Highline Technical Innovations 10QSB/A 2006 Q3 Quarterly report (small business) (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-QSB/A

QUARTERLY REPORT

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended February 28, 2006

o Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 000-31090

SYSTEMS EVOLUTION INC.

(Exact name of Small Business Issuer as specified in its charter)

Idaho	82-0291029
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

10777 Westheimer Road, Suite 810

Houston, Texas 77042

(Address of principal executive offices)

713-979-1600

Issuer's telephone number

None

(Former name, former address and former fiscal year,

if changed since last report)

Check whether the issuer (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months or for such shorter period that the Registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days.

(1) x Yes o No

(2) x Yes o No

The number of shares of issuer's Common Stock outstanding as of April 19, 2006:

187,922,760 shares

SYSTEMS EVOLUTION INC.

INDEX

QUARTERLY REPORT ON FORM 10-QSB

FOR QUARTERLY PERIOD ENDED February 28, 2006

PART I. FINANCIAL INFORMATION

ITEM 1 - Unaudited Consolidated Financial Statements

Consolidated Balance Sheets as of February 28, 2006 (Unaudited) and May 31, 2005

b. Consolidated Statements of Operations for the Three And Nine Months Ended February 28, 2006 and 2005 (Unaudited)

c. Consolidated Statements of Cash Flows for the Nine Months Ended February 28, 2006 and 2005 (Unaudited)

d. Notes to Consolidated Financial Statements (Unaudited)

ITEM 2 - Management's Discussion and Analysis

ITEM 3 - Controls and Procedures

PART II. OTHER INFORMATION

ITEM 6 - Exhibits

SIGNATURES

EXHIBIT 31 - Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

EXHIBIT 32 - Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Statement Regarding This Amendment

This amendment to the Form 10-QSB for the period ended February 28, 2006, as previously filed on April 19, 2006 includes restated financial statements to properly reflect derivative accounting for warrants issued to consultants, the conversion features of the convertible notes payable and associated warrants.

Warrants issued to consultants and the warrants associated with the Convertible Notes payable have been accounted for as freestanding derivative liabilities instead of equity as was originally filed. Additionally, the embedded conversion options of the convertible notes payable have been bifurcated from the debt and accounted for separately as derivative liabilities instead of equity as was originally filed. We have added notes 6 and 7 further explaining the derivative liabilities and provided information on subsequent changes.

We are required to record the fair value of the embedded conversion options and the warrants on our balance sheet with changes in the values of these derivatives reflected in the consolidated statement of operations as “Gain (loss) on derivative liabilities.” The effect on our consolidated statement of operations for the quarters ended February 28, 2006 and 2005 of the non-cash changes related to accounting separately for these derivative liabilities and modifying the estimated volatility was an increase in our net loss of $8,273,975 and a decrease in our net loss of $3,083,064, respectively. The cumulative effect on our consolidated balance sheets as of February 28, 2006 and 2005 was an additional liability of $15,383,398 and $5,616,981, respectively and a decrease in stockholders' equity of $13,481,316 and $4,998,498, respectively.

In all other material respects, this Amended Quarterly Report on Form 10-QSB/A is unchanged from the Quarterly Report on Form 10-QSB previously filed by the Company. This amendment should also be read in conjunction with our amended Annual Report on Form 10-KSB/A for the fiscal year ended May 31, 2005.

PART I. FINANCIAL INFORMATION

ITEM 1 - Unaudited Consolidated Financial Statements

SYSTEMS EVOLUTION, INC.

CONSOLIDATED BALANCE SHEETS

February 28, 2006 and May 31, 2005

(Unaudited)

& #160; February 28, May 31,

& #160; 2006 2005

(Restated) (Restated)

ASSETS

Current Assets
Cash	$	6,404		$	66,060
Accounts receivable, net of allowance for doubtful accounts of $17,211 and $23,341		560,825			319,612
Unbilled revenue		223,479			476,541
Prepaid expenses and other current assets		18,537			71,580
Total Current Assets		809,245			933,793

Unamortized debt issue costs, net of accumulated amortization of $720,010 and $43,586, respectively		4,654,958			5,331,382
Other assets		10,639			8,971
Furniture and equipment, net of accumulated depreciation of $178,224 and $132,361, respectively		99,308			127,330
Goodwill		1,231,648			1,231,648
Intangibles, net of $1,189,971 and $650,847 amortization and impairment, respectively		1,122,537			1,661,664
TOTAL ASSETS	$	7,928,335		$	9,294,788

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities
Accounts payable	$	605,523		$	281,702
Accrued expenses		597,969			242,345
Deferred revenue		-			15,509
Notes payable		57,419			50,096
Current portion of convertible notes, net of unamortized discount of $75,754		77,482			-
Derivative liability		16,748,720			5,731,053
Total Current Liabilities		18,087,113			6,320,705

Deferred rents		19,546			-
Convertible notes, net of unamortized discount of $264,084		74,739			23,544
Long-term debt - related parties		131,509			133,599
Total Liabilities		18,312,907			6,477,848

STOCKHOLDERS' DEFICIT
Common stock, no par value, 750,000,000 shares authorized, 187,922,760 shares issued and outstanding		7,857,464			7,297,683
Accumulated deficit		(18,242,036	)		(4,480,743	)
Total Stockholders' Deficit		(10,384,572	)		2,816,940
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	7,928,335		$	9,294,788

SYSTEMS EVOLUTION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Three and Nine Months Ended February 28, 2006 and 2005

(unaudited)

		Three Months				Nine Months
		2006 (Restated)		2005 (Restated)		2006 (Restated)		2005 (Restated)

Revenues	$	1,116,756	$	1,798,459	$	3,521,743	$	3,277,505

Cost of Goods Sold		298,591		349,792		1,216,459		863,267

Gross Profit		818,165		1,448,667		2,305,284		2,414,308

Operating Expenses:
Payroll and related costs		847,706		1,500,352		2,747,981		2,965,529
General, administrative, and selling		158,241		544,178		639,377		2,547,348
Depreciation & amortization		194,996		245,450		583,032		496,609

Operating loss		(382,778)		(841,313)		(1,665,106)		(3,595,178)

Interest expense		(416,046)		(70,544)		(1,303,356)		(146,225)
Gain (loss) on derivative liabilities		(8,777,651)		2,414,999		(10,798,652)		1,859,849
Other Income		6		4,703		15,937		4,703
Other costs		(1,343)		-		(10,116)		-

Net income / (loss)	$	(9,577,812)	$	1,507,845	$	(13,761,293)	$	(1,876,851)

Basic loss per share	$	(0.09)	$	0.02	$	(0.09)	$	(0.03)
Diluted loss per share	$	(0.09)	$	0.01	$	(0.09)	$	(0.03)


Weighted average shares outstanding		107,974,507		79,481,122		146,695,700		68,385,086
Fully diluted weighted average shares outstanding		107,974,507		244,390,213		146,695,700		68,385,086

SYSTEMS EVOLUTION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended February 28, 2006 and 2005

(unaudited)


		2006 (Restated)	2005 (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(13,761,293)	$ (1,876,851)
Adjustments to reconcile net loss to net cash used in operating activities:
Derivative gain / (loss)		10,798,652	(1,859,849)
Depreciation and amortization		583,032	553,138
Amortization of discount on notes payable		320,015	12,414
Amortization of deferred financing costs		676,424	24,981
Shares issued for services		312,058	1,866,801
Shares issued for bonus		-	32,694
Tax benefit		-	(4,703)
Changes in:
Accounts receivable		(241,214)	(78,548)
Prepaid expenses and other current assets		306,105	(372,515)
Other assets		(1,668)	(58,947)
Accounts payable		329,822	18,523
Unearned service revenue		(15,509)		-
Accrued expenses		375,024		89,571
NET CASH USED IN OPERATING ACTIVITIES		(318,552)		(1,633,291)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of CMS		-	3,723
Purchase of Next Hire		-	(12,811)
Purchase of Duration Software		-	(425,836)
Purchase of equipment		(2,500)		(34,988)
NET CASH USED IN INVESTING ACTIVITIES		(2,500)		(469,912)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable and long-term debt		3,940	238,399
Payments on notes payable and long-term debt		(10,000)	(687,292)
Proceeds from convertible notes		250,000		2,825,000
Deferred rent		17,456		-
Cash paid for financing costs		-		(358,468)
Common stock issued for cash		-		124,840
Proceeds from exercise of warrants		--		2,250
NET CASH PROVIDED BY FINANCING ACTIVITIES		261,396		2,144,729

NET CHANGE IN CASH		(59,656)	41,526
- Cash, beginning of period		66,060	19,522
- Cash, end of period	$	6,404	$ 61,048

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	�� 3,792	$ 26,677
Income Taxes paid		-	-

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for acquisition of CMS		-	104,000
Common stock issued for acquisition of Duration		-	2,250,000
Common stock issued for acquisition of Next Hire		-	40,000
Common stock issued for computer equipment		-	52,070
Common stock issued for debt		216,738	31,029
Discount of notes payable		250,000	-

SYSTEMS EVOLUTION INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2006

(UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of Systems Evolution Inc. ("SEVI") have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained in the SEVI's Annual Report filed with the SEC on Form 10-KSB. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal 2005 as reported in the 10-KSB have been omitted.

Impairment of Long-Lived Assets - SEVI reviews the carrying value of its long-lived assets annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. SEVI assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value.

NOTE 2 - STOCK BASED COMPENSATION

SEVI accounts for stock-based compensation under the intrinsic value method. Under this method, SEVI recognizes no compensation expense for stock options granted when the number of underlying shares is known and exercise price of the option is greater than or equal to the fair market value of the stock on the date of grant. The following table illustrates the effect on net loss and net loss per share if SEVI had applied the fair value provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation for the nine months ended February 28, 2006 and 2005:

				Three Months Ending February 28,
		2006 (Restated)					2005 (Restated)

Net income / (loss) as reported		$ (9,577,812)			$		1,507,845
Add: intrinsic value expense recorded			-			108,265
Deduct: total stock-based employee compensation expense determined under fair value based method			-			(374,039)
Pro forma net loss	$		(9,577,812)			$ 1,242,071

Basic and diluted net loss per common share:
As reported	$		(0.09)			$ 0.02
Pro forma			(0.09)			0.02

				Nine Months Ending February 28,
		2006 (Restated)					2005 (Restated)

Net income / (loss) as reported		$ (13,761,293)			$		(1,876,851)
Add: intrinsic value expense recorded			-			534,751
Deduct: total stock-based employee compensation expense determined under fair value based method			-			(1,112,617)
Pro forma net loss	$		(13,761,293)			$ (2,454,717)

Basic and diluted net loss per common share:
As reported	$		(0.09)			$ (0.03)
Pro forma			(0.09)			(0.04)

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: (1) 1.5% risk-free interest rate, (2) expected option life is the actual remaining life of the options as of each year end, (3) expected volatility is from 181% to 781% and (4) zero expected dividends.

NOTE 3 - CONVERTIBLE NOTES

During 2005, SEVI issued a total of $3,075,000 in convertible promissory notes pursuant to a private placement. Promissory notes for $1,825,000 are convertible at the holder’s option into SEVI common stock at $0.05 per share, accrue interest at 8% per annum, and have 36,500,000 warrants attached to them. During the second quarter of 2006 SEVI issued an additional $250,000 in convertible promissory notes pursuant to a private placement. Additionally, $150,000 of the promissory notes were converted into 3,000,000 shares of SEVI common stock during the second quarter of 2005 and $41,338 of the promissory notes were converted into 11,482,740 shares of common stock during the quarter ended February 28, 2006. Interest on these notes is payable semi-annually, and the notes mature on August 31, 2007. The warrants were denominated as Series A, B, C, and D warrants. The following table summarizes each series.

Series	Number of shares	Exercise Price	Expiration
A	9,125,000	$0.06	90 days from registration of underlying common shares
B	9,125,000	$0.07	180 days from registration of underlying common shares
C	9,125,000	$0.08	270 days from registration of underlying common shares
D	9,125,000	$0.15	August 31, 2009
	36,500,000

Promissory notes for $1,500,000 are convertible at the holders’ option into SEVI common stock at the lesser of 50% of the average of the three lowest trading prices 20 days prior to one day before the holder sends the conversion notice to SEVI or $0.13 per share, accrue interest at 8% per annum, and have 4,500,000 warrants attached to them. The exercise price of the warrants is $0.08 per share. The warrants are exercisable for 5 years. Accrued interest and principal are due at maturity. $500,000 matures on December 30, 2006, $500,000 matures on January 14, 2007, $250,000 matures on April 28, 2007, and $250,000 matures on November 14, 2007.

The notes have been discounted for the fair value of the embedded conversion options and freestanding warrants accounted for as derivatives. All discounts will be amortized over the life of the notes using the effective interest method. The fair values of the derivatives were calculated using the Cox-Ross-Rubestein model. See note 6 for more information on the derivatives. Variables used in the Cox-Ross-Rubestein model include (1) 2.75% to 3.84% risk-free interest rate, (2) expected volatility of 125% and (3) zero expected dividends.

A summary of the convertible notes at February 28, 2006 and May 31, 2005 is as follows:

		February 28, 2006			May 31, 2005
Gross proceeds from notes	$	3,325,000		$	3,075,000
Less: Value of derivatives		(3,325,000	)		(3,075,000	)
Less: Retirement of debt for stock		(191,337	)		-
Add: Amortization of discounts		343,558			23,544
Carrying value of notes on February 28, 2006		152,221			23,544
Less current portion		(77,482	)		-
Long-term convertible notes, net	$	74,739		$	23,544

NOTE 4 - COMMON STOCK

During the three months ending August 31, 2005, SEVI issued the following shares:

In July 2005, SEVI issued 6,361,691 shares per a board resolution to offer restricted SEVI shares in exchange for all vested options in a one for one exchange (one vested option for one restricted SEVI share) as of May 31, 2005 for those still employed by SEVI as of June 30^th, 2005. SEVI received a signed agreement from all option holders in order to receive the Share Grant that stipulates the Holder agrees to give up all un-vested options; these agreements amended all employment contracts then in force as of May 31, 2005.

In July 2005, SEVI issued 300,000 shares valued at $6,000 to directors of SEVI as of December 2004.

During the three months ending November 30, 2005, SEVI issued the following shares:

In September 2005, SEVI issued 3,120,000 shares in exchange for the conversion of a $150,000 convertible promissory note held by Platinum Partners Value Arbitrage Fund LP and the associated accrued interest of $6,000.

In November 2005, SEVI issued 1,340,000 shares valued at $0.01 per share in exchange for interest accrued on the convertible notes issued September 2004.

·	In November 2005, SEVI issued 4,000,000 shares valued at $0.01 per share in exchange for an executed release from an employment contract with an officer of SEVI.

·	In November 2005, SEVI issued 4,500,000 shares valued at $0.01 per share, per board resolution, to individuals taking on new management positions with SEVI.

·	In November 2005, SEVI issued 4,165,512 shares valued at $0.01 per share, per board resolution to individuals for services.

During the three months ending February 28, 2006, SEVI issued the following shares:

·	In January 2006, SEVI issued 4,191,074 shares in exchange for the conversion of $15,088 convertible promissory notes held by various convertible note holders.

·	In January 2006, SEVI issued 1,538,461 shares valued at $.0065 per share in exchange for legal services from Mark L. Baum and Philip E. Koehnke for the month of January 2006.

·	In February 2006, SEVI issued 7,291,666 shares in exchange for the conversion of $26,250 convertible promissory notes held by various convertible note holders.

·	In February 2006, SEVI issued 2,222,222 shares valued at $.0045 per share in exchange for legal services from Mark L. Baum and Philip E. Koehnke for the month of February 2006.

Subsequent to February 28, 2006:

In March 2006, SEVI issued 5,000,000 shares to Allen Goldsmith, principal with Technology Navigators, Inc. for payment of outstanding accounts payable. As of the end of February 2006 shares of the stock had not been sold, therefore the value of the stock had not been determined. The shares were sold between March 1, 2006 and March 8, 2006 for an average price of $.01862 per share.

·	In March 2006, SEVI issued 1,000,000 unrestricted shares and 500,000 restricted shares valued at $.04 per share to Pinchus Gold as compensation under a 12 month consulting services agreement.

·	In March 2006, SEVI issued 5,000,000 shares to Mr. Pinchus Gold upon his exercise of warrants issued to Mr. Gold as a part of the service agreement contract discussed above. The warrants were exercisable at $.01 per share.

·	In March 2006, SEVI issued 9,781,111 shares in exchange for the conversion of $35,212 convertible promissory notes held by various convertible note holders.

·	In March 2006, SEVI issued 917,000 shares valued at $.01125 per share, per board resolution, to an individual as compensation under their bonus plan.

·	In March 2006, SEVI issued 6,000,000 shares to Allen Goldsmith principal with Technology Navigators, Inc. in payment of outstanding accounts payable. The shares were sold between March 13, 2006 and March 29, 2006 for an average price of $.03612 per share.

·	In March 2006, SEVI issued an additional 5,000,000 shares to Mr. Pinchus Gold upon his exercise of warrants issued to Mr. Gold as part of the service agreement contract discussed above. The warrants were exercisable at $.0125 per share.

In March 2006, SEVI issued 12,000,000 shares to Mr. James Panther upon his exercise of warrants issued to Mr. Panther as part of an advisory services agreement. Mr. Panther’s services center on the restructuring of the convertible notes outstanding for SEVI. The warrants were exercised at $.0138 per share.

·	In March 2006, SEVI issued 872,600 shares valued at $.01146 per share, in exchange for legal services from Mark L. Baum for the month of March 2006.

·	In March 2006, SEVI issued 2,452,000 shares valued at $.02 per share to Bob C. Johnson, per board resolution, as compensation for 90 days.

·	In April 2006, SEVI issued 5,000,000 shares valued at $.03 per share to Triangle Technology, Inc. in payment of outstanding accounts payable.

·	In April 2006, SEVI issued 3,372,000 shares valued at $.02 per share, per board resolution for installment payments to 4 individuals.

·	In April 2006, SEVI issued 9,526,000 shares valued at $.02 per share per board resolution, as compensation for 90 days to 6 employees.

NOTE 5 - SEGMENT INFORMATION

Reportable segments are based on internal organizational structure and are comprised of the Consulting division (“Consulting”) (this represents a name change from Business & Technology or “B&T”, instigated on January 1, 2006) or the Next Hire Consultants (“NHC”) division. The Consulting division provides high-end, value-added software development services and the NHC division provides contract staff and permanent placement services.

Segment financial information is summarized as follows:

(Restated)	Consulting	NHC	Corporate and other	Total
Three Months ended February 28, 2006
Revenue	$ 742,495	$ 316,932	$ 57,329	$ 1,116,756
Depreciation and amortization	4,950	-	190,046	194,996
Interest expense	441	-	415,605	416,046
Net income (loss)	(133,888)	116,727	(9,560,651)	(9,577,812)
Total assets	668,909	167,476	7,091,950	7,928,335
Expenditures for long-lived assets	-	-	-	-

Three Months ending February 28, 2005
Revenue	$ 1,625,309	$ 173,150	$ -	$ 1,798,459
Depreciation and amortization	7,390	-	238,060	245,450
Interest expense	602	940	69,002	70,544
Net income (loss)	(1,652)	22,931	1,486,566	1,507,845
Expenditures for long-lived assets	17,985	-	456	29,546

Nine Months ended February 28, 2006
Revenue	$ 2,767,243	$ 722,301	$ 32,199	$ 3,521,743
Depreciation and amortization	14,474	-	570,515	584,989
Interest expense	2,630	-	1,300,726	1,303,356
Net income (loss)	(396,866)	129,582	(13,494,009)	(13,761,293)
Total assets	668,909	167,476	7,091,950	7,928,335
Expenditures for long-lived assets	13,383	-	4,457	17,840

Nine Months ending February 28, 2005
Revenue	$ 2,999,263	$ 272,982	$ 5,260	$ 3,277,505
Depreciation and amortization	11,709	-	484,900	496,609
Interest expense	2,744	940	142,541	146,225
Net income (loss)	(273,894)	(33,073)	(1,569,884)	(1,876,851)
Expenditures for long-lived assets	24,338	3,687	5,436	34,988

NOTE 6 - DERIVATIVES

SEVI evaluated the application of SFAS 133 and EITF 00-19 for all of its financial instruments and identified the following financial instruments as derivatives:

1)	Embedded conversion option of Convertible Notes

2)	Warrants to purchase common stock associated with the Convertible Notes

3)	Warrants to purchase common stock issued with consulting agreements for two individuals (“Consulting Warrants”)

Based on the guidance in SFAS 133 and EITF 00-19, SEVI bifurcated and separately accounted for the embedded conversion options of the Convertible Notes Payable because the conversion price was not fixed and was not convertible into a fixed number of shares.

Furthermore, SEVI concluded that the exercise price and the number of shares to be issued under the “Consulting Warrants” and the Convertible Notes Warrants are fixed. However, because the Convertible Notes might result in issuing an indeterminate number of shares, it cannot be concluded that SEVI has a sufficient number of authorized shares to settle either group of warrants. As such, the warrants were accounted for as derivative liabilities.

SEVI is required to record the fair value of the conversion options and the warrants on its balance sheet with changes in the values of these derivatives reflected in the consolidated statement of operations as “Gain (loss) on embedded derivative liability.” The derivative liabilities were not previously classified as such in SEVI's historical financial statements causing those financial statements to be restated. See note 7 for details.

The impact of the application of SFAS 133 and EITF 00-19 on the balance sheet as of February 28, 2006 is as follows:

Embedded conversion option in Convertible Debenture	$16,300,360
Convertible Debenture warrants	249,631
Consulting warrants	198,729
Total	$16,748,720

The fair values were calculated using the Cox-Ross-Rubenstein model. Variables used in the Cox-Ross-Rubenstein model include (1) 4.6% risk-free interest rate, (2) expected volatility of 125% and (3) zero expected dividends. The impact on statements of operations for the three and six months ended February 28, 2006 and 2005 is as follows:

	Three months ended February 28,		Nine months ended February 28,
	2006	2005	2006	2005
Embedded Conversion Option in Convertible Debenture	$(8,655,395)	$ (145,429)	$(11,512,447)	$(8,486,066)
Convertible Debenture warrants	(67,947)	1,451,589	428,819	6,285,465
Consulting warrants	(54,309)	1,108,839	284,976	4,060,450
Total gain (loss) on derivative liabilities:	$(8,777,651)	$2,414,999	$(10,798,652)	$ 1,859,849

NOTE 7 - RESTATEMENT

SEVI restated its 2005 quarterly financial statements from amounts previously reported. SEVI has determined that certain financial instruments issued by SEVI contain features that require accounting for these features as derivative instruments. Accordingly, warrants issued to consultants, the conversion options of the Note Payable and Convertible Debentures and their associated warrants were orignally accounted for as equity and should have been accounted for as derivative liabilities. Note 6 was added to disclose the derivative instrument liabilities and provide information on subsequent changes. In addition, SEVI has modified the estimated volatility used in the Cox-Ross-Rubenstein option pricing model used to value the warrants issued to consultants, the warrants issued to the debentures holders and the conversion options embedded in the Note Payable and the Convertible Debentures. Additionally, SEVI has changes the amortization of the discount to be on the effective interest method instead of the straight-line method.

SEVI is required to record the fair value of the conversion features and the warrants on the balance sheet at fair value with changes in the values of these derivatives reflected in the consolidated statement of operations as “Gain (loss) on derivative instrument liabilities.”

Following is a summary of the restatement adjustments:

	Balance Sheet February 28, 2006			Balance Sheet May 31, 2005
	As Reported	Adjustments	As Restated	As Reported	Adjustments	As Restated

Cash	$ 6,404		$ 6,404	$ 66,060		$ 66,060
Accounts receivable	560,825		560,825	319,612		319,612
Unbilled revenue	223,479		223,479	476,541		476,541
Prepaid expenses and other current assets	18,537		18,537	71,580		71,580
Deferred financing costs	2,752,876	$ 1,902,082	4,654,958	4,236,848	$ 1,094,534	5,331,382
Other assets	10,639		10,639	8,971		8,971
Furniture and equipment	99,308		99,308	127,330		127,330
Goodwill	1,231,648		1,231,648	1,231,648		1,231,648
Intangibles	1,122,537		1,122,537	1,661,664		1,661,664

Total assets	$ 6,026,253	$ 1,902,082	$ 7,928,335	$ 8,200,254	$ 1,094,534	$ 9,294,788


Accounts payable	$ 605,523		$ 605,523	$ 281,702		$ 281,702
Accrued expenses	597,969		597,969	242,345		242,345
Deferred revenue	-		-	15,509		15,509
Notes payable	57,419		57,419	50,096		50,096
Current portion of convertible notes, net	-	$ 77,482	77,482	-		-
Current portion derivative liability	-	13,402,498	13,402,498	-	$ 1,107,343	1,107,343
Deferred Rents	19,546		19,546	-		-
Convertible note	1,517,543	(1,442,804)	74,739	800,107	(776,563)	23,544
Derivative liability	-	3,346,222	3,346,222	-	4,623,710	4,623,710
Long-term debt - related parties	131,509		131,509	133,599		133,599

Total liabilities	2,929,509	15,383,398	18,312,907	1,523,358	4,954,490	6,477,848

Common stock	16,263,858	(8,406,394)	7,857,464	15,485,062	(8,187,379)	7,297,683
Accumulated deficit	(13,167,114)	(5,074,922)	(18,242,036)	(8,808,166)	4,327,423	(4,480,743)

Total equity/(deficit)	3,096,744	(13,481,316)	(10,384,572)	6,676,896	(3,859,956)	2,816,940

Total Liabilities and Equity/(Deficit)	$ 6,026,253	$ 1,902,082	$ 7,928,335	$ 8,200,254	$ 1,094,534	$ 9,294,788

	Three Months Ended February 28, 2006			Three Months Ended February 28, 2005
	As Reported	Adjustments	As Restated	As Reported	Adjustments	As Restated

Gross Profit	$ 818,163	$ 2	$ 818,165	$ 1,448,667		$ 1,448,667

Operating Expenses:
Payroll and related	847,706		847,706	1,500,352		1,500,352
General and administrative	157,447	794	158,241	524,178	$ 20,000	544,178
Depreciation and amortization	194,997	(1)	194,996	245,450		245,450

Operating loss	(381,987)	(791)	(382,778)	(821,313)	(20,000)	(841,313)

Interest expense	(920,513)	504,467	(416,046)	(758,609)	688,065	(70,544)
Other income	6		6	-		-
Tax benefit	-		-	4,703		4,703
Other costs	(1,343)		(1,343)	-		-
Gain (loss) on derivative instrument liabilities	-	(8,777,651)	(8,777,651)	-	2,414,999	2,414,999

Net income / (loss)	$ (1,303,837)	$ (8,273,975)	$ (9,577,812)	$(1,575,219)	$ 3,083,064	$ 1,507,845

Basic and diluted loss per share	$ (0.01)		$ (0.09)	$ (0.02)		$ (0.01)

	Nine Months Ended February 28, 2006			Nine Months Ended February 28, 2005
	As Reported	Adjustments	As Restated	As Reported	Adjustments	As Restated


Gross Profit	$ 2,305,284		$ 2,305,284	$ 2,414,308		$ 2,414,308

Operating Expenses:
Payroll and related costs	2,747,981		2,747,981	2,965,529		2,965,529
General , administrative and selling	637,109	$ 311	637,420	2,527,348	$ 20,000	2,547,348
Depreciation and amortization	584,989		584,989	496,609		496,609

Operating loss	(1,664,795)	(311)	(1,665,106)	(3,575,178)	(20,000)	(3,595,178)

Interest expense	(2,699,663)	1,396,307	(1,303,356)	(1,386,673))	1,240,448	(146,225)
Other income	15,937		15,937	-		-
Tax benefit	-		-	4,703		4,703
Other costs	(10,116)		(10,116)	-		-
Gain (loss) on derivative instrument liabilities	-	(10,798,652)	(10,798,652)	-	1,859,849	1,859,849

Net loss	$ (4,358,637)	$ (9,402,656)	$ (13,761,293)	$ (4,957,148)	$ 3,080,297	$(1,876,851)

Basic and diluted loss per share	$ (0.03)		$ (0.09)	$ (0.07)		$ (0.02)

ITEM 2 - Management's Discussion and Analysis

FORWARD LOOKING STATEMENTS

This quarterly report contains forward-looking statements that involve risks and uncertainties. We use words such as anticipate, believe, plan, expect, future, intend and similar expressions to identify such forward-looking statements. You should not place too much reliance on these forward-looking statements. Our actual results are likely to differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described in this section.

The Company, previously known as Wallace Resources Inc., was organized in the State of Idaho on August 26, 1968. Systems Evolution Inc., our Texas operating company was acquired by the Company on September 9, 2003, and after the acquisition, the Company's current directors and management took control of the Company. We generate revenue from professional services performed for our end-user customers and the end-user customers of our software partners.

Revenue is derived primarily from professional services provided on a time and materials basis, with the remaining revenue provided from fixed fee engagements. For time and material contracts, revenue is recognized and billed by multiplying the number of hours expended by our professionals in the performance of the contract by the established billing rates. For fixed fee projects, revenue is generally recognized using the proportionate performance method. Provisions for estimated losses on uncompleted contracts are made on a contract-by-contract basis and are recognized in the period in which such losses are determined. Billings in excess of costs plus earnings are classified as deferred revenues. On many projects we are also reimbursed for out-of-pocket expenses such as airfare, lodging and meals. These reimbursements are included as a component of revenue.

Our revenue and operating results are subject to substantial variations based on our customers' expenditures and the frequency with which we are chosen to perform services for our customers. Revenue from any given customer will vary from period to period.

Our gross margins are affected by trends in the utilization rate of our professionals (defined as the percentage of our professionals' time billed to customers, divided by the total available hours in the respective period), the salaries we pay our consulting professionals, and the average rate we receive from our customers. If a project ends earlier than scheduled or we retain professionals in advance of receiving project assignments, our utilization rate will decline and adversely affect our gross margins.

Recent Developments

In October 2005, SEVI entered into a teaming agreement with The Project Group Inc. (“TPG”), a company currently in Chapter 11 Bankruptcy and publicly traded on the Pink Sheets with the symbol PJTGQ. TPG is an integrator of Microsoft Project software and a Microsoft Gold Partner. This teaming agreement provides SEVI and TPG the ability to increase market penetration by cross marketing our services (software development) to TPG clients and TPG’s services (Microsoft Project implementation) to our clients, increase operating efficiencies by integrating our physical Houston offices, and gain Microsoft Gold Partner status (achieved October 2005).

Furthermore, on October 4, 2005, SEVI and TPG entered into a non-binding term sheet that provides a plan of reorganization of TPG in bankruptcy court and the corporate integration of the two companies after TPG emerges from bankruptcy. “The entire transaction and relevant terms are subject to approval by the respective Board of Directors of SEVI and TPG, our respective shareholders as required, by the SEVI convertible note holders as required, by the creditors of TPG, and the Bankruptcy Court.”

SEVI discontinued the $1,500,000 factoring facility with Allied Capital Partners, LP on the anniversary of the facility as provided in the original agreement with no costs associated with its discontinuance.

In March 2006, SEVI amended its Amended 2006 Stock Incentive Plan to include up to 100,000,000 shares, from 50,000,000 shares, that may be issued pursuant to the Amended Plan, all upon the terms and subject to the provisions of the Amended Plan. This plan provides for the grant, at the discretion of the Compensation Committee of the Board of Directors, of stock awards of common stock, restricted stock awards of common stock, or stock options to purchase common stock of the Corporation.

Results of Operations for the three month periods ended February 28, 2006 and 2005

Total gross profit decreased from $1,448,667 for the three month period ended February 28, 2005 to $818,165 for the three month period ended February 28, 2006, a decrease of 44%. The decrease in gross profit resulted from decreased sales in the Consulting division and other revenues from Corporate and other. The decrease in Consulting and Other was partially offset by an increase in placement fees generated in the NHC division.

Net income from operations decreased from net income of $1,507,845 for the three month period ended February 28, 2005 to a net loss of $(9,577,812) for the three month period ended February 25, 2006. The decrease in the loss is attributable to reductions in payroll costs and general and administrative costs within the period along with a $8,777,651 adjustment for loss on derivative instrument liabilities.

Operating Expenses

Payroll and related costs make up the majority of our cost of revenue. Total payroll and related costs decreased from $1,500,352 for the three month period ended February 28, 2005 to $847,706 for the three month period ended February 28, 2006, a decrease of 44%. This decrease is attributed to reduction in operations related staff.

General and administrative expenses consist of salaries and benefits for sales, executive and administrative employees, training, marketing activities, investor relations, recruiting, non-reimbursable travel costs and expenses and miscellaneous expenses. General and administrative expenses decreased from $544,178 for three month period ended February 28, 2005 to $158,241 for the three month period ended February 28, 2006. This decrease is related to retaining a small administrative management team and little ongoing professional services.

Derivatives

The gain (loss) on derivative liabilities changed from a gain of $2,414,999 for the three month period ended Febraury 28, 2005 to a loss of $8,777,651 for the three month period ended February 28, 2006. This change is the result of additional derivative liabilities and the negative change in the valuation of the derivative liabilities.

Liquidity and Capital Resources

Net cash used by operating activities was $318,552 for the nine month period ended February 28, 2006 compared to $1,883,291 used by operating activities for the nine month period ended February 28, 2005.

Net cash provided by financing activities was $261,396 for the nine month period ended February 28, 2006 compared to $2,394,729 for nine month period ended February 28, 2005.

On August 31, 2004, the Company executed a Purchase Agreement with certain institutional and accredited investors under which the Company agreed to sell and the purchasers agreed to purchase convertible promissory notes due August 31, 2007 (the "Notes") in the aggregate principal amount of up to $2,500,000 bearing interest at the rate of 8% per annum and convertible into shares of our Common Stock at a conversion price of $0.05 per share. On September 9, 2004, the Company completed the sale of an aggregate of $1,825,000 in Notes and accompanying Warrants under the Purchase Agreement which resulted in net proceeds to the Company of $1,542,417. The Notes are initially convertible into 36,500,000 shares of Common Stock, and an additional 36,500,000 shares of Common Stock are reserved for issuance upon exercise of the Warrants issued to the note holders.

On December 30, 2004, we executed a securities purchase agreement with certain institutional and accredited investors for the sale of 8% Callable Secured Promissory Notes and accompanying Warrants. Under this agreement, on December 30, 2004, we completed the sale of an aggregate of $500,000 of these Notes, which resulted in net proceeds to SEVI of $408,148; on January 14, 2005, completed the sale of an additional $500,000 of these Notes, with net proceeds to SEVI of $497,500; on April 29, 2005 completed the sale of an additional $250,000 principal amount of these notes with net proceeds to SEVI of $230,000; and on November 14, 2005 completed the sale of an additional $250,000 principal amount of these notes with net proceeds to SEVI of $250,000.

The Company estimates that our requirements for additional capital over the next 12 months will be in the range of $1,324,000 or four times our net cash used in operating activities. There can be no assurance we will be able to raise this additional required capital on satisfactory terms, or at all. In the event we are unable to obtain such additional capital or to obtain it on acceptable terms or in sufficient amounts, the impact thereof would have a material adverse effect on our business, operating results, financial condition and may affect our ability to carry on as a Company.

Critical Accounting Policies

Consulting revenues are comprised of revenue from professional services fees recognized primarily on a time and materials basis as performed. For fixed fee engagements, revenue is recognized using the proportionate performance method (based on the ratio of hours expended to total estimated hours). Provisions for estimated losses on uncompleted contracts are made on a contract-by-contract basis and are recognized in the period in which such losses are determined. Billings in excess of costs plus earnings are classified as deferred revenues. Our normal payment terms are net 30 days. We record an expense for the expected losses on uncollectible accounts receivable each period based on known facts and circumstances for the respective period.

Deferred Financing Costs

Deferred financing costs relate to the cost incurred in the arrangement of Systems Evolution Inc.'s debt agreement and are being amortized using the straight-line method over the terms of the related debt.

ITEM 3 - Controls and Procedures

Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer has concluded that, as of the end of such period, the Company's disclosure controls and procedures were not effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. The disclosure controls and procedures were not effective due to late filing and derivative accounting and disclosures. The Company has implemented procedures to properly account for and disclose the derivatives.

Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 6 - Exhibits and Report on Form 8-K

(a) Exhibits.

Ex	31 Certification of Chief Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Ex	32 Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

; Systems Evolution Inc.

Dated: April 19, 2006

; /s/ Robert C. Rhodes

; &# 160; Robert C. Rhodes

; Chief Executive Officer

; /s/ Robert C. Rhodes

; &# 160; Robert C. Rhodes

; Chief Financial Officer

Highline Technical Innovations (SEVI) Inactive 10QSB/A2006 Q3 Quarterly report (small business) (amended)