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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



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|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2005



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



Commission File Number 000-28432



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BOSTON COMMUNICATIONS GROUP, INC.

(Exact Name of Registrant as Specified in its Charter)



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|                                              |  |                    
|--------------------------------------------- |  | -------------------
|MASSACHUSETTS                                 |  | 04-3026859         
|(State or Other Jurisdiction                  |  | (I.R.S. Employer   
|of Incorporation or Organization)             |  | Identification No.)
|                                              | 
|55 Middlesex Turnpike, Bedford, Massachusetts |  | 01730              
|(Address of Principal Executive Office)       |  | (Zip Code)         



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



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Securities registered pursuant to Section 12(b) of the Act:



None



Securities registered pursuant to Section 12(g) of the Act:



Common Stock, par value $.01 per share



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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES ̈NO x



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)
of the Exchange Act.    YES ̈NOx



Indicate by check mark whether 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ̈



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer x



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



The approximate aggregate value of the common stock held by non-affiliates of
the registrant, computed by reference to the closing sales price of such stock quoted on the NASDAQ National Market on June 30, 2005, was $36,344,345. The number of shares outstanding of the Registrants common stock, $.01 par value per
share, as of March 1, 2006 was 17,905,803.



DOCUMENTS
INCORPORATED BY REFERENCE



Portions of the
registrants definitive proxy statement for its 2006 Annual Meeting of Stockholders are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K.





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TABLE OF CONTENTS



|         |  |                                                                                                   |  |         
|-------- |  | ------------------------------------------------------------------------------------------------- |  | --------
|         |  |                                                                                                   |  | Page No.
|PART I   |  |                                                                                                   |  |         
|Item 1.  |  | Business                                                                                          |  | 3       
|Item 1A. |  | Risk Factors                                                                                      |  | 16      
|Item 1B. |  | Unresolved Staff Comments                                                                         |  | 23      
|Item 2.  |  | Properties                                                                                        |  | 23      
|Item 3.  |  | Legal Proceedings                                                                                 |  | 24      
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                               |  | 26      
|PART II  |  |                                                                                                   |  |         
|Item 5.  |  | Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity |  | 28      
|Item 6.  |  | Selected Financial Data                                                                           |  | 28      
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations             |  | 29      
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                        |  | 43      
|Item 8.  |  | Financial Statements and Supplementary Data                                                       |  | 43      
|Item 9.  |  | Changes and Disagreements with Accountants on Accounting and Financial Disclosure                 |  | 74      
|Item 9A. |  | Controls and Procedures                                                                           |  | 74      
|Item 9B. |  | Other Information                                                                                 |  | 76      
|PART III |  |                                                                                                   |  |         
|Item 10. |  | Directors and Executive Officers of the Registrant                                                |  | 76      
|Item 11. |  | Executive Compensation                                                                            |  | 76      
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                                    |  | 76      
|Item 13. |  | Certain Relationships and Related Transactions                                                    |  | 77      
|Item 14. |  | Principal Accounts Fees and Services                                                              |  | 77      
|PART IV  |  |                                                                                                   |  |         
|Item 15. |  | Exhibits and Financial Statement Schedules                                                        |  | 77      



This Annual 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:



| |  |  | Our ability to obtain new customers and retain existing customers, in particular due to the uncertainty regarding our business in light of the pending lawsuits with Freedom
Wireless, Inc.;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Legal expenses and estimated losses related to the Freedom Wireless lawsuits and the impact of the lawsuits on our business;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | Estimates of the timing of the appeals process regarding the Freedom Wireless lawsuit;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | Our ability to continue as a going concern;
| | - |  | -------------------------------------------



| |  |  | The timing of Verizon Wireless, Cingular Wireless and Alltel Corporation migrations;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Continued customer concentration and diversification of our revenue base;
| | - |  | -------------------------------------------------------------------------



| |  |  | Investment in our global expansion of our product portfolio to attract new customers in new markets;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Entrance of new competitors in the wireless services market;
| | - |  | ------------------------------------------------------------



| |  |  | Estimated future cash balances;
| | - |  | -------------------------------



| |  |  | Revenues;
| | - |  | ---------



| |  |  | Cost of revenues;
| | - |  | -----------------



| |  |  | Engineering, research and development expenditures;
| | - |  | ---------------------------------------------------



| |  |  | Sales and marketing expenses;
| | - |  | -----------------------------



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| |  |  | General and administrative expenses;
| | - |  | ------------------------------------



| |  |  | Interest income;
| | - |  | ----------------



| |  |  | Income taxes;
| | - |  | -------------



| |  |  | Defined benefit plan contributions;
| | - |  | -----------------------------------



| |  |  | Financing of operations with cash and short-term investments;
| | - |  | -------------------------------------------------------------



| |  |  | Expectations regarding new product offerings; and
| | - |  | -------------------------------------------------



| |  |  | Payment of dividends.
| | - |  | ---------------------



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 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, Quantitative and Qualitative Disclosures About Market Risk and those set forth in Items 1 and 3
of Part I of this Annual Report on Form 10-K. The factors 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.



Item 1.    BUSINESS



OVERVIEW



Boston Communications Group, Inc.
(bcgi) delivers innovative products and services that enable mobile operators and Mobile Virtual Network Operators (MVNOs) worldwide to differentiate their offerings and increase market penetration while reducing costs.
Incorporated in 1988, bcgi is a leader in identifying and addressing market needs of the wireless communications market with proven solutions, including prepaid and postpaid billing, payments and access management. We offer our billing,
payment and access management solutions on both a managed services and a licensed system basis to wireless operators and MVNOs, including Ampd Mobile, Cable and Wireless, Cincinnati Bell Wireless, Cingular Wireless, Sprint Nextel Corporation,
Telefonica and Verizon Wireless. These innovative solutions help our customers compete effectively by attracting and retaining additional subscriber customers, thereby increasing their ability to drive additional revenue while lowering their
operating costs.



Wireless operators continue to seek ways to
attract and retain subscribers by fully realizing the potential of their networks and investments in next-generation technology. Subscriber growth in the wireless industry has slowed in recent years as wireless penetration has surpassed 70 percent
in the United States and many parts of the world. As a result, wireless operators are focused on the profitable addition of new products and services to retain their existing subscribers and attract new subscribers in different market segments.
Industry competition is forcing operators to find ways to reduce operational costs and to cost-effectively target new market segments, most notably the youth population. Additionally, some countries that have historically had limited landline and
wireless coverage are just beginning their rollouts of extensive wireless networks, often starting with the most up to date technological wireless data and voice services. MVNOs, resellers of network capacity who purchase wholesale minutes from a
hosting carrier, are also evolving into important wireless providers in many worldwide markets and are frequently seeking wireless services providers like bcgito help them bring their wireless offerings to new markets.



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Wireless data services are growing rapidly worldwide, as carriers purchase next generation technology
that enables m-commerce, web-browsing and other data-related services. This increase in wireless data transactions requires prepaid and postpaid billing support as well as access management capabilities.



To help operators rapidly deploy and manage innovative voice and data
services for their subscribers, we provide a variety of products that are marketed and grouped within four main product lines: bcgiBilling, bcgi Payment, bcgi Access Management and bcgi Network Solutions. Many of the
products within these product lines were re-branded in 2005 to enhance our ability to sell one or more of our products to both domestic and international wireless operators and MVNOs. These product lines are supported by our operating units which
include: Real-Time Billing, Voyager Billing, bcgi Payment, and bcgi Access Management. Our product lines include the following:



| |  |  | Our bcgi Billing product line includes our prepaid wireless product, renamed Real-Time Billing, and our postpaid product which is marketed under the Voyager Billing brand.
Real-Time Billing was launched in 1994 and has been the key driver of our business over the past several years, enabling wireless operators to provide their subscribers the ability to make wireless calls on a prepaid basis, without a contract
commitment or term. Our Real-Time Billing provides carriers with high reliability real-time rating, call processing and subscriber management capabilities that enable operators to offer prepaid service that mirrors postpaid functionality while
exploiting the benefits of low-cost distribution through alternative channels. Voyager BillingTM, our postpaid
billing product acquired from Infotech Solutions Corporation (ISC) in 2002, is a comprehensive managed services billing platform which supports U.S. operators billing needs, including postpaid and converged pre/postpaid billing for voice and
data services.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our Payment Services offerings are now offered under the bcgiPayment product line, which includes a variety of payment solutions, as well our Payment Manager product
acquired from Airada Networks, Inc. and its Indian subsidiary, Airada Networks Private Limited (Airada) in November 2004. bcgiPayment consists of PayExtendTMand Payment Manager, both of which offer wireless operators the ability to deploy and manage an array of convenient recharge options  with cash, debit or credit card  that can be accessed
at ATMs, self-serve kiosks, retail stores, via the Internet and directly from subscribers handsets using short-dialing codes or voice.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our bcgiAccess Management product line consists of two complementary modules, Mobile Guardian Filter and Mobile Guardian Profile Manager. Mobile Guardian Filter was created
through our relationship with and subsequent acquisition of PureSight, Inc. and its Israeli subsidiary, PureSight Ltd. (PureSight) in June 2005, and can be used by operators to enable subscribers to manage and restrict access to unsolicited,
unapproved or harmful content in accordance with industry and government standards, or subscriber preferences. Mobile Guardian Profile Manager, developed by bcgi and made commercially available in 2004, provides a value-added tool that allows
enterprises and consumers to establish user profiles that enable real-time management of an individuals or groups voice and data usage. These services allow operators to empower their subscribers (parents or enterprise administrator) to
manage, with real-time control at a device level, voice and data usage based on a wide variety of parameters, including time of day, session origin and destination (voice and data) and overall usage allowances.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In February 2005, we launched our bcgi Network product line, which consists of IN Session Control and Data Gateway. IN Session Control provides full, real-time control of
voice transactions for home and roaming, and integrates with our Real-Time Billing and access management applications or third-party billing systems and applications. Data Gateway enables billing for data services by providing real-time subscriber
validation, subscriber access controls and network interfaces to support our products and third-party applications.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



bcgi Professional Services are offered to our customers to support all of our product lines by providing comprehensive integration, design, and
consulting services across all our products to enhance and customize our



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customers offering. In February 2006, we announced our MVNO Managed Services Suite offering which integrates our billing, access management, payment
and network solutions with MVNO-focused technology and business consulting services in a single package available to operators in Europe, the Middle East and Africa (EMEA). This suite enables operators to quickly scale, deliver and manage
content-based mobile services hosted on bcgis billing platform and monitored by our world-class network operations center. Through this offering, operators are able to capitalize on our full network integration certification with all
major network infrastructure providers and the ability to support all network standards.



Our Global Alliance Program was announced in February 2006, expanding our international focus by targeting opportunities in the growing markets of Asia-Pacific, Latin America and EMEA. bcgis new alliance
program gives premier systems integrators and resellers in these regions the opportunity to extend their capabilities and offer their customers our managed services and licensed products. The Global Alliance Program allows systems integrators and
resellers to select the type and level of partnership involvement most appropriate for their business, giving them the opportunity to strengthen and broaden their product portfolios with our products and solutions. We offer a three-tiered
independent agent program that allows systems integrators to begin to work and grow with us in their market. Our authorized resellers include major systems integrators, network equipment providers and independent software vendors.



The following summarizes our products within our product lines and the
service delivery models under which they are marketed and sold:



|                           |  |                  |  |                       |  |                      |  |                                |  |           |  |                |  |                  |  |            
|-------------------------- |  | ---------------- |  | --------------------- |  | -------------------- |  | ------------------------------ |  | --------- |  | -------------- |  | ---------------- |  | -----------
|                           |  | bcgiBilling      |  | bcgiAccess Management |  | bcgiPayment          |  | bcgiNetwork                   
|Service Delivery Model     |  | Real-TimeBilling |  | VoyagerBilling        |  | MobileGuardianFilter |  | Mobile GuardianProfile Manager |  | PayExtend |  | PaymentManager |  | INSessionControl |  | DataGateway
|Managed Services           |  | X                |  | X                     |  | X                    |  | X                              |  | X         |  | N/A            |  | X                |  | X          
|Global Licensed Sales      |  | X                |  | N/A                   |  | X                    |  | X                              |  | N/A       |  | X              |  | X                |  | X          
|bcgi Professional Services |  | X                |  | X                     |  | X                    |  | X                              |  | X         |  | X              |  | X                |  | X          



For revenue
information related to our geographic segments, see Note 12 Segment Reporting, in the Notes to Consolidated Financial Statements.



PRODUCTS AND SERVICES



bcgiBILLING



To grow profitably in the global wireless market, wireless operators need to distinguish themselves by providing a service portfolio that offers the
flexibility, freedom and enhanced services that translate into subscriber satisfaction and loyalty. bcgiBilling, which includes our Real-Time Billing and Voyager Billing products, is well positioned to offer wireless operators the
competitive advantage to grow subscriber counts and increase profitability.



Real-Time Billing



Real-Time Billing enables
wireless operators and MVNOs worldwide to provide their subscribers, without a contract commitment or term, the ability to make wireless calls on a prepaid basis. Real-Time Billing can be implemented on either a managed services basis using our
TotalSourceTMimplementation model or as a licensed system installed within the wireless operators
infrastructure.



Real-Time Billing combines a flexible business
model with intelligent networking architecture based on our proprietary service integration software that enables digital calling features, rating for data services, including Short Message Service (SMS), Push-To-Talk (PTT) and Multi-media Messaging
Services (MMS) billing. We combine these features with our transaction processing infrastructure that includes Web-based customer care



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tools, a network of voice resources to play voice messages and open application programming interfaces (APIs) to integrate with the existing infrastructure
of wireless operators, including their billing systems and distribution outlets. Our proprietary software, expertise and use of recognized vendor technologies, including those of Sun Microsystems, Hewlett Packard, EMC, Oracle, Tekelec and Cisco,
enable us to deliver premium, high quality and competitive solutions.



Some specific features and capabilities offered under Real-Time Billing include:



| |  |  | Operation in all wireless network environments including AMPS, CDMA, TDMA, GSM and iDEN, 1xRTT, GPRS voice and data networks;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | Efficient digital network interfacesusing 3GPP-compliant intelligent networking standards or our proprietary Pre-IN/ISUP session control;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Certified compliance with WIN and GSMs CAMEL IN standards;
| | - |  | -----------------------------------------------------------



| |  |  | Flexible rating engine;
| | - |  | -----------------------



| |  |  | Robust extensible markup language (XML)-based APIs;
| | - |  | -----------------------------------------------------



| |  |  | Customizable announcement profiles;
| | - |  | -----------------------------------



| |  |  | Service plan creation for targeting specific customer segments with a package of service features and payment options;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Intuitive user interfaces;
| | - |  | --------------------------



| |  |  | Full voucher/PIN management capabilities; and
| | - |  | ---------------------------------------------



| |  |  | Cost-effective recharge mechanisms, including credit card, Internet, debit, ATM and cash.
| | - |  | -----------------------------------------------------------------------------------------



We continue to expand the features and rating capabilities of our Real-Time Billing product to offer additional
functionality to our carrier customers and their prepaid subscribers, and we generally release one or two major software upgrades per year. We work closely with operators marketing departments to develop sophisticated features and
functionality to enable operators to quickly modify the way they market and sell prepaid solutions.



Using our Real-Time Billing managed services, operators worldwide are able to offer prepaid service to subscribers, allowing them to establish an account
with an operator by prepaying a specific dollar amount that is credited toward future service. The wireless operator then turns over the management of each call, to our state-of-the-art Signaling System 7 (SS7) network, which is connected to our
transaction-processing platform to retrieve information regarding the status of the subscribers prepaid account. Once we validate the subscriber, our platform rates the in-bound or out-bound call in real-time, calculating the minutes remaining
in the subscribers account based on his or her rate plan. Armed with this information, our system ensures that the subscriber does not exceed his or her balance by alerting the subscriber when his or her balance is getting low and terminating
the call in real-time if the subscribers balance is depleted. Once the call is completed, the subscribers account is updated on a real-time basis by our platform, in accordance with the wireless operators instructions. Before each
call and prior to the end of each call, our voice network delivers a voice message to the subscriber, informing the subscriber of his or her prepaid account balance. Our real-time monitoring and rating not only eliminates the risk of bad debt and
revenue leakage, but also reduces wireless operator customer care costs since the subscriber is able to manage his or her account by being informed of the account balance status through our voice network and Web-based customer care applications.



Real-Time Billing can also be deployed in-house with wireless
operators on a licensed basis. A wireless operator can purchase our licensed product to integrate with their network and enable some or all of the same complex series of validation, call control, rating and billing that our managed services platform
provides. The licensed system communicates directly with the wireless operators network elements and databases.



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Approximately 91% of our total consolidated revenues were generated from our Real-Time Billing product in
2005. Depending on the outcome of our pending lawsuits with Freedom Wireless, we may in the future be prevented from offering, or significantly limited in our ability to offer, our Real-Time Billing managed services products in the United States.



Voyager Billing



Voyager Billing provides operators full billing and operational support
services. Voyager Billing is currently offered as a managed service billing platform in the United States to meet operator demand for a comprehensive billing system that supports pre-paid, postpaid, and converged billing for voice and data services.
We have integrated this solution with our product families and have leveraged it with our technological capabilities to enhance our ability to cross-sell multiple cost-effective solutions to new and existing customers. We principally generate
revenue for Voyager Billing by charging our customers a per subscriber fee for each monthly bill produced. We currently support numerous U.S. regional wireless operators and the MVNO market, which often favors billing flexibility and independence
from host-carrier networks.



Voyager Billing enables wireless
operators to control every aspect of subscriber management  network provisioning, inter-carrier relations, billing, invoicing, customer care, inventory management and retail operations  within one comprehensive system. Voyager Billing
integrates with the carriers switch to rate calls and allows wireless operators to generate monthly subscriber invoices. Voyager Billing provides user environments for all levels of wireless operator applications, including an interface for
the provisioning of new plans and services for both prepaid and postpaid plans and easy-to-use interfaces for customer service representatives. Wireless operators are able to run a convergent enterprise using Voyager Billing offering postpaid,
prepaid, and hybrid plans from a single interface. This capability improves operational efficiencies and enables wireless operators to migrate subscribers through product offerings as their needs or profiles change.



Voyager Billing provides a total retail management solution, allowing the
wireless operator to manage its entire point-of-sale access, including phone number inventory, equipment, accessories and cash drawer. Voyager Billing also offers robust reporting and decision support tools, allowing useful analysis of subscriber
usage and trends, enabling wireless operators to better understand subscriber behavior.



The key features and capabilities of Voyager Billing are as follows:



| |  |  | Operates in all wireless network environments including AMPS, CDMA, TDMA and GSM, 1xRTT, GPRS voice and data networks;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Supports all types of wireless plans and payment plans, including postpaid, prepaid and hybrid solutions;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Provides real-time rating, switch mediation and revenue assurance capabilities;
| | - |  | -------------------------------------------------------------------------------



| |  |  | Supports data billing and mediation;
| | - |  | ------------------------------------



| |  |  | Online agent management;
| | - |  | ------------------------



| |  |  | Comprehensive retail management system;
| | - |  | ---------------------------------------



| |  |  | Advanced reporting capabilities;
| | - |  | --------------------------------



| |  |  | Multi-service billing capabilities to capture all voice and data services on consolidated statements;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Electronic bill presentment and payment; and
| | - |  | --------------------------------------------



| |  |  | Wireless number portability and number pooling compliance.
| | - |  | ----------------------------------------------------------



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bcgiPAYMENT



bcgiPayment consists of PayExtendTMand Payment Manager, both of which offer wireless operators the ability to deploy a choice of convenient recharge options to their subscribers  whether
through cash, debit or credit cardat locations including ATMs, self-serve kiosks, retail stores, via the Internet or directly from subscribers handsets using short-dialing codes or voice. We provide bcgi Payment solutions to
operators who use our Real-Time Billing solution, as well as to operators who use our competitors prepaid solutions.



PayExtend



PayExtend is our cost-effective, real-time, payment network available to U.S. wireless operators on a managed services basis. This product leverages our
existing infrastructure to unite wireless operators with multiple financial partners by consolidating services through our centralized network as we take financial and operational responsibility for the transactions.



PayExtend currently offers the following payment modules:



| |  |  | ATM Recharge
| | - |  | ------------

ATM Recharge is a managed
distribution channel that offers wireless operators an additional recharge footprint by leveraging well-established ATM locations that have been enabled with advanced functionality. The service allows a wireless subscriber to purchase additional
wireless prepaid funds in real-time using their bank debit card.



| |  |  | Payment Agent Service
| | - |  | ---------------------

Payment Agent Service is a
consumer facing service that allows subscribers of participating wireless operators to purchase wireless airtime using their credit or debit cards via the channel they find most convenient  the Internet, a voice response unit or through live
customer service agents. As a managed service, Payment Agent Service is designed to mitigate the risk associated with processing card-not-present credit card sales by using our established risk management practices from nearly 20 years of
credit card processing experience.



| |  |  | Channel Manager
| | - |  | ---------------

The risks of maintaining and
monitoring prepaid card inventory require considerable operator resources to avoid the costs of shrinkage and lost sales. Channel Manager is a specialized point-of-sale solution developed for operators who wish to sell prepaid wireless service
through wireless channels such as their own company stores and authorized wireless agents. Using the Internet to perform wireless account activations and recharges, Channel Manager streamlines the process, reduces risk and provides powerful
reporting and security features to deliver a seamless prepaid recharge experience for subscribers and operators alike.



Payment Manager



Payment Manager is available worldwide as a licensed platform to help operators cost-effectively enable and manage multiple funding channels and drive the
type of funding activity most beneficial to them. A single platform that supports the unique payment needs of wireless operators, Payment Manager allows operators to create multiple payment channels and manage those channels from a single Web-based
user interface. With support for real-time payment processing, multi-level settlement capabilities, sophisticated payment loyalty functionality and fraud prevention tools, Payment Manager can be integrated into any operator network to improve
operational efficiency and to help lower the cost of accepting customer payments.



Payment Manager modules include:



e-Distribution module

Payment Managers e-Distribution module allows wireless operators to provide a wide variety of
in-person recharge channels, including company-owned stores, authorized agents and partner locations.



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The e-Distribution module includes APIs that allow wireless operators to integrate quickly with point-of-sale (POS) networks that use wireless
telecommunication message format ISO 8583 or similar message formats. Payment Managers standard import and export API can also be customized to meet the specific connection needs of a particular POS partner. With integrated ePIN management
functionality, wireless operators can provide broad and flexible in-person recharge options through a single payment processing platform. In addition to ISO-8583 support, the e-Distribution module allows wireless operators to provide Web-enabled
touchpoints for retail stores or kiosks. A standardized Web interface provides an easy-to-use method for subscribers, store personnel, and customer service representatives to recharge or perform common account management tasks.



ATM Recharge module

The ATM Recharge module provides the ability to seamlessly integrate with ATM networks through partnerships with banks, enabling wireless operators to
create a broad system of recharge touchpoints. ATMs provide a 24/7 physical location for recharge, while also allowing wireless operators to leverage the marketability of bank partnerships.



Electronic Funding module

Payment Managers Electronic Funding module provides wireless operators the ability to process a wide variety of payments using multiple electronic
payment types. Furthermore, the Electronic Funding module enables wireless operators to offer anywhere, anytime, any amount recharge using payment account information and SMS recharge, automatic top-up, or self-care Web and wireless application
protocol (WAP) interfaces. The Electronic Funding module enables:



| |  |  | Credit card payments
| | - |  | --------------------



| |  |  | Debit card payments
| | - |  | -------------------

| |  |  | Bank account payments
| | - |  | ---------------------



| |  |  | Automatic top-up
| | - |  | ----------------



| |  |  | SelfCare Web interface
| | - |  | ----------------------



Fraud Management module

To avoid costly fraud losses, Payment Manager contains a Fraud Management
module so wireless operators can monitor and protect against high-risk transactions by defining custom fraud rules for distribution networks by recharge channel or payment type. By checking for velocity and transaction amount limits, wireless
operators can control what types of transactions are marked for fraud, as well as the consequences for accounts marked with attempts at fraudulent transactions. These accounts can be soft or hard locked, allowing wireless operators to customize both
monitoring and the level of protection from particular types of fraud attempts.



Balance Transfer module

One of the features gaining in popularity throughout the wireless market is the concept of balance
transfers, which allow subscribers to share money with other subscribers from their wireless accounts. This enables subscribers to get the airtime they need without purchasing a recharge, while also generating revenue for the wireless operator
through a flexible and customizable fee structure for each gifting transaction. By using bcgis Balance Transfer module, wireless operators can provide the payment flexibility subscribers want, encouraging increased airtime usage and
more frequent recharges, leading to increased recharge revenue in addition to the fee revenue generated by balance sharing transactions.



Peer-to-Peer Recharge module

The Peer-to-Peer
Recharge module provides recharge functionality for wireless operators to expand recharge channels into rural areas and densely-populated urban areas or to provide new distribution



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schemes while reducing the cost of remote distribution. Using the Peer-to-Peer Recharge module, authorized peer resellers can sell airtime using their mobile
handsets.



Loyalty and Promotions module

The Loyalty and Promotions module provides a robust set of tools for strengthening customer relationships by providing positive reinforcement for payment
interactions with the wireless provider. The promotions platform provides direct and instantaneous reinforcement through recharge rewards for meeting operator-specified rules, while loyalty points systems provide long-term encouragement to recharge
by using an accumulation of loyalty points, resulting in lower churn.



bcgiACCESS MANAGEMENT



Our bcgiAccess Management products, Mobile Guardian Profile Manager and Mobile Guardian Filter, allow operators to work together with subscribers and enterprises to better manage access to wireless services.
Striking the proper balance between the benefits and potential abuses of wireless service is critical among segments that do not require unlimited access to everything the wireless network has to offer. We created Mobile Guardian using our
proprietary software and leveraging our real-time subscriber management expertise and existing infrastructure. Mobile Guardians flexible architecture can be used by the operator to restrict access to inappropriate content in accordance with
industry or government standards and to provide a value-added tool that allows enterprises and consumers to manage individual voice and data usage. Mobile Guardian is being offered as both a managed service in the U.S. using the bcgiTotalSource model and as a managed service using the bcgi MVNO Managed Services Suite in the EMEA region, and on a licensed basis worldwide. As of December 31, 2005, we have not generated significant revenues from our bcgi
Access Management solutions. Since Mobile Guardian serves postpaid subscribers, its large addressable market is expected to further diversify our revenue among new and existing customers.



In addition to its consumer appeal, Mobile Guardian helps wireless operators target the enterprise market with a
highly-differentiated solution for businesses that provides significant benefits over those currently derived from third-party, post-bill cost-analysis solutions. Mobile Guardian:



| |  |  | Provides corporations with the flexibility to set and update restrictions and monthly allowances to meet their specific requirements;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Enables greater control and visibility into employees wireless voice usage and data access (e.g., Internet activity, SMS, games, ring tones, etc.); and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Preempts conflicts and costs related to reactive management of employees wireless use.
| | - |  | ---------------------------------------------------------------------------------------



To help operators better address the wireless needs of families, Mobile Guardian eases the decision-making process of
parents who are considering purchasing wireless service for their children by mitigating concerns about access to unsolicited, unapproved or harmful content and cost management. Mobile Guardian:



| |  |  | Helps parents balance their concerns about safety, usage management and financial restraint;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Eases the burden and risk of inappropriate wireless use by enabling parents to configure their account to fit the unique needs of their children;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Allows parents to set always available and/or never accessible phone numbers, and enables emergency calls to always available numbers, even if
the users monthly limit has been reached (unlike prepaid plans);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Enables parents to restrict the days and times when the wireless phone can be used.
| | - |  | -----------------------------------------------------------------------------------



This proprietary solution consists of two complementary modules. The first, Mobile Guardian Profile Manager, enables
operators to provide their wireless subscribers with a simple method to set usage parameters, calling allowances and access preferences via an easy-to-use, Web-based interface. Mobile Guardian Profile



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Manager allows the wireless operator to offer wireless access and usage settings directly to consumers, such as parents and enterprise administrators. Using
the Mobile Guardian Profile Manager tool, parents and enterprise administrators can instantly modify profile information for voice and data usage. The Mobile Guardian Profile Managers hierarchical account structure allows a single
administrator to control an unlimited number of accounts. Mobile Guardian Profile Manager operates on top of an enterprise or familys existing rate plan to give the telecom manager or parent real-time control over how the individual phones on
his or her plan are used.



The second module, Mobile Guardian
Filter, provides content filtering and categorization of Web and WAP based content through analysis of customer data traffic. Using dynamic identification capabilities, Mobile Guardian Filter enables operators to flexibly manage subscriber access to
content, regardless of content type, origin or delivery method. As a result, operators can responsibly meet the demand for content that may not be appropriate for all subscribers. The Mobile Guardian Filter can be implemented standalone to meet
basic filtering requirements or can be integrated with the Mobile Guardian Profile Manager to allow content filtering based on individual profile information set by a parent or enterprise administrator.



The combined capabilities of Mobile Guardian Profile Manager and Mobile
Guardian Filter solves a number of issues that can inhibit the adoption and usage of wireless by families and enterprises, while serving as a framework for a robust set of filtering and wireless service management capabilities.



bcgiNETWORK



bcgi Network products enable the integration of Real-Time Billing,
Mobile Guardian or third-party rating and charging systems to voice and data networks. By effectively shielding the billing and business logic from network complexity and exposing a single interface for integration, we provide one of the most
efficient and cost-effective methods for wireless operators to introduce new services and applications. bcgi Network consists of IN Session Control and Data Gateway, products we launched in February 2005.



IN Session Control



IN Session Control provides full, real-time control of voice transactions for home and roaming, and is pre-integrated to
work with our Real-Time Billing and bcgi Access Management applications. IN Session control is also designed for integration to other existing real-time billing systems and third-party applications. IN Session Control is designed to meet
industry standards and deliver on the promise of intelligent networking. Using GSM/CAMEL, WIN/IS-826, and also ISUP interfaces, bcgis session control capabilities allow us to flexibly deploy in any network.





Data Gateway



Data Gateway provides real time control of data
transactions and sessions in GPRS/EDGE and 1xRTT/1xEV-DO networks by supporting industry standard IS-835C, Diameter, and RADIUS protocols. The Data Gateway product is pre-integrated into the existing bcgi value added services, and provides a
standardized API to allow rapid integration to other vendors value added services as well.



IMPLEMENTING OUR PRODUCTS



Wireless operators can purchase our products either on a managed services basis (bcgiTotalSource) or on a licensed basis. Our bcgi TotalSource model is an end-to-end outsourced solution that enables U.S. and EMEA wireless
operators to get our products to market quickly without large capital investments and with inherent expertise. With bcgi TotalSource, wireless operators can deploy new solutions by leveraging our expertise as a leading provider of outsourced
solutions. In a typical managed services relationship, we take responsibility for all



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aspects of our solutions performance including project implementation, ongoing operation and upgrades to the wireless operators application.



bcgi TotalSource includes:



| |  |  | Purchase, deployment and maintenance of all required server hardware and bcgi proprietary software hosted in bcgis state-of-the art redundant data centers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | High reliability platforms with service level guarantees;
| | - |  | ---------------------------------------------------------



| |  |  | Maintenance fees on all hardware and software;
| | - |  | ----------------------------------------------



| |  |  | 7x24 hour database, system administration and application support;
| | - |  | ------------------------------------------------------------------



| |  |  | Comprehensive implementation support and project management through bcgi Professional Services;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Robust transaction reporting and analysis;
| | - |  | ------------------------------------------



| |  |  | Training;
| | - |  | ---------



| |  |  | Standard bcgi software releases; and
| | - |  | ------------------------------------



| |  |  | Capacity planning for all solution components we supply, including new hardware purchases when required.
| | - |  | --------------------------------------------------------------------------------------------------------



We also offer our products and services on a licensed system basis worldwide. In a licensed sale, a wireless operator
licenses certain bcgi proprietary software and, in some cases, purchases complementary third-party hardware and software, all to be deployed within the operators network. The software and components are fully integrated by the customer
within the customers environment and operated by their network personnel. In 2005, we expanded our focus on international sales of our licensed products, adding personnel and costs to support technical operations as well as sales and marketing
efforts, which includes marketing our licensed product through direct and indirect sales channels through our Global Alliance Program.



Licensed sales typically include:



| |  |  | bcgiproprietary software right to use license;
| | - |  | ----------------------------------------------



| |  |  | Comprehensive implementation support, training and project management through bcgi Professional Services;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Comprehensive user manuals;
| | - |  | ---------------------------



| |  |  | 7x24 hour application maintenance and support; and
| | - |  | --------------------------------------------------



| |  |  | Standard bcgi software releases.
| | - |  | --------------------------------



SALES AND MARKETING



Our sales strategy focuses on establishing and maintaining long-term relationships with our customers. Our business development and sales professionals and their support teams are assigned to groups of wireless
operators, including global, national and regional operators assigned by region. A consultative sales process supported by bcgi Professional Services is utilized to understand and define customer needs and to determine how our solutions can
address their needs. Each business development professional capitalizes on his or her in-depth knowledge of the operators and our suite of solutions to cross-sell these solutions to current and prospective customers. Our business development team
has historically been comprised of individuals who target and serve carriers in the U.S. In 2005, we have expanded our sales team to include highly skilled international sales executives and sales engineers in order to support our global
strategyboth for direct and indirect sales.



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Our direct sales strategy is complemented by a marketing program that includes participation in industry
trade shows and conferences, speaking engagements, advertising and public relations. Because our target customers are mobile operators and MVNOs, we seek to gain broad industry recognition through carefully selected events and activities specific to
the wireless industry. Our indirect sales strategy is facilitated by our Global Alliance Program, announced in February 2006. Through our Global Alliance Program we have developed authorized reseller relationships with industry partners, including
major systems integrators, network equipment providers and independent software vendors through whom we expect to generate indirect licensed sales revenues.



Our sales cycle for managed services and license sales are typically six to twelve months, but can often be longer. As a result of the Freedom Wireless
judgment against us, our ability to sell our products and services has been significantly impaired. We have also encountered difficulty in renewing our existing customer agreements. Although the technology used in our Real-Time Billing services is
directly at issue in the Freedom Wireless lawsuit, concerns regarding our viability have also made it more difficult for us to sell our other products and services.



ENGINEERING, RESEARCH AND DEVELOPMENT



We have developed proprietary software and interfaces to wireless operators existing infrastructure, enabling us to
perform real-time event management and subscriber management functions associated with our prepaid, postpaid, access management, payment and other solutions. These software applications and interfaces include:



| |  |  | Call control software and interfaces via digital and intelligent networking standards to carrier switching equipment;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Voice resource software for the injection of real-time pre-call and post-call voice messaging;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | XML-based real-time and File Transfer Protocol (FTP)-based near-real-time interfaces to other carrier network equipment;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | XML and other secure internet interfaces to third-party mobile content providers;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Event rating and subscriber management software for the real-time rating and debiting of mobile accounts;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Payment management software for linking to financial networks and billing platforms;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | PIN/stored value card creation and management systems;
| | - |  | ------------------------------------------------------



| |  |  | Customer care applications and user interface templates, including integrated voice response and Web-based interactions; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | XML-based interfaces to legacy wireless operator billing and provisioning systems.
| | - |  | ----------------------------------------------------------------------------------



We believe that one of our key competitive advantages is our proprietary software. Our future success will depend in part on
our ability to continue to enhance existing solutions and develop new solutions in response to changing market, customer and technological requirements of the wireless industry. An important factor in the future success of our mobile services
platform will be our ability to provide, at competitive prices, more functionality and features than those available in other competitive offerings.



We have protected various aspects of our intellectual property with a portfolio of patent applications filed with the U.S. Patent Office and
internationally, one of which has been approved and others of which are currently pending.



We spent $20.1 million in 2005, $15.8 million in 2004, and $14.0 million in 2003 on engineering, research and development, including capitalized software costs. We expect to continue to devote significant resources to
our engineering, research and development efforts in 2006 and future years.



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CUSTOMERS



We currently provide one or more of our products to international and U.S. wireless operators and MVNOs, including Ampd Mobile, Cable and
Wireless, Cincinnati Bell Wireless, Cingular Wireless, Sprint Nextel Corporation, Telefonica and Verizon Wireless, among others. MVNOs, as resellers of network capacity who purchase wholesale services from a hosting carrier to attract and serve
targeted segments, require specific types of wireless expertise that we offer. Our technology and expertise directly address the challenges faced by MVNOs, including real-time usage rating and billing, account activation and suspension, the rapid
introduction of value-added services, real-time account replenishment, fraud prevention, customer care and selfcare. We also provide our products to many mid-size and small regional wireless operators throughout the United States, allowing them to
offer cost-effective, comprehensive postpaid and prepaid services with a wide array of competitive features, including multiple recharge channels, access management and nationwide roaming capabilities. Our products and services have been implemented
throughout the world, including the United States, Africa, Central America, Latin America and the Caribbean. Currently, almost all of our revenue is generated from our U.S. managed services Real-Time Billing product by charging wireless operators
usage-based recurring fees.



Historically, a significant
portion of our total revenues in any particular period has been attributed to a limited number of customers. Net revenues attributable to our ten largest customers accounted for approximately 89% of our total revenues in 2005 and 92% of our total
revenues in 2004. Sprint Nextel Corporation accounted for 38% of total revenues in 2005 and 14% of total revenues in 2004. Verizon Wireless accounted for 24% of total revenues in 2005 and 43% of total revenues in 2004. Cingular Wireless accounted
for 14% of total revenues in 2005 and 22% of total revenues in 2004. Verizon Wireless, Cingular Wireless and Alltel Corporation are also anticipated to be fully migrated off of our Real-Time Billing platform by June, 2006. These three carriers
comprised approximately 44%, or $46 million, of our 2005 consolidated revenues. Thus, revenues from Verizon, Cingular and Alltel will substantially decrease in 2006, resulting in a reduction of Real-Time Billing from these three customers. We can
provide no assurance that other customers may not migrate off of our platform due to concerns regarding our viability.



We continue to invest in our customer and product diversification strategy which includes support of our bcgiAccess Management, bcgiPayment and Voyager Billing products and our expansion into new domestic and international wireless markets, including the developing MVNO market. These strategic initiatives are expected to result in sequential increases in cost of revenues,
engineering, research and development and sales and marketing expenses.



COMPETITION



The market for providing solutions
to wireless operators is highly competitive and subject to rapid change. A number of independent companies currently offer one or more of the solutions we provide. In addition, many wireless operators, including Verizon Wireless, are providing, or
can provide, the products and services we offer in-house, primarily in the billing area and often utilizing a competitors technology. Demand for our services could also be affected by trends in the wireless industry, including greater
consolidation, technological changes and/or other developments. These developments can make it easier or more cost-effective for wireless operators to provide certain services themselves and could make it more difficult for us to offer a
cost-effective alternative to a wireless operators in-house capabilities. In addition, we anticipate the entrance of new competitors in the wireless services market in the future, particularly competing with our bcgiAccess Management
products.



As a result of the Freedom Wireless judgment against
us, our ability to compete effectively has been significantly impaired. Specifically, we have encountered difficulty in renewing our existing customer agreements and our ability to sell our products and services has been impaired. Although the
technology used in our Real-Time Billing services is directly at issue in the Freedom Wireless lawsuit, concerns regarding our viability have made it more difficult for us to compete and sell our other products and services as well.



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Along with the in-house capabilities of the wireless operators themselves, the following is a list of key
competitors in the wireless billing markets:



|                                                                                                                                              |  |                                                                                                            
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------
|      Amdocs, Inc.       Comverse Technology, Inc.       Convergys Corp.       Ericsson Telecommunications       Huawai Technologies Co. |  |       LogicaCMG       Lucent Technologies, Inc.       Telcordia Technologies, Inc.       Verisign, Inc.



We believe that the
principal competitive factors in the market for providing solutions to wireless operators include the ability to identify and respond to wireless operator needs, timeliness, quality and breadth of product and service offerings, price and technical
expertise. We believe we are capable of competing effectively in all these areas, but that the market perceptions and resulting uncertainty about our business due to the Freedom Wireless lawsuits are making it more difficult for us to do so. We also
believe that our most important competitive advantage is our proprietary software. We also believe that our competitive advantages in the wireless services industry include our ability to easily integrate with all switch types, wireless system types
(GSM, TDMA, CDMA, 2.5G, 3G, etc.) and billing systems. This integration is critical since industry consolidation has resulted in carriers operating multiple switch types and billing systems across their footprints, requiring prepaid solutions to
integrate with all technologies in order to offer nationwide programs. Our other competitive advantages include:



| |  |  | Reliable platforms with feature-rich capabilities;
| | - |  | --------------------------------------------------



| |  |  | Knowledgeable, experienced and skilled employees;
| | - |  | -------------------------------------------------



| |  |  | Ability to process transactions in real-time;
| | - |  | ---------------------------------------------



| |  |  | Ability to reduce wireless operator costs of cash collection, bad debt and customer care;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Customer care applications, including feature-rich Web-based care and CSRcare, that reduce wireless operator costs;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Mobile content filtering capabilities;
| | - |  | --------------------------------------



| |  |  | Quality and breadth of features and functionality;
| | - |  | --------------------------------------------------



| |  |  | Robust reporting and analysis capabilities;
| | - |  | -------------------------------------------



| |  |  | Technical expertise and experience;
| | - |  | -----------------------------------



| |  |  | The size and scale of our managed services platform, enabling us to competitively price our solutions and cost-effectively process micro transactions;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ability to quickly identify and respond to customer needs and rapidly deploy new features and functionality to enable our customers to be more competitive; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ability to integrate our solutions into wireless operators technological and business processes in order to streamline their operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



GOVERNMENT REGULATION



The Federal Communications Commission, under the terms of the Communications
Act of 1934, as amended, including the Telecommunications Act of 1996, regulates interstate communications and the use of radio spectrum, including entry, exit, rates and terms of operation. Presently, we do not operate any facilities utilizing
radio spectrum and we do not have any facilities-based services involving interstate communications. Consequently, we are not required to and do not hold any licenses or other authorizations issued by the Federal Communications Commission for
interstate operations.



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Our wireless operator customers are regulated at both the federal and state levels. Proposals to
intensify or reduce government regulations 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 and results of operations.



EMPLOYEES



As of December 31, 2005, we had a total of 504 full-time and part-time employees. Of these employees, 398 served in
engineering, technical operations and support and software development, 62 served in sales, business development, marketing, product management and client relations, and 47 served in administration and management. None of our employees are
represented by a labor union. We believe that our employee relations are good. However, some of our current employees have sought, and may continue to seek, other employment prior to a final resolution of the Freedom Wireless lawsuits.



BACKLOG



As of December 31, 2005 and 2004, there was no backlog of firm orders.
We include in backlog only those orders for which we have received completed purchase orders and for which delivery has been specified within 12 months. Most orders are subject to cancellation by the customer. Because of the possibility of customer
changes in delivery schedules, cancellation of orders and potential delays in product shipments, our backlog as of any particular date may not be representative of actual sales for any succeeding period.



AVAILABLE INFORMATION



We maintain an internet website at www.bcgi.net. The contents of our website
are not part of this annual report on Form 10-K, and our internet address is included in this document as an inactive textual reference only. We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and each amendment to these reports as soon as reasonably practical after we file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Each such report is available
via a direct link through our website to our filings on the Securities and Exchange Commission EDGAR system or directly from the SECs website, www.sec.gov.



Item 1A.    RISK FACTORS



Certain Factors That May Affect Future Results



If we lose, in whole or significant part, our appeal of the Freedom Wireless lawsuit in the U.S. Court of Appeals for the Federal Circuit (Appeals Court) or the lawsuits with Freedom Wireless in United States District Court
in Massachusetts (District Court), it would have a material adverse impact on our business, including potential asset impairment charges and the possibility of bankruptcy, impairing our ability to continue as a going concern.



Although we have filed to appeal the entire judgment in
the Freedom Wireless lawsuit involving us and Cingular, the Appeals Court may uphold the judgment in whole or in part, which currently stands at $165 million and exceeds our ability to pay. 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.



Freedom Wireless has also filed two
separate patent infringement lawsuits against us and Sprint Nextel Corporation and us and Alltel Corporation and other carriers. Although we are contesting the lawsuits, there can



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be no assurance of a favorable outcome in these matters. We are obligated to indemnify Sprint Nextel, Alltel and the other carriers for damages they may
incur with respect to any finding of infringement by bcgis technology.



Regardless of the outcome in these lawsuits, we have already incurred approximately $26.8 million in legal and other costs as of December 31, 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.



We may continue to seek a settlement agreement with Freedom Wireless but we may not be able to reach a reasonable settlement or we may reach a
settlement that could negatively impact our financial performance.



We have engaged in settlement discussions with Freedom Wireless at various times; however, we have been unable to reach mutual agreement with Freedom Wireless and the other defendants in the cases. We continue to believe that we do not
infringe the Freedom Wireless patents and believe that the patents are invalid, and that the size of the damages awarded bears no relationship to a reasonable royalty that bcgi or any company would have paid for a license of the patents.
Nevertheless, in light of the adverse judgment and the negative effect that it is having on our business, we may engage in additional settlement discussions with Freedom Wireless in the future. Despite our desire to reach a reasonable settlement
agreement, we may not be able to do so. Even if we are able to obtain a settlement, any settlement agreement and license may carry terms unfavorable to us and may significantly restrict our cash and/or future ability to generate profits.
Additionally, a settlement may not be able to mitigate the adverse impact the judgment has already had on our business.



The Funding of Security for Appeal (Appeal 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 facing us and 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 $41.5 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 that bcgiand the two executive officers
named as defendants have meritorious defenses to the allegations set forth in the lawsuit.



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.



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As the uncertainty surrounding the status of the Freedom Wireless lawsuits continues, we face
significant challenges retaining existing customers, vendors and employees and attracting new customers, vendors and employees, all of which has had 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 significantly impact our existing business in the following ways:



| |  |  | Our ability to sell our products and services, including our products and services that are not related to the Freedom Wireless claims, to new and existing customers has been and
may continue to be limited;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Alltel Corporation and other existing customers have terminated, failed to renew or are seeking to terminate their current contracts with us;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Existing customers may reduce their prepaid sales and marketing efforts with respect to our products in order to mitigate their potential exposure to litigation from Freedom
Wireless;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Current employees have sought and may continue to seek other employment prior to a final resolution of the Freedom Wireless 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 payment requirements and other terms in order for us to
obtain their products and services.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As a result,
even if we are successful in our appeal and in the other Freedom Wireless lawsuits, our business may have been irreparably harmed. If our business substantially deteriorates further, we may need to seek protection under the U.S. Bankruptcy Code
before our appeal is decided.



The loss or significant
reduction of business from one of our major customers, including Verizon Wireless, Cingular Wireless or Sprint Nextel Corporation, 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 total revenue received from Sprint Nextel Corporation, Verizon Wireless and Cingular Wireless
for the three and twelve months ended December 31, 2005:



|                          |  |                    |   |  |            |  
|------------------------- |  | ------------------ | - |  | ---------- | -
|                          |  | Three months ended |   |  | Year ended |  
|Sprint Nextel Corporation |  | 46                 | % |  | 38         | %
|Verizon Wireless          |  | 22                 | % |  | 24         | %
|Cingular Wireless         |  | 9                  | % |  | 14         | %



Verizon Wireless,
Cingular Wireless and Alltel Corporation are also anticipated to be fully migrated off of our Real-Time Billing platform by June, 2006. These carriers collectively represented approximately $46 million in revenue or 44% of our total 2005 revenues.
Thus, revenues from Verizon, Cingular and Alltel will substantially decrease, resulting in a reduction of overall revenue from our Real-Time Billing business from these three customers. We can provide no assurance that other customers may not
migrate off of our platform due to concerns regarding our viability.



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, including Sprint Nextel Corporation whose contract expires in the first quarter of 2007. 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



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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.



Sprint Nextel became our largest customer in 2005 and we expect that revenue from Sprint Nextel will constitute an even larger percentage of our revenue in 2006. We can provide no assurance that Sprint Nextel will
continue to use our services beyond the term of their contract with us. If we were to lose Sprint Nextel as a customer, our business would be materially and adversely impacted and we would likely need to seek protection under the U.S. Bankruptcy
Code. 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 new
products, including bcgi Access Management, Payment Manager and bcgi Network.



We have introducedbcgiAccess Management, Payment Manager and bcgiNetwork product offerings to the global 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 of bcgiAccess
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, as discussed in
the overview section of managements discussion and analysis of financial condition and results of operations, we anticipate that our global expansion and expanded product suite may 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 loss of additional customers or the inability to effectively sell our products and services to new customers;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | The lack of acceptance or delayed acceptance of our newest solutions, including bcgiAccess 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.;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our wireless customers ability to minimize churn (the percentage of total prepaid subscribers that terminate service on our network);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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, Cingular and Alltel generate less revenue due to 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 fall 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. 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 new solutions, including bcgi Access Management, bcgi Network or bcgi 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, 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, Spain, 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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##### Table of Contents

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 has
been 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 terms and conditions acceptable to us. Additionally, we may be restricted from making acquisitions that would be attractive to us due to the uncertainty associated with the Freedom Wireless litigation.



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We also may not be able to successfully integrate past or future acquisitions. 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 Freedom Wireless litigation has made it more challenging for us to attract and retain critical employees. 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 operators.



We have historically provided our solutions almost exclusively to
wireless carriers. The market for solutions to wireless operators is highly competitive and subject to rapid change as new technologies are continually



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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 operators and the wireless operators themselves who provide, or can provide, in-house services similar to ours. These wireless
operators, and many of the independent service providers, have significantly greater financial and other resources than we do. In addition, the wireless industry is subject to consolidation, which could potentially result in the loss of carrier
customers and/or subscribers. Competitive pressures may make it difficult for us to acquire and retain customers and may require us to reduce the price of our service solutions. We cannot be certain that we will be able to compete successfully with
existing or new competitors. Our failure to maintain and enhance our competitive position would limit our ability to retain and increase our market share, resulting in serious harm to our business and operating results.



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 1B.    UNRESOLVED STAFF COMMENTS



Not applicable.



Item 2.    PROPERTIES



We own the facility at our principal location in Bedford, Massachusetts. Our Bedford location currently houses our data and network operations center, as well as our corporate headquarters, engineering and software
development, sales and marketing, and administrative personnel. We lease space at our locations in Burlington and Woburn, Massachusetts; Westbrook, Maine; Hyderabad, India; and Petah Tikva, Israel. Our Woburn facility currently serves as our
redundant data center site. We also have 33 other smaller leased facilities throughout the United States that house certain equipment for our network.



Our Westbrook facility houses many of the support functions for our Voyager Billing solution, including software development and technical support. Both
our Burlington and Hyderabad facilities host certain software development functions. The Petah Tikva facility hosts certain engineering and software development, sales and marketing, and administrative personnel. We believe that our existing sites
will accommodate our data center space needs and that suitable additional space is available if needed.



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The following list comprises our significant leased facilities:



|                          |  |                |  |                         
|------------------------- |  | -------------- |  | ------------------------
|Location                  |  | Square Footage |  | Expiration Date         
|Woburn, Massachusetts     |  | 13,669         |  | February 2009           
|Westbrook, Maine          |  | 10,679         |  | May 2006                
|Burlington, Massachusetts |  | 9,235          |  | June 2007               
|Hyderabad, India          |  | 10,821         |  | June 2007 -February 2008
|Petah Tikva, Israel       |  | 3,498          |  | August 2006             



Item 3.    LEGAL PROCEEDINGS



Freedom Wireless Patent Infringement Lawsuit



Jury Trial in
District Court



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 District Court. In February 2005, Verizon
Wireless 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. On May 20, 2005, a jury determined
that bcgi and the remaining defendants infringed or are infringing two Freedom Wireless patents. The jury damages and post-trial damages (through October 12, 2005) plus interest and court costs awarded by the District Court total
approximately $165 million (bcgi and each carrier are jointly liable for specific amounts). We have an obligation to indemnify the other defendants for damages they may incur with respect to any infringement by our technology.



In July 2005, we entered into the 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 totaling approximately $191 million, the amount required by the District
Court to stay the execution of the amount of the judgment that concerns the joint infringement by us and Cingular, pending appeal. Cingular has also agreed to dismiss, without prejudice, the indemnification action filed by Cingular against us in May
2005. Cingular filed this action in an effort to enforce Cingulars indemnity rights against us 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 December 31, 2005, this escrow amount (including interest earned to date) totaled $41.5 million and is recorded as restricted cash.



Injunction



On October 12, 2005 the District Court granted injunctive relief (the
Injunction) to Freedom Wireless providing a 90 day grace period during which we could still provide our services to carriers. Subsequent to the 90-day grace period, the District Court ordered that we must stop providing prepaid services
to all of our Real-Time Billing customers, other than those who have a license with Freedom (Verizon Wireless is currently our only customer with such a license). We filed a motion to clarify the order or stay the Injunction pending appeal which was
denied by the District Court. We filed an emergency appeal to stay the Injunction with the Appeals Court.



On December 15, 2005, the Appeals Court stayed the Injunction previously granted by the District Court. Therefore, our carrier customers, including
co-defendant Cingular Wireless, may continue to use our Real-Time Billing service during the appeals process. In addition, the Appeals Court did not require bcgi and/or the other defendants to post additional security for any potential
damages that may accrue during the appeals process.



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Appeal of District Court Judgment



In October 2005, we filed to appeal the District Court judgment with the Appeals Court. Our principal appeal brief is
expected to be filed in March, 2006 and the appeal process is expected to continue into 2007. If our appeal is unsuccessful or if we cannot successfully manage our business during the appeal process, we may not be able to continue our ongoing
operations or may need to seek protection under the U. S. Bankruptcy Code.



Freedom Wireless Patent Infringement Lawsuits Against bcgi, Sprint Nextel Corporation 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
Sprint Nextel Corporation, and the second against us, Alltel Corporation and several other of our carrier customers. These lawsuits allege that we and each of our named carrier customers infringe the same two patents related to the current judgment
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 that the patents are invalid.



Accounting



While we
continue to believe that we do not infringe these patents and believe that the patents are invalid and that the size of the damages awarded bears no relationship to a reasonable royalty that bcgi or any company would have paid for a license of the
patents, 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 litigation and in accordance with FAS 5 and FIN 14, we 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 higher than the current
judgment of $165 million, which exceeds our ability to pay.



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 have responded to the amended complaint and filed for a motion to dismiss the suit.
We intend to contest the lawsuit vigorously and believe that bcgiand 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. We have provided documents and
deposition testimony in response to a subpoena that 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.



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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 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



No matters were submitted to a vote of our security holders, through solicitation of proxies or otherwise, during the three months ended December 31,
2005.



EXECUTIVE OFFICERS OF THE REGISTRANT



Our executive officers and their ages and positions as of
February 28, 2006 are as follows:



|                        |  |     |  |                                                                                  
|----------------------- |  | --- |  | ---------------------------------------------------------------------------------
|Name                    |  | Age |  | Position                                                                         
|Paul J. Tobin           |  | 62  |  | Chairman                                                                         
|E.Y. Snowden            |  | 51  |  | President and Chief Executive Officer, Director                                  
|Karen A. Walker         |  | 40  |  | Treasurer, Vice President, Finance and Administration and Chief Financial Officer
|William D. Wessman      |  | 56  |  | Executive Vice President and Chief Technology Officer                            
|Frederick E. von Mering |  | 53  |  | Chief Operating Officer, Director                                                



Mr. Tobin has
over 25 years experience in the telecommunications and wireless industry. Mr. Tobin is one of our founders and has served as our Chairman since 1996. Mr. Tobin also held the position of President from February 1990 until February 1996, and
from April 1997 to February 1998. Prior to his tenure with us, Mr. Tobin served as President of Cellular One Boston/Worcester and Portsmouth, NH, and Regional Marketing Manager for Satellite Business Systems (a joint venture of IBM, Comsat and
Aetna). Mr. Tobin began his career as a Securities Analyst at Chase Manhattan Bank after receiving his undergraduate degree in Economics from Stonehill College and his M.B.A. in marketing/finance from Northeastern University. Mr. Tobin is
also a member of the Board of Directors of NWH, Inc.



Mr. Snowden joined us as President and Chief Executive Officer in February 1998. Mr. Snowden leads our overall business direction and strategy. Prior to that, he served as President and Chief Operating Officer of American Personal
Communications, L.P. d/b/a Sprint Spectrum (APC/Sprint Spectrum), a wireless carrier, where he oversaw the successful launch of the nations first Personal Communications Services (PCS) network. Before joining APC/Sprint
Spectrum in 1994, Mr. Snowden served as an Area Vice President at Pacific Telesis Group, a telecommunications provider, where he played an integral role in Pacific Bells entry into the PCS market through the development of the business
plan for Pacific Bell Mobile Services. Previously, he served as Chief Executive Officer of Universal Optical Company, a manufacturer and marketer of designer eyewear. Mr. Snowden spent his early career as a Corporate Strategy
Consultant and Manager with the Boston Consulting Group, a consulting firm. Mr. Snowden currently serves on the Executive Committee of the CTIA board of directors and the CTIA Wireless Foundation board. He also acts as director and
vice-chairman of the board for the Massachusetts Telecommunications Council, a director of Tatara Systems, Inc., and as a Trustee of the Tower School in Marblehead, Mass. Mr. Snowden holds a bachelors degree in mathematical sciences from
Stanford University and a masters degree in business administration from Harvard Business School.



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Ms. Walker, our Chief Financial Officer and Vice President of Finance and Administration, has been
with us since 1993. She joined us as Corporate Controller in 1993 and she became Vice President of Finance and Administration in August 1998. In April 1999, she was promoted to the position of CFO. As CFO, Ms. Walker is responsible for
overseeing finance, accounting, human resources and investor relations. She also played an integral part in guiding us through our IPO and follow-on offering. Prior to joining us, Ms. Walker spent over six years at Ernst & Young, LLP,
a public accounting firm, where she earned her C.P.A. and was a Manager in E&Ys Entrepreneurial Services Group. Ms. Walker holds a B.S. degree in Accounting from Boston College.



Mr. Wessman has over 30 years of experience in the telecommunications
industry. He began his career with us in April 1995, managing all product implementations, customer care initiatives and quality assurance operations. In February of 1997, Mr. Wessman was promoted to Vice President of Implementation and Account
Management, where he was responsible for Prepaid Wireless Services implementations and Prepaid Account Management. In February 2000, he was promoted to Chief Technology Officer, expanding his role to include the management of all technical resources
at bcgi. Prior to joining us, Mr. Wessman spent 24 years with NYNEX Corporation (now Verizon). At NYNEX, he held various positions primarily in Information Services where he managed the development of billing systems and became Director
of Quality Assurance, responsible for managing system testing, quality assurance and customer billing support. He has been a member of the QuEST Forum since 1999 and served on its Board of Directors in 2000. QuEST is the Telecommunication
Industrys quality organization and responsible for the creation and maintenance of quality standards (TL9000). Mr. Wessman holds undergraduate and M.B.A. degrees from Northeastern University.



Mr. von Mering has been involved with the telecommunications and
wireless industries for nearly 20 years. As Chief Operating Officer of bcgi, Mr. von Mering oversees the operations of the companys business units tasked with development and delivery of our products and services. In addition, he
has responsibility for the Client Services organization. Previously, Mr. von Mering was Vice President of Corporate Development, and prior to that he held the role of our first Chief Financial Officer until 1999, helping us execute our initial
public offering in 1996. Before joining us, Mr. von Mering was Regional Vice President and General Manager for the paging division of Metromedia. Prior to Metromedia, Mr. von Mering held various positions at Coopers & Lybrand a
public accounting firm, where he earned his C.P.A. Mr. von Mering was appointed to the Board of Directors of MicroFinancial, Inc. (NYSE:MFI) in 2004 and serves as its Audit Committee Chairman. Mr. von Mering has an undergraduate degree in
accounting from Boston College and an M.B.A. from Babson College.



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PART II



|Item 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------



Market Information for Common Stock



Our Common Stock is traded on the NASDAQ National Market, under the symbol
BCGI. The following table sets forth the high and low sales prices for our Common Stock for each full quarterly period within fiscal years 2005 and 2004.



|               |  |      |      |      |   |      |  |     |       |  |   |     
|-------------- |  | ---- | ---- | ---- | - | ---- |  | --- | ----- |  | - | ----
|               |  | 2005 |      | 2004
|               |  | High |      | Low  |   | High |  | Low
|First Quarter  |  | $    | 9.66 |      | $ | 6.13 |  | $   | 12.39 |  | $ | 9.35
|Second Quarter |  | $    | 7.29 |      | $ | 1.28 |  | $   | 13.32 |  | $ | 8.10
|Third Quarter  |  | $    | 2.62 |      | $ | 0.87 |  | $   | 10.34 |  | $ | 7.50
|Fourth Quarter |  | $    | 1.42 |      | $ | 0.90 |  | $   | 10.22 |  | $ | 8.50



Holders



At March 1, 2006 there were approximately 77 holders of record of our
Common Stock.



Dividends



We have never declared or paid a cash dividend on our Common Stock. We
currently intend to retain all of our earnings to finance future operations and, accordingly, we do not anticipate declaring or paying any cash dividends in the foreseeable future.



Item 6.    SELECTED FINANCIAL DATA



The following tables should be read in conjunction with our Consolidated Financial Statements and the notes thereto and with Managements Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere in this report (in thousands, except per share data):



|                                                                        |  |                         |         |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|----------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | -
|                                                                        |  | Year ended December 31, |        
|                                                                        |  | 2005                    |         |   | 2004 |   |         | 2003 |  | 2002 |         | 2001 |  
|Consolidated Statements of Operations Data:                             |  |                         |         |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Total revenues                                                          |  | $                       | 103,858 |   |      | $ | 107,928 |      |  | $    | 99,787  |      | $ | 64,636  |  | $ | 54,613  |  
|Operating income (loss)                                                 |  |                         | (60,156 | ) |      |   | 26,417  |      |  |      | 24,816  |      |   | 3,715   |  |   | (1,762  | )
|Income (loss) from continuing operations                                |  |                         | (54,162 | ) |      |   | 17,211  |      |  |      | 16,135  |      |   | 3,156   |  |   | (170    | )
|Income (loss) from discontinued operations                              |  |                         |        |   |      |   | (11     | )    |  |      | 9       |      |   | 200     |  |   | 986     |  
|Net income (loss)                                                       |  |                         | (54,162 | ) |      |   | 17,200  |      |  |      | 16,144  |      |   | 3,356   |  |   | 816     |  
|Basic net income (loss) from continuing operations per common share     |  |                         | (3.07   | ) |      |   | 0.96    |      |  |      | 0.90    |      |   | 0.18    |  |   | (0.01   | )
|Diluted net income (loss) from continuing operations per common share   |  |                         | (3.07   | ) |      |   | 0.94    |      |  |      | 0.87    |      |   | 0.18    |  |   | (0.01   | )
|Basic net income (loss) from discontinued operations per common share   |  |                         |        |   |      |   | 0.00    |      |  |      | 0.00    |      |   | 0.01    |  |   | 0.06    |  
|Diluted net income (loss) from discontinued operations per common share |  |                         |        |   |      |   | 0.00    |      |  |      | 0.00    |      |   | 0.01    |  |   | 0.05    |  
|Basic net income (loss) per common share                                |  |                         | (3.07   | ) |      |   | 0.96    |      |  |      | 0.90    |      |   | 0.20    |  |   | 0.05    |  
|Diluted net income (loss) per common share                              |  | $                       | (3.07   | ) |      | $ | 0.94    |      |  | $    | 0.87    |      | $ | 0.19    |  | $ | 0.05    |  
|Consolidated Balance Sheets Data (at year end):                         |  |                         |         |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Cash, restricted cash and short-term investments                        |  | $                       | 80,816  |   |      | $ | 77,752  |      |  | $    | 66,513  |      | $ | 55,075  |  | $ | 60,253  |  
|Working capital                                                         |  |                         | 14,612  |   |      |   | 79,294  |      |  |      | 70,204  |      |   | 55,236  |  |   | 59,230  |  
|Property and equipment, net                                             |  |                         | 53,283  |   |      |   | 55,559  |      |  |      | 58,638  |      |   | 44,896  |  |   | 38,795  |  
|Total assets                                                            |  |                         | 175,291 |   |      |   | 168,011 |      |  |      | 154,591 |      |   | 124,755 |  |   | 116,553 |  
|Shareholders equity                                                    |  | $                       | 86,346  |   |      | $ | 138,447 |      |  | $    | 128,201 |      | $ | 101,739 |  | $ | 96,830  |  



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In March 2004, we ceased providing our ROAMERplus solution, effectively discontinuing our Roaming
Services segment. Accordingly, the operating results of the Roaming Services segment have been segregated as discontinued operations in the Consolidated Balance Sheets and Consolidated Statements of Income.



Results for the year ended December 31, 2005 include a charge for
estimated loss from litigation of $64.3 million and general and administrative legal expenses of $10.2 million, primarily for the Freedom Wireless suit.



Results for the year ended December 31, 2004 include a charge for general and administrative legal expenses of $3.0 million, primarily for the
Freedom Wireless suit.



Results for the year ended
December 31, 2003 include a charge for general and administrative legal expenses of $4.0 million, primarily for the Freedom Wireless suit.



Results for the year ended December 31, 2002 include a charge for general and administrative legal expenses of $4.3 million, primarily for the
Freedom Wireless lawsuit.



Results for the year ended
December 31, 2001 include a special charge of $538,000 for accruals, inventory write-downs and severance resulting from the discontinuance of our voice mail product, a charge for general and administrative legal expenses of $3.6 million to
accrue for estimated legal expenses, primarily for the Freedom Wireless lawsuit and a special charge of $894,000, principally for the permanent impairment of a cost-based investment.



|Item 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



CONSOLIDATED RESULTS OF OPERATIONS



Overview



We deliver innovative products and services that enable mobile operators and MVNOs worldwide to differentiate their offerings and increase market
penetration while reducing costs. Our access management, prepaid and postpaid billing and payment solutions enable operators to address new market needs. These solutions help our customers compete effectively by attracting and retaining additional
subscriber customers, thereby increasing their ability to drive additional revenue while lowering their operating costs. We offer our fully managed services and licensed products to wireless operators in the United States and worldwide, selling
through both direct and indirect channels.



Our bcgi
Billing product line includes our prepaid wireless product, Real-Time Billing, and our postpaid product, Voyager Billing. Voyager Billing serves U.S. operators and MVNOs, and our revenues are earned principally on a per subscriber basis for
generating a postpaid subscribers monthly bill. 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, SMS and other
data services. Additionally, whether deployed on a managed service basis or licensed basis, we generate revenues from software licensing, implementations, bcgi Professional Services 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 of installation for licensed sales.



While we have not generated significant bcgiAccess Management revenues related to our Mobile Guardian products to date, we expect that we will
generate greater future revenues from these products by charging wireless operators on a per subscriber per month basis, a per transaction basis, or on a one-time subscriber license basis, plus maintenance and other services.



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In the U.S., we typically generate revenues from bcgiPayment 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 4% to $103.9 million in 2005 compared to $107.9
million in 2004. In 2004, net revenues increased 8% from $99.8 million in 2003. Our operating loss of $60.2 million in 2005 compares to $26.4 million of operating income in 2004. The decrease in operating income from 2004 to 2005 is primarily due
to:



| |  |  | The accrual of $64.3 million for the estimated loss from the Freedom Wireless litigation recorded in accordance with FAS 5 and FIN 14;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An additional $7.2 million in legal costs related to the Freedom Wireless litigation;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Lower revenue from the loss of Verizon and Cingular subscribers;
| | - |  | ----------------------------------------------------------------



| |  |  | Increased investment in engineering, research and development to enhance our product offerings; and
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | Investments in an international sales team and infrastructure to support our expansion into global markets.
| | - |  | -----------------------------------------------------------------------------------------------------------



Our operating income of $26.4 million in 2004 increased 6% over $24.8 million
in 2003.



On May 20, 2005, a jury determined that
bcgi and the other defendants infringed or are infringing two Freedom Wireless patents. The jury damages and post-trial damages (through October 12, 2005) plus interest and court costs awarded by the District Court total approximately
$165 million (bcgi and each carrier are jointly liable for specific amounts). We have an obligation to indemnify the other defendants for damages they may incur with respect to any infringement by our technology.



In July 2005, we entered into the 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 totaling $191 million to stay the execution of the judgment, pending
appeal. At December 31, 2005, this escrow amount (including interest earned to date) totaled $41.5 million and is recorded as restricted cash.



On October 12, 2005 the District Court granted the Injunction to Freedom Wireless providing a 90 day grace period during which we could continue to
provide our services to carriers. Subsequent to the 90-day grace period, the District Court ordered that we must stop providing prepaid services to all of our Real-Time Billing customers, other than those who have a license with Freedom. We filed a
motion to clarify the order or stay the Injunction pending appeal which was denied by the District Court. We filed an emergency appeal to stay the Injunction with the Appeals Court and on December 15, 2005 the Appeals Court stayed the
Injunction. Therefore, our carrier customers, including co-defendant Cingular Wireless, may continue to use our Real-Time Billing service during the appeals process. In addition, the Appeals Court did not require bcgi and/or the other
defendants to post additional security for any potential damages that may accrue during the appeals process.



In October 2005, we filed to appeal the District Court judgment with the Appeals Court. Our principal appeal brief is expected to be filed in March, 2006,
and the appeal process is expected to continue into 2007. If our appeal is unsuccessful or if we cannot successfully manage our business during the appeal process, we may not be able to continue our ongoing operations or may need to seek protection
under the U. S. Bankruptcy Code.



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 $64.3 million in 2005, 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 higher than the current judgment of $165 million, which exceeds our ability to pay.



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



| |  |  | If the Appeals Court overturns the judgment of infringement, it could either rule that bcgi would have no liability to Freedom Wireless, or that the case 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 that bcgiwould 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 could enter into a settlement agreement.
| | - |  | ----------------------------------------------------



Since we cannot anticipate the impact on our business due to the Freedom Wireless litigation, we cannot provide precise future earnings guidance; however,
we anticipate that revenues and earnings will decrease for the first quarter of 2006 from the fourth quarter of 2005. These decreases are due to our expectations that customer migrations, namely Verizon and Cingular, will continue and accelerate in
the first quarter. Additionally, we anticipate that Verizon Wireless and Cingular Wireless will each constitute less than 10% of net revenues for the first quarter of 2006, compared to 21% and 9% of revenues, respectively, for the fourth quarter of
2005. Verizon Wireless and Cingular Wireless are also anticipated to be fully migrated off of our Real-Time Billing platform by June, 2006. Additionally, Alltel Corporation and other smaller carriers have recently stopped using our Real-Time Billing
platform due to concerns regarding our viability resulting from the Freedom Wireless litigation. Revenue generated from these carriers collectively totaled approximately 10% of our 2005 revenues.



In 2005 we expanded our product offerings on a global scale, both on a
managed services basis and on a licensed sale basis. This global expansion of our product offerings provides customers the ability to choose which service delivery model best suits their needs. Selling our products on a licensed sale basis is
expected to result in less predictability in our future sales trends.



We plan to continue to invest in and focus on our customer and product diversification strategy which includes support of bcgiAccess Management, bcgiPayment and Voyager Billing products as well as expansion into new domestic
and international wireless markets, including the developing MVNO market.



In March 2004, we ceased providing our ROAMERplus solution, effectively discontinuing our Roaming Services segment.



Segment Revenues

($ in thousands)



|                   |       |                                  |                        |      |     |       |      |                        |         |  |       |   |                        |   |        |  |     |  
|------------------ | ----- | -------------------------------- | ---------------------- | ---- | --- | ----- | ---- | ---------------------- | ------- |  | ----- | - | ---------------------- | - | ------ |  | --- | -
|                   |       | Twelve months ended December 31, |                       
|                   | 2005  |                                  |                        | 2004 |     |       | 2003 |                       
|                   | Total |                                  | % of TotalNet Revenues |      |     | Total |      | % of TotalNet Revenues |         |  | Total |   | % of TotalNet Revenues |  
|Real-Time Billing  |       | $                                | 94,089                 |      | 91  | %     |      | $                      | 102,373 |  | 95    | % |                        | $ | 95,799 |  | 96  | %
|Other              |       |                                  | 9,769                  |      | 9   | %     |      |                        | 5,555   |  | 5     | % |                        |   | 3,988  |  | 4   | %
|Total net revenues |       | $                                | 103,858                |      | 100 | %     |      | $                      | 107,928 |  | 100   | % |                        | $ | 99,787 |  | 100 | %



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Revenues



Real-Time Billing



Our net revenues from Real-Time Billing decreased by 8% to $94.1 million in 2005 compared to $102.4 million in 2004. In 2004 net revenues from Real-Time
Billing increased 7% compared to $95.8 million in 2003. While the subscribers on our platform increased by 315,000 from 2004, bringing our total subscriber base to 4.09 million as of December 31, 2005, revenue decreased primarily because
the average billed rate per minute declined by approximately 22% for 2005 compared to 2004. The decline in our average billed rate per minute was principally due to customers with lower contractual pricing becoming a larger portion of Real-Time
Billing revenues, in addition to customary volume discounts for those customers. Sprint Nextel became our largest customer in 2005 and we expect revenue from Sprint Nextel will constitute an even larger percentage of our revenue in 2006.



The net revenue increase from Real-Time Billing in 2004 compared to 2003
was due primarily to additional revenue from Sprint Nextel Corporation, partially offset by lower revenues from Verizon Wireless. The increase was also attributable to an increase in the average billed minutes of use per subscriber per month to 113
for 2004 compared to 111 in 2003. These increases were partially offset by an 11% decrease in our average billed rate per minute. Our U.S. subscriber base remained consistent with 3.77 million subscribers as of December 31, 2004 and 2003.



In future periods, we expect our prepaid subscriber base to
decrease, as we anticipate that the loss of subscribers from Verizon Wireless, Cingular Wireless and Alltel Corporation will exceed subscriber growth from other customers. In addition, other existing customers may decide to limit or stop using our
Real-Time Billing service due to the uncertainty resulting from the Freedom Wireless lawsuits. The loss of these subscribers is also expected to contribute to further overall decreases in our average billed rate per minute since customers with lower
contractual pricing are expected to become a larger portion of our revenues. As a result of these factors and despite expected off-setting growth of Sprint Nextel Corporation revenues, we expect Real-Time Billing revenues to decrease significantly
in 2006.



Other revenues



Other revenues are generated from our other products and operating units,
including, bcgi Payment, bcgi Access Management and Voyager Billing. Our net revenues from these business and product lines increased by 76% to $9.8 million in 2005 compared to $5.6 million in 2004. Other net revenues also increased
40% in 2004 compared to 2003. The increases in 2005 and 2004 are primarily due to our efforts to diversify our revenues with new products and customers. Although the technologies used in these other operating units are not implicated in the Freedom
Wireless lawsuits, we have had difficulties selling these products in certain instances due to concerns about our viability. We expect that these difficulties will continue and may increase at least as long as the lawsuits are pending and
potentially even after.



Cost of revenues



Cost of 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 and other support costs. Although these costs have certain variable elements in relation to revenues, they are
primarily fixed in nature. Cost of revenues increased in absolute dollars to $25.9 million, or 25% of total revenues, in 2005 from $24.0 million, or 22% of total revenues, in 2004. The increase in cost of revenues in 2005 resulted primarily from
increased software and equipment maintenance costs (approximately $490,000) and additional personnel, wages and related costs (approximately $1.0 million) to support our launch of new customers and our investments in professional services and our
global licensing strategy. Cost of revenues increased to $24.0 million in 2004 from $23.0 million or 23% of total revenues in 2003. The increase in cost of revenues in 2004 resulted primarily from increased software and equipment maintenance costs
(approximately



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$690,000). Our cost of revenues is expected to increase in the first quarter of 2006 compared with the $6.7 million incurred in the fourth quarter of 2005.



Operating Data

($ in thousands)



|                                              |  |       |         |             |      |   |       |      |             |  |     |       |  |             |        |  |     |  
|--------------------------------------------- |  | ----- | ------- | ----------- | ---- | - | ----- | ---- | ----------- |  | --- | ----- |  | ----------- | ------ |  | --- | -
|                                              |  | 2005  |         |             | 2004 |   |       | 2003 |            
|                                              |  | Total |         | % ofRevenue |      |   | Total |      | % ofRevenue |  |     | Total |  | % ofRevenue |       
|Total revenues                                |  | $     | 103,858 |             | 100  | % |       | $    | 107,928     |  | 100 | %     |  | $           | 99,787 |  | 100 | %
|Engineering, research and development expense |  |       | 16,670  |             | 16   | % |       |      | 12,561      |  | 12  | %     |  |             | 10,729 |  | 11  | %
|Sales and marketing expense                   |  |       | 10,590  |             | 10   | % |       |      | 6,629       |  | 6   | %     |  |             | 5,986  |  | 6   | %
|General and administrative expense            |  |       | 15,001  |             | 14   | % |       |      | 13,023      |  | 12  | %     |  |             | 11,926 |  | 12  | %
|General and administrative expenselegal      |  |       | 10,219  |             | 10   | % |       |      | 2,991       |  | 3   | %     |  |             | 3,990  |  | 4   | %
|Estimated loss from litigation                |  |       | 64,300  |             | 62   | % |       |      |            |  |    | %     |  |             |       |  |    | %
|Depreciation and amortization expense         |  | $     | 21,348  |             | 21   | % |       | $    | 22,332      |  | 21  | %     |  | $           | 19,336 |  | 19  | %



Engineering, research and
development expenses



Engineering, research and
development (ER&D) 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
ER&D expenses in absolute dollars and as a percentage of revenue in 2005 compared to 2004 resulted primarily from additional personnel, wages and related costs of approximately $4.0 million principally to support the development of bcgi
Access Management and bcgi Payment, along with the enhancement of the features and functionality of our other products. The additional personnel acquired through our acquisitions of PureSight and Airada also contributed approximately $1.6
million to the increase in personnel, wages and related costs.



The increase in ER&D expenses in absolute dollars and as a percentage of revenue in 2004 compared to 2003 resulted from additional personnel, wages and related costs of approximately $1.9 million to support the development of
bcgi Access Management, along with the enhancement of the features and functionality for our existing products. These increases were partially offset by a $440,000 decrease in bonuses earned by employees relating to our 2004 financial
performance compared to 2003.



ER&D expenses in absolute
dollars are expected to increase slightly in the first quarter of 2006 compared with the $4.4 million incurred in the fourth quarter of 2005 due to increased energy costs, maintenance, payroll and other operating costs.



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 in 2005 increased in absolute dollars and as a percentage of revenue over 2004
primarily due to approximately $2.5 million to support the expansion of our international sales efforts, approximately $380,000 for additional personnel, wages and related costs to support our diversification strategy, approximately $260,000 for
additional costs to exhibit at major domestic industry tradeshows, approximately $180,000 for higher domestic travel costs and approximately $400,000 for targeted marketing programs.



Sales and marketing expenses increased in absolute dollars in 2004 as compared to 2003 due to higher commissions of
approximately $220,000 resulting from higher revenues, increased trade show costs of approximately $300,000 and increased promotional costs of approximately $150,000 to support Mobile Guardian



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and other diversification efforts. These increases were partially offset by decreases of approximately $190,000 for bonuses earned relating to our 2004
financial performance compared to 2003.



Sales and marketing
expense in absolute dollars are expected to increase approximately $1.0 million in the first quarter of 2006 compared with the $2.9 million incurred in the fourth quarter of 2005 reflecting our continued expansion of our product offerings on a
global scale, including participation in major international trade shows.



General and administrative expenses



General
and administrative (G&A) expenses include salaries and benefits of employees and other expenses that provide our administrative support. The increase in G&A expenses in absolute dollars and as a percentage of revenue in 2005
compared to 2004 was principally due to additional personnel, wages and related costs of approximately $730,000 and higher costs associated with expanded regulatory requirements and related costs for public companies of approximately $170,000 and
outside legal support of approximately $540,000.



The increase
in G&A expenses in absolute dollars in 2004 compared to 2003 was due to higher costs associated with expanded regulatory requirements and related costs for public companies totaling approximately $550,000, additional personnel, wages and related
costs of approximately $560,000 and increased facility costs of approximately $140,000, which was partially offset by decreases of approximately $380,000 for bonuses earned by employees relating to our 2004 financial performance compared to 2003.



G&A expenses in absolute dollars are expected to increase
slightly in the first quarter of 2006 compared with the $3.4 million incurred in the fourth quarter of 2005.



General and administrative expenseslegal charges



General and administrative legal expenses primarily represent legal expenses to defend the Freedom Wireless litigation. The increase in expense for 2005 compared to 2004 was primarily due to higher costs associated
with the trial and the judgment against us. The decrease in 2004 compared to 2003 was primarily due to the timing of the discovery phase which yielded greater costs in 2003. We expect to incur approximately $1.0 million in the first quarter
of 2006 as we continue our appeal of the Freedom Wireless lawsuit.



Estimated loss from litigation



bcgi
and certain of our current or former carrier customer defendants (Cingular Wireless, AT&T Wireless Services, CMT Partners and Western Wireless Corp.) were found by the District Court to have infringed or are infringing two Freedom Wireless
patents. The total damages award granted by the District Court was $165 million, an amount which exceeds bcgi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 continue to believe that we do not infringe these patents, that the patents are invalid and that the size of the damages awarded bears no relationship to a reasonable royalty that bcgi or any company would
have paid for a license of the patents, 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 $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 higher than the current judgment of $165 million, which exceeds our ability to pay, depending on the outcome of the appeal.



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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 2005 decrease in depreciation and amortization expense in
absolute dollars as compared to 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 $531,000.
The increase in depreciation and amortization expense in absolute dollars and as a percentage of revenue in 2004 compared to 2003 was attributable to additional telecommunication equipment and software to enhance our managed services platform as
well as to further develop our licensed products.



Interest income



Interest income increased to $1.8 million in 2005
compared to $1.2 million in 2004 and 2003. 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. Our increase in combined cash, restricted cash and investment positions in 2005 and higher average interest rates during 2005 resulted in increased levels of interest income compared to the previous years. If we ultimately make a cash
payment relating to the Freedom Wireless litigation, this would likely substantially reduce our cash and investment balances and therefore reduce future interest income.



Provision for income taxes



The income tax benefit for the year ended December 31, 2005 was $4.2 million, compared to an income tax provision of $10.4 million (37.7% effective
tax rate) for the year ended December 31, 2004. The benefit recorded in the current year primarily reflects our assessment of our ability to realize the tax benefit from the ultimate loss, if any, from the Freedom Wireless judgment and also
reflects a favorable adjustment from the completion of a routine IRS audit of several tax returns. Absent any changes to our legal reserve assumptions or other matters, we expect that our effective tax rate in 2006 will be substantially below
statutory tax rates.



Acquisitions



In November 2004, we acquired the assets of Airada Networks, Inc. and Airada
Networks Private Limited (Airada), a privately-held provider of payment management software solutions for the wireless marketplace, for $1.3 million in cash. Additional contingent cash consideration may be paid to Airada based on attaining certain
defined annual revenue targets and other metrics through 2007, most of which will be accounted for as goodwill. For 2005, Airada earned contingent consideration of $323,000 of which $311,000 was paid in 2005 and all of which was accrued in purchased
accounting. The purchase price of the acquisition was allocated to identifiable assets based on fair values as of the date of acquisition. We 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. Identifiable intangible assets consist of acquired technology and customer contracts and are being amortized on
a straight-line basis over five years. The results of operations of Airada are included in our Consolidated Statements of Operations from the date of acquisition.



In June 2005, we acquired the assets and certain liabilities of PureSight, Inc. and its Israeli subsidiary, PureSight LTD.
(PureSight), a privately-held provider of advanced content recognition solutions for mobile operators, ISPs and enterprises. We paid $6.6 million in cash for PureSight, including acquisition costs. We 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



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agreements and are being amortized over four to seven years. The results of operations of PureSight are included in our Consolidated Statements of Operations
from the date of acquisition.



Liquidity and Capital Resources



As of December 31, 2005, cash, cash equivalents,
restricted cash and short-term investments increased 4% to $80.8 million compared to $77.8 million at December 31, 2004, primarily due to our net loss offset by non-cash adjustments, higher accounts payable and accrued expenses, an income tax
refund and to a lesser extent, a lower than usual days sales outstanding. The net cash provided by operations of $30.5 million in 2005 resulted from a $54.2 million net loss along with adjustments for depreciation and amortization of $21.3 million
and an estimated loss contingency recorded in the Freedom Wireless patent infringement lawsuit of $64.3 million, decreased receivables of $2.7 million caused by a decrease in our days sales outstanding from 63 as of December 31, 2004 to 55 at
December 31, 2005 and a decrease in deferred income taxes of $6.7 million.



Our investing activities used $25.9 million of net cash for 2005. We entered into an agreement with Cingular Wireless, placing $41 million of cash into escrow which is restricted cash for security since Cingular has
posted the required bonds to stay the execution of judgment, pending appeal, in the Freedom Wireless lawsuit. In addition, we spent approximately $18.2 million for the purchase of telecommunications equipment and software to enhance our managed
services platform as well as to further develop our licensed products. Internally capitalized costs were $3.6 million for the year ended December 31, 2005. We also 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 $516,000 for 2005 primarily from proceeds from the exercise of stock options and the issuance of common stock
under the Employee Stock Purchase Plan.



Since our cash balance
as of December 31, 2005 was higher than expected due to certain working capital changes, including accrued expenses and accounts receivable, we expect that our cash position will decline and range between $71 to $73 million at March 31,
2006.



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 and we may need to seek protection under the U. S. Bankruptcy Code.



We have non-cancelable commitments for equipment, maintenance, 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 December 31, 2005 (in thousands):



|                         |  |       |              |                       |          |       |          |   |                  |  |   |    |  |   |  
|------------------------ |  | ----- | ------------ | --------------------- | -------- | ----- | -------- | - | ---------------- |  | - | -- |  | - | -
|                         |  | Total |              | Payment due by period
|                         |  |       | within1 year |                       | 2-3years |       | 4-5years |   | More than5 years
|Contractual Obligations: |  |       |              |                       |          |       |          |   |                  |  |   |    |  |   |  
|Operating leases         |  | $     | 2,744        |                       | $        | 1,416 |          | $ | 1,252            |  | $ | 76 |  | $ | 
|Purchase commitments     |  |       | 4,337        |                       |          | 3,693 |          |   | 631              |  |   | 13 |  |   | 
|                         |  |       |              |                       |          |       |          |   |                  |  |   |    |  |   |  
|Total                    |  | $     | 7,081        |                       | $        | 5,109 |          | $ | 1,883            |  | $ | 89 |  | $ | 
|                         |  |       |              |                       |          |       |          |   |                  |  |   |    |  |   |  



36



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##### Table of Contents

Selected Quarterly Operating Results



The following table sets forth certain unaudited quarterly results of our operations for the eight quarters in the two-year
period ended December 31, 2005, including such amounts expressed as a percentage of total revenues. This quarterly information is unaudited, prepared on the same basis as the audited Consolidated Financial Statements and, in the opinion of our
management, reflects all necessary adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the information for the periods presented. The quarterly operating results are not necessarily indicative of future
results of operations, which you should read in conjunction with the audited Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K.





|                                             |  |                                          |        |   |               |   |         |               |  |   |               |   |               |   |               |  |               |        |               |   |        |  |   |        |  |   |        |  
|-------------------------------------------- |  | ---------------------------------------- | ------ | - | ------------- | - | ------- | ------------- |  | - | ------------- | - | ------------- | - | ------------- |  | ------------- | ------ | ------------- | - | ------ |  | - | ------ |  | - | ------ | -
|                                             |  | Three months ended                       |       
|                                             |  | Dec. 31, 2005                            |        |   | Sep. 30, 2005 |   |         | Jun. 30, 2005 |  |   | Mar. 31, 2005 |   | Dec. 31, 2004 |   | Sep. 30, 2004 |  | Jun. 30, 2004 |        | Mar. 31, 2004 |  
|                                             |  | (in thousands, except per share amounts) |       
|Total revenues                               |  | $                                        | 26,260 |   |               | $ | 25,631  |               |  | $ | 25,615        |   |               | $ | 26,352        |  | $             | 26,013 |               | $ | 27,020 |  | $ | 27,650 |  | $ | 27,245 |  
|Expenses:                                    |  |                                          |        |   |               |   |         |               |  |   |               |   |               |   |               |  |               |        |               |   |        |  |   |        |  |   |        |  
|Cost of revenues                             |  |                                          | 6,742  |   |               |   | 6,570   |               |  |   | 6,347         |   |               |   | 6,227         |  |               | 5,879  |               |   | 6,326  |  |   | 5,928  |  |   | 5,842  |  
|Engineering, research and development        |  |                                          | 4,434  |   |               |   | 4,608   |               |  |   | 3,599         |   |               |   | 4,029         |  |               | 3,425  |               |   | 3,062  |  |   | 2,888  |  |   | 3,186  |  
|Sales and marketing                          |  |                                          | 2,865  |   |               |   | 3,012   |               |  |   | 2,277         |   |               |   | 2,436         |  |               | 1,597  |               |   | 1,542  |  |   | 1,643  |  |   | 1,847  |  
|General and administrative                   |  |                                          | 3,432  |   |               |   | 4,014   |               |  |   | 3,810         |   |               |   | 3,745         |  |               | 3,299  |               |   | 3,178  |  |   | 3,289  |  |   | 3,257  |  
|General and administrativelegal expense     |  |                                          | 1,385  |   |               |   | 2,305   |               |  |   | 4,319         |   |               |   | 2,210         |  |               | 941    |               |   | 450    |  |   | 450    |  |   | 1,150  |  
|Estimated loss from litigation               |  |                                          |       |   |               |   | 40,300  |               |  |   | 24,000        |   |               |   |              |  |               |       |               |   |       |  |   |       |  |   |       |  
|Depreciation and amortization                |  |                                          | 5,353  |   |               |   | 5,237   |               |  |   | 5,204         |   |               |   | 5,554         |  |               | 5,479  |               |   | 5,894  |  |   | 5,490  |  |   | 5,469  |  
|                                             |  |                                          |        |   |               |   |         |               |  |   |               |   |               |   |               |  |               |        |               |   |        |  |   |        |  |   |        |  
|Total operating expenses                     |  |                                          | 24,211 |   |               |   | 66,046  |               |  |   | 49,556        |   |               |   | 24,201        |  |               | 20,621 |               |   | 20,453 |  |   | 19,689 |  |   | 20,752 |  
|Operating income (loss)                      |  |                                          | 2,049  |   |               |   | (40,415 | )             |  |   | (23,941       | ) |               |   | 2,151         |  |               | 5,393  |               |   | 6,568  |  |   | 7,962  |  |   | 6,494  |  
|Interest income                              |  |                                          | 531    |   |               |   | 420     |               |  |   | 408           |   |               |   | 400           |  |               | 303    |               |   | 322    |  |   | 251    |  |   | 312    |  
|                                             |  |                                          |        |   |               |   |         |               |  |   |               |   |               |   |               |  |               |        |               |   |        |  |   |        |  |   |        |  
|Income (loss) before income taxes            |  |                                          | 2,580  |   |               |   | (39,995 | )             |  |   | (23,533       | ) |               |   | 2,551         |  |               | 5,696  |               |   | 6,890  |  |   | 8,213  |  |   | 6,806  |  
|Provision (benefit) for income taxes         |  |                                          | (72    | ) |               |   | 590     |               |  |   | (5,671        | ) |               |   | 918           |  |               | 1,739  |               |   | 2,722  |  |   | 3,211  |  |   | 2,722  |  
|                                             |  |                                          |        |   |               |   |         |               |  |   |               |   |               |   |               |  |               |        |               |   |        |  |   |        |  |   |        |  
|Net income (loss) from continuing operations |  |                                          | 2,652  |   |               |   | (40,585 | )             |  |   | (17,862       | ) |               |   | 1,633         |  |               | 3,957  |               |   | 4,168  |  |   | 5,002  |  |   | 4,084  |  
|Loss from discontinued operations            |  |                                          |       |   |               |   |        |               |  |   |              |   |               |   |              |  |               |       |               |   |       |  |   |       |  |   | (11    | )
|                                             |  |                                          |        |   |               |   |         |               |  |   |               |   |               |   |               |  |               |        |               |   |        |  |   |        |  |   |        |  
|Net income (loss)                            |  | $                                        | 2,652  |   |               | $ | (40,585 | )             |  | $ | (17,862       | ) |               | $ | 1,633         |  | $             | 3,957  |               | $ | 4,168  |  | $ | 5,002  |  | $ | 4,073  |  
|                                             |  |                                          |        |   |               |   |         |               |  |   |               |   |               |   |               |  |               |        |               |   |        |  |   |        |  |   |        |  
|Basic net income (loss) per share:           |  |                                          |        |   |               |   |         |               |  |   |               |   |               |   |               |  |               |        |               |   |        |  |   |        |  |   |        |  
|Continuing operations                        |  | $                                        | 0.15   |   |               | $ | (2.29   | )             |  | $ | (1.01         | ) |               | $ | 0.09          |  | $             | 0.23   |               | $ | 0.24   |  | $ | 0.27   |  | $ | 0.22   |  
|                                             |  |                                          |        |   |               |   |         |               |  |   |               |   |               |   |               |  |               |        |               |   |        |  |   |        |  |   |        |  
|Net income (loss)                            |  | $                                        | 0.15   |   |               | $ | (2.29   | )             |  | $ | (1.01         | ) |               | $ | 0.09          |  | $             | 0.23   |               | $ | 0.24   |  | $ | 0.27   |  | $ | 0.22   |  
|                                             |  |                                          |        |   |               |   |         |               |  |   |               |   |               |   |               |  |               |        |               |   |        |  |   |        |  |   |        |  
|Weighted average common shares               |  |                                          | 17,734 |   |               |   | 17,734  |               |  |   | 17,641        |   |               |   | 17,602        |  |               | 17,566 |               |   | 17,534 |  |   | 18,295 |  |   | 18,277 |  
|Diluted net income (loss) per share:         |  |                                          |        |   |               |   |         |               |  |   |               |   |               |   |               |  |               |        |               |   |        |  |   |        |  |   |        |  
|Continuing operations                        |  | $                                        | 0.15   |   |               | $ | (2.29   | )             |  | $ | (1.01         | ) |               | $ | 0.09          |  | $             | 0.22   |               | $ | 0.24   |  | $ | 0.27   |  | $ | 0.22   |  
|                                             |  |                                          |        |   |               |   |         |               |  |   |               |   |               |   |               |  |               |        |               |   |        |  |   |        |  |   |        |  
|Net income (loss)                            |  | $                                        | 0.15   |   |               | $ | (2.29   | )             |  | $ | (1.01         | ) |               | $ | 0.09          |  | $             | 0.22   |               | $ | 0.24   |  | $ | 0.27   |  | $ | 0.22   |  
|                                             |  |                                          |        |   |               |   |         |               |  |   |               |   |               |   |               |  |               |        |               |   |        |  |   |        |  |   |        |  
|Weighted average common shares               |  |                                          | 17,735 |   |               |   | 17,734  |               |  |   | 17,641        |   |               |   | 17,726        |  |               | 17,835 |               |   | 17,732 |  |   | 18,735 |  |   | 18,720 |  



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|                                         |  |                                   |   |  |              |    |  |              |    |  |              |   |  |              |   |  |              |   |  |              |   |  |              |  
|---------------------------------------- |  | --------------------------------- | - |  | ------------ | -- |  | ------------ | -- |  | ------------ | - |  | ------------ | - |  | ------------ | - |  | ------------ | - |  | ------------ | -
|                                         |  | As a Percentage of Total Revenues |  
|                                         |  | Dec. 31,2005                      |   |  | Sep. 30,2005 |    |  | Jun. 30,2005 |    |  | Mar. 31,2005 |   |  | Dec. 31,2004 |   |  | Sep. 30,2004 |   |  | Jun. 30,2004 |   |  | Mar. 31,2004 |  
|Total revenues                           |  | 100                               | % |  | 100          | %  |  | 100          | %  |  | 100          | % |  | 100          | % |  | 100          | % |  | 100          | % |  | 100          | %
|Expenses:                                |  |                                   |   |  |              |    |  |              |    |  |              |   |  |              |   |  |              |   |  |              |   |  |              |  
|Cost of revenues                         |  | 26                                |   |  | 26           |    |  | 25           |    |  | 24           |   |  | 23           |   |  | 23           |   |  | 21           |   |  | 21           |  
|Engineering, research and development    |  | 17                                |   |  | 18           |    |  | 14           |    |  | 15           |   |  | 13           |   |  | 11           |   |  | 10           |   |  | 12           |  
|Sales and marketing                      |  | 11                                |   |  | 12           |    |  | 9            |    |  | 9            |   |  | 6            |   |  | 6            |   |  | 6            |   |  | 7            |  
|General and administration               |  | 13                                |   |  | 16           |    |  | 15           |    |  | 14           |   |  | 13           |   |  | 12           |   |  | 12           |   |  | 12           |  
|General and administrationlegal expense |  | 5                                 |   |  | 9            |    |  | 17           |    |  | 8            |   |  | 4            |   |  | 2            |   |  | 2            |   |  | 4            |  
|Estimated loss from litigation           |  |                                  |   |  | 157          |    |  | 94           |    |  |             |   |  |             |   |  |             |   |  |             |   |  |             |  
|                                         |  |                                   |   |  |              |    |  |              |    |  |              |   |  |              |   |  |              |   |  |              |   |  |              |  
|Depreciation and amortization            |  | 20                                |   |  | 20           |    |  | 20           |    |  | 21           |   |  | 21           |   |  | 22           |   |  | 20           |   |  | 20           |  
|                                         |  |                                   |   |  |              |    |  |              |    |  |              |   |  |              |   |  |              |   |  |              |   |  |              |  
|Total operating expenses                 |  | 92                                |   |  | 258          |    |  | 193          |    |  | 92           |   |  | 79           |   |  | 76           |   |  | 71           |   |  | 76           |  
|Operating income (loss)                  |  | 8                                 |   |  | (158         | )  |  | (93          | )  |  | 8            |   |  | 21           |   |  | 24           |   |  | 29           |   |  | 24           |  
|                                         |  |                                   |   |  |              |    |  |              |    |  |              |   |  |              |   |  |              |   |  |              |   |  |              |  
|Interest income                          |  | 2                                 |   |  | 2            |    |  | 2            |    |  | 2            |   |  | 1            |   |  | 1            |   |  | 1            |   |  | 1            |  
|Income (loss) before income taxes        |  | 10                                |   |  | (156         | )  |  | (92          | )  |  | 10           |   |  | 22           |   |  | 25           |   |  | 30           |   |  | 25           |  
|Provision (benefit) for income taxes     |  |                                  |   |  | 2            |    |  | (22          | )  |  | 3            |   |  | 7            |   |  | 10           |   |  | 12           |   |  | 10           |  
|                                         |  |                                   |   |  |              |    |  |              |    |  |              |   |  |              |   |  |              |   |  |              |   |  |              |  
|Net income (loss)                        |  | 10                                | % |  | (158         | )% |  | (70          | )% |  | 6            | % |  | 15           | % |  | 15           | % |  | 18           | % |  | 15           | %
|                                         |  |                                   |   |  |              |    |  |              |    |  |              |   |  |              |   |  |              |   |  |              |   |  |              |  



Off-Balance Sheet Arrangements



During 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 income taxes. 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, software development costs and costs capitalized for internal use
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Impairment of long-lived and intangible assets and goodwill
| | - |  | -----------------------------------------------------------



| |  |  | Accounting for income taxes
| | - |  | ---------------------------



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##### Table of Contents

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. 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 principally on a per subscriber basis for generating a postpaid subscribers monthly bill.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | For PayExtend, we earn revenues by processing transactions on behalf of wireless operators subscribers.
| | - |  | --------------------------------------------------------------------------------------------------------



Each of these revenues is recognized when the service is provided. For
license fees, special projects, implementation services and bcgi Professional 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 and payment 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. This revenue is recognized in the month in which it is earned upon sell through to a customer.



For multiple element arrangements, we determine fair value of each
undelivered element and we recognize revenue based on the residual value method. 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 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 collectability 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) or disputed amounts, 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.



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##### Table of Contents

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 14 Reasonable 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. We are expensing legal costs related to the Freedom Wireless lawsuit as incurred due to the lengthy and unpredictable proceedings which have made it difficult to reasonably estimate legal
costs for the lawsuit. Other litigation will continue to be accounted for in accordance with our accounting policy, and generally, we develop an estimate of probable costs in consultation with our outside legal counsel who is handling the case.
There can be no assurance that our expenses will not exceed our estimates.



Research and Development, Software Development Costs and Costs Capitalized for Internal Use



Research and development costs are charged to expense as incurred. However, costs incurred for the development of computer software or for the deployment
of assets for internal use are capitalized. The direct labor and payroll-related costs of development of computer software, primarily for coding and testing of 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 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
totaled $3.6 million for the years ended December 31, 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:



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##### Table of Contents

| |  |  | 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 Consolidated Statement of Operations. The estimated undiscounted cash flows for each of our long-lived assets could differ materially from the actual 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 each operating unit, which includes bcgiAccess Management, bcgi Payment, Real-Time Billing and Voyager Billing with its carrying amount,
including goodwill. Fair value for each operating unit is determined using a discounted cash flow valuation model, which requires judgments to be made by management regarding estimating future cash flows, economic life and discount rates, among
other assumptions. If the carrying amount of the operating units net assets exceeds the fair value of that operating unit, we would evaluate any impairment loss under the next step of the impairment test. The estimated discounted cash flows
for each operating unit could differ materially from the actual results.



In November 2004, we acquired the assets of Airada and determined the fair value of the assets acquired and liabilities assumed. The principal asset acquired was completed technology related to a payment management
software solution for the wireless marketplace valued at approximately $1.7 million, as well as customer contracts valued at approximately $100,000.



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
determining the fair market value of assets acquired and their useful lives. Different assumptions could yield materially different results.



We performed our annual impairment test in the fourth quarters of our fiscal year and determined that goodwill was not impaired. As a result of the
Freedom Wireless lawsuit judgment discussed in Note 11 to the Consolidated Financial Statements, the Company performed an asset impairment test for our long-lived assets and goodwill as of June 30, 2005, September 30, 2005 and during
the fourth quarter of 2005 and concluded that no impairment existed. Future impairment tests may result in impairment losses that could have a material adverse impact on our results of operations.



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Income Taxes



Our 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 depends 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.



While we have considered the current facts and
circumstances of the tax benefit from the ultimate loss, if any, relating to the Freedom Wireless judgment in assessing the amount of our valuation allowance, there is no assurance that the valuation allowance will not need to be increased in the
future to cover deferred tax assets that may not be realizable. Any increase in the valuation allowance could have a material adverse impact on our income tax provision and net income in the period in which such determination is made.



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 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 is
no longer an alternative.



We are adopting Statement
No. 123(R) on January 1, 2006 using the modified prospective transition method and therefore will not restate prior periods.



As permitted by Statement No. 123, in 2005 and prior, we accounted for share-based payments to employees using Opinion 25s intrinsic value
method and, as such, generally recognized no compensation cost for employee stock options. 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 and our stock price at the time of grant, although it will have no impact on our overall financial position. Non-cash expenses related to FAS 123(R) for options that have been granted and that are not vested as of December 31, 2005 are
anticipated to be immaterial in 2006. However, had we 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 (loss) per share in Note 3 to our 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.



While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when
employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions was $1.6 million, $128,000, and $3.5 million in 2005, 2004 and 2003, respectively.



In May 2005, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections (SFAS 154) which supersedes APB Opinion No. 20, Accounting Changes and SFAS No. 3,Reporting
Accounting Changes in Interim Financial Statements. SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted



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accounting principle. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error
correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retroactively. Therefore, the reporting of a correction of an error by restating previously issued
financial statements is also addressed by this Statement. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of SFAS 154 to have
a material impact on our consolidated results of operations and financial condition.



In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47),Accounting for Conditional Asset Retirement Obligations an interpretation of FASB Statement No. 143. FIN 47
clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing
and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing
and (or) method of settlement. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47
also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We are
currently analyzing FIN 47 and believe the adoption of FIN 47 will not have a material impact on our financial condition, results of operations or liquidity.



Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The following Consolidated Financial Statements and supplementary data are included as part of this Annual Report on Form 10-K:



|                                                                                                     |  |   
|---------------------------------------------------------------------------------------------------- |  | --
|Consolidated Balance Sheets at December 31, 2005 and 2004                                            |  | 44
|Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003           |  | 45
|Consolidated Statements of Shareholders Equity for the years ended December 31, 2005, 2004 and 2003 |  | 46
|Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003           |  | 47
|Notes to Consolidated Financial Statements                                                           |  | 48
|Report of Ernst & Young LLP, Independent Registered Public Accounting Firm                           |  | 67



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Boston Communications Group, Inc.



Consolidated Balance Sheets

(In thousands, except share and per share amounts)



|                                                                                                                                                                                               |  |              |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                                               |  | December 31, |        
|                                                                                                                                                                                               |  | 2005         |         |   | 2004 |  
|ASSETS                                                                                                                                                                                         |  |              |         |   |      |   |         |  
|Current assets:                                                                                                                                                                                |  |              |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                                                                      |  | $            | 14,601  |   |      | $ | 9,467   |  
|Restricted cash                                                                                                                                                                                |  |              | 41,466  |   |      |   |        |  
|Short-term investments                                                                                                                                                                         |  |              | 24,749  |   |      |   | 68,285  |  
|Accounts receivable, net of allowance for doubtful accounts of $949 in 2005 and $474 in 2004                                                                                                   |  |              | 14,830  |   |      |   | 17,358  |  
|Deferred income taxes                                                                                                                                                                          |  |              |        |   |      |   | 319     |  
|Prepaid expenses and other assets                                                                                                                                                              |  |              | 3,443   |   |      |   | 2,907   |  
|                                                                                                                                                                                               |  |              |         |   |      |   |         |  
|Total current assets                                                                                                                                                                           |  |              | 99,089  |   |      |   | 98,336  |  
|Property and equipment:                                                                                                                                                                        |  |              |         |   |      |   |         |  
|Building, land and leasehold improvements                                                                                                                                                      |  |              | 14,204  |   |      |   | 14,576  |  
|Telecommunications systems & software                                                                                                                                                          |  |              | 107,131 |   |      |   | 94,900  |  
|Furniture and fixtures                                                                                                                                                                         |  |              | 811     |   |      |   | 789     |  
|Systems in development                                                                                                                                                                         |  |              | 3,445   |   |      |   | 2,837   |  
|                                                                                                                                                                                               |  |              |         |   |      |   |         |  
|                                                                                                                                                                                               |  |              | 125,591 |   |      |   | 113,102 |  
|Less allowance for depreciation and amortization                                                                                                                                               |  |              | 72,308  |   |      |   | 57,543  |  
|                                                                                                                                                                                               |  |              |         |   |      |   |         |  
|                                                                                                                                                                                               |  |              | 53,283  |   |      |   | 55,559  |  
|Intangible assets, net                                                                                                                                                                         |  |              | 3,279   |   |      |   | 2,450   |  
|Goodwill                                                                                                                                                                                       |  |              | 10,258  |   |      |   | 4,753   |  
|Other assets                                                                                                                                                                                   |  |              | 9,382   |   |      |   | 6,913   |  
|                                                                                                                                                                                               |  |              |         |   |      |   |         |  
|Total assets                                                                                                                                                                                   |  | $            | 175,291 |   |      | $ | 168,011 |  
|                                                                                                                                                                                               |  |              |         |   |      |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                           |  |              |         |   |      |   |         |  
|Current liabilities:                                                                                                                                                                           |  |              |         |   |      |   |         |  
|Accounts payable                                                                                                                                                                               |  | $            | 1,589   |   |      | $ | 312     |  
|Accrued expenses                                                                                                                                                                               |  |              | 12,244  |   |      |   | 13,386  |  
|Accrued estimated loss from litigation                                                                                                                                                         |  |              | 64,300  |   |      |   |        |  
|Deferred revenue                                                                                                                                                                               |  |              | 4,449   |   |      |   | 3,753   |  
|Income taxes payable                                                                                                                                                                           |  |              | 1,895   |   |      |   | 1,591   |  
|                                                                                                                                                                                               |  |              |         |   |      |   |         |  
|Total current liabilities                                                                                                                                                                      |  |              | 84,477  |   |      |   | 19,042  |  
|Non-current liabilities:                                                                                                                                                                       |  |              |         |   |      |   |         |  
|Accrued pension liability                                                                                                                                                                      |  |              | 4,468   |   |      |   | 3,476   |  
|Deferred income taxes                                                                                                                                                                          |  |              |        |   |      |   | 7,046   |  
|                                                                                                                                                                                               |  |              |         |   |      |   |         |  
|Total non-current liabilities                                                                                                                                                                  |  |              | 4,468   |   |      |   | 10,522  |  
|Commitments and contingencies (Note 11)                                                                                                                                                        |  |              |         |   |      |   |         |  
|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; 17,737,421 and 17,581,625 shares issued and outstanding at December 31, 2005 and December 31,
2004, respectively |  |              | 177     |   |      |   | 176     |  
|Additional paid-in capital                                                                                                                                                                     |  |              | 106,232 |   |      |   | 104,070 |  
|Deferred compensation                                                                                                                                                                          |  |              | (15     | ) |      |   |        |  
|Retained earnings (deficit)                                                                                                                                                                    |  |              | (19,732 | ) |      |   | 34,430  |  
|Accumulated other comprehensive loss                                                                                                                                                           |  |              | (316    | ) |      |   | (229    | )
|                                                                                                                                                                                               |  |              |         |   |      |   |         |  
|Total shareholders equity                                                                                                                                                                     |  |              | 86,346  |   |      |   | 138,447 |  
|Total liabilities and shareholders equity                                                                                                                                                     |  | $            | 175,291 |   |      | $ | 168,011 |  
|                                                                                                                                                                                               |  |              |         |   |      |   |         |  



See accompanying
notes.



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Boston Communications Group, Inc.



Consolidated Statements of Operations

(In thousands, except per share amounts)



|                                                                  |  |                         |         |   |      |   |         |      |  |   |       
|----------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------
|                                                                  |  | Year Ended December 31,
|                                                                  |  | 2005                    |         |   | 2004 |   |         | 2003
|NET REVENUES                                                      |  | $                       | 103,858 |   |      | $ | 107,928 |      |  | $ | 99,787
|                                                                  |  |                         |        
|EXPENSES:                                                         |  |                         |         |   |      |   |         |      |  |   |       
|Cost of revenues *                                                |  |                         | 25,886  |   |      |   | 23,975  |      |  |   | 23,004
|Engineering, research and development                             |  |                         | 16,670  |   |      |   | 12,561  |      |  |   | 10,729
|Sales and marketing                                               |  |                         | 10,590  |   |      |   | 6,629   |      |  |   | 5,986 
|General and administrative                                        |  |                         | 15,001  |   |      |   | 13,023  |      |  |   | 11,926
|General and administrative  legal charges                        |  |                         | 10,219  |   |      |   | 2,991   |      |  |   | 3,990 
|Estimated loss from litigation                                    |  |                         | 64,300  |   |      |   |        |      |  |   |      
|Depreciation and amortization                                     |  |                         | 21,348  |   |      |   | 22,332  |      |  |   | 19,336
|                                                                  |  |                         |         |   |      |   |         |      |  |   |       
|Operating income (loss)                                           |  |                         | (60,156 | ) |      |   | 26,417  |      |  |   | 24,816
|Interest income                                                   |  |                         | 1,759   |   |      |   | 1,188   |      |  |   | 1,214 
|                                                                  |  |                         |         |   |      |   |         |      |  |   |       
|Income (loss) before income taxes                                 |  |                         | (58,397 | ) |      |   | 27,605  |      |  |   | 26,030
|Provision (benefit) for income taxes                              |  |                         | (4,235  | ) |      |   | 10,394  |      |  |   | 9,895 
|                                                                  |  |                         |         |   |      |   |         |      |  |   |       
|Net income (loss) from continuing operations                      |  |                         | (54,162 | ) |      |   | 17,211  |      |  |   | 16,135
|Discontinued operations:                                          |  |                         |         |   |      |   |         |      |  |   |       
|Income (loss) from discontinued operations, before taxes          |  |                         |        |   |      |   | (19     | )    |  |   | 15    
|Provision (benefit) for income taxes from discontinued operations |  |                         |        |   |      |   | (8      | )    |  |   | 6     
|                                                                  |  |                         |         |   |      |   |         |      |  |   |       
|Net income (loss) from discontinued operations                    |  |                         |        |   |      |   | (11     | )    |  |   | 9     
|                                                                  |  |                         |         |   |      |   |         |      |  |   |       
|Net income (loss)                                                 |  | $                       | (54,162 | ) |      | $ | 17,200  |      |  | $ | 16,144
|                                                                  |  |                         |         |   |      |   |         |      |  |   |       
|Basic net income (loss) per share:                                |  |                         |         |   |      |   |         |      |  |   |       
|Continuing operations                                             |  | $                       | (3.07   | ) |      | $ | 0.96    |      |  | $ | 0.90  
|Net income (loss)                                                 |  | $                       | (3.07   | ) |      | $ | 0.96    |      |  | $ | 0.90  
|Weighted average common shares outstanding                        |  |                         | 17,663  |   |      |   | 17,918  |      |  |   | 17,984
|Diluted net income (loss) per share:                              |  |                         |         |   |      |   |         |      |  |   |       
|Continuing operations                                             |  | $                       | (3.07   | ) |      | $ | 0.94    |      |  | $ | 0.87  
|Net income (loss)                                                 |  | $                       | (3.07   | ) |      | $ | 0.94    |      |  | $ | 0.87  
|Weighted average common shares outstanding                        |  |                         | 17,663  |   |      |   | 18,256  |      |  |   | 18,633

---

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



See accompanying notes.



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Boston Communications Group, Inc.



Consolidated Statements of Shareholders Equity

(In thousands, except share amounts)



|                                                            |  |              |   |  |                          |     |   |                      |   |         |                           |  |   |                                   |   |  |                          |         |   |  |   |      |   |  |   |         |  
|----------------------------------------------------------- |  | ------------ | - |  | ------------------------ | --- | - | -------------------- | - | ------- | ------------------------- |  | - | --------------------------------- | - |  | ------------------------ | ------- | - |  | - | ---- | - |  | - | ------- | -
|                                                            |  | Common Stock |   |  | AdditionalPaid InCapital |     |   | DeferredCompensation |   |         | RetainedEarnings(deficit) |  |   | AccumulatedOtherComprehensiveLoss |   |  | TotalShareholdersEquity |        
|Balance December 31, 2002                                   |  | 17,367,317   |   |  |                          | 174 |   |                      |   | 100,479 |                           |  |   |                                  |   |  |                          | 1,086   |   |  |   |     |   |  |   | 101,739 |  
|Exercise of stock options                                   |  | 806,281      |   |  |                          | 8   |   |                      |   | 6,216   |                           |  |   |                                  |   |  |                          |        |   |  |   |     |   |  |   | 6,224   |  
|Tax benefit from stock option exercises                     |  |             |   |  |                          |    |   |                      |   | 3,455   |                           |  |   |                                  |   |  |                          |        |   |  |   |     |   |  |   | 3,455   |  
|Issuance of common stock under employee stock purchase plan |  | 75,430       |   |  |                          |    |   |                      |   | 684     |                           |  |   |                                  |   |  |                          |        |   |  |   |     |   |  |   | 684     |  
|Comprehensive income:                                       |  |              |   |  |                          |     |   |                      |   |         |                           |  |   |                                   |   |  |                          |         |   |  |   |      |   |  |   |         |  
|Net income                                                  |  |             |   |  |                          |    |   |                      |   |        |                           |  |   |                                  |   |  |                          | 16,144  |   |  |   |     |   |  |   | 16,144  |  
|Securities valuation adjustment, net of tax                 |  |             |   |  |                          |    |   |                      |   |        |                           |  |   |                                  |   |  |                          |        |   |  |   | (45  | ) |  |   | (45     | )
|                                                            |  |              |   |  |                          |     |   |                      |   |         |                           |  |   |                                   |   |  |                          |         |   |  |   |      |   |  |   |         |  
|Comprehensive income                                        |  |             |   |  |                          |    |   |                      |   |        |                           |  |   |                                  |   |  |                          |        |   |  |   |     |   |  |   | 16,099  |  
|                                                            |  |              |   |  |                          |     |   |                      |   |         |                           |  |   |                                   |   |  |                          |         |   |  |   |      |   |  |   |         |  
|Balance December 31, 2003                                   |  | 18,249,028   |   |  |                          | 182 |   |                      |   | 110,834 |                           |  |   |                                  |   |  |                          | 17,230  |   |  |   | (45  | ) |  |   | 128,201 |  
|Exercise of stock options                                   |  | 88,912       |   |  |                          | 1   |   |                      |   | 654     |                           |  |   |                                  |   |  |                          |        |   |  |   |     |   |  |   | 655     |  
|Tax benefit from stock option exercises                     |  |             |   |  |                          |    |   |                      |   | 128     |                           |  |   |                                  |   |  |                          |        |   |  |   |     |   |  |   | 128     |  
|Issuance of common stock under employee stock purchase plan |  | 82,185       |   |  |                          | 1   |   |                      |   | 627     |                           |  |   |                                  |   |  |                          |        |   |  |   |     |   |  |   | 628     |  
|Repurchase of common stock                                  |  | (838,500     | ) |  |                          | (8  | ) |                      |   | (8,173  | )                         |  |   |                                  |   |  |                          |        |   |  |   |     |   |  |   | (8,181  | )
|Comprehensive income:                                       |  |              |   |  |                          |     |   |                      |   |         |                           |  |   |                                   |   |  |                          |         |   |  |   |      |   |  |   |         |  
|Net income                                                  |  |             |   |  |                          |    |   |                      |   |        |                           |  |   |                                  |   |  |                          | 17,200  |   |  |   |     |   |  |   | 17,200  |  
|Securities valuation adjustment, net of tax                 |  |             |   |  |                          |    |   |                      |   |        |                           |  |   |                                  |   |  |                          |        |   |  |   | (90  | ) |  |   | (90     | )
|Minimum pension liability adjustment, net of tax            |  |             |   |  |                          |    |   |                      |   |        |                           |  |   |                                  |   |  |                          |        |   |  |   | (94  | ) |  |   | (94     | )
|                                                            |  |              |   |  |                          |     |   |                      |   |         |                           |  |   |                                   |   |  |                          |         |   |  |   |      |   |  |   |         |  
|Comprehensive income:                                       |  |             |   |  |                          |    |   |                      |   |        |                           |  |   |                                  |   |  |                          |        |   |  |   |     |   |  |   | 17,016  |  
|                                                            |  |              |   |  |                          |     |   |                      |   |         |                           |  |   |                                   |   |  |                          |         |   |  |   |      |   |  |   |         |  
|Balance December 31, 2004                                   |  | 17,581,625   |   |  |                          | 176 |   |                      |   | 104,070 |                           |  |   |                                  |   |  |                          | 34,430  |   |  |   | (229 | ) |  |   | 138,447 |  
|Exercise of stock options                                   |  | 3,710        |   |  |                          |    |   |                      |   | 21      |                           |  |   |                                  |   |  |                          |        |   |  |   |     |   |  |   | 21      |  
|Tax benefit from stock option exercises                     |  |             |   |  |                          |    |   |                      |   | 1,624   |                           |  |   |                                  |   |  |                          |        |   |  |   |     |   |  |   | 1,624   |  
|Issuance of common stock under employee stock purchase plan |  | 143,010      |   |  |                          | 1   |   |                      |   | 494     |                           |  |   |                                  |   |  |                          |        |   |  |   |     |   |  |   | 495     |  
|Issuance of Restricted Stock                                |  | 9,276        |   |  |                          |    |   |                      |   | 23      |                           |  |   | (23                               | ) |  |                          |        |   |  |   |     |   |  |   |        |  
|Amortization of deferred compensation                       |  |             |   |  |                          |    |   |                      |   |        |                           |  |   | 8                                 |   |  |                          |        |   |  |   |     |   |  |   | 8       |  
|Comprehensive income (loss):                                |  |              |   |  |                          |     |   |                      |   |         |                           |  |   |                                   |   |  |                          |         |   |  |   |      |   |  |   |         |  
|Net loss                                                    |  |             |   |  |                          |    |   |                      |   |        |                           |  |   |                                  |   |  |                          | (54,162 | ) |  |   |     |   |  |   | (54,162 | )
|Securities valuation adjustment, net of tax                 |  |             |   |  |                          |    |   |                      |   |        |                           |  |   |                                  |   |  |                          |        |   |  |   | 25   |   |  |   | 25      |  
|Foreign currency translation, net of tax                    |  |             |   |  |                          |    |   |                      |   |        |                           |  |   |                                  |   |  |                          |        |   |  |   | (4   | ) |  |   | (4      | )
|Minimum pension liability adjustment, net of tax            |  |             |   |  |                          |    |   |                      |   |        |                           |  |   |                                  |   |  |                          |        |   |  |   | (108 | ) |  |   | (108    | )
|                                                            |  |              |   |  |                          |     |   |                      |   |         |                           |  |   |                                   |   |  |                          |         |   |  |   |      |   |  |   |         |  
|Comprehensive loss                                          |  |             |   |  |                          |    |   |                      |   |        |                           |  |   |                                  |   |  |                          |        |   |  |   |     |   |  |   | (54,249 | )
|                                                            |  |              |   |  |                          |     |   |                      |   |         |                           |  |   |                                   |   |  |                          |         |   |  |   |      |   |  |   |         |  
|Balance December 31, 2005                                   |  | 17,737,421   |   |  | $                        | 177 |   |                      | $ | 106,232 |                           |  | $ | (15                               | ) |  | $                        | (19,732 | ) |  | $ | (316 | ) |  | $ | 86,346  |  
|                                                            |  |              |   |  |                          |     |   |                      |   |         |                           |  |   |                                   |   |  |                          |         |   |  |   |      |   |  |   |         |  



See accompanying notes.



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##### Table of Contents

Boston Communications Group, Inc.



Consolidated Statements of Cash Flows

(In thousands)



|                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                          |  | Year Ended December 31, |        
|                                                                                                          |  | 2005                    |         |   | 2004 |   |         | 2003 | 
|CONTINUING OPERATIONS:                                                                                    |  |                         |         |   |      |   |         |      |  |   |         |  
|OPERATING ACTIVITIES                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income (loss) from continuing operations                                                              |  | $                       | (54,162 | ) |      | $ | 17,211  |      |  | $ | 16,135  |  
|Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operations: |  |                         |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                                             |  |                         | 21,348  |   |      |   | 22,332  |      |  |   | 19,336  |  
|Deferred income taxes                                                                                     |  |                         | (6,727  | ) |      |   | 1,044   |      |  |   | 3,894   |  
|Tax benefit from stock option exercises                                                                   |  |                         | 1,624   |   |      |   | 128     |      |  |   | 3,455   |  
|Stock-based compensation                                                                                  |  |                         | 8       |   |      |   |        |      |  |   |        |  
|Changes in operating assets and liabilities, net of acquisitions:                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|Accounts receivable, net                                                                                  |  |                         | 2,709   |   |      |   | 931     |      |  |   | (3,257  | )
|Prepaid expenses and other assets                                                                         |  |                         | (844    | ) |      |   | (587    | )    |  |   | (511    | )
|Accrued estimated loss from litigation                                                                    |  |                         | 64,300  |   |      |   |        |      |  |   |        |  
|Accounts payable and accrued expenses                                                                     |  |                         | 300     |   |      |   | (736    | )    |  |   | 626     |  
|Deferred revenue                                                                                          |  |                         | 696     |   |      |   | (35     | )    |  |   | (323    | )
|Other liabilities                                                                                         |  |                         | 992     |   |      |   | 895     |      |  |   | 632     |  
|Income taxes payable                                                                                      |  |                         | 304     |   |      |   | 831     |      |  |   | (1,152  | )
|                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operations                                                                           |  |                         | 30,548  |   |      |   | 42,014  |      |  |   | 38,835  |  
|                                                                                                          |  |                         |        
|INVESTING ACTIVITIES                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|Acquisition of businesses, net of cash acquired                                                           |  |                         | (6,634  | ) |      |   | (1,349  | )    |  |   |        |  
|Restricted cash                                                                                           |  |                         | (41,466 | ) |      |   |        |      |  |   |        |  
|Payment of earnout in acquired businesses                                                                 |  |                         | (902    | ) |      |   | (424    | )    |  |   |        |  
|Purchase of short-term investments                                                                        |  |                         | (45,496 | ) |      |   | (68,780 | )    |  |   | (45,969 | )
|Sale of short-term investments                                                                            |  |                         | 88,945  |   |      |   | 63,957  |      |  |   | 23,100  |  
|Purchase of long-term investments                                                                         |  |                         | (2,134  | ) |      |   | (2,740  | )    |  |   | (1,657  | )
|Purchase of property and equipment                                                                        |  |                         | (18,243 | ) |      |   | (18,983 | )    |  |   | (32,838 | )
|                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash used for investing activities                                                                    |  |                         | (25,930 | ) |      |   | (28,319 | )    |  |   | (57,364 | )
|                                                                                                          |  |                         |        
|FINANCING ACTIVITIES                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|Proceeds from exercise of stock options                                                                   |  |                         | 21      |   |      |   | 655     |      |  |   | 6,224   |  
|Proceeds from issuance of common stock                                                                    |  |                         | 495     |   |      |   | 628     |      |  |   | 684     |  
|Repurchase of common stock                                                                                |  |                         |        |   |      |   | (8,181  | )    |  |   |        |  
|                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used for) financing activities                                                      |  |                         | 516     |   |      |   | (6,898  | )    |  |   | 6,908   |  
|Net cash provided by (used for) by continuing operations                                                  |  |                         | 5,134   |   |      |   | 6,797   |      |  |   | (11,395 | )
|Discontinued operations:                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used for) operating activities of discontinued operations                           |  |                         |        |   |      |   | (290    | )    |  |   | 235     |  
|                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used for) discontinued operations                                                   |  |                         |        |   |      |   | (290    | )    |  |   | 235     |  
|                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Increase (decrease) in cash and cash equivalents                                                          |  |                         | 5,134   |   |      |   | 6,507   |      |  |   | (11,386 | )
|Cash and cash equivalents at beginning of year                                                            |  |                         | 9,467   |   |      |   | 2,960   |      |  |   | 14,346  |  
|                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                                                  |  | $                       | 14,601  |   |      | $ | 9,467   |      |  | $ | 2,960   |  
|                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  



See accompanying notes.



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##### Table of Contents

Boston Communications Group, Inc.



Notes to Consolidated Financial Statements

Years Ended December 31, 2005, 2004 and 2003



1.    DESCRIPTION OF BUSINESS



Boston Communications Group, Inc. (the Company) delivers
innovative products and services that enable mobile operators and Mobile Virtual Network Operators (MVNOs) worldwide to differentiate their offerings and increase market penetration while reducing costs. Founded in 1988, the Company is a leader in
identifying and addressing new market needs with proven solutions, including prepaid and postpaid billing, payments and access management.



2.    BASIS OF PRESENTATION



The accompanying consolidated financial statements have been prepared on the going concern basis in accordance with the accounting principles generally
accepted in the United States. This basis contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.



On May 20, 2005, a jury determined that bcgi and the other defendants infringed or are infringing two Freedom Wireless patents. The jury
damages and post-trial damages (through October 12, 2005) plus interest and court costs awarded by the District Court total approximately $165 million (bcgi and each carrier are jointly liable for specific amounts).



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 and may ultimately exceed the Companys ability to pay. The Company is appealing the judgment and could ultimately settle the litigation. However, there can be no assurance that the Company will prevail on appeal
or be able to settle, or be able to settle on acceptable terms. If the Company is unable to successfully manage its business during the appeals process, if the Companys appeal is unsuccessful or if the Company is unable to reach an acceptable
settlement agreement, then it may not be able to continue its ongoing operations or may need to seek protection under the U. S. Bankruptcy Code. See Note 11 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.



3.    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.



Reclassifications



Certain amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year
presentation. Specifically, certain facilities and administrative technology costs were reclassified from cost of services, engineering, research and development, and sales and marketing to general and administrative costs to better reflect what
areas these costs are currently supporting.



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##### Table of Contents

Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



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 principally on a per subscriber basis for 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, bcgi Professional Services, development projects and implementations, which are typically recognized ratably over the remaining life of the contract with the
respective wireless operator.



For 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 and payment 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 upon sell through to a
customer.



For multiple element arrangements, we determine fair
value of each undelivered element and we recognize revenue based on the residual value method. 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.



Information concerning principal geographic areas is as follows for the years
ended December 31 (in thousands):



|              |  |      |         |      |   |         |  |   |       
|------------- |  | ---- | ------- | ---- | - | ------- |  | - | ------
|              |  | 2005 |         | 2004 |   | 2003   
|Net revenues: |  |      |         |      |   |         |  |   |       
|United States |  | $    | 101,261 |      | $ | 103,654 |  | $ | 94,015
|Other         |  |      | 2,597   |      |   | 4,274   |  |   | 5,772 
|              |  |      |         |      |   |         |  |   |       
|Total         |  | $    | 103,858 |      | $ | 107,928 |  | $ | 99,787
|              |  |      |         |      |   |         |  |   |       



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 and restricted cash consist primarily of institutional money market funds.



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##### Table of Contents

Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



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. The components of the Companys available-for-sale securities were as follows as of December 31 (in thousands):



|                                    |  |      |        |      |   |       
|----------------------------------- |  | ---- | ------ | ---- | - | ------
|                                    |  | 2005 |        | 2004
|Bond mutual funds                   |  | $    |       |      | $ | 2,531 
|Corporate notes                     |  |      | 5,894  |      |   | 8,002 
|Municipal auction rate securities   |  |      | 18,855 |      |   | 47,464
|Annuities                           |  |      |       |      |   | 10,288
|                                    |  |      |        |      |   |       
|Total available for sale securities |  | $    | 24,749 |      | $ | 68,285
|                                    |  |      |        |      |   |       



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 and municipal auction rate securities maturing in less than thirty-six months.



Substantially all of the Companys short-term investments have contractual maturities of twelve months or less. Because of the short term to
maturity, amortized costs approximate fair values for all of these securities. Realized and unrealized gains and losses for 2005, 2004 and 2003 were not material.



In connection with the Freedom Wireless judgment discussed in Note 11 to the 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 December 31, 2005, this escrow amount (including interest earned to date) totaled $41.5 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.



Estimated Loss
from Litigation and Legal Costs



The Company accrues for
loss contingencies 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), 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.



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. The Company



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



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. 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.



Foreign Currency Translation



Results of operations for the Companys Indian and Israeli subsidiaries were translated into United States dollars using the average exchange rates
during the applicable periods. Assets and liabilities were translated into United States dollars using the exchange rate on the balance sheet date. Resulting translation adjustments were recorded in Accumulated Other Comprehensive Income (Loss) in
Shareholders Equity in the Companys consolidated financial statements.



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.



Comprehensive Income



Components of comprehensive income include net income (loss) and certain transactions that have generally been reported in the consolidated statements of
shareholders equity. Other comprehensive income (loss) is comprised of unrealized gains and losses on available-for-sale securities, foreign currency translation and minimum pension liability adjustments.



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 $41.5 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



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



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.



The Companys accounts receivable as of December 31, 2005 includes three customers whose balances represent 38%, 15% and 10% of net accounts receivable, respectively. The Companys accounts receivable
as of December 31, 2004 includes three customers whose balances represent 34%, 32% and 12% of net accounts receivable, respectively. During the years ended December 31, 2005, 2004 and 2003, the Companys top 10 customers accounted for
89%, 92% and 91% of its total revenues, respectively. The following table summarizes sales in excess of 10% of total revenues, as a percentage of total revenues, to major customers for the years ended December 31:



|                          |  |      |   |  |      |   |  |      |  
|------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                          |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Sprint Nextel Corporation |  | 38   | % |  | 14   | % |  |     | %
|Verizon Wireless          |  | 24   | % |  | 43   | % |  | 52   | %
|Cingular Wireless         |  | 14   | % |  | 22   | % |  | 24   | %



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, Software Development Costs and Costs Obtained for Internal Use



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 (98-1
costs). 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. Unamortized 98-1 costs were $1.6 million and $2.8 million at December 31, 2005 and 2004, respectively. The amounts
charged to expense for the amortization of 98-1 costs were $1.9 million, $3.1 million and $3.3 million in 2005, 2004 and 2003. No amounts were recorded as write downs to net realizable value.



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 (FAS 86 costs).
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



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



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. Unamortized FAS 86 costs were $5.2 million and $3.9 million at December 31, 2005 and 2004, respectively. The amount charged to expense for the
amortization of FAS 86 costs were $1.6 million, $548,000 and $113,000 in 2005, 2004 and 2003. No amounts were recorded as write downs to net realizable value.



Amortization of FAS 86 costs begins when the solution is made available for general release and amortization of 98-1 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. When indicators of impairment exist and the carrying value of intangibles and long-lived assets, other
than goodwill, may not be recoverable, the Company compares 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 Consolidated Statement of Operations. The estimated undiscounted cash flows for each of our long-lived assets could differ
materially from the actual results.



As a result of the Freedom
Wireless lawsuit judgment discussed in Note 11 to the Consolidated Financial Statements, the Company performed an asset impairment test for its long-lived assets as of June 30, 2005, September 30, 2005 and during the fourth quarter of
2005 and concluded that no impairment existed.



Goodwill and Other
Intangibles



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 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 each operating unit, which includes bcgiAccess Management, bcgiPayment, Real-Time
Billing and Voyager Billing with its carrying amount, including goodwill. Fair value for each operating unit is determined using a discounted cash flow valuation model, which requires judgments to be made by management regarding estimating future
cash flows, economic life and discount rates, among other assumptions. If the carrying amount of the operating units net assets exceeds the fair value of that operating unit, the Company would evaluate any impairment loss under the next step
of the impairment test. The estimated discounted cash flows for each operating unit could differ materially from the actual results.



The Company performed the annual impairment test in the fourth quarters of 2004 and 2003 and determined that goodwill was not impaired. As a result of the
Freedom Wireless lawsuit judgment discussed in Note 11 to



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##### Table of Contents

Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



the Consolidated Financial Statements, the Company performed an asset impairment test by operating unit for its goodwill and long-lived assets as of
June 30, 2005, September 30, 2005 and during the fourth quarter of 2005 and concluded that no impairment existed.



Additional cash consideration payments were paid to Infotech Solutions Corporation (ISC) (acquired in 2002) and accounted for as additional
goodwill. For 2005, ISC earned contingent consideration of $636,000 that was paid in the first quarter of 2006. For 2004, ISC earned contingent consideration of $590,000 that was paid in the first quarter of 2005. For 2003, ISC achieved certain
revenue targets resulting in contingent consideration paid in 2004 of $410,000.



The Companys intangible assets, which are assessed for impairment in accordance with FAS 144, acquired through business combinations consisted of (in thousands):



|                            |  |                      |       |                         |   |                      |  |                         |       |  |   |    
|--------------------------- |  | -------------------- | ----- | ----------------------- | - | -------------------- |  | ----------------------- | ----- |  | - | ---
|                            |  | December 31, 2005    |       | December 31, 2004      
|                            |  | Gross carryingamount |       | Accumulatedamortization |   | Gross carryingamount |  | Accumulatedamortization
|Acquired technology         |  | $                    | 3,580 |                         | $ | 1,089                |  | $                       | 2,700 |  | $ | 462
|Trademark (indefinite life) |  |                      | 50    |                         |   |                     |  |                         |      |  |   |   
|Non-compete agreements      |  |                      | 410   |                         |   | 56                   |  |                         |      |  |   |   
|Customer contracts          |  |                      | 560   |                         |   | 176                  |  |                         | 300   |  |   | 88 
|                            |  |                      |       |                         |   |                      |  |                         |       |  |   |    
|                            |  | $                    | 4,600 |                         | $ | 1,321                |  | $                       | 3,000 |  | $ | 550
|                            |  |                      |       |                         |   |                      |  |                         |       |  |   |    



The intangible assets
are being amortized over a four to seven year life and the intangible amortization expense was $771,000 and $270,000 for the years ended December 31, 2005 and 2004. Estimated amortization expense for the five subsequent years ended
December 31, is as follows (in thousands):



|            |  |   |    
|----------- |  | - | ---
|2006        |  | $ | 916
|2007        |  |   | 876
|2008        |  |   | 676
|2009        |  |   | 545
|2010        |  |   | 102
|There after |  | $ | 114



Goodwill activity for
the years ended December 31 consists of the following (in thousands):



|                             |  |      |        |      |   |      
|---------------------------- |  | ---- | ------ | ---- | - | -----
|                             |  | 2005 |        | 2004
|Goodwill  beginning of year |  | $    | 4,753  |      | $ | 4,177
|Acquisitions                 |  |      | 4,869  |      |   |     
|Increase related to earnout  |  |      | 636    |      |   | 576  
|                             |  |      |        |      |   |      
|Goodwill  end of year       |  | $    | 10,258 |      | $ | 4,753
|                             |  |      |        |      |   |      



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



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



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 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 $6.57 per share. Options to purchase 1,139,291 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 455,326. 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 $2.4 million of stock-based compensation for all options whose vesting was accelerated. The Company took this action to 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, the pro forma expense for the twelve months ended December 31, 2005 is substantially higher than normal levels.



Pro forma information regarding net income and earnings per share is required
by FAS 123 and has been determined as if the Company had accounted for its stock-based awards to employees under the fair value method of FAS 123. The fair value of the Companys stock-based awards to employees was estimated at the date of
grant using the Black-Scholes option valuation model using the following assumptions:



|                                               |  |             |  |             |  |            
|---------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                               |  | 2005        |  | 2004        |  | 2003       
|Risk-free interest rate                        |  | 3.39%-4.45% |  | 1.47%-3.85% |  | 1.59%-2.64%
|Weighted average fair value of options granted |  | $1.96       |  | $6.76       |  | $5.66      
|Expected life of options grants                |  | 3-5 years   |  | 3-5 years   |  | 3 years    
|Expected volatility of underlying stock        |  | 62%-134%    |  | 63%-87%     |  | 84-88%     
|Dividend yield                                 |  |            |  |            |  |           



The Black-Scholes
option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions,
including expected stock price volatility. Because the Companys options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value
estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its options.



For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. 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 for the years ended December 31 (in thousands,
except per-share information):



55



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



|                                                                                                                                    |  |      |         |   |      |   |        |  |   |       
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ |  | - | ------
|                                                                                                                                    |  | 2005 |         |   | 2004 |   | 2003  
|Net income (loss) as reported                                                                                                       |  | $    | (54,162 | ) |      | $ | 17,200 |  | $ | 16,144
|Add: Stock-based employee compensation expense included in reported net income (loss)                                               |  |      | 8       |   |      |   |       |  |   |      
|                                                                                                                                    |  |      |         |   |      |   |        |  |   |       
|Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of tax
benefit |  |      | 4,519   |   |      |   | 2,694  |  |   | 2,968 
|                                                                                                                                    |  |      |         |   |      |   |        |  |   |       
|Pro forma net income (loss)                                                                                                         |  | $    | (58,673 | ) |      | $ | 14,506 |  | $ | 13,176
|                                                                                                                                    |  |      |         |   |      |   |        |  |   |       
|Basic net income (loss) per share:                                                                                                  |  |      |         |   |      |   |        |  |   |       
|Net income (loss) as reported                                                                                                       |  | $    | (3.07   | ) |      | $ | 0.96   |  | $ | 0.90  
|                                                                                                                                    |  |      |         |   |      |   |        |  |   |       
|Pro forma net income (loss)                                                                                                         |  | $    | (3.32   | ) |      | $ | 0.81   |  | $ | 0.73  
|                                                                                                                                    |  |      |         |   |      |   |        |  |   |       
|Diluted net income (loss) per share:                                                                                                |  |      |         |   |      |   |        |  |   |       
|Net income (loss) as reported                                                                                                       |  | $    | (3.07   | ) |      | $ | 0.94   |  | $ | 0.87  
|                                                                                                                                    |  |      |         |   |      |   |        |  |   |       
|Pro forma net income (loss)                                                                                                         |  | $    | (3.32   | ) |      | $ | 0.79   |  | $ | 0.72  
|                                                                                                                                    |  |      |         |   |      |   |        |  |   |       



Basic and Diluted Net Income 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, which comprise stock options. 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. Accordingly, for the years ended December 31, 2005, 2004 and 2003 options to purchase 3,945,000, 1,293,000 and 241,900 shares, respectively, of Common Stock have been excluded from the
computation.



The following table sets forth a reconciliation
of basic and diluted shares (in thousands) for the years ended December 31:



|                                             |  |        |  |        |  |       
|-------------------------------------------- |  | ------ |  | ------ |  | ------
|                                             |  | 2005   |  | 2004   |  | 2003  
|Denominator for basic net income per share   |  | 17,663 |  | 17,918 |  | 17,984
|Effect of dilutive employee stock options    |  |       |  | 338    |  | 649   
|                                             |  |        |  |        |  |       
|Denominator for diluted net income per share |  | 17,663 |  | 18,256 |  | 18,633
|                                             |  |        |  |        |  |       



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.



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



The Company expects to adopt Statement No. 123(R) on January 1, 2006 using the modified
prospective transition method and therefore will not restate prior periods.



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. The impact of adopting Statement No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future and our stock price at the time of grant, although it will have
no impact on the Companys overall financial position. Non-cash expenses related to FAS 123(R) for options that have been granted and that are not vested as of December 31, 2005 are anticipated to be immaterial in 2006. 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) per share in Note 3 to the Companys
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.



While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock
options), the amount of operating cash flows recognized in prior periods for such excess tax deductions was $1.6 million, $128,000, and $3.5 million in 2005, 2004 and 2003, respectively.



In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 154,Accounting Changes and Error Corrections (SFAS 154) which supersedes APB Opinion No. 20,Accounting Changes and SFAS No. 3,Reporting Accounting Changes in Interim Financial
Statements. SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in
accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of
an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retroactively. Therefore, the reporting of a correction of an error by restating previously
issued financial statements is also addressed by this Statement. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of
SFAS 154 to have a material impact on our consolidated results of operations and financial condition.



In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations  an
interpretation of FASB Statement No. 143. FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation
to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is
unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of
the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of
fiscal years ending after December 15, 2005. We are currently analyzing FIN 47 and believe the adoption of FIN 47 will not have a material impact on our financial condition, results of operations or liquidity.



57



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



4.    ACQUISITIONS



| | (a) |  | Airada Networks, Inc. and Airada Networks Private Limited
| | --- |  | ---------------------------------------------------------



In November 2004, the Company acquired the assets of Airada Networks, Inc. and its Indian subsidiary Airada Networks Private Limited (Airada), a
privately-held provider of payment management software solutions for the wireless marketplace, for $1.3 million in cash. Additional contingent cash consideration may be paid to Airada based on attaining certain defined annual revenue targets and
other metrics through 2007, most of which will be accounted for as goodwill. For 2005, Airada earned contingent consideration of $323,000 of which $311,000 was paid in 2005 and all of which was accrued in purchase accounting. The purchase price of
the acquisition was allocated to identifiable assets based on fair values as of the date of acquisition. 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. Identifiable intangible assets consist of acquired technology and customer contracts and are being amortized on a straight-line
basis over five years. The results of operations of Airada are included in the Companys Consolidated Statements of Operations from the date of acquisition.



Pro forma information including the results of Airada has not been presented as Airadas operations were not material.



| | (b) |  | PureSight, Inc. and PureSight LTD.
| | --- |  | ----------------------------------



In June 2005, the Company acquired the assets and certain liabilities of PureSight, Inc. and its Israeli subsidiary, PureSight LTD. (PureSight), a
privately-held 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, 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 Consolidated Statement of Operations from the date of acquisition. The allocation of the purchase price to the fair value of the identifiable net assets acquired and the excess purchase price to goodwill
is as follows (in thousands):



|                                      |  |   |        |  
|------------------------------------- |  | - | ------ | -
|Purchase price                        |  | $ | 6,766  |  
|Acquisition costs                     |  |   | 834    |  
|VAT Receivable                        |  |   | (966   | )
|                                      |  |   |        |  
|Total price paid                      |  | $ | 6,634  |  
|                                      |  |   |        |  
|Allocation of Purchase Price:         |  |   |        |  
|Accounts receivable, net              |  |   | 180    |  
|Property and equipment                |  |   | 58     |  
|Other assets                          |  |   | 27     |  
|Accrued expenses and deferred revenue |  |   | (100   | )
|Purchased Technology                  |  |   | 1,340  |  
|Customer contracts                    |  |   | 260    |  
|Goodwill                              |  |   | 4,869  |  
|                                      |  |   |        |  
|                                      |  |   | $6,634 |  
|                                      |  |   |        |  



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



Pro forma information including the results of PureSight has not been presented as PureSights
operations were not material.



5.    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 which is recorded in other assets on the Companys
Consolidated Balance Sheet.



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. The Company performed an
asset impairment test for the Notes as of December 31, 2005 and concluded that no impairment existed.



6.    ACCRUED EXPENSES



Accrued expenses consist of the following at December 31 (in thousands):



|                             |  |      |        |      |   |       
|---------------------------- |  | ---- | ------ | ---- | - | ------
|                             |  | 2005 |        | 2004
|Payroll and related benefits |  | $    | 5,799  |      | $ | 4,153 
|Equipment costs              |  |      | 577    |      |   | 2,288 
|Legal fees                   |  |      | 1,894  |      |   | 1,447 
|Contingent consideration     |  |      | 716    |      |   | 1,054 
|Other                        |  |      | 3,258  |      |   | 4,444 
|                             |  |      |        |      |   |       
|Total accrued expenses       |  | $    | 12,244 |      | $ | 13,386
|                             |  |      |        |      |   |       



7.    ACCUMULATED OTHER COMPREHENSIVE LOSS



The components of accumulated other comprehensive loss are summarized below (in thousands).



|                                |  |                                           |      |   |                                        |   |    |                                               |  |   |                                         |   |  |   |      |  
|------------------------------- |  | ----------------------------------------- | ---- | - | -------------------------------------- | - | -- | --------------------------------------------- |  | - | --------------------------------------- | - |  | - | ---- | -
|                                |  | Securitiesvaluation adjustment,net of tax |      |   | Foreigncurrency translation,net of tax |   |    | Minimumpensionliability adjustment,net of tax |  |   | Totalaccumulated othercomprehensiveloss |  
|Balance as of December 31, 2002 |  |                                           |     |   |                                        |   |   |                                               |  |   |                                        |   |  |   |     |  
|Current-period change           |  |                                           | (45  | ) |                                        |   |   |                                               |  |   |                                        |   |  |   | (45  | )
|                                |  |                                           |      |   |                                        |   |    |                                               |  |   |                                         |   |  |   |      |  
|Balance as of December 31, 2003 |  |                                           | (45  | ) |                                        |   |   |                                               |  |   |                                        |   |  |   | (45  | )
|Current period change           |  |                                           | (90  | ) |                                        |   |   |                                               |  |   | (94                                     | ) |  |   | (184 | )
|                                |  |                                           |      |   |                                        |   |    |                                               |  |   |                                         |   |  |   |      |  
|Balance as of December 31, 2004 |  | $                                         | (135 | ) |                                        | $ |   |                                               |  | $ | (94                                     | ) |  | $ | (229 | )
|Current period change           |  |                                           | 25   |   |                                        |   | (4 | )                                             |  |   | (108                                    | ) |  |   | (87  | )
|                                |  |                                           |      |   |                                        |   |    |                                               |  |   |                                         |   |  |   |      |  
|Balance as of December 31, 2005 |  | $                                         | (110 | ) |                                        | $ | (4 | )                                             |  | $ | (202                                    | ) |  | $ | (316 | )
|                                |  |                                           |      |   |                                        |   |    |                                               |  |   |                                         |   |  |   |      |  



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



8.    INCOME TAXES



Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax assets and liabilities are as follows at December 31 (in thousands):



|                                                                                         |  |      |         |   |      |   |        |  
|---------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                                                                         |  | 2005 |         |   | 2004 |  
|Deferred tax assets:                                                                     |  |      |         |   |      |   |        |  
|Estimated loss on litigation                                                             |  | $    | 25,720  |   |      | $ |       |  
|Allowance for doubtful accounts                                                          |  |      | 380     |   |      |   | 121    |  
|Deferred compensation                                                                    |  |      | 1,002   |   |      |   | 610    |  
|Accrued legal                                                                            |  |      | 780     |   |      |   |       |  
|Accrued expenses and other                                                               |  |      | 1,259   |   |      |   | 508    |  
|Alternative minimum credit                                                               |  |      | 522     |   |      |   |       |  
|Valuation allowance                                                                      |  |      | (20,837 | ) |      |   |       |  
|                                                                                         |  |      |         |   |      |   |        |  
|Total deferred tax assets                                                                |  |      | 8,826   |   |      |   | 1,239  |  
|                                                                                         |  |      |         |   |      |   |        |  
|Deferred tax liabilities:                                                                |  |      |         |   |      |   |        |  
|Tax deprecation and amortization in excess of book depreciation and amortization expense |  |      | (7,464  | ) |      |   | (7,966 | )
|Prepaid expenses and other                                                               |  |      | (1,362  | ) |      |   |       |  
|                                                                                         |  |      |         |   |      |   |        |  
|Total deferred tax liabilities                                                           |  |      | (8,826  | ) |      |   | (7,966 | )
|                                                                                         |  |      |         |   |      |   |        |  
|Net deferred tax asset (liability)                                                       |  | $    |        |   |      | $ | (6,727 | )
|                                                                                         |  |      |         |   |      |   |        |  



The Company has
provided a valuation allowance against its gross deferred tax asset in 2005 as realization of the tax benefits associated with certain of the temporary differences is uncertain.



The provision for income taxes consists of the following for the years ended December 31 (in thousands):



|                           |  |      |        |   |      |   |        |  |   |      
|-------------------------- |  | ---- | ------ | - | ---- | - | ------ |  | - | -----
|                           |  | 2005 |        |   | 2004 |   | 2003  
|Current:                   |  |      |        |   |      |   |        |  |   |      
|Federal                    |  | $    | 1,688  |   |      | $ | 7,706  |  | $ | 5,063
|State                      |  |      | 804    |   |      |   | 1,696  |  |   | 944  
|                           |  |      |        |   |      |   |        |  |   |      
|Total current              |  |      | 2,492  |   |      |   | 9,402  |  |   | 6,007
|Deferred:                  |  |      |        |   |      |   |        |  |   |      
|Federal                    |  |      | (5,886 | ) |      |   | 837    |  |   | 3,310
|State                      |  |      | (841   | ) |      |   | 147    |  |   | 584  
|                           |  |      |        |   |      |   |        |  |   |      
|Total deferred             |  |      | (6,727 | ) |      |   | 984    |  |   | 3,894
|                           |  |      |        |   |      |   |        |  |   |      
|Total income tax provision |  | $    | (4,235 | ) |      | $ | 10,386 |  | $ | 9,901
|                           |  |      |        |   |      |   |        |  |   |      



60



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



A reconciliation of the income tax provision (benefit) at the statutory rate to the income tax
provision as reported is as follows for the years ended December 31 (in thousands):



|                                              |  |      |         |   |      |   |        |      |  |   |       |  
|--------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                              |  | 2005 |         |   | 2004 |   |        | 2003 | 
|Federal provision (benefit) at statutory rate |  | $    | (19,855 | ) |      | $ | 9,662  |      |  | $ | 9,116 |  
|State income provision, net of federal taxes  |  |      | (4,347  | ) |      |   | 1,052  |      |  |   | 1,448 |  
|Permanent differences                         |  |      | (250    | ) |      |   | (151   | )    |  |   | (63   | )
|Recognition of NOLs not previously benefited |  |      |        |   |      |   |       |      |  |   | (323  | )
|Research credits                              |  |      | (620    | ) |      |   | (234   | )    |  |   | (22   | )
|Valuation allowance                           |  |      | 20,837  |   |      |   |       |      |  |   |      |  
|Other                                         |  |      |        |   |      |   | 57     |      |  |   | (255  | )
|                                              |  |      |         |   |      |   |        |      |  |   |       |  
|Total income tax provision (benefit)          |  | $    | (4,235  | ) |      | $ | 10,386 |      |  | $ | 9,901 |  
|                                              |  |      |         |   |      |   |        |      |  |   |       |  



Income taxes paid were
$2.4 million in 2005, $8.7 million in 2004 and $3.7 million in 2003.



9.    CAPITAL STOCK



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
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.



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



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 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



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



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.



Preferred Stock



The Board of Directors is authorized, subject to certain
limitations prescribed by law, without further shareholder approval, to issue from time to time up to an aggregate of 1,965,000 shares of Preferred Stock in one or more series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption price or
prices, liquidation preferences and the number of shares constituting any series or designations of such series. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change of control of the Company. Currently,
there are no shares of Preferred Stock issued and outstanding. The Company has no present plans to issue any shares of Preferred Stock.



Stock Option Plans



The Companys 2005 Stock Incentive Plan (the Incentive Plan) was adopted by the Board of Directors and approved by its stockholders in
2005. The Incentive Plan provides for the grants of options, restricted stock



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



awards, stock appreciation rights and other stock-based awards to employees, officers, directors and consultants and advisors to the Company and its
subsidiaries. The Incentive Plan replaced the Companys prior Stock Option Plans (the Option Plans), under which no further awards may be granted although options continue to remain outstanding until cancelled or exercised. A total
of 1,500,000 options were approved under the Incentive Plan in addition to 600,000 shares that may also be issued under the Incentive Plan which expire, terminate, or are otherwise surrendered, canceled or forfeited, under the Option Plans.
Additionally, 50,000 shares of restricted stock may be issued under the Incentive Plan and shall be counted against the 1,500,000 option limit as two and four-tenths shares for each share of common stock issued upon settlement of such awards.



Under the Incentive Plan, the Company may grant options that
are intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (Incentive Stock Options), or options not intended to qualify as incentive stock options
(Non-Statutory Options). Incentive stock options may only be granted to the Companys employees. The maximum number of shares with respect to which options or other awards may be granted to any employee under the Incentive Plan
shall not exceed 100,000 shares of Common Stock during any calendar year. All options granted have 10-year terms and generally vest and become exercisable over one to three years.



The Company granted 9,276 shares of restricted stock in 2005 to certain officers and employees at par value. The restricted
shares had a weighted average grant date fair value of $2.62 per share and a vesting period of three years.



Stock option activity information is as follows:



|                              |  |           |   |      |                                |      |         |           |   |                              |   |         |  |           |                              |  |   |      
|----------------------------- |  | --------- | - | ---- | ------------------------------ | ---- | ------- | --------- | - | ---------------------------- | - | ------- |  | --------- | ---------------------------- |  | - | -----
|                              |  | 2005      |   | 2004 |                                | 2003
|                              |  | Options   |   |      | Weighted Average ExercisePrice |      | Options |           |   | WeightedAverageExercisePrice |   | Options |  |           | WeightedAverageExercisePrice
|Outstandingbeginning of year |  | 3,126,279 |   |      | $                              | 9.51 |         | 2,679,257 |   |                              | $ | 9.25    |  | 2,852,761 |                              |  | $ | 8.38 
|Granted                       |  | 962,160   |   |      |                                | 3.51 |         | 629,380   |   |                              |   | 10.32   |  | 675,010   |                              |  |   | 11.18
|Exercised                     |  | (3,710    | ) |      |                                | 5.88 |         | (88,912   | ) |                              |   | 7.26    |  | (806,281  | )                            |  |   | 7.72 
|Canceled                      |  | (139,825  | ) |      |                                | 9.57 |         | (93,446   | ) |                              |   | 9.79    |  | (42,233   | )                            |  |   | 10.63
|                              |  |           |   |      |                                |      |         |           |   |                              |   |         |  |           |                              |  |   |      
|Outstandingend of year       |  | 3,944,904 |   |      | $                              | 8.04 |         | 3,126,279 |   |                              | $ | 9.51    |  | 2,679,257 |                              |  | $ | 9.25 
|                              |  |           |   |      |                                |      |         |           |   |                              |   |         |  |           |                              |  |   |      



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



The following table summarizes the options outstanding and exercisable as of December 31, 2005:





|                         |  |                 |  |                               |       |                                                    |      |                 |           |                               |   |      
|------------------------ |  | --------------- |  | ----------------------------- | ----- | -------------------------------------------------- | ---- | --------------- | --------- | ----------------------------- | - | -----
|                         |  |                 |  | Options Outstanding           |       | Options Exercisable                               
|Range of Exercise
Prices |  | Number ofShares |  | WeightedAverageExercise Price |       | WeightedAverageRemainingContractualLife (In years) |      | Number ofShares |           | WeightedAverageExercise Price
|$  0.93- $  1.73         |  | 565,860         |  | $                             | 1.63  |                                                    | 9.66 |                 | 15,000    |                               | $ | 1.12 
|1.88-     6.88           |  | 494,793         |  |                               | 5.33  |                                                    | 5.24 |                 | 457,443   |                               |   | 5.60 
|7.00-     7.29           |  | 641,592         |  |                               | 7.15  |                                                    | 5.59 |                 | 641,592   |                               |   | 7.15 
|7.31-     7.92           |  | 503,939         |  |                               | 7.71  |                                                    | 6.52 |                 | 503,939   |                               |   | 7.71 
|7.94-     9.13           |  | 497,585         |  |                               | 8.77  |                                                    | 6.38 |                 | 497,585   |                               |   | 8.77 
|9.22-   11.72            |  | 494,283         |  |                               | 10.96 |                                                    | 7.53 |                 | 494,283   |                               |   | 10.96
|11.82-   13.03           |  | 523,952         |  |                               | 12.72 |                                                    | 6.60 |                 | 523,952   |                               |   | 12.72
|13.05-   27.13           |  | 222,900         |  |                               | 14.61 |                                                    | 2.91 |                 | 222,900   |                               |   | 14.61
|                         |  |                 |  |                               |       |                                                    |      |                 |           |                               |   |      
|$  0.93- $27.13          |  | 3,944,904       |  | $                             | 8.04  |                                                    | 6.57 |                 | 3,356,694 |                               | $ | 9.16 
|                         |  |                 |  |                               |       |                                                    |      |                 |           |                               |   |      



There were 929,858
options available for grant of which up to 40,724 shares of restricted stock may be granted at December 31, 2005. There were 2,119,697 and 1,569,150 options exercisable as of December 31, 2004 and 2003, respectively.



Employee Stock Purchase Plan



The Companys 2004 Employee Stock Purchase Plan (the Purchase
Plan) was adopted by the Board of Directors and approved by the shareholders of the Company in June 2004. The Purchase Plan authorizes the issuance of up to a total of 357,531 shares of Common Stock to participating employees. As of
December 31, 2005, there were 214,341 shares available for grant under the Purchase Plan.



All of the Companys full-time employees, who have been employed for a minimum of three months, including directors of the Company who are employees, are eligible to participate in the Purchase Plan. On the first
day of a designated payroll deduction period (the Offering Period), the Company will grant to each eligible employee who has elected to participate in the Purchase Plan an option to purchase shares of Common Stock as follows: the
employee may authorize an amount (up to a maximum of 10% of such employees regular pay) to be deducted by the Company from such pay during the Offering Period. On the last day of the Offering Period, the employee is deemed to have exercised
the option, at the option exercise price, to the extent of accumulated payroll deductions. Under the terms of the Purchase Plan, the option price is an amount equal to 85% of the fair market value per share of the Common Stock on either the first
day or the last day of the Offering Period, whichever is lower. In no event may an employee purchase in any one Offering Period a number of shares which has an aggregate market value (determined on either the first or the last day of the Offering
Period) in excess of $12,500. The Compensation Committee may, at its discretion, choose an Offering Period of 12 months or less for each of the Offerings and choose a different Offering Period for each Offering.



10.    RETIREMENT PLANS



Defined Benefit Plan



In 2002, the Company implemented a defined benefit retirement plan (the Plan) for certain executives.
Contributions are based on periodic actuarial valuations and are charged to the Consolidated Statement of



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



Income on a systematic basis over the expected average remaining service lives of the executives as prescribed by Statement of Financial Accounting Standards
No. 87, Employers Accounting for Pensions (FAS 87). The Companys funding policy is to make annual contributions to the extent such contributions are tax deductible as actuarially determined. The benefits under the
defined benefit plan are based on years of service and compensation.



The table below reflects the status of the Plan as of December 31 (in thousands):



|                                                                       |  |      |        |   |      |    |        |      |  |    |       |  
|---------------------------------------------------------------------- |  | ---- | ------ | - | ---- | -- | ------ | ---- |  | -- | ----- | -
|                                                                       |  | 2005 |        |   | 2004 |    |        | 2003 | 
|Change in benefit obligation                                           |  |      |        |   |      |    |        |      |  |    |       |  
|Benefit obligation at beginning of year                                |  | $    | 4,985  |   |      | $  | 3,611  |      |  | $  | 2,093 |  
|Service cost                                                           |  |      | 513    |   |      |    | 412    |      |  |    | 366   |  
|Interest cost                                                          |  |      | 287    |   |      |    | 217    |      |  |    | 178   |  
|Actuarial loss                                                         |  |      | 377    |   |      |    | 745    |      |  |    | 974   |  
|Unrecognized net prior service cost                                    |  |      |       |   |      |    |       |      |  |    |      |  
|                                                                       |  |      |        |   |      |    |        |      |  |    |       |  
|Benefit obligation at end of year                                      |  | $    | 6,162  |   |      | $  | 4,985  |      |  | $  | 3,611 |  
|                                                                       |  |      |        |   |      |    |        |      |  |    |       |  
|Funded Status                                                          |  | ($   | 6,162  | ) |      | ($ | 4,985  | )    |  | ($ | 3,611 | )
|Unrecognized net actuarial loss                                        |  |      | 1,957  |   |      |    | 1,663  |      |  |    | 1,090 |  
|Unrecognized net prior service cost                                    |  |      | 1,700  |   |      |    | 1,795  |      |  |    | 1,889 |  
|                                                                       |  |      |        |   |      |    |        |      |  |    |       |  
|Net liability recognized                                               |  | ($   | 2,505  | ) |      | ($ | 1,527  | )    |  | ($ | 632   | )
|                                                                       |  |      |        |   |      |    |        |      |  |    |       |  
|Amounts recognized in the Consolidated Balance Sheets consist of:      |  |      |        |   |      |    |        |      |  |    |       |  
|Accrued benefit liability                                              |  | ($   | 4,468  | ) |      | ($ | 3,476  | )    |  | ($ | 632   | )
|Prepaid asset                                                          |  |      |       |   |      |    |       |      |  |    |      |  
|Other comprehensive loss                                               |  |      | 263    |   |      |    | 154    |      |  |    |      |  
|Intangible pension asset included in other assets on the balance sheet |  |      | 1,700  |   |      |    | 1,795  |      |  |    |      |  
|Net amount recognized                                                  |  | $    | (2,505 | ) |      | $  | (1,527 | )    |  | $  |      |  
|                                                                       |  |      |        |   |      |    |        |      |  |    |       |  



The components of net
periodic benefit costs for the years ended December 31 (in thousands):



|                                                                                            |  |      |     |      |   |      |  |   |    
|------------------------------------------------------------------------------------------- |  | ---- | --- | ---- | - | ---- |  | - | ---
|                                                                                            |  | 2005 |     | 2004 |   | 2003
|Components of net periodic benefit costs                                                    |  |      |     |      |   |      |  |   |    
|Service cost                                                                                |  | $    | 513 |      | $ | 412  |  | $ | 366
|Interest cost                                                                               |  |      | 287 |      |   | 217  |  |   | 178
|Amortization of unrecognized items                                                          |  |      | 178 |      |   | 266  |  |   | 33 
|                                                                                            |  |      |     |      |   |      |  |   |    
|Net periodic benefit costs                                                                  |  | $    | 978 |      | $ | 895  |  | $ | 577
|                                                                                            |  |      |     |      |   |      |  |   |    
|Other comprehensive loss attributable to change in additional minimum liability recognition |  | $    | 108 |      | $ | 94   |  | $ |   
|                                                                                            |  |      |     |      |   |      |  |   |    



The projected benefit
obligation and accumulated benefit obligation in excess of plan assets at December 31, 2005 was $6.2 million and $4.5 million, respectively. The Plan assets are not qualified assets under FAS 87, and as a result, are accounted for outside of
the Plan and are recorded in the Companys balance sheet as long-term investments. The long-term investments are Company-owned life insurance policies, to which the Company intends to contribute annually.



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



In 2003, the Company purchased life insurance as the investment vehicle to fund the pension benefits.
Because sponsors are not entitled to tax deductions for any contributions to a nonqualified plan, the plan is considered unfunded for purposes of FAS 87, which means the net periodic pension cost for the plan has no components for return on plan
assets or deferred asset gains or losses. The Company has purchased life insurance policies to make up for some of the tax disadvantages to sponsors of nonqualified plans. However, the cash surrender value of a key-executive life insurance policy
owned by the Company does not represent a plan asset for pension accounting or disclosure purposes. Rather, the Company is accounting for this business-owned life insurance in accordance with FASB Technical Bulletin No. 85-4, Accounting
for Purchases of Life Insurance, and separately accounts for the pension cost and liability under FAS 87.



The weighted average assumptions used in the accounting for the Plan are as follows:



|                              |  |      |   |  |      |   |  |      |  
|----------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                              |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Discount rate                 |  | 5.50 | % |  | 6.00 | % |  | 6.00 | %
|Rate of compensation increase |  | 3.00 | % |  | 3.00 | % |  | 3.00 | %
|                              |  |      |   |  |      |   |  |      |  



Expected 2006 Company
contributions and estimated future benefit payments are as follows (in thousands):



|                               |  |   |      
|------------------------------ |  | - | -----
|Expected Company Contributions |  |   |      
|2006                           |  | $ | 1,517
|Expected Benefit Payments      |  |   |      
|2006                           |  | $ |     
|2007                           |  |   |     
|2008                           |  |   | 126  
|2009                           |  |   | 216  
|2010                           |  |   | 263  
|2011-15                        |  | $ | 1,528



Defined Contribution Plan



The Employee Savings and Retirement Plan is qualified
under Sections 401(a) and (k) of the Internal Revenue Code. The Company contributes a percentage of each participating employees salary deferral contributions. The Companys matching contributions are invested in various mutual funds
and become 25 percent vested at the end of an employees second year of service, and vest 25 percent per year of service thereafter until becoming fully vested at the end of five years of service. For the years ended December 31, 2005,
2004 and 2003, the Companys matching contributions under this plan were $278,000, $281,000 and $233,000, respectively.



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



11.    COMMITMENTS AND CONTINGENCIES



Lease obligations and purchase commitments



The Company has purchase obligations and non-cancelable operating lease
commitments for office space and equipment, many of which are renewable at its option. Rent expense was approximately $2.0 million in 2005, $1.9 million in 2004 and $2.1 million in 2003. Future payments due under non-cancelable operating leases are
as follows for the years ended December 31 (in thousands):



|                   |  |                  |      
|------------------ |  | ---------------- | -----
|                   |  | Operating Leases
|2006               |  | $                | 1,416
|2007               |  |                  | 750  
|2008               |  |                  | 502  
|2009               |  |                  | 76   
|                   |  |                  |      
|Total payments due |  | $                | 2,744
|                   |  |                  |      



Purchase commitments
totaled $4.3 million as of December 31, 2005. These commitments related principally to obligations to purchase equipment and telecommunications services from various vendors.



Legal



Freedom Wireless Patent Infringement Lawsuit



Jury Trial in District Court



In March 2000, Freedom Wireless, Inc. filed a suit against the Company 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). In February 2005, Verizon Wireless 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. On May 20, 2005, a jury determined that the Company and the remaining
defendants infringed or are infringing two Freedom Wireless patents. The jury damages and post-trial damages through October 12, 2005, plus interest and court costs awarded by the District Court totaled approximately $165 million (the Company
and each carrier are jointly liable for specific amounts). The Company has an obligation to indemnify the other defendants for damages they may incur with respect to any infringement by our technology.



In July 2005, the Company entered into an agreement with Cingular Wireless
whereby the Company 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 totaling $191 million, the amount required by the District
Court to stay the execution 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 agreement does not alter the Companys obligation to indemnify Cingular. At December 31, 2005, this escrow amount (including interest earned to date) totaled $41.5 million and is recorded as
restricted cash.



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



Injunction



On October 12, 2005 the District Court granted injunctive relief (the Injunction) to Freedom Wireless providing a 90 day grace period
during which the Company could still provide its services to carriers. Subsequent to the 90-day grace period, the District Court ordered that the Company must stop providing prepaid services to all of its Real-Time Billing customers, other than
those who have a license with Freedom (Verizon Wireless is currently the Companys only customer with such a license). The Company filed a motion to clarify the order or stay the Injunction pending appeal which was denied by the District Court.
The Company filed an emergency appeal to stay the Injunction with the U.S. Court of Appeals for the Federal Circuit (Appeals Court).



On December 15, 2005, the Appeals Court stayed the Injunction previously granted by the District Court. Therefore, the Companys carrier
customers, including co-defendant Cingular Wireless, may continue to use the Companys Real-Time Billing service during the appeals process. In addition, the Appeals Court did not require the Company and/or the other defendants to post
additional security for any potential damages that may accrue during the appeals process.



Appeal of District Court Judgment



In October 2005, the Company filed to appeal the District Court judgment with the Appeals Court. The Companys principal appeal brief is expected to be filed in March, 2006 and the appeal process is expected to
continue into 2007. If the Companys appeal is unsuccessful or if the Company cannot successfully manage its business during the appeal process, the Company may not be able to continue its ongoing operations or may need to seek protection under
the U. S. Bankruptcy Code.



Freedom Wireless Patent Infringement Lawsuits
Against bcgi, Sprint Nextel Corporation 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 the Company and Sprint Nextel Corporation, and the second against the Company, Alltel
Corporation and several other of the Companys carrier customers. These lawsuits allege that the Company and each of the named carrier customers infringe the same two patents related to the current judgment held by Freedom Wireless, Inc. 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 the Company does not infringe these patents and that the patents are invalid.



Accounting



While the
Company continues to believe that it does not infringe these patents and believes that the patents are invalid and that the size of the damages awarded bears no relationship to a reasonable royalty that bcgior any company would have paid for
a license of the patents, 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
managements assessment of the potential outcomes of the litigation 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 litigation. However, the actual loss, if any, may be significantly higher or lower than the amount accrued
and could be higher than the current judgment of $165 million, which exceeds the Companys ability to pay.



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



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 Chief Executive Officer and the Chief Financial Officer on behalf of persons who purchased the Companys 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 has responded to the amended complaint and filed for a motion to dismiss the suit. The Company intends to
contest the lawsuit vigorously and believe that bcgiand 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 our Prepaid Wireless
Services Agreement for that portion of any liability specific to Verizon Wireless prepaid offered through use of the Companys services. The complaint does not specify damages as it relates to Verizon Wireless prepaid. The Company has provided
documents and deposition testimony in response to a subpoena that has been served on the Company. 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 the Company will prevail. However, the Company does not believe that these matters (other than as disclosed) will have a material adverse effect on the Companys consolidated financial
position, although an adverse outcome of any of these matters could have a material adverse effect on the Companys 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



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



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 lawsuits and the Verizon Indemnification Complaint.



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.



12.    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 are not covered under traditional roaming agreements by arranging payment for roaming calls. The Prepaid Systems solution 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 and $3.4 million for the years ended December 31, 2004 and 2003, respectively.



In 2005, the Company realigned its operating units to consist of bcgi
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, primarily to determine worldwide product direction,
pricing and other important operating unit decisions, but without profit and loss responsibility for a large portion of the expenses of each unit. The Chief Operating Officer predominantly utilizes consolidated or departmental cost data



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Boston Communications Group, Inc.



Notes to Consolidated Financial Statements(Continued)

Years Ended December 31, 2005, 2004 and 2003



rather than operating unit data to make critical financial decisions. Revenues for each business are recorded and tracked separately. Most of the
Companys revenues are generated by Real-Time Billing. Other revenues include revenues from products other than Real-Time Billing. The specific break-down of significant revenues is as follows:



|                   |  |                                    |         |                       |      |   |       |      |                       |  |     |       |  |                       |        |  |     |  
|------------------ |  | ---------------------------------- | ------- | --------------------- | ---- | - | ----- | ---- | --------------------- |  | --- | ----- |  | --------------------- | ------ |  | --- | -
|                   |  | Twelve months ended December 31st, |        
|                   |  | 2005                               |         |                       | 2004 |   |       | 2003 |                      
|                   |  | Total                              |         | % of TotalNetRevenues |      |   | Total |      | % of TotalNetRevenues |  |     | Total |  | % of TotalNetRevenues |       
|Real-Time Billing  |  | $                                  | 94,089  |                       | 91   | % |       | $    | 102,373               |  | 95  | %     |  | $                     | 95,798 |  | 96  | %
|Other              |  |                                    | 9,769   |                       | 9    | % |       |      | 5,554                 |  | 5   | %     |  |                       | 3,989  |  | 4   | %
|Total net revenues |  | $                                  | 103,858 |                       | 100  | % |       | $    | 107,927               |  | 100 | %     |  | $                     | 99,787 |  | 100 | %



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Shareholders

Boston Communications Group, Inc.:



We have audited the accompanying consolidated balance sheets of Boston Communications Group, Inc. as of December 31,
2005 and 2004, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audit also included the financial statement schedule listed
in the Index in Item 15(a). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.



We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Boston Communications Group, Inc. at December 31, 2005 and 2004, and the
consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



The accompanying consolidated financial statements have been prepared assuming that Boston Communications Group, Inc. will
continue as a going concern. As more fully described in Note 11, the Company has received a judgment in a lawsuit filed by Freedom Wireless and has been assessed damages in excess of the Companys ability to pay. Although the decision is being
appealed, and there continue to be various legal and other alternatives available to the Company that, if successful, may reduce or eliminate the effect of this matter on the Company, this condition raises substantial doubt about the Companys
ability to continue as a going concern. Managements plan in regard to this matter is also described in Notes 2 and 11. The 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.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Boston
Communications Group Inc.s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 6, 2006 expressed an unqualified opinion thereon.



Ernst & Young LLP



Boston, Massachusetts

March 6, 2006



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|Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------



None.



|Item 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



|1. |  | Evaluation of disclosure controls and procedures.    Our management, with the participation of our chief executive officer and chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2005. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other
procedures of a company that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the
SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2005, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were
effective at the reasonable assurance level.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



No
change in our internal control over financial reporting occurred during the fiscal quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



|2. |  | Managements Report on Internal control over annual financial reporting.
|-- |  | ------------------------------------------------------------------------



The management of Boston Communications Group, Inc. is responsible for the preparation and fair presentation of the
financial statements and other financial information contained in this Form 10-K. Management is also responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the companys principal executive and principal financial officers and effected by the
companys board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures that:



| |  |  | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the companys assets that could have a material effect
on the financial statements.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Because of its
inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



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Management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2005. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.



Based on this assessment, management has concluded that our internal control
over financial reporting is effective at December 31, 2005 based on these criteria, and that there were no material weaknesses in our internal control over financial reporting as of that date.



Ernst & Young LLP, an independent registered public accounting firm,
which has audited and reported on the consolidated financial statements contained in this Form 10-K, has issued its written attestation report on managements assessment of our internal control over financial reporting which appears below this
report.



Report of Independent Registered Public Accounting
Firm



The Board of Directors and Shareholders

Boston Communications Group, Inc.:



We have audited managements assessment, included in the accompanying Managements Report on Internal Control over Financial Reporting that
Boston Communications Group, Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Boston Communications Group, Inc.s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.



In
our opinion, managements assessment that Boston Communications Group, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based



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on the COSO criteria. Also, in our opinion, Boston Communications Group, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the COSO criteria.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Boston Communications Group, Inc. as of December 31,
2005 and 2004, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended December 31, 2005 of Boston Communications Group, Inc. and our report dated
March 6, 2006 expressed an unqualified opinion thereon.



Ernst & Young LLP



Boston,
Massachusetts

March 6, 2006



| | 3. |  | Changes in internal controls over financial reporting. There were no significant changes in our internal controls or in other factors that could significantly affect these
controls subsequent to the date of their most recent evaluation.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 9B. | OTHER INFORMATION
|-------- | -----------------



None.



PART III



|Item 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
|-------- | -----------------------------------------------



The sections entitled Election of Directors and Reports Under Section 16(a) of the Exchange Act appearing in our proxy
statement for the annual meeting of stockholders to be held on June 7, 2006 set forth certain information with respect to our directors and reports filed by certain persons under Section 16(a) of the Exchange Act and are incorporated
herein by reference. Certain information with respect to persons who are, or may be deemed to be, executive officers is set forth under the caption Executive Officers of the Company in Part I of this report.



We have adopted the Code of Ethics Revised and Updated as of December 2003, a
code of ethics that applies to all of our employees. This code of ethics is publicly available on our website at www.bcgi.net/about/investor/corporate.html. If we make any substantive amendments to the code of ethics or grant any waiver,
including any implicit waiver, from a provision of the code to our Chief Executive Officer, Chief Financial Officer or Corporate Controller, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8-K.



|Item 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------



The sections entitled Executive Compensation, Employment Agreements with Named Executive Officers and Report of the
Compensation Committee appearing in our proxy statement for the 2006 annual meeting of stockholders set forth certain information with respect to the compensation of our management and are incorporated herein by reference.



|Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------



The section entitled Security Ownership of Certain Beneficial Owners and Management appearing in our proxy
statement for the 2006 annual meeting of stockholders sets forth certain information with respect to the ownership of our Common Stock and is incorporated herein by reference.



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|Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------



The sections entitled Executive Compensation, Employment Agreements with Named Executive Officers and Certain
Transactions appearing in our proxy statement for the 2006 annual meeting of stockholders set forth certain information with respect to certain business relationships and transactions between us and our directors and officers and are
incorporated herein by reference.



|Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------



The section entitled Principal Accountant Fees and Services appearing in our proxy statement for the 2006 annual meeting of stockholders sets forth certain information with respect to the fees paid to and
services performed by our principal accountants and are incorporated herein by reference.



PART IV



|Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
|-------- | -------------------------------------------------------------



(a)(1)  Financial Statements



The following consolidated financial statements of Boston Communications Group, Inc. are included as Item 8:



|                                                                                             |  |   
|-------------------------------------------------------------------------------------------- |  | --
|Consolidated Balance Sheets at December 31, 2005 and 2004                                    |  | 44
|Consolidated Statements of OperationsYears ended December 31, 2005, 2004 and 2003           |  | 45
|Consolidated Statements of Shareholders EquityYears ended December 31, 2005, 2004 and 2003 |  | 46
|Consolidated Statements of Cash FlowsYears ended December 31, 2004, 2003 and 2002           |  | 47
|Notes to Consolidated Financial Statements                                                   |  | 48



(2)  Financial Statement
Schedules



Index to Consolidated Financial Statement
Schedules



For the years ended December 31, 2005, 2004
and 2003:



Schedule IIValuation and
Qualifying Accounts



All other Schedules have been omitted
because the required information is shown in the consolidated financial statements or notes thereto or they are not applicable.



|(3) |  | The Exhibits listed in the Exhibit Index immediately preceding the Exhibits are filed as part of this Annual Report on Form 10-K.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) 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.



BOSTON COMMUNICATIONS GROUP, INC. (Registrant)By:

/s/    E.Y. SNOWDENE.Y. Snowden President and Chief Executive Officer




Date: March 7, 2006



Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                                      |  |                                                                                                                     |  |              
|----------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | -------------
|Signature                                             |  | Title                                                                                                               |  | Date         
|                                                      |  |                                                                                                                    
|/s/    E. Y. SNOWDENE. Y. Snowden                     |  | President, Chief Executive Officer and Director                                                                     |  | March 7, 2006
|                                                      |  |                                                                                                                    
|/s/    KAREN A. WALKERKaren A. Walker                 |  | Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 7, 2006
|                                                      |  |                                                                                                                    
|/s/    PAUL J. TOBINPaul J. Tobin                     |  | Chairman of the Board of Directors                                                                                  |  | March 7, 2006
|                                                      |  |                                                                                                                    
|/s/    BRIAN E. BOYLEBrian E. Boyle                   |  | Vice Chairman of the Board of Directors                                                                             |  | March 7, 2006
|                                                      |  |                                                                                                                    
|/s/    FREDERICK E. VON
MERINGFrederick E. von
Mering |  | Director                                                                                                            |  | March 7, 2006
|                                                      |  |                                                                                                                    
|/s/    JAMES A. DWYERJames A. Dwyer                   |  | Director                                                                                                            |  | March 7, 2006
|                                                      |  |                                                                                                                    
|/s/    PAUL R. GUDONISPaul R. Gudonis                 |  | Director                                                                                                            |  | March 7, 2006
|                                                      |  |                                                                                                                    
|/s/    GERALD SEGELGerald Segel                       |  | Director                                                                                                            |  | March 7, 2006
|                                                      |  |                                                                                                                    
|/s/    GERALD
MCGOWANGerald
McGowan                   |  | Director                                                                                                            |  | March 7, 2006



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                  
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                      
|            | 
|3.1         |  | Restated Articles of Organization of the Company, as amended.12                                                                                                                  
|            | 
|3.3         |  | Amended and Restated By-Laws of the Company.1                                                                                                                                    
|            | 
|4.1         |  | Rights Agreement.2                                                                                                                                                               
|            | 
|10.1        |  | +1996 Stock Option Plan.1                                                                                                                                                        
|            | 
|10.2        |  | +Employment Letter Agreement dated February 10, 1998 between the Company and E.Y. Snowden.3                                                                                      
|            | 
|10.3        |  | +1998 Stock Incentive Plan.4                                                                                                                                                     
|            | 
|10.4        |  | +Boston Communications Group, Inc. 2000 Stock Option Plan.5                                                                                                                      
|            | 
|10.5        |  | +Amendment No. 1 to Boston Communications Group, Inc. 2000 Stock Option Plan.6                                                                                                   
|            | 
|10.6        |  | +Amendment No. 2 to Boston Communications Group, Inc. 2000 Stock Option Plan.7                                                                                                   
|            | 
|10.7        |  | +Supplemental Executive Retirement Agreement - Founders.8                                                                                                                        
|            | 
|10.8        |  | +Supplemental Executive Retirement Agreement  Non-founders.8                                                                                                                    
|            | 
|10.9        |  | +2004 Stock Incentive Plan.9                                                                                                                                                     
|            | 
|10.10       |  | +2004 Employee Stock Purchase Plan.9                                                                                                                                             
|            | 
|10.11       |  | +Amendment #1 dated May 3, 2005 to Employment Agreement with E. Y. Snowden, dated February 10, 1998.                                                                             
|            | 
|10.12       |  | +Change of Control Agreement with Karen A. Walker, dated May 3, 2005.                                                                                                            
|            | 
|10.13       |  | +Change of Control Agreement with William Wessman, dated May 3, 2005.                                                                                                            
|            | 
|10.14       |  | +Change of Control Agreement with Paul Tobin, dated May 3, 2005.                                                                                                                 
|            | 
|10.15       |  | +Change of Control with Fritz von Mering, dated May 3, 2005.                                                                                                                     
|            | 
|10.16       |  | +2005 Stock Incentive Plan.10                                                                                                                                                    
|            | 
|10.17       |  | +Form of Nonstatutory Stock Option Agreement for employees pursuant to the Companys 2005 Stock Incentive Plan.10                                                                
|            | 
|10.18       |  | +Form of Nonstatutory Stock Option Agreement for Directors pursuant to the Companys 2005 Stock Incentive Plan.10                                                                
|            | 
|10.19       |  | +Form of Restricted Stock Agreement for Directors pursuant to the Companys 2005 Stock Incentive Plan.10                                                                         
|            | 
|10.20       |  | +Form of Restricted Stock Agreement Granted Under 2005 Stock Incentive Plan.10                                                                                                   
|            | 
|10.21       |  | +Form of Incentive Stock Option Agreement for Executive Officers pursuant to the Companys 2005 Stock Incentive Plan.10                                                          
|            | 
|10.22       |  | PureSight Asset Purchase Agreement, dated May 20, 2005, between Cellular Express Inc. and bcgi Technologies Ltd., as Buyers, and Puresight,
Inc. and PureSight Ltd. as sellers.10
|            | 
|10.23       |  | +Change of Control Agreement between the Company and Thomas M. Erskine, dated May 3, 2005.                                                                                       
|            | 
|10.24       |  | +Change of Control Agreement between the Company and Ersin Galioglu, dated May 3, 2005.                                                                                          
|            | 
|10.25       |  | +Change of Control Agreement between the Company and James Anderson, dated May 3, 2005.                                                                                          
|            | 
|10.26       |  | Funding of Security for Appeal Agreement between the Company and Cingular Wireless LLC.11                                                                                        
|            | 
|10.27       |  | +Amendment #1 to 2004 Employee Stock Purchase Plan.11                                                                                                                            
|            | 
|10.28       |  | Lease between the Company and Cummings Properties, Inc. dated March 3, 2005.11                                                                                                   



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##### Table of Contents

|      |  |                                                                                                 
|----- |  | ------------------------------------------------------------------------------------------------
|      | 
|10.29 |  | +Summary of 2006 Board of Directors Compensation Plan.                                          
|      | 
|10.30 |  | +Summary of 2006 Executive Compensation Plan.                                                   
|      | 
|14    |  | Code of Ethics Revised and Updated as of December, 2003.8                                       
|      | 
|21    |  | Subsidiaries of the Registrant.                                                                 
|      | 
|23    |  | Consent of Independent Registered Public Accounting Firm.                                       
|      | 
|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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|1 |  | Incorporated by reference to the Companys Registration Statement on Form S-1 filed June 17, 1996 (File No. 333-4128)
|- |  | ---------------------------------------------------------------------------------------------------------------------

|2 |  | Incorporated by reference to the Companys Form 8-K filed September 7, 2005.
|- |  | ----------------------------------------------------------------------------

|3 |  | Incorporated by reference to the Companys Form 10-Q for the quarter ended March 31, 1998.
|- |  | ------------------------------------------------------------------------------------------

|4 |  | Incorporated by reference to the Companys Form 10-K for the year ended December 31, 1998.
|- |  | ------------------------------------------------------------------------------------------

|5 |  | Incorporated by reference to the Companys Form 10-Q for the quarter ended June 30, 2000.
|- |  | -----------------------------------------------------------------------------------------

|6 |  | Incorporated by reference to the Companys Form 10-Q for the quarter ended June 30, 2001.
|- |  | -----------------------------------------------------------------------------------------

|7 |  | Incorporated by reference to the Companys Form 10-Q for the quarter ended June 30, 2003.
|- |  | -----------------------------------------------------------------------------------------

|8 |  | Incorporated by reference to the Companys Form 10-K for the year ended December 31, 2003.
|- |  | ------------------------------------------------------------------------------------------

|9 |  | Incorporated by reference to the Companys Form 10-Q for the quarter ended June 30, 2004.
|- |  | -----------------------------------------------------------------------------------------

|10 |  | Incorporated by reference to the Companys Form 10-Q for the quarter ended June 30, 2005.
|-- |  | -----------------------------------------------------------------------------------------

|11 |  | Incorporated by reference to the Companys Form 10-Q for the quarter ended September 30, 2005.
|-- |  | ----------------------------------------------------------------------------------------------

+ Management contract or compensatory plan or arrangement filed as an exhibit pursuant to Item 15(c) of this Report.



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##### Table of Contents

SCHEDULE II



BOSTON COMMUNICATIONS GROUP, INC.



VALUATION AND QUALIFYING ACCOUNTS

(In thousands)



|                                                              |  |                             |     |                                   |   |            |  |                       |       |  |   |    
|------------------------------------------------------------- |  | --------------------------- | --- | --------------------------------- | - | ---------- |  | --------------------- | ----- |  | - | ---
|                                                              |  | BALANCEATBEGINNINGOF PERIOD |     | CHARGED TO STATEMENTOF OPERATIONS |   | DEDUCTIONS |  | BALANCEAT ENDOFPERIOD
|Accounts receivables reserves and allowances for years ended: |  |                             |     |                                   |   |            |  |                       |       |  |   |    
|December 31, 2005                                             |  | $                           | 474 |                                   | $ | 605        |  | $                     | 130   |  | $ | 949
|December 31, 2004                                             |  |                             | 878 |                                   |   | 244        |  |                       | 648   |  |   | 474
|December 31, 2003                                             |  | $                           | 966 |                                   | $ | 1,379      |  | $                     | 1,467 |  | $ | 878



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