Boston Communications (BCGI) 10-Q 2004 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 10549

FORM 10-Q

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

For the quarterly period ended September 30, 2004

or

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 0-28432

Boston Communications Group, Inc.

(Exact name of registrant as specified in its charter)

Massachusetts	04-3026859
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

100 Sylvan Road, Woburn, Massachusetts 01801

(Address of principal executive offices)

Registrant’s telephone number, including area code: (781) 904-5000

(Former name, former address, former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)    YES  x    NO  ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date. As of November 1, 2004, the Company had outstanding 17,560,192 shares of common stock, $.01 par value per share.

INDEX

PART I.	FINANCIAL INFORMATION:
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations Certain Factors That May Affect Future Results	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
PART II.	OTHER INFORMATION:	25
Item 1.	Legal Proceedings	25
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	25
Item 6.	Exhibits	26

This Quarterly Report contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties, including without limitation, statements regarding the expectations regarding our new product offerings, expansion into new markets, Verizon Wireless’ timetable to transfer subscribers from our platform to their internal prepaid platform, diversification of our product and customer base, total revenues,bcgiMobile Guardian revenues, earnings per share, billing and transaction processing services revenues, sales and marketing expenses, depreciation and amortization, costs to defend the Freedom Wireless lawsuit and the belief that the Company does not infringe on the Freedom Wireless patents, additional capital investments, payment of additional contingent cash consideration to Infotech Solutions Corporation, and the ability to finance our operations for the next 12 months. These statements are based on the current beliefs and assumptions of management.

Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believe,” “anticipate,” “plan,” “expect,” “intend,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words.

A number of important factors could cause actual events or our actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Certain Factors That May Affect Future Results” and “Quantitative and Qualitative Disclosures About Market Risk”. The statements discussed herein do not reflect the potential future impact of any mergers, acquisitions or dispositions. We do not assume any obligation to update any forward-looking statements made herein.

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BOSTON COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	September 30, 2004			December 31, 2003
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	12,197		$	2,960
Short-term investments		58,680			63,553
Accounts receivable, net of allowance for billing adjustments and doubtful accounts of $794 in 2004 and $878 in 2003		16,629			18,386
Inventory		361			679
Deferred income taxes		902			1,260
Prepaid expenses and other assets		3,605			2,121
Total current assets		92,374			88,959
Property and equipment:
Building and leasehold improvements		14,448			10,989
Telecommunications systems & software		91,943			86,418
Furniture and fixtures		647			540
Systems in development		6,117			10,789
		113,155			108,736
Less allowance for depreciation and amortization		57,286			50,098
		55,869			58,638
Intangible assets, net		740			920
Goodwill		4,753			4,177
Other assets		3,896			1,897
Total assets	$	157,632		$	154,591
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,029		$	1,844
Accrued expenses		9,434			12,363
Deferred revenue		3,211			3,788
Income taxes payable		351			760
Total current liabilities		14,025			18,755
Non-current liabilities:
Accrued pension liability		1,291			632
Deferred income taxes		8,103			7,003
Total non-current liabilities		9,394			7,635
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued and outstanding		—			—
Common stock, voting, par value $.01 per share, 35,000,000 shares authorized; 17,550,310 and 18,249,028 shares issued at September 30, 2004 and December 31, 2003, respectively		176			182
Additional paid-in capital		103,710			110,834
Retained earnings		30,473			17,230
Accumulated other comprehensive loss		(146	)		(45	)
Total shareholders’ equity		134,213			128,201
Total liabilities and shareholders’ equity	$	157,632		$	154,591

See accompanying notes.

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BOSTON COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share amounts)

	Three months ended September 30,					Nine months ended September 30,
	2004		2003			2004			2003
REVENUES:
Billing and Transaction Processing Services	$	25,591	$	24,669		$	79,127		$	69,840
Prepaid Systems		1,429		1,907			2,788			4,390
		27,020		26,576			81,915			74,230
EXPENSES:
Cost of Billing and Transaction Processing Services revenues*		6,232		5,775			18,093			16,779
Cost of Prepaid Systems revenues*		660		706			1,636			2,144
Engineering, research and development		3,694		3,365			10,987			9,596
Sales and marketing		1,567		1,618			5,106			4,701
General and administrative		1,955		2,005			6,166			5,875
General and administrative – legal expenses		450		1,350			2,050			2,990
Depreciation and amortization		5,894		5,132			16,853			14,337
		20,452		19,951			60,891			56,422
Operating income		6,568		6,625			21,024			17,808
Interest income		322		287			885			925
Income from continuing operations before income taxes		6,890		6,912			21,909			18,733
Provision for income taxes		2,722		2,626			8,655			7,123
Net income from continuing operations		4,168		4,286			13,254			11,610
Discontinued operations (Note 6):
Income (loss) from discontinued operations, before taxes		—		14			(19	)		95
Income tax (expense) / benefit from discontinued operations		—		(6	)		8			(36	)
Net income / (loss) from discontinued operations		—		8			(11	)		59
Net income	$	4,168	$	4,294		$	13,243		$	11,669
Basic net income per share:
Continuing operations	$	0.24	$	0.24		$	0.73		$	0.65
Net income	$	0.24	$	0.24		$	0.73		$	0.65
Weighted average common shares outstanding		17,534		18,202			18,035			17,897
Diluted net income per share:
Continuing operations	$	0.24	$	0.23		$	0.72		$	0.62
Net income	$	0.24	$	0.23		$	0.72		$	0.62
Weighted average common shares outstanding		17,732		18,797			18,395			18,672

* exclusive of depreciation, which is shown separately.

See accompanying notes.

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BOSTON COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

	Nine months ended September 30,
	2004			2003
OPERATING ACTIVITIES
Net income from continuing operations	$	13,254		$	11,610
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		16,853			14,337
Deferred income taxes		1,458			1,814
Income tax benefit from exercise of stock options		—			2,323
Changes in operating assets and liabilities:
Accounts receivable		1,607			(2,666	)
Inventory		318			(155	)
Prepaid expenses and other assets		(1,466	)		(1,170	)
Accounts payable, accrued expenses and deferred revenue		(4,020	)		1,965
Other non-current liabilities		659			482
Income taxes payable		(409	)		(697	)
Net cash provided by operating activities of continuing operations		28,254			27,843
Income (loss) from discontinued operations		(11	)		59
Net change in operating assets and liabilities of discontinued operations		(303	)		(112	)
Net cash provided by (used in) operating activities of discontinued operations		(314	)		(53	)
Net cash provided by operations		27,940			27,790
INVESTING ACTIVITIES
Payment of earn-out in connection with acquisition		(424	)		—
Purchases of long-term investments		(2,017	)		(1,517	)
Purchases of short-term investments		(48,739	)		(33,943	)
Sales of short-term investments		53,511			15,850
Purchase of property and equipment		(13,904	)		(26,680	)
Net cash used in investing activities		(11,573	)		(46,290	)
FINANCING ACTIVITIES
Proceeds from issuance of common stock		627			683
Proceeds from exercise of stock options and employee stock purchase plan		424			6,158
Repurchase of common stock		(8,181	)		—
Net cash provided by (used in) financing activities		(7,130	)		6,841
Increase (decrease) in cash and cash equivalents		9,237			(11,659	)
Cash and cash equivalents at beginning of period		2,960			31,146
Cash and cash equivalents at end of period	$	12,197		$	19,487
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes	$	7,870		$	3,194

See accompanying notes.

5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

For further information, refer to the condensed consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2003.

2. Summary of Significant Accounting Policies

Reclassifications

Certain amounts in the accompanying condensed consolidated financial statements have been reclassified to conform to the current year presentation.

Revenue Recognition

Revenues are recognized in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition” and application of Emerging Issues Task Force Issue No. 00-21 “Revenue Arrangements with Multiple Deliverables.”

The Company earns Billing and Transaction Processing Services revenues in various ways, depending on the type of transaction:

1) bcgi Real-Time Subscriber Management solutions - the Company principally earns revenues by processing prepaid wireless minutes and transactions, net of any penalties incurred related to outages on the platform;

2) bcgiPayment Services - the Company earns revenues by processing transactions on behalf of wireless carriers’ subscribers; and

3) bcgiVoyager Billing and Customer Care - the Company earns revenues by generating a subscriber’s monthly bill.

Revenues for each of these solutions are recognized as the services are provided.

Billing and Transaction Processing Services revenues also include amounts for licensing fees and related maintenance, development projects and implementations, which are typically recognized ratably over the remaining life of the contract with the respective carrier. For multiple element arrangements, the Company determines the fair value of each element based on specific objective evidence for that element and allocates total revenue from these arrangements to each element based on its fair value.

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The Company typically recognizes revenue for its Prepaid Systems business from the sale of systems at the time the systems are shipped or delivered to the customer, depending on contract terms. In the event there are acceptance terms that are not perfunctory, the Company defers revenue until acceptance has occurred. The fair value of installation revenue, based on vendor-specific objective evidence, is deferred until the entire installation is complete. Revenues from maintenance and support services are recognized ratably over the term of the contract period, which is generally one year, based on vendor-specific objective evidence of fair value. Vendor-specific objective evidence of fair value is based upon the amount charged when the service is sold separately, which is typically the contract’s renewal rate.

All revenues are recorded net of unbillable amounts, and a reserve for billing adjustments and doubtful accounts is recorded based on historical experience or specific identification of an event necessitating a reserve.

Legal Costs

The Company accrues the costs of settlements, damages and, under certain conditions, costs of defense when such costs are probable and reasonably estimable; otherwise, such costs are expensed as incurred. As discussed in Note 3 to the condensed consolidated financial statements, the Company began to expense legal costs related to the Freedom Wireless lawsuit as incurred due to the lengthy and unpredictable discovery process, which made it difficult to continue to reasonably estimate legal costs for the suit. Other litigation will continue to be accounted for in accordance with the Company’s accounting policy, and generally, the Company develops an estimate of probable costs in consultation with the Company’s outside legal counsel who is handling the case. There can be no assurances that the Company’s expenses will not exceed its estimates.

Research and Development, Software Development Costs and Assets Obtained and Deployed for Internal Use

Research and development costs are charged to expense as incurred. However, certain costs incurred for the development of computer software or deployment of assets for internal use are capitalized. The direct labor and payroll-related costs of development of computer software, primarily for the coding and testing of the software, are capitalized in accordance with the American Institute of Certified Public Accountants’ Statement of Position 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” The direct labor, travel and payroll related costs to deploy assets for internal use are capitalized until the asset is placed in service. The capitalized costs are subject to an ongoing assessment of recoverability based on the Company’s anticipated use, changes in hardware and software technologies and anticipated future undiscounted net cash flows.

Amortization of capitalized software development costs begins when the product is available and released for general use on the company’s platforms. Amortization of internal use costs begins when the related asset is first placed in service. These costs are amortized on a straight-line basis over a three-year period.

Impairment of Long-Lived Assets

The Company reviews the carrying value of its long-lived assets, including definite-lived intangible assets, and assesses the recoverability of these assets in accordance with Statement of Financial Accounting Standards Board Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company assesses assets for impairment when events and circumstances indicate that the assets may be impaired because of a change in anticipated use or technology, and the undiscounted operating cash flows estimated to be generated by those assets over their useful life are less than the carrying amounts of those assets. The impairment loss is measured by comparing the fair value of the assets to their carrying values. Fair value is determined by either a quoted market price or use of a discounted cash flow method, whichever is more appropriate under the circumstances involved.

7

In accordance with Statement of Financial Accounting Standards Board Statement No. 142 “Goodwill and Other Intangible Assets” (FAS 142), goodwill is not amortized but is subject to annual impairment tests. Goodwill is evaluated for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is tested for impairment by comparing the carrying amount to the estimated future undiscounted cash flows of the lowest level of related assets. If this review indicates that goodwill is not recoverable, the carrying amount would be reduced to fair value based on a discounted cash flow analysis taking into consideration the time value of money and investment risk factors.

For impairment tests of goodwill, the goodwill is attributed to the billing and transaction processing services and prepaid systems businesses as a single unit. As a result, the enterprise-wide approach, which is based on the market value of the Company’s common stock, is utilized to determine if an impairment loss exists.

Stock Based Compensation

The Company has elected to follow the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations in accounting for its stock-based compensation plans, rather than the alternative fair value method promulgated under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation (FAS 123).” Under APB 25, since the exercise price of options granted under these plans equals the fair market price of the underlying stock on the date of grant, the Company recognizes no compensation expense for stock option grants.

Had compensation expense for the Company’s stock plans been recorded consistent with the provisions of FAS 123, the pro forma net income and net income per share would have been as follows:

(in thousands, except per-share amounts)

	Three months ended September 30,				Nine months ended September 30,
	2004		2003		2004		2003
Net income as reported	$	4,168	$	4,294	$	13,243	$	11,669
Add: Stock-based employee compensation expense included in reported net income		—		—		—		—
Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of tax benefit		584		655		1,832		1,954
Pro forma net income	$	3,584	$	3,639	$	11,411	$	9,715
Basic net income per share:
As reported	$	0.24	$	0.24	$	0.73	$	0.65
Pro forma	$	0.20	$	0.20	$	0.63	$	0.54
Diluted net income per share:
As reported	$	0.24	$	0.23	$	0.72	$	0.62
Pro forma	$	0.20	$	0.19	$	0.62	$	0.52

8

Comprehensive Income

Comprehensive income is comprised of net income and unrealized gains and losses on available-for-sale securities.

	Three months ended September 30,				Nine months ended September 30,
	2004		2003		2004			2003
Net income as reported	$	4,168	$	4,294	$	13,243		$	11,669
Unrealized gain (loss) on available for sale securities		125		—		(101	)		—
Comprehensive income	$	4,293	$	4,294	$	13,142		$	11,669

3. Contingencies

Legal

In March 2000, Freedom Wireless, Inc. filed a suit against the Company and a number of the Company’s wireless carrier customers. The suit is being tried in the United States District Court in Massachusetts and alleges that the defendants infringe two patents held by Freedom Wireless, Inc. and seeks damages in an unspecified amount as well as injunctive relief. If there was a ruling that the Company infringed the Freedom Wireless patents, it could significantly restrict the Company’s ability to conduct business. In addition, the Company has an obligation to indemnify the other defendants for damages they may incur with respect to any infringement by the Company’s technology. On August 10, 2004, the plaintiff and the defendant each had four summary judgment motions denied by the court, bringing the case closer to the trial phase. The suit is in the pre-trial phase and the trial is scheduled to begin on January 31, 2005. The Company does not believe that it infringes these patents and believes that the patents are invalid in light of prior art and other reasons.

From time to time, as a normal incidence of the nature of the Company’s business, various claims, charges and litigation are asserted or commenced against the Company arising from, or related to, contractual matters, patents, trademarks, personal injury, and personnel and employment disputes. As to such claims and litigation, the Company can give no assurance that it will prevail. However, the Company does not believe that any of these current matters (other than as disclosed) will have a material adverse effect on its consolidated financial position, although an adverse outcome of any of these matters could have a material adverse effect on its consolidated results of operations or cash flows in future quarters or in the quarter or annual period in which one or more of these matters are resolved.

Indemnifications

In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45), which requires certain guarantees to be recorded at fair value as opposed to the previous practice of recording a liability only when a loss is probable and reasonably estimable. FIN 45 also requires a guarantor to make significant new guaranty disclosures, even when the likelihood of making any payments under the guarantee is remote.

The Company has agreed to indemnification provisions in certain of its agreements with customers and its leases of real estate in the ordinary course of its business.

With respect to customer agreements, these provisions generally obligate the Company to indemnify the customer against losses, expenses, liabilities and damages that may be awarded against the customer in the event the Company’s systems or services infringe upon a patent or other intellectual property right of a third

9

party. The agreements generally limit the scope of and remedies for such indemnification obligations in certain respects, including but not limited to geographical limitations and the right to replace or modify an infringing product or service. The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of these agreements.

With respect to real estate leases, these indemnification provisions typically apply to claims asserted against the landlord by a third party relating to personal injury and property damage occurring at the leased premises or to certain breaches of the Company’s contractual obligations. The term of these indemnification provisions generally survive the termination of the lease, although the exposure is greatest during the lease term and for a short period of time thereafter. The maximum potential amount of future payments that the Company could be required to make under these indemnification provisions is unlimited. The Company has purchased insurance that reduces the amount of such exposure for landlord indemnifications. The Company has never paid any amounts to defend lawsuits or settle claims related to these landlord indemnification provisions. Accordingly, the Company believes the estimated fair value of these indemnification arrangements is minimal.

4. Basic and Diluted Net Income Per Share

Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period plus the impact, if dilutive, of common share equivalents, which comprise stock options. For purposes of computing diluted earnings per share, weighted average common share equivalents do not include stock options with an exercise price that exceeds the average market price of the Company’s Common Stock for the respective period. Accordingly, for the three months ended September 30, 2004 and 2003 options to purchase 1,636,000 and 227,000 shares, respectively, of Common Stock have been excluded from the computation. In addition, for the nine months ended September 30, 2004 and 2003 options to purchase 1,246,000, and 80,000 shares, respectively, of Common Stock have been excluded from the computation.

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):

	Three months ended September 30,				Nine months ended September 30,
	2004		2003		2004			2003
Numerator for basic and diluted earnings per share:
Income from continuing operations	$	4,168	$	4,286	$	13,254		$	11,610
Income (loss) from discontinued operations		—		8		(11	)		59
Net income	$	4,168	$	4,294	$	13,243		$	11,669
Denominator:
Denominator for basic net income per share		17,534		18,202		18,035			17,897
Effect of dilutive employee stock options		198		595		360			775
Denominator for diluted net income per share		17,732		18,797		18,395			18,672
Basic net income per common share:
Income from continuing operations	$	0.24	$	0.24	$	0.73		$	0.65
Income (loss) from discontinued operations		—		—		—			—
Net income per common share	$	0.24	$	0.24	$	0.73		$	0.65
Diluted net income per common share:
Income from continuing operations	$	0.24	$	0.23	$	0.72		$	0.62
Income (loss) from discontinued operations		—		—		—			—
Net income per common share	$	0.24	$	0.23	$	0.72		$	0.62

5. Segment Reporting

The Company’s reportable operating segments consist of Billing and Transaction Processing Services and

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Prepaid Systems. The Company’s Billing and Transaction Processing Services solutions allow wireless carriers to access the Company’s real-time subscriber management network and transaction processing platform, enabling such carriers to offer prepaid wireless calling, payment services replenishment capabilities and postpaid billing and customer care to their subscribers. The real-time subscriber management network and transaction processing platform also enablesbcgiMobile Guardian, a Web-based solution that allows end-users to actively manage their wireless usage and access. The Prepaid Systems segment has been operating from the Company’s Tulsa location where it assembles and markets prepaid systems principally to international carriers. In September 2004, the Company began the process of consolidating the Tulsa operations into the corporate headquarters in Massachusetts. As a result of this consolidation, the Company does not expect to be reporting Prepaid Systems as a separate segment in 2005.

As described in footnote 6, the Company ceased providing its ROAMERplus solution in March 2004, effectively discontinuing its Roaming Services segment.

(in thousands, except percentages)

Three months ended September 30,	Billing and Transaction Processing Services			Prepaid Systems			Total
2004
Revenues	$	25,591		$	1,429		$	27,020
Gross margin		19,359			769			20,128
Gross margin percentage		76	%		54	%		74	%
2003
Revenues	$	24,669		$	1,907		$	26,576
Gross margin		18,894			1,201			20,095
Gross margin percentage		77	%		63	%		76	%

Nine months ended September 30,	Billing and Transaction Processing Services			Prepaid Systems			Total
2004
Revenues	$	79,127		$	2,788		$	81,915
Gross margin		61,034			1,152			62,186
Gross margin percentage		77	%		41	%		76	%
2003
Revenues	$	69,840		$	4,390		$	74,230
Gross margin		53,061			2,246			55,307
Gross margin percentage		76	%		51	%		75	%

6. Discontinued Operations

Due to industry consolidation and a change in the fundamentals of inter-carrier roaming, resulting in a continued decline in profitability, the Company ceased providing its ROAMERplus solution in March 2004, effectively discontinuing its Roaming Services segment. Pursuant to Statement of Financial Accounting Standards 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”), the condensed consolidated financial statements have been reclassified to reflect this discontinued operation. Accordingly, the operating results of the Roaming Services segment have been segregated as a discontinued operation in the Condensed Consolidated Statements of Operations and Consolidated Statements of Cash Flows. In addition, 2003 amounts have been restated to reflect Roaming Services as discontinued operations.

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At September 30, 2004 there was $39,000 in accounts receivable related to the Roaming Services segment. Revenues for the Roaming Services segment were $0 and $924,000 for the three months ended September 30, 2004 and 2003, respectively, and $563,000 and $2.8 million for the nine months ended September 30, 2004 and 2003, respectively.

7. Retirement Plans

Defined Benefit Plan

In 2002, the Company adopted a defined benefit retirement plan (the Plan) for certain executives. Contributions are based on periodic actuarial valuations and are charged to the Consolidated Statement of Operations on a systematic basis over the expected average remaining service lives of the executives as prescribed by Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions” (FAS 87). The Company’s funding policy is to make annual contributions to the extent such contributions are tax deductible as actuarially determined. The benefits under the defined benefit plan are based on years of service and compensation.

The components of net periodic benefit costs for the three and nine months ended September 30, 2004 and 2003 are as follows (unaudited and in thousands):

	Three months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Components of net periodic benefit costs
Service cost	$	109	$	82	$	362	$	247
Interest cost		58		38		220		115
Amortization of unrecognized net prior service cost		31		24		77		71
Net periodic benefit costs	$	198	$	144	$	659	$	433

8. Stockholders’ Equity

Effective July 1, 2004, companies incorporated in Massachusetts became subject to Chapter 156D of the Massachusetts Business Corporation Act. Chapter 156D eliminates the concept of treasury shares and provides that shares reacquired by a company are to be treated as authorized but unissued shares of common stock. As a result of this change, the Company has reclassified, for balance sheets presented, shares previously classified as treasury shares as authorized but unissued shares of common stock. At December 31, 2003 the Company had 273,420 shares at a cost of $2.1 million classified as treasury stock.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a leader in transaction processing solutions for real-time wireless subscriber management, payment services and billing and customer care. Through these solutions, we deliver prepaid and postpaid billing, wireless account recharge and mobile commerce services. We provide solutions to wireless operators worldwide through a combination of our industry-leading, proprietary software applications, world-class infrastructure and data centers, expertise in telecommunications platform integration and flexible implementation models. Our solutions provide carriers with a distinct competitive advantage by empowering them to attract, retain and maximize the value of subscribers, while lowering the cost associated with customer care, payment processing and churn.

We operate our billing and transaction processing services as a business process outsourcer, primarily in the United States. Our customers include Nextel Communications, Inc., branded as BOOST Mobile^™, ALLTEL, Verizon Wireless, Cingular Wireless and other regional carriers. Our prepaid systems business sells turnkey systems primarily to wireless carriers outside the United States. We sell our products and services to our wireless carrier customers through our direct sales force. The specifics of each segment’s revenues and gross margins are discussed in greater detail below.

In the third quarter of 2004, we generated revenues of $27.0 million and diluted earnings per share of $0.24. These results were driven by the growth in our billing and transaction processing services revenues, which increased 4% to $25.6 million for the three months ended September 30, 2004 compared to $24.7 million for the three months ended September 30, 2003 and increased 13% to $79.1 million for the nine months ended September 30, 2004 compared to $69.8 million for the nine months ended September 30, 2003. The increase in billing and transaction processing services revenues principally resulted from an increase in our prepaid subscriber base from 3.58 million subscribers at September 30, 2003 to 3.91 million subscribers at September 30, 2004. The increase in our subscriber base resulted from additional subscriber growth from certain of our carrier customers, partially offset by the loss of subscribers from Verizon Wireless.

Verizon Wireless accounted for 51% of our total revenues for the year ended December 31, 2003 and 41% of our total revenues for the three months ended September 30, 2004. Our existing prepaid wireless services agreement with Verizon Wireless is in its auto-renewal term and may be terminated by either party upon 90 days written notice. In June 2004, Verizon Wireless began activating new retail subscribers on their internal prepaid platform, and in October 2004 began to convert subscribers offbcgi’s platform. The subscriber conversions are expected to be completed by the third quarter of 2005, although we can provide no assurance that conversions will not be completed sooner than expected.

We currently support Cingular Wireless’ TDMA prepaid program, which represented 23% of our total revenues for the year ended December 31, 2003 and for the three months ended September 30, 2004, under a contract that expires in the first half of 2005. Cingular Wireless has begun offering GSM service to certain of its prepaid subscribers. Since we only support its TDMA business, we expect that Cingular Wireless’s subscribers we currently support will expire off our network over time.

We are seeking to mitigate the impact of the expected loss of prepaid wireless revenues from our two largest customers by focusing on diversifying our revenues, as we enable growth from other existing customers and target new and current customers with our expanded product offerings. Over the past nine months, our revenue growth has been principally generated from customers other than Verizon and Cingular. In 2004, we introducedbcgi Mobile Guardian, a unique offering that provides Web-based tools for parents and enterprises seeking to better manage postpaid wireless usage of their children or employees. This solution has generated significant interest from both existing and prospective national and regional carrier customers and we expect to generate revenue from this solution in 2005. In addition, Nextel further expanded its youth-oriented, pay-as-you-go service, branded as BOOST Mobile, into seven major new markets during the past quarter using thebcgiPrepaid Wireless solution. Nextel, which represented 14% of our total revenues for the three months ended September 30, 2004, up from 11% for the three months ended June 30, 2004, has added approximately 400,000 net subscribers during the nine months ended September 30, 2004. Finally, we continue to expand our presence across the regional wireless and mobile virtual network operator (MVNO) marketplace with all of our new and existing solutions.

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Although we cannot anticipate the level at which Verizon Wireless will convert subscribers offbcgi’s platform and do not have sufficient information on how Cingular Wireless’s nationwide GSM network will impact our subscriber base, given our baseline of revenues and related trends, we anticipate that for the fourth quarter ending December 31, 2004, our total revenues will range between $24 million and $26 million. Additionally, we anticipate that our earnings per share for the quarter ending December 31, 2004 will approximate $0.14 to $0.18, including approximately $0.02-0.03 per share of legal costs, primarily associated with the Freedom Wireless lawsuit.

Segment Data

(in thousands, except percentages)

Three months ended September 30,	Billing and Transaction Processing Services			Prepaid Systems			Total
2004
Revenues	$	25,591		$	1,429		$	27,020
Gross margin		19,359			769			20,128
Gross margin percentage		76	%		54	%		74	%
2003 (1)
Revenues	$	24,669		$	1,907		$	26,576
Gross margin		18,894			1,201			20,095
Gross margin percentage		77	%		63	%		76	%
Nine months ended September 30,	Billing and Transaction Processing Services			Prepaid Systems			Total
2004
Revenues	$	79,127		$	2,788		$	81,915
Gross margin		61,034			1,152			62,186
Gross margin percentage		77	%		41	%		76	%
2003 (1)
Revenues	$	69,840		$	4,390		$	74,230
Gross margin		53,061			2,246			55,307
Gross margin percentage		76	%		51	%		75	%

(1) Our Roaming Service business was discontinued in the quarter ended March 31, 2004. 2003 amounts have been restated to reflect Roaming Services as a discontinued operation.

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Billing and Transaction Processing Services

Billing and transaction processing services revenues consist principally of revenues from our three primary solution sets:bcgiReal-Time Subscriber Management solutions (which includesbcgi Prepaid Wireless,bcgi Mobile Guardian^TM andbcgi Network Governor^TM),bcgi Voyager Billing and Customer Care andbcgi Payment Services. Billing and transaction processing services revenues increased 4% to $25.6 million for the three months ended September 30, 2004 compared to $24.7 million for the three months ended September 30, 2003 and increased 13% to $79.1 million for the nine months ended September 30, 2004 compared to $69.8 million for the nine months ended September 30, 2003. The revenue increase for the three and nine month periods ended September 30, 2004 compared to the corresponding periods in the previous year was primarily a result of the 9% increase in the subscriber base to 3.91 million as of September 30, 2004 from 3.58 million as of September 30, 2003. The increase in our subscriber base resulted from additional subscriber growth from certain of our carrier customers, partially offset by a decrease in Verizon Wireless subscribers.

Average billed minutes of use per subscriber decreased to 108 per month for the three-month period ended September 30, 2004 from 113 per month for the three-month period ended September 30, 2003. The lower average billed minutes of use for the three-month period ended September 30, 2004 compared to the same period in the previous year resulted from a reduction in the minutes of use from Verizon Wireless and Cingular Wireless. Average billed minutes of use per subscriber increased to 113 per month for the nine-month period ended September 30, 2004 from 111 per month for the nine-month period ended September 30, 2003. The increase in average billed minutes of use for the nine-month period ended September 30, 2004 compared to the same period in the previous year resulted primarily from new carrier programs that offered more attractive features and more competitive pricing, resulting in greater usage.

For the three-month period ended September 30, 2004 the average billed rate per minute was consistent with the same period in the previous year. For the nine month period ended September 30, 2004, our average billed rate per minute decreased approximately 9% compared to the same period in the prior year principally due to carriers availing themselves of our volume pricing discounts. We expect billing and transaction processing revenues to decrease in the fourth quarter of 2004 compared to the three months ended September 30, 2004 due primarily to the anticipated loss of Verizon and Cingular subscribers.

Gross margins for billing and transaction processing services were 76% of billing and transaction processing services revenues for the three months ended September 30, 2004 compared to 77% of such revenues for the three months ended September 30, 2003. The decrease in our gross margin for the three month period resulted from costs incurred to support our technology enhancement initiatives. Gross margins increased to 77% of billing and transaction processing services revenues for the nine months ended September 30, 2004 compared to 76% of such revenues for the nine months ended September 30, 2003. While our cost of services in absolute dollars increased for the nine month period ended September 30, 2004 to support our technology enhancement initiatives, Nextel’s market expansion and ourbcgi Mobile Guardian product introduction, our gross margins increased due mainly to increased revenue and our predominantly fixed cost infrastructure.

Prepaid Systems

Prepaid systems revenues decreased to $1.4 million for the three months ended September 30, 2004 from $1.9 million for the three months ended September 30, 2003 and decreased to $2.8 million for the nine months ended September 30, 2004 compared to $4.4 million for the nine months ended September 30, 2003. The decrease in prepaid systems revenues resulted primarily from fewer system sales. Our prepaid system sales levels are not easily predictable and often fluctuate on an annual and quarter-to-quarter basis.

Gross margins for prepaid systems decreased to 54% of prepaid systems revenues for the three months ended September 30, 2004 from 63% for the three months ended September 30, 2003 and decreased to 41% of prepaid systems revenues for the nine months ended September 30, 2004 compared to 51% of such revenues for the nine months ended September 30, 2003. The decrease for the three and nine months ended September 30, 2004 was due mainly to fixed costs not absorbed at lower levels of system sales. During the quarter ended September 30, 2004 we

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began a phased shut down of our Tulsa operation, which housed much of the operations that support our prepaid systems business. We expect that our systems business will be fully integrated into our Massachusetts locations within the first half of 2005. The expenses we have incurred to begin closing this facility are reflected in our operating results. Additionally, as a result of the consolidation, we do not expect to be reporting prepaid systems as a separate segment in 2005.

Operating Data

(in thousands)

	Three months ended September 30,
	2004				2003
	Total		% of Total Revenues		Total		% of Total Revenues
Total revenues	$	27,020	100	%	$	26,576	100	%
Engineering, research and development		3,694	14	%		3,365	13	%
Sales and marketing		1,567	6	%		1,618	6	%
General and administrative		1,955	7	%		2,005	8	%
General and administrative – legal		450	2	%		1,350	5	%
Depreciation and amortization		5,894	22	%		5,132	19	%
	Nine months ended September 30,
	2004				2003
	Total		% of Total Revenues		Total		% of Total Revenues
Total revenues	$	81,915	100	%	$	74,127	100	%
Engineering, research and development		10,987	13	%		9,596	13	%
Sales and marketing		5,106	6	%		4,701	6	%
General and administrative		6,166	8	%		5,875	8	%
General and administrative – legal		2,050	3	%		2,990	4	%
Depreciation and amortization		16,853	21	%		14,337	19	%

Engineering, research and development expenses

Engineering, research and development expenses primarily include the salaries and benefits for software development and engineering personnel associated with the development, implementation and maintenance of new and existing solutions. The increase in engineering, research and development expenses for both the three and nine month periods ended September 30, 2004 in absolute dollars principally resulted from additional resources devoted to expanding and enhancing the features and functionality of our billing and transaction processing services business, as well as additional resources added to support our growth, technology enhancements and new solutions, includingbcgi Mobile Guardian. Spending for engineering, research and development remained consistent as a percentage of revenues as we generated greater revenues in the periods ended September 30, 2004 compared to the year-earlier periods.

Sales and marketing expenses

Sales and marketing expenses include direct sales and product management salaries, commissions, travel and entertainment expenses, in addition to the cost of trade shows, direct mail and other promotional expenses. In absolute dollars, sales and marketing expenses were relatively consistent for the three month period ended September 30, 2004 compared to the same period in the previous year. Sales and marketing expenses increased for the nine-month period ended September 30, 2004 compared to the same period in the prior year primarily to support our marketing efforts for the product introduction ofbcgi Mobile Guardian in the first half of the year. As we

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generated greater revenues in each of the three and nine month periods ended September 30, 2004 from the year-earlier periods, spending for sales and marketing remained consistent as a percentage of revenues over both of these periods. For the three months ending December 31, 2004, we expect spending for sales and marketing to increase principally to support the promotion and sales strategy for our new solutions.

General and administrative expenses

General and administrative expenses include salaries and benefits of employees and other expenses that provide administrative support. General and administrative expenses in absolute dollars decreased for the three month period ended September 30, 2004 and increased for nine month period ended September 30, 2004 as compared to the same periods the prior year. This decrease in the three month period ended September 30, 2004 was principally due to lower general corporate legal expenses. The increase for the nine month period ended September 30, 2004 was due primarily to additional resources and costs associated with additional regulatory requirements and an increase in legal costs incurred to enhance our intellectual property portfolio. However, as we generated greater revenues in the three month period ended September 30, 2004 from the year-earlier periods, spending for general and administrative expenses declined as a percentage of revenues from 8% to 7%.

General and administrative expenses – legal expenses

General and administrative - legal expenses are incurred primarily for legal expenses to defend the patent infringement lawsuit initiated by Freedom Wireless. General and administrative - legal expenses decreased for both the three and nine month periods ended September 30, 2004 compared to the respective year-earlier periods principally due to lower costs to defend the Freedom Wireless lawsuit. We expect to incur, on average, approximately $1 million per quarter (before taxes) for legal costs until the Freedom Wireless matter is resolved. However, this cost will likely continue to vary from quarter to quarter, depending on the level of activity and timing of proceedings.

Depreciation and amortization expense

Depreciation and amortization expense includes depreciation and amortization of telecommunications systems and software, building, furniture, equipment, leasehold improvements and certain intangible assets. We provide for depreciation and amortization using the straight-line method over the estimated useful lives of the assets, which range from three to twenty years. The increase in depreciation and amortization expense for both the three and nine month periods ended September 30, 2004 was primarily due to more capital deployed to support growth and continued enhancements in billing and transaction processing services, includingbcgi Mobile Guardian and other technology enhancement initiatives. In addition, to a lesser extent, the increase was due to write-offs of certain assets during the quarter ended September 30, 2004, including assets of our Tulsa location. As a result, we expect depreciation and amortization expense to decrease in the quarter ended December 31, 2004.

Interest income

Interest income increased 12% to $322,000 for the three months ended September 30, 2004 from $287,000 for the three months ended September 30, 2003 and decreased 4% to $885,000 for the nine months ended September 30, 2004 from $925,000 for the nine months ending September 30, 2003. The increase in interest income for the three month period ended September 30, 2004 compared to the same period in the previous year resulted from an increased cash and investment balance. The decrease in interest income for the nine month period ended September 30, 2004 compared to the prior year resulted from lower yield on certain investments.

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Provision for income taxes

The income tax rate for the nine months ended September 30, 2004 was 39.5% compared to an income tax rate of 38% for the nine months ended September 30, 2003. The increase in the income tax rate is primarily due to the use of net operating loss carry forwards in the prior year that were completely utilized during the year ended December 31, 2003.

Discontinued Operations

In March 2004, we ceased providing our ROAMERplus solution, effectively discontinuing our Roaming Services segment. This business generated a net loss of $0 and $11,000 for the three and nine months ended September 30, 2004 and net income of $8,000 and $59,000 for the three and nine months ended September 30, 2003, respectively. At September 30, 2004, the discontinued Roaming Services segment had net accounts receivable of $39,000.

Liquidity and Capital Resources

Cash, cash equivalents and short-term investments increased to $70.9 million at September 30, 2004 compared to $66.5 million at December 31, 2003. Net cash provided by continuing operations of $27.9 million for the nine months ended September 30, 2004 resulted from net income of $13.3 million, adjustments for depreciation and amortization of $16.9 million. In addition, the increase in cash and investments was due to a decrease in accounts receivable of $1.6 million as our DSO (days sales outstanding) decreased to 59 days. These amounts were partially offset by a decrease in accounts payable, accrued expenses and deferred revenue of $4.0 million as certain fixed asset purchases were accrued just prior to year end along with lower levels of bonus accrued at September 30, 2004 compared to December 31, 2003. In addition, the net cash provided by continuing operations was partially offset by an increase in prepaid expenses and other assets of $1.5 million primarily to purchase certain long-term maintenance contracts in 2004.

Our investing activities utilized $11.6 million of net cash for the nine months ended September 30, 2004. We utilized $13.9 million for capital expenditures, including approximately $2.8 million for internally capitalized labor and purchased long-term investments of $2.0 million during the period. We anticipate that, during the fourth quarter ending September 30, 2004, we will make additional capital investments of $5 to 6 million for equipment and software to support new solutions and enhanced feature capabilities and for our billing and transaction processing services. We have recorded $590,000 as our estimate of the anticipated payment to Infotech Solutions Corporation in 2005 based on qualified revenues estimated to be earned in 2004 under the terms of our earn-out provisions from the acquisition. We intend to finance such capital investments or contingent consideration payments from cash or short-term investments on-hand or cash flow generated from operations.

Our financing activities used cash of $7.1 million during the nine months ended September 30, 2004 due mainly to the repurchase of common stock pursuant to our 2004 Share Repurchase Plan. As of September 30, 2004, we repurchased a total of 838,500 shares at a total cost of $8.2 million. This use of cash was slightly offset by proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan.

We have non-cancelable operating lease commitments for office space, many of which are renewable at our option, equipment lease commitments and various other commitments under which we are contractually obligated beyond the current period. Future minimum payments due under non-cancelable agreements are as follows (in thousands):

			Payment due by period
	Total		Within 1 year		2-3 years		4-5 years		More than 5 years
Contractual obligations:	$	5,005	$	2,998		1,852		155	$	—
Operating leases		2,680		1,707		884		89		—
Purchase commitments		2,137		1,994		143		—		—
Total	$	9,822	$	6,699	$	2,879	$	244	$	—

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We believe that our cash and short-term investments and the funds we anticipate to generate from operations will be sufficient to finance our operations for at least the next 12 months.

Off Balance Sheet Arrangements

During the three months ended September 30, 2004, we did not engage in:

• Material off-balance sheet activities, including the use of structured finance or special purpose entities;

• Material trading activities in non-exchange traded commodity contracts; or

• Material transactions with persons or entities that benefit from their non-independent relationship with us

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of those financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to bad debts, inventories, capitalized software and labor, long-lived assets, goodwill and intangible asset impairment, legal expenses, contingencies and litigation. We base our estimates on historical experience, known trends and events and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from such estimates under different assumptions or conditions.

We believe the following policies to be our most critical policies in the preparation of our condensed consolidated financial statements:

• Revenue recognition and allowance for bad debts

• Legal costs

• Research and development, software development costs and costs capitalized for internal use

• Impairment of long-lives and intangible assets and goodwill

A summary of these policies may be found in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission on March 11, 2004. During the three months ended September 30, 2004, there has been no change in the above critical accounting policies. In addition, there has been no significant change in the underlying accounting assumptions and estimates used in the above critical accounting policies.

Certain Factors That May Affect Future Results

Verizon Wireless and Cingular Wireless, our two largest customers, are currently utilizing our competitors’ prepaid solutions, which will result in the loss of existing subscribers and fewer subscriber additions to our platforms.

On July 11, 2003, Verizon Wireless notified us that they intend to test their own internal prepaid platform, purchased from one of our competitors in 2004. In June 2004, Verizon Wireless began to activate new prepaid retail subscribers on their internal prepaid platform and in October 2004, began to convert subscribers offbcgi’s platform. The subscriber conversions are expected to be completed by the third quarter of 2005, although we can provide no assurance that conversions will not be completed sooner than expected. Verizon Wireless use of their internal prepay platform and the expected conversion process will have a material, adverse effect on our revenues and net income for the three months ended December 31, 2004 and thereafter.

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We currently provide prepaid wireless solutions to Cingular Wireless’s TDMA markets under a contract that expires in the first half of 2005. Cingular Wireless uses another vendor to provide prepaid wireless service in its GSM markets. Because Cingular Wireless has begun offering prepaid service on its newest GSM network, we expect our revenue from this TDMA business to decrease over time, although we can give no assurances as to the timing and rate of our revenue loss. Additionally, there is no guarantee that Cingular Wireless will not migrate its existing TDMA prepaid business onto its GSM network, thereby causing a more rapid reduction in our revenues and net income.

The loss or significant reduction of business from one of our major customers, including Verizon Wireless, Cingular Wireless or Nextel Communications, would have a material adverse effect on our business.

Historically, a significant portion of our revenues in any particular period has been attributable to a limited number of customers in the wireless telecommunications business. Verizon Wireless represented 41%, Cingular Wireless represented 23% and Nextel Communications represented 14% of our total revenues for the three months ended September 30, 2004.

Most of our customer contracts are not exclusive. Therefore, our carrier customers have used and/or tested and continue to use and/or test their own services or services of our competitors in certain markets. In addition, certain of our contracts are up for renewal in 2004 and beyond. If and when each of the contracts is renewed, some contractual rates may be lower than in previous years and at lower rates than we have estimated.

In addition, we depend on our wireless carrier customers to market and sell our solutions to consumers. We can provide no assurance that they will do so successfully, and therefore, that there will be a significant market for prepaid programs, including our prepaid wireless solutions.

An unfavorable judgment in the Freedom Wireless lawsuit would have a material adverse impact on our business.

In March 2000, Freedom Wireless, Inc. filed a suit against us and a number of our wireless carrier customers claiming that we and the other defendants infringe a patent of Freedom Wireless. In March 2001, Freedom Wireless amended the complaint to include a continuation patent. Freedom Wireless seeks injunctive relief and damages in an unspecified amount. In addition, we are contractually obligated to indemnify the other defendants for any damages that they incur as a result of any infringement by our technology.

The suit is in the pre-trial phase and the trial is scheduled to begin on January 31, 2005. We cannot yet assess our potential liability, if any. Any adverse outcome, including the following, would have a material adverse effect on our business, financial condition and results of operations:

• Injunctive relief against us, which could significantly restrict our ability to conduct our business;

• An adverse judgment against us for significant monetary damages;

• A settlement on unfavorable terms;

• Obligations to the other defendants to indemnify them for damages;

• Obligations to customers for breach of a contractual warranty of non-infringement; and/or

• A requirement to reengineer our prepaid processing solution to avoid patent infringement, which would likely result in additional expense and delay.

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Regardless of the outcome, we will continue to incur significant expenses to defend this lawsuit. We have incurred approximately $15.7 million in legal costs as of September 30, 2004 to defend this lawsuit, and we expect to incur approximately $1 million per quarter in legal costs until the Freedom Wireless matter is resolved. However, this cost will likely continue to vary from quarter to quarter, depending on the level of activity and the timing of proceedings. Moreover, this lawsuit may divert the efforts and attention of our management team from normal business operations. Finally, we may become subject to additional patent infringement lawsuits in the future.

Our future operating results are difficult to predict and may materially fluctuate, which may result in significant fluctuations in our stock price.

We have experienced fluctuations in our quarterly operating results and such fluctuations may continue and could intensify. Our quarterly operating results may vary significantly depending on a number of factors, including:

• The extent of our carrier customers’ emphasis on promoting prepaid solutions and the timing of related marketing initiatives, including our carriers’ allocation of marketing resources for initiatives other than prepaid wireless services, such as wireless number portability, data services, new technologies, etc.;

• Our and our carrier customer’s ability to minimize “churn” (the percentage of total prepaid subscribers that terminate service on our network);

• The lack of acceptance or delayed acceptance of our newest solutions, includingbcgiMobile Guardian;

• Variations in volumes of minutes of use generated by our carrier customers’ subscribers;

• Rates paid by our customers;

• Impact and acceptance of existing solutions or the introduction of competing solutions by wireless carriers, including those who are currently our prepaid wireless services customers;

• Our carrier customers’ ability to generate additional prepaid subscribers using our solutions;

• The number and significance of network outages in a particular quarter and the severity and timing of penalties that result from such outages;

• Decreased demand for our prepaid systems and licensed solutions, caused by reductions in capital budgets of our customers, changing technologies, and other reasons beyond our control;

• Changes in the mix of solutions we provide;

• Seasonal trends, particularly in the second and third quarters when carriers are not usually marketing and selling prepaid services as aggressively as in the first and fourth quarters of the year; and

• Consolidation within the wireless industry, which could lead to the loss of a major customer or the reduction in rates per minute paid by our customers.

Due to all of the foregoing factors, it is possible that in some future quarter our results of operations will be below prior results or the expectations of public market analysts and investors. In such event, the price of our common stock would likely be materially and adversely affected. In addition, a significant portion of our expenses is fixed in the short term. Accordingly, our results of operations are particularly sensitive to fluctuations in revenues. If our revenues fall below our expectations, we would most likely not be able to reduce our fixed or other expenses in time to sufficiently respond to such a shortfall.

If we do not continue to develop and offer more desirable functionality and features in our solutions at competitive prices, including the new solutions currently in our pipeline, we will not be able to compete effectively and our business will be materially and adversely affected.

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Our business will not be successful if we do not develop and offer more functionality and features in our solutions than those available in competitive offerings or if we are unable to develop new solutions to offer our carrier customers. Also, there can be no assurance that we will successfully support and enhance our real-time subscriber management network and billing and transaction processing platform effectively or that our network will successfully support current and future growth. In addition, we may be unable to leverage our existing infrastructure to provide enhancements to our current solutions or new solutions cost-effectively. If we cannot develop and provide more desirable functionality and features than our competitors, if we cannot sell our new solutions, includingbcgi Mobile Guardian, to our customers, or if we are unable to keep our costs down to provide new and enhanced solutions at competitive prices, we would likely lose market share or be required to reduce our margins, which would have a material adverse effect on our business, financial condition and results of operations. In addition, if we do not successfully continue to upgrade our software and hosting environment as new wireless technologies evolve, including but not limited to 3G technology, we may lose existing and prospective customers.

If we experience outages in our network, we will be subject to financial penalties that could adversely affect our business and operating results.

Each quarter, we have experienced network outages, some of which have resulted in significant reductions in revenue due to penalty clauses contained in certain of our carrier customer contracts. Any failure to successfully support current and future growth, or an increase in the frequency or duration of outages would reduce our revenue and damage our reputation.

Our operations depend on our ability to maintain our computer and other telecommunications equipment and systems in effective working order and to protect our systems against damage from fire, natural disaster, power loss, telecommunications failure, computer viruses or similar events. Although we have built redundancy into our network, providing for backup systems, equipment and telecommunications connections, there are still parts of the network that are not redundant at this time. Our Bedford, Massachusetts building is operational and currently performs nearly all significant processing functions of our network, but not all portions of the network have been made fully redundant at our Bedford facility. Although the Woburn facility is designed for redundancy, until our Bedford facility becomes fully operational (expected to be in the fourth quarter of 2004), we will not have complete geographical redundancy. When the Bedford site does become fully operational, we still may not be protected from a natural disaster within the greater Boston, Massachusetts area.

Our business would be materially adversely impacted if we cannot protect our intellectual property.

Our success and ability to compete depends in part upon our proprietary technology and our ability to protect such technology. We have a number of patent applications pending to protect our proprietary technology in the United States and internationally. If these patent applications are not approved, we may not be able to prevent others from using similar technologies and we may be subject to additional patent infringement lawsuits or royalty payments to use the technology. We rely on a combination of contractual provisions, confidentiality procedures, and patent, trademark, trade secret and copyright laws to protect the proprietary aspects of our technology. These legal protections afford only limited protection and competitors may gain access to our intellectual property which may result in the loss of customers. In addition, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our technology or to obtain and use our proprietary information. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of the proprietary rights of others. Any litigation could result in substantial costs and diversion of resources with no assurance of success and could seriously harm our business and operating results.

We may never realize the anticipated benefits of any acquisitions.

A key part of our growth and diversification strategy is to engage in acquisitions. We regularly review future acquisition opportunities. There can be no assurance that we will be able to identify any appropriate acquisition candidates or that any identified acquisition opportunities will be available on terms and conditions acceptable to us. Acquisitions involve numerous risks, including, among other things:

• Possible decreases in capital resources or dilution to existing stockholders;

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• Difficulties and expenses incurred in connection with the acquisitions and the subsequent assimilation of the operations and the services or products of the acquired company;

• Difficulties of operating a new business;

• Potential inherited liability for the past actions of the acquired company;

• Risk that any acquired company’s internal controls may not be adequate;

• Diversion of management’s attention from other business concerns;

• Limited ability to predict future operating results of the acquired company; and

• Potential loss of key employees and customers of the acquired company.

In the event that the operations of an acquired business do not meet expectations, we may be required to restructure the acquired business or write-off the value of some or all of the assets of the acquired business. There can be no assurance that any acquisition will be successfully integrated into our operations or will have the intended financial or strategic results.

We may not be able to effectively manage the expansion of our business, which would adversely impact our ability to offer competitive solutions and grow.

We have expanded our operations rapidly, creating significant demands on our management, administrative, operational, development and financial personnel and other resources. Any additional expansion by us may further strain our management, financial and other resources. There can be no assurance that our systems, procedures, controls and existing space will be adequate to support expansion of our operations. Inability of our management to manage operational changes effectively, would materially and adversely affect the quality of our solutions, our ability to retain key personnel and our business, financial condition and results of operations.

Our business may suffer if we are unable to attract and retain key employees.

Competition for employees with the skills we require is intense. Our success will depend on our ability to attract and retain key employees, including members of the executive management team as well as those employees in crucial technical, marketing and staff positions. The loss of one or more key employees, our inability to attract additional qualified employees, or the delay in hiring key personnel could have a material adverse impact on our business, financial condition and results of operations.

The market for our solutions is very competitive and depends on the growth and health of the wireless industry and wireless carriers.

We have historically provided our solutions almost exclusively to wireless carriers. The market for solutions to wireless carriers is highly competitive and subject to rapid change as new technologies are continually introduced in the wireless marketplace. We anticipate continued growth and competition in the wireless services industry and, consequently, the entrance of new competitors in the future. Our competitors include independent providers of prepaid and other solutions to wireless carriers and the wireless carriers themselves who provide, or can provide, in-house services similar to ours. These wireless carriers, and many of the independent service providers, have significantly greater financial and other resources than we do. In addition, the wireless industry is subject to consolidation, which could potentially result in the loss of carrier customers and/or subscribers. Competitive pressures may make it difficult for us to acquire and retain customers and may require us to reduce the price of our service solutions. We cannot be certain that we will be able to compete successfully with existing or new competitors. Our failure to maintain and enhance our competitive position would limit our ability to retain and increase our market share, resulting in serious harm to our business and operating results.

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To provide our solutions, we depend on a number of third-party software, hardware and service vendors and our business, financial condition and results of operations would be materially adversely affected if we are unable or delayed in our ability to obtain these components and applications.

Our operations are supported by many hardware components and software applications from third-party vendors, sometimes licensed from single vendors. There can be no assurance that these vendors will continue to license these components and applications to us or that they will do so at reasonable prices. In addition, there can be no assurance that these hardware components and software applications will function in accordance with specifications agreed upon by us and our vendors. If we cannot obtain these components and applications from our existing vendors, we may not be able to timely procure or develop replacement software and hardware at commercially reasonable costs, or at all. If we are unable to do so, we may be required to delay the development or sale of our current or future solutions, which would materially and adversely affect our business, financial condition and results of operations.

We rely on complex information technology systems and networks to operate our business. Any significant system or network disruption could have a material adverse effect on our business and operating results.

We rely on the efficient and uninterrupted operation of complex information technology systems and networks. All information technology systems and networks are potentially vulnerable to damage or interruption from a variety of sources, including but not limited to computer viruses, security breach, natural disasters, terrorism, war and telecommunication failure. There may also be system or network disruptions if new or upgraded business management systems are defective or aren’t installed properly. We have implemented various measures to guard against these risks. However, there can be no assurance that a system or network failure or significant disruption will not have a material adverse impact on our business and our operating results. In addition, in the event of such a disruption or failure, we may incur significant costs to remedy the damages caused by such a situation.

Changes in government regulations could adversely impact our business.

Proposals to intensify or reduce government regulations of the wireless telephone industry continue to be discussed at both the federal and state levels. Such changes may decrease the growth of the wireless telephone industry, result in new competitors or industry consolidation, limit the number of potential customers for our solutions or impede our ability to offer competitive solutions to the wireless market or otherwise have a material adverse effect on our business, financial condition and results of operations.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

We maintain an investment portfolio in accordance with our investment policy. The primary objectives of our investment policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Although our investments are subject to credit risk, our policy specifies credit quality standards for our investments and limits the amount of credit exposure from any single issue, issuer or type of investment. While our investments are also subject to interest rate risk and will decrease in value if market interest rates increase, we typically hold all of our investments until maturity. However, since the investments are typically held to maturity and are generally conservative in nature and of relatively short duration, interest rate risk is mitigated. We do not currently use derivative financial instruments.

Item 4.Controls and Procedures

Management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2004. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2004, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

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No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION:

Item 1.Legal Proceedings

In March 2000, Freedom Wireless, Inc. filed a suit against us and a number of our wireless carrier customers. The suit is being tried in the United States District Court in Massachusetts and alleges that the defendants infringe two patents held by Freedom Wireless, Inc. and seeks damages in an unspecified amount as well as injunctive relief. If there were a ruling that we infringed the Freedom Wireless patents, it could significantly restrict our ability to conduct business. In addition, we have an obligation to indemnify the other defendants for damages they may incur with respect to any infringement by our technology. On August 10, 2004, the plaintiff and the defendant each had four summary judgment motions denied by the court, bringing the case closer to the trial phase. The suit is in the pre-trial phase and the trial is scheduled to begin on January 31, 2005. We do not believe that we infringe these patents and believe that the patents are invalid in light of prior art and other reasons.

We expect to incur, on average, approximately $1 million per quarter for legal costs until the Freedom Wireless matter is resolved. However, this cost will likely continue to vary from quarter to quarter, depending on the level of activity and the timing of proceedings. There can be no assurances that costs to defend the Freedom Wireless suit will not exceed our estimates. If Freedom Wireless prevails in this case, the amount of damages could be substantial and our business, financial condition and results of operations would be materially adversely affected.

From time to time, as a normal incidence of the nature of our business, various claims, charges and litigation are asserted or commenced against us arising from, or related to, contractual matters, patents, trademarks, personal injury, and personnel and employment disputes. As to such claims and litigation, we can give no assurance that we will prevail. However, we do not believe that any of these current matters (other than as disclosed) will have a material adverse effect on our consolidated financial position, although an adverse outcome of any of these matters could have a material adverse effect on our consolidated results of operations or cash flows in future quarters or in the quarter or annual period in which one or more of these matters are resolved.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) The following table provides information about purchases of equity securities by us during the quarter ended September 30, 2004:

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased (1)	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Appropriate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)
07/01/2004-07/31/2004	334,000	9.72	838,500	1,161,500

(1) We repurchased 334,000 shares of our common stock during the quarter ended September 30, 2004, pursuant to the repurchase program that we publicly announced on June 14, 2004.

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(2) Our board of directors approved the repurchase by us of up to an aggregate of 2,000,000 shares of our common stock pursuant to the repurchase program. The program will expire at the earliest occurrence of any of the following events:

a. The repurchase of all shares that are authorized to be repurchased under the program;

b. Termination of the repurchase program by our board of directors; and

c. June 10, 2005.

Item 6.Exhibits

a) Exhibits

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b)

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SIGNATURES

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

Date: November 9, 2004		Boston Communications Group, Inc.
		(Registrant)
	By:	/s/ Karen A. Walker
		Karen A. Walker
		Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)

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