)       90    (1,228)      46        234      157
                           -------   ------   ------    ------   -------  -------    -------  -------
Net income (loss).......   $(1,171)  $  185   $ (409)   $  138   $  (191) $     7    $    38  $   424
                           =======   ======   ======    ======   =======  =======    =======  =======
Pro Forma:
 Income (loss) before
  income taxes..........   $(1,253)  $  302   $ (453)   $  228
 Provision for (benefit
  from) income taxes....      (318)      77     (115)       58
                           -------   ------   ------    ------
 Net income (loss)......   $  (935)  $  225   $ (338)   $  170
                           =======   ======   ======    ======                                         
</TABLE>
 
                                      28
<PAGE>
 
<TABLE>   
<CAPTION>
                                                         QUARTER ENDED
                          ---------------------------------------------------------------------------
                          MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
                            1996      1996     1996      1996     1997      1997     1997      1997
                          --------- -------- --------- -------- --------- -------- --------- --------
                                                     (UNAUDITED)
<S>                       <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>
AS A PERCENT OF TOTAL
 REVENUE:
Revenue:
 License fees and re-
  lated services........      5.7%      --%      3.7%     0.5%     27.3%    52.2%     59.2%    43.8%
 Other services.........     94.3    100.0      96.3     99.5      72.7     47.8      40.8     56.2
                            -----    -----     -----    -----     -----    -----     -----    -----
 Total revenue..........    100.0    100.0     100.0    100.0     100.0    100.0     100.0    100.0
                            -----    -----     -----    -----     -----    -----     -----    -----
Cost of revenue:
 License fees and re-
  lated services........      3.4       --       1.7       --      19.2     19.1      13.3     10.0
 Other services.........     67.8     67.5      65.3     60.4      52.1     41.4      47.6     38.2
                            -----    -----     -----    -----     -----    -----     -----    -----
 Total cost of revenue..     71.2     67.5      67.0     60.4      71.3     60.5      60.9     48.2
                            -----    -----     -----    -----     -----    -----     -----    -----
Gross margin............     28.8     32.5      33.0     39.6      28.7     39.5      39.1     51.8
Operating expenses:
 Sales and marketing....      7.9      5.3       8.0     10.5       7.6      9.5      12.0     16.3
 General and administra-
  tive..................     27.1     18.0      24.9     23.5      24.9     22.0      17.8     18.1
 Research and develop-
  ment..................      4.8      2.1       0.1      0.1       9.2      3.5       4.3     10.3
                            -----    -----     -----    -----     -----    -----     -----    -----
 Total operating ex-
  penses................     39.8     25.4      33.0     34.1      41.7     35.0      34.1     44.7
                            -----    -----     -----    -----     -----    -----     -----    -----
Operating income (loss).    (11.0)     7.1        --      5.5     (13.0)     4.5       5.0      7.1
Other expense, net......     (3.3)    (4.0)     (5.1)    (3.1)     (4.5)    (3.9)     (2.7)    (2.5)
                            -----    -----     -----    -----     -----    -----     -----    -----
Income (loss) before
 income taxes...........    (14.3)     3.1      (5.1)     2.4     (17.5)     0.6       2.3      4.6
Provision for (benefit
 from) income taxes.....     (0.9)     1.2      (0.5)     0.9     (15.2)     0.4       2.0      1.2
                            -----    -----     -----    -----     -----    -----     -----    -----
Net income (loss).......    (13.4)%    1.9%     (4.6)%    1.5%     (2.3)%    0.2%      0.3%     3.4%
                            =====    =====     =====    =====     =====    =====     =====    =====
Pro Forma:
 Income (loss) before
  income taxes..........    (14.3)%    3.1%     (5.1)%    2.4%
 Provision for (benefit
  from) income taxes....     (3.6)     0.8      (1.3)     0.6
                            -----    -----     -----    -----
 Net income (loss)......    (10.7)%    2.3%     (3.8)%    1.8%
                            =====    =====     =====    =====
</TABLE>    
   
  During 1996, license fee revenue of approximately $882,000 reflected the
delivery of non-LNP products to a major customer primarily in the first and
third quarters. License fees and related services revenue significantly
increased in the quarters ended March 31, June 30, and September 30, 1997,
reflecting market acceptance of the Company's LNP products, rising to 59% of
total revenue in the quarter ended September 30, 1997 due to a high level of
activity generated by large ILEC customers' requirements to provide LNP
capability by October 1, 1997. The following quarter, which ended December 31,
1997, reflected a decline in license fees and related services revenue from
this relatively high level to approximate the second quarter 1997 level. Other
services revenue fluctuated during 1996 due to the timing and completion of
customer software development projects. In the fourth quarter of 1996,
significant services revenue resulted from the completion of a major custom
software development project at BellSouth, which did not continue into 1997.
Furthermore, other services revenue declined substantially in absolute dollar
terms in 1997 as a result of the Company's strategic shift to broaden its
business mix. Other services revenue was adversely impacted in the second and
third quarters of 1997 due to delays in signing contracts with two major
customers for which work had commenced. These contracts were signed in the
fourth quarter of 1997 and favorably impacted both revenue and gross margins
during that period. See "Risk Factors--Fluctuations in Quarterly Results of
Operations", "--Reliance on Significant Customers" and "--Expansion of
Strategic Focus".     
 
  Cost of revenue as a percentage of revenue has varied significantly from
quarter to quarter. Total cost of revenue in the quarter ended March 31, 1996
as a percentage of revenue was significantly higher than the three succeeding
quarters, a result of budget and schedule overruns on two projects completed
in that quarter. Total cost of revenue as a percentage of revenue in the
quarter ended December 31, 1996 declined from previous quarters as a result of
increased revenue associated with
 
                                      29
<PAGE>
 
   
the completion of the BellSouth contract. In the first and second quarters of
1997, significant research and development expenses were charged to cost of
revenue. This resulted from the Company entering into a license with a major
customer prior to completion of the internal development effort. Total cost of
revenue in the quarter ended June 30, 1997 declined as a percentage of revenue
from the preceding quarter, as license fees and related services revenue,
which has a lower cost, significantly increased as percentage of total
revenue. Cost of license fees and related services in the first three quarters
of 1997 reflect increasing productivity in the installation of LNP software as
well as license cost. Cost of other services in the third quarter of 1997 was
increased as a result of personnel costs incurred in anticipation of the
signing of customer contracts. These contracts were signed in the fourth
quarter of 1997. The fourth quarter of 1997 reflected a significant decline in
cost of revenue attributable to the transfer of certain personnel to research
projects and increased efficiencies in all areas.     
   
  Sales and marketing expense declined in absolute dollars and as a percentage
of revenue in the quarter ended June 30, 1996 as a result of a one time staff
reduction. As the Company began to expand its strategic focus to include LNP
products and related services in late 1996, the Company reorganized its sales
and marketing organization to implement its new product strategy. LNP product
launch expenses caused a higher than normal spending level in the quarter
ended December 31, 1996. Sales and marketing expense grew in absolute terms
during 1997 as the Company increased its sales and marketing headcount from 10
to 20 to support product distribution with additional increases in the second
and fourth quarters attributable to one-time compensation charges.     
 
  In the quarter ended March 31, 1996, general and administrative expense
increased in part due to the Company increasing its bad debt reserve by
approximately $577,000. In the quarter ended September 30, 1996, the Company
increased its provision for pension plan liabilities by $430,000. Both of
these changes significantly impacted operating results in the respective
periods. In addition, general and administrative expenses increased in 1996
because of the allocation to general and administrative expense of the
salaries and other expenses associated with underutilized custom development
personnel. From the quarter ended March 31, 1997 through the quarter ended
September 30, 1997, general and administrative expense has declined as a
percentage of revenue, reflecting improved productivity, partially offset by
investments in management, financial and quality control systems to support
the Company's anticipated growth. Marginal increases in spending in the fourth
quarter of 1997 reflect one-time employee benefit plan changes and
compensation charges.
   
  Research and development expense in quarters prior to June 30, 1996 was
related to non-LNP products. Following the strategic decision to invest in
standard software products, in late 1996, a software development laboratory
was established, personnel were hired and overall spending increased
significantly. In the quarters ended September 30, 1996 and December 31, 1996,
the cost of certain development personnel was allocated from research and
development to the cost of performing a specific custom development project.
This caused abnormally low levels of research and development expense in
absolute terms and as a percentage of revenue in such periods. In addition,
significant research and development expenses were recorded as cost of revenue
in the first two quarters of 1997. Research and development expense in the
fourth quarter of 1997 reflects significant staff increases and spending on
MetOSS development efforts.     
 
  The Company believes that period-to-period comparisons of its operating
results are not necessarily meaningful and should not be relied upon as
indications of future performance. Although the Company has recently
experienced revenue growth, in particular with respect to license fees and
related services revenue, such growth should not be considered indicative of
future revenue growth, if any, or of future operating results. Failure by the
Company, for any reason, to increase revenue would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Fluctuations in Quarterly Results of
Operations".
 
                                      30
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
   
  The Company has historically financed its operations through a combination
of cash flow from operations and borrowings. In addition, on May 31, 1996, the
Company completed a private placement of $6.5 million in subordinated debt. At
December 31, 1997, the Company's principal sources of liquidity included $1.3
million of cash and cash equivalents, a $10.0 million secured bank line of
credit and an equipment term loan agreement of $1.5 million, both of which
expire in September 1998. As of February 1, 1998, the Company had an
outstanding balance under the line of credit in the amount of approximately
$1.7 million and $664,000 outstanding with respect to the equipment term loan
agreement. The Company intends to renew or replace these credit facilities in
1998; however, there can be no assurance that the Company will be able to
obtain adequate credit facilities on commercially reasonable terms or at all.
The Company is required under the credit line to comply with certain financial
covenants regarding tangible net worth, performance ratios relating to
profitability, debt, asset performance and working capital. At December 31,
1997, the Company was in compliance with such covenants or had obtained
waivers. The Company does not anticipate that continuing to comply with these
debt covenants will materially affect its business.     
 
  The Company has senior subordinated promissory notes payable to stockholders
in the amount of $6.8 million bearing semi-annual interest payments at a rate
of 9% beginning April 1996, and principal repayments of $1.6 million due semi-
annually beginning in 2000. The Company also has notes payable to stockholders
in the amount of $5.1 million bearing annual interest payments of 7.25%, with
the principal due in 2006. The loan agreements contain covenants limiting the
Company's ability to incur indebtedness, make investments, dispose of assets,
pay dividends and enter into contracts with related parties. The Company
expects to use a portion of the proceeds of this offering to retire all of its
subordinated promissory and stockholder notes and related accrued interest.
See "Use of Proceeds".
   
  Net cash provided by operating activities totaled $1.8 million in 1995, $1.5
million in 1996 and $3.7 million in 1997. Net cash provided by operations in
1995, 1996 and 1997 were substantially impacted by net income (loss) and non-
cash charges, particularly depreciation and amortization expense, which
totaled $2.5 million, $3.5 million and $4.0 million in the respective periods.
In 1995 and 1996, net contract receivables, unbilled work-in-progress,
unearned revenue and customer deposits used operating cash of $6.5 million and
$2.6 million in the respective periods. Such cash usage was higher in 1995 due
to several large contracts in the fourth quarter of 1995 which were billed and
not collected, or in certain cases, not yet billed because project milestones
had not been met. In 1997, the Company shifted predominantly to fixed-price
contracts from contracts billed on a time-and-materials basis. Such contracts
typically include large milestone payments and initial down payments which may
be billed and collected prior to actual completion of the related integration
and consulting effort. As a result, unearned revenue and customer deposits
provided $5.4 million in operating cash flow for 1997. Contract receivables
and unbilled work-in-progress at December 31, 1997 used $4.3 million in
operating cash flow. Gross contract receivables increased $4.0 million, or
41%, to $13.9 million as of December 31, 1997 from $9.9 million as of December
31, 1996, while revenue only increased 34% in the fourth quarter of 1997 as
compared to the fourth quarter of 1996. This increase was primarily
attributable to an increase during late 1997 in progress billings made in
advance of revenue being recognizable on the percentage-of-completion method,
as compared to the latter part of 1996. Depending on the progress to
completion on the related contract milestone, contract billings result in
either the recognition of revenue or the recording of unearned revenue. The
difference in the timing of such fixed milestone billings in relation to the
timing of revenue recognition as of December 31, 1997 resulted in an increase
in accounts receivable as well as a corresponding increase in unearned revenue
of $5.4 million, or 809%, to $6.1 million as of December 31, 1997 from
$666,000 as of December 31, 1996. Revenue also increased during the fourth
quarter of 1997 in comparison to the same quarter in 1996, which also resulted
in higher accounts receivable at the end of 1997.     
 
                                      31
<PAGE>
 
  Net cash used in investing activities totaled $1.9 million in 1995, $2.1
million in 1996 and $2.9 million in the year ended December 31, 1997. Net cash
used in each period related primarily to purchases of furniture, fixtures and
computer equipment.
   
  Financing activities used $6.8 million in 1995, provided $2.6 million in
1996 and used $2.8 million in 1997. In 1995, as an S corporation, the Company
distributed $5.8 million to stockholders and had a net repayment of long-term
obligations totaling $1.0 million. In 1996, the Company obtained aggregate
financing of $10.8 million, of which $7.7 million was used to repay long-term
obligations. Financing activities in 1997 primarily consisted of repayments of
capital lease obligations totaling $3.0 million.     
 
  At December 31, 1997, the Company had $5.4 million in working capital. The
Company's principal commitments at December 31, 1997 were leases on its three
facilities in the Denver metropolitan area and other operating leases totaling
$23.3 million, net of sublease income, and capital lease obligations totaling
$4.3 million. There were no material commitments for future capital
expenditures at that date. The Company believes that the proceeds from the
sale of the Common Stock in the offering, combined with existing cash
balances, available credit facilities and funds generated by operations will
be sufficient to meet its anticipated working capital and capital expenditure
requirements for at least the next 12 months.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
  The Company has determined that the adoption of the recently issued
Statement of Position 97-2, "Software Revenue Recognition" and Statements of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", No.
129, "Disclosures of Information about Capital Structure", No. 130, "Reporting
Comprehensive Income", and No. 131, "Disclosures about Segments of an
Enterprise and Related Information", will not have a material impact on the
timing of the Company's revenue recognition or its footnote disclosures.
Although the Company believes it is currently in compliance with Statement of
Position 97-2 ("SOP 97-2"), should the Company adopt new or change existing
licensing practices, such as entering into subscription licensing
arrangements, the Company's revenue recognition practices may be subject to
change to comply with the accounting guidance provided in SOP 97-2. SFAS No.
128 is effective for financial statements for both interim and annual periods
ending after December 15, 1997. Accordingly, basic and diluted earnings per
share have been reflected in the Financial Statements included herein.
 
                                      32
<PAGE>
 
                                   BUSINESS
   
  Evolving Systems is a leading provider of selected software solutions and
services that enable telecommunications carriers to address the technical
challenges to their operational support systems created by the industry's
rapidly changing competitive and regulatory environment. The Company's first-
to-market LNP software solution, which enables carriers to meet the
requirements that customers retain their local phone numbers when changing
service providers, has been selected for use by two of the five RBOCs and two
leading local and long distance carriers. The Company believes that the
implementation of LNP will require significant changes in a broad range of
carriers' software and systems that perform mission critical functions such as
ordering, provisioning, service assurance and billing, collectively known as
OSS.     
 
  Recognizing the opportunity created by the ongoing deregulation of local
telephone service, the Company has capitalized on its historic strength as a
leading architect and developer of telecommunications solutions to satisfy
technically challenging OSS requirements to position itself as both a leading
custom software developer and a provider of next-generation OSS applications.
From its inception in 1985 through 1996, the Company focused on providing
custom software development services to a limited number of telecommunications
companies. Beginning in 1996, in order to capitalize on the market demand for
OSS solutions to implement LNP, the Company made a strategic decision to
expand its focus to include development of standard software products to
address a variety of needs created by LNP. In May 1996, the Company obtained
financing from new investors and reconstituted its Board of Directors. The new
Board of Directors replaced the Company's senior management team beginning in
July 1996.
 
INDUSTRY BACKGROUND
 
 THE TELECOMMUNICATIONS INDUSTRY
 
  Historically, telecommunications carriers operated in a highly regulated
environment, with both local and long distance telephone service providers
operating as monopolies with little competition. More recently, however, the
U.S. and many foreign governments have begun to deregulate the
telecommunications industry in order to reduce prices and improve
telecommunications services through increased competition. Deregulation and
the widespread adoption of new telecommunications technologies, such as fiber
optics, 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 competitive local carriers, alternate access providers
and wireless operators. To be competitive in this new environment,
telecommunications service providers are seeking to rapidly enter new markets
by offering differentiated services in a cost-effective manner.
 
  The U.S. long distance market was opened to competition beginning in the
early 1980s. More recently, 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 ILECs to offer LNP, which allows customers to retain
their local phone numbers regardless of the carrier providing local telephone
service. The Act also requires that carriers unbundle local services and
facilities, which requires that access to ILECs' ordering, service
provisioning and billing systems be made available to competing carriers.
 
  Similar initiatives to deregulate local telephone service have been adopted
or are being considered in a number of foreign markets, including Australia,
Belgium, Canada, Germany, Holland, Hong Kong and the United Kingdom. Recent
adoption of the World Trade Organization agreement on basic telecommunications
services may accelerate this trend. For example, the Canadian Radio-Television
& Telecommunications Commission (the "CRTC") issued a report in 1995 in which
LNP was
 
                                      33
<PAGE>
 
identified as the critical catalyst to encourage competition among local
telephone carriers. In 1997, the CRTC issued Decision 97-8, under which all
service providers would gain equal access to local markets, providing impetus
for the implementation of LNP throughout Canada.
 
  These new competitive and regulatory pressures have created significant
technological challenges for both existing and new carriers. Existing carriers
must develop new systems that are interoperable with their legacy systems, not
only to support the LNP and unbundling requirements of the Act but also to
enable them to respond to increasing competitive challenges. In addition, new
entrants to local telephone markets require LNP solutions that do not depend
on an existing OSS infrastructure and that can be deployed quickly and cost-
effectively. Thus, the Company believes that carriers' OSS are evolving from
back-office legacy systems to strategic business systems that play an
increasingly important role in enhancing competitiveness as well as enabling
compliance with the requirements of the Act.
 
 OPERATIONAL SUPPORT SYSTEMS
 
  OSS encompass 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. Billing
systems are used by carriers to collect, collate, manage and report billing
information. The following diagram depicts four areas of OSS and the key
functions they provide.
 
 
               [OPERATIONAL SUPPORT SYSTEMS GRAPH APPEARS HERE]
 
 
                                      34
<PAGE>
 
  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 carriers, calls to and from that number will not be routed correctly,
causing service problems for customers. Moreover, carriers that have not
implemented LNP may incur substantial call termination or "dip" charges if
they direct calls to regions where LNP has been mandated. 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, the Company believes a
significant market opportunity exists for a range of LNP and OSS solutions
that address the following needs of existing and new carriers:
 
  . ROBUST LNP PROVISIONING SOLUTION. Carriers require flexible, scalable LNP
provisioning solutions that allow them to cost-effectively support number
portability for customers, as well as to address regulatory requirements.
ILECs require LNP solutions that interface with regional number portability
databases operated by the Number Portability Administration Centers ("NPACs"),
which maintain and track data on ported telephone numbers, existing OSS,
network switches and components. New wireless or other competitive local
exchange carriers ("CLECs") require LNP solutions that do not depend on an
existing OSS infrastructure and that can be deployed quickly and cost-
effectively. These LNP solutions should be based on industry standards to
allow carriers flexibility with respect to subsequent OSS decisions and
implementation. Additionally, solutions should be based on standard software
products to minimize custom development efforts and deployment timeframes.
 
  . INTEROPERABILITY AMONG CARRIERS. LNP and other requirements of the Act
give rise to a variety of inter-carrier transactions by which services and
access to facilities are bought and sold. When a customer ports a telephone
number to a new service provider, the new service provider typically needs to
provide, at a minimum, the range of services and facilities offered by the
previous service provider. These services may include, for example, voice
mail, call forwarding, directory assistance, calling card and operator
services. If the new service provider does not offer all of these services, it
may need to purchase certain services from the previous service provider.
Although inter-carrier transactions can be processed manually, the Company
believes that as the volume and complexity of inter-carrier transactions
increase, both existing and new carriers will seek new OSS to process such
transactions in order to reduce costs and minimize errors.
 
 
                                      35
<PAGE>
 
  . SEAMLESS DATA DISSEMINATION THROUGHOUT CARRIERS' OSS. By introducing
fundamental changes in the relationships among carriers' various OSS, LNP
requires changes in how data are managed and disseminated within carriers. LNP
allows carriers or customers to initiate changes in data relating to a
customer or telephone number. Therefore, carriers must be able to disseminate
LNP-related data throughout their OSS on a real-time basis. Thus, LNP creates
the need for an OSS environment that supports multiple applications and that
provides carriers with a central database to which other OSS can interface to
obtain data on the carrier and the location of the switch servicing the
telephone number. These data also include billing addresses to be utilized for
rating purposes, and the facilities and value-added services now being
provided for customer service, network management and maintenance purposes.
Such an OSS environment should also contain standard legacy application
interfaces to minimize implementation time.
 
  . EXPERIENCED AND RELIABLE IMPLEMENTATION PROVIDER. To provide necessary
support services for these LNP and LNP-related solutions, carriers will need
vendors with significant telecommunications software and OSS-related domain
expertise. ILECs need such vendors in order to integrate LNP and LNP-related
solutions into their multiple legacy systems. CLECs that do not have personnel
with the required expertise will need vendors to provide such services and
expertise. These needs are further complicated by the fact that LNP
implementation only began to occur in 1997, and few solution providers have
experience in implementing LNP.
 
THE EVOLVING SYSTEMS SOLUTION
   
  Recognizing the opportunity created by the ongoing deregulation of local
telephone service, the Company has capitalized on its historic strength as a
leading architect and developer of solutions for satisfying technically
challenging OSS requirements to position itself as a provider of next-
generation OSS solutions while continuing to provide software development
services. The Company has initially focused on developing LNP products to
address the immediate needs of carriers, quickly establishing itself as a
leading supplier of LNP-based OSS solutions. The Company intends to leverage
its initial LNP success to address the evolving needs of telecommunications
service providers by developing and providing a family of innovative service
provisioning and OSS solutions. The Company's MetOSS family of product
offerings, including current LNP products and future LNP-related provisioning
and OSS platform products, is designed to provide comprehensive, flexible,
reliable and scalable solutions to meet carriers' needs in today's rapidly
changing multi-carrier market. The Company's approach seeks to offer carriers
time-to-market advantages, protection for legacy system investments and cost-
effective OSS deployment, staffing, operation and maintenance.     
 
  The Company's LNP, OSS and custom software development solutions are
designed to offer the following benefits:
   
  . LEADING LNP SOLUTIONS. The Company delivered the first-to-market LNP OSS
solution, which has been selected for use by two of the five RBOCs and two
leading local and long distance carriers. The Company's MetOSS LNP products,
OrderPath, NumberManager and NodeMaster, allow any telecommunications service
provider to meet the mandates of the Act by enabling LNP when a customer
changes carriers. The Company was a pioneer in developing standards and
interface requirements for carriers to communicate with the NPACs, regional
third-party clearinghouses required by the Act to oversee, mediate, track and
resolve LNP-related issues among U.S. carriers. The Company acted as the
primary software architect and developer for the systems software used by
Lockheed, the administrator of the U.S. regional NPACs. This enabled the
Company to gain considerable time-to-market advantages and comprehensive
knowledge of the operational and technical challenges facing the industry in
commercially developing and releasing an LNP solution for carriers. The
Company has developed an open, client/server based-LNP solution that allows
carriers significant flexibility and rapid LNP deployment. Additionally, the
Company's solutions comply with OSS interoperability standards governed by the
Telecommunications Management Network ("TMN"),     
 
                                      36
<PAGE>
 
a global standards body for carriers, facilitating future changes to their
OSS. The Company's solution also allows carriers to avoid the potentially
significant "dip" charges that might otherwise be imposed based upon
termination of calls in regions where LNP has been mandated.
   
  . LNP-RELATED APPLICATIONS TO PROVIDE INTEROPERABILITY AMONG CARRIERS. The
Company intends to release new OSS provisioning applications that are designed
to enable carriers to effectively perform LNP-related inter-carrier
provisioning transactions. Targeted for release by the end of 1998 or early
1999, the Company's new MetOSS provisioning applications, Local Service
Exchange and Number Exchange, are designed to facilitate interoperability
among carriers. Carriers utilizing Local Service Exchange will be able to
coordinate the provisioning of facilities and services for LNP customers who
wish to receive the same or similar services provided by their previous
service provider. Local Service Exchange will enable carriers to initiate and
process local service requests ("LSRs"). Local Service Exchange will allow
carriers to track service provisioning response and turnaround times with
other carriers and should reduce the number of errors associated with the
manual processing of LSRs. Number Exchange will address the telephone number
pooling, allocation and assignment requirements brought about by LNP, as well
as provide a database to support call origination and termination
identification, thereby enabling accurate rating and billing for calls to or
from regions which have implemented LNP.     
 
  . OSS PLATFORM TO FACILITATE DATA DISSEMINATION. The Company is developing
its MetOSS-Global Enterprise Management System ("GEM") platform, an OSS
environment that supports multiple applications and includes a scalable,
extensible database, APIs for third-party developers to write compatible
applications, business logic that governs the data dissemination throughout
other OSS platforms and standard legacy application interfaces to facilitate
rapid implementation. This platform is designed to provide a common,
enterprise-wide and standards-based data scheme so that all of carriers' OSS
can easily obtain data that has been affected by LNP. The GEM platform offers
a high degree of modularity, with the first modules targeted for release by
the end of 1998 or early 1999. The Company's platform is designed to provide
interoperability standards and interfaces, allowing customers to select OSS
applications developed by the Company or other third-party developers. The
Company believes that customers adopting the MetOSS-GEM platform will realize
savings on training, operations and maintenance due to the common user and
operational interfaces.
 
  . COMPREHENSIVE RANGE OF SERVICES. The Company will continue to provide
custom software development services, while offering a comprehensive array of
product and system integration services for its clients. The Company's service
offerings build on more than a decade of experience with leading
telecommunications companies such as GTE and Lucent, which has enabled the
Company to develop significant expertise in implementing highly complex,
technically challenging OSS solutions. The Company also provides customer
support, including system installation, testing, training, enhancements and
upgrades, help desk support, user group seminars and software audits. The
Company believes that this full range of professional and customer support
services represents a source of competitive advantage.
 
THE EVOLVING SYSTEMS STRATEGY
 
  The Company's objective is to become a leading provider of next-generation
OSS solutions to telecommunications companies. Key elements of the Company's
strategy include:
 
  . MAINTAIN MARKET LEADERSHIP IN SERVICE PROVISIONING PRODUCTS. The Company
intends to continue leveraging its LNP market position to obtain leadership
positions in future provisioning applications and OSS products, as well as to
influence standards in these areas. By targeting OSS areas where the Company
possesses domain knowledge and expertise, the Company believes it can rapidly
capture market share. Lockheed has been selected as the operator of all of the
U.S. NPACs. The Company believes that its close relationship with Lockheed
will afford the Company industry
 
                                      37
<PAGE>
 
foresight into the future direction and needs of carriers' LNP-related
provisioning and other OSS requirements. For example, the Company's Local
Service Exchange and Number Exchange provisioning products, which are expected
to be released by late 1998 or early 1999, are designed to facilitate
interoperability among carriers.
 
  . DEVELOP NEXT-GENERATION OSS APPLICATIONS PLATFORM. The Company's MetOSS-
GEM platform is designed to offer carriers an OSS environment that supports
multiple applications developed by the Company or by third-party developers.
The Company plans to incorporate interoperability standards in its platform
architecture to allow service providers and third-party software developers to
design applications using the Company's development environment and APIs. The
Company believes that this platform product, slated for initial release by
late 1998 or early 1999, will enable carriers to effectively disseminate LNP-
related data throughout carriers' OSS infrastructures. The Company's OSS
platform is being designed to offer carriers an integrated migration path to
solve future OSS challenges, reduce training and staffing costs and extend the
life of OSS investments and technologies.
 
  . LEVERAGE TELECOMMUNICATIONS DOMAIN EXPERTISE. The Company believes that
its experience with large telecommunications companies over the past decade in
developing pioneering solutions for critical needs in the areas of customer
provisioning, network management and wireless data has allowed it to develop
broad domain expertise and technical skills. The Company intends to
selectively maintain custom software development projects with leading
telecommunications companies in order to maintain its domain expertise. For
example, the Company continues to provide custom software solutions and
services for Lucent in areas such as cellular digital packet (CDPD), code
division multiple access (CDMA) and over-the-air activation. The Company also
intends to continue to provide custom software and services solutions to
companies such as Lucent, GTE and Lockheed. By maintaining these custom
software development services on a selective basis, the Company believes it is
able to gain insight on unique OSS products opportunities that are addressable
by standard software products, such as the Company's leading LNP products. In
addition, the Company intends to leverage this domain expertise to develop its
MetOSS product offerings, including the platform, provisioning and other OSS
products.
 
  . MAINTAIN PROFESSIONAL SERVICE EXPERTISE. The Company intends to maintain a
strong focus on its professional services and systems integration business
activities in order to facilitate sales of software products and gain ongoing
insight into customer requirements. The Company will continue to perform
systems integration in key OSS domain areas and in implementation of its
MetOSS products. For example, the Company intends to provide product
integration and support services to customers who have licensed third-party
applications that support the Company's MetOSS platform products.
 
  . EXPAND STRATEGIC PARTNERSHIPS. The Company intends to facilitate the
development of third- party software applications that are compatible with its
MetOSS-GEM platform by introducing in late 1998 or early 1999 a third-party
software application development environment and a set of application
specifications for its platform. By developing partnerships with leading
ordering, billing and service assurance application providers, the Company
believes carriers that adopt its OSS platform will be able to adopt point
applications from multiple vendors while maintaining data interoperability
across such applications. In order to broaden its sales presence and further
penetrate selected accounts and international markets, the Company plans to
complement its direct sales efforts through relationships with systems
integrators and services organizations.
 
METOSS APPLICATION AND PLATFORM ARCHITECTURE
 
  The Company's existing LNP applications and future provisioning applications
are designed as open client/server applications, supporting Windows 95,
Windows NT, and Java-based clients, HP/UX-based server operating systems and
Oracle relational database software. The applications use object-
 
                                      38
<PAGE>
 
oriented application methodologies and afford users a modular, scalable
solution. The Company has a strong commitment to the Internet as all current
and future applications are being designed to incorporate the use of Java and
Web browsers. The Company's applications are designed to function either on a
standalone basis or concurrently with other applications on the Company's
MetOSS-GEM platform.
 
  The Company's MetOSS-GEM platform is being designed and developed to support
multiple, interoperable OSS applications running concurrently in a
distributed, scalable network computing environment. The platform will support
the HP/UX-based server operating system and Oracle relational database
software, and incorporates selected components from third-party middleware
suppliers. The Company has published rules and standards on the use of the
platform for its internal, third-party and customer software developers,
including user interface and API specifications, as well as guidelines for
data extensibility between OSS.
 
METOSS PRODUCTS
 
  The Company's MetOSS product line is being designed to include its current
LNP-based service provisioning products, its future provisioning products,
which will address carrier requirements created as a result of LNP, and its
future OSS platform products.
 
                                      39
<PAGE>
 
 LNP PRODUCTS
 
  The Company's current LNP products enable carriers to accommodate customer
requests to change carriers while retaining the same phone number, and to
obtain and disseminate call routing data to carriers' networks. The Company
currently offers three LNP products, which were released in the first half of
1997. The Company's LNP products are licensed under perpetual licenses and may
be licensed separately or bundled as a complete solution. The prices for such
licenses are based upon modules selected by the customer and the number of
access lines or wireless subscribers serviced by the customer. Prices start at
approximately $200,000 for a limited-use license and are graduated in intervals
to over $1 million for unlimited access line/subscriber use. Customers
licensing an application on a limited usage basis pay additional license fees
as their number of access lines/subscribers increases. Customers typically
engage the Company to provide installation, integration and testing of the LNP
products in connection with these licenses. Such services are provided for
additional fees, depending upon the mix of products licensed and the complexity
of the customer's system. The Company provides a 90-day warranty against
defects, 24 hour per day help desk support and problem resolution as part of
the license and offers extended warranty support services on an optional annual
maintenance program. The Company is currently in the process of enhancing its
LNP products to address the marketplace requirements and standards being
developed for the wireless industry. General software upgrades and enhancements
for all products are planned. The following diagram depicts the Company's
current LNP products and how they are designed to interface to legacy and other
OSS applications and gateways.
 
     [ARTWORK DEPICTING PRODUCT INTERFACE TO OSS APPLICATIONS APPEARS HERE]
 
  ORDERPATH is currently in use and enables carriers to process requests by
customers for changing carriers while retaining the same telephone number.
OrderPath provides a direct link by the carrier to any of the NPACs. The
Company's products are also sold with a number of standard interfaces to legacy
systems, such as Bellcore's SOAC system. Consistent with the Company's
standards-based approach, the product complies with North American Numbering
Council specifications, which specify carrier interoperability with the NPAC.
   
  NUMBERMANAGER is currently in use and enables carriers to receive downloads
from NPACs, allowing carriers to update their network switches, provisioning
systems and other OSS on a real-time basis as numbers are ported. NumberManager
supports both Lockheed and Perot-operated NPACs, as well as a number of
standard interfaces to switching equipment from leading vendors, such as
Nortel, Ericsson, Lucent and Bellcore.     
 
                                       40
<PAGE>
 
  NODEMASTER is currently in use and complements OrderPath and NumberManager by
providing an interface between NumberManager and the carriers' physical network
infrastructures. NodeMaster is also sold with standard interfaces to hardware
switches and equipment from leading vendors. NodeMaster was designed to provide
carriers with the flexibility to operate in a multi-vendor hardware
environment.
 
 FUTURE SERVICE PROVISIONING PRODUCTS
 
  The Company believes that as carriers implement LNP solutions they will see a
need for other OSS products that interface with these solutions. The Company
plans to extend its product family to include additional OSS products based
upon its MetOSS architecture that are planned to streamline customer
provisioning and support. The Company expects these additional service
provisioning products to be released by late 1998 or early 1999, and to be
licensed on a perpetual basis with pricing similar to the Company's current LNP
products. The following diagram illustrates how the Company's MetOSS-GEM
platform is designed to extend a carrier's OSS environment to support multiple
applications developed by the Company or third-party developers.
 
          [ARTWORK OF SUPPORT FOR MULTIPLE APPLICATIONS APPEARS HERE]
 
  The Company has the following MetOSS products under development.
 
  LOCAL SERVICE EXCHANGE is being designed to automate the creation and
exchange of LSRs between carriers. LSRs contain the details of customers'
services such as call waiting, call forwarding and voice mail. This product
automates the LSR process, which is currently performed in a costly manual
fashion. The Company expects LSR processing volume to increase as a result of
deregulation and LNP. The product provides an interface between carriers and
meets industry standards, such as the Order and Billing Forum specifications,
which define interfaces and record formats for the electronic exchange of
orders and billing data.
 
  NUMBER EXCHANGE is being designed to address the telephone number management
and allocation requirements of service providers that have implemented LNP
solutions. Upon the introduction of LNP, service providers will be required to
implement systems which provide more efficient and automated telephone number
pooling, number management, allocation and reservations, as well as interface
with the new third-party telephone number administrator. Number Exchange
provides carriers with interfaces to these telephone number administrators,
allowing carriers control of
 
                                       41
<PAGE>
 
their number pooling, administration and assignment, which were previously
under the control of ILECs. NumberManager also is being designed to track the
coordinates of call origination and termination in order to ensure accurate
rating of calls for billing purposes.
 
 FUTURE PLATFORM PRODUCTS
 
  The Company is currently developing MetOSS-GEM, an OSS environment that
supports multiple applications, that is designed to enable carriers to
effectively disseminate LNP and other data throughout carriers' OSS
infrastructures. Carriers that adopt the Company's platform will be able to
choose among leading third-party applications in ordering, provisioning,
service assurance and billing, share data effectively among these applications
and rapidly implement multiple applications. The Company expects to sell the
modules both separately and as an integrated solution. The Company anticipates
the first release of the platform by late 1998 or early 1999.
   
  The first release of the Company's MetOSS-GEM platform product is scheduled
to incorporate three functional modules. The specifications for the Shared
Services Module set forth standards for the design and development of both the
Company's and third parties' OSS applications written to the platform. The
Shared Services Module is intended to provide common services, such as
transaction processing, data sharing and security among all applications
operating on the platform. While the initial version of the Shared Services
Module will be comprised primarily of non-proprietary, commercially available
software products from third-party vendors, future versions of the Shared
Services Module are anticipated to add proprietary functionality, as well as
the rules and standards for use of third-party components. The Enterprise
Information Module is being designed to provide data warehousing and a single
enterprise data view across all applications. The data and information in the
Enterprise Information Module is intended to be accessed and utilized for a
wide range of applications and reporting, such as parity reporting and churn
analysis. The Development Environment Module will provide the rules and
programming interfaces to be used by internal, third-party or customer
software application developers for compatibility with MetOSS.     
 
  The Company is developing two additional MetOSS modules for subsequent
release, the Gateway Module and the Extensibility Module. The Gateway Module
is being designed to provide the mechanism for integrating external systems
into the MetOSS environment, thus allowing carriers to benefit from rapid
implementation and data communication throughout their OSS. The Gateway Module
will be utilized for both inter- and intra-carrier systems and will support
the most common interface protocols and devices. The Extensibility Module will
define data formatting and user interfaces specifications for applications,
ensuring common user interfaces, data exchange and sharing among applications.
See "Risk Factors--Rapid Technological Change; Risks Associated With New
Versions and New Products; Risks of Software Defects".
 
 SERVICES
 
  The Company's professional services are focused primarily on providing
custom software development to leading telecommunications companies and
systems integration and customer support for its telecommunications customers.
 
  CUSTOM SOFTWARE. The Company provides custom software development services
spanning the complete system development life cycle from feasibility and
requirements planning through development and production rollout. By offering
these custom development services on a selective basis to leading
telecommunications service providers for over a decade, the Company has
developed a unique, broad-based telecommunications domain expertise that it
believes provides it with a competitive advantage.
 
  PRODUCT INTEGRATION. The Company's proprietary Product Integration Review
("PIR") process defines customer requirements associated with the installation
and integration of the Company's
 
                                      42
<PAGE>
 
software products. The Company's PIR produces a set of documents that describe
the project deliverables, installation process, any legacy system interfaces
and software development requirements, as well as the project timeline and
milestones. The Company believes its PIR positions it for a successful
customer relationship and creates opportunities for additional product sales
or services engagements.
 
  SYSTEMS INTEGRATION. The Company provides a range of systems integration
services, including system design, database design, network design, network
configuration and other system-development areas of expertise. The Company
also provides systems integration services for third-party software products.
 
  CUSTOMER SUPPORT. The Company provides a broad array of customer support
services, including 24 hour per day help desk support, problem resolution,
software maintenance and scheduled software upgrades, complete training and
documentation for products and services, and quality assurance. The Company's
typical software maintenance agreement has a 12-month term.
 
CUSTOMERS
   
  The Company markets its products and services to a range of existing service
providers, including ILECs, CLECs and interexchange carriers. Historically,
the Company's revenue has been generated from sales to customers in the U.S.
The Company's LNP and custom software development customers by market are
described below. See "Risk Factors--Reliance on Significant Customers".     
   
  INCUMBENT LOCAL EXCHANGE CARRIERS. The Company's offerings to ILECs include
LNP solutions, OSS provisioning, order activation solutions, consulting and
custom software development. The Company's LNP customers include Ameritech and
Pacific Bell/Southwestern Bell, and the Company also has supplied custom
software development services for BellSouth, GTE and Pacific Bell/Southwestern
Bell.     
 
  WIRELESS SERVICE PROVIDERS. The Company provides wireless service providers
with over-the-air provisioning and service activation software, wireless data
applications and billing and cellular digital packet data ("CDPD") solutions.
The Company has supplied custom software and consulting services to AT&T
Wireless, Bell Atlantic Mobile, GTE Mobilenet and Sprint PCS.
 
  INTEREXCHANGE SERVICE PROVIDERS. The Company has supplied LNP and custom
software for WorldCom and Sprint.
 
  COMPETITIVE LOCAL EXCHANGE COMPANIES. The Company provides organizations
such as ICG Communications Inc., TCG and WorldCom with OSS provisioning, order
entry, order activation, billing and customer care solutions, as well as
professional services such as systems integration and custom software
development.
   
  NETWORK EQUIPMENT SUPPLIERS. The Company provides software and services to
equipment suppliers such as Lucent, Nortel, Ericsson and Stratus Computer,
Inc., which is either integrated into hardware products or sold separately.
The Company also works with these and other network equipment vendors to
develop interfaces between the Company's MetOSS products and network switches
and systems.     
 
MARKETING AND SALES
 
  The Company's marketing efforts include direct marketing to targeted
accounts, participation in selected trade shows, advertising in specific
industry trade journals, presentations at industry conferences and forums,
press releases to the industry and certain other marketing initiatives. The
primary objectives of the Company's marketing efforts are to generate market
awareness and qualified
 
                                      43
<PAGE>
 
leads. The Company's sales activities are primarily conducted through a direct
sales and sales support organization, complemented by other sales channels
including strategic distribution partners who help to identify and qualify
leads. The Company assigns a dedicated account manager to each major customer.
As of December 31, 1997, the Company's direct sales force consisted of 16
individuals, located in six cities in the U.S. Due to the complex nature of
the Company's products and services and to the procurement processes of its
customers, the sales cycle can range from 60 days to more than a year.
 
  The Company's marketing and sales efforts have been focused primarily on
facility-based local exchange, interexchange and wireless service providers in
the U.S., and substantially all of the Company's sales have been to U.S.
customers. The Company believes that significant demand exists for new OSS
products and services outside of the U.S. due to increased deregulation and
resulting competition. The Company intends to expand its sales and marketing
efforts outside of the U.S. through a combination of direct sales in selected
markets, partnering with specific third-party systems integrators and software
suppliers and the extension of its relationships with existing customers as
they expand into international markets. See "Risk Factors--Risk of Planned
International Expansion".
 
RESEARCH AND DEVELOPMENT
 
  The Company's research and development efforts are primarily focused on
identifying market requirements and performing design and development
functions. These activities follow the Company's Product Development Process
("PDP") that governs the product lifecycle from concept through product launch
and subsequent retirement from the marketplace through the use of cross-
functional teams. The PDP provides the Company's senior management with a
series of decision milestones that allows management to consider ongoing
projects on a regular basis. The Company's research and development
expenditures for 1996 were $641,000, representing 2% of total revenue, and for
1997 were $2.9 million, representing 7% of total revenues. See "Risk Factors--
Rapid Technological Change; Risks Associated with New Versions and New
Products; Risks of Software Defects".
 
COMPETITION
   
  The market for telecommunications software is intensely competitive and is
subject to rapid technological change, evolving industry standards and
regulatory developments. The Company 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. The Company's existing and potential competitors include many
large domestic and international companies, including certain of the Company's
customers, that have substantially greater financial, manufacturing,
technological, marketing, distribution and other resources, larger installed
customer bases and longer-standing relationships with customers than the
Company. Although the Company concentrates on providing software and services
for the telecommunications industry, the market for telecommunications
software is extremely large and the Company currently holds only a very small
portion of the market share. The principal competitors of the Company's LNP
products include Bellcore, Lucent, Nortel and Tekelec. The Company believes
that competitors of its MetOSS products will include AG Communications,
Bellcore, CBIS, Ericsson, and Lucent. One of the Company's principal
customers, Lucent, competes with the Company with respect to certain of the
Company's products and services, and there can be no assurance that Lucent
will not expand the range of products and services offered in competition with
the Company. In addition, Lockheed has retained rights to the NPAC software
developed for Lockheed by the Company, and Lockheed could potentially compete
with the Company 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. The Company expects competition to increase in the
future from existing competitors and from other companies that may enter the
Company's existing or future markets with solutions which may be less costly,
provide higher performance or additional features or be introduced earlier
than the Company's     
 
                                      44
<PAGE>
 
solutions. Many telecommunications companies have large internal development
organizations which develop software solutions and provide services similar to
the Company's products and services. In addition, customers who have purchased
custom software solutions from the Company are not precluded from competing
with the Company. Additionally, although the Company developed certain NPAC
software for Lockheed, Lockheed is under no obligation to utilize the Company
as a vendor on future LNP-related projects.
   
  The Company believes that its ability to compete successfully depends on
numerous factors, both within and outside of its control, including
responsiveness to service providers' needs, relative quality and reliability
of the Company's and its competitors' products and services, price, project
management capabilities, technical subject matter expertise, quality of
customer service and support, the emergence of new industry standards, the
development of technical innovations, the attraction and retention of
qualified personnel, regulatory changes and general market and economic
conditions. The Company believes that its role in developing the Interoperable
Interface Specification document and the Functional Requirements Specification
document for Lockheed provided the Company with an early competitive advantage
in the LNP market. Because these documents subsequently were put into the
public domain, however, there can be no assurance that the Company's role in
developing these documents will provide any competitive advantage in the
future. A variety of potential actions by the Company's 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 have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that the Company will be able to compete successfully with
existing or new competitors or will properly identify and address the demands
of new markets. The failure by the Company to adapt to emerging market
demands, respond to regulatory and technological changes or to compete
successfully with existing and new competitors would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Competition".     
 
INTELLECTUAL PROPERTY
 
  The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology. The Company 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. The Company presently has no patents, but has patent
applications pending in the U.S. on elements of three of its LNP products,
NumberManager, OrderPath and NodeMaster. In addition, the Company has
registered or filed for registration of certain of its trademarks. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use the Company's 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 the Company's proprietary rights. There can be no assurance that the
Company's means of protecting its 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 the Company's technology, duplicate the
Company's technology or design around any patent of the Company. Moreover,
litigation may be necessary in the future to enforce the Company's
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 have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Protection of Intellectual Property; Risks of Infringement".
 
EMPLOYEES
   
  As of December 31, 1997, the Company employed a total of 313 employees, of
which 61 are research and development staff, 167 professional services staff,
65 are general and administrative staff     
 
                                      45
<PAGE>
 
and 20 are marketing and sales staff. None of the Company's employees is
represented by a labor union. The Company has experienced no work stoppages
and believes that its relations with its employees are good.
 
FACILITIES
 
  The Company leases office space at three locations in the Denver, Colorado
metropolitan area, including two in the Englewood area (Meridian and
Southgate) and one in the Boulder area (Centennial Valley). The Company also
leases sales offices in Dallas, Chicago, Atlanta, San Francisco and
Washington, D.C. The Company's leases in the Denver, Colorado metropolitan
area are shown below:
 
<TABLE>
<CAPTION>
                        LOCATION                 SQUARE FOOTAGE LEASE EXPIRATION
                        --------                 -------------- ----------------
         <S>                                     <C>            <C>
         Meridian...............................    120,281        11/30/2016
         Southgate..............................     68,566        12/31/2000
         Centennial Valley......................     10,992        10/31/2002
</TABLE>
 
  The Company intends to consolidate all of its activities presently conducted
in its Southgate facility at the Meridian location in the second quarter of
1998 and sublease the Southgate facility in its entirety. The Company believes
that its office space will be adequate to meet the Company's current needs
through approximately 1999.
 
LEGAL PROCEEDINGS
 
  From time to time, the Company has been involved in litigation relating to
claims arising out of its operations in the ordinary course of business. As of
the date of this Prospectus, the Company is not a party to any legal
proceedings, the adverse outcome of which would, in management's opinion, have
a material adverse effect on the Company's business, financial condition and
results of operations.
 
                                      46
<PAGE>
 
                                  MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
  The executive officers and directors of the Company and their ages as of
December 31, 1997 are as follows:
 
<TABLE>
<CAPTION>
          NAME           AGE                     POSITION
          ----           ---                     --------
<S>                      <C> <C>
George A.                 55
 Hallenbeck(1)(2).......     Chairman of the Board of Directors
J. Richard Abramson.....  49 President, Chief Executive Officer and Director
Roger A. Barnes.........  49 Senior Vice President of Finance, Chief
                             Financial Officer, Treasurer and Assistant
                             Secretary
Jeffrey J. Finn.........  39 Senior Vice President and General Manager of
                             Product Development and Distribution
James M. Ross...........  55 Senior Vice President and General Manager of
                             Services
Marilu C. Crosby........  50 Vice President of Human Resources
Robert M. Gahan.........  46 Vice President of Corporate Development
David J. Molny..........  39 Vice President, Chief Technical Officer and
                             Director
Anita T. Moseley........  45 Vice President of Legal Services, General
                             Counsel and Secretary
Terry C. Porter.........  45 Vice President of Sales and Sales Support
Harry B. Fair(1)(2).....  47 Vice Chairman of the Board of Directors
Donald R. Dixon(2)......  50 Director
Robert J. Loarie(1).....  55 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
 
  GEORGE A. HALLENBECK was a founder of the Company in June 1985 and has
served as Chairman and a member of the Board of Directors since that time. Mr.
Hallenbeck served as the Company's Chief Executive Officer from June 1985
until December 1996 and as its President from June 1985 until December 1988.
Mr. Hallenbeck currently provides independent consulting services to
technology companies. Mr. Hallenbeck received a B.A. from the University of
Colorado.
 
  J. RICHARD ABRAMSON joined the Company as its President and Chief Operating
Officer in August 1996, serving in such capacities until December 1996 when he
became the President and Chief Executive Officer. Mr. Abramson has been a
member of the Company's Board of Directors since November 1996. From May 1990
through January 1996, Mr. Abramson served as the Chairman of the Board of
Directors, President and Chief Executive Officer of Prairie Systems, Inc., a
privately-held company which provides software products and services for the
telecommunications industry ("Prairie Systems"). Before 1990, Mr. Abramson
held various executive management positions with Applied Communications, Inc.
(which was acquired by U.S. West in 1986) and ACI Telecom, companies which
provide software and services for the banking and telecommunications industry,
and various sales and marketing management positions at First Data Resources
and IBM. Mr. Abramson holds a B.S. from the University of Nebraska.
 
  ROGER A. BARNES joined the Company in November 1997 as Senior Vice President
of Finance, Chief Financial Officer, Treasurer and Assistant Secretary. From
February 1996 to June 1997, Mr. Barnes served as President, Chief Executive
Officer and Director of Formida Software Corporation, a privately-held company
which provides software products for the development of applications utilizing
advanced object relational database technology. From February 1995 to February
1996, Mr. Barnes held the position of Director, Technology Corporate Finance
at Arthur Andersen & Co., LLP, where he
 
                                      47
<PAGE>
 
established the firm's technology corporate finance advisory practice. Between
1991 and 1994, Mr. Barnes served as President and Chief Executive Officer of
Centur Consulting Group, his own financial advisory consulting company.
Earlier in his career, Mr. Barnes held various executive management positions
at American President Companies, Ltd. and ROLM Corporation. Mr. Barnes holds a
B.S. from the University of Nebraska.
 
  JEFFREY J. FINN joined the Company in July 1996 as Vice President of Sales
and Marketing and held that position until September 1997 when he assumed the
position of Senior Vice President and General Manager of Product Development
and Distribution. From 1990 until 1996, Mr. Finn served as the Senior Vice
President of Prairie Systems. Earlier in his career, Mr. Finn held various
positions at ACI Telecom and IBM. Mr. Finn holds a B.S. from the University of
Nebraska.
   
  JAMES M. ROSS joined the Company in June 1997 as Vice President of
Integration Services and held that position until September 1997 when he
assumed the position of Senior Vice President and General Manager of Services.
Mr. Ross served as Senior Vice President of APAC Teleservices Inc., a customer
care outsourcing company, from June 1996 until May 1997, and as Senior Vice
President and General Manager of Cap Gemini Sogeti, an international
information technology and systems integration company, from December 1994
until May 1996. From August 1991 to June 1994, Mr. Ross served as Executive
Vice President - Managing Director, Worldwide Telecommunications of SHL
Systemhouse Inc., an international information technology and systems
integration company. Mr. Ross holds a B.A. from Rutgers University.     
 
  MARILU C. CROSBY joined the Company in December 1996 as Vice President of
Human Resources. From July 1996 to December 1996, she served as a principal
with Crosby, Bowen & McCoy, Inc., a benefits outsourcing company, and, from
December 1992 until June 1996, served as the Vice President of Human Resources
at Wadley Medical Center. Ms. Crosby holds a B.A. from Augusta College and an
M.A. from the University of South Carolina.
 
  ROBERT M. GAHAN joined the Company in May 1997 as Director of Business
Development and held that position until August 1997 when he assumed the
position of Vice President of Corporate Development. From January 1993 until
December 1996, Mr. Gahan served as National Sales Director at Qwest
Communications, a Denver-based telecommunications company. Previously, Mr.
Gahan held the positions of General Manager at Bakersfield Cellular Telephone
Company, a business unit of BellSouth Cellular Corporation, a
telecommunications company, and Senior Sales Manager for U.S. West Cellular.
Mr. Gahan holds a B.A. from the University of Iowa.
 
  DAVID J. MOLNY joined the Company in February 1987, serving as a system
architect and group manager on numerous development projects, until September
1997 when he assumed the positions of Vice President and Chief Technical
Officer of the Company. Mr. Molny has served as a member of the Company's
Board of Directors since November 1996. Previously, Mr. Molny held various
positions at AT&T Bell Laboratories and AT&T Network Systems, both
telecommunications companies. Mr. Molny holds a B.S. from the State University
of New York at Potsdam and an M.S. from the University of Southern California.
 
  ANITA T. MOSELEY joined the Company in May 1994 as corporate counsel of the
Company and held that position until June 1997 when she assumed the positions
of Vice President of Legal Services, General Counsel and Secretary of the
Company. Between September 1991 and May 1994, she held an in-house corporate
counsel position with the Federal Deposit Insurance Corporation/Resolution
Trust Corporation. Ms. Moseley holds a B.A. from Syracuse University and a
J.D. from the University of Utah.
 
  TERRY C. PORTER joined the Company in May 1997 as Director of Sales and
Sales Support and held that position until September 1997 when he assumed the
position of Vice President of Sales and Sales Support. From March 1996 until
May 1997, Mr. Porter was the Managing Director of U.S. Operations,
 
                                      48
<PAGE>
 
responsible for middleware sales and support, at Siemens Nixdorf Information
Systems. Prior to 1996, Mr. Porter served in various executive management
positions at Covia Technologies, a company providing interoperable message-
based product groups. Mr. Porter holds a B.S. from Purdue University.
   
  HARRY B. FAIR has served as Vice Chairman of the Board of Directors since
April 1996. Mr. Fair is one of the founders of the Company and has served on
the Company's Board of Directors since 1986. Mr. Fair served as President of
the Company between December 1988 and April 1996. Mr. Fair currently is the
general manager of several privately-held companies that provide
infrastructure commercial data and voice communications, Internet solutions
and technical solutions for credit unions. Mr. Fair holds a B.A. from the
University of Denver. Following this offering, it is anticipated that the Vice
Chairman of the Board of Directors position will be eliminated and Mr. Fair
will serve as a member of the Company's Board of Directors.     
 
  DONALD R. DIXON has served as a member of the Company's Board of Directors
since December 1997 and previously served as a member of the Company's Board
of Directors from May 1996 to November 1996. Since 1993, Mr. Dixon has been
associated with Trident Capital, L.P., a venture capital firm ("Trident"),
which he helped found. From 1988 to 1993, Mr. Dixon served as Co-President of
Partech International, a private equity fund manager associated with Banque
Paribas. Mr. Dixon serves as a director of Bank America Merchant Services,
Inc., Pegasus Systems, Inc., Platinum Software Corporation, as well as several
privately-held companies. Trident manages Information Associates L.P. and
Information Associates, C.V., both of which are stockholders of the Company.
Mr. Dixon holds a B.S. from Princeton University and an M.B.A. from Stanford
University.
 
  ROBERT J. LOARIE has served as a member of the Company's Board of Directors
since May 1996. Since August 1992, Mr. Loarie has been a Principal of, and
since December 1997, a Managing Director of, Morgan Stanley & Co.
Incorporated, a diversified investment firm, and a general partner of Morgan
Stanley Venture Partners, L.P. and Morgan Stanley Venture Partners II, L.P.,
venture capital investment partnerships. Since November 1996, Mr. Loarie has
also served as a managing member of Morgan Stanley Venture Partners III,
L.L.C., a venture capital investment company. Mr. Loarie also serves as a
director of Adaptec, Inc., TelCom Semiconductor, Inc. and several privately-
held companies. Mr. Loarie holds a B.S. from the Illinois Institute of
Technology and an M.B.A. from the Harvard University Graduate School of
Business.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
  The Audit Committee consists of Messrs. Fair, Hallenbeck and Loarie. The
Audit Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent certified public
accountants and reviews the Company's annual financial statements.
 
  The Compensation Committee consists of Messrs. Dixon, Fair and Hallenbeck.
The Compensation Committee makes recommendations to the Board of Directors
concerning salaries and incentive compensation for officers and employees of
the Company and reviews the performance of the Chief Executive Officer.
 
DIRECTOR COMPENSATION
 
  The Company's directors do not receive any compensation for serving on the
Board of Directors; however, directors are reimbursed for reasonable out-of-
pocket expenses incurred in connection with attending Board of Directors or
committee meetings.
 
                                      49
<PAGE>
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
  The Compensation Committee of the Board of Directors currently consists of
Messrs. Dixon, Fair and Hallenbeck. Mr. Fair previously served as the
Company's President and currently serves as Vice Chairman of the Board of
Directors of the Company. Mr. Hallenbeck previously served as the Company's
President and Chief Executive Officer and currently serves as the Chairman of
the Board of Directors of the Company. Mr. Dixon was not at any time during
fiscal 1997, nor at any other time, an officer or employee of the Company. No
member of the Compensation Committee or executive officer of the Company has a
relationship that would constitute an interlocking relationship with executive
officers or directors of another entity.
 
EXECUTIVE COMPENSATION
 
 SUMMARY COMPENSATION
   
  The following table sets forth the compensation paid by the Company during
the fiscal year ended December 31, 1997 to the Company's Chief Executive
Officer and each of the Company's five other most highly compensated executive
officers whose total annual salary and bonus exceeded $100,000 for services
rendered to the Company in all capacities during 1997 (collectively, the
"Named Executive Officers"):     
 
                          SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                          LONG-TERM
                                                         COMPENSATION
                                                            AWARDS
                                                         ------------
                                ANNUAL COMPENSATION       SECURITIES
                             ---------------------------  UNDERLYING     ALL OTHER
NAME AND PRINCIPAL POSITION  YEAR SALARY ($)   BONUS ($) OPTIONS (#)  COMPENSATION(1)
- ---------------------------  ---- ----------   --------- ------------ ---------------
<S>                          <C>  <C>          <C>       <C>          <C>
J. Richard Abramson.....     1997  $306,000    $112,094    427,500        $9,600
 President, Chief
 Executive Officer and
 Director
Jeffrey J. Finn.........     1997   235,026(2)   54,297    240,750         9,600
 Senior Vice President
 and General Manager of
 Product Development and
 Distribution
Marilu C. Crosby........     1997   102,000      18,682     50,000         4,500
 Vice President of Human
 Resources
David J. Molny..........     1997   160,500       4,136     59,500         9,450
 Vice President, Chief
 Technical Officer and
 Director
Anita T. Moseley........     1997   112,882      11,610     59,929         6,656
 Vice President of Legal
 Services, General
 Counsel and Secretary
Steven F. Langion(3)....     1997    81,169      25,685     23,867         4,017
 Former Vice President
 of Development
</TABLE>
- --------
(1) Represents contributions made by the Company on behalf of the individuals
    which are currently managed under the Company's 401(k) Plan.
   
(2) Includes commissions in the amount of $47,768 earned in 1997.     
(3) Mr. Langion's employment with the Company was terminated on May 19, 1997.
 
                                      50
<PAGE>
 
 STOCK OPTIONS
 
  The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1997 by the Company to each of the Named
Executive Officers:
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
<TABLE>   
<CAPTION>
                                      INDIVIDUAL GRANTS(1)
                         -----------------------------------------------
                                                                                       POTENTIAL REALIZABLE
                                                                                         VALUE AT ASSUMED
                         NUMBER OF     PERCENT OF                                      ANNUAL RATES OF STOCK
                         SECURITIES   TOTAL OPTIONS              DEEMED               PRICE APPRECIATION FOR
                         UNDERLYING    GRANTED TO     EXERCISE  VALUE OF                  OPTION TERM(5)
                          OPTIONS       EMPLOYEES     PRICE PER OPTIONS  EXPIRATION   -----------------------
          NAME            GRANTED   IN FISCAL YEAR(2) SHARE(3)  GRANTED   DATE(4)         5%          10%
          ----           ---------- ----------------- --------- -------- ----------   ----------- -----------
<S>                      <C>        <C>               <C>       <C>      <C>          <C>         <C>
J. Richard Abramson.....  202,500         29.5%         $ .80    $2.50      1/1/03    $   101,250 $   257,175
                          225,000          --            9.50     9.50    12/29/07      1,343,250   3,406,500
Jeffrey J. Finn.........   25,750         16.6            .80     2.50      1/1/03         12,875      32,703
                          215,000          --            9.50     9.50    12/29/07      1,283,550   3,255,100
Marilu C. Crosby........   20,000          3.4            .80     2.50      1/1/03         10,000      25,400
                           20,000          --             .80     4.00     1/19/06         10,000      25,400
                           10,000          --            9.50     9.50    12/29/07         59,700     151,400
David J. Molny..........   59,500          4.1           9.50     9.50    12/29/07        355,215     900,830
Anita T. Moseley........   22,429          4.1            .80     4.00     1/19/06         11,215      28,485
                           37,500          --            9.50     9.50    12/29/07        223,875     567,750
Steven F. Langion.......   23,867          1.6            .80     4.50     8/19/97(6)      11,934      30,311
</TABLE>    
- --------
(1) Each of the options was granted pursuant to the Company's Stock Option
    Plan and is subject to the terms of such plan as described herein.
(2) Based on 1,449,439 options granted to employees in 1997.
(3) The exercise price per share of options granted was equal to the fair
    market value of the Common Stock on the date of grant as determined by the
    Company's Board of Directors.
   
(4) The "deemed value" of the Common Stock underlying the options was
    determined in December 1997 by the Company's Board of Directors solely for
    financial accounting purposes. Such determination was based primarily upon
    the Board's retroactive evaluation of the Company's ability to expand its
    focus to include the development of standard software products with a new
    management team and the impact of this activity on the value of the
    Company's equity securities. In making such evaluation, the Board of
    Directors considered all relevant information, including financial
    results, earnings projections, product data, comparable public company
    valuations and the likelihood of completing this offering.     
   
(5) The potential realizable value is calculated based on the term of the
    option at the date of grant (ten years). It is calculated assuming that
    the fair market value of the Company's Common Stock on the date of grant
    appreciates at the indicated annual rate compounded annually for the
    entire term of the option and that the option is exercised and sold on the
    last day of its term for the appreciated stock price.     
   
(6) This option expired three months after the termination of Mr. Langion's
    employment with the Company.     
 
                                      51
<PAGE>
 
  The following table sets forth information with respect to (i) the exercise
of stock options by the Named Executive Officers during the fiscal year ended
December 31, 1997, (ii) the number of securities underlying unexercised
options held by the Named Executive Officers as of December 31, 1997 and (iii)
the value of unexercised in-the-money options (i.e., options for which the
fair market value of the Common Stock ($9.50 at December 31, 1997) exceeds the
exercise price) as of December 31, 1997:
 
                     OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                                       NUMBER OF SECURITIES
                                      UNDERLYING UNEXERCISED            VALUE OF UNEXERCISED
                          SHARES     OPTIONS AT FISCAL YEAR-           IN-THE-MONEY OPTIONS AT
                         ACQUIRED            END (#)                   FISCAL YEAR-END (#) (1)
                            ON     VALUE   -------------------------- -------------------------
          NAME           EXERCISE REALIZED EXERCISABLE  UNEXERCISABLE EXERCISABLE UNEXERCISABLE
          ----           -------- -------- -----------  ------------- ----------- -------------
<S>                      <C>      <C>      <C>          <C>           <C>         <C>
J. Richard Abramson.....     --     --       83,125        441,875     $723,188    $1,886,813
Jeffrey J. Finn.........     --     --       31,187        283,813      271,327       598,673
Marilu C. Crosby........     --     --        5,000         45,000       43,500       304,500
David J. Molny..........     --     --          750         61,750        6,525        19,575
Anita T. Moseley........     --     --        1,297         61,203       11,284       206,216
Steven F. Langion.......  11,698    --          -- (2)         -- (2)       --            --
</TABLE>
- --------
(1) Based on the estimated fair market value of the Common Stock as of
    December 31, 1997, $9.50 per share (as determined by the Board of
    Directors), minus the per share exercise price, multiplied by the number
    of shares underlying the option.
(2) On August 19, 1997, Mr. Langion exercised the portions of his stock
    options that had vested through the date of termination of his employment
    with the Company. The remaining portions of the options expired upon such
    termination.
 
EMPLOYEE BENEFIT PLANS
 
 AMENDED AND RESTATED STOCK OPTION PLAN
 
  The Company's Amended and Restated Stock Option Plan was adopted by the
Board of Directors on January 19, 1996 and most recently amended on December
16, 1997. There are currently 3,150,000 shares of Common Stock authorized for
issuance under the Option Plan. At December 31, 1997, the Company had granted
options to purchase an aggregate of approximately 2,346,665 shares of Common
Stock, of which options to purchase approximately 86,989 shares had been
exercised, options to purchase approximately 372,275 shares had been canceled
(due to expiration or otherwise) and options to purchase approximately
1,887,401 shares at a weighted average exercise price of approximately $4.92
remained outstanding. Additionally, an aggregate of approximately 1,175,610
shares were available for future grant. The Option Plan will terminate in
January 2006 unless terminated sooner by the Board of Directors.
 
  The Option Plan provides for the grant of incentive stock options under the
Code to employees and nonstatutory stock options, stock appreciation rights,
restricted stock purchase awards and stock bonuses to employees, directors and
consultants. The Option Plan is administered by the Board of Directors or a
committee appointed by the Board of Directors which determines recipients and
types of awards to be granted, including the exercise price, number of shares
subject to the award and the exercisability thereof.
 
  The terms of stock options granted under the Option Plan generally may not
exceed ten years. The exercise price of options granted under the Option Plan
is determined by the Board of Directors, provided that the exercise price of
an incentive stock option cannot be less than 100% of the fair market value of
the Common Stock on the date of the option grant. Options granted under the
Option Plan vest at the rate specified in the option agreement. No stock
option may be transferred by the
 
                                      52
<PAGE>
 
optionee other than by will or the laws of descent or distribution or, in
certain limited instances, pursuant to a qualified domestic relations order,
provided that an optionee whose relationship with the Company or any related
corporation ceases for any reason (other than by death or permanent and total
disability) may exercise options in the three-month period following such
cessation (unless such options terminate or expire sooner by their terms) or
in such longer period as may be determined by the Board of Directors. Options
may be exercised for up to 12 months and 18 months after an optionee's
relationship with the Company and related corporations ceases due to death or
disability, respectively.
 
  No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant, and the term of the
option does not exceed five years from the date of grant. The aggregate fair
market value, determined at the time of grant, of the shares of Common Stock
with respect to which incentive stock options are exercisable for the first
time by an optionee during any calendar year (under all such plans of the
Company and its affiliates) may not exceed $100,000. Options may be
immediately exercisable, at the discretion of the Company, whether vested or
not, subject to repurchase by the Company of any unvested shares.
 
  Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full become available again for the grant of
awards under the Option Plan. Shares with respect to which stock appreciation
rights have been exercised are not available for the grant of new awards or
stock options.
 
  The Board of Directors has the authority to reprice outstanding options and
stock appreciation rights and to offer optionees and holders of stock
appreciation rights the opportunity to replace outstanding options and stock
appreciation rights with new options or stock appreciation rights for the same
or a different number of shares.
 
  Restricted stock purchase awards granted under the Option Plan may be
granted pursuant to a repurchase option in favor of the Company in accordance
with a vesting schedule and at a price determined by the Board of Directors.
Restricted stock purchases must be at a price equal to at least 85% of the
stock's fair market value on the award date, but stock bonuses may be awarded
in consideration of past services without a purchase payment. Rights under a
stock bonus or restricted stock bonus agreement may not be transferred other
than by will, the laws of descent and distribution or a qualified domestic
relations order while the stock awarded pursuant to such an agreement remains
subject to the agreement. Stock appreciation rights granted under the Option
Plan may be tandem rights, concurrent rights or independent rights.
 
  Upon certain changes in control of the Company, each outstanding option
shall be assumed or an equivalent option substituted by the successor
corporation or, if the successor corporation refuses to assume or substitute
for outstanding options, such options shall become fully vested and
exercisable for a period of 15 days after notice from the Company, or
thereafter terminate.
 
 EMPLOYEE STOCK PURCHASE PLAN
 
  On December 16, 1997, the Company's Board of Directors adopted an Employee
Stock Purchase Plan covering an aggregate of 250,000 shares of Common Stock.
The Purchase Plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Code. Under the Purchase Plan, the
Board of Directors may authorize participation by eligible employees,
including officers, in periodic offerings following the adoption of the
Purchase Plan. The Board of Directors currently plans that the offering period
for any offering will be six months.
 
  Employees are eligible to participate in the first offering commencing
following the date they are employed by the Company or an affiliate of the
Company. Employees who participate in an offering may have up to 15% of their
earnings (provided that such amount does not exceed $25,000 in value
 
                                      53
<PAGE>
 
per calendar year) withheld pursuant to the Purchase Plan and applied at the
end of each offering period to the purchase of shares of Common Stock. The
price of Common Stock purchased under the Purchase Plan will be equal to 85%
of the lower of the fair market value of the Common Stock on the commencement
date of each offering period or the purchase date. Employees may end their
participation in the offering at the end of the offering period, and
participation ends automatically upon termination of employment with the
Company.
   
  In the event of a change of control in the Company, the Company and the
Board of Directors have discretion to provide that each right to purchase
Common Stock will be assumed or an equivalent right substituted by the
successor corporation, or the Board of Directors may shorten the offering
period and provide for all sums collected by payroll deductions to be applied
to purchase stock immediately prior to the change in control. The Purchase
Plan will terminate at the direction of the Board of Directors.     
 
401(K) PLAN
 
  The Company maintains a 401(k) profit sharing and retirement plan (the
"401(k) Plan"). All employees who have reached 21 years of age and have
completed 30 continuous days of employment are eligible to participate in the
401(k) Plan. Pursuant to the 401(k) Plan, employees may elect to reduce their
current compensation by 15%, up to the annual limit prescribed by statute
($9,500 in 1997), and to contribute the amount of such reduction to the 401(k)
Plan. The Company makes nonelective contributions in the amount of 4% of each
participant's annual compensation and matches 100% of each participant's
eligible contributions up to 2% of each participant's annual compensation. The
401(k) Plan also provides for discretionary contributions and qualified
nonelective contributions to the 401(k) Plan by the Company. Employee
participants may direct the trustee with respect to the investment of the
assets of the 401(k) Plan only if the trustee consents to such direction in
writing. Prior to the adoption of the 401(k) Plan, the Company maintained a
defined contribution retirement plan, which was available to all employees 21
years of age or older with one year of service to the Company. Effective
December 31, 1996, the accrual of benefits under such retirement plan ceased
and the retirement plan was merged into the 401(k) Plan.
 
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
   
  The Company's Amended and Restated Bylaws (the "Bylaws") provide that the
Company will indemnify its directors and executive officers and may indemnify
its other officers, employees and other agents to the fullest extent permitted
by Delaware law. The Company is also empowered under the Bylaws to enter into
indemnification agreements, as the Company has done, with its directors and
executive officers. See "Certain Transactions". The Bylaws also allow the
Company to purchase insurance on behalf of any person it is required or
permitted to indemnify.     
   
  In addition, the Company's Restated Certificate of Incorporation (the
"Certificate") provides that the Company's directors shall not be liable for
monetary damages for breach of fiduciary duty to the Company and its
stockholders as a director, except for liability (i) for breach of their duty
of loyalty to the Company or its stockholders; (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law; (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation
Law; or (iv) for any transaction from which the director derived an improper
personal benefit. The Certificate further provides that no amendment or repeal
of this provision shall apply to or have any effect on the liability or
alleged liability of any director of the Company for or with respect to any
acts or omissions of such director occurring prior to such amendment or
repeal. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, the liability of directors then will be eliminated or limited to
the fullest extent permitted by Delaware law, as so amended. This provision
does not affect a director's responsibilities under any other laws, such as
the federal securities laws or state or federal environmental laws.     
 
 
                                      54
<PAGE>
 
                             CERTAIN TRANSACTIONS
   
  Pursuant to authority granted by the Bylaws, the Company has entered into
indemnification agreements (the "Indemnification Agreements") with each of its
directors and executive officers. Subject to the provisions of the
Indemnification Agreements, the Company shall indemnify and advance expenses
to such directors and executive officers in connection with their involvement
in any event or occurrence which arises in their capacity as, or as a result
of, their position with the Company. See "Management--Limitation of Liability
and Indemnification of Officers and Directors".     
   
  During 1997, the Company paid Vail Technologies, Inc. approximately $146,000
for certain consulting services provided in connection with the Company's
agreement with Lockheed. George A. Hallenbeck, Chairman of the Board and
holder of more than 5% of the Company's Common Stock, is the sole owner of
Vail Technologies, Inc. Neither Vail Technologies, Inc. nor Mr. Hallenbeck
currently is providing any consulting services to the Company.     
 
  On November 25, 1996, the Company entered into a termination agreement with
George A. Hallenbeck in connection with the termination of his services as
Chief Executive Officer of the Company, pursuant to which the Company paid Mr.
Hallenbeck a total of $120,000 in six monthly installments commencing January
1, 1997.
 
  In September 1996, in connection with the deferral of interest due on the
Subordinated Notes (as defined below), the Company issued warrants to purchase
an aggregate of 96,962 shares of Non-voting Common Stock (which, upon
completion of this offering, will convert into warrants to purchase shares of
Common Stock) at an exercise price of $.80 per share to Morgan Stanley Venture
Capital Fund II, L.P., Morgan Stanley Venture Capital Fund II, C.V. and Morgan
Stanley Venture Investors, L.P. (the "Morgan Stanley Funds") and warrants to
purchase an aggregate of 85,673 shares of Non-voting Common Stock (which, upon
completion of this offering, will convert into warrants to purchase shares of
Common Stock) at an exercise price of $.80 per share to Information
Associates, C.V. and Information Associates, L.P (the "Information Associates
Funds"). The warrants expire in May 2003. Robert J. Loarie, a director of the
Company, is a General Partner of Morgan Stanley Venture Partners II, L.P., the
General Partner of the Morgan Stanley Funds. He is also a Vice President of
Morgan Stanley Venture Capital II, Inc., the Managing General Partner of
Morgan Stanley Venture Partners II, L.P. Donald R. Dixon, a director of the
Company, is President of Trident Capital Management, L.L.C., the Investment
General Partner of Information Associates, C.V. and the General Partner of
Information Associates, L.P. The shares of Non-voting Common Stock issuable
upon conversion of such warrants are entitled to certain registration rights.
See "Description of Capital Stock--Registration Rights".
 
  On May 31, 1996, the Company issued senior subordinated promissory notes
(the "Subordinated Notes") in the aggregate principal amount of $6,500,000 and
warrants to purchase an aggregate of 727,998 shares of Non-voting Common Stock
(which, upon completion of this offering, will convert into warrants to
purchase shares of Common Stock) at an exercise price of $.80 per share (the
"Warrants"), which expire in May 2003, to the Morgan Stanley Funds and
Information Associates Funds. The Subordinated Notes accrue interest at the
rate of 9% and are payable in four annual installments commencing June 1,
2000. The principal amount of the Subordinated Notes, together with interest,
are fully due and payable upon the consummation of this offering. The shares
of Common Stock issuable upon exercise of the Warrants are entitled to certain
registration rights. See "Description of Capital Stock--Registration Rights".
 
  On April 1, 1996, the Company entered into a consulting services agreement
with Harry B. Fair, pursuant to which the Company paid Mr. Fair a total of
$106,000. Mr. Fair is currently not providing any consulting services to the
Company.
 
                                      55
<PAGE>
 
   
  During the fiscal years ended December 31, 1994 and December 31, 1995, the
Company was an S corporation under the Code and made distributions to its
stockholders. See "Dividend Policy and S Corporation Status". The Company
deferred making distributions at the end of fiscal 1995 to its stockholders.
On January 2, 1996, the Company issued promissory notes bearing interest at
the rate of 7.25% to the following directors, executive officers and holders
of more than 5% of the Company's Common Stock in the following principal
amounts equal to the amount of each stockholder's deferred distribution for
the year ended December 31, 1995: John A. Elmgren, Harry B. Fair, George A.
Hallenbeck, David J. Molny and Wayne A. Pulick in the amounts of $655,257,
$2,293,401, $2,293,401, $65,526 and $655,257, respectively (the "Stockholder
Notes"). The Stockholder Notes contain prepayment penalties and are due on
January 2, 2006, with interest payable on each December 31. On May 24, 1996,
each holder executed an Acknowledgment and Confirmation of Subordination,
agreeing to subordinate the repayment of the principal of their Stockholder
Notes to the Subordinated Notes. Further, in September 1996, each holder
agreed to forgive interest payable on the Stockholder Notes as of September
30, 1996 in exchange for the Company's agreement to amend the Stockholder
Notes to contain prepayment penalties.     
 
  In January 1995, the Company made a loan to George A. Hallenbeck in the
principal amount of $137,400, bearing interest at the rate of 6.5% per annum
and payable in monthly installments through December 1995. Such loan was
repaid in full.
   
  The Company believes that the terms of the transactions described above were
no less favorable to the Company than would have been obtained from an
unaffiliated third party. Any future transactions between the Company and any
of its officers, directors or principal stockholders will be on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties and will be approved by a majority of the independent and
disinterested members of the Board of Directors.     
 
                                      56
<PAGE>
 
                      PRINCIPAL AND SELLING STOCKHOLDERS
 
  The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of December 31, 1997,
and as adjusted to reflect (a) the sale of the Common Stock being offered
hereby (assuming no exercise of the Underwriters' over-allotment option) and
(b) to give effect to the conversion of all outstanding shares of Non-voting
Common Stock and Preferred Stock into shares of Common Stock for (i) each
person (or group of affiliated persons) who is known by the Company to own
beneficially more than 5% of the Common Stock, (ii) each of the Company's
directors, (iii) each of the Company's current stockholders who is expected to
sell shares in this offering (the "Selling Stockholders"), (iv) each of the
Named Executive Officers and (v) all directors and current executive officers
of the Company as a group. Except as otherwise noted, the persons or entities
in this table have sole voting and investing power with respect to all the
shares of Common Stock owned by them.
 
<TABLE>   
<CAPTION>
                          SHARES BENEFICIALLY                SHARES BENEFICIALLY
                            OWNED PRIOR TO                       OWNED AFTER
                            OFFERING(1)(2)       NUMBER OF     OFFERING(1)(2)
                          ----------------------- SHARES     -----------------------
NAME OF BENEFICIAL OWNER    NUMBER     PERCENT    OFFERED      NUMBER     PERCENT
- ------------------------  ------------ -------------------   ------------ ----------
<S>                       <C>          <C>       <C>         <C>          <C>
George A. Hallenbeck....     2,625,000    33.9%   383,600(3)    2,241,400    20.7%
c/o Evolving Systems,
Inc.
9777 Mt. Pyramid Court
Englewood, CO 80112
Harry B. Fair...........     2,175,000    28.1    318,377(4)    1,856,623    17.1
c/o Evolving Systems,
Inc.
9777 Mt. Pyramid Court
Englewood, CO 80112
Morgan Stanley Venture       1,015,210    12.3        --        1,090,210    9.6
Partners(5).............
3000 Sand Hill Road
Building 4, Suite 250
Menlo Park, CA 94025
Trident Capital(6)......       898,173    11.0        --          973,173    8.6
2480 Sand Hill Road
Menlo Park, CA 94025
John A. Elmgren(7)......       713,250    9.2     104,210(8)      609,040    5.6
1518 Cottonwood Lane
Littleton, CO 80121
Wayne A. Pulick.........       600,750    7.8      87,904(9)      512,846    4.7
147 Alpine Avenue
Golden, CO 80401
J. Richard Abramson(10).        89,218      1.1       --           89,218     *
Marilu C. Crosby(10)....         5,000     *          --            5,000     *
Donald R. Dixon(11).....       898,173    11.0        --          973,173    8.6
Jeffrey J. Finn(10).....        35,827     *          --           35,827     *
Steven F. Langion.......        11,698     *          --           11,699     *
Robert J. Loarie(12)....     1,015,210     12.3       --        1,090,210    9.6
David J. Molny..........        83,250      1.1    10,000          73,250     *
Anita T. Moseley(10)....         1,780     *          --            1,780     *
All directors and
 current executive
 officers as a group (13
 persons)(13)...........     6,928,458     78.9   711,977       6,616,481     55.7
Additional Selling
 Stockholder:
Timothy J. Drummond.....        77,625      1.0     5,000          72,625     *
</TABLE>    
 
                                      57
<PAGE>
 
- --------
  * Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
    Securities and Exchange Commission and generally includes voting or
    investment power with respect to securities. Shares of Common Stock
    issuable upon exercise of stock options and warrants that are currently
    exercisable or exercisable within 60 days of December 31, 1997 are deemed
    outstanding for computing the percentage of the person or entity holding
    such securities but are not outstanding for computing the percentage of
    any other person or entity. Except as indicated by footnote, and subject
    to community property laws where applicable, the persons named in the
    table above have sole voting and investment power with respect to all
    shares of Common Stock shown as beneficially owned by them.
(2) Percentage of ownership is based on 7,740,747 shares of Common Stock
    outstanding before this offering and 10,831,656 shares of Common Stock
    outstanding after this offering.
(3) Assuming the Underwriters' over-allotment option is exercised in full, Mr.
    Hallenbeck will sell an aggregate of 500,000 shares in the offering and
    will beneficially own 2,125,000 shares, or 19.3%, after the offering.
(4) Assuming the Underwriters' over-allotment option is exercised in full, Mr.
    Fair will sell an aggregate of 500,000 shares in the offering and will
    beneficially own 1,675,000 shares, or 15.2%, after the offering.
   
(5) Includes 87,750 shares owned by Morgan Stanley Venture Capital Fund II,
    C.V., 352,500 shares owned by Morgan Stanley Venture Capital Fund II, L.P.
    and 91,500 shares owned by Morgan Stanley Venture Investors, L.P. Also
    includes warrants to purchase an aggregate of 483,460 shares of Common
    Stock, 79,838 of which are owned by Morgan Stanley Venture Capital Fund
    II, C.V., 320,453 of which are owned by Morgan Stanley Venture Capital
    Fund II, L.P. and 83,169 of which are owned by Morgan Stanley Venture
    Investors, L.P. The percent beneficially owned after the offering includes
    150,000 shares that the Morgan Stanley Funds and the Information
    Associates Funds may purchase in the offering.     
   
(6) Includes 12,750 shares owned by Information Associates, C.V. and 458,250
    shares owned by Information Associates, L.P. Also includes warrants to
    purchase an aggregate of 427,173 shares of Common Stock, 11,597 of which
    are owned by Information Associates, C.V. and 415,576 of which are owned
    by Information Associates, L.P. The percent beneficially owned after the
    offering includes 150,000 shares that the Information Associates Funds and
    the Morgan Stanley Funds may purchase in the offering.     
(7) Includes 750 shares subject to stock options exercisable within 60 days of
    December 31, 1997.
(8) Assuming the Underwriters' over-allotment option is exercised in full, Mr.
    Elmgren will sell an aggregate of 150,000 shares in the offering and will
    beneficially own 563,250 shares, or 5.1%, after the offering.
(9) Assuming the Underwriters' over-allotment option is exercised in full, Mr.
    Pulick will sell an aggregate of 150,000 shares in the offering and will
    beneficially own 450,750 shares, or 4.1%, after the offering.
(10) Consists solely of shares subject to stock options exercisable within 60
     days of December 31, 1997.
   
(11) Consists solely of shares owned by investment funds managed by Trident
     Capital (see Note 6 above). Mr. Dixon is President of Trident Capital
     Management, L.L.C., the Investment General Partner of Information
     Associates, C.V. and the General Partner of Information Associates, L.P.
     The percent beneficially owned after the offering includes 150,000 shares
     that the Information Associates Funds and the Morgan Stanley Funds may
     purchase in the offering.     
   
(12) Consists solely of shares owned by investment funds managed by Morgan
     Stanley Venture Partners (see Note 5 above). Mr. Loarie is a General
     Partner of Morgan Stanley Venture Partners II, L.P., the General Partner
     of each of the funds. He is also a Vice President of Morgan Stanley
     Venture Capital II, Inc., the Managing General Partner of Morgan Stanley
     Venture Partners II, L.P. Mr. Loarie disclaims beneficial ownership of
     such shares. The percent beneficially owned after the offering includes
     150,000 shares that the Morgan Stanley Funds and the Information
     Associates Funds may purchase in the offering.     
(13) Includes 131,825 shares subject to stock options exercisable within 60
     days of December 31, 1997. Also includes warrants to purchase an
     aggregate of 910,633 shares of Common Stock. Also see Notes 11 and 12
     above.
 
                                      58
<PAGE>
 
                         DESCRIPTION OF CAPITAL STOCK
 
  The following description of the capital stock of the Company and certain
provisions of the Company's Certificate and Bylaws is a summary and is
qualified in its entirety by the provisions of the Certificate and Bylaws,
which have been filed as exhibits to the Company's Registration Statement, of
which this Prospectus is a part.
 
  Effective upon completion of this offering, the Company's authorized capital
stock shall consist of 25,000,000 shares of Common Stock, $.001 par value per
share, and 2,000,000 shares of Preferred Stock, $.001 per share. As of
December 31, 1997, there were approximately 60 record holders of the Company's
Common Stock.
 
COMMON STOCK
 
  The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors, and as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy". In the event of a liquidation, dissolution or
winding up of the Company, holders of the Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation preference of any then outstanding Preferred Stock. Holders of
Common Stock have no preemptive rights and no right to convert their Common
Stock into any other securities. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.
 
PREFERRED STOCK
 
  The Board of Directors has the authority, without further vote or action by
the stockholders, to issue up to 2,000,000 shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including any dividend rights, conversion rights, voting rights,
terms of redemption, liquidation preferences, sinking fund terms and the
number of shares constituting any series or the designation of such series. An
effect of the existence of unissued and unreserved Common Stock and Preferred
Stock may be to enable the Board of Directors to issue shares to persons
friendly to current management which could render more difficult or discourage
an attempt to obtain control of the Company by means of a merger, tender
offer, proxy contest or otherwise, and thereby protect the continuity of the
Company's management. Such additional shares also could be used to dilute the
stock ownership of persons seeking to obtain control of the Company.
Additionally, the issuance of Preferred Stock could adversely affect the
voting power of holders of Common Stock and the likelihood that such holders
will receive dividend payments and payments upon liquidation. No shares of
Preferred Stock will be outstanding as of the closing of this offering.
 
WARRANTS
   
  As of December 31, 1997, the Company had outstanding warrants to purchase an
aggregate of 910,633 shares of Non-voting Common Stock at an exercise price of
$.80 per share (the "Common Stock Warrants"), which will automatically convert
into warrants to purchase Common Stock upon consummation of this offering. The
Common Stock Warrants contain provisions for the adjustment of the exercise
price upon the occurrence of certain events, including a stock dividend, stock
split or recapitalization. The Common Stock Warrants terminate on May 31,
2003. The holders of the Common Stock Warrants are entitled to certain
registration rights set forth in the Registration Rights Agreement. See "--
Registration Rights".     
 
                                      59
<PAGE>
 
REGISTRATION RIGHTS
   
  The Company has entered into a registration rights agreement (the
"Registration Rights Agreement") with the holders (or their permitted
transferees) of approximately 6,740,909 shares of the Company's Common Stock
(the "Holders"). Additionally, holders of the Company's Common Stock Warrants
are entitled to registration rights upon the exercise of such Common Stock
Warrants. See "--Warrants". If the Company proposes to register any of its
securities under the Securities Act, the Holders are entitled to notice of
such registration and are entitled to include, at the Company's expense, their
shares therein. In addition, the Holders may require the Company at its
expense on not more than two occasions to use its best efforts to effect the
registration, subject to certain conditions and limitations. Further, subject
to certain limitations, the Holders may require the Company at its expense to
register their shares on Form S-3 when such form becomes available for use by
the Company.     
 
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
 
  The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an anti-takeover law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, together with affiliates and associates, owns (or at any time
during the prior three years has owned) 15% or more of the corporation's
voting stock.
 
  The Company's Certificate and Bylaws also require that, effective upon the
closing of this offering, any action required or permitted to be taken by
stockholders of the Company must be effected at a duly called annual or
special meeting of the stockholders and may not be effected by a consent in
writing. In addition, special meetings of the stockholders of the Company may
be called only by the Board of Directors, the Chairman of the Board of
Directors, the Chief Executive Officer or by holders of at least two-thirds of
the shares of voting stock of the Company. The Company's Certificate also
provides that the authorized number of directors may be changed only by
resolution of the Board of Directors. Individual directors may only be removed
from the Board of Directors without cause by the affirmative vote of the
holders of at least 66 2/3% of the voting power of all then-outstanding shares
of voting stock. In addition, the Company's Certificate provides for the
classification of the Board of Directors into three classes, only one of which
shall be elected at any given annual meeting. These provisions may have the
effect of delaying, deterring or preventing a change in control of the Company
or depressing the market price of Common Stock or discouraging hostile
takeover bids in which stockholders of the Company could receive a premium for
their shares of Common Stock.
 
TRANSFER AGENT AND REGISTRAR
 
  American Stock Transfer & Trust Company has been appointed as the transfer
agent and registrar for the Company's Common Stock.
 
                                      60
<PAGE>
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
  Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
   
  Upon completion of this offering, assuming no exercise of outstanding
options or warrants, the Company will have outstanding, in the aggregate,
10,843,254 shares of Common Stock (11,037,345 shares if the Underwriters'
over-allotment is exercised in full). Of these shares, the 4,000,000 shares of
Common Stock sold in this offering will be freely tradable without restriction
or further registration under the Securities Act, unless such shares are
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act ("Affiliates"). The remaining 6,843,254 shares of
Common Stock held by existing stockholders are "restricted securities" as that
term is defined in Rule 144 under the Securities Act (the "Restricted
Shares"). Restricted Shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144 or 701 promulgated under the Securities Act, which rules are summarized
below. As a result of the contractual restrictions described below and the
provisions of Rules 144 and 701, additional shares will be available for sale
in the public market as follows:     
 
<TABLE>   
<CAPTION>
 DAYS AFTER DATE OF THIS   SHARES ELIGIBLE FOR
        PROSPECTUS             FUTURE SALE                       COMMENT
 -----------------------   -------------------                   -------
 <S>                       <C>                 <C>
 Upon effectiveness......       4,000,000      Freely tradable, shares sold in offering.
 Upon effectiveness......               0      Rule 144(k) (shares not subject to 180-day
                                               lock-up).
 90 days.................          33,902      Rule 144 and Rule 701 (outstanding shares
                                               not subject to 180-day lock-up).
 180 days................       6,809,352      Lock-up released. Outstanding shares
                                               salable under Rule 144, Rule 144(k) and
                                               Rule 701.
</TABLE>    
   
  Upon completion of this offering, the holders of approximately 6,740,909
shares of Common Stock, or their transferees, will be entitled to certain
rights with respect to the registration of such shares under the Securities
Act. Additionally, holders of the Company's outstanding Common Stock Warrants
are entitled to registration rights upon the exercise of such warrants.
Registration of such shares under the Securities Act would result in such
shares becoming freely tradable without restriction under the Securities Act
(except for shares purchased by Affiliates) immediately upon the effectiveness
of such registration.     
   
  The Company's officers, directors and certain stockholders and optionees
have agreed that they will not, without the prior written consent of Goldman,
Sachs & Co., directly or indirectly offer, sell, contract to sell or otherwise
dispose of approximately 6,809,352 shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock during the
180-day period commencing on the date of this Prospectus (the "Lock-up
Agreements"). Goldman, Sachs & Co., on behalf of the Underwriters, may, in its
sole discretion and at any time without notice, release any or all holders of
securities of the Company subject to Lock-up Agreements from any or all of
their obligations under their respective Lock-up Agreements.     
 
  In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an Affiliate of the Company, or person (or
persons whose shares are aggregated) who has beneficially owned Restricted
Shares for at least one year will be entitled to sell in any three-month
period a number of shares that does not exceed greater of (i) one percent of
the then outstanding
 
                                      61
<PAGE>
 
shares of the Company's Common Stock or (ii) the average weekly trading volume
of the Company's Common Stock in the Nasdaq National Market during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are subject to certain requirements relating to manner of sale, notice and the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an
Affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned Restricted Shares for at least two
years is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above.
 
  An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with
Rule 144's holding period restrictions, in each case commencing 90 days after
the date of this Prospectus. In addition, non-Affiliates may sell Rule 701
shares without complying with the public information, volume and notice
provisions of Rule 144.
 
  The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Company's
Option Plan and Purchase Plan. Based on the number of options outstanding and
options and shares reserved for issuance at December 31, 1997, such
registration statement would cover approximately 3,313,011 shares. Such
registration statement is expected to be filed as soon as practicable after
the date hereof and will become effective immediately upon filing. Shares
registered under such registration statement will, subject to Rule 144 volume
limitations applicable to Affiliates, be available for sale in the open
market, unless such shares are subject to vesting restrictions with the
Company or the Lock-up Agreements described above. See "Management".
 
                                 LEGAL MATTERS
 
  The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and certain of the Selling Stockholders by its counsel,
Cooley Godward LLP, Boulder, Colorado. Certain legal matters in connection
with the offering will be passed upon for the Underwriters by Brobeck, Phleger
& Harrison LLP, Denver, Colorado.
 
                                    EXPERTS
 
  The financial statements as of December 31, 1997 and for the year ended
December 31, 1997, included in this Prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
 
  The financial statements as of December 31, 1996 and for each of the two
years in the period then ended included in this Prospectus and the related
financial statement schedule included elsewhere in the registration statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and elsewhere in the registration statement,
and have been so included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
 
                                      62
<PAGE>
 
                             EVOLVING SYSTEMS, INC.
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Report of Price Waterhouse LLP............................................. F-2
Report of Deloitte & Touche LLP............................................ F-3
Balance Sheets............................................................. F-4
Statements of Operations................................................... F-5
Statements of Changes in Stockholders' Equity.............................. F-6
Statements of Cash Flows................................................... F-7
Notes to Financial Statements.............................................. F-8
</TABLE>
 
                                      F-1
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and
Stockholders of Evolving Systems, Inc.
 
  In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Evolving Systems,
Inc. at December 31, 1997, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards 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 audit provides a
reasonable basis for the opinion expressed above.
 
Price Waterhouse LLP
 
Boulder, Colorado
February 24, 1998
 
                                      F-2
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Stockholders of
Evolving Systems, Inc.:
 
  We have audited the accompanying balance sheet of Evolving Systems, Inc. as
of December 31, 1996 and the related statements of operations, changes in
stockholders' equity and cash flows for each of the two years in the period
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, such financial statements present fairly, in all material
respects, the financial position of Evolving Systems, Inc. as of December 31,
1996 and the results of its operations and its cash flows for each of the two
years in the period then ended in conformity with generally accepted
accounting principles.
 
DELOITTE & TOUCHE LLP
 
Denver, Colorado
March 4, 1997, except for Note 7,
 as to which the date is February 10, 1998
 
                                      F-3
<PAGE>
 
                             EVOLVING SYSTEMS, INC.
 
                                 BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                       PRO FORMA
                                                                     STOCKHOLDERS'
                                                                        EQUITY
                                         DECEMBER 31,  DECEMBER 31,  DECEMBER 31,
                                             1996          1997          1997
                                         ------------  ------------  -------------
                                                                       (NOTE 1)
                                                                      (UNAUDITED)
<S>                                      <C>           <C>           <C>
                ASSETS
Current assets:
 Cash and cash equivalents.............  $ 3,184,116   $ 1,170,659
 Certificates of deposit...............      155,181       130,987
 Contract receivables, net of
  allowance of $298,000 and $520,000
  at December 31, 1996 and 1997,
  respectively.........................    9,562,506    13,343,939
 Unbilled work in-progress.............      767,856       840,992
 Deferred tax assets...................      160,733     1,276,282
 Prepaid and other current assets......      375,447     1,077,374
                                         -----------   -----------
   Total current assets................   14,205,839    17,840,233
 Property and equipment, net...........    9,840,518     9,802,630
 Other assets, net of amortization of
  $28,141 and $0 at December 31, 1996
  and 1997, respectively...............      309,549       216,636
                                         -----------   -----------
                                         $24,355,906   $27,859,499
                                         ===========   ===========
 LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Current portion of long-term
  obligations..........................  $ 2,794,359   $ 3,177,637
 Accounts payable......................    2,168,668     2,047,340
 Accrued liabilities...................    2,187,139     1,195,019
 Unearned revenue and customer
  deposits.............................      665,837     6,054,421
                                         -----------   -----------
   Total current liabilities...........    7,816,003    12,474,417
Long-term obligations, including
 related parties.......................   15,302,068    13,287,012
Deferred income taxes..................      242,082       400,493
Commitments and contingencies (Note 3).
Stockholders' equity:
 Preferred stock, $.001 par value;
  1,500,000 shares authorized; no
  shares issued........................          --            --      $     --
 Series A preferred stock, $.001 par
  value; 8,160 shares authorized,
  issued and outstanding at December
  31, 1996 and 1997 (liquidation
  preference $6,250 per share); none
  outstanding pro forma................            8             8           --
 Common stock, $.001 par value;
  4,930,000 non-voting shares
  authorized; 1,535,786 and 1,620,760
  non-voting issued and outstanding as
  of December 31, 1996 and 1997,
  respectively; 10,070,000 voting
  shares authorized, no voting shares
  issued, or outstanding as of
  December 31, 1996 and 1997,
  respectively; 7,740,747 voting
  issued and outstanding at December
  31, 1997 pro forma...................        1,536         1,621         7,741
 Common stock, $.01 par value; 12,500
  voting shares authorized; none
  issued and outstanding at December
  31, 1996 and 1997....................          --            --            --
 Additional paid-in capital............    1,007,632     2,423,060     2,416,948
 Deferred compensation.................          --       (992,188)     (992,188)
 Retained earnings (accumulated
  deficit).............................      (13,423)      265,076       265,076
                                         -----------   -----------     ---------
   Total stockholders' equity..........      995,753     1,697,577     1,697,577
                                         -----------   -----------     ---------
                                         $24,355,906   $27,859,499
                                         ===========   ===========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-4
<PAGE>
 
                             EVOLVING SYSTEMS, INC.
 
                            STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                         -------------------------------------
                                            1995         1996         1997
                                         -----------  -----------  -----------
<S>                                      <C>          <C>          <C>
Revenue:
 License fees and related services...... $       --   $   882,500  $20,033,964
 Other services.........................  45,354,661   36,035,564   22,686,329
                                         -----------  -----------  -----------
   Total revenue........................  45,354,661   36,918,064   42,720,293
                                         -----------  -----------  -----------
Cost of revenue:
 License fees and related services......         --       450,000    6,338,475
 Other services.........................  26,588,928   24,081,340   18,885,428
                                         -----------  -----------  -----------
   Total cost of revenue................  26,588,928   24,531,340   25,223,903
                                         -----------  -----------  -----------
 Gross margin...........................  18,765,733   12,386,724   17,496,390
Operating expenses:
 Sales and marketing....................   3,404,638    2,912,720    5,064,654
 General and administrative.............   7,725,268    8,587,126    8,635,424
 Research and development...............     820,949      641,114    2,914,312
                                         -----------  -----------  -----------
   Total operating expenses.............  11,950,855   12,140,960   16,614,390
                                         -----------  -----------  -----------
Income from operations..................   6,814,878      245,764      882,000
Other income (expense):
 Interest income........................      73,477       77,778      175,384
 Interest expense, including related
  party interest of $669,440, $523,189,
  $989,378 for the year ended December
  31, 1995, 1996 and 1997...............    (762,344)  (1,499,534)  (1,570,535)
                                         -----------  -----------  -----------
   Total................................    (688,867)  (1,421,756)  (1,395,151)
                                         -----------  -----------  -----------
Income (loss) before income taxes.......   6,126,011   (1,175,992)    (513,151)
Provision for (benefit from) income
 taxes..................................         --        81,349     (791,650)
                                         -----------  -----------  -----------
Net income (loss)....................... $ 6,126,011  $(1,257,341) $   278,499
                                         ===========  ===========  ===========
Net Income (loss) per common share...... $      4.00  $      (.82) $       .18
Weighted avarge common shares
 outstanding............................   1,530,000    1,533,004    1,557,236
Diluted net income (loss) per common
 share.................................. $      4.00  $      (.82) $       .03
Diluted weighted avarage common shares
 outstanding............................   1,530,000    1,533,004    8,222,312
Pro forma (unaudited) (Note 5):
 Income (loss) before income taxes...... $ 6,126,011  $(1,175,992)
 Provision for (benefit from) income
  taxes.................................   2,300,578     (297,886)
                                         -----------  -----------
   Net income (loss).................... $ 3,825,433  $  (878,106)
                                         ===========  ===========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-5
<PAGE>
 
                            EVOLVING SYSTEMS, INC.
 
                 STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                             $.001 PAR
                       SERIES A        $.01 PAR VOTING       NON-VOTING
                    PREFERRED STOCK      COMMON STOCK       COMMON STOCK   ADDITIONAL                RETAINED       TOTAL
                    -----------------  -----------------  ----------------  PAID-IN      DEFERRED    EARNINGS   STOCKHOLDERS'
                    SHARES    AMOUNT    SHARES   AMOUNT    SHARES   AMOUNT  CAPITAL    COMPENSATION (DEFICIT)      EQUITY
                    --------  -------  --------  -------  --------- ------ ----------  ------------ ----------  -------------
<S>                 <C>       <C>      <C>       <C>      <C>       <C>    <C>         <C>          <C>         <C>
Balance,
December 31, 1994.       --       --     10,200     102                                              8,859,128    8,859,230
Distributions to
stockholders......                                                                                  (5,811,810)  (5,811,810)
Net income........                                                                                   6,126,011    6,126,011
                    --------   ------  --------  ------   --------- ------ ----------   ----------  ----------   ----------
Balance,
December 31, 1995.       --       --     10,200     102                                              9,173,329    9,173,431
Distributions to
stockholders......                                                                                  (7,257,623)  (7,257,623)
Reclassification
of undistributed
earnings upon
conversion from
non-taxable to
taxable status....                                                            670,862                 (670,862)
Recapitalization..     8,160        8   (10,200)   (102)  1,530,000  1,530       (510)                    (926)
Other.............                                            5,786      6     10,693                                10,699
Forgiveness of
shareholder
interest..........                                                            326,587                               326,587
Net loss..........                                                                                  (1,257,341)  (1,257,341)
                    --------   ------  --------  ------   --------- ------ ----------   ----------  ----------   ----------
Balance,
December 31, 1996.     8,160        8       --      --    1,535,786  1,536  1,007,632                  (13,423)     995,753
Stock option
exercises.........                                           84,974     85     67,894                                67,979
Deferred
compensation
related to stock
options...........                                                          1,347,534   (1,347,534)
Amortization of
deferred
compensation......                                                                         355,346                  355,346
Net Income........                                                                                     278,499      278,499
                    --------   ------  --------  ------   --------- ------ ----------   ----------  ----------   ----------
Balance,
December 31, 1997.     8,160   $    8       --   $  --    1,620,760 $1,621 $2,423,060   $ (992,188) $  265,076   $1,697,577
                    ========   ======  ========  ======   ========= ====== ==========   ==========  ==========   ==========
</TABLE>
 
  The accompanying notes are an integral part of these financial statements.
 
                                      F-6
<PAGE>
 
                             EVOLVING SYSTEMS, INC.
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31,
                                          -------------------------------------
                                             1995         1996         1997
                                          -----------  -----------  -----------
<S>                                       <C>          <C>          <C>
OPERATING ACTIVITIES:
Net income (loss).......................  $ 6,126,011  $(1,257,341) $   278,499
Adjustments to reconcile net income
 (loss) to net cash provided by
 operating activities:
 Provision for uncollectible contract
  receivables...........................          --       577,000      456,600
 Amortization of deferred compensation..          --           --       355,346
 Depreciation and amortization..........    2,447,762    3,527,436    4,004,225
 Loss on disposal of property and
  equipment.............................       27,810      121,166      159,304
 Non-cash interest expense..............          --       668,222          --
 Provision for deferred income taxes....          --        81,349     (957,138)
Change in operating assets and
 liabilities:
 Contract receivables...................   (3,189,157)  (3,832,181)  (4,237,934)
 Unbilled work-in-progress..............   (1,046,855)     770,027      (73,135)
 Prepaid and other assets...............      (81,951)    (235,609)    (609,014)
 Accounts payable.......................     (366,953)     481,091     (121,327)
 Accrued liabilities....................      183,699      398,874     (992,121)
 Unearned revenue and customer
  deposits..............................   (2,277,379)     170,544    5,388,594
                                          -----------  -----------  -----------
   Net cash provided by operating
    activities..........................    1,822,987    1,470,578    3,651,899
                                          -----------  -----------  -----------
INVESTING ACTIVITIES:
Purchases of property and equipment.....   (2,026,253)  (3,106,525)  (2,966,966)
Proceeds from sale of property and
 equipment..............................       12,453      936,858       45,346
Change in certificates of deposit.......       (2,976)      52,860       25,688
Change in stockholder notes receivable..       79,026          --           --
                                          -----------  -----------  -----------
   Net cash used in investing
    activities..........................   (1,937,750)  (2,116,807)  (2,895,932)
                                          -----------  -----------  -----------
FINANCING ACTIVITIES:
Proceeds from long-term obligations.....    1,071,624   10,811,904      200,000
Repayments of long-term obligations.....   (2,062,052)  (7,686,322)  (3,037,403)
Distributions to stockholders...........   (5,811,810)    (573,998)
Proceeds from exercise of options.......          --         4,671       67,979
Warrants issued.........................          --         4,853          --
Repurchase of common stock..............          --           (43)         --
                                          -----------  -----------  -----------
   Net cash provided by (used in)
    financing activities................   (6,802,238)   2,561,065   (2,769,424)
                                          -----------  -----------  -----------
Net increase (decrease) in cash and cash
 equivalents............................   (6,917,001)   1,914,836   (2,013,457)
Cash and cash equivalents at beginning
 of period..............................    8,186,281    1,269,280    3,184,116
                                          -----------  -----------  -----------
Cash and cash equivalents at end of
 period.................................  $ 1,269,280  $ 3,184,116  $ 1,170,659
                                          ===========  ===========  ===========
SUPPLEMENTAL DISCLOSURE OF OTHER CASH
 AND NON-CASH INVESTING AND FINANCING
 TRANSACTIONS
 Interest paid..........................  $   762,342  $   805,707  $ 1,566,184
 Income taxes paid......................               $    65,471  $   289,867
 Assets acquired under capital lease....  $ 4,439,482  $ 1,946,597  $ 1,205,714
 Distribution to stockholders in form
  of notes payable......................               $ 6,683,625
 Constructive dividend to stockholders
  and related contribution to capital...               $   670,862
 Accrued interest payable converted
  into note payable.....................               $   341,635
 Accrued interest payable contributed
  to equity.............................               $   326,587
 Collection of stockholder note
  receivable through reduction of
  stockholder note payable..............               $    58,374
 Warrants issued as consideration for
  accrued interest payable converted to
  stockholder notes payable.............               $     1,218
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-7
<PAGE>
 
                            EVOLVING SYSTEMS, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
ORGANIZATION
 
  Evolving Systems, Inc. ("Evolving Systems" or the "Company") provides
Operational Support Systems ("OSS") software solutions to telecommunications
companies. The Company's software products and professional services are
designed to address the increasingly complex operational support system
requirements of telecommunications companies in areas such as customer care,
service provisioning, network management and billing. Evolving Systems
combines pre-sales consulting with standard product software and post-sales
systems integration to create solutions to its customers' specific
requirements. This provides customers with a tailored solution, together with
the time-to-market advantages of software products.
 
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
   
  The Company recognizes revenue in accordance with the provisions of
Statement of Position 91-1, "Software Revenue Recognition". The Company
derives revenue from license fees and services under the terms of both fixed
price and time and materials contracts. License fees and related services
revenue during 1996 consisted of fees from non-LNP software products.
Subsequent to 1996, license fees and related services revenue consists of
revenue from contracts involving the Company's 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 and 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.
 
  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
maintenance or training services are bundled with the original license fee
arrangement, their fair value is deferred and recognized during the period
such services are provided.     
 
 
                                      F-8
<PAGE>
 
                            EVOLVING SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  The Company 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 cost
indicate a loss. The Company does not anticipate a change in the timing of
revenue recognition upon adoption of Statement of Position 97-2, "Software
Revenue Recognition".
 
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
 
  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.
 
CONCENTRATION OF CREDIT RISK
 
  Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and accounts receivable. The Company has cash
investment policies that limit investments to repurchase agreements and
certificates of deposit. The Company performs ongoing evaluations of its
customers' financial condition and, generally, requires no collateral from its
customers. During the years ended December 31, 1995, 1996 and 1997, the
Company recognized approximately 78%, 73%, and 89% of total revenue from two,
five, and six customers, respectively, all in the telecommunications industry.
As of December 31, 1996 and 1997, these customers accounted for 75%, and 85%
of contract receivables, respectively.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  For certain of the Company's 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. Additionally, based upon
the borrowing rates currently available to the Company for debt agreements
with similar terms and average maturities, management believes the carrying
amount of the notes payable to the bank approximates fair market value. For
the notes payable to stockholders and the senior subordinated promissory
notes, the Company estimated the fair value below using rates offered for
similar instruments with similar maturities.
 
<TABLE>
<CAPTION>
                                             DECEMBER 31, 1996 DECEMBER 31, 1997
                                             ----------------- -----------------
   <S>                                       <C>               <C>
   Carrying amount..........................    $11,962,058       $11,885,744
   Estimated fair value.....................    $11,424,840       $11,403,514
</TABLE>
 
 
                                      F-9
<PAGE>
 
                            EVOLVING SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
PROPERTY AND EQUIPMENT
 
  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.
 
STOCK-BASED COMPENSATION
 
  SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in
October 1995. This accounting standard permits the use of either a fair value
based method or the method defined in Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), to account for
stock-based compensation arrangements. Companies that elect to use the method
provided in APB No. 25 are required to disclose the pro forma net income and
earnings per share that would have resulted from the use of the fair value
based method. The Company has elected to continue to determine the value of
stock-based compensation arrangements under the provisions of APB No. 25, and
accordingly, it has included the pro forma disclosures required under SFAS No.
123 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
 
  The FASB issued SFAS No. 128 in February of 1997. This pronouncement
establishes new standards for computing and presenting earnings per share
("EPS") on a basis that is more comparable to international standards and
provides for the presentation of basic and diluted EPS. Basic EPS is computed
by dividing net income 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.
Prior period EPS have been restated to conform with the new statement.
 
 
The following is the reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the years ended December 31:
 
<TABLE>
<CAPTION>
                                                 1995       1996        1997
                                              ---------- -----------  ---------
BASIC EARNINGS PER SHARE
<S>                                           <C>        <C>          <C>
 Net income (loss)........................... $6,126,011 ($1,257,341) $ 278,499
                                              ========== ===========  =========
 Basic weighted average common shares
  outstanding................................  1,530,000   1,533,004  1,557,236
                                              ========== ===========  =========
 Basic earnings per common share:             $     4.00 $      (.82) $     .18
                                              ========== ===========  =========
<CAPTION>
DILUTED EARNINGS PER SHARE
<S>                                           <C>        <C>          <C>
 Net income (loss)........................... $6,126,011 $(1,257,341) $ 278,499
                                              ---------- -----------  ---------
 Basic weighted average number of common
  shares outstanding ........................  1,530,000   1,533,004  1,557,236
<CAPTION>
EFFECT OF DILUTIVE SECURITIES
<S>                                           <C>        <C>          <C>
 Options and warrants........................        --          --     545,076
 Conversion of preferred shares..............        --          --   6,120,000
                                              ---------- -----------  ---------
 Diluted weighted average common shares
  outstanding................................  1,530,000   1,533,004  8,222,312
                                              ========== ===========  =========
 Diluted earnings per common share:           $     4.00 $      (.82) $     .03
                                              ========== ===========  =========
</TABLE>
 
 
                                     F-10
<PAGE>
 
                            EVOLVING SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
Options and warrants to purchase 1,735,585 shares of common stock at $.80 per
share were outstanding at December 31, 1996 but were not included in the
computation of 1996 diluted EPS because they were anti-dilutive due to the net
loss for 1996. Of those options and warrants, 1,400,852 were still outstanding
at December 31, 1997.
 
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
 
  The Board of Directors has authorized management of the Company to file a
registration statement with the SEC permitting the Company to sell shares of
its common stock to the public. If the
Company's IPO is consummated under the terms presently anticipated, all of the
convertible preferred stock outstanding will automatically convert into
6,120,000 shares of common stock. Unaudited pro forma stockholders' equity as
of December 31, 1997, as set forth on the accompanying balance sheets, is
adjusted for the anticipated conversion of such preferred stock based on an
assumed public offering price.
 
RECLASSIFICATIONS
 
  Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.
 
2. BALANCE SHEET COMPONENTS
 
  Certain balance sheet components are as follows:
 
<TABLE>
<CAPTION>
                                     DECEMBER 31,
                               -------------------------
                                  1996          1997
                               -----------  ------------
   <S>                         <C>          <C>
   PROPERTY AND EQUIPMENT:
     Computer equipment and
      purchased software.....  $13,650,128  $ 17,372,371
     Furniture, fixtures and
      leasehold improvements.    3,825,438     3,861,952
                               -----------  ------------
                                17,475,566    21,234,323
     Less accumulated
      depreciation...........   (7,635,048)  (11,431,693)
                               -----------  ------------
                               $ 9,840,518  $  9,802,630
                               ===========  ============
</TABLE>
 
  Included in property and equipment at December 31, 1996 and 1997 are assets
under capital lease of $9,799,108 and $10,564,928, respectively. Related
accumulated depreciation is $3,979,232 and $6,243,846, as of December 31, 1996
and 1997, respectively.
 
<TABLE>
   <S>                                                    <C>        <C>
   ACCRUED LIABILITIES:
     Accrued compensation and related expenses........... $  581,427 $  943,591
     Benefit plan contributions payable (Note 6).........  1,020,712     88,620
     Sublessee deposits..................................    585,000     52,595
     Other...............................................        --     110,212
                                                          ---------- ----------
                                                          $2,187,139 $1,195,018
                                                          ========== ==========
</TABLE>
 
                                     F-11
<PAGE>
 
                            EVOLVING SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
3. LONG-TERM OBLIGATIONS, INCLUDING RELATED PARTY OBLIGATIONS AND COMMITMENTS
 
  Long-term obligations, including capitalized lease obligations, consist of
the following:
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       ------------------------
                                                          1996         1997
                                                       -----------  -----------
   <S>                                                 <C>          <C>
   Notes payable to a bank under line of credit and
    term debt facility...............................  $   916,667  $   783,333
   Note payable to bank, variable interest at the
    financial institution's prime rate plus 1.5% (10%
    at December 31, 1996)............................       64,643          --
   Notes payable to stockholders.....................    5,120,423    5,092,859
   Senior subordinated promissory notes payable to
    stockholders.....................................    6,841,635    6,792,885
   Capital lease obligations.........................    5,153,059    3,795,572
                                                       -----------  -----------
     Total...........................................   18,096,427   16,464,649
   Less current portion..............................   (2,794,359)  (3,177,637)
                                                       -----------  -----------
   Long-term portion.................................  $15,302,068  $13,287,012
                                                       ===========  ===========
</TABLE>
 
 Line of Credit and Notes Payable to Bank
 
  Under a borrowing arrangement with a bank, the Company has a revolving line
of credit with $10,000,000 of maximum available credit at December 31, 1997
(limited to 80% of the balance of certain qualifying assets) which bears
interest at prime plus .75%, (9.25% at December 31, 1997) unless the Company
has been profitable for two quarters, at which time the interest rate will be
prime plus .25%. The arrangement is collateralized by substantially all assets
of the Company. Borrowings outstanding under the line of credit at December
31, 1996 and 1997 were $0 and $200,000, respectively. Letters of credit under
the agreement totaling $746,323 and $664,216 were outstanding at December 31,
1996 and 1997, respectively.
 
  The Company also has a term debt facility under the borrowing arrangement.
Under the term debt facility, which expires September 16, 1998, the Company
can draw up to a maximum of $1,500,000, subject to certain terms and
conditions. Each borrowing under the term debt facility is repayable in 36
monthly installments. The term debt facility bears interest at a rate equal to
prime plus 1.25%, (9.75% at December 31, 1997) unless the Company has been
profitable for two quarters, at which time the interest rate will be prime
plus .75%. The term debt facility is collateralized by accounts receivable and
property and equipment.
 
  Under the borrowing arrangement, the Company is limited in its ability to
pay dividends, make investments, incur other indebtedness, or enter into a
business merger. Additionally, the Company must maintain certain financial
covenants, in addition to other restrictive covenants, with which it is in
compliance as of December 31, 1997.
 
 Notes Payable to Stockholders
 
  On January 2, 1996, the Company distributed substantially all previously
undistributed earnings on which stockholders had been taxed in the form of
stockholder notes payable (the Notes), aggregating $6,683,625. These Notes are
unsecured and are due January 2, 2006, with interest payable annually on
December 31 at 7.25% per annum, and contain prepayment penalties. The payment
of principal under the Notes is subordinated to all financial institution debt
arising from
 
                                     F-12
<PAGE>
 
                            EVOLVING SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
agreements currently in existence, as amended, and all other indebtedness of
the Company to third party commercial lenders and banks. Interest payable as
of September 30, 1996, in the amount of $326,587, was forgiven by the Note
holders and has been accounted for as a capital contribution.
 
 Senior Subordinated Promissory Notes Payable to Stockholders
 
  In May 1996, the Company issued Senior Subordinated Promissory Notes to
certain stockholders (the Promissory Notes) for a total of $6,500,000. The
Promissory Notes are unsecured, and the principal is due in four equal annual
payments beginning on June 1, 2000. Interest is payable semiannually on
December 1 and June 1 at 9% per annum. The payment of principal under the
Promissory Notes is subordinated to all financial institution debt arising
from agreements currently in existence, as amended, and all other indebtedness
of the Company to third party commercial lenders and banks, except the Notes
Payable to Stockholders. The Promissory Notes limit the Company's ability to
incur other indebtedness, pay dividends, make investments or sell its assets.
In connection with the issuance of the Promissory Notes, warrants to purchase
727,998 of the Company's Non-Voting Common stock at $.80 per share were issued
to the Promissory Note holders. The warrants expire May 31, 2003.
 
  In September 1996, the Company and the Promissory Note holders entered into
an agreement to defer all interest incurred to date and to be incurred through
November 30, 1996, aggregating $341,635, by adding such amount to the
principal of the Promissory Notes. The deferred interest is payable on or
before December 1, 1998 and accrues interest at 12% per annum. In connection
with the deferral of interest, the Company issued to the Promissory Note
holders additional warrants to purchase 182,635 shares of the Company's Non-
Voting Common stock at $.80 per share which expire May 31, 2003.
 
  Costs associated with the origination of the Promissory Note aggregating
$337,690 ($261,308 remaining at December 31, 1997), included within other
assets, are being amortized over the life of the Promissory Notes.
 
  Scheduled maturities of debt obligations for the periods ending December 31
are as follows:
 
<TABLE>
<CAPTION>
                               NOTES    SHAREHOLDER NOTES CAPITAL LEASE
                              PAYABLE        PAYABLE       OBLIGATIONS     TOTAL
                             ---------  ----------------- ------------- -----------
   <S>                       <C>        <C>               <C>           <C>
   1998....................    533,333         292,885       2,415,717    3,241,935
   1999....................    250,000             --        1,076,724    1,326,724
   2000....................        --        3,250,000         692,805    3,942,805
   2001....................        --        3,250,000         142,180    3,392,180
   2002....................        --              --              --           --
   Thereafter..............        --        5,092,859             --     5,092,859
                             ---------     -----------     -----------  -----------
                               783,333      11,885,744       4,327,426   16,996,503
   Less amounts
    representing interest..        --              --         (531,854)    (531,854)
                             ---------     -----------     -----------  -----------
                               783,333      11,885,744       3,795,572   16,464,649
   Less current maturities.   (533,333)       (292,885)     (2,351,419)  (3,177,637)
                             ---------     -----------     -----------  -----------
                             $ 250,000     $11,592,859     $ 1,444,153  $13,287,012
                             =========     ===========     ===========  ===========
</TABLE>
 
                                     F-13
<PAGE>
 
                            EVOLVING SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Operating Lease Commitments
 
  The Company leases its office and operating facilities and various equipment
under non-cancelable operating leases. Rent expense was $2,789,032,
$4,156,863, and $3,746,954 for the years ended December 31, 1995, 1996, and
1997, respectively. Rent expense for the year ended December 31, 1996 and 1997
is net of $341,862 and $1,276,419, respectively in sublease rental income. As
of December 31, 1996 and 1997 certificates of deposit totalling $155,181 and
$130,987, respectively, are pledged as collateral on an office space lease.
 
  During 1996, the Company entered into a lease obligation on a new corporate
campus of approximately 120,281 square feet located in Englewood, Colorado.
The Company has subleased a portion of this campus. In connection with its
obligations under certain of its office facility leases, the Company has
letters of credit totaling $746,323 and $664,216 outstanding at December 31,
1996 and 1997, respectively.
 
  Future minimum non-cancelable commitments under these leases as of December
31, 1997, are as follows:
 
<TABLE>
   <S>                                                               <C>
   1998............................................................. $ 3,652,070
   1999.............................................................   2,838,548
   2000.............................................................   2,560,407
   2001.............................................................   1,446,420
   2002.............................................................   1,420,506
   Thereafter.......................................................  11,510,846
                                                                     -----------
                                                                      23,428,797
   Less: sublease income............................................     167,630
                                                                     -----------
                                                                     $23,261,167
                                                                     ===========
</TABLE>
 
4. RECAPITALIZATION, CAPITAL STOCK AND STOCK OPTIONS
 
 Recapitalization
 
  Effective January 1996, Evolving Systems, Inc. ("Old ESI") merged into ESI
Merger Corporation (the "Merger"), a Delaware corporation, which previously
had no operations. Simultaneously, ESI Merger Corporation changed its name to
Evolving Systems, Inc. Pursuant to the Merger agreement, each share of the Old
ESI common stock outstanding as of January 10, 1996 was converted into .8
shares of the Company's Series A Preferred Stock and 100 shares of the
Company's non-voting common stock. As part of the recapitalization, the
Company became a taxable entity and as of that date had $670,862 of earnings
which had not been distributed to its shareholders. Consequently, for
financial statement purposes, these undistributed earnings have been
reclassified to additional paid-in capital under the assumption of a
constructive dividend to the shareholders followed by a contribution to the
Company's capital (see Note 5).
 
 Series A Preferred Stock
 
  Each share of Series A Preferred Stock is convertible at the option of the
holder into 750 shares of non-voting common stock, subject to antidilution
provisions, has voting rights on an as-converted to voting common stock basis
and has preference in liquidation equal to $6,250 (aggregate liquidation
preference as of December 31, 1997 is equal to $51 million). If the Company
enters into a transaction whereby it sells substantially all of its assets or
agrees to merge into or with another entity, a liquidation
 
                                     F-14
<PAGE>
 
                            EVOLVING SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
is considered to have occurred. Additionally, if the Company completes an
Initial Public Offering (IPO) of its common stock in which the price is at
least $5 per share and gross proceeds exceed $10,000,000, the Series A
preferred shares shall automatically convert into shares of common stock.
 
 Common Stock
 
  Each share of non-voting common stock outstanding shall automatically
convert into one share of voting common stock immediately prior to the closing
of an IPO.
 
 Stock Options
 
  On January 19, 1996, the Company's board of directors approved a stock
option plan. Under the stock option plan, 3,150,000 shares of the Company's
non-voting common stock are reserved for issuance, of which 1,175,610 shares
are available for grant as of December 31, 1997. The Company has also reserved
910,633 shares of non-voting 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 will
automatically vest upon the effectiveness of the IPO. On December 30, 1997 the
Board of Directors approved the repricing of all options granted from
September 1, 1997 through December 30, 1997 to a new exercise price of $9.50.
No compensation expense was recorded as the options were repriced to an
exercise price equal to fair market value.
 
  Generally, stock options are granted with an exercise price not less than
the fair value of non-voting common stock as determined by the Board of
Directors at the date of grant, and accordingly no compensation cost was
recognized during 1995 and 1996. 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,
$355,346 was recognized as expense during the year ended December 31, 1997.
 
  Based on calculations using the minimum value option-pricing model, the
weighted average grant date fair value of options and warrants was $0 and
$1.29 in 1996 and 1997, respectively. The fair value has been estimated using
the minimum value option-pricing model with the following assumptions used for
grants in 1996 and 1997, respectively: no dividend yield for both periods; an
expected life of 3 years for both periods; no volatility; and weighted average
risk free interest rates of 6.5% and 6.3% for 1996 and 1997, respectively.
 
  The pro forma impact on the Company's net income and net income per share
had compensation cost been recorded at the date of grant based on the minimum
value method prescribed by SFAS No. 123 is shown below:
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED
                                                               DECEMBER 31, 1997
                                                               -----------------
   <S>                                                         <C>
   Net income:
     As reported..............................................     $278,499
     SFAS No. 123 Pro forma...................................     $ 89,891
   Net income per common share:
     As reported..............................................     $    .18
     SFAS No. 123 Pro forma...................................     $    .06
   Diluted net income per common share:
     As reported..............................................     $    .03
     SFAS No. 123 Pro forma...................................     $    .01
</TABLE>
 
 
                                     F-15
<PAGE>
 
                            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, 1997 follows:
 
<TABLE>
<CAPTION>
                                                                                         STOCK OPTIONS AND
                                     STOCK OPTIONS AND WARRANTS OUTSTANDING             WARRANTS EXERCISABLE
                            --------------------------------------------------------- ------------------------
                                                      WEIGHTED AVERAGE
                                                         REMAINING        WEIGHTED                 WEIGHTED
                               RANGE OF      NUMBER     CONTRACTUAL       AVERAGE      NUMBER      AVERAGE
                            EXERCISE PRICES OF SHARES   LIFE (YEARS)   EXERCISE PRICE OF SHARES EXERCISE PRICE
                            --------------- --------- ---------------- -------------- --------- --------------
   <S>                      <C>             <C>       <C>              <C>            <C>       <C>
   Options.................      $0.80        993,647       8.92           $0.80       339,261      $0.80
                                 $9.50        893,754       9.76           $9.50           --       $9.50
                                            ---------       ----           -----       -------      -----
                                            1,887,401       9.32           $4.92       339,261      $0.80
                                            =========       ====           =====       =======      =====
   Warrants................      $0.80        910,633       5.40           $0.80       910,633      $0.80
                                            =========       ====           =====       =======      =====
</TABLE>
 
  The following is a summary of stock option activity:
 
<TABLE>
<CAPTION>
                                                   WEIGHTED             WEIGHTED
                                NUMBER OF SHARES   AVERAGE  OPTIONS AND AVERAGE
                               ------------------- EXERCISE  WARRANTS   EXERCISE
                                OPTIONS   WARRANTS  PRICE   EXERCISABLE  PRICE
                               ---------  -------- -------- ----------- --------
   <S>                         <C>        <C>      <C>      <C>         <C>
   Options and warrants
    outstanding, January 1,
    1996.....................        --        --   $ --           --    $
     Options and warrants
      granted................    897,226   910,633   0.80
     Less options forfeited..    (70,279)      --    0.80
     Less options exercised..     (2,015)      --    0.80
                               ---------  --------
   Options and warrants
    outstanding, December 31,
    1996.....................    824,932   910,633   0.80    1,016,482    0.80
     Options granted.........  1,449,439       --    6.19
     Less options forfeited..   (301,996)      --    0.93
     Less options exercised..    (84,974)      --    0.80
                               ---------  --------
   Options and warrants
    outstanding, December 31,
    1997.....................  1,887,401   910,633   3.58    1,249,894    0.80
                               =========  ========
</TABLE>
 
  Included in total options and warrants exercisable at December 31, 1996 and
December 31, 1997 are 910,633 warrants issued in connection with debt
financings (see Note 3). Subsequent to December 31, 1997, the Company granted
options to purchase 19,073 shares of common stock at an exercise price of
$10.00 per share. No compensation was recorded as the options were granted
with an exercise price equal to fair market value.
 
5. INCOME TAXES
 
  Prior to January 6, 1996, the Company elected to be taxed under Subchapter S
of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly,
the shareholders were responsible for payment of taxes on income earned by the
Company and the Company distributed to shareholders annually an amount equal
to the estimated tax liability arising from operations. On January 6, 1996,
the Company revoked its election to be taxed under Subchapter S of the Code
and elected to be taxed under Subchapter C of the Code. In connection with the
change in status, the Company recorded a deferred tax liability and tax
expense of $379,235. For comparative purposes, a pro forma tax provision
(benefit) has been calculated and presented in the statements of operations as
if the Company had been a taxable entity since its inception.
 
                                     F-16
<PAGE>
 
                             EVOLVING SYSTEMS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The provision for (benefit from) income taxes consists of the following:
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                       ------------------------
                                                          1996         1997
                                                       ----------- ------------
   <S>                                                 <C>         <C>
   Current:
     Federal.......................................... $       --  $    165,758
     State............................................         --          (270)
   Deferred:
     Federal..........................................      74,152     (953,612)
     State............................................       7,197       (3,526)
                                                       ----------- ------------
       Total.......................................... $    81,349 $   (791,650)
                                                       =========== ============
</TABLE>
 
  Components of the Company's deferred tax assets and liabilities are as
follows as of December 31:
 
<TABLE>
<CAPTION>
                                                             1996       1997
                                                           ---------  ---------
   <S>                                                     <C>        <C>
   Deferred tax assets:
     Deferred revenue..................................... $     --   $ 164,995
     Research and development credit carryforwards........       --     750,000
     Minimum tax credit carryforwards.....................       --     167,279
     Allowance for doubtful accounts......................       --     194,008
     Net operating loss carryforwards.....................   328,028        --
     Reserves against contract receivables................   111,324        --
     Other................................................    15,698     59,680
                                                           ---------  ---------
       Total deferred tax assets..........................   455,050  1,335,962
                                                           ---------  ---------
   Deferred tax liabilities:
     Accumulated depreciation.............................  (532,810)  (460,173)
     Miscellaneous accruals and reserves..................    (3,589)       --
                                                           ---------  ---------
   Total deferred tax liabilities.........................  (536,399)  (460,173)
                                                           ---------  ---------
   Net deferred tax asset (liability)..................... $ (81,349) $ 875,789
                                                           =========  =========
</TABLE>
 
  The provision for (benefit from) income taxes are different from the amounts
computed by applying the federal statutory rate to income before income taxes.
The amounts are reconciled as follows for the years ended December 31:
 
<TABLE>
<CAPTION>
                                                            1996       1997
                                                          ---------  ---------
   <S>                                                    <C>        <C>
   Federal income taxes (benefit) at statutory rate...... $(395,458) $(174,471)
   State income tax, net of federal benefit..............   (26,036)    (3,704)
   Effect of conversion to C Corporation.................   379,235        --
   Cancellation of indebtedness..........................   109,914        --
   Research and development tax credits..................       --    (750,000)
   Amortization of deferred compensation.................              120,818
   Other.................................................    13,694     15,707
                                                          ---------  ---------
   Provision for (benefit from) income taxes............. $  81,349  $(791,650)
                                                          =========  =========
</TABLE>
 
  As of December 31, 1997 the Company has research and development tax credit
carryforwards for federal income tax purposes of $750,000, which will begin to
expire in 2011.
 
                                      F-17
<PAGE>
 
                            EVOLVING SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
6. BENEFIT PLANS
 
  The Company has established a 401(k) Plan which is available to all
employees 21 years of age or older with one year of service to the Company.
Employees may contribute up to 15% of gross compensation not to exceed the
maximum statutory contribution amount. The Company may make discretionary
matching contributions. All employee contributions are fully vested
immediately and employer contributions vest 100% after completion of three
years of service. During 1995, 1996, and 1997, the Company contributed
$586,257, $0 and $1,017,896, respectively, under the 401(k) Plan.
 
  The Company also had a defined contribution retirement plan, which was
available to all employees 21 years of age or older with one year of service
to the Company. Company contributions to the defined contribution retirement
plan were made annually at 7.4% of the eligible employees' salary and vest
after completion of three years of service. During 1995 and 1996, the Company
contributed $703,983, and $965,198, respectively, under the defined
contribution retirement plan. Effective December 31, 1996 the accrual of
benefits under the retirement plan ceased and the retirement plan was merged
into the 401(k) Plan.
 
7. SUBSEQUENT EVENTS
 
  In connection with its proposed initial public offering, a one-for-two
reverse stock split of the Company's stock was effected on February 10, 1998.
All common stock share and per share information and all preferred stock
conversion rates presented in these financial statements have been restated
for all periods presented to reflect the reverse stock split.
 
  Effective upon completion of this offering, the Company's authorized capital
stock shall consist of 25,000,000 shares of Common Stock, $.001 par value per
share, and 2,000,000 shares of Preferred Stock, $.001 par value per share.
 
                                     F-18
<PAGE>
 
                               GLOSSARY OF TERMS
 
  "API"--Application Programming Interface. Application programs invoke APIs
to request lower-level services that are performed by the platform software,
computer, or operating system. An API incorporates a set of standard software
interrupts, calls and data formats that application programs use to initiate
contact with network services, communications programs, or other systems.
 
  "cellular"--Term used for Cellular Mobile Telephone System (or CMTS). A
wireless telephone system based on a grid of cell sites. Each cell site serves
a limited geographic area and contains transmitters, receivers and antennae.
Each cell site is connected to centrally-located switching gear and control
equipment. Each cellular telephone has a unique identification number which
allows the central switch to track and coordinate all mobile phones in the
service area, including the hand-offs from one cell site to another.
 
  "CDPD"--Cellular Digital Packet Data. A method of sending and receiving data
over the existing analog cellular network. The data are structured in
"packets" which are transmitted over cellular frequencies that are not being
used in phone conversations, thereby avoiding the need to develop an overlay
cellular network exclusively for data communications. Targeted at telemetry
applications and highly mobile users, packets are sent and received via CDPD
modems, which can be connected to cellular telephones, personal computers or
specialized devices.
   
  "CLEC"--Competitive Local Exchange Carriers. CLECs are service providers who
have been granted licenses to offer services in local markets which are
competitive to the ILEC's offerings.     
 
  "client"--Clients are devices and software which request information from
other sources and provide the end user interface. Typically, the client is a
PC or workstation attached to a local area network.
 
  "client/server"--A computer system architecture in which the "client" is a
desktop computing device which is "served" by another networked computer.
Computers are integrated over the network by an application, which provides a
single system image. The server may be a mainframe, minicomputer, or
workstation with attached storage devices.
 
  "database"--A collection of information organized in such a way that a
computer program can quickly insert, retrieve and update application data.
 
  "digital"--A method of storing, processing and transmitting information by
representing information with combinations of the binary digits 0 and 1.
 
  "HP/UX"--Brand name of Hewlett Packard's Unix operating system product line.
 
  "ILECs"--Incumbent Local Exchange Carriers. ILECs are local exchange
carriers who were formerly part of the Bell System. Through divestiture and
recent consolidation, these companies now include Ameritech, Bell Atlantic,
BellSouth, GTE, Southwestern Bell and U.S. West.
 
  "Java"--A high-level object-oriented programming language developed by Sun
Microsystems, Inc. which facilitates the creation of platform-independent
applications and software components. It was designed primarily for writing
software for World Wide Web sites, although the use of Java is expanding for
other commercial purposes.
 
  "LNP"--Local Number Portability. LNP, which enables customers to retain
their local phone number when changing service providers, was mandated by the
Telecommunications Act of 1996 and regulations promulgated thereunder in order
to facilitate a level playing field for local telephone service competition.
The implementation of LNP utilizes a new ten-digit telephone number, known as
the Location Routing Number, or LRN. The LRN is used by the originating
carrier to determine the identity and location of the terminating carrier's
switch.
 
                                      G-1
<PAGE>
 
  "LSR"--Local Service Request. LSRs are 22-page forms which are used by
competing carriers to place wholesale orders with ILECs. The competing
carriers utilize the LSRs to place orders for unbundled facilities and
services provided by ILECs, and support retail orders associated with new
customers captured by the competing carriers. LSRs today are primarily
processed in a costly manual fashion due to the relative lack of inter-carrier
transactions. However, with the introduction of LNP, the volume of LSRs is
expected to increase dramatically, creating the need to exchange LSRs by
facsimile, e-mail, the Internet and through electronic document interchange
(EDI) interfaces.
 
  "NPACs"--Number Portability Administration Centers. These are the regional
third-party clearinghouses established by state and federal regulators in
order to oversee, mediate, track and resolve all customer LNP-related issues
among U.S. carriers. In the U.S., there are seven NPACs, which are
administered by Lockheed Martin IMS and Perot Systems.
 
  "OSS"--Operational Support Systems. OSS are the systems and procedures which
directly support the daily operation of the telecommunications infrastructure.
The average local exchange carrier has hundreds of OSS, which are typically
categorized into ordering, provisioning, service assurance and billing.
 
  "PCS"--Personal Communication Services. PCS is a new, lower-powered, higher
frequency technology that is competitive to cellular. Operating at frequencies
between 1800 MHz and 2000 MHz, PCS provides certain cost advantages over
cellular, offers digital communications and improved security.
 
  "RBOCs"--Regional Bell Operating Companies. The local exchange carriers
formerly part of the Bell System. See ILECs.
 
  "server"--The server component of a client/server system. The server
operates on the local area network and may be a mainframe, minicomputer, or
workstation with attached storage devices.
 
  "switch"--A central facility capable of establishing, routing and releasing
connections on a per call basis between two or more circuits, services or
systems. Switches are used for both wireline and wireless communications
networks.
 
  "Unix"--A powerful multi-user, multi-tasking computer operating system
widely adopted in the telecommunications industry. Unix is available on a wide
range of computers, from personal computers to minicomputers to mainframes.
 
                                      G-2
<PAGE>
 
                                 UNDERWRITING
 
  Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman,
Sachs & Co., Hambrecht & Quist LLC and UBS Securities LLC are acting as
representatives, has severally agreed to purchase from the Company and the
Selling Stockholders, the following respective numbers of shares of Common
Stock set forth opposite its name below:
 
<TABLE>   
<CAPTION>
                                                                       NUMBER OF
                                                                       SHARES OF
                                                                        COMMON
                               UNDERWRITER                               STOCK
                               -----------                             ---------
   <S>                                                                 <C>
   Goldman, Sachs & Co................................................
   BancAmerica Robertson Stephens.....................................
   Hambrecht & Quist LLC..............................................
   UBS Securities LLC.................................................
                                                                       ---------
     Total............................................................ 4,000,000
                                                                       =========
</TABLE>    
 
  Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
 
  The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $   per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $   per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, this offering price and other selling terms may from time
to time be varied by the representatives.
   
  The Company and certain Selling Stockholders have granted the Underwriters
an option exercisable for 30 days after the date of this Prospectus to
purchase up to an aggregate of 600,000 additional shares of Common Stock to
cover over-allotments, if any. If the Underwriters exercise their over-
allotment option, the Underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof that the
number of shares to be purchased by each of them, as shown in the foregoing
table, bears to the 4,000,000 shares of Common Stock offered.     
 
  The Company and its officers, directors and certain stockholders have agreed
that, during the period beginning from the date of this Prospectus and
continuing to and including the date 180 days after the date of the
Prospectus, they will not, subject to certain exceptions, offer, sell,
contract to sell, grant an option to sell, transfer or otherwise dispose of
any securities of the Company without the prior written consent of the
representatives of the Underwriters.
 
  The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Common Stock offered by them.
 
  Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated between the
Company and the representatives of the Underwriters. Among the factors to be
considered in determining the initial public offering price of the Common
Stock, in addition to prevailing market conditions, will be the Company's
historical performance,
 
                                      U-1
<PAGE>
 
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuations of companies in related businesses.
 
  The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the symbol "EVOL". The Company and the Selling
Stockholders have agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
 
  In connection with this offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created by the Underwriters in connection with this offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Common Stock; and
syndicate short positions created by the Underwriters involve the sale by the
Underwriters of a greater number of shares of Common Stock than they are
required to purchase from the Company in this offering. The Underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the shares of Common Stock sold
in this offering for their account may be reclaimed by the syndicate if such
shares are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock, which may be higher than the price that
might otherwise prevail in the open market; and these activities, if
commenced, may be discontinued at any time. These transactions may be effected
on the Nasdaq National Market, in the over-the-counter market or otherwise.
   
  An aggregate of 350,000 shares of the Common Stock offered hereby have been
reserved for purchase from the Underwriters through a directed share program
by the Morgan Stanley Funds, the Information Associates Funds and other
persons having relationships with the Company. Such sales will be at the
initial public offering price. The number of shares of Common Stock available
for sale to the general public in the offering will be reduced to the extent
such persons purchase the reserved shares. Any reserved shares not so
purchased will be offered by the Underwriters to the general public on the
same terms as the other shares offered hereby.     
 
                                      U-2
<PAGE>
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
  NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
 
                               ----------------
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Prospectus Summary........................................................    3
Risk Factors..............................................................    7
Use of Proceeds...........................................................   19
Dividend Policy and S Corporation Status..................................   19
Dilution..................................................................   20
Capitalization............................................................   21
Selected Financial Data...................................................   22
Management's Discussion and Analysis of Financial Condition and Results of
 Operations...............................................................   23
Business..................................................................   33
Management................................................................   47
Certain Transactions......................................................   55
Principal and Selling Stockholders........................................   57
Description of Capital Stock..............................................   59
Shares Eligible for Future Sale...........................................   61
Legal Matters.............................................................   62
Experts...................................................................   62
Change in Accountants.....................................................   63
Additional Information....................................................   63
Index to Consolidated Financial Statements................................  F-1
Underwriting..............................................................  U-1
Glossary of Terms.........................................................  G-1
</TABLE>
 
                               ----------------
 
  THROUGH AND INCLUDING    , 1998 (THE 25TH DAY AFTER THE DATE OF THIS PRO-
SPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPEC-
TUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
                               4,000,000 SHARES
 
                            EVOLVING SYSTEMS, INC.
 
                                 COMMON STOCK
                          (PAR VALUE $.001 PER SHARE)
 
                               ----------------
 
                       [LOGO OF EVOLVING SYSTEMS, INC.]
 
                               ----------------
 
                             GOLDMAN, SACHS & CO.
 
                        BANCAMERICA ROBERTSON STEPHENS
 
                               HAMBRECHT & QUIST
 
                                UBS SECURITIES
 
                      REPRESENTATIVES OF THE UNDERWRITERS
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
 
                                    PART II
 
                    INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
  The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Common Stock being registered. All the amounts
shown are estimates except for the SEC registration fee and the NASD filing
fee.
 
<TABLE>
      <S>                                                              <C>
      Registration fee................................................ $ 16,284
      NASD filing fee.................................................    6,020
      Nasdaq Stock Market Listing Application fee.....................   44,578
      Blue sky qualification fees and expenses........................    7,500
      Printing and engraving expenses.................................  150,000
      Legal fees and expenses.........................................  250,000
      Accounting fees and expenses....................................  270,000
      Transfer agent and registrar fees...............................    7,500
      Custodian fees..................................................    2,500
      Miscellaneous...................................................  120,618
                                                                       --------
          Total....................................................... $875,000
                                                                       ========
</TABLE>
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
 
  Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").
 
  The Registrant's Restated Certificate of Incorporation and Amended and
Restated By-laws include provisions to (i) eliminate the personal liability of
its directors for monetary damages resulting from breaches of their fiduciary
duty to the extent permitted by the General Corporation Law of Delaware and
(ii) require the Registrant to indemnify its directors and executive officers
to the fullest extent permitted by Section 145 of the Delaware Law, including
circumstances in which indemnification is otherwise discretionary. Pursuant to
Section 145 of the Delaware Law, a corporation generally has the power to
indemnify its present and former directors, officers, employees and agents
against expenses incurred by them in connection with any suit to which they
are or are threatened to be made, a party by reason of their serving in such
positions so long as they acted in good faith and in a manner they reasonably
believed to be in or not opposed to, the best interests of the corporation and
with respect to any criminal action, they had no reasonable cause to believe
their conduct was unlawful. The Registrant believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
These provisions do not eliminate the directors' duty of care, and, in
appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for acts or omissions that the director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from
which the director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the director's duty to the Registrant or
its stockholders when the director was aware or should have been aware of a
risk of serious injury to the Registrant or its stockholders, for acts or
omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's duty to the Registrant or its stockholders,
for improper transactions between the director and the Registrant and for
improper distributions to stockholders and loans to directors and officers.
The provision also does not affect a director's responsibilities under any
other law, such as the federal securities law or state or federal
environmental laws. See "Management--Limitation of Liability and
Indemnification of Officers and Directors" and "Certain Transactions".
 
                                     II-1
<PAGE>
 
  The Registrant has entered into indemnification agreements with each of its
directors and executive officers requiring the Registrant to indemnify such
persons against expenses, judgments, fines, settlements and other amounts
incurred (including expenses of a derivative action) in connection with any
proceeding, whether actual or threatened, to which any such person may be made
a party by reason of the fact that such person is or was a director or an
executive officer of the Registrant or any of its affiliated enterprises,
provided that such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful. The indemnification agreements also
set forth certain procedures that will apply in the event of a claim for
indemnification thereunder. See "Certain Transactions".
 
  The Underwriting Agreement, filed as Exhibit 1.1 to this Registration
Statement, provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act or otherwise.
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
 
  Since January 1, 1995, the Registrant has issued and/or sold the following
unregistered securities:
 
  (1) On January 2, 1996, the Registrant issued an aggregate principal amount
      of $5,092,859 of promissory notes to its stockholders in connection
      with the stockholders' deferred receipt of their 1995 S Corporation
      distributions.
 
  (2) On January 10, 1996, in connection with the Registrant's
      reincorporation from Colorado to Delaware, the Registrant issued an
      aggregate of 510,000 shares of its Non-voting Common Stock and an
      aggregate of 8,160 shares of its Series A Preferred Stock in exchange
      for cancellation of the issued and outstanding shares of capital stock
      of its Colorado predecessor.
 
  (3) From January 19, 1996 to January 2, 1998, options granted to employees,
      directors and consultants of the Registrant to purchase an aggregate of
      85,051 shares of the Registrant's Non-voting Common Stock under its
      Stock Option Plan at a weighted average exercise price of $.80 per
      share have been exercised.
 
  (4) On June 7, 1996, Thomas Konchan, a former employee of the Registrant,
      exercised a nonstatutory stock option to purchase 3,825 shares of the
      Registrant's Non-voting Common Stock at an exercise price of $.80 per
      share.
 
  (5) On May 31, 1996, the Registrant issued and sold an aggregate principal
      amount of $6,500,000 of its Senior Subordinated Promissory Notes, along
      with warrants to purchase an aggregate of 727,998 shares of its Non-
      voting Common Stock at an exercise price of $.80 per share, to five
      accredited investors. The aggregate purchase price of the warrants was
      $4,853.33. On September 30, 1996, in connection with amendment of the
      terms of the Senior Subordinated Promissory Notes, the Registrant
      issued and sold additional warrants to purchase an aggregate of 182,635
      shares of its Non-voting Common Stock at an exercise price of $.80 per
      share to such investors at an aggregate purchase price of $1,217.58.
 
  The issuance of the promissory notes described in paragraph (1) above did
not involve any public offering and therefore was exempt from registration
under the Securities Act by virtue of Section 4(2) thereof.
 
  The issuance of the securities described in paragraph (2) above was exempt
from registration under the Securities Act by virtue of Section 3(a)(9)
thereof in that the securities were issued in an exchange transaction with the
Registrant's existing stockholders solely for the purpose of changing the
Registrant's domicile within the United States.
 
  The stock option exercises described in paragraphs (3) and (4) above were
exempt from registration under the Securities Act by virtue of Rule 701
promulgated thereunder in that they were
 
                                     II-2
<PAGE>
 
issued and sold either pursuant to a written compensatory benefit plan or
pursuant to a written contract relating to compensation.
 
  The issuance and sale of the securities described in paragraph (5) above
were exempt from registration under the Securities Act by virtue of Section
4(2) thereof. The purchasers of the securities were either accredited
investors, as defined in Section 2(15)(ii) of the Securities Act, or
experienced venture capital investors. Each purchaser represented to the
Registrant its intention to acquire the securities for investment and not for
distribution, and appropriate restrictive legends are affixed to the
certificates representing the securities. In addition, each purchaser received
adequate information about the Registrant in connection with making its
investment decision.
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
 
<TABLE>   
<CAPTION>
    EXHIBIT
    NUMBER   DESCRIPTION OF DOCUMENT
    -------  -----------------------
   <C>       <S>
    1.1*     Form of Underwriting Agreement.
    3(i).1*  Amended and Restated Certificate of Incorporation, as amended.
    3(i).2*  Certificate of Amendment to the Amended and Restated Certificate
             of Incorporation, as amended.
    3(i).3*  Form of Restated Certificate of Incorporation to be effective upon
             the closing of the offering to which this Registration Statement
             relates.
    3(ii).1* Amended and Restated By-laws of the Registrant.
    3(ii).2* Form of Amended and Restated By-laws to be effective upon the
             closing of the offering to which this Registration Statement
             relates.
    4.1*     Reference is made to Exhibits 3(i).1 through 3(ii).2.
    4.2*     Specimen stock certificate representing shares of Common Stock.
    5.1*     Opinion of Cooley Godward LLP.
   10.1*     Indemnification Agreement, entered into by the Registrant and each
             of its directors and executive officers, dated as of January 1,
             1998.
   10.2      Amended and Restated Stock Option Plan.
   10.3*     Employee Stock Purchase Plan to be effective upon the closing of
             this offering.
   10.4*     Note and Warrant Purchase Agreement, between the Registrant and
             the parties named therein, dated as of May 31, 1996.
   10.5*     Form of Senior Subordinated Promissory Note, as amended.
   10.6*     Form of Warrant to Purchase Shares of Common Stock.
   10.7*     Registration Rights Agreement, dated as of May 31, 1996.
   10.8*     Loan and Security Agreement, by and between the Registrant and
             Silicon Valley Bank, dated as of September 18, 1996, as amended.
   10.9*     Collateral Assignment, Patent Mortgage and Security Agreement, by
             and between the Registrant and Silicon Valley Bank, dated as of
             September 18, 1996, as amended.
   10.10     Software Development Agreement, by and between the Registrant and
             American Telephone & Telegraph Company, dated as of May 1, 1993.
             (The division of American Telephone & Telegraph Company
             responsible for this Agreement has split off from AT&T and is now
             known as Lucent Technologies, Inc.)
   11.1*     Statement regarding computation of earnings per share.
   16.1*     Letter regarding change in certifying accountant.
   23.1      Consent of Price Waterhouse LLP, Independent Accountants.
   23.2      Consent of Deloitte & Touche LLP, Independent Auditors, and Report
             on Schedule.
   23.3      Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
   24.1*     Power of Attorney. Reference is made to page II-5.
   27*       Financial Data Schedule.
</TABLE>    
- --------
  * Previously filed.
 
 
                                     II-3
<PAGE>
 
(B) FINANCIAL STATEMENT SCHEDULES.
 
  Schedule II--Valuation and Qualifying Accounts and Reserves
 
  All other schedules are omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements or notes thereto.
 
ITEM 17. UNDERTAKINGS.
 
  Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions described in Item 15 or otherwise, the
Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel, the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
 
  The undersigned Registrant hereby undertakes:
 
    (1) That, for purposes of determining any liability under the Securities
  Act, each filing of the Registrant's annual report pursuant to Section
  13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act")
  (and, where applicable, each filing of an employee benefit plan's annual
  report pursuant to Section 15(d) of the Exchange Act) that is incorporated
  by reference in the registration statement shall be deemed to be a new
  registration statement relating to the securities offered therein and the
  offering of such securities at that time shall be deemed to be the initial
  bona fide offering thereof.
 
    (2) That, for purposes of determining any liability under the Securities
  Act, the information omitted from the form of prospectus filed as part of
  this Registration Statement in reliance upon Rule 430A and contained in a
  form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
  (4) or 497(h) under the Act shall be deemed to be part of this Registration
  Statement as of the time it was declared effective.
 
    (3) For the purpose of determining any liability under the Securities
  Act, each post-effective amendment that contains a form of prospectus shall
  be deemed to be a new registration statement relating to the securities
  offered therein, and the offering of such securities at that time shall be
  deemed to be the initial bona fide offering thereof.
 
    (4) To provide to the Underwriters at the closing specified in the
  Underwriting Agreement, certificates in such denomination and registered in
  such names as required by the Underwriters to permit prompt delivery to
  each purchaser.
 
                                     II-4
<PAGE>
 
                                  SIGNATURES
   
  Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Englewood, State of Colorado on the 17 day of April, 1998.     
 
                                 EVOLVING SYSTEMS, INC.
 
                                     /s/ J. RICHARD ABRAMSON
                                 By: __________________________________________
                                      J. Richard Abramson
                                      President, Chief Executive Officer and
                                      Director
   
  Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.     
 
<TABLE>   
<CAPTION>
 SIGNATURE                     TITLE                                 DATE
 ---------                     -----                                 ----
 <C>                           <S>                                   <C>
 /s/ GEORGE A. HALLENBEC____*K Chairman of the Board of Directors    April 17, 1998
 George A. Hallenbeck
 /s/ J. RICHARD ABRAMSON_____  President, Chief Executive Officer    April 17, 1998
 J. Richard Abramson           and Director
                               (Principal Executive Officer)
 /s/ ROGER A. BARNES*________  Senior Vice President of Finance,     April 17, 1998
 Roger A. Barnes               Chief Financial Officer, Treasurer
                               and Assistant Secretary
                               (Principal Financial and Accounting
                               Officer)
 /s/ DAVID J. MOLNY*_________  Vice-President, Chief Technical Of-   April 17, 1998
 David J. Molny                ficer and Director
 /s/ HARRY B. FAIR*__________  Vice Chairman of the Board of         April 17, 1998
 Harry B. Fair                 Directors
 /s/ DONALD R. DIXON*________  Director                              April 17, 1998
 Donald R. Dixon
 /s/ ROBERT J. LOARIE*_______  Director                              April 17, 1998
 Robert J. Loarie
</TABLE>    
 
  /s/ J. RICHARD ABRAMSON
*By:______________________
J. Richard Abramson
Attorney-In-Fact
 
 
                                     II-5
<PAGE>
 
                                                                    SCHEDULE II
 
                            EVOLVING SYSTEMS, INC.
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                  BALANCE AT   ADDITIONS            BALANCE AT
                                  BEGINNING    CHARGED TO   WRITE-     END
                                   OF PERIOD   OPERATIONS    OFFS    OF PERIOD
                                  ----------- ------------ -------- -----------
<S>                               <C>         <C>          <C>      <C>
Allowance for Doubtful Accounts
Year Ended:
 December 31, 1996...............  $    --      $577,000   $279,000  $298,000
                                   --------     --------   --------  --------
 December 31, 1997...............  $298,000     $456,500   $234,500  $520,000
                                   --------     --------   --------  --------
</TABLE>
 
                                      S-1
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>   
<CAPTION>
  EXHIBIT
  NUMBER   DESCRIPTION OF DOCUMENT
  -------  -----------------------
 <C>       <S>
  1.1*     Form of Underwriting Agreement.
  3(i).1*  Amended and Restated Certificate of Incorporation, as amended.
  3(i).2*  Certificate of Amendment to the Amended and Restated Certificate of
           Incorporation, as amended.
  3(i).3*  Form of Restated Certificate of Incorporation to be effective upon
           the closing of the offering to which this Registration Statement
           relates.
  3(ii).1* Amended and Restated By-laws of the Registrant.
  3(ii).2* Form of Amended and Restated By-laws to be effective upon the
           closing of the offering to which this Registration Statement
           relates.
  4.1*     Reference is made to Exhibits 3(i).1 through 3(ii).2.
  4.2*     Specimen stock certificate representing shares of Common Stock.
  5.1*     Opinion of Cooley Godward LLP.
 10.1*     Indemnification Agreement, entered into by the Registrant and each
           of its directors and executive officers, dated as of January 1,
           1998.
 10.2*     Amended and Restated Stock Option Plan.
 10.3*     Employee Stock Purchase Plan to be effective upon the closing of
           this offering.
 10.4*     Note and Warrant Purchase Agreement, between the Registrant and the
           parties named therein, dated as of May 31, 1996.
 10.5*     Form of Senior Subordinated Promissory Note, as amended.
 10.6*     Form of Warrant to Purchase Shares of Common Stock.
 10.7*     Registration Rights Agreement, dated as of May 31, 1996.
 10.8*     Loan and Security Agreement, by and between the Registrant and
           Silicon Valley Bank, dated as of September 18, 1996, as amended.
 10.9*     Collateral Assignment, Patent Mortgage and Security Agreement, by
           and between the Registrant and Silicon Valley Bank, dated as of
           September 18, 1996, as amended.
 10.10     Software Development Agreement, by and between the Registrant and
           American Telephone & Telegraph Company, dated as of May 1, 1993.
           (The division of American Telephone & Telegraph Company responsible
           for this Agreement has split off from AT&T and is now known as
           Lucent Technologies, Inc.)
 11.1*     Statement regarding computation of earnings per share.
 16.1*     Letter regarding change in certifying accountant.
 23.1      Consent of Price Waterhouse LLP, Independent Accountants.
 23.2      Consent of Deloitte & Touche LLP, Independent Auditors, and Report
           on Schedule.
 23.3      Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
 24.1*     Power of Attorney. Reference is made to page II-5.
 27*       Financial Data Schedule.
</TABLE>    
- --------
  * Previously filed.

<PAGE>
                                                                   EXHIBIT 10.10

                                                           Contract No. LHL-101E
                        SOFTWARE DEVELOPMENT AGREEMENT

                                   SECTION I


THIS AGREEMENT made as of this first day of May, 1993, by and between AMERICAN
TELEPHONE AND TELEGRAPH COMPANY, a New York corporation having a place of
business at 67 Whippany Road, Whippany, New Jersey 07052-3303 ("Company") and
EVOLVING SYSTEMS, INC., a Colorado corporation having a place of business at
8000 East Maplewood Avenue, Englewood, Colorado 80111 ("Supplier").

     WHEREAS, Company desires to retain Supplier to furnish the programming,
training, consulting or other services (the "Services") specified in Work
Authorization Letters (each an "Authorization Letter") to be issued from time to
time and executed by both parties; and

     WHEREAS, Company also desires to obtain certain license rights to the Pre-
existing Software created and/or owned by Supplier as provided in the
Authorization Letter; and

     WHEREAS, Supplier is willing to grant such rights and perform such Services
based upon the terms and conditions set forth in this Agreement and in the
Authorization Letter applicable thereto;

NOW, THEREFORE, in consideration of the foregoing recitals and the terms and
conditions set forth in this Agreement and in the Authorization Letters issued
hereunder, the parties agree as follows:

DEFINITIONS.  As used in this Agreement, the following terms have the following
meaning, unless the context indicates otherwise:

     "SOFTWARE".  The lower case noun "software" means, depending on context,
     (a) one or more software works, (b) one or more of such works together with
     one or more software media providing representations of copies of such
     work(s), or (c) an aggregate of (a) and (b).  The adjective "software"
     means the term qualifies a subject which is or pertains to software.

     "SOFTWARE MEDIA".  The terms "Software media" or "software media" refer to
     a physical means or manifestation primarily adapted to convey, record,
     store or carry software, a representation of a copy of such software being
     provided by details of such media.  The terms include any tape, document,
     semiconductor memory, wave(s) or other physical means or manifestation
     comprising one or more such media and primarily adapted to convey such
     software to means external thereto or to persons, but the terms do not mean
     software or copy.

     "OBJECT PROGRAM" or "OBJECT CODE".  The term "object program" or "object
     code" means the fully compiled or assembled series of instructions, written
     in machine language, ready to be loaded into the computer, that guides the
     operation of the computer, in printed out form as well as stored in
     software media compatible with any equipment described in this Agreement.

     "SOURCE PROGRAM" or "SOURCE CODE".  The term "source program" or "source
     code" means the computer program expressed in a source language that
     operates on the computers identified in the Specifications, and includes
     such other information or documentation identified as source code in an
     Authorization Letter.  Such source code shall consist of a full source
     language statement of the programs comprising the Software.
<PAGE>
 
     "DOCUMENTATION".  The term "documentation" means the documentation relating
     to the Software as set forth in the Authorization Letter.  Subject to the
     terms of the Authorization Letter, Documentation may include complete
     program maintenance, documentation, procedures, flow charts, schematic
     diagrams and annotations which comprise the precoding detail design
     specification, and all other material necessary to allow a reasonably
     skilled programmer or analyst to maintain and enhance the Software without
     the assistance of Supplier or reference to any other materials.

     "PRE-EXISTING SOFTWARE".  Supplier's or third-party software, in object
     code and source code form, including all related documentation, as
     described in the Authorization Letter.

     "DEVELOPED SOFTWARE".  The modifications to the Pre-existing Software and
     any custom software, in object code and source code form, including all
     related documentation, which Supplier will develop in accordance with an
     Authorization Letter.

     "SOFTWARE".  The upper case term "Software" means the Pre-existing Software
     combined with the Developed Software.

     "WORK".  The term "Work" as used in this Agreement shall have the same
     meaning as the term "Services."

STATEMENT OF WORK.  Supplier shall provide the Services described in the
- -----------------                                                       
Authorization Letter and deliver the Pre-existing Software and the Developed
Software (collectively referred to as "Software") and all other Deliverables
described in the Authorization Letter to Company at Company's location in
accordance with the Work schedule set forth in the Authorization Letter.  The
Software and such other Deliverables shall perform and comply with the
specifications set forth in the Authorization Letter (the "Specifications").

REPRESENTATIVES.  Company's Technical Representative(s) for each project shall
- ---------------                                                               
be designated in the Authorization Letter.

Supplier's Representative for each project under this Agreement shall be
designated in the Authorization Letter.

DELIVERABLES.  Supplier shall provide to Company the Deliverables described in
- ------------                                                                  
the Authorization Letter for each project.

PERFORMANCE OF WORK.  All Work under this Agreement shall be completed in
- -------------------                                                      
accordance with the schedule identified in the Authorization Letter.

SOFTWARE TITLE AND RIGHTS.  For purposes of this clause, the term "Developed
- -------------------------                                                   
Information" shall mean the Developed Software and other Deliverables developed
under or in anticipation of Work specified in the Authorization Letter by or in
behalf of Supplier for Company.

     Supplier agrees, and shall obligate Supplier's employees and subcontractors
to agree, that all such Developed Information shall be kept in confidence by
Supplier and Supplier's employees, shall be used only in the performance of this
Agreement or work as specified in the Authorization Letter, and may not be used
for other purposes except upon such terms as may be agreed upon between the
parties in writing.  If Supplier has the right to use any of the Developed
Information owned by Company, all copies of the Developed information shall bear
such copyright notices and other legends regarding ownership of the property as
may be requested by Company.

     Company shall not acquire under this Agreement any title to any portion of
the Software or any portion of any other Deliverable which was not developed by
or in behalf of Supplier for Company under or in anticipation of this Agreement
(collectively referred to as the "Background Information").  The term
"Background Information" includes the Pre-existing Software.  Supplier agrees to
grant to Company a license to use such Background Information as provided in the
Authorization Letter.  If Company has the right to use 
<PAGE>
 
any of the Background Information, all copies of the Background information
shall bear such copyright notices and other legends regarding ownership of the
property as may be requested by Supplier.

     Company agrees to protect and maintain the confidentiality of the
Background Information and to use the Background Information only for the
purposes set forth in the applicable Authorization Letter.  Unless otherwise
provided in the applicable Authorization Letter, Company shall not sublicense,
assign, transfer, disclose or distribute any Background Information to any third
party.  Without limiting the foregoing, Company shall require any of its
employees, agents, customers or assigns who may receive disclosure of any
Background Information to agree to protect the confidentiality and use of such
information in the manner provided above.  Company agrees to use best efforts to
enforce such agreements on behalf of Supplier.

     Subject to the limitations of the preceding paragraphs, Company shall
acquire title upon its delivery to all Software media and other information
communication media copies of the other Deliverables delivered under this
Agreement to Company, whether or not Company owns any portion of such Software
or other information fixed on the media or on the other Deliverables, provided
that Supplier shall retain risk of loss and damage to any such Deliverables and
media and any software or other information fixed therein until acceptance of
the Software and other Deliverables by Company.  Supplier agrees, for itself and
its affiliates, not to assert any patent or copyright owned or controlled by
Supplier or any affiliate thereof against Company, its affiliates and its and
their direct or indirect customers in connection with any of the Software or
other Deliverables or any other subject matter directly or indirectly containing
or derived from Work done under or in anticipation of this Agreement, unless
Company or its customers violate(s) the terms of the license or other
restrictions relating to the use, possession, disclosure or ownership of such
Software, Deliverables, or other subject matter.

COMPENSATION.  In full compensation for the Work performed and any rights
- ------------                                                             
transferred, assigned or granted to Company under this Agreement and any and all
expenses Supplier might incur and for complying with all of the terms and
conditions contained in this Agreement, Company shall pay Supplier as provided
in the Authorization Letter.

INVOICING AND PAYMENT.  Separate invoices shall be rendered in duplicate in
- ---------------------                                                      
accordance with milestone activities or as otherwise provided in the
Authorization Letter.

     Invoices shall be sent in duplicate to the address set forth in the
     Authorization Letter.

     Company shall pay properly rendered invoices within thirty (30) days of
     receipt thereof.

NOTICES.  Any notice or demand which under the terms of this Agreement or under
- --------                                                                       
any statute must or may be given or made by Supplier or Company shall be in
writing and shall be given or made by telegram, tested telex, confirmed
facsimile, or similar communication or by certified or registered mail addressed
to the respective parties as follows:

To Company:                 American Telephone and Telegraph Company
                            P.O. Box 1101 (101 JFK Parkway)
                            Short Hill, NJ 07078-0996
                            Attn:  Purchasing Manager
                                   Technical Services/Projects

To Supplier:                Evolving Systems, Inc.
                            8000 East Maplewood Avenue
                            Englewood, CO 80111
                            Attn:  Steve Langion

       with a copy to:
                            Evolving Systems, Inc.
                            8000 East Maplewood Avenue
                            Englewood, CO 80111
<PAGE>
 
                  Attn:     Larry Schwartz

Such notice or demand shall be deemed to have been given or made when sent by
telegram, telex, of facsimile, or other communications or when deposited,
postage prepaid in the U.S. mail.

     The above addresses may be charged at any time by giving prior
     written notice as above provided.

TERM.  The term of this Agreement shall be five (5) years from the effective
- ----                                                                        
date unless earlier terminated pursuant to this Agreement.  Company may extend
such term for successive one (1) year periods by providing written notice to
Supplier at least thirty (30) days' prior to the expiration of the initial five
(5) year term or any one (1) year renewal thereof.  No termination of this
Agreement shall effect the performance of either party under an Authorization
Letter unless the Authorization Letter is terminated in accordance with the
provisions of the Authorization Letter.

THE DOCUMENTS FORMING THIS AGREEMENT.  This Agreement consists of the following:
- ------------------------------------                                            

A.  This SECTION I, attached hereto and made a part of this Agreement.

B.  SECTION II, "General Provisions of a Software Development Contract",
    attached hereto and made a part of this Agreement.

C.  Authorization Letters which will be issued from time to time.

If any provision in Section II is inconsistent with any provision of SECTION I
of this Agreement, SECTION I shall govern.  If any provision of an Authorization
Letter is inconsistent with Sections I or II, the Authorization Letter shall
govern.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement, which is
effective as of the day and year first above written.

EVOLVING SYSTEMS, INC.      AMERICAN TELEPHONE AND
                            TELEGRAPH COMPANY


By:_____________________    By:_______________________
Name:___________________    Name:_____________________
Title:__________________    Title:____________________
Date:___________________    Date:_____________________
<PAGE>
 
             GENERAL PROVISIONS OF A SOFTWARE DEVELOPMENT CONTRACT

                                  SECTION II

ACCEPTANCE
- ----------

A.  Company shall evaluate the Software and each other Deliverable (individually
and collectively referred to in this clause as "Deliverable") furnished under an
Authorization Letter for compliance with the Specifications and shall submit a
written acceptance or rejection to Supplier within thirty (30) days after the
receipt by Company of the complete Deliverable associated with each task.
Company shall have the right to extend said period in writing if necessary.
Such written acceptance or rejection shall be made only by Company's Technical
Representative.  A rejection shall state in detail which Specifications have not
been met by the Deliverable and how the Deliverable fails to meet the
Specifications.  In no event shall early turnover of the Deliverable by Supplier
to Company constitute acceptance of such Deliverable by Company.  Company shall
have the right to accept portions of the Software or of any other Deliverable.
Company's acceptance of the Software or of any other Deliverable or any portion
thereof shall occur only upon a formal written acceptance sent by the
aforementioned Company Representative or upon payment of the invoice associated
with the Deliverable or Software as detailed in the Authorization Letter.

B.  If a Deliverable evaluated pursuant to paragraph A of this clause is
rejected, Supplier agrees to correct, at its expense, each error leading to such
rejection and resubmit the corrected Deliverable to Company within fifteen (15)
days after receipt of notice from Company of such error.  Company shall have
thirty (30) days after the resubmitting of such corrected Deliverable to accept
or reject such Deliverable in the same manner as provided in paragraph A above.
If the corrected Deliverable complies with the Specifications, Supplier shall
incorporate the corrections in the Deliverables.

C.  If the errors in a rejected Deliverable are not corrected within the fifteen
(15)-day period specified n paragraph B of this clause or if a resubmitted
Deliverable rested or re-evaluated by Company during the thirty (30) day re-
evaluation period is again rejected, then Company may, at it is option:  (1)
retain the Deliverable at an equitable adjustment in price as may be agreed by
the parties, in which case that Deliverable shall be deemed accepted; (2) afford
Supplier one or more correction extensions for a period or periods to be
specified by Company without prejudice to Company's rights to thereafter
exercise its option under either clause (1) or (3) of this paragraph without
further notice to Supplier, if the errors have not been corrected; or (3) if the
defect is material in nature, terminate the Authorization Letter and pay all
expenses incurred by Supplier up to the termination date of the Authorization
Letter.  If option (3) is exercised, Company shall have no further obligation to
Supplier under the Authorization Letter.

AFFILIATED COMPANY.  An affiliated corporation, partnership or venture
- ------------------                                                    
("affiliate") is an entity that directly, or indirectly through one or more
intermediaries, controls or is controlled by, or is under common control with,
the entity specified.

ARBITRATION.  Should any dispute arise under this Agreement or under an
- -----------                                                            
Authorization Letter, such matters shall be determined by arbitration in the
following manner:  Upon written request from either party to the other that such
dispute be referred to arbitration, the parties shall endeavor to select an
arbitrator within ten (10) days of such request.  If no selection is made within
that period, immediately thereafter the parties shall jointly request the
American Arbitration Association to designate an arbitrator.  The parties agree
to abide by such rules respecting the time, place and frequency of arbitration
meetings, and the procedure governing the presentation and hearing of the
disputed matter, as shall be adopted by the arbitrator.  The direct expenses of
the arbitration, including the compensation and expenses of the arbitrator and
fees of the Association, but not including the parties' expenses or the expenses
of the parties' witnesses, shall be borne equally between the parties.  The
decision of the arbitrator shall be final and the parties agree to abide by such
decision.
<PAGE>
 
ASSIGNMENT BY COMPANY.  Company shall have the right to assign this Agreement
- ---------------------                                                        
and to assign its rights and delegate its duties under this Agreement either in
whole or in part ("assignment"), at any time and without Supplier's consent, to
any of its present or future affiliated companies, or to any combination of the
foregoing.  Company shall give Supplier written notice of any assignment.  Upon
acceptance of the assignment and assumption of the duties under this Agreement
by assignee, Company shall be released and discharged, to the extent of the
assignment, from all further duties under this Agreement as to material so
assigned, provided that the assignee maintains a net worth at least equal to the
value of the Services to be provided under any uncompleted Authorization
Letters.  If Company requests that Supplier waive the net worth condition set
forth in the preceding sentence, Supplier shall not unreasonably deny such
request.

ASSIGNMENT BY SUPPLIER.  Supplier shall not assign any right or interest under
- ----------------------                                                        
this Agreement (excepting monies due or to become due) or delegate or
subcontract any Work or other obligation to be performed or owed under this
Agreement without prior written consent of Company.  Any attempted assignment or
delegation in contravention of the above provisions shall be void and
ineffective.  Any assignment of monies shall be void and ineffective to the
extent that (1) Supplier shall not have given Company at least thirty (30) days
prior written notice of such assignment and (2) such assignment attempts to
impose upon Company obligations to the assignee additional to the payment of
such monies, or to preclude Company from dealing solely and directly with the
Supplier in all matters pertaining to this Agreement including the negotiation
of amendments or settlements of charges due.  All Work performed by Supplier's
subcontractor(s) at any tier shall be deemed Work performed by Supplier.

     Supplier may assign or otherwise transfer its rights under this Agreement
to a party or a successor in interest by merger, by operation of law, or by the
acquisition of capital stock, or to a party acquiring substantially all of the
business of Supplier, provided that the transferee shall have a net worth after
such transaction at least as large as the net worth of Supplier at the time this
Agreement was executed.  Supplier shall provide Company with prior written
notice of Supplier's assignment or transfer under the preceding sentence.
Notwithstanding the above provisions, Supplier shall not assign or transfer its
rights under this Agreement to any company which competes in a business in which
the Company's Network Wireless Systems Business Unit is engaged as of the date
of this Agreement without Company's prior written consent (which consent shall
not be unreasonably withheld).

AUDIT.  Supplier shall maintain accurate and complete records of all hours of
- -----                                                                        
direct labor employees engaged in work for which payment under this Agreement is
to be computed on the basis of actual time worked, at a fixed rate per unit of
time and all other costs, if any, payable by Company under this Agreement.  Such
records shall be maintained in accordance with recognized commercial accounting
practices so they may be readily audited.  Supplier shall permit Company to
examine and audit these records and all supporting records at all reasonable
times.  All payments, if any, made under this Agreement by Company shall be
subject to final adjustments as determined by such audit(s).  Supplier shall
retain all such records for a period not less than one (1) calendar year after
completion of this Agreement.

CHANGES.  Company may at any time during the progress of the Work require
- -------                                                                  
additions to or alterations of or deductions or deviations (all hereinafter
referred to as a "Change") from the Work called for under an Authorization
Letter, subject to the terms of the applicable Authorization Letter.  Except as
provided for in the Authorization Letter, no Change shall be considered as
additions to or deductions from the Work called for under the Authorization
Letter, nor shall Supplier be entitled to any compensation for work done
pursuant to, or in contemplation of, a Change, unless made pursuant to a written
Change Order issued by Company and executed by both parties.  Supplier shall be
paid for any work performed in preparing a Change at Company's request.

CHOICE OF LAW.  The construction, interpretation and performance of this
- -------------                                                           
Agreement and all transactions under it shall be governed by the laws of the
state of New Jersey, excluding its choice of laws rules and excluding the
Convention of the International Sales of Goods.  Supplier agrees to submit to
the jurisdiction of any court wherein an action is commenced against Company
based on a claim for which Supplier has agreed to indemnify Company under this
Agreement.
<PAGE>
 
COMPLIANCE WITH LAWS.  Supplier and all persons furnished by Supplier shall
- --------------------                                                       
comply at their own expense with all applicable federal, state, local and
foreign laws, ordinances, regulations and codes, including the identification
and procurement of required permits, certificates, licenses, insurance,
approvals and inspections in performance under this Agreement.  Supplier agrees
to indemnify Company and its customers for any loss or damage that may be
sustained by reason of any failure to do so.

CONTINUING SUPPORT.  Supplier shall provide the support and maintenance in
- ------------------                                                        
connection with Services as set forth in the Authorization Letter for the
Services.  Supplier represents that any personnel it supplies to assist Company
shall be fully qualified to provide the necessary assistance.

ENTIRE AGREEMENT.  This Agreement shall incorporate the typed or written
- ----------------                                                        
provisions on Company's orders issued pursuant to this Agreement and shall
constitute the entire agreement between the parties with respect to the subject
matter of this Agreement and the order(s) and shall not be modified or
rescinded, except by a writing signed by Supplier and Company.  All references
in these terms and conditions to this Agreement or to Work services, material,
equipment, products Software or information furnished under, in performance of,
pursuant to, or in contemplation of, this Agreement shall also apply to any
orders pursuant to this Agreement.  Printed provisions on the reverse side of
Company's orders and all provisions on Supplier's forms shall be deemed deleted.
Additional or different terms inserted in this Agreement by either party, or
deletions thereto, whether by alternations, addenda, or otherwise shall be in
force and effect unless expressly consented to by both parties in writing.
Estimates or forecasts furnished by Company shall not constitute commitments.
The provisions of this Agreement and of the Authorization Letters issued
hereunder supersede all contemporaneous oral agreements and all prior oral and
written quotations, communications, agreements, and understandings of the
parties with respect to the subject matter of this Agreement and such
Authorization Letters.

EXPORT CONTROL.  In addition to Supplier's obligation under the USE OF
- --------------                                                        
INFORMATION CLAUSE or any restrictive legends, both parties assure each other
that it does not intend to and will not knowingly, without prior written consent
of the Office of Export Licensing of the United States Department of Commence,
P. O. Box 273, Washington, DC 20044, transmit directly or indirectly:

(1)  Any technical data, including software, furnished by either party;

(2)  Any immediate product (including processes, materials, and services)
     produced directly by the use of the technical data furnished by either
     party; or

(3)  Any commodity produced by such immediate product if the immediate product
     of the technical information or software furnished by either party is a
     plant capable of producing a commodity or is a major component of such
     plant;

to Afghanistan, the People's Republic of China or to any Group Q, S, W, Y or Z
country as listed in Supplement No. 1 to Part 770 of the Export Administration
Regulations issued by the U. S. Department of Commerce.  Upon request, Company
will furnish Supplier a copy of the current Supplement.  Both parties agree to
promptly inform the other in writing of any such written consent issued by the
Office of Export Licensing.  Both parties assure the other that it will not
transmit directly or indirectly, any information or software furnished hereunder
or any portion thereof without the prior written consent of the other to any of
the above-mentioned countries.

FORCE MAJEURE.  Neither party shall be held responsible for any delay or failure
- -------------                                                                   
in performance of any part of this Agreement or an Authorization Letter to the
extent such delay or failure is caused by fire, flood, explosion, war, strike,
embargo, government requirement, civil or military authority, act of God, act or
omission of carriers or other similar causes beyond its control and without the
fault or negligence of the delayed or nonperforming party or its subcontractors
("force majeure conditions").  Notwithstanding the foregoing, Supplier's
liability for loss or damage to Company's material in Supplier's possession or
control shall not be modified by this clause.  If any force majeure condition
occurs, the party delayed or unable to perform shall give immediate notice to
the other party, stating the nature of the force majeure condition and any
action being taken to avoid or minimize its effect, and the party affected by
the other's delay or inability 
<PAGE>
 
to perform may elect to: (1) suspend this Agreement or an Authorization Letter
for the duration of the force majeure condition and (i) at its option buy, sell,
obtain or furnish elsewhere material or services to be bought, sold, obtained or
furnished under this Agreement or an Authorization Letter (unless such sale or
furnishing is prohibited under this Agreement) and deduct from any commitment
the quantity bought, sold, obtained or furnished or for which commitments have
been made elsewhere and (ii) once the force majeure condition ceases, resume
performance under this Agreement or an Authorization Letter with an option in
the affected party to extend the period of this Agreement or an Authorization
Letter up to the length of time the force majeure condition endured; and/or (2)
when the delay or nonperformance continues for a period of at least fifteen (15)
days, terminate, at no charge, this Agreement or an Authorization Letter or the
part of it relating to material not already shipped and services not already
performed. Unless written notice is given within forty-five (45) days after the
affected party is notified of the force majeure condition, (1) shall be deemed
selected.

IDENTIFICATION.  Without Company's written consent, Supplier shall make no use
- --------------                                                                
of any identification of Company or Company's affiliated companies in its
advertising or promotional efforts in reference to activities undertaken by
Supplier under this Agreement without Company's prior written consent.  The term
"identification" includes any trade name, trademark, service mark, insignia,
symbol, or any simulation thereof, and any code, drawing, specification, or
evidence of Company's inspection.  Supplier agrees to remove any such
identification prior to any sale, use disposition of material or equipment
rejected or not purchased by Company, and shall indemnify Company and its
affiliated companies against any claim arising out of Supplier's failure to do
so.  Nothing in this Agreement shall require Supplier to obtain prior approval
to state in a presentation or a proposal that company is a customer of Supplier
and, once Supplier and Company's relationship with respect thereto has been
announced, that Supplier is performing or has performed the projects specified
in Authorization Letters. This clause does not modify the USE OF INFORMATION
clause.  With respect to matters requiring Company's consent, Company agrees to
respond promptly to Supplier's request for consent (usually within ten (10)
days) and shall not deny unreasonably such requests.

INDENTIFICATION CREDENTIALS.  Company may, at its discretion, require Supplier's
- ---------------------------                                                     
employees to exhibit identification credentials, which Company may issue, in
order to gain access to Company's premises for performance of the work.  If, for
any reason, any of Supplier's employees are no longer performing Work, Supplier
shall immediately inform Company's Representative in the speediest manner
possible.  Notification shall be followed by prompt delivery to Company's
Representative in the speediest manner possible.  Notification shall be followed
by prompt delivery to Company's Representative of the identification credentials
involved or a written statement of the reasons why the identification
credentials cannot be returned. Supplier shall be liable for any damage or loss
sustained by Company if such identification credentials are not returned to
Company.

IMPLEADER.  Supplier shall not implead or bring an action against Company or its
- ---------                                                                       
customers or the employees of either based on any claim by any person for
personal injury or death that occurs in the course or scope of employment of
such person by Company or its customers and that arises out of material or
services furnished by Supplier under this Agreement.

INDEMNITY.  All persons furnished by Supplier shall be considered solely
- ---------                                                               
Supplier's employees or agents or subcontractors.  Supplier shall be responsible
for payment of all unemployment, social security and other payroll taxes for its
employees, including contributions when required by law.  Supplier agrees to
indemnify and save harmless company, its affiliates and its customers and their
officers, directors, employees, successors and assigns (all hereinafter referred
to in this clause as "Company") from and against any losses, damages, claims,
demands, suits, liabilities and expenses (including attorneys' fees) that arise
out of or result from:  (1) injuries or death to persons or damage to property,
including theft, caused or alleged to have been caused by the performance of the
Work or services performed by Supplier or persons furnished by Supplier; (2)
assertions under Workers' Compensation or similar acts made by persons furnished
by Supplier or by any subcontractor, or by reason of any injuries to such
persons for which Company would be responsible under Worker's Compensation or
similar acts if the persons were employed by Company; (3) any failure on the
part of the Supplier to satisfy all claims for labor, equipment, materials, and
other obligations relating directly or indirectly to the performance of the
Work; or (4) any failure by Supplier to perform Supplier's obligations under
this clause of the INSURANCE clause.  Supplier agrees to defend Company, at
Company's request, against any such claim, demand or suit.  Company agrees to
notify 
<PAGE>
 
Supplier within a reasonable time of any written claims or demands against
Company for which Supplier is responsible under this clause.

INFRINGEMENT.  The following terms apply to any infringement, or claim of
- ------------                                                             
infringement, of any patent, trademark, copyright, trade secret or other
proprietary interest based on the manufacture, installation, normal use, lease,
license or sale of any equipment, software, documentation, service or material
("material") furnished to Company by Supplier under this Agreement or an
Authorization Letter or in contemplation of this Agreement or an Authorization
Letter.  Supplier shall indemnify Company and its customers for any loss,
damage, expense or liability that may result by reason of any such infringement
or claim except to the extent such infringement or claim (a) arises from
Supplier's adherence to Company's written instructions or directions which
involve the use of material other than (1) commercial material which is
available on the open market or is the same as such material, or (2) material of
Supplier origin, design or selection, or (b) arises from the combination of
materials supplied by Supplier with materials provided by Company or any other
source not obtained by Supplier, or (c) arises from the modification(s) by
Company or its customers of any materials provided by Supplier, or (d) arises
from the failure of Company or its customers to use any materials or information
in accordance with the terms of a license or other restrictions applicable to
the materials or information; and Company shall so indemnify Supplier in such
excepted cases.  Each party shall defend or settle, at its own expense, any
action or suit against the other for which it is responsible under this clause.
Each party shall notify the other promptly of any claim of infringement for
which the other is responsible, and shall cooperate with the other in every
reasonable way to facilitate the defense of any such claim.

     If Company's or its customer's use of the material shall be prevented by
injunction or court order because of any infringement for which Supplier is
liable hereunder, Supplier shall at no expense, loss or damage to Company and
its customers (1) replace such material with equally suitable material free of
infringement, or (2) modify such material so that it will be free of
infringement and substantially no less capable than the material originally
furnished, or (3) by license or other release from claim of infringement procure
for Company's and its customers' benefit the right to use such material, or (4)
after Supplier has demonstrated to Company its good faith to achieve the
foregoing without success, accept the return of the material from Company and
its customers, refund the Company any charges paid therefor, less a reasonable
amount for use, and restore the premises and associated equipment as nearly to
their original condition as is reasonably possible.

INSPECTION.  Company's Representatives shall at reasonable and with appropriate
- ----------                                                                     
notice have access to the Work for the purpose of inspection and Supplier shall
provide safe and proper facilities for such inspection.

INSURANCE.  Supplier shall maintain and cause Supplier's subcontractors to
- ---------                                                                 
maintain during the term of this Agreement:  (1) Workers Compensation insurance
as prescribed by the law of the state or nation in which the Work is performed;
(2) employer's liability insurance with limits of at least $300,000 each
occurrence; (3) hired and non-owned automobile liability insurance if the use of
motor vehicles is required, with limits of at least $1,000,000 combined single
limit for bodily injury and property damage for each occurrence; and (4)
Comprehensive General Liability ("CGL") insurance, including Contractual
Liability and Broad Form Property damage, with limits of at least $5,000,000
combined single limit for personal injury and property damage for each
occurrence.  All CGL insurance shall designate company, its affiliates and their
officers, directors, and employees as an additional insured.  Any portion of the
insurance coverage hereunder may be maintained by Supplier under an umbrella
policy.

     Supplier agrees that Supplier, Supplier's insurer(s) and anyone claiming
by, through, under, or in Supplier's behalf shall have no claim, right of action
or right of subrogation against Company and its customers based on any loss or
liability insured against under the foregoing insurance.  Supplier and
Supplier's subcontractors shall furnish within ten (10) days after execution of
this Agreement, certificates or adequate proof of the foregoing insurance,
including, if specifically requested by Company, a provision stating that
Company shall be notified in writing at least thirty (30) days prior to
cancellation of or any change in the policy.
<PAGE>
 
LIMIT OF EXPENDITURE.  See Work Authorization Letter, if applicable.
- --------------------                                                

LIMITATION OF LIABILITY.  The monetary liability of Supplier to Company under
- -----------------------                                                      
this Agreement, whether for negligence, infringement, indemnification, breach of
warranty, or for any default whatsoever (excluding defaults for payment of
amounts due to Company under this Agreement or any Authorization Letter), for
all claims, losses, demands, damages, suits and liabilities (including costs,
expenses and reasonable attorney's fees of Supplier or reimbursed by Supplier)
relating or arising from this Agreement or any Authorization Letter (hereinafter
referred to as "claims"), shall be limited to (i) the amount of insurance
covering the claim if the claim is covered under the insurance Supplier itself
is required to maintain under "Insurance" above, and (ii) if the claim is not
covered under the insurance Supplier itself is required to maintain under
"Insurance" above, $1,000,000.  The monetary liability of Company to Supplier
under this Agreement, whether for negligence, infringement, indemnification, or
for any default whatsoever (excluding defaults for payment of amounts due to
Supplier under this Agreement or any Authorization Letter), for all claims
(including costs, expenses and reasonable attorney's fees of company or
reimbursed by Company) relating or arising from this Agreement or any
Authorization Letter shall be limited to $5,000,000.  The limitations set forth
in the preceding sentences are hereinafter referred to as the "Liability Cap."
A Liability Cap shall apply to each Authorization Letter.  The existence of more
than one claim or suit arising under an Authorization Letter shall not enlarge
or extend the limit of the Liability Cap for that Authorization Letter.  Each
party hereby releases the other party from all claims in excess of the Liability
Cap, subject to the stated exceptions herein.  The parties acknowledge that the
other parts of this Agreement rely upon the inclusion of this liability
limitation in this Agreement.

     Notwithstanding the foregoing, the parties expressly agree that the
liability of a party to the other party for the intentional failure to maintain
the confidentiality of such other party's confidential information or
intellectual property as required under this Agreement or an Authorization
Letter, or for the intentional failure to limit the use of confidential
information or intellectual property as required under this Agreement or an
Authorization Letter, shall not be limited by the Liability Cap.  Furthermore,
the parties agree that nothing in this clause shall be deemed to excuse or
otherwise limit (i) a party's non-monetary duties under any express provision of
this Agreement or an Authorization Letter, including, but not limited to,
Supplier's and Company's non-monetary duties under "INDEMNIFICATION" and
"INFRINGEMENT" above, and (ii) the express payment provisions of any
Authorization Letter.  For purposes of (i) above, the parties expressly agree
that Supplier's obligations under the second paragraph of "INFRINGEMENT" above
shall be deemed to be non-monetary duties.

     Unless expressly provided to the contrary in an Authorization Letter,
Supplier's sole liability for any deficiency in the Work provided under this
Agreement or under an Authorization Letter shall be the correction of defects
under the warranty provided in the subsection titled "Warranty" in this
Agreement, but nothing herein shall be deemed to bar any claim for damages or
losses to a party's tangible property resulting from the negligence of the other
party (subject to the terms of the Liability Cap).

     SUBJECT ONLY TO THE LIMITATIONS BELOW, IN NO EVENT SHALL EITHER PARTY BE
LIABLE UNDER THIS AGREEMENT OR ANY AUTHORIZATION LETTER FOR ANY INDIRECT,
CONSEQUENTIAL OR INCIDENTAL DAMAGES (INCLUDING, WITHOUT LIMITATION, DAMAGES FOR
LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION OR LOSS OF BUSINESS INFORMATION)
EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

     The limitation of liability in the immediately preceding paragraph is
subject to the following exceptions:  (1) Such limitation shall not apply to
damages or losses to a party's tangible property resulting from the negligence
of the other party, and (2) Such limitation shall not apply to third party
claims for which Supplier would be responsible under "INDEMNIFICATION" above or
to claims for which Supplier or Company would be responsible under
"INFRINGEMENT" above, and such limitation shall not be deemed to excuse or
otherwise limit (i) a party's non-monetary duties under any express provision of
this Agreement or an Authorization Letter, including, but not limited to, the
parties' non-monetary duties under `INDEMNIFICATION" and `INFRINGEMENT" above,
and (ii) the express payment provisions of any Authorization Letter.  For
purposes of (i) above, the parties expressly agree that Supplier's obligations
under the second paragraph of "INFRINGEMENT" above shall be deemed to be non
monetary duties.  However, all 
<PAGE>
 
claims falling under (1) or (2) above shall be subject to the Liability Cap for
Supplier stated above (subject to the applicable exceptions).

     This clause is intended to establish the maximum monetary liability of the
parties under this Agreement and the Authorization Letters issued hereunder.
Nothing herein shall prevent the parties from establishing lower liability
limits and/or from limiting the remedies available to either party in an
Authorization Letter.  In such event, the liability limits and limited remedies
provided in the Authorization Letter shall prevail.

MAINTENANCE.  Subject to the terms of the Authorization Letter, Supplier agrees
- -----------                                                                    
to promptly provide Company at the cost set forth in the applicable
Authorization Letter with (1) any modifications, in object and source code form,
to the Pre-existing Software made by Supplier where such modifications have been
announced by Supplier to be generally available and (2) any such modifications,
in object and source code form, made by Supplier to the Developed Software.
Supplier makes no warranty that such modifications will integrate or function
with other software used by Company or its customers.  Supplier agrees to
undertake any integration and testing required for such modifications at its
standard rates then in effect, plus actual expenses.  Company may discontinue
purchasing maintenance of the Software at any time.

     As used in this clause, the term "modifications" or "maintenance" shall
include updates, enhancements and new releases.  Supplier agrees to notify
Company of the pending availability of all Pre-existing Software modifications
as soon as the modifications are ready for distribution.  Supplier shall
promptly provide to Company any revisions to the associated documentation to
reflect the modifications purchased by Company.  All such modifications shall be
considered Software subject to the ownership provisions in the appropriate
Authorization Letter.  Company may incorporate the modifications into the
Software in its possession or continue using previous versions of the Software
at Company's option.  Supplier agrees to provide, at Company's request,
maintenance for at lease two (2) previous releases of the Software, provided
such releases are in active use by Company or its customers.

MARKETING.  See Authorization Letter, if applicable.
- ---------                                           

NO LIENS.  The Work shall be delivered free from all claims, liens and charges
- --------                                                                      
of third parties whatsoever.  Company reserves the right to require, before
making payment, proof that all third parties furnishing labor and materials for
the Work have been paid.

NONEXCLUSIVE MARKET RIGHTS.  It is expressly understood and agreed that, except
- --------------------------                                                     
as provided for in this Agreement, this Agreement does not grant to Supplier any
exclusive privileges or rights and Company may contract with other manufacturers
and suppliers for the procurement of comparable materials, products and
services.

RELEASES VOID.  Neither party shall require (1) waivers or releases of any
- -------------                                                             
personal rights or (2) execution of documents which conflict with the terms of
this Agreement, from employees, representatives or customers of the other in
connection with visits to its premises and both parties agree that no such
releases, waivers or documents shall be pleaded by them or third persons in any
action or proceeding.

REPRESENTATIONS.  Supplier represents to Company and its customers that the Work
- ---------------                                                                 
will be performed in a workerlike manner in accordance with professional
standards in the field and subject to the acceptance criteria established in
this Agreement or the Authorization Letter.

RIGHT OF ENTRY AND PLANT RULES.  Each party shall have the right to enter the
- ------------------------------                                               
premises of the other party during normal business hours with respect to the
performance of this Agreement, subject to all plant rules and regulations,
security regulations and procedures and U. S. Government clearance requirements
if applicable.  Company is not responsible for the safekeeping of Supplier's
property on Company premises.

SHIPPING.  Supplier shall, at its expense:  (a) ship the material to the site
- --------                                                                     
designated in the Authorization Letter by the date set forth in the
Authorization Letter in accordance with specific shipping instructions; (b)
place the number of this Agreement on all subordinate documents; (c) enclose a
packing memorandum with 
<PAGE>
 
each shipment, and when more than one (1) package is shipped, identify the one
containing the memorandum; and (d) mark the number on all packages and shipping
papers. Adequate protective packing shall be furnished at no additional charge.

SUPPLIER EMPLOYEES.  The term Supplier employee means anyone performing the Work
- ------------------                                                              
furnished by Supplier under this Agreement, including but not limited to the
Supplier's employees, consultants, representatives, agents, subcontractors and
subcontractors' subcontractors at all tiers.  It is agreed that all persons
provided by Supplier to perform the Work are not employees or agents of Company,
and Company shall not exercise any direct control or supervision over Supplier
employees but Company's Representative will be available for consultation.

     Supplier shall be responsible for its own labor relations with any trade or
union which represents its employees and shall be responsible for negotiating
and adjusting all disputes.  Supplier shall be the sole entity responsible for
receiving complaints from Supplier employees of the termination or change of
their assignments.

     Whenever the Supplier has knowledge that any actual or potential labor
dispute is delaying or threatens to delay the timely performance of this
Agreement, the Supplier shall immediately give notice thereof, including all
relevant information with respect thereto, to the Company's Purchasing
Representative.

     Company has the right at any time for reasonable cause (prior to and after
assignment to Company's Work) to reject or have Supplier remove Supplier's
employee(s) from the Work under this Agreement upon notice to Supplier.  Upon
such notice, Supplier shall, at company's request, replace the Supplier
employee(s).  In the event of any staffing change, the Company shall not be
charged for the time required to train the replacement.  The amount of
noncompensatory training time, if any, shall be mutually determined by Supplier
and Company's Representative.

     Supplier further agrees that any of Supplier employees, who are or become a
"leased employee"(as define in Section 414(n) of the Internal Revenue Code) of
Company during the term of this Agreement, shall not be covered by, and shall be
excluded from participation in, any employee benefit plan maintained by Company.
Supplier shall indemnify and save Company harmless from and against any losses,
damages, claims, demands, suits and liabilities that arise out of, or result
from, any failure by Supplier to perform its obligations under this clause.
Supplier shall also indemnify and save Company harmless from entitlement,
assertion or claim, which any of Supplier employee might have or might make
relative to rights or privileges in any Company employee benefit plan and which
arises, in whole or in part, out of Work rendered under this Agreement.

SUPPLIER'S INFORMATION.  Except for information owned by Company, the Pre-
- ----------------------                                                   
existing Software, and information identified as confidential or proprietary by
Supplier, no specifications, drawings, sketches, models, samples, tools,
computer or other apparatus programs, technical or business information or data,
written, oral or otherwise, furnished by Supplier to Company under this
Agreement, or in contemplation of this Agreement, shall be considered by
Supplier to be confidential and proprietary.  This does not alter or affect
Supplier's continuing obligations regarding Software or other Deliverables
exclusively licensed to Company under this Agreement.

SURVIVAL OF OBLIGATIONS.  The obligations of the parties under this Agreement or
- -----------------------                                                         
under an Authorization Letter, which by their nature would continue beyond
termination, cancellation or expiration of this Agreement or the applicable
Authorization Letter, including, by the way of illustration only and not
limitation, those in the clauses COMPLIANCE WITH LAWS, IDENTIFICATION,
IMPLEADER, INFRINGEMENT, LIMITATION OF LIABILITY, RELEASES VOID, SOFTWARE TITLE
AND RIGHTS, SUPPLIER EMPLOYEES, USE OF INFORMATION AND WARRANTY (and INSURANCE
and INDEMNITY in included in this Agreement), shall survive termination,
cancellation or expiration of this Agreement.  In addition, the parties'
obligations to maintain the confidentiality of any information shall survive the
termination of this Agreement.
<PAGE>
 
TAXES.  Company shall reimburse Supplier only for the following tax payments
- -----                                                                       
with respect to transactions under this Agreement unless Company advises
Supplier that an exemption applies:  state and local sales and use taxes,
privilege and property taxes, any other taxes or amounts levied in lieu of any
of the foregoing, or any other taxes or charges based on use by Company or its
customers of any Software or other Deliverables, but in all events excluding any
tax based on Supplier's net income, as applicable.  Taxes payable by Company
shall be billed as separate items on Supplier's invoices and shall not be
included in Supplier's prices.  Company shall have the right to have Supplier
contest any such taxes that Company deems improperly levied at Company's expense
and subject to Company's direction and control.

TERMINATION.  Company may at any time terminate this Agreement by written notice
- -----------                                                                     
to Supplier, subject to the provisions of the clause TERM above.  An
Authorization Letter may be terminated in accordance with the provisions of the
Authorization Letter.

TIMELY PERFORMANCE.  If Supplier has knowledge that anything prevents or
- ------------------                                                      
threatens to prevent the timely performance of the Work under this Agreement,
Supplier shall immediately notify Company's Representative thereof and include
all relevant information concerning the delay or potential delay.

TOOLS AND EQUIPMENT.  Unless otherwise specifically provided in an Authorization
- -------------------                                                             
Letter, Supplier shall provide all labor, tools, software programs, materials
and equipment (the "tools") for performance of this Agreement.  Should Supplier
actually use tools owned, rented or licensed by Company, Supplier acknowledges
that Supplier accepts the tools "as is where is", that Company has no
responsibility for the condition or state of repair of the tools and that
Supplier shall have risk of loss and damage to such tools incurred after
delivery of them to Supplier.  Unless otherwise specifically provided in this
Agreement or authorized in writing by Company's Representative, Supplier agrees
not to remove tools from Company premises and Supplier agrees to use the tools
only in the performance of this Agreement.

     Supplier agrees to return the tools to Company upon completion of use, or
at such earlier time as Company may request, in the same condition as when
received by Supplier, reasonable wear and tear excepted.

USE OF INFORMATION.  Any specifications, drawings, sketches, models, samples,
- ------------------                                                           
tools, computer or other apparatus programs, technical or business information
or data, written, oral or otherwise, owned or controlled by Company
("Information") and furnished to Supplier under this Agreement or order, or in
contemplation of this Agreement or order, shall remain Company's property.  All
copies of such Information in written, graphic or other tangible form shall be
returned to Company at its request if no longer needed by Supplier for work
under an Authorization Letter.  Unless such Information was previously known to
Supplier free of any obligation to keep it confidential, or has been or is
subsequently made public by Company or a third party, it shall be kept
confidential by Supplier, shall be used only in filling of orders or in
performing under this Agreement or order, and may not be used for other purposes
except upon such terms as may be agreed upon between Supplier and Company in
writing.

WAIVER.  The failure of either party at any time to enforce any right or remedy
- ------                                                                         
available to it under this Agreement or otherwise with respect to any breach or
failure by the other party shall not be construed to be a waiver of such right
or remedy with respect to any other breach or failure by the other party.

WARRANTY.  Supplier shall provide such warranties for the repair of errors or
- --------                                                                     
defects in the Work as may be provided in the Authorization Letter applicable to
such Work.

     Supplier warrants that there are no copy protection or similar mechanisms
within the Software which, either now or in the future, will interfere with the
grants made in this Agreement.  Supplier also warrants that Supplier shall not
install, either now or in the future, any malicious code, program, or other
internal component (e.g. software virus, software worm, software time bomb or
similar component), which is designed to damage, destroy, or alter software,
firmware, or hardware or which is designed, in any manner, reveal, damage,
destroy, or alter any data or other information accessed through or processed by
the Software in any manner or which is designed to adversely affect the
operation of a computer or its memory. Supplier shall immediately advise
Company, in writing, upon reasonable suspicion or actual knowledge that 
<PAGE>
 
the Software provided under this Agreement may result in the harm described
above. Supplier shall indemnify and hold Company and its customers harmless from
any damage resulting from Supplier's failure to comply with this paragraph.

     All warranties shall survive inspection, acceptance and payment.

     EXCEPT AS EXPRESSLY SET FORTH IN THIS SUBSECTION TITLED "WARRANTY",
SUPPLIER DISCLAIMS ALL WARRANTIES, EXPRESS AND IMPLIED, INCLUDING WITHOUT
LIMITATION THE IMPLIED WARRANTY OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE.

WORK DONE BY OTHERS.  If any part of the Work is dependent upon work done by a
- -------------------                                                           
subcontractor or supplier of Supplier, Supplier shall inspect and promptly
report to Company's Representative any defect that renders such other work
unsuitable for Supplier's proper performance.  Supplier's silence shall
constitute approval of such work done by other as fit, proper and suitable for
Supplier's performance of the Work.

<PAGE>
 
                                                                    EXHIBIT 23.1


                      CONSENT OF INDEPENDENT ACCOUNTANTS


We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 24, 1998
relating to the financial statements of Evolving Systems, Inc. as of and for the
year ended December 31, 1997, which appears in such Prospectus. We also consent
to the application of such report to the Financial Statement Schedule for the
year ended December 31, 1997 listed under Item 16(b) of this Registration
Statement when such schedule is read in conjunction with the financial
statements referred to in our report. The audit referred to in such report also
included this schedule. We also consent to the reference to us under the heading
"Experts" in such Prospectus.


/s/ PRICE WATERHOUSE LLP

PRICE WATERHOUSE LLP

Boulder, Colorado
April 17, 1998

<PAGE>
                                                                    EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE

We consent to the use in this Amendment No. 2 to Registration Statement No. 333-
43973 of Evolving Systems, Inc. of our report dated March 4, 1997, except for
Note 7, as to which the date is February 10, 1998, appearing in the Prospectus,
which is a part of this Registration Statement, and to the reference to us under
the heading "Experts" in such Prospectus.

Our audits of the financial statements referred to in our aforementioned report 
also included the financial statement schedule of Evolving Systems, Inc., listed
in Item 16. This financial statement schedule is the responsibility of the 
Company's management. Our responsibility is to express an opinion based on our 
audits. In our opinion, such financial statement schedule, when considered in 
relation to the basic financial statements taken as a whole, presents fairly in 
all material respects the information set forth therein.

/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP

Denver, Colorado
April 17, 1998




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