Boston Communications (BCGI) 10-Q 2005 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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, 2005

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.)

55 Middlesex Turnpike, Bedford, Massachusetts 01730

(Address of principal executive offices) (Zip Code)

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

(Former name, former address and 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 Rule 12b-2 of the Exchange Act)    YES  x    NO  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    YES  ¨    NO  x

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 4, 2005, the Company had outstanding 17,734,607 shares of common stock, $.01 par value per share.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION:		1
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Cash Flows	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38
PART II. OTHER INFORMATION:		39
Item 1.	Legal Proceedings	39
Item 6.	Exhibits	41
SIGNATURES		42

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:

• Accrued estimated loss from the Freedom Wireless lawsuit;

• Expectations regarding future settlements, judgments, appeal or bankruptcy;

• Indemnification obligations to customers;

• Continued customer concentration and diversification of revenue;

• Expectations regarding new product offerings and global expansion;

• Outcome of the class action lawsuit;

• Subscribers;

• Entrance of new competitors in the wireless services market;

• Financing of investments with cash and short-term investments;

• Interest income; and

• Defined benefit plan contributions.

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.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

BOSTON COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	September 30, 2005			December 31, 2004
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	8,335		$	9,467
Restricted cash		41,130			—
Short-term investments		24,016			68,285
Accounts receivable, net of allowance of $877 in 2005 and $474 in 2004		15,326			17,358
Tax refund receivable		1,931			—
Deferred income taxes		145			319
Prepaid expenses and other assets		3,727			2,907
Total current assets		94,610			98,336
Property and equipment:
Building, land and leasehold improvements		14,192			14,576
Telecommunications systems & software		101,957			94,900
Furniture and fixtures		810			789
Systems in development		6,922			2,837
		123,881			113,102
Less allowance for depreciation and amortization		70,671			57,543
		53,210			55,559
Intangible assets, net		3,508			2,450
Goodwill		10,275			4,753
Other assets		9,355			6,913
Total assets	$	170,958		$	168,011
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,167		$	312
Accrued expenses		11,123			13,386
Accrued estimated loss from litigation		64,300			—
Deferred revenue		3,707			3,753
Income taxes payable		—			1,591
Total current liabilities		80,297			19,042
Non-current liabilities:
Accrued pension liability		4,210			3,476
Deferred income taxes		4,280			7,046
Total non-current liabilities		8,490			10,522
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $.01 par value, 1,965,000 shares authorized, none issued and outstanding		—			—
Series A junior preferred stock, $.01 par value, 35,000 shares authorized, none issued and outstanding		—			—
Common stock, voting, par value $.01 per share, 35,000,000 shares authorized; 17,734,607 and 17,581,625 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively		177			176
Additional paid-in capital		104,607			104,070
Deferred compensation		(11	)		—
Retained earnings (deficit)		(22,384	)		34,430
Accumulated other comprehensive loss		(218	)		(229	)
Total shareholders’ equity		82,171			138,447
Total liabilities and shareholders’ equity	$	170,958		$	168,011

See accompanying notes.

1

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,
	2005			2004		2005			2004
NET REVENUES	$	25,631		$	27,020	$	77,598		$	81,915
EXPENSES:
Cost of revenues*		7,022			6,892		20,492			19,729
Engineering, research and development		5,445			3,694		14,506			10,987
Sales and marketing		3,038			1,567		7,827			5,106
General and administrative		2,699			1,955		7,849			6,166
General and administrative – legal charges		2,305			450		8,834			2,050
Estimated loss from litigation		40,300			—		64,300			—
Depreciation and amortization		5,237			5,894		15,995			16,853
Operating income (loss)		(40,415	)		6,568		(62,205	)		21,024
Interest income		420			322		1,228			885
Income (loss) before income taxes		(39,995	)		6,890		(60,977	)		21,909
Provision/(benefit) for income taxes		590			2,722		(4,163	)		8,655
Net income (loss) from continuing operations		(40,585	)		4,168		(56,814	)		13,254
Net loss from discontinued operations		—			—		—			(11	)
Net income (loss)	$	(40,585	)	$	4,168	$	(56,814	)	$	13,243
Basic net income (loss) per share:
Continuing operations	$	(2.29	)	$	0.24	$	(3.22	)	$	0.73
Net income (loss)	$	(2.29	)	$	0.24	$	(3.22	)	$	0.73
Weighted average common shares outstanding		17,734			17,534		17,659			18,035
Diluted net income (loss) per share:
Continuing operations	$	(2.29	)	$	0.24	$	(3.22	)	$	0.72
Net income (loss)	$	(2.29	)	$	0.24	$	(3.22	)	$	0.72
Weighted average common shares outstanding		17,734			17,732		17,659			18,395

* exclusive of depreciation and amortization, which is shown separately.

See accompanying notes.

2

BOSTON COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

	Nine months ended September 30,
	2005			2004
OPERATING ACTIVITIES
Net income (loss) from continuing operations	$	(56,814	)	$	13,254
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operations:
Depreciation and amortization		15,995			16,853
Deferred income taxes		(2,592	)		1,458
Accrued estimated loss from litigation		64,300			—
Other non-cash expense		12			—
Changes in operating assets and liabilities:
Restricted cash		(41,130	)		—
Accounts receivable, net		2,240			1,607
Tax refund receivable		(1,931	)		—
Prepaid expenses and other assets		(1,101	)		(1,148	)
Accounts payable, accrued expenses and deferred revenue		(1,340	)		(4,020	)
Income taxes payable		(1,591	)		(409	)
Other non-current liabilities		734			659
Net cash provided by (used in) operating activities of continuing operations		(23,218	)		28,254
Loss from discontinued operations		—			(11	)
Net change in operating assets and liabilities of discontinued operations		—			(303	)
Net cash used in operating activities of discontinued operations		—			(314	)
Net cash provided by (used in) operations		(23,218	)		27,940
INVESTING ACTIVITIES
Acquisition of business		(6,634	)		—
Payment of earnout of acquired business		(894	)		(424	)
Purchases of short-term investments		(40,528	)		(48,739	)
Sales of short-term investments		84,808			53,511
Purchase of long-term investments		(2,134	)		(2,017	)
Purchases of property and equipment		(13,047	)		(13,904	)
Net cash provided by (used in) investing activities		21,571			(11,573	)
FINANCING ACTIVITIES
Proceeds from exercise of stock options		21			424
Proceeds from issuance of common stock		494			627
Repurchase of common stock		—			(8,181	)
Net cash provided by (used in) financing activities		515			(7,130	)
Increase (decrease) in cash and cash equivalents		(1,132	)		9,237
Cash and cash equivalents at beginning of period		9,467			2,960
Cash and cash equivalents at end of period	$	8,335		$	12,197
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes	$	1,819		$	7,870

See accompanying notes.

3

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited financial statements have been prepared on a going concern basis 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. This basis contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Operating results for the three and nine month periods ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

On May 20, 2005, the jury in the Freedom Wireless, Inc. prepaid patent infringement lawsuit issued a verdict of $128 million against the Company and the other co-defendants, including Cingular Wireless, for past damages through December 31, 2004, an amount which exceeds the Company’s ability to pay. On October 12, 2005, the U.S. District Court for the District of Massachusetts (the “District Court”) granted Freedom Wireless’ request for injunctive relief. The Company filed an emergency motion with the District Court to clarify and stay the injunction pending appeal. The District Court denied the motion on November 9, 2005 and the Company expects to appeal that decision with the U.S. Court of Appeals for the Federal Circuit (“Appeals Court”). If a stay is granted, the Company may be required to provide security for the estimated amount of royalties due for the estimated timeframe through the date of the ruling on appeal. If the Company is unable to provide adequate collateral, or an injunction is not stayed, or if the Company is unable to get an adverse judgment reversed, then it may not be possible for the Company to provide the prepaid wireless or Real-Time Billing service bureau as currently offered in the United States. In that event, the Company may not be able to continue its ongoing operations or may need to seek protection under the U. S. Bankruptcy Code. If the injunction is not stayed, the injunction could prohibit the Company from providing its prepaid services to approximately 3.0 million prepaid subscribers of Cingular Wireless and other carriers serviced by the Company, representing approximately 64% of the Company’s total revenue for the three months ended September 30, 2005.

The District Court denied Freedom Wireless’ motion to award attorneys fees and enhanced damages awarded by the jury, including treble damages. However, the District Court granted Freedom Wireless’ request to add prejudgment interest and other costs totaling $20.1 million, bringing the total joint liability to $148.1 million. Interest and damages for infringement by the Company and Cingular from January 1, 2005 through August 31, 2005, may also be awarded and the Company believes the amount would be approximately $15.0 million. The Company is appealing the entire judgment. Based on management’s assessment of the potential outcomes of the case and in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (FAS 5) and FASB Interpretation 14, Reasonable Estimation of the Amount of a Loss (FIN 14), the Company has accrued an estimated loss of $64.3 million with respect to the Freedom Wireless litigation, excluding the Company’s legal costs which are expensed as incurred. However, the actual loss, if any, may be significantly higher or lower than the amount accrued. See Note 4 for a more detailed discussion of this and other litigation.

The above matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

The balance sheet at December 31, 2004 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 consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2004 and Form 8-K filed on June 24, 2005.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include 100% of the Company’s accounts and operations and all of its wholly-owned subsidiaries. Upon consolidation, all intercompany accounts and transactions are eliminated.

4

Reclassifications

Certain amounts in the accompanying 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 revenues in various ways through its managed services business:

1) Real-Time Billing - the Company principally earns revenues by processing prepaid wireless minutes or as a percentage of wireless customer revenue, net of any penalties incurred related to outages on the platform;

2) Voyager Billing - the Company earns revenues by generating a postpaid subscriber’s monthly bill; and

3) PayExtend - the Company principally earns revenues by processing transactions on behalf of wireless operators’ subscribers.

Revenues for each of these solutions are recognized as the services are provided. Managed services revenues also include amounts for licensing fees, development projects and implementations, which are typically recognized ratably over the remaining life of the contract with the respective wireless operator.

For the Company’s licensed systems sales, the Company typically recognizes revenues from the sale of systems at the time the systems are shipped or delivered to the customer, depending on shipping terms. In the event there are acceptance terms, the Company defers revenue until acceptance has occurred. In addition, certain software is licensed to distributors, who pay licensing fees to the Company as they sell the software to their customers and the revenue is recognized in the month it is earned.

For multiple element arrangements, the Company determines the fair value of each element based on the specific objective evidence for that element and allocates total revenue from these arrangements to each element based on its fair value. Installation revenue is deferred until the entire installation is complete. Revenues from maintenance and support and other services are based on vendor-specific objective evidence of fair value and recognized ratably over the term of the maintenance and support contract period. Vendor-specific objective evidence of fair value of maintenance and support is based upon the amount charged when the service is sold separately, which is typically the contract’s renewal rate. Vendor-specific objective evidence of fair value for installation and other services is based upon standard pre-established rates.

All revenues are recorded net of unbillable amounts and amounts that are estimated to be uncollectible based on historical experience. A reserve for doubtful accounts is recorded based on historical experience or specific identification of an event necessitating a reserve.

Cash, Cash Equivalents, Restricted Cash and Short-Term Investments

The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist primarily of institutional money market funds.

The Company accounts for its marketable securities in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Instruments in Debt and Equity Securities.” The Company has classified all of its short-term investments as available-for-sale, and is thus reported at fair market value with unrealized gains and losses, net of tax, reported as a separate component of stockholder’s equity.

Investments that mature in more than three months but less than 36 months are considered short-term investments because the Company views its available-for-sale portfolio as available for use in its current operations. The Company’s short-term investments are invested in corporate notes, municipal auction rate securities and annuities maturing in less than thirty-six months.

5

Substantially all of the Company’s short-term investments have contractual maturities of twelve months or less.

In connection with the Freedom Wireless judgment discussed in Note 4 to the Condensed Consolidated Financial Statements, in July 2005 the Company entered into a Funding of Security for Appeal Agreement (“Appeal Agreement”) with Cingular Wireless whereby the Company placed $41 million in escrow as security for any potential joint liability associated with the litigation. At September 30, 2005, this escrow amount (including interest earned to date) totaled $41.1 million and is recorded as restricted cash.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Legal Costs

The Company accrues the costs of settlements, damages and, under certain conditions, costs of defense when such costs are probable and estimable; otherwise, such costs are expensed as incurred. As discussed in Note 4 to the Condensed Consolidated Financial Statements, the Company expenses legal costs related to the Freedom Wireless lawsuits as incurred due to the lengthy and unpredictable nature of this litigation, which has made it difficult to continue to reasonably estimate legal costs for the litigation. In addition, the Company expenses legal costs related to the Verizon Contractual Indemnification as incurred due to the unpredictable nature of this matter, which makes it difficult to reasonably estimate legal costs. 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 assurance that the Company’s expenses will not exceed its estimates.

Income Taxes

The Company’s current and deferred income taxes, and associated valuation allowances, are impacted by events and transactions arising in the normal course of business as well as in connection with special and non-recurring items. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets and the timing of income tax payments. Actual collections and payments may materially differ from these estimates as a result of changes in tax laws as well as unanticipated future transactions impacting related income tax balances.

The income tax provision for the three months ended September 30, 2005 was $590,000, compared to an income tax provision of $2.7 million (39.5% effective tax rate) for the three months ended September 30, 2004. The provision recorded in the current quarter primarily reflects the valuation allowance for deferred tax assets that may not be realizable due to current operating losses being incurred as a result of the Freedom Wireless judgment. The income tax benefit for the nine months ended September 30, 2005 was $4.2 million, compared to an income tax provision of $8.7 million (39.5% effective tax rate) for the nine months ended September 30, 2004. The benefit recorded in the current year reflects the Company’s assessment of its ability to realize the tax benefit from the ultimate loss, if any, from the Freedom Wireless judgment.

6

Comprehensive Income (Loss)

Components of comprehensive income (loss) include net income (loss) and certain transactions that have generally been reported in the condensed consolidated statements of shareholders’ equity.

(in thousands)	Three months ended September 30,					Nine months ended September 30,
	2005			2004		2005			2004
Net income (loss) as reported	$	(40,585	)	$	4,168	$	(56,814	)	$	13,243
Securities valuation adjustment, net of tax		(15	)		125		34			(101	)
Foreign currency translation, net of tax		(22	)		—		(23	)		—
Comprehensive income (loss)	$	(40,622	)	$	4,293	$	(56,803	)	$	13,142

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, restricted cash, short and long-term investments and accounts receivable.

The Company maintains cash, cash equivalents, restricted cash, short-term investments and long-term investments primarily with high credit quality financial institutions and monitors the amount of credit exposure to any one financial institution, thereby mitigating credit risk. The restricted cash of $41.1 million is maintained with one financial institution, as required by the escrow agreement.

The Company’s managed services business allows wireless operators throughout the United States to utilize its real-time billing capabilities, enabling such operators to offer prepaid wireless calling to their subscribers, offer various ways to replenish their accounts and to purchase digital content. Wireless operators also utilize the Company’s managed services business to provide their subscribers with a monthly postpaid wireless bill. In addition, the Company sells licensed systems on a global basis, most recently in North and South America and Africa, however the Company is in the process of expanding its sales territories through Europe, Latin America and Asia, among other areas. The Company generally does not require collateral from its customers, although upfront payments for a portion of the total sale are typically required prior to shipment. In addition, certain software is licensed to distributors, who pay licensing fees to the Company as they sell the software to their customers.

Property and Equipment

Property and equipment are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets, which range from 3 to 20 years. Systems in development primarily represent internally capitalized labor and purchased hardware and software to be used in the Company’s managed services and licensed products business that are not yet placed into service and will be depreciated and amortized when placed in service, typically over three to five years.

Research and Development and Software Development Costs

Research and development costs are charged to expense as incurred. However, costs incurred for the development of computer software or deployment of assets for internal use is 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, anticipated future undiscounted net cash flows and changes in hardware and software technologies.

7

The Company also capitalizes internal software development costs in accordance with Financial and Accounting Standards Board (“FASB”) Statement No. 86 (“FAS 86”), “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.” This statement specifies that costs incurred internally in creating a computer software product shall be charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of all planning, designing, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements. The Company ceases capitalization of internally developed software when the product is made available for general release to customers and thereafter, any maintenance and customer support is charged to expense when related revenue is recognized or when those costs are incurred. The Company continually evaluates the recoverability of capitalized costs and if the success of new product releases is less than it anticipates, then a write-down of capitalized costs may be made which could adversely affect its results in the reporting period in which the write-down occurs.

Amortization of capitalized software development costs begins when the solution is made available for general release and 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 to assess the recoverability of these assets in accordance with Statement of Financial Accounting Standards (FAS) 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 might be impaired because of a change in anticipated use or technology, and the undiscounted operating cash flows estimated to be generated by those assets 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 quoted market prices or a discounted cash flow method, whichever is more appropriate under the circumstances involved.

The Company accounts for goodwill in accordance with FAS 142 “Goodwill and Other Intangible Assets.” Under FAS 142, goodwill is not amortized but is subject to annual impairment tests. The Company evaluates goodwill for impairment annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is tested for impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.

As a result of the Freedom Wireless lawsuit judgment discussed in Note 4 to the Condensed Consolidated Financial Statements, the Company performed an asset impairment test for its long-lived assets and goodwill as of June 30, 2005 and September 30, 2005 and concluded that no impairment existed.

Stock-Based Compensation

The Company has elected to follow the intrinsic value method in accordance with 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 accounting method provided for under FAS No. 123, “Accounting for Stock-Based Compensation.” 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.

During the first quarter of 2005, the Company accelerated the vesting of certain unvested stock options. These stock options were awarded to employees, officers and directors under the Company’s 2000 Stock Option Plan and 2004 Stock Incentive Option Plan and had exercise prices that were greater than $7.75 per share. Options to purchase 866,331 shares of the Company’s Common Stock became exercisable immediately as a result of the vesting acceleration. The aggregate number of options to purchase shares of the Company’s Common Stock held by directors and executive officers that were accelerated pursuant to this acceleration is

8

310,496. The exercise prices and number of shares subject to the accelerated options were unchanged. The acceleration of the vesting of these options did not result in a charge based on generally accepted accounting principles. For pro forma disclosure requirements under FAS 123, the Company recognized an additional $1.8 million of stock-based compensation for all options whose vesting was accelerated. The Company took this action because it will limit the negative impact on the Company’s results from operations beginning in 2006 when FAS 123(R) takes effect for the Company.

Since the Company accelerated vesting as described above for the first quarter of 2005, the pro forma expense for the nine months ended September 30, 2005 is substantially higher than normal levels, and the pro forma expense for the three months ended September 30, 2005 is somewhat lower than typical levels.

Had compensation expense for the Company’s Stock Plans been determined consistent with FAS No. 123, the pro forma net income (loss) and net income (loss) per share would have been as follows (in thousands, except per-share information):

	Three months ended September 30,					Nine months ended September 30,
	2005			2004		2005			2004
Net income (loss) as reported	$	(40,585	)	$	4,168	$	(56,814	)	$	13,243
Add: Stock-based employee compensation expense included in reported net income (loss)		12			—		12			—
Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of tax benefit		177			584		2,764			1,832
Pro forma net income (loss)	$	(40,750	)	$	3,584	$	(59,566	)	$	11,411
Basic net income (loss) per share:
As reported	$	(2.29	)	$	0.24	$	(3.22	)	$	0.73
Pro forma	$	(2.30	)	$	0.20	$	(3.37	)	$	0.63
Diluted net income (loss) per share:
As reported	$	(2.29	)	$	0.24	$	(3.22	)	$	0.72
Pro forma	$	(2.30	)	$	0.20	$	(3.37	)	$	0.62

Basic and Diluted Net Income (Loss) Per Share

Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings (loss) 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. For purposes of computing diluted earnings (loss) 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. In addition, during loss periods, no stock options are included as their effect would be anti-dilutive. Accordingly, for the three months ended September 30, 2005 and 2004, options to purchase 3,930,000 and 1,636,000 shares, respectively, of Common Stock have been excluded from the computation. In addition, for the nine months ended September 30, 2005 and 2004, options to purchase 3,930,000 and 1,246,000 shares, respectively, of Common Stock have been excluded from the computation.

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The following table sets forth a reconciliation of basic and diluted shares for the three and nine months ended September 30 (unaudited and in thousands except for shares):

	Three months ended September 30,		Nine months ended September 30,
	2005	2004	2005	2004
Denominator:
Denominator for basic net income (loss) per share	17,734	17,534	17,659	18,035
Effect of dilutive employee stock options	—	198	—	360
Denominator for diluted net income (loss) per share	17,734	17,732	17,659	18,395

Recent Accounting Pronouncements

On December 16, 2004, and as amended on April 14, 2005, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment (Statement No. 123(R)), which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement No. 123(R) is similar to the approach described in Statement No. 123. However, Statement No.123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro forma disclosure will no longer be an alternative.

Under Statement No. 123(R), the Securities and Exchange Commission allows companies to implement Statement No. 123(R) at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. The Company expects to adopt Statement No. 123(R) on January 1, 2006.

As permitted by Statement No.123, the Company currently accounts for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement No. 123(R)’s fair value method will have a significant impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position. The impact of adoption of Statement No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted Statement No. 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement No. 123 as described in the disclosure of pro forma net income (loss) and earnings per share in Note 2 to the Company’s Condensed Consolidated Financial Statements. Statement No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.

3. Other Assets

In 2004 and 2005, the Company exchanged cash totaling $1,500,000 and received secured convertible promissory notes (the “Notes”) for the same amount from an early stage entity with whom the Company has a commercial relationship.

The Notes accrued interest at a rate of 15% per annum until April, 2005 and subsequently accrue interest at a rate of 12% per annum. Because of the early-stage nature of the entity, interest income from the notes is being accounted for as interest payments are received. The Notes, together with accrued interest, are due on July 23, 2007 and are secured by the entity’s assets, properties and rights.

The Notes are convertible at any time into the borrower’s common stock or preferred stock, as defined in the agreement.

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4. Contingencies

Legal

Freedom Wireless Patent Infringement Lawsuit

In March 2000, Freedom Wireless, Inc. filed a suit against the Company and a number of its current or former carrier customers (including Verizon Wireless, Cingular Wireless, AT&T Wireless Services, CMT Partners and Western Wireless Corp.) in the United States District Court in Massachusetts (“District Court”). On May 20, 2005, a jury determined that the Company and certain of the other defendants infringed or are infringing the two Freedom Wireless patents. The jury damages award was in the total amount of $128 million for past damages through December 31, 2004. In August 2005 the Company filed a motion asking the District Court to order a new trial on damages or to reduce the level of damages awarded, which was denied by the District Court and judgment was entered for $128 million, plus interest and costs.

In July 2005, the Company entered into a Funding of Security for Appeal (“Appeal Agreement”) with Cingular Wireless whereby the Company placed $41 million into escrow for the purpose of using these funds as security for Cingular. In exchange for placing the funds into escrow, Cingular has posted bonds in the amount required by the District Court to stay the execution of the amount of the judgment that concerns the joint infringement by the Company and Cingular, pending appeal. Cingular has also agreed to dismiss, without prejudice, the action filed by Cingular against the Company in May 2005. Cingular filed this action in an effort to enforce Cingular’s indemnity rights against the Company as a result of the Freedom Wireless judgment. Cingular is not obligated to provide the security for the payment of any portion of the damages for which Cingular is not jointly liable. The Appeal Agreement does not alter the Company’s obligation to indemnify Cingular. At September 30, 2005, this escrow amount (including interest earned to date) totaled $41.1 million and is recorded as restricted cash.

The Company posted a bond to stay the execution of the amount of the judgment that concerns the joint infringement by the Company and Western Wireless, pending appeal.

In October, 2005, the District Court denied Freedom Wireless’ motion to award attorneys fees and enhanced damages, including treble damages. However, the District Court granted Freedom Wireless’ request to add prejudgment interest at the prime rate and other costs totaling $20.1 million to the original judgment, bringing the total joint liability of the Company and Cingular (which includes AT&T Wireless Services and CMT Partners) to $147.8 million and the Company and Western Wireless to $297,000. Interest and damages for infringement by the Company and Cingular from January 1, 2005 to August 31, 2005 may also be awarded and the Company believes the amount would be approximately $15.0 million.

On October 12, 2005, the District Court granted Freedom Wireless’ request for injunctive relief, which Freedom has claimed enjoins the Company and the co-defendants individually, jointly, or in concert with any third party, other than a licensee of Freedom Wireless, from making, using, selling or offering to sell three implementations of its U.S. service bureau, multi-frequency (MF), common channel signaling system seven (SS7), and pre-intelligent network (pre-IN), or any systems that are not colorably different. The Court allowed the Company and the co-defendant carriers in the case a 90-day grace period, during which the defendants would be required to pay Freedom Wireless a license fee equivalent to 2.5 cents per minute of use. On average, the Company currently charges its customers approximately 1 cent per minute of use, which includes a full suite of real-time billing, rating and support services using the Company’s proprietary software and network.

The Company filed an emergency motion with the District Court to clarify the terms of the injunction and to stay the injunction pending appeal. The motion was denied by the District Court on November 9, 2005. The Company expects to immediately appeal that decision to the U.S. Court of Appeals for the Federal Circuit (“Appeals Court”) and seek a stay of the injunction while the appeal of the entire judgment is pending.

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If a stay is granted, the Company may be required to provide security for the estimated amount of royalties due for the estimated timeframe through the date of the ruling on appeal. If this amount exceeds the Company’s ability to secure or if the Company is required to post a bond and is unable to do so, the Company may need to seek protection under the U. S. Bankruptcy Code unless the District Court or Appeals Court dispense with such security. If the injunction is not stayed pending appeal, the injunction would prohibit the Company from providing the MF, SS7 and pre-IN implementations of its prepaid wireless service bureau to the Company’s customers who are not licensees of Freedom Wireless in the United States. The injunction could cause irreparable harm to the Company’s business, as it would apply to approximately 3.0 million prepaid subscribers, including Cingular Wireless and other carriers serviced by the Company, who represented approximately 64% of the Company’s total revenues for the three months ended September 30, 2005. In those circumstances, the Company would likely be required to seek protection under the U.S. Bankruptcy Code. In addition, if the injunction is left standing, or if we must provide security and are unable to do so, our carriers may try to cancel their contracts with us, or we may not be able to fulfill the contractual terms of our contracts.

The Company has filed an appeal with the Appeals Court. The appeal process may take 12 to 18 months or longer. In order to appeal, the defendants have posted bonds to cover 110% of the current damages amount. If the Appeals Court determines that royalties must be secured for non-defendant customers as a condition for staying the injunction, the amount of the security could be the Company’s sole responsibility and could exceed the Company’s ability to pay. If the Company is unable to provide adequate collateral, or an injunction is not stayed, or if the Company is unable to get an adverse judgment reversed, then it may not be possible for the Company to provide the prepaid wireless or Real-Time Billing service bureau as currently offered in the United States. In that event, the Company may not be able to continue its ongoing operations or may need to seek protection under the U. S. Bankruptcy Code.

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. In 2005, Verizon Wireless, which was a defendant in the case, reached a settlement with Freedom Wireless and, as a result, was removed as a defendant in the case. The Company was not part of the settlement discussions and the terms of the settlement are not public.

While the Company continues to believe that it does not infringe the Freedom Wireless patents and believes that the patents are invalid in light of prior art and other reasons, in light of the adverse judgment, the Company believes it is probable that a loss has been incurred. Although the ultimate amount of such loss, if any, is not currently known, accounting guidelines under Statement of Financial Accounting Standards No. 5,Accounting for Contingencies (FAS 5) and FASB Interpretation 14,Reasonable Estimation of the Amount of a Loss (FIN 14), specify that if a loss can be reasonably estimated, it should be recorded.Based on managements’ assessment of the potential outcomes of the case and in accordance with FAS 5 and FIN 14, the Company accrued an estimated loss of $24.0 million in the quarter ended June 30, 2005 and an additional $40.3 million estimated loss in the quarter ended September 30, 2005, for a total estimated loss of $64.3 million with respect to the Freedom Wireless judgment. However, the

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actual loss, if any, may be significantly higher or lower than the amount accrued and could be as high as approximately $163 million, which exceeds the Company’s ability to pay, and may continue to increase, depending on the status of the injunction against the Company.

Freedom Wireless Patent Infringement Lawsuits Against the Company, Nextel Communications and Alltel Corporation et al

Subsequent to the jury verdict, Freedom Wireless filed two separate lawsuits in the District Court, the first against the Company and Nextel Communications, and the second against the Company and Alltel Corporation and several other carrier customers of the Company. These lawsuits allege that the Company and each of its named carrier customers infringe the same two prepaid patents held by Freedom Wireless and seek damages as well as injunctive relief. The Company has an obligation to indemnify its customers for damages they may incur with respect to any infringement by the Company’s technology. The Company intends to contest the lawsuits vigorously and believes that it does not infringe these patents and believes that the patents are invalid in light of prior art and other reasons.

Cingular Wireless Indemnification Complaint

On May 23, 2005, a complaint was filed by Cingular Wireless seeking judgment in indemnity against the Company.The complaint seeks judgment for contractual indemnification against the Company in an amount equal to Cingular’s money damages and other relief as determined by the District Court in the Freedom Wireless patent infringement lawsuit. As discussed above, upon entering into the Appeal Agreement, Cingular agreed to dismiss, without prejudice, this complaint.

Class Action Lawsuit

In June 2005, a putative class action complaint was filed in the U.S. District Court for the District of Massachusetts, against the Company, the Company’s Chief Executive Officer and its Chief Financial Officer on behalf of persons who purchased its common stock between November 15, 2000 and May 20, 2005. The complaint was amended on October 12, 2005 to modify the commencement date to June 6, 2002. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act as well as Rule 10b-5 promulgated thereunder by allegedly failing to disclose adverse facts regarding the Freedom Wireless, Inc. lawsuit, including that the Company had willfully infringed the Freedom Wireless patents. The Company is due to respond to the amended complaint on December 2, 2005. The Company intends to contest the lawsuit vigorously and believes that it and the two executive officers named as defendants have meritorious defenses to the allegations set forth in the lawsuit.

Verizon Contractual Indemnification

On April 28, 2005, a complaint by Aerotel Corporation was filed against Verizon alleging infringement by Verizon Communications, Verizon Wireless and others of a patent on prepaid technology. The Company is not named in the complaint. Verizon has notified the Company that the Company may be asked to indemnify them in this case under the Company’s Prepaid Wireless Services Agreement for that portion of any liability specific to Verizon Wireless prepaid offered through the use of the Company’s service. A subpoena for documents and deposition testimony has been served on the Company. The complaint does not specify damages as it relates to Verizon Wireless prepaid. The lawsuit is currently in the discovery phase and at this time it is not possible to determine the potential outcome of this indemnification claim.

Other

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 these matters (other than as disclosed) will have a material adverse effect on its consolidated financial

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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 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. Certain of the Company’s carrier customers are currently seeking to require the Company to indemnify them for losses incurred, or that may be incurred, in connection with the Freedom Wireless and Aerotel litigation.

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.

5. Shareholders’ Equity

Common Stock Purchase Rights

On September 6, 2005, the Board of Directors of the Company declared a dividend of one right (each, a “Right”) for each outstanding share of the Company’s common stock, $.01 par value per share (the “Common Stock”), to shareholders of record at the close of business on September 19, 2005 (the “Record Date”). Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, $.01 par value per share (the “Series A Junior Preferred Stock”), at a purchase price of $35.00 (the “Purchase Price”) in cash, subject to adjustment.

Initially, the Rights are not exercisable and will be attached to all certificates representing outstanding shares of Common Stock, and no separate Rights Certificates will be distributed. The Rights will separate from the Common Stock, and the distribution date (the “Distribution Date”) will occur, upon the earlier of (i) the close of business on the tenth business day (or such later date as may be determined by the Board of Directors) following the later of (a) the first date of a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock or (b) the first date on which an executive officer of the Company has actual knowledge that an Acquiring Person has become such (the “Stock

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Acquisition Date”) or (ii) the close of business on the tenth business day (or such later date as may be determined by the Board of Directors) following the commencement of a tender offer or exchange offer (other than a Permitted Offer (as defined in the Rights Agreement)) that would result in a person or group beneficially owning 15% or more of the outstanding shares of Common Stock. The Distribution Date may be deferred in circumstances determined by the Board of Directors. In addition, certain inadvertent acquisitions will not trigger the occurrence of the Distribution Date. Until the Distribution Date (or earlier redemption or expiration of the Rights), (i) the Rights will be evidenced by the Common Stock certificates outstanding on the Record Date, together with a Summary of Rights to be mailed to record holders, or by new Common Stock certificates issued after the Record Date which contain a notation incorporating the Rights Agreement by reference, (ii) the Rights will be transferred with and only with such Common Stock certificates, and (iii) the surrender for transfer of any certificates for Common Stock outstanding (with or without a copy of the Summary of Rights or such notation) will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate.

The Rights are not exercisable until the Distribution Date and will expire upon the close of business on September 6, 2015 (the “Final Expiration Date”) unless earlier redeemed or exchanged. In the event that any person becomes an Acquiring Person, unless the event causing the 15% threshold to be crossed is a Permitted Offer (as defined in the Rights Agreement), then, promptly following the first occurrence of such event, each holder of a Right (except as provided below and in Section 7(e) of the Rights Agreement) shall thereafter have the right to receive, upon exercise, that number of shares of Common Stock of the Company (or, in certain circumstances, cash, property or other securities of the Company) which equals the exercise price of the Right divided by 50% of the current market price (as defined in the Rights Agreement) per share of Common Stock at the date of the occurrence of such event. However, Rights are not exercisable following such event until such time as the Rights are no longer redeemable by the Company as described below. Notwithstanding any of the foregoing, following the occurrence of such event, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. The event summarized in this paragraph is referred to as a “Section 11(a)(ii) Event.”

In the event that, at any time after any person becomes an Acquiring Person, (i) the Company is consolidated with, merged with and into, or consummates a share exchange with, another entity, and the Company is not the surviving or acquiring entity of such consolidation, merger or share exchange (other than a transaction that follows a Permitted Offer) or if the Company is the surviving or acquiring entity, but shares of its outstanding Common Stock are changed or exchanged for stock or securities (of any other person) or cash or any other property, or (ii) more than 50% of the Company’s assets or earning power is sold or transferred, each holder of a Right (except Rights which previously have been voided as set forth above) shall thereafter have the right to receive, upon exercise, that number of shares of common stock of the acquiring company which equals the exercise price of the Right divided by 50% of the current market price (as defined in the Rights Agreement) of such common stock at the date of the occurrence of the event. The events summarized in this paragraph are referred to as “Section 13 Events.” A Section 11(a)(ii) Event and Section 13 Events are collectively referred to as “Triggering Events.”

At any time after the occurrence of a Section 11(a)(ii) Event, when no person owns a majority of the Common Stock, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such Acquiring Person which have become void), in whole or in part, at an exchange ratio of one share of Common Stock, or one one-thousandth of a share of Series A Junior Preferred Stock (or of a share of a class or series of the Company’s Preferred Stock having equivalent rights, preferences and privileges), per Right (subject to adjustment).

The Purchase Price payable, and the number of units of Series A Junior Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Series A Junior Preferred Stock, (ii) if holders of the Series A Junior Preferred Stock are granted certain rights or warrants to subscribe for Series A Junior Preferred Stock or convertible securities at less than the then-current market price (as defined in the Rights Agreement) of the Series A Junior Preferred Stock, or (iii) upon the distribution to holders of the Series A Junior Preferred Stock of evidences of indebtedness or assets (excluding regular periodic cash dividends paid out of earnings or retained earnings) or of subscription rights or warrants (other than those referred to above). The number of Rights associated with each share of Common Stock is also

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subject to adjustment in the event of a stock split of the Common Stock or a stock dividend on the Common Stock payable in Common Stock or subdivisions, consolidations or combinations of the Common Stock occurring, in any such case, prior to the Distribution Date.

With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments amount to at least 1% of the Purchase Price. No fractional shares of Series A Junior Preferred Stock (other than fractions which are integral multiples of one one-thousandth of a share of Series A Junior Preferred Stock) will be issued and, in lieu thereof, an adjustment in cash will be made based on the market price of the Series A Junior Preferred Stock on the last trading date prior to the date of exercise.

Series A Junior Preferred Stock purchasable upon exercise of the Rights will not be redeemable. Each share of Series A Junior Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors, a minimum preferential quarterly dividend payment of $10 per share or, if greater, an aggregate dividend of 1,000 times the dividend declared per share of Common Stock. In the event of liquidation, the holders of the Series A Junior Preferred Stock will be entitled to a minimum preferential liquidation payment of $1,000 per share, plus an amount equal to accrued and unpaid dividends, and will be entitled to an aggregate payment of 1,000 times the payment made per share of Common Stock. Each share of Series A Junior Preferred Stock will have 1,000 votes, voting together with the Common Stock. In the event of any merger, consolidation, share exchange or other transaction in which Common Stock is changed or exchanged, each share of Series A Junior Preferred Stock will be entitled to receive 1,000 times the amount received per share of Common Stock. These rights are protected by customary antidilution provisions. Because of the nature of the Series A Junior Preferred Stock’s dividend, liquidation and voting rights, the value of one one-thousandth of a share of Series A Junior Preferred Stock purchasable upon exercise of each Right should approximate the value of one share of Common Stock.

Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. Although the distribution of the Rights should not be taxable to shareholders or to the Company, shareholders may, depending upon the circumstances, recognize taxable income in the event that the Rights become exercisable for Common Stock (or other consideration) of the Company or for common stock of the acquiring company as set forth above.

Any provision of the Rights Agreement, other than the redemption price, may be amended by the Board prior to such time as the Rights are no longer redeemable. Once the Rights are no longer redeemable, the Board’s authority to amend the Rights is limited to correcting ambiguities or defective or inconsistent provisions in a manner that does not adversely affect the interest of holders of Rights.

The Rights are intended to protect the shareholders of the Company in the event of an unfair or coercive offer to acquire the Company and to provide the Board with adequate time to evaluate unsolicited offers.

6. Segment Reporting and Discontinued Operations

FAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial statements. It also established standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision-maker is the Chief Operating Officer. Historically, the Company’s reportable operating segments consisted of Billing and Transaction Processing Services, Roaming Services and Prepaid Systems. The Company’s Billing and Transaction Processing Services solutions allowed wireless carriers to access the Company’s managed services network and transaction processing platform, enabling such carriers to offer prepaid wireless calling, replenishment capabilities and postpaid billing and customer care to their subscribers. The Roaming Services solution provided wireless carriers the ability to generate revenues from subscribers who were not covered under traditional roaming agreements by arranging payment for roaming calls. The Prepaid Systems solution

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assembled and marketed prepaid systems to international wireless operators. Beginning in 2004, Prepaid Systems was no longer reported as a separate segment, as it was deemed to be not material, representing less than 10% of consolidated revenues, total assets and operations for all periods presented.

In March 2004, the Company ceased providing its ROAMERplussolution, 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 consolidated financial statements reflect this as a discontinued operation. Revenues for the Roaming Services segment were $563,000 for the three months ended March 31, 2004.

In the second quarter of 2005, the Company realigned its operating units to consist ofbcgi Payment,bcgiAccess Management, Real-Time Billing and Voyager Billing. A general manager has been assigned to manage each of these businesses which are classified as operating units. Revenues for each business are recorded and tracked separately. The Company is currently in the process of determining direct and indirect cost allocations to these businesses and, as such, does not currently possess operating financial results in accordance with the disclosures required by SFAS 131. The Company anticipates that sufficient reliable and consistent information will be available in 2006. Until such information is available, the Company cannot disclose the information required by FAS No. 131. Revenues for the Company’s operating units are as follows (unaudited and in thousands):

	Three months ended September 30,
	2005				2004
	Total		% of Total Net Revenues		Total		% of Total Net Revenues
Real-Time Billing	$	23,007	90	%	$	25,523	94	%
Other		2,624	10	%		1,497	6	%
Total net revenues	$	25,631	100	%	$	27,020	100	%
	Nine months ended September 30,
	2005				2004
	Total		% of Total Net Revenues		Total		% of Total Net Revenues
Real-Time Billing	$	70,710	91	%	$	77,951	95	%
Other		6,888	9	%		3,964	5	%
Total net revenues	$	77,598	100	%	$	81,915	100	%

7. Retirement Plans

The Company offers a defined benefit retirement plan (the “Plan”) for certain executives. Contributions are based on periodic actuarial valuations and are charged to the Condensed Consolidated Statements 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 Plan are based on years of service and compensation.

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The components of net periodic benefit costs for the three and nine months ended September 30, 2005 and 2004 are as follows (unaudited and in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2005		2004		2005		2004
Components of net periodic benefit costs
Service cost	$	127	$	109	$	383	$	362
Interest cost		72		58		216		220
Amortization of unrecognized net prior service cost		45		31		135		77
Net periodic benefit costs	$	244	$	198	$	734	$	659

8. Acquisition

In June 2005, the Company acquired the assets and certain liabilities of PureSight, Inc. and its Israeli subsidiary, PureSight LTD. (PureSight), a provider of advanced content recognition solutions for mobile operators, ISPs and enterprises. The Company paid $6.6 million in cash for PureSight, including acquisition costs. Management determined the fair value of the assets and certain liabilities acquired by considering the anticipated cash flows to be generated from the existing products, the valuation of customer contracts and relationships and non-compete agreements, the estimated life of the technology acquired and other factors. Identifiable intangible assets of $1.6 million consist of acquired technology, customer contracts and relationships, trademarks and non-compete agreements and are being amortized over four to seven years. The results of operations of PureSight are included in the Company’s Condensed Consolidated Statement of Operations from the date of acquisition.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We develop products and services that enable wireless operators to fully realize the potential of their networks. Our access management, billing, payment and network solutions help operators rapidly deploy and manage innovative voice and data services for subscribers. Available as licensed products and fully managed services, our solutions power wireless operators and enable mobile virtual network operators (“MVNOs”) with market-leading implementations of prepaid wireless, postpaid billing, wireless account funding and m-commerce. We provide our fully managed services and licensed products domestically to U.S. wireless operators. Internationally, we offer our products to wireless operators on a licensed basis. We sell our products and services to wireless operators through our direct sales force in the United States and through both direct and indirect channels internationally.

We generate revenues from our Real-Time Billing product as a managed service principally by processing prepaid wireless minutes or as a percentage of wireless customer revenue. Real-Time Billing services revenues are recorded net of outage penalties that we may incur based on contracted service level agreements with the wireless operators. We also generate revenues from other transactions processed, including Push to Talk, Short Message Service (SMS) and other data services. Additionally, whether deployed on a managed service basis or licensed basis, we generate revenues from software licensing, implementations and special development services. These revenues are typically recognized over the term of the contract for managed services customers and at the time of shipment or completion for licensed sales.

Our Voyager Billing revenues are earned by generating a subscriber’s monthly bill.

While there have been no significantbcgiAccess Management revenues related to our Mobile Guardian products to date, we expect that we will generate revenues from these products by charging wireless operators on a per subscriber per month basis, or on a one-time subscriber license basis.

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ForbcgiPayment, domestically we typically generate revenues by charging wireless operators a transaction fee for the services performed and paying the financial partners a fee for enabling the transaction. Internationally, we license technology to wireless operators to support their payment processing needs.

Our net revenues decreased 5% to $25.6 million in the third quarter of 2005 compared to $27.0 million in the third quarter of 2004 and decreased 5% to $77.6 million for the nine months ended September 30, 2005 compared to $81.9 million for the nine months ended September 30, 2004. Our net loss was $40.6 million in the third quarter of 2005 compared to $4.2 million in net income in the third quarter of 2004 primarily due to:

• The additional accrual of $40.3 million for the estimated loss from the Freedom Wireless judgment recorded in accordance with FAS 5;

• Lower revenue from the loss of Verizon and Cingular subscribers;

• Additional costs from our acquisition of PureSight;

• Legal costs related to the Freedom Wireless litigation; and

• Investments in international sales and development.

Principally due to the $64.3 million estimated loss from the Freedom Wireless judgment and the $8.8 million of legal expenses related to the Freedom Wireless litigation, we incurred a $56.8 million net loss for the nine months ended September 30, 2005 compared to $13.2 million in net income for the nine months ended September 30, 2004.

On May 20, 2005, a jury in the Freedom Wireless patent infringement lawsuit issued a verdict of $128 million against us and the other co-defendants, including Cingular Wireless, for past damages through December 31, 2004, an amount which exceeds our ability to pay. In July 2005,bcgientered into a Funding of Security for Appeal (“Appeal Agreement”) with Cingular Wireless whereby we placed $41 million into escrow for the purpose of using these funds as security for Cingular. In exchange for placing the funds into escrow, Cingular has posted bonds in the amount required by the District Court to stay the execution of the amount of judgment that concerns the joint infringement bybcgi and Cingular, pending appeal. Cingular has also agreed to dismiss, without prejudice, the action filed by Cingular againstbcgi in May 2005. Cingular filed this action in an effort to enforce Cingular’s indemnity rights against the Company as a result of the Freedom Wireless judgment. Cingular is not obligated to provide the security for the payment of any portion of the damages for which Cingular is not jointly liable. The Appeal Agreement does not alterbcgi’sobligation to indemnify Cingular. At September 30, 2005, this escrow amount (including interest earned to date) totaled $41.1 million and is recorded as restricted cash.

On October 12, 2005, the U. S. District Court for the District of Massachusetts (“District Court”) granted Freedom Wireless’ request for injunctive relief enjoining us from offering three implementations of our U.S. managed services offering to any wireless carrier other than a licensee of Freedom Wireless, subject to a 90-day grace period. During the 90-day grace period, the defendants would be required to pay Freedom Wireless a license fee equivalent to 2.5 cents per minute of use. In order to mitigate the severe impact of this injunction, we filed an emergency motion with the District Court to request a stay of the injunction pending appeal. On November 9, 2005, the stay was denied by the District Court. We expect to immediately appeal that decision to the U.S. Court of Appeals for the Federal Circuit (“Appeals Court”) and seek a stay of the injunction while the appeal of the judgment is pending. If the injunction is not stayed, the injunction would prohibit us from providing the MF, SS7, and pre-IN implementations of our prepaid wireless services to our customers in the United States, which represented approximately 64% of our total revenue for the three months ended September 30, 2005.

In October, 2005, the District Court denied Freedom Wireless’ motion to award attorneys fees and enhanced damages, including treble damages. However, the District Court granted Freedom Wireless’ request to add prejudgment interest at the prime rate and other costs totaling $20.1 million to the original judgment, bringing the

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total joint liability ofbcgiand Cingular (which includes AT&T Wireless Services and CMT Partners) to $147.8 million and the Company and Western Wireless to $297,000. Interest and damages for infringement bybcgi and Cingular from January 1, 2005 through August 31, 2005 may also be awarded and we believe that the amount would be approximately $15.0 million.

Based on management’s assessment of the potential outcomes of the case and in accordance with FAS 5 and FIN 14, we have accrued an estimated loss of $24.0 million in the quarter ended June 30, 2005 and an additional $40.3 million estimated loss in the quarter ended September 30, 2005, for a total estimated loss of $64.3 million with respect to the Freedom Wireless judgment, excluding our legal charges which are expensed as incurred. However, the actual loss, if any, may be significantly higher or lower than the amount accrued and could be as high as approximately $163 million, which exceeds our ability to pay, and may continue to increase, depending on the status of the injunction against us.

We have filed an appeal of the entire case with the Appeals Court. The appeal process may take 12 to 18 months or longer. In order to appeal, the defendants have posted bonds to cover 110% of the current damages amount. If the Appeals Court determines that royalties must be secured for non-defendant customers as a condition for staying the injunction, the amount of the security could be our sole responsibility and could exceed our ability to pay. If we are unable to provide adequate collateral, or an injunction is not stayed, or if we are unable to get an adverse judgment reversed, then we will not be able to provide the prepaid wireless or Real-Time Billing service bureau as currently offered in the United States. In that event, we may not be able to continue our ongoing operations or may need to seek protection under the U. S. Bankruptcy Code.

The potential outcomes vary greatly and could include any of the following:

• If the injunction is not stayed or if security is required to be posted for royalties that exceed our ability to pay, we would need to negotiate a settlement and/or a license with Freedom Wireless or would likely need to seek protection under the U.S. Bankruptcy Code.

• If the Appeals Court overturns the judgment of infringement, the Appeals Court could either rule thatbcgi would have no liability to Freedom Wireless or that the case would be returned to the District Court for a new trial on infringement.

• If the Appeals Court overturns the judgment that the patents held by Freedom Wireless were valid or enforceable, the Appeals Court could either rule thatbcgi would have no liability to Freedom Wireless, or the case could be returned to the District Court for a new trial on the issue of invalidity or unenforceability.

• If the Appeals Court rules in favor of Freedom Wireless, we would need to seek protection under the U.S. Bankruptcy Code.

• The parties may enter into a settlement agreement.

In 2004, Verizon Wireless began to use its own internal prepaid billing platform, and began adding new subscribers and converting existing subscribers from our Real-Time Billing solution to its platform. Conversions have been

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ongoing and are expected to continue into 2006. Additionally, while our Cingular Wireless contract expires in the first half of 2006, the injunction issued by the District Court has required Cingular Wireless to stop adding new subscribers to its TDMA prepaid offering, which is the only prepaid offering thatbcgi supports for Cingular Wireless. If the Appeals Court does not stay the injunction, Cingular Wireless will no longer be able to process prepaid wireless calls on our managed services platform as of January 2006.

In September 2005, our Board of Directors declared a dividend of one Right (each, a “Right”) for each outstanding share of our common stock, $.01 par value per share, to shareholders of record at the close of business on September 19, 2005. Each Right entitles the registered holder to purchase from us one one-thousandth of a share of Series A Junior Participating Preferred Stock, $.01 par value per share, at a purchase price of $35.00 in cash, subject to adjustment.

The Rights are intended to protect our shareholders in the event of an unfair or coercive offer to acquire us and to provide the Board with adequate time to evaluate unsolicited offers. The Rights may have anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire us without conditioning the offer on a substantial number of Rights being acquired. The Rights, however, should not affect any prospective offeror willing to make an offer at a fair price and otherwise in the best interests ofbcgiand our shareholders, as determined by the Board. The Rights should not interfere with any merger or other business combination approved by the Board.

We have not provided guidance for the remainder of 2005 or beyond since we cannot anticipate the impact of the Freedom Wireless litigation and related injunction and other factors, including the fact that Verizon Wireless may terminate our existing prepaid wireless services agreement upon 90 days written notice. We plan to continue to invest in and focus on our customer and product diversification strategy that includes investment in all of our new and existing products that we are marketing on a global basis.

Segment Data

(unaudited and in thousands)

	Three months ended September 30,
	2005				2004
	Total		% of Total Net Revenues		Total		% of Total Net Revenues
Real-Time Billing	$	23,007	90	%	$	25,523	94	%
Other		2,624	10	%		1,497	6	%
Total net revenue	$	25,631	100	%	$	27,020	100	%
	Nine months ended September 30,
	2005				2004
	Total		% of Total Net Revenues		Total		% of Total Net Revenues
Real-Time Billing	$	70,710	91	%	$	77,951	95	%
Other		6,888	9	%		3,964	5	%
Total net revenue	$	77,598	100	%	$	81,915	100	%

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Revenues

Real-Time Billing

Our net revenues from Real-Time Billing decreased by 10% in the third quarter of 2005 compared to the third quarter of 2004. While the subscribers on thebcgi platform increased by 129,000 from the same quarter in the previous year, bringing the our total subscriber count to 4.0 million as of September 30, 2005, revenue decreased primarily because the average billed rate per minute declined by approximately 29% for the third quarter of 2005 compared to the same quarter in the previous year. The decline in our average billed rate per minute was principally due to lower contractual rates and volume discounts for customers who signed contracts recently and who represent a larger percentage of total Real-Time Billing revenues.

Our net revenues from Real-Time Billing decreased by 11% in the nine month period ended September 30, 2005 compared to the same period in 2004. The decrease in revenues was due primarily to our average prepaid subscriber base decreasing by 100,000, yielding average subscribers of 3.9 million for the nine month period ended September 30, 2005, and to the decrease in the average billed rate per minute. The decrease in our average prepaid subscriber base is due primarily to subscriber losses from Verizon Wireless and Cingular Wireless exceeding the number of subscriber additions from Nextel Communications and other customers. The Real-Time Billing average billed rate per minute declined by approximately 20% for the nine months ended September 30, 2005 compared to the same nine month period in the previous year. The decline in the average billed rate per minute is due primarily to lower contractual rates for customers who signed contracts more recently and who represent a larger percentage of total Real-Time Billing revenue.

If the injunction is left standing, the injunction could prohibit us from providing our prepaid wireless services to carriers in the United States who are not licensees of Freedom Wireless, which represented approximately 64% of our total revenue for the three months ended September 30, 2005. If relief from the injunction is granted and a license from Freedom Wireless is not secured, customers who do not want to risk operating without a license from Freedom Wireless may not renew their contracts upon expiration.

In future quarters, we expect our prepaid subscriber base to further decrease, as we anticipate that Verizon Wireless conversions and subscriber churn from Cingular Wireless will exceed subscriber growth from other customers.

Other revenues

Other revenues are generated from our other three operating units,bcgi Payment,bcgi Access Management and Voyager Billing. Our net revenues from these operating units increased by 75% and 77% in the third quarter and first nine months of 2005 compared to the same periods in 2004. The increase in revenues for both the three and nine month periods ended September 30, 2005 was due primarily to our efforts to diversify our revenues with new products and customers.

Nextel Communications, Verizon Wireless and Cingular Wireless accounted for 39%, 24% and 12% of total revenues, respectively, in the third quarter of 2005. In addition, Nextel Communications, Verizon Wireless and Cingular Wireless accounted for 36%, 25% and 16% of total revenues, respectively, in the nine month period ended September 30, 2005.

Cost of total revenues

Cost of total revenues primarily include the salaries and benefits of personnel who support our managed services network and our licensed product offerings, along with costs for maintenance, telecommunications, travel, facilities and other support costs. Cost of total revenues increased to 27% of total revenues in the third quarter of 2005 from 26% in the third quarter of 2004. Cost of total revenues increased to 26% of total revenues in the nine months ended September 30, 2005 from 24% in the same nine month period in 2004. The increase in cost of total revenues in both the three and nine month periods resulted primarily from additional personnel and wages to support our investments in professional services and global licensing, partially offset by decreases in costs for new product launch and facilities.

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Operating Data

(unaudited and in thousands)

	Three months ended September 30,
	2005				2004
	Total		% of Total Net Revenues		Total		% of Total Net Revenues
Total net revenues	$	25,631	100	%	$	27,020	100	%
Engineering, research and development		5,445	21	%		3,694	14	%
Sales and marketing		3,038	12	%		1,567	6	%
General and administrative		2,699	11	%		1,955	7	%
General and administrative – legal		2,305	9	%		450	2	%
Estimated loss from litigation		40,300	157	%		—	—
Depreciation and amortization		5,236	20	%		5,894	22	%
	Nine months ended September 30,
	2005				2004
	Total		% of Total Net Revenues		Total		% of Total Net Revenues
Total net revenues	$	77,598	100	%	$	81,915	100	%
Engineering, research and development		14,504	19	%		10,987	13	%
Sales and marketing		7,827	10	%		5,106	6	%
General and administrative		7,849	10	%		6,166	8	%
General and administrative – legal		8,834	12	%		2,050	3	%
Estimated loss from litigation		64,300	83	%		—	—
Depreciation and amortization		15,995	21	%		16,853	21	%

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 existing and new software. The increase in engineering, research and development expenses for the three month period ended September 30, 2005 compared to the same quarter in 2004 resulted primarily from additional personnel, wages and related costs of approximately $1.6 million principally to support the development ofbcgi Access Management andbcgi Payment, along with the enhancement of the features and functionality of our other products. The personnel acquired through our acquisitions of PureSight, Inc., its Israeli subsidiary, PureSight Ltd. (PureSight) and Airada Networks, Inc. and Airada Networks Private Limited also contributed to the increase in personnel, wages and related costs.

The increase in engineering, research and development expenses for the nine month period ended September 30, 2005 compared to the same period in 2004 primarily resulted from additional personnel, wages and related costs of approximately $2.8 million and additional equipment rental and maintenance expense of $272,000 principally to support the development ofbcgi Access Management andbcgi Payment, along with the enhancement of the features and functionality of our other products. The personnel acquired through our acquisitions of PureSight and Airada Networks also contributed to the increase in personnel, wages and related costs.

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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. Sales and marketing expenses increased in the three month period ended September 30, 2005 compared to the same period in 2004 primarily due to $632,000 for the expansion of our international sales efforts, $365,000 for additional personnel, wages and related costs to support our diversification strategy, $350,000 for major industry tradeshows we exhibited at in the third quarter of 2005 and $110,000 for targeted marketing programs.

Sales and marketing expenses increased in the nine month period ended September 30, 2005 compared to the same period in 2004 principally due to $1.7 million in additional expense related to our international focus, including additional personnel for our international sales team and worldwide tradeshow attendance. In addition, sales and marketing expenses increased due to initiatives to brand and market ourbcgi Access Management andbcgiPayment products through trade shows, marketing programs and other channels.

General and administrative expenses

General and administrative expenses include salaries and benefits of employees and other expenses that provide our administrative support. General and administrative expenses increased for the three month period ended September 30, 2005 compared to the same period in 2004, principally due to additional personnel, wages and related costs of approximately $454,000 to support our diversification strategy, higher outside legal costs of approximating $224,000 and expanded regulatory requirements and related costs for public companies totaling approximately $115,000.

The increase in general and administrative expenses for the nine month period ended September 30, 2005 compared to the same period in 2004 was due to additional personnel, wages and related costs of approximately $855,000 to support our diversification strategy, higher costs associated with outside legal support of approximately $417,000 and expanded regulatory requirements and related costs for public companies totaling approximately $230,000.

General and administrative expenses – legal charges

General and administrative legal expenses primarily represent legal expenses to defend the patent infringement suits initiated by Freedom Wireless. The increase in expense for both the three and nine month periods ended September 30, 2005 compared to the respective year-earlier periods was due to higher costs associated primarily with the trial and the judgment against bcgi.

Estimated loss from litigation

On September 1, 2005, the District Court upheld the jury verdict thatbcgi and certain of our current or former carrier customer defendants (Cingular Wireless, AT&T Wireless Services, CMT Partners and Western Wireless Corp.) infringed or are infringing two Freedom Wireless patents. The jury damages award was in the total amount of $128 million for past damages through December 31, 2004. Additionally, the District Court has ordered pre-judgment interest and court costs of $20.1 million, bringing the total judgment to $148.1 million, an amount which exceedsbcgi’s ability to pay.bcgiand each carrier are jointly liable for specific amounts. We have filed our appeal of the judgment with the Appeals Court. While we do not believe that we infringe these patents and believe that the patents are invalid in light of prior art and other reasons, in light of the adverse judgment against us, we believe it is probable that a loss contingency exists. Although the ultimate amount of such loss, if any, is not currently known, accounting guidelines under Statement of Financial Accounting Standards No. 5,Accounting for Contingencies (FAS 5) and FASB Interpretation 14Reasonable Estimation of the Amount of a Loss (FIN 14), specify that if a loss can be reasonably estimated, it should be recorded. Based on management’s assessment of the potential outcomes of the case and in accordance with FAS 5 and FIN 14, we have accrued an estimated loss of $24.0 million in the quarter ended June 30, 2005 and an additional $40.3 million estimated loss in the quarter ended September 30, 2005, for a total estimated loss of $64.3 million with respect to the Freedom Wireless judgment, excluding our legal costs which are expensed as incurred. However, the actual loss, if any, may be significantly higher or lower than the amount accrued and could be as high as approximately $193 million and may continue to increase, depending on the status of the injunction against us.

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Depreciation and amortization expense

Depreciation and amortization expense includes depreciation of telecommunications systems and software, building, furniture and equipment and leasehold improvements. We provide for depreciation using the straight-line method over the estimated useful lives of the assets, which range from three to twenty years. The decrease in depreciation and amortization expense in absolute dollars for both the three and nine month periods ended September 30, 2005 compared to the same period in 2004 was primarily due to certain capital equipment that became fully depreciated in the first half of 2005, partially offset by intangible asset amortization from the acquisitions of PureSight and Airada of $182,000 for the three months ended September 30, 2005 and $362,000 for the nine months ended September 30, 2005.

Interest income

Interest income increased to $420,000 for the three month period ended September 30, 2005 compared to $322,000 for the three month period ended September 30, 2004 and increased to $1.2 million for the nine month period ended September 30, 2005 from $885,000 for the nine month period ended September 30, 2004. Interest income was earned primarily from investments, which were purchased using the cash generated from operations, from the sale of our teleservices business in 2000 and from the proceeds from our public offerings. Although our combined cash and investment positions decreased as of September 30, 2005, higher average interest rates during the periods resulted in increased levels of interest income compared to the same periods in the previous year. If we ultimately make a cash payment relating to the Freedom Wireless litigation or pledge a substantial portion of our cash to stay the execution of the judgment, this may substantially reduce our cash and investment balances and therefore reduce future interest income.

Provision for income taxes

The income tax provision for the three months ended September 30, 2005 was $590,000 compared to an income tax provision of $2.7 million (39.5% effective tax rate) for the three months ended September 30, 2004. The provision recorded in the current quarter primarily reflects the valuation allowance for deferred tax assets that may not be realizable due to the current operating losses being incurred as a result of the Freedom Wireless verdict.

The income tax benefit for the nine months ended September 30, 2005 was $4.2 million, compared to an income tax provision of $8.7 million (39.5% effective tax rate) for the nine months ended September 30, 2004. The benefit recorded in the current year reflected our assessment of our ability to realize the tax benefit from the ultimate loss, if any, from the Freedom Wireless litigation.

Acquisitions

In June 2005, we acquired the assets and certain liabilities of PureSight, a provider of advanced content recognition solutions for mobile operators, ISPs and enterprises. We paid $6.6 million in cash for PureSight, including acquisition costs. Management determined the fair value of the assets and certain liabilities acquired by considering the anticipated cash flows to be generated from the existing products, the valuation of customer contracts and relationships and non-compete agreements, the estimated life of the technology acquired and other factors. Identifiable intangible assets of $1.6 million consist of acquired technology, customer contracts and relationships, trademarks and non-compete agreements and are being amortized over four to seven years. The results of operations of PureSight are included in our Condensed Consolidated Statement of Operations from the date of acquisition.

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Discontinued Operations

In March 2004, we ceased providing our ROAMERplus solution, effectively discontinuing our Roaming Services segment. This business generated a net loss of $11,000 for the nine months ended September 30, 2004.

Liquidity and Capital Resources

As of September 30, 2005, cash, cash equivalents, restricted cash and short-term investments decreased 5% to $73.5 million compared to $77.8 million at December 31, 2004, primarily due to operating and investing activities. We entered into an agreement with Cingular Wireless, placing $41 million of cash into escrow which is restricted cash in that it will be used for security to stay the execution of judgment in the Freedom Wireless lawsuit. The net cash used in operations of $23.4 million in the nine months ended September 30, 2005 resulted from a $56.8 million net loss, along with adjustments for depreciation and amortization of $16.0 million and an estimated loss contingency recorded in the Freedom Wireless patent infringement lawsuit of $64.3 million, reclassification of $41.1 million in cash to restricted cash due to the Appeal Agreement with Cingular Wireless, decreased receivables of $2.2 million caused by an decrease in our days sales outstanding from 63 as of December 31, 2004 to 58 at September 30, 2005, a decrease in deferred income taxes of $2.6 million, an increase in tax refunds receivable, prepaid expenses and other assets of $3.2 million and a decrease in accounts payable, accrued expense, deferred revenue and income taxes payable of $2.9 million resulting from income tax, bonus and equipment accruals as of December 31, 2004 that were subsequently paid.

Our investing activities provided $21.8 million of net cash for the nine months ended September 30, 2005. The funds provided by investing activities were used to partially fund the $41 million escrow agreement. In addition, we spent approximately $13.0 million for the purchase of telecommunications equipment and software to enhance our managed services platform as well as further develop our licensed products. Internally capitalized costs were $2.8 million for both the nine month period ended September 30, 2005 and 2004. In addition, we acquired a business for approximately $6.6 million and contributed $1.5 million to fund our defined benefit plan, a contribution which we intend to make every year in our second quarter.

Our financing activities provided cash of $550,000 for the nine months ended September 30, 2005 primarily from proceeds from the exercise of stock options and the issuance of common stock under the Employee Stock Purchase Plan.

Subject to the outcome of the Freedom Wireless litigation, including license fees that may be payable, we believe that our cash, cash equivalents and short-term investments will be sufficient to finance our operations for at least the next twelve months and for the foreseeable future thereafter. An adverse final judgment, license fee payable or a settlement in the Freedom Wireless litigation would likely (when paid) adversely impact our liquidity and capital resources. Depending on the amount of the adverse judgment, settlement or license fee, the negative impact to our liquidity and capital resources could be material.

We have non-cancelable commitments for equipment, operating lease commitments for office space, many of which are renewable at our option, as well as various other commitments for telecommunications services. We include in our commitments those agreements under which we are contractually obligated and agreements that are cancelable, but which we do not anticipate canceling. The following table summarizes our contractual obligations as of September 30, 2005 (in thousands):

			Payment due by period
	Total		within 1 year		2-3 years		4-5 years		More than 5 years
Contractual Obligations:
Operating leases	$	2,745	$	1,414	$	1,178	$	153	$	—
Purchase commitments		5,224		4,219		985		20		—
Total	$	7,970	$	5,633	$	2,163	$	174	$	—

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Off-Balance Sheet Arrangements

During the third quarter of 2005, 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

The discussion and analysis of our financial condition and results of operations is based upon our 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, 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 consolidated financial statements:

• Revenue recognition and allowance for bad debts

• Estimated loss from litigation and legal costs

• Research and development and software development costs

• Impairment of long-lived and intangible assets and goodwill

• Accounting for income taxes

Revenue Recognition and Allowance for Bad Debts

Our revenue recognition policy is critical because revenue is a key component affecting our operations. In addition, revenue recognition determines the timing of certain expenses, such as commissions and bonuses, although historically expenses that are contingent on revenue recognition are not material. We follow very specific and detailed guidelines in recognizing revenue; however, certain judgments relating to the elements required for revenue recognition affect the application of our revenue policy. Revenue results are difficult to predict and any shortfall in revenue, changes in judgments concerning recognition of revenue, changes in uncollectible or bad debt estimates, changes in mix, amount of international sales or delays in recognizing revenue, could cause operating results to vary significantly from quarter to quarter.

We recognize our revenues in accordance with 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.” We earn revenues in various ways, depending on the type of transaction. For our managed services business, we earn revenues in the following ways:

• For Real-Time Billing, we earn revenues principally by processing prepaid wireless minutes or as a percentage of wireless customer revenue, net of any penalties incurred related to outages on our platform.

• For Voyager Billing, we earn revenues by generating a postpaid subscriber’s monthly bill.

• For PayExtend, we earn revenues by processing transactions on behalf of wireless operators’ subscribers.

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Each of these revenues is recognized when the service is provided. For license fees, special projects and implementation services related to our managed services business, revenues are typically recognized ratably over the remaining life of the contract with the wireless operator.

For our licensed systems sales, we typically recognize revenue from the sale of systems at the time the systems are shipped or delivered to the customer, depending on shipping terms. In the event there are acceptance terms, we defer revenue until acceptance has occurred. In addition, certain software is licensed to distributors, who pay licensing fees to us as they sell the software to their customers and this revenue is recognized in the month in which it is earned.

For multiple element arrangements, we determine the fair value of each element based on our specific objective evidence for that element and allocate total revenue from these arrangements to each element based on its fair value. Installation revenue is deferred until the installation is complete. Revenues from maintenance and support and other services are based on vendor-specific objective evidence of fair value and recognized ratably over the term of the maintenance and support contract period or when the services are performed. Vendor-specific objective evidence of fair value for maintenance and support is based upon the amount charged when the service is sold separately, which is typically the contract’s renewal rate. Vendor-specific objective evidence of fair value for installation and other services is based upon standard pre-established rates.

In addition to recording revenues net of any penalties incurred related to outages on our managed services platform and estimated amounts that may be disputed, we evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet their financial obligations (e.g. bankruptcy filings, substantial downgrading of credit scores), we record a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. In addition, we record reserves based on the length of time the receivables are past due and on historical experience. If circumstances change (e.g., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet their financial obligations), estimates of amounts recoverable could be adversely affected. We believe that our allowance for billing adjustments and doubtful accounts fairly represents the potential amount of bad debt we could incur.

Estimated Loss from Litigation and Legal Costs

We accrue for loss contingencies in accordance with Statement of Financial Accounting Standards No. 5,Accounting for Contingencies (FAS 5) and FASB Interpretation 14Reasonable Estimation of the Amount of a Loss (FIN 14), which specifies that if a loss is probable and can be reasonably estimated, it should be recorded. Furthermore, when some amount within the range appears at the time to be a better estimate than any other amount within the range, that amount shall be accrued.When no amount within the range is a better estimate than any other amount, however, the minimum amount in the range shall be accrued. There can be no assurance as to whether the actual loss will be higher or lower than the amount which is accrued.

We accrue the costs of settlements, damages and, under certain conditions, costs of defense when such costs are probable and estimable; otherwise, such costs are expensed as incurred. As discussed in Note 4 to the Condensed Consolidated Financial Statements, we are expensing legal costs related to the Freedom Wireless lawsuits as incurred due to the lengthy and unpredictable proceedings which had made it difficult to reasonably estimate legal costs for the lawsuits. In addition, we expense legal costs related to the Verizon Contractual Indemnification as incurred due to the unpredictable nature of this matter, which makes it difficult to reasonable estimate legal costs.

Research and Development and Software Development Costs

Research and development costs are charged to expense as incurred. However, costs incurred for the development of computer software or deployment of assets for internal use is 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

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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 our anticipated use, anticipated future undiscounted net cash flows and changes in hardware and software technologies.

We also capitalize internal software development costs in accordance with Financial and Accounting Standards Board (“FASB”) Statement No. 86 (“FAS 86”), “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.” This statement specifies that costs incurred internally in creating a computer software product shall be charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of all planning, designing, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements. We cease capitalization of internally developed software when the product is made available for general release to customers and thereafter, any maintenance and customer support is charged to expense when related revenue is recognized or when those costs are incurred. We continually evaluate the recoverability of capitalized costs and if the success of new product releases is less than we anticipate, then a write-down of capitalized costs may be made which could adversely affect our results in the reporting period in which the write-down occurs.

Internally capitalized costs increased to $1.1 million for the three month period ended September 30, 2005 compared to $1.0 million for the three month period ended September 30, 2004 and were $2.8 million for the nine month periods ended September 30, 2005 and 2004. Amortization of capitalized software development costs begins when the solution is made available for general release and amortization of internal use costs begins when the related asset is first placed into service. These costs are amortized on a straight-line basis over a three-year period.

Impairment of Long-Lived and Intangible Assets and Goodwill

We assess the impairment of long-lived assets, identifiable intangibles and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which result in an impairment review include the following:

• Significant underperformance relative to expected historical or projected future operating results;

• Significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and

• Significant negative industry or economic trends.

When indicators of impairment exist and the carrying value of intangibles and long-lived assets, other than goodwill, may not be recoverable, we compare the projected undiscounted cash flows from these assets, which are determined considering a number of factors including past operating results, budgets, economic projections, market trends and solution development cycles, to their carrying value. If the carrying value of the long-lived asset exceeds the estimated undiscounted cash flows, the asset is considered impaired and the carrying value is then compared to the asset’s fair value. If the carrying value exceeds the fair value, an impairment loss equal to the excess is recorded immediately in the Statement of Operations. Fair value is determined by either a quoted market price or use of a present value technique, which requires judgments to be made by management regarding estimating future cash flows, economic life and discount rates, among other assumptions. Different assumptions could yield materially different results.

We account for goodwill in accordance with FAS 142 “Goodwill and Other Intangible Assets.” Under FAS 142, goodwill is not amortized but is subject to annual impairment tests. We evaluate goodwill for impairment annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is tested for impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.

In October 2002, we acquired the assets and certain liabilities of Infotech Solutions Corporation (“ISC”) and determined the fair value of the assets acquired and liabilities assumed. The principal asset acquired was completed technology of $1.0 million related to billing software solutions for the wireless marketplace as well as customer contracts of $200,000. We may be required to pay additional contingent cash consideration based on ISC attaining certain defined annual revenue targets in 2005, which will be accounted for as additional goodwill. As of September 30, 2005, we recorded an estimated contingent cash consideration liability for 2005 of $681,000.

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In November 2004, we acquired the assets of Airada Networks, Inc. and Airada Networks Private Limited (“Airada”) and determined the fair value of the assets acquired and liabilities assumed. The principal asset acquired was completed technology of $1.7 million related to a payment management software solution for the wireless marketplace as well as customer contracts of $100,000. We may be required to pay additional contingent cash consideration based on Airada attaining certain defined annual revenue and operational targets through 2007, most of which will be accounted for as additional goodwill.

In June 2005, we acquired the assets and certain liabilities of PureSight and determined the fair value of the assets acquired and liabilities assumed. The principal assets acquired were completed technology related to advanced content recognition solutions for mobile operators, ISPs and enterprises, non-compete agreements, customer contracts and relationships and trademarks valued at approximately $1.6 million.

Management determined the fair value of the assets acquired by considering the anticipated cash flows to be generated from the existing products, the valuation of customer relationships, the estimated life of the technology acquired and other assumptions. The valuation of completed technology was primarily based on future cash flow projections over the estimated economic life adjusted for an incremental obsolescence rate discounted to present value. We estimated that the useful life of the acquired technology is four to seven years.

Significant judgments and estimates are involved in our acquisitions to determine the fair market value of assets acquired and their useful lives. Different assumptions could yield materially different results.

As a result of the Freedom Wireless lawsuit judgment and related accounting, we performed an asset impairment test for our long-lived assets and goodwill as of June 30 and September 30, 2005 and concluded that no impairment existed.

Income Taxes

Our current and deferred income taxes, and associated tax reserves, are impacted by events and transactions arising in the normal course of business as well as in connection with special and non-recurring items. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets and the timing of income tax payments. Actual collections and payments may materially differ from these estimates as a result of changes in tax laws as well as unanticipated future transactions impacting related income tax balances.

New Accounting Pronouncements

On December 16, 2004 and as amended on April 14, 2005, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment (Statement No. 123(R)), which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement No. 123(R) is similar to the approach described in Statement 123. However, Statement No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro forma disclosure is no longer an alternative.

Under Statement No. 123(R), the Securities and Exchange Commission allows companies to implement Statement No. 123(R) at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. We expect to adopt Statement No. 123(R) on January 1, 2006.

As permitted by Statement 123, we currently account for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of Statement No. 123(R)’s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement No. 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income (loss) and earnings per share in Note 2 to our Condensed Consolidated Financial Statements. Statement No. 123(R) also requires the

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benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.

Certain Factors That May Affect Future Results

An unfavorable outcome regarding our request for clarification or a stay of the injunction with the Appeals Court would have a material adverse impact on our business, including potential asset impairment charges and the possibility of a bankruptcy filing, and would impair our ability to continue as a going concern.

In order to mitigate the severe impact of the injunction imposed by the District Court on October 12, 2005 in the Freedom Wireless lawsuit, we filed an emergency motion to clarify or stay the injunction pending appeal to allow us to continue to serve all non-defendant operators during the appeals process. On November 9, 2005, the District Court denied the motion. The Company expects to appeal that decision with the Appeals Court. If a stay is granted, we may be required to provide security for the estimated amount of royalties due for the estimated timeframe through the date of the ruling on appeal. If this amount exceeds our ability to secure or if we are required to post a bond and are unable to do so, we may need to seek protection under the U. S. Bankruptcy Code. If the injunction is not stayed, it would prohibit us from providing our prepaid wireless services to our carrier customers who are not licensees of Freedom Wireless in the United States, which represented approximately 64% of our total revenue during the three months ended September 30, 2005. In addition, if the injunction is not clarified or stayed or if we must provide security and are unable to do so, our carriers may try to cancel their contracts with us or we may not be able to fulfill the contractual terms of our contracts.

If our appeal of the Freedom Wireless lawsuit is denied by the Appeals Court, it would have a material adverse impact on our business, including potential asset impairment charges and the likelihood of bankruptcy, impairing our ability to continue as a going concern.

Although we have filed to appeal the judgment in the Freedom Wireless lawsuit, the Appeals Court may uphold the judgment, which currently stands at $148.1 million and exceeds our ability to pay. The amount of damages could be higher by approximately $15.0 million if interest and damages for infringement bybcgi and Cingular from January 1, 2005 to the present are awarded. If the final judgment after the appeal is adverse to us and exceeds our ability to pay, we would need to seek protection under the U.S. Bankruptcy Code. In addition, any significant delay in the Appeals Court issuing a final ruling could impair our business going forward due to ongoing uncertainty and additional legal costs.

In addition, Freedom Wireless has filed two separate patent infringement lawsuits against us and Nextel Communications and Alltel Corporation as well as other carriers, respectively. Although we are contesting the lawsuits, there can be no assurance of a favorable outcome in these matters. We are obligated to indemnify Nextel and Alltel and the other carriers for damages they may incur with respect to any finding of infringement bybcgi’s technology.

Regardless of the outcome in these lawsuits, we have already incurred approximately $25.0 million in legal and other costs as of September 30, 2005 and will continue to incur significant expenses to support our ongoing defense. Ongoing legal costs may fluctuate from time to time, depending on the nature of our legal proceedings.

At any time during the aforementioned proceedings, we may seek a settlement with Freedom Wireless and/or a license to use Freedom Wireless’ patents. Any such settlement or license may carry terms unfavorable to us and may significantly restrict our cash and/or future ability to generate profits.

If execution of the judgment in the Freedom Wireless lawsuit is not stayed and we are required to post any future bonds or provide security on our own (for additional damages, royalties or otherwise), we may not be able to do so on our own. As a result, we may need to seek protection under the U.S. Bankruptcy Code.

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In July 2005, we entered into an Appeal Agreement with Cingular Wireless whereby we placed $41 million into escrow for the purpose of using these funds as security to Cingular. In exchange for placing the funds into escrow, Cingular has posted bonds in the amount required by the District Court to stay the execution of the judgment, pending appeal. Cingular is not obligated to provide the security for the payment of any portion of the damages for which Cingular is not jointly liable. To date,bcgi and the defendants have posted bonds in the amount required by the District Court to stay the execution of the judgment. However, in the event the defendants have to post a bond for the damages since December 31, 2004 to appeal the case, and Cingular does not post such bond, we may not be able to post such bond ourselves. In addition, ifbcgiis required to post any bonds or provide security for potential additional damages or future royalties while the appeal is pending, we may not be able to fulfill such an obligation. Thus, if we are required to post any future bonds or provide security on our own and are unable to do so, this could result in our need to seek protection under the U.S. Bankruptcy Code.

The agreement with Cingular Wireless, in addition to any future requirement to provide additional security on our own, may substantially reduce our working capital and access to cash.

With the current uncertainties facingbcgiand the potential for unforeseen changes in our business and estimates, including but not limited to loss of customers and/or higher than expected legal costs, we may need additional working capital. In such circumstances, we may not have access to the $41 million placed in escrow as security for our appeal. We also may need to provide additional security for potential additional damages or royalties. If we are unable to secure additional capital or finance sufficient assets, we may need to seek protection under the U.S. Bankruptcy Code.

A class action lawsuit has been filed against us, which may result in litigation that is costly to defend and the outcome of which is uncertain and may harm our business.

A putative class action complaint was filed in June 2005 and has been subsequently amended in the U.S. District Court for the District of Massachusetts, against us, our Chief Executive Officer and our Chief Financial Officer on behalf of persons who purchased our common stock between June 6, 2002 and May 20, 2005. The amended complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act as well as Rule 10b-5 promulgated thereunder by allegedly failing to disclose adverse facts regarding the Freedom Wireless, Inc. lawsuit, including that we had willfully infringed the Freedom Wireless patents. We intend to contest the lawsuit vigorously and believe thatbcgiand the two executive officers named as defendants have meritorious defenses to the allegations set forth in the lawsuit.

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We can provide no assurance as to the outcome of this complaint. Any conclusion of this matter in a manner adverse to us could have a material adverse affect on our financial position and results of operations. In addition, the costs to us of defending any litigation or other proceeding could be substantial, even if such litigation or proceedings are resolved in our favor. Furthermore, there can be no assurance that our directors’ and officers’ insurance will be sufficient to cover any potential damages from this lawsuit. Such litigation could also substantially divert the attention of our management and our resources in general. Uncertainties resulting from the initiation and continuation of any litigation or other proceeding could harm our ability to compete in the marketplace.

As the uncertainty surrounding the status of the Freedom Wireless lawsuits continues, we face challenges with our potential and existing customers, vendors and employees, all of which could have a material adverse effect on our business.

The status of the Freedom Wireless lawsuit remains unresolved and may remain unresolved for an indefinite period of time. This uncertainty has and will likely continue to impact our existing business in the following ways:

• If the injunction is upheld, we will be enjoined from selling our prepaid service bureau in the United States altogether, unless sold in conjunction with a Freedom Wireless licensee;

• Our ability to sell our products and services to new and existing customers has been and may continue to be limited;

• Existing customers have not continued and may continue to not renew their current contracts or could seek to terminate their contracts;

• Existing customers may reduce their prepaid sales and marketing efforts to mitigate their potential exposure under the litigation;

• Current employees have sought and may continue to seek other employment prior to a final resolution of this matter;

• Prospective employees have not accepted and may continue not to accept our employment offers; and

• Current and potential vendors have imposed and may continue to impose restrictions on us, including higher pricing, advance payments and other terms regarding our ability to obtain their products and services.

Verizon Wireless and Cingular Wireless, two of our largest customers using our Real-Time Billing managed services, are currently also utilizing in-house and/or our competitors’ prepaid solutions, which will result in the continued loss of existing subscribers and fewer subscriber additions to our platform.

Verizon Wireless may terminate our existing prepaid wireless services agreement upon 90 days written notice. Verizon Wireless began converting subscribers from our platform to its internal platform in the fourth quarter of 2004. Conversions have been ongoing and are expected to continue into 2006. Additionally, while our Cingular Wireless contract expires in the first half of 2006, the injunction issued by the District Court has required Cingular Wireless to stop adding new subscribers to its TDMA prepaid offering, which is the only prepaid offering thatbcgi supports for Cingular Wireless. If the Appeals Court stays the injunction or if a license to use Freedom Wireless’ patents is obtained allowing Cingular Wireless to begin to add new subscribers, Cingular Wireless’ reduced sales efforts for its TDMA prepaid offering are expected to result in fewer gross additions and all of its current subscribers will stop being hosted on our Real-Time Billing platform over time. If the Appeals Court does not stay the injunction, Cingular Wireless will no longer be able to process prepaid wireless calls on our managed services platform as of January 2006. Thus, revenues from Verizon and Cingular will substantially decrease, resulting in a reduction of overall revenue from our Real-Time Billing business from these two customers.

The loss or significant reduction of business from one of our major customers, including Nextel Communications, Verizon Wireless or Cingular Wireless, 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. The following table summarizes the percentage of our

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total revenue received from Nextel Communications, Verizon Wireless and Cingular Wireless for the three months ended September 30, 2005:

Nextel Communications	39	%
Verizon Wireless	24	%
Cingular Wireless	12	%

Most of our customer contracts are not exclusive. Therefore, our wireless operator 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 2006 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 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 our mobile services platform.

Nextel became our largest customer in the first quarter of 2005. We can provide no assurance that Nextel will continue to use our services beyond the term of their contract with us. If we were to lose Nextel as a customer and cannot replace the revenue, our business would be materially and adversely impacted. Additionally, there are a limited number of U.S. customers available in the marketplace and if we are unable to add new customers, our business would be materially and adversely impacted.

Our future success depends partly on the global acceptance of our newer products, including bcgi Access Management, Payment Manager and bcgi Network.

We have recently introduced bcgiAccess Management, Payment Manager andbcgiNetwork product offerings to the marketplace.The acceptance of these new products is critical to our strategy to diversify and grow our revenue base. Our success in gaining acceptance of these offerings will depend on our ability to integrate these products into existing wireless operator billing platforms. In addition, the success ofbcgiAccess Management will depend on wireless operator and subscriber acceptance of the capabilities of this product.To date we have not had any significant deployments of these products, and in light of the current status of the Freedom Wireless litigation, our ability to sell new products is impaired. The failure or delay of any of these offerings to be accepted in the marketplace could have a material adverse effect on our business, financial condition and results of operations.

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. Additionally, we anticipate the change in our business model will result in more revenues from licensed sales, which tend to be less predictable. Our quarterly operating results may vary significantly depending on a number of factors, including:

• Developments in the Freedom Wireless matter, including the cost of royalties, license fees, additional damages and legal support;

• The lack of acceptance or delayed acceptance of our newest solutions, includingbcgiAccess Management and Payment Manager;

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

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

• Rates charged and paid by our customers;

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

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

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

• The relatively long sales cycles for many of our products;

• Seasonal trends, particularly in the second and third quarters when wireless operators 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.

We expect that our revenues and net income will decline in future quarters, as Verizon and Cingular generate less revenue and due to the potential impact of the injunction in the Freedom Wireless matter and customer concerns regarding our viability. Also, a significant portion of our expenses is fixed. 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. Additionally, due to all of the foregoing factors, it is possible that in some future quarter our results of operations will be below our expectations and/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 and could potentially result in the delisting of our stock.

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

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 wireless customers. Also, there can be no assurance that we will successfully support and enhance our Real-Time Billing 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 Access Management,bcgi Network orbcgi Payment, 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 pricing, 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.

Our international sales and operations subject us to additional risks that can adversely affect our operating results.

We are expanding our sales and operations internationally and expect to derive a greater portion of our revenues from customers outside the United States. Additionally, we have recently acquired businesses in India and Israel and opened sales offices in Singapore, Mexico and the United Kingdom. Our international operations are subject to a variety of risks, including:

• General economic conditions in each country or region;

• The overlap of different tax regimes;

• Fluctuations in currency exchange rates and difficulties in transferring funds from certain countries;

• The difficulty of managing an organization operating in various countries;

• Compliance with a variety of international laws and regulations, including trade restrictions, local labor ordinances and changes in tariff rates;

• Longer payment cycles and difficulties in collecting accounts receivable;

• Import and export licensing requirements;

• Political unrest, terrorism and the potential for other hostilities, particularly in areas in which we have facilities; and

• Reduced protection for intellectual property rights in some countries.

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Our success depends, in part, on our ability to anticipate and address these risks. We cannot guarantee that these or other factors will not adversely affect our business or operating results.

We entered into a strategic investment agreement with an early stage entity with which we have a commercial relationship.

In exchange for cash totaling $1.5 million, we received secured convertible promissory notes for the same amount. The notes are convertible at any time into the borrower’s common stock or preferred stock, as defined in the agreement. If the entity does not execute on its strategic plan, our investment could become impaired and therefore, may not be recovered.

We rely on complex information technology systems and networks to operate our business. If any significant system or network disruption occurs, we will be subject to financial penalties that could adversely affect 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 breaches, natural disasters, fire, power loss, terrorism, war, telecommunication failure or similar events. We have implemented various measures to guard against these risks, however, 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 wireless customer contracts. Our Bedford and Woburn, Massachusetts facilities are redundant and each facility is able to provide all significant processing functions of our network. We still may not be protected from a natural disaster within the greater Boston, Massachusetts area. There may also be system or network disruptions if new or upgraded business management systems are defective or are not installed properly. 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.

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 that 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 acquisition opportunities and have acquired companies in the recent past. 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

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terms and conditions acceptable to us. We may not be able to successfully integrate recent or future acquired companies and personnel. Acquisitions involve numerous risks, including, among other things:

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

• Risk that the acquired company’s technology infringes on an existing patent;

• 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 and continue to invest in new products and features, including expanding internationally. This has created significant demands on our technical, management, operational, development and administrative 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 or that we will be successful in our expansion strategy. 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. Additionally, there can be no assurance that our investments will result in generating revenues within a reasonable time or that they will be sufficient to generate a reasonable return.

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

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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.

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 are 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.

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. Our investments are also subject to interest rate risk and will decrease in value if market interest rates increase. However, since our investments are generally conservative in nature and are of a relatively short duration and some are held to maturity, interest rate risk is mitigated.

We do not use derivative financial instruments for either hedging foreign currency exposure risk or speculative trading purposes. Accordingly, we do not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item.

Item 4.Controls and Procedures

Management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of September 30, 2005. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that, as of September 30, 2005, 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 CEO and CFO 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 required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’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 Securities Exchange Act) occurred during the three months ended September 30, 2005 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

Freedom Wireless Patent Infringement Lawsuit

In March 2000, Freedom Wireless, Inc. filed a suit against us and a number of our current or former carrier customers (including Verizon Wireless, Cingular Wireless, AT&T Wireless Services, CMT Partners and Western Wireless Corp.) in the United States District Court in Massachusetts (“District Court”). On May 20, 2005, a jury determined thatbcgi and certain of the other defendants infringed or are infringing the two Freedom Wireless patents. The jury damages award was in the total amount of $128 million for past damages through December 31, 2004. In August 2005,bcgi filed a motion asking the District Court to order a new trial on damages or to reduce the level of damages awarded, which was denied by the District Court and judgment was entered for $128 million, plus interest and costs.

In July 2005,bcgi entered into a Funding of Security for Appeal (“Appeal Agreement”) with Cingular Wireless whereby we placed $41 million into escrow for the purpose of using these funds as security to Cingular. In exchange for placing the funds into escrow, Cingular has posted bonds in the amount required by the District Court to stay the execution of the amount of the judgment that concerns the joint infringement bybcgi and Cingular, pending appeal. Cingular has also agreed to dismiss, without prejudice, the action filed by Cingular againstbcgi in May 2005. Cingular filed this action in an effort to enforce Cingular’s indemnity rights againstbcgi as a result of the Freedom Wireless judgment. Cingular is not obligated to provide the security for the payment of any portion of the damages for which Cingular is not jointly liable. The agreement does not alter our obligation to indemnify Cingular. At September 30, 2005, this escrow amount (including interest earned to date) totaled $41.1 million and is recorded as restricted cash.

In October, 2005, the District Court denied Freedom Wireless’ motion to award attorneys fees and enhanced damages awarded by the jury, including treble damages. However, the District Court granted Freedom Wireless’ request to add prejudgment interest at the prime rate and other costs to the original judgment totaling $20.1 million, bringing the total joint liability ofbcgiand Cingular (which includes AT&T Wireless Services and CMT Partners) to $147.8 million and the Company and Western Wireless to $297,000. Interest and damages for infringement bybcgiand Cingular from January 1, 2005 through August 31, 2005 may also be awarded and we believe that the amount would be approximately $15.0 million.

On October 12, 2005, the District Court granted Freedom Wireless’ request for injunctive relief, which Freedom has claimed enjoinsbcgi and the co-defendants individually, jointly, or in concert with any third party, other than a licensee of Freedom Wireless, from making, using, selling or offering to sell three implementations of our U.S. service bureau, multi-frequency (MF), common channel signaling system seven (SS7), and pre-intelligent network (pre-IN), or any systems that are not colorably different. The Court allowedbcgi and the co-defendant carriers in the case a 90-day grace period, during which the defendants would be required to pay Freedom Wireless a license fee equivalent to 2.5 cents per minute of use. On average, we currently charge our customers approximately 1 cent per minute of use, which includes a full suite of real-time billing, rating and support services using our proprietary software and network.

In order to mitigate the severe impact of this injunction that was granted by the District Court, we filed an emergency motion to clarify the terms of the injunction or to stay the injunction pending appeal. On November 9, 2005, the motion was denied by the District Court. We expect to immediately appeal that decision to the Appeals Court and seek a stay of the injunction while the appeal of the judgment is pending.

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If a stay is granted, we may be required to provide security for the estimated amount of royalties due for the estimated timeframe through the date of the ruling on appeal. If this amount exceeds our ability to secure or if we are required to post a bond and are unable to do so, we may need to seek protection under the U. S. Bankruptcy Code unless the Appeals Court dispenses with such security. If the injunction is not stayed pending appeal, it would prohibit us from providing the MF, SS7 and pre-IN implementations of our prepaid wireless services to our carrier customers in the United States who are not licensees of Freedom Wireless, which represented approximately 64% of our total revenue for the three months ended September 30, 2005. We would also likely need to seek protection under U.S. Bankruptcy Code. In addition, if the injunction is left standing, or if we must provide security and are unable to do so, our carriers may try to cancel their contracts with us, or we may not be able to fulfill the contractual terms of our contracts.

We have filed our appeal with the Court of Appeals for the Federal Circuit (“Appeals Court”). The appeal process may take 12 to 18 months or longer. In order to appeal, the defendants have posted bonds to cover 110% of the current damages amount. If the Appeals Court determines that royalties must be secured for non-defendant customers as a condition for staying the injunction, the amount of the security could be our sole responsibility and could exceed our ability to pay. If we are unable to provide adequate collateral, or an injunction is not stayed, or if we are unable to get an adverse judgment reversed, then it will not be possible for us to provide the prepaid wireless or Real-Time Billing service bureau as currently offered in the United States. In that event, we may not be able to continue our ongoing operations or may need to seek protection under the U. S. Bankruptcy Code.

We have an obligation to indemnify the other defendants for damages they may incur with respect to any infringement by our technology. In 2005, Verizon Wireless, which was a defendant in the case, reached a settlement with Freedom Wireless and, as a result, was removed as a defendant in the case. We were not part of the settlement discussions and the terms of the settlement are not public.

While we continue to believe that we do not infringe these patents and believe that the patents are invalid in light of prior art and other reasons, in light of the adverse judgment, we believe it is probable that a loss has been incurred. Although the ultimate amount of such loss, if any, is not currently known, accounting guidelines under Statement of Financial Accounting Standards No. 5,Accounting for Contingencies (FAS 5) and FASB Interpretation 14,Reasonable Estimation of the Amount of a Loss (FIN 14), specify that if a loss can be reasonably estimated, it should be recorded.Based on management’s assessment of the potential outcomes of the case and in accordance with FAS 5 and FIN 14, we have accrued an estimated loss of $24.0 million in the quarter ended June 30, 2005 and an additional $40.3 million estimated loss in the quarter ended September 30, 2005, for a total estimated loss of $64.3 million with respect to the Freedom Wireless litigation. However, the actual loss, if any, may be significantly higher or lower than the amount accrued, and could be as high as $163 million, which exceeds our ability to pay, and may continue to increase, depending on the status of the injunction against us.

Freedom Wireless Patent Infringement Lawsuits Against bcgi, Nextel Communications and Alltel Corporation

On May 20, 2005, Freedom Wireless filed two separate lawsuits in the U.S. District Court for the District of Massachusetts, the first against us and Nextel Communications, and the second against us, Alltel Corporation and

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several other of our carrier customers. These lawsuits allege that we and each of our named carrier customers infringe the same two patents held by Freedom Wireless, Inc. and seek damages as well as injunctive relief. We have an obligation to indemnify our customers for damages they may incur with respect to any infringement by our technology. We intend to contest the lawsuits vigorously and believe that we do not infringe these patents and believe that the patents are invalid in light of prior art and other reasons.

Class Action Lawsuit

In June 2005, a putative class action complaint was filed in the U.S. District Court for the District of Massachusetts, against us, our Chief Executive Officer and our Chief Financial Officer on behalf of persons who purchased our common stock between November 15, 2000 and May 20, 2005. The complaint was amended on October 12, 2005 to modify the commencement date to June 6, 2002. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act as well as Rule 10b-5 promulgated thereunder by allegedly failing to disclose adverse facts regarding the Freedom Wireless, Inc. lawsuit, including that we had willfully infringed the Freedom Wireless patents. We are due to respond to the amended complaint on February 10, 2006. We intend to contest the lawsuit vigorously and believe thatbcgiand the two executive officers named as defendants have meritorious defenses to the allegations set forth in the lawsuit.

Verizon Contractual Indemnification

On April 28, 2005, a complaint by Aerotel Corporation was filed against Verizon alleging infringement by Verizon Communications, Verizon Wireless and others of a patent on prepaid technology. We are not named in the Complaint. Verizon has notified us that we may be asked to indemnify them in this case under our Prepaid Wireless Services Agreement for that portion of any liability specific to Verizon Wireless prepaid offered through use of our services. The complaint does not specify damages as it relates to Verizon Wireless prepaid. A subpoena for documents and deposition testimony has been served on us. The lawsuit is currently in the discovery phase and at this time it is not possible to determine the potential outcome of this indemnification claim.

Other

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 these 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 6.Exhibits

Exhibits

3.1	Articles of Organization, as amended.
10.1	Funding of Security for Appeal Agreement between the Company and Cingular Wireless LLC
10.2	Amendment #1 to 2004 Employee Stock Purchase Plan
10.3	Lease between the Company and Cummings Properties, Inc. dated March 3, 2005
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, 2005

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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