<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-K

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

                  For the fiscal year ended December 31, 1997

                                       OR

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

                        Commission File Number 333-4128

                      BOSTON COMMUNICATIONS GROUP, INC.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

MASSACHUSETTS                                          04-3026859
-----------------------------------------------------  -------------------
(State or Other Jurisdiction                           (I.R.S. Employer
 of Incorporation or Organization)                     Identification No.)
 
100 SYLVAN ROAD, SUITE 100, WOBURN, MASSACHUSETTS      01801
-----------------------------------------------------  -------------------
(Address of Principal Executive Office)                (Zip Code)
 
Registrant's telephone number, including area code:    (617) 692-7000
                                                       -------------------

          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
                    --------------------------------------

          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.

          The approximate aggregate value of the voting 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 March 3, 1998, was
$147,371,248.

The number of shares outstanding of the Registrant's common stock, $.01 par
value per share, as of March 3, 1998 was 16,261,655.

                      DOCUMENTS INCORPORATED BY REFERENCE

          The following document is incorporated by reference in the following
part of this Form 10-K: information required by Part III (Items 10, 11, 12 and
13) of this Annual Report on Form 10-K is incorporated from the Proxy statement
relating to the 1998 Annual Meeting of Stockholders of the Company.

<PAGE>
 
ITEM 1.   BUSINESS
                                   BACKGROUND
GENERAL

Boston Communications Group provides innovative roaming services, prepaid
wireless services, teleservices and prepaid and voice systems to wireless
telephone carriers throughout North and South America.  The Company's 
ROAMERplus/TM/ roaming service provides carriers with the ability to cost-
effectively generate revenues from subscribers who are not covered under
traditional roaming agreements by arranging payment for roaming calls and paying
carriers for the airtime used. BCG is the leading provider of roaming services
to the unregistered roaming market. The Company's Teleservices Division provides
customer support teleservices to wireless carriers which allows them to
outsource all or a portion of their customer service activities, and are
designed to help wireless carriers retain subscribers, reduce costs and manage
growth. The Company's Prepaid Division provides carriers with prepaid wireless
services through its C2C(R) Network, which enables carrier subscribers to use
their wireless phone as if they were a post-pay subscriber, thereby expanding
service offerings to new and existing subscribers without the added billing
costs and collection risk. The Systems Division markets a voice processing
platform with enhanced features for providing prepaid wireless, voice messaging
and fax mail services to wireless and wireline carriers throughout North America
and South America. The Systems Division also manufactures prepaid systems which
are used to support the Company's C2C Network. In the fourth quarter of 1997 the
Company formally reorganized its corporate structure into four divisions,
Roaming Services, Teleservices, Prepaid Wireless Services and Systems.

Wireless telephone service has been one of the fastest growing areas of the
telecommunications industry over the last twelve years. The Cellular
Telecommunications Industry Association ("CTIA") estimates that the number of
wireless subscribers in the United States increased from approximately 340,000
in December 1985 to approximately 56 million in March 1998. This represents an
increase in market penetration from under 1% to over 20% of the United States
population. The CTIA also estimates that aggregate annual service revenues from
wireless subscribers grew from approximately $482.4 million in 1985 to
approximately $26.4 billion in 1996. A number of factors have contributed to
this growth, including the build-out of the wireless network infrastructure, the
decreasing cost of wireless telephones, the increasing mobility of the United
States population, technological improvements in the size and battery life of
wireless telephones and greater acceptance of wireless telephone use.
Significant growth in the wireless telephone market is expected to continue in
the future, particularly given the emergence of "personal communications
services" (PCS) as a new form of wireless service.  Industry sources forecast
that the number of cellular and PCS subscribers will grow to 94 million by the
end of the year 2000, representing a market penetration of approximately 30% of
the United States population, and estimate that the aggregate annual services
revenue from wireless subscribers alone will be over $35 billion.

In August 1997, the Company completed a public offering and sold 3 million
shares of its common stock which raised net proceeds of approximately $35.8
million.  The net proceeds will continue to be used for capital and other
expenditures in connection with the expansion of the C2C Network.  In addition,
the Company purchased the remaining 20% of Wireless Americas Corporation (WAC)
for $1.4 million, bringing the Company's ownership to 100% of WAC's capital
stock.  WAC was subsequently merged into Voice Systems Technology Inc. (VST).

The Company was organized as a Massachusetts corporation in August, 1988 and
introduced its ROAMERplus roaming service in 1991. The Company introduced
teleservices in 1993 and its prepaid wireless service in 1996.  The Company's
systems were introduced in 1996 with the acquisition of VST.  The Company's
principal office is located at 100 Sylvan Road, Suite 100, Woburn, Massachusetts
01801 and its telephone number is (617) 692-7000.

                                      -2-
<PAGE>
 
                            DESCRIPTION OF BUSINESS


SERVICES

ROAMING SERVICES DIVISION

The Company's roaming service is being used by approximately 94 wireless
carriers that collectively hold licenses for over 1,100 markets in the United
States, Canada and Mexico. BCG services 9 of the 10 largest wireless carriers,
by number of subscribers, in the United States.  The Company's ROAMERplus
service provides carriers with the ability to generate revenues from
unregistered roamers in their service area. When an unregistered roamer places a
call in the carrier's service area, the carrier's mobile switching center
forwards the call, at the Company's expense, to the Company's proprietary
digital call processing system. The roamer may complete the call by charging the
call to a telephone calling card, a commercial credit card or as a collect call.
In October, 1997 the Company finalized an agreement with AT&T to allow holders
of AT&T calling cards the ability to charge ROAMERplus calls to those cards.  A
majority of all incoming traffic is initially handled by an automated call
processing system, which prompts the caller for billing and calling information.
The Company's specially trained service representatives handle all remaining
calls as well as calls requiring additional operator assistance.

In order to implement the Company's ROAMERplus service, a carrier need only make
a minor software change in its switches. BCG pays for transport of the calls to
its facilities and for completion of the calls. Under its agreements with
carriers, which typically have a term of one year, BCG pays the serving carrier
for the airtime that the roamer uses and charges the roamer for the call. The
charge for the call appears directly on a telephone or credit card bill, with
BCG (typically, under the trade name "Wireless Roaming") as the vendor.
ROAMERplus eliminates collection and fraud risk for the carrier because BCG
takes responsibility for collection from the customer. The Company manages this
collection and fraud risk by utilizing its own proprietary fraud control systems
as well as external systems, and validating the caller's credit before
completing the call.


TELESERVICES DIVISION

The Company designed and began providing  teleservices in 1993 in response to
the industry's need for 24-hour, 365 day customer service. The Company's
teleservices program allows a carrier's subscriber to obtain information on rate
plans, phone operations and service center locations, as well as instructions on
roaming features and promotions.  Subscribers also may make billing inquiries,
initiate address and rate plan changes, and obtain other customer assistance.
The Company's service centers also assist carriers in billing and collections.
Most carriers using BCG's teleservices use these services for off-hours and
overflow subscriber support. However, the Company's services range from narrowly
defined, short-term projects to the provision of all of the carrier's customer
service activities. The Company currently provides teleservices to fifteen
wireless customers.  Certain wireless carriers that have contracted for the
Company's prepaid wireless services have also engaged the Company to provide
teleservices for the carrier's prepaid subscribers.

The Company provides most of its teleservices from its service center in Woburn,
Massachusetts. The Company designed this facility to provide highly efficient,
rapid customer response through the deployment of state-of-the-art switching
technologies with client/server architecture and open, automatic call delivery
platforms. Each customer service representative utilizes database interfaces,
customized for each carrier, to facilitate subscriber inquiry response,
technical problem resolution, program/feature clarification, on-line follow-up
and performance reporting.  These customized interfaces can be programmed to
give the Company complete access to a particular carrier's subscriber databases.
Administration of call center floor personnel is facilitated by the use of
forecasting, scheduling and monitoring systems that allow floor supervisors to
observe numerous aspects of the call center's performance in a graphical format,
including information on call duration, compliance with contract standards and
operator performance.

                                      -3-
<PAGE>
 
BCG has identified additional specific teleservices needs in the wireless
industry and has developed services to meet those needs. These services allow
the carriers to better manage the demands of hiring, training, managing and
retaining a large number of customer service representatives for specialized
service projects that often place significant increased demands on the capacity
of customer service centers. For example, BCG provides teleservice support to
carriers who are currently supporting prepaid subscribers on the C2C Network.
BCG's wireless-trained representatives are available to effectively answer
subscriber questions that are not handled by C2C's automated customer service
application.  Additional specialized teleservices include LAWBUST, the Cellular
Telephone Industry Association's program developed by BCG and CTIA to assist law
enforcement officials and carriers in combating wireless fraud through on-line
access to the CTIA's proprietary database and other techniques.  BCG also
provides special support services to carriers including dealer support, lead
management, phone number and NPA-NXX area code changes and third party
verification services.

The Company offers extensive in-house classroom and on-the-job training programs
for its teleservices personnel, including instruction on a full breadth of call
handling techniques and service quality.  In addition, carrier-specific training
allows the teleservices staff to disseminate information on a particular
carrier's services, as well as to update and edit information in the carrier's
databases.  BCG intends to continue to market and invest in its teleservices
technology in order to provide additional service offerings.


PREPAID WIRELESS SERVICES DIVISION

The Company introduced its C2C Network-based prepaid wireless service offering
in early 1996 and was offering the service in 153 U.S. Metropolitan Service
Areas (MSA's) as of December 31, 1997.  The C2C Network permits a wireless
carrier to automatically switch a prepaid subscriber's call to the C2C Network
where information regarding the status of that subscriber's prepaid account is
maintained.  A subscriber establishes an account with the wireless carrier by
prepaying a specific dollar amount to be credited toward future service.
Subsequently, each call that is initiated or received by the subscriber is
routed to the C2C Network and rated in real time based on the telephone number
called, carrier usage charges, taxes and applicable surcharges. When the
remaining balance is reduced to a minimal amount, the subscriber is able to
replenish the account by purchasing additional prepaid service from the carrier
with cash or a credit card.   The C2C Network can complete the call and debit
the account automatically without requiring the subscriber to enter a debit card
number or other information.  As a result, a prepaid subscriber receives service
substantially similar to a subscriber using traditional billing arrangements,
including the ability to make outgoing and receive incoming calls, as well as to
roam into other markets through the Company's ROAMERplus service.

Carriers compensate BCG for network usage by contracting at a per minute rate
for prepaid subscriber usage based on connection time between the carrier's
mobile switching center and the C2C Network voice node.  The Company's existing
contracts to provide prepaid wireless services through the C2C Network are
generally two or three years.

The C2C Network consists of a central computer database linked by a high speed,
wide area frame relay network to geographically distributed proprietary call
processing subsystems, called voice nodes. Each voice node is capable of serving
more than one carrier and consists of a computer controlled telecommunications
switch and an interactive voice response unit that provides high quality
personalized voice prompts. These voice nodes are linked to the carriers' mobile
switching centers via dedicated telephone facilities. The distributed node
architecture is designed to be modular and scaleable while remaining efficient
and cost-effective. The centralized database enables prepaid users to make calls
while roaming in other service areas where the C2C Network is in place.

During 1997, the Company deployed an additional 29 C2C nodes in various markets
across the United States, bringing the total number of C2C nodes deployed to 50
as of December 31, 1997.  In that time the Company increased the total MSA's
commercially available and in use by prepaid subscribers to 153 from 

                                      -4-
<PAGE>
 
57 at December 31, 1996. Carriers are currently in the process of implementing
BCG prepaid systems in an additional 33 U.S. MSA's which, when combined with the
MSA's where prepaid service is now available, will cover over 70% of the U.S.
population.

In October, 1997 the Company entered into a Letter of Agreement with Rogers
Cantel, a Canadian wireless telephone carrier, for the provision of prepaid
wireless service in all of Rogers Cantel's Canadian markets.  In September, 1997
the Company finalized an agreement with AT&T Wireless Services (AWS) to provide
wireless prepaid service in markets serviced by AWS.  The Company currently
provides C2C to several other carriers, including AirTouch Communications, Bell
Atlantic Mobile, Bell South Cellular Corp., LA Cellular, Southern New England
Telephone Corp., Southwestern Bell Mobile Systems, Western Wireless' PCS
Division and Frontier Cellular in addition to several wireless resellers.  The
Company is continuing to install, at its expense, the voice nodes and data links
that make up the C2C Network in order to support additional market areas under
existing carrier contracts and commitments.   As of February 28, 1998 the
Company was supporting over 340,000 prepaid subscribers on behalf of carriers
who have deployed a BCG prepaid system in the United States and Canada.


SYSTEMS DIVISION

The Systems Division sells systems for prepaid wireless calling on a turn-key
basis primarily to international customers.  It also markets systems for voice
messaging, fax mail and other enhanced service applications to  Original
Equipment Manufacturers (OEM's) and wireless and wireline carriers throughout
North America.  Since establishing this division, the Company has made
significant prepaid system sales in Mexico, Venezuela, Peru and Ecuador. To
support its systems and on-going sales efforts in Mexico, in 1997 the Company
established a Mexican subsidiary, BCG de Mexico, S.R.L which employs technicians
and other support staff throughout Mexico.

In October, 1997 the Company entered into a two-year agreement with Motorola,
Inc. through the Latin America Division of its Cellular Subscriber Sector for
the marketing and distribution by Motorola of the Company's systems in Central
America, South America and Puerto Rico.


ENGINEERING, RESEARCH AND DEVELOPMENT

BCG believes that its future success will depend in large part on its ability to
enhance existing services and develop new services in response to changing
market, customer or technological requirements of the wireless telephone
industry.  An important factor in the future success of the Company's prepaid
wireless service will be the Company's ability to provide, at competitive
prices, more functionality and features than those typically available in other
competitive offerings.  The Company has developed proprietary software to enable
its call processing platform to handle custom signaling interfaces to various
types of wireless switches, specialized call rating requirements of prepaid
wireless services, and interfaces to wireless administration and management
information systems.  The Company is developing a number of enhanced services
that it intends to make available to prepaid and traditional subscribers through
the C2C Network. These enhanced services will be designed to enable carriers to
generate additional sources of revenue from subscribers, in addition to
providing carriers with more extensive internal reporting capabilities.

The Company spent approximately $839,000, $3.2 million and $5.4 million on
engineering, research and development in 1995, 1996, and 1997, respectively.
The Company expects to continue to devote substantial resources to its
engineering, research and development activities in future years.

                                      -5-
<PAGE>
 
SALES, MARKETING AND DISTRIBUTION

The Company's sales strategy is to establish and maintain long-term
relationships with its customers. The Company utilizes a consultative sales
process to understand and define customer needs and determine how those needs
can be addressed by the Company's services. BCG seeks to build upon its existing
customer relationships by integrating and cross-selling its different service
offerings. The Company's sales cycle varies for different services and can be up
to 12 months for the Company's teleservices and prepaid services.

The Company's sales force currently consists of 11 sales representatives
supervised by two senior sales executives. The Company's sales representatives
generally have significant experience in the wireless industry, either as former
employees of wireless carriers or in selling products and services to wireless
carriers. The Company typically assigns each sales representative to a single
group of wireless telephone carriers in order to support the development and
maintenance of long-term customer relationships.  The sales representatives are
supported by product specific account and service managers who also typically
have experience in the wireless industry and manage the accounts on a daily
basis after the completion of the initial sale.  Most sales representatives are
strategically located in the carriers major geographic regions, however, the
Company's other sales, marketing and product management activities are supported
from its Woburn, Massachusetts facility, and from its Tulsa, Oklahoma Systems
Division location.

The Company's direct sales strategy is complemented by a marketing program that
includes participation in industry trade shows and advertising. Because the
Company's customers are a readily identifiable group, the Company seeks to gain
wide exposure through carefully selected events and activities specific to the
wireless telephone industry.

Product and account management groups have been established for the prepaid
wireless and systems divisions. Each group focuses on understanding the prepaid
market and providing carriers with valuable information regarding prepaid
marketing and subscriber trends, distribution techniques and marketing success
factors.  The Company works closely with the carriers and the industry to
disseminate and integrate this information into their prepaid programs to help
generate and retain prepaid subscribers.  In addition, these departments focus
on identification of new features and functionality which drive incremental
prepaid business.

Distribution of prepaid services is a integral piece of the prepaid wireless
service business because it provides consumers with numerous channels to
purchase or replenish prepaid service.  The Company continues to improve
distribution options for prepaid cards on behalf of the wireless carriers by
seeking arrangements with national distributors, retailers, resellers and
alternative channels to increase market penetration and exposure.


CUSTOMER BASE

The Company provides its services to wireless carriers of varying size,
expertise and capabilities. The Company currently provides one or more of its
services to approximately 94 wireless carriers in the United States, Canada and
Mexico, including 9 of the 10 largest cellular carriers in the United States.
Historically, a significant portion of the Company's revenues in any particular
period has been attributable to a limited number of customers. Net revenues
attributable to the Company's ten largest customers accounted for approximately
84.6%, 82.4% and 74.5% of the Company's total revenues in 1995, 1996, and 1997,
respectively.  Ameritech Cellular Services, Inc., Bell Atlantic Mobile,
Southwestern Bell Mobile Systems and Bell South Cellular Corp. accounted for
approximately for 14.8%, 12.3%, 6.4% and 11.4%, respectively, of total revenues
in 1996 and for 11.6%, 11.6%, 10.6% and 4.7%, respectively, of total revenues in
1997.

For the year ending December 31, 1997, the Company's Systems Division generated
$11.1 million in prepaid and voice system revenues.  Of this revenue, 43.9%
represented sales to support prepaid service in several Mexican markets on
behalf of Tel-Cel, Mexico's largest wireless carrier and 41.5% of the revenue
represented system sales to three other customers.

                                      -6-
<PAGE>
 
COMPETITION

The market for services to wireless carriers is highly competitive and subject
to rapid change. A number of companies currently offer one or more of the
services offered by the Company. In addition, many wireless carriers are
providing or can provide, in-house, the services that the Company offers. Trends
in the wireless telephone industry, including greater consolidation and
technological or other developments that make it simpler or more cost-effective
for wireless carriers to provide certain services themselves, could affect
demand for the Company's services and could make it more difficult for the
Company to offer a cost-effective alternative to a wireless carrier's in-house
capabilities. In addition, the Company anticipates continued growth in the
wireless carrier services industry, and consequently, the entrance of new
competitors in the future.  BCG's principal competitor in unregistered roaming
market is National Telemanagement Corporation (NTC) and in the prepaid network
market, Brite Voice Systems, GTE Telecommunications Services, Inc. and NTC. In
the teleservices market, BCG competes with a variety of companies that have
inbound and outbound service centers. The Systems Division's principal
competitors in the voice processing systems market include Boston Technology,
Inc., Octel Communications Corp. and Centigram Communications Corp. The Systems
Division competes primarily with Atlas Telecommunications and Brite Voice
Systems in the turnkey prepaid system business.

The Company believes that the principal competitive factors in the wireless
carrier services industry include the ability to identify and respond to
customer needs, quality and breadth of service offerings, price and technical
expertise. The Company's ability to compete also depends in part on a number of
competitive factors outside its control, including the ability to hire and
retain employees, the development by others of products and services that are
competitive with the Company's products and services, the price at which others
offer comparable products and services and the extent of its competitors'
responsiveness to customer needs.  There can be no assurance that the Company
will be able to continue to compete successfully with its existing competitors
or with new competitors.


GOVERNMENT REGULATION

The Federal Communications Commission ("FCC"), under the terms of the
Communications Act of 1934, as amended, including the Telecommunications Act of
1996, regulates interstate communications and use of  radio spectrum, including
entry, exit, rates and terms of operation. BCG presently neither operates any
facilities utilizing radio spectrum nor has any facilities-based services
involving interstate communications. Consequently, it is not required to and
does not hold any licenses or other authorizations issued by the FCC. However,
the wireless carriers that constitute the Company's customers are regulated at
both the federal and state levels. Such regulation may decrease the growth of
the wireless telephone industry, affect the development of the PCS market, limit
the number of potential customers for the Company's services or impede the
Company's ability to offer competitive services to the wireless market or
otherwise have a material adverse effect on the Company's business and results
of operations. At the same time, the Telecommunications Act of 1996, a
deregulatory measure, may cause changes in the industry, including entrance of
new competitors and industry consolidation, which could in turn affect the
Company's cost of doing business or otherwise have a material effect on the
Company's business, financial condition and results of operations.


EMPLOYEES

As of December 31, 1997, the Company had a total of 860 full-time and part-time
employees. Of these employees, 616 serve in call center and related functions,
139 serve in technical support and technology development, 44 serve in sales,
marketing, product and account management and 61 serve in administration and
management. None of the Company's employees are represented by a labor union.
The Company believes that its employee relations are good.

                                      -7-
<PAGE>
 
BACKLOG

As of December 31, 1997, the Company's backlog of firm orders for its systems
was $640,000.  The Company includes in backlog only those orders for which it
has 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, the Company's
backlog as of any particular date may not be representative of actual sales for
any succeeding period.


ITEM 2.   PROPERTIES

The Company leases space at its four principal locations: Burlington and Woburn,
Massachusetts, Tulsa, Oklahoma and Mexico City, Mexico.  The Woburn location
serves as a service center operations facility for teleservices and ROAMERplus
services.  The Woburn location also has separate facilities that house the
Company's network operations center as well as the Company's executive
headquarters, engineering, sales and finance personnel.  The Company is in the
process of negotiating additional lease space in its Woburn location in order to
accommodate the additional direct and indirect personnel required to support the
growth and expansion of its teleservices and C2C businesses.  The Burlington
site was utilized for service center operations for teleservices and ROAMERplus
services throughout 1997 and into early 1998.  Its operations are expected to be
fully consolidated into the Woburn facility in the first half of 1998.  It is
anticipated that unused portions of the Burlington location will be subleased.
The Tulsa facility is used for the manufacturing and assembly of systems and
related sales efforts.  The Mexico City office serves as the headquarters of its
technical service operation in Mexico.  The Company also has 30 other leased
facilities throughout the United States which are used to house the Company's
voice nodes and certain equipment for the C2C Network.


ITEM 3.   LEGAL PROCEEDINGS

On November 20, 1997, AWS sent a letter to the Company stating that it believes
that it is entitled to indemnification from the Company in respect to a certain
claim presently pending in a case brought by Ronald A. Katz Technology
Licensing, L.P. and MCI Telecommunications Corporation against AT&T Corp. in the
United States District Court for the Eastern District of Pennsylvania.  The
letter asserts that Count 13 of the complaint, which relates in part to prepaid
wireless service, gives rise to an obligation on the part of the Company to
indemnify AWS with respect to that count.  The amount in question is
undetermined.  The suit against AT&T Corp. was filed on July 8, 1997.  The
contract between the Company and AWS pursuant to which the Company presently
provides prepaid services to AWS, and upon which AWS's claim for indemnification
is based, was not executed until October 15, 1997.  For this and other reasons,
the Company believes that the claim is without merit.  To date, no legal action
has been brought against the Company.


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          No matters were submitted to a vote of security holders of the
Company, through solicitation of proxies or otherwise, during the last quarter
of the year ended December 31, 1997.

                                      -8-
<PAGE>
 
EXECUTIVE OFFICERS OF THE REGISTRANT

          The executive officers of the Company and their ages and positions are
as follows:
<TABLE>
<CAPTION>
 
     Name                     Age     Position
     ----                     ---     --------
<S>                          <C>  <C>
Paul J. Tobin                 54  Chairman of the Board

Brian E. Boyle                49  Vice Chairman

E.Y. Snowden                  43  President & Chief Executive Officer, Director

Frederick E. von Mering       44  Vice President, Finance and Administration,
                                  Director
</TABLE>

          Mr. Tobin has served as Chairman of the Board of Directors of the
Company since February 1996.  He also served as the Company's President and
Chief Executive Officer from March, 1997 to February, 1998 and from 1990 until
February 1996.  Prior to joining the Company, Mr. Tobin served as President of
Cellular One Boston/Worcester from July 1984 to January 1990 and as a Regional
Marketing Manager for Satellite Business Systems, a joint venture of IBM, Comsat
Corp. and Aetna Life & Casualty from April 1980 to June 1984. Mr. Tobin received
his undergraduate degree in economics from Stonehill College and his M.B.A. in
marketing and finance from Northeastern University.  Mr. Tobin also serves as a
member of the Board of Trustees at Stonehill College.

          Mr. Boyle has served as Vice Chairman of the Company since February
1996 and as Chairman, New Wireless Services of the Company from January 1994 to
February 1996. From July 1990 to September 1993, Mr. Boyle served as Chief
Executive Officer of Credit Technologies, Inc., a supplier of customer
application software for the wireless telephone industry. Prior to 1990, Mr.
Boyle founded and operated a number of ventures servicing the telecommunications
industry, including APPEX Corp. (now EDS Personal Communications Division of EDS
Corporation, a global telecommunications service company) and Leasecomm Corp., a
micro-ticket leasing company. Mr. Boyle earned his B.A. in mathematics from
Amherst College and his B.S., M.S. and Ph.D. in electrical engineering and
operations research from M.I.T.  Mr. Boyle is also a Director of Saville Systems
PLC, a provider of customized billing solutions to telecommunications providers,
as well as of several private companies.
 
          Mr. Snowden has served as the Company's President and Chief Executive
Officer since February, 1998.  Prior to joining the Company, Mr. Snowden served
as President and Chief Operating Officer of American Personal Communications,
L.P. d/b/a Sprint Spectrum where he oversaw the launch of the Nation's first PCS
network.  From 1991 to 1994, Mr. Snowden was Area Vice President, Personal
Communication & Intelligent Network Services at Pacific Bell, Inc.  From 1988 to
1990, Mr. Snowden was a Principal at Mehta Burkett & Company, Inc. a merchant
banking firm.  From 1986 to 1988, Mr. Snowden was an executive at Universal
Optical Company, Inc. where he held the positions of Chief Executive Officer and
President & Chief Operating Officer.  Prior to 1986, Mr. Snowden was employed by
various organizations including The Beta Group, Boston Consulting Group, Inc.
and Price Waterhouse LLP.  Mr. Snowden earned his B.S. in Mathematical Sciences
from Stanford University and his M.B.A. from Harvard Graduate School of Business
Administration.

          Mr. von Mering has served as the Company's Vice President, Finance and
Administration since 1989. Prior to joining the Company, Mr. von Mering served
as Regional Vice President and General Manager for the paging division of
Metromedia, Inc., a communications company, from 1980 to 1986. From 1975 to
1979, Mr. von Mering was employed at Coopers & Lybrand LLP. Mr. von Mering
earned his B.A. degree in accounting from Boston College and his M.B.A. from
Babson College.

Each officer serves at the discretion of the Board of Directors. There are no
family relationships among any of the Directors and executive officers of the
Company.

                                      -9-
<PAGE>
 
                                    PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

MARKET INFORMATION FOR COMMON STOCK

          Boston Communications Group, Inc.'s  Common Stock is traded on the
Nasdaq National Market, under the symbol BCGI.  The following table reflects the
range of high and low selling prices of the Company's common stock for the
periods indicated since the date on which the Common Stock commenced trading.
<TABLE>
<CAPTION>
 
                             1996                  1997
                            ------                ------
                        HIGH        LOW       HIGH        LOW
                      --------    -------    -------     ------
<S>                  <C>         <C>        <C>         <C>
First Quarter            --         --      $  7 1/8    $ 3 7/8
Second Quarter       $   17       $ 14        15 1/16     4 1/8
Third Quarter            14 1/4     12        17 1/4     12 1/4
Fourth Quarter           16 1/8      4 3/8    19          8 1/2
</TABLE>

HOLDERS

At March 16, 1998, there were approximately 5,100 holders of Common Stock.


DIVIDENDS

The Company has never paid a cash dividend on its Common Stock.  The Company
currently intends to retain all of its earnings to finance future growth and,
accordingly, does not anticipate paying any cash dividends in the forseeable
future.

ITEM 6.   SELECTED FINANCIAL DATA

          The following tables should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this report.
<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                  --------------------------------------------------------
                                                    1993        1994        1995       1996(1)      1997
                                                  --------    --------    --------    --------    --------
                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                               <C>         <C>         <C>         <C>         <C> 
CONSOLIDATED STATEMENTS OF OPERATIONS DATA: 
Total revenues                                    $  8,694    $ 18,334    $ 34,220     $ 50,651    $ 68,099
Operating income (loss)                               (269)        405       2,129          610      (2,389)
Income (loss) from continuing operations(2)           (332)        288       3,008          599      (1,116)
Income (loss) from discontinued operations             (92)      1,507        (165)          --          --
Net income (loss)                                     (424)      1,795       2,843          599      (1,116)
Net income (loss) available to common 
 shareholders                                       (1,454)        779       1,893          148      (1,116)
Basic net income (loss) per common share(3):         (0.56)       0.24        0.57         0.02       (0.08)
Diluted net income (loss) per common share(3):       (0.56)       0.22        0.22         0.01       (0.08)
CONSOLIDATED BALANCE SHEET DATA:
Cash and short-term investments                        681         204         253       21,421      33,704
Working capital                                        695       1,098       2,082       26,433      38,210
Property and equipment, net                          1,262       2,699       4,884       12,906      38,087
Total assets                                         6,889       8,867      13,614       51,959      93,385
Redeemable preferred stock                          14,930      14,947      15,896           --          --
Shareholders' equity (deficit)                    $(11,370)   $(10,591)   $ (8,698)    $ 42,893    $ 80,104
Dividends per common share                              --          --          --           --          --
</TABLE>
(1) In February 1996, the Company acquired VST for Common Stock and cash with an
    aggregate value of approximately $2.5 million.

                                      -10-
<PAGE>
 
(2) In 1995, the Company reversed the deferred tax asset valuation allowance,
    resulting in a tax benefit of $1.8 million. In addition, in 1994 and 1995,
    the Company realized benefits from net operating loss carryforwards of
    $382,000 and $840,000, respectively. See Note 6 of Notes to Consolidated
    Financial Statements.
(3) See Note 2 of Notes to Consolidated Financial Statements


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

          The management's discussion and analysis of financial condition and
results of operations have been included as Appendix A to this Form 10-K.


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          The financial statements and supplementary data have been included in
Appendix B to this Form 10-K.


ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

          None.

                                      -11-
<PAGE>
 
                                   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 the Company's proxy statement for
the annual meeting of stockholders to be held on May 21, 1998, sets forth
certain information with respect to the directors of the Company 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 of the Company is set forth
under the caption "Executive Officers of the Company" in Part I of this report.


ITEM 11.  EXECUTIVE COMPENSATION

          The sections entitled "Executive Compensation", "Employment Agreements
with Named Executive Officers" and "Report of the Compensation Committee"
appearing in the Company's proxy statement for the annual meeting of
stockholders to be held on May 21, 1998, set forth certain information with
respect to the compensation of management of the Company and are incorporated
herein by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          The section entitled "Security Ownership of Certain Beneficial Owners
and Management" appearing in the Company's proxy statement for the annual
meeting of stockholders to be held on May 21, 1998, set forth certain
information with respect to the ownership of the Company's Common Stock and is
incorporated herein by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          The sections entitled "Executive Compensation", "Employment Agreements
with Named Executive Officers," and "Certain Transactions" appearing in the
Company's proxy statement for the annual meeting of stockholders to be held on
May 21, 1998, set forth certain information with respect to certain business
relationships and transactions between the Company and its directors and
officers and are incorporated herein by reference.


                                    PART IV

ITEM 14.  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 Appendix B attached hereto:

Consolidated Balance Sheets-December 31, 1997 and 1996.
Consolidated Statements of Operations-Fiscal years ended December 31, 1997, 1996
and 1995.
Consolidated Statements of Stockholders' Equity-Fiscal years ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Cash Flows-Fiscal years ended December 31, 1997, 1996
and 1995.
Notes to Consolidated Financial Statements.

                                      -12-
<PAGE>
 
 (2)      FINANCIAL STATEMENT SCHEDULES

          Index to Consolidated Financial Statement Schedules

For the three years 1997, 1996 and 1995:
          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.

(B)       REPORTS ON FORM 8-K

None

                                      -13-
<PAGE>
 
                                  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 on the 20/th/ day of March,
1998.

                                    BOSTON COMMUNICATIONS GROUP, INC.


                                    By:   /s/  E.Y. Snowden
                                         --------------------------
                                               E. Y. SNOWDEN
                                             PRESIDENT AND CHIEF
                                              EXECUTIVE OFFICER


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. Snowden              President, Chief       March 20, 1998
------------------------------       Executive Officer   
        E. Y. Snowden                and Director      
                                     


   /s/  Fritz E. von Mering          Vice President,        March 20,1998
------------------------------       Finance and        
     Fritz E. von Mering             Administration,    
                                     Director (Principal
                                     Financial and      
                                     Accounting Officer) 
                                     


     /s/  Paul J. Tobin              Chairman of the        March 20, 1998
------------------------------       Board of Directors 
         Paul J. Tobin             

                                      -14-
<PAGE>
 
           SIGNATURE                 TITLE                  DATE
           ---------                 -----                  ---- 


      /s/  Brian E. Boyle            Vice Chairman of the   March 20, 1998 
------------------------------       Board of Directors              
         Brian E. Boyle            


    /s/  Jerrold D. Adams            Director               March 20, 1998
------------------------------ 
        Jerrold D. Adams


     /s/  Craig L. Burr              Director               March 20, 1998
------------------------------  
        Craig L. Burr

 
     /s/  Paul R. Gudonis            Director               March 20, 1998
------------------------------ 
        Paul R. Gudonis

 
      /s/   Gerald Segel             Director               March 20, 1998
------------------------------ 
         Gerald Segel


     /s/  Mark J. Kington            Director               March 20, 1998
------------------------------ 
       Mark J. Kington

                                      -15-
<PAGE>
 
                                   APPENDIX A

                                      -16-
<PAGE>
 
Management's Discussion and Analysis of Financial Condition and Results of
Operations

Overview
--------

Boston Communications Group provides innovative roaming services, prepaid
wireless services, teleservices and prepaid and voice systems to wireless
telephone carriers throughout North and South America.  The Company's Roaming
Services Division provides carriers with ROAMERplus/TM/ call processing services
which give carriers the ability to generate revenues from subscribers who are
not covered under traditional roaming agreements by arranging payment for
roaming calls and paying carriers for the airtime used.  BCG is the leading
provider of roaming services to the unregistered roaming market.  The Company's
Teleservices Division provides customer support teleservices to wireless
carriers which allow carriers to outsource all or a portion of their customer
service activities, and are designed to help carriers retain subscribers, reduce
costs and manage growth.  The Company's Prepaid Division provides carriers with
its prepaid wireless service, C\\2\\C(R), which enables carrier subscribers to
use their wireless phone as if they were a post-pay subscriber, thereby
expanding service offerings to new and existing subscribers without the added
billing costs and collection risk.  The Systems Division markets a voice
processing platform with enhanced features for providing prepaid wireless, voice
messaging and fax mail services to wireless and wireline carriers throughout
North America and South America.  The Systems Division also manufactures prepaid
systems which are sold directly to carriers and are used to support the
Company's C\\2\\C network.

The Company has achieved significant growth in revenues over the past five
years, with total revenues increasing from $8.7 million for the year ended
December 31, 1993 to $68.1 million for the year ended December 31, 1997. Total
revenues for 1997 represent a 34.3% increase over the $50.7 million in revenues
generated in 1996. The increase in revenues in 1997 over 1996 was primarily the
result of higher revenues generated from prepaid wireless services and system
sales which together account for 78.2%, or $13.6 million of the year to year
increase. Operating loss for 1997 was $2.4 million, compared to 1996 operating
income of $610,000. The operating loss was primarily due to expenses associated
with the additional investment to support the expansion of the C\\2\\C network.
The expansion is in response to new carrier agreements, as well as existing
carrier customers who added new markets to the C\\2\\C network. To support
carrier agreements, the Company increased the number of nodes deployed for the
C\\2\\C network from 21 in 1996 to 50 at the end of 1997. However, revenues
generated from these new carriers and markets were not sufficient to offset the
costs associated with the expansion, including capital, telecommunications, and
personnel. The lag in revenues was due to both the timing of deployments as well
as delays in certain carrier marketing and distribution programs. The Company
expects that it will continue to incur additional capital and personnel costs to
support the C\\2\\C network due to continued expansion as well as ongoing
development to support enhancements and new features. These costs and other
costs to support the C\\2\\C network will continue to be a significant
percentage of revenue until the subscriber base and usage revenues grow
sufficiently to cover operating costs.

                                      -17-
<PAGE>
 
In August 1997, the Company completed a public offering and sold 3 million
shares of its common stock, raising net proceeds of approximately $35.8 million.
The proceeds are being utilized to support expenditures associated with the
C\\2\\C network, including capital and other operating costs and for general
corporate purposes, including working capital. A portion of the net proceeds may
also be used for the acquisition of businesses, products and technologies which
are complimentary to those of the Company. The Company currently has no plans,
commitments or negotiations with respect to any such transactions.

                                      -18-
<PAGE>
 
Results of Operations
---------------------

The following table sets forth, for the periods indicated, the percentage of
total revenues represented  by  certain items in the Company's Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
                                  PERCENTAGE OF TOTAL REVENUES
                                     YEAR ENDED DECEMBER 31,
                                   1997       1996       1995
----------------------------------------------------------------
<S>                              <C>        <C>        <C>
 
Revenues:
  Roaming services                   47.7%      63.6%      74.4%
  Teleservices                       25.0       26.5       25.6
  Prepaid wireless services          11.0        0.6        0.0
  System sales                       16.3        9.3        0.0
----------------------------------------------------------------
  Total revenues                    100.0      100.0      100.0
----------------------------------------------------------------
Expenses:
  Cost of service revenues           64.9       72.3       76.3
  Cost of system revenues             9.1        5.1        0.0
  Engineering, research
    and development                   8.0        6.4        2.5
  Sales and marketing                 7.5        5.8        5.7
  Management fees                     0.0        0.6        2.9
  General and administrative          5.1        4.5        3.8
  Depreciation and
    amortization                      8.1        4.1        2.6
  Impairment of long-lived
    assets                            0.8        0.0        0.0
----------------------------------------------------------------
  Total expenses                    103.5       98.8       93.8
----------------------------------------------------------------
Operating income (loss)              (3.5)       1.2        6.2
Interest income (expense)             1.6        1.2       (0.4)
----------------------------------------------------------------
Income (loss) from continuing
  operations before income taxes     (1.9)       2.4        5.8
Provision (benefit) for
  income taxes                       (0.3)       1.2       (3.0)
----------------------------------------------------------------
Income (loss) from continuing
  operations                         (1.6)       1.2        8.8
Loss from
  discontinued operations             0.0        0.0       (0.6)
----------------------------------------------------------------
Net income (loss)                    (1.6)       1.2        8.2
Accretion of dividends on
  redeemable preferred stock          0.0        0.9        2.7
----------------------------------------------------------------
Net income (loss) available to
common shareholders                  (1.6)%      0.3%       5.5%
----------------------------------------------------------------
</TABLE> 

                                      -19-
<PAGE>
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS
                                  (CONTINUED)

Years Ended December 31, 1997 and 1996


Service and system revenues
---------------------------

Total revenues increased 34.3% from $50.7 million in the year ended December 31,
1996 to $68.1 million in the year ended December 31, 1997. Roaming services
revenues remained stable in 1997 at $32.5 million compared to $32.2 million for
the year ended December 31, 1996. Although there were fewer suspensions of
inter-carrier automatic roaming agreements by the carriers in 1997, BCG was able
to offset this decrease in unregistered roaming traffic by expanding its billing
options and maintaining its market presence. Teleservices revenues increased
26.9% from $13.4 million in the year ended December 31, 1996 to $17.0 million in
the year ended December 31, 1997. This increase was primarily attributable to
new and additional services provided to existing and new carrier customers.
Included in these additional revenues are billing inquiry services offered to
the carrier's C2C prepaid customers. Prepaid wireless service revenues increased
from $312,000 in the year ended December 31, 1996 to $7.5 million in the year
ended December 31, 1997. As of December 31, 1997, 50 C2C network nodes were
deployed in various markets throughout the United States compared to 21 as of
December 31, 1996. At the end of 1997, these nodes were processing calls for
approximately 290,000 subscribers. System revenues increased 136.2% from $4.7
million in 1996 to $11.1 million in the year ended December 31, 1997. The
increase in system revenues was attributable to prepaid systems sold to new and
existing customers in Mexico and South America in 1997.

Cost of service revenues
------------------------

Cost of service revenues consist primarily of wireless network and landline
transmission costs in addition to the personnel costs associated with operator
assisted roaming service calls,  teleservice calls and C2C operations. Cost of
service revenues decreased as a percentage of service revenues from 79.6% to
77.5% in the years ended December 31, 1996 and 1997, respectively.  The decrease
in cost of service revenues as a percentage of service revenues was primarily
due to significant increases in revenue generated by C2C to better absorb its
operating costs and, to a lesser extent, increased labor efficiencies in roaming
services and teleservices.

Cost of system revenues
-----------------------

Cost of system revenues represent the cost of prepaid and voice systems sold by
the Systems Division. Cost of system revenues as of December 31, 1997 totaled
$6.2 million or 55.9% of system revenues and increased from $2.6 million or
54.9% of system revenues in the prior year. The reduction in the gross margin
resulted from a change in the mix of system sales towards international prepaid
sales which typically yield a lower margin.

Engineering, research and development expenses
----------------------------------------------

Engineering, research and development expenses primarily include the salaries
and benefits for software development and engineering personnel associated with
the development, implementation and maintenance of existing and new services.
Engineering, research and development expenses increased 68.8% from $3.2 million
in the year ended December 31, 1996 to $5.4 million in the year ended December
31, 1997 and increased as a percentage of revenues from 6.4% to 8.0% in the
years ended December 31, 1996 and 1997, respectively. This increase was
principally due to costs, including recruiting fees and other personnel costs,
associated with the Company's hiring of new personnel to support ongoing
development and enhancements, implementation and deployment of the C2C network,
and to a lesser extent, additional personnel and related costs to support the
expansion of teleservices and system sales. The Company intends to continue to
increase its engineering, research and development expenditures to support
future development and enhancements of its prepaid and other wireless services
and systems.

                                      -20-
<PAGE>
 
   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                   OPERATIONS
                                  (CONTINUED)

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, advertising and other promotional expenses. Sales and
marketing expenses increased 75.9% from $2.9 million in the year ended December
31, 1996 to $5.1 million in the year ended December 31, 1997, and increased as a
percentage of revenues from 5.8% to 7.5% in the years ended December 31, 1996
and 1997, respectively. The increase in sales and marketing expenses was due to
additional expenditures to support the concentrated efforts of the systems
division to expand internationally and the overall growth in the system sales.
These costs include additional sales and product management personnel,
commissions and other related expenses. Additional personnel, recruiting,
commissions and other personnel costs were also incurred to support sales and
marketing efforts in the prepaid service and teleservice divisions. The Company
expects to increase expenditures for sales, marketing and product management in
the future.


Management fees
---------------

Management fees of  $252,000 for the year ended December 31, 1996, represent the
costs associated with payroll and certain benefit costs of senior management
personnel responsible for the operations of the Company payable under the terms
of a Management Agreement with Boston Communications Capital Corporation. The
Management Agreement was terminated on March 31, 1996. As a result of the
termination, the entire payroll and related costs of these senior management
personnel now are being directly incurred by the Company and are recorded as
general and administrative expenses.


General and administrative expenses
-----------------------------------

General and administrative expenses include salaries and benefits and other
expenses that provide administrative support to the Company. General and
administrative expenses increased 52.2% from $2.3 million in the year ended
December 31, 1996 to $3.5 million in the year ended December 31, 1997. General
and administrative expenses increased as a percentage of revenues from 4.5% to
5.1% in the years ended December 31, 1996 and 1997, respectively. The rise in
general and administrative expenses was primarily attributable to additional
employees and related recruiting expenses to support the Company's growth along
with a full year of costs associated with being a publicly traded company. In
addition, the increase relates to the costs of senior management personnel that
were classified as management fees through March 31, 1996.


Depreciation and amortization expense
-------------------------------------

Depreciation and amortization expense includes depreciation of
telecommunications systems, furniture and equipment and leasehold improvements.
The Company provides for depreciation using the straight-line method over the
estimated useful lives of the assets, which range from three to seven years.
Goodwill related to acquisitions is being amortized over eight years.
Depreciation and amortization expense increased 162% from $2.1 million in the
year ended December 31, 1996 to $5.5 million in the year ended December 31,
1997. This increase was due primarily to the depreciation of additional
technical equipment and software to support the rapid expansion and continuing
development of the Company's prepaid wireless network. In addition, the
amortization of goodwill from the Company's acquisitions and depreciation of
technical equipment and software purchased for the teleservices business
resulted in greater depreciation and amortization expense in 1997. Depreciation
and amortization expense are expected to increase in 1998 due to increased
capital expenditures for telecommunications systems to support the continued
expansion and enhancement of the C2C network.

                                      -21-
<PAGE>
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS
                                  (CONTINUED)


Impairment of long-lived assets
-------------------------------

The Company recognized a pre-tax charge of $569,000 in the year ended December
31, 1997 for a one-time write-down of assets that are no longer being used to
support the Company's operations.


Interest income (expense)
-------------------------

Interest income increased from $589,000 in the year ended December 31, 1996 to
$1.1 million in the year ended December 31, 1997. Interest income was earned
from investments of the proceeds of the Company's  public offerings and was
offset slightly by interest expense from the Company's capital leases.


Provision (benefit) for income taxes
------------------------------------

The income tax expense of $600,000 for the year ended December 31, 1996 yielded
a 50% income tax rate. The income tax benefit of $188,000 for the year ended
December 31, 1997 yielded a 14% income tax benefit. The higher rate in 1996 and
lower benefit in 1997 resulted primarily from the non-deductibility of goodwill
from the Company's acquisitions. The effective income tax rate is expected to
continue to be greater than 40% in 1998 due to the continued impact of non-
deductible goodwill.

The Company has recorded a net deferred tax asset for net operating loss
carryforwards based on management's assessment that it is more likely than not
that future results of operations will be sufficient to realize this asset.


Income (loss) from continuing operations
----------------------------------------

The Company recognized income from continuing operations of $610,000 in the year
ended December 31, 1996 and a loss of $2.4 million in the year ended December
31, 1997.  The decrease in income from continuing operations reflects the
increased depreciation, telecommunication and personnel costs associated with
the deployment and operation of the C2C network.  The additional expenditures
were greater than the increase in C\\2\\C revenue due to delays in the
carrier marketing and distribution of prepaid services.

                                      -22-
<PAGE>
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS
                                  (CONTINUED)


Years Ended December 31, 1996 and 1995

Service and system revenues
---------------------------

Total revenues increased 48.2% from $34.2 million in the year ended December 31,
1995 to $50.7 million in the year ended December 31, 1996. Roaming service
revenues increased 26.8% from $25.4 million for the year ended December 31, 1995
to $32.2 million for the year ended December 31, 1996, due primarily to
increased revenues generated by higher call volumes from existing carrier
customers.  The increase in roaming service revenues generated from existing
carrier customers resulted from the general growth in the number of wireless
subscribers, increased roaming by wireless subscribers and increased frequency
in the suspension of inter-carrier roaming agreements between wireless carriers
due to greater incidents of wireless fraud. Teleservices revenues increased
52.2% from $8.8 million in the year ended December 31, 1995 to $13.4 million in
the year ended December 31, 1996. This increase was primarily attributed to new
and additional services provided to existing customers and new carrier
customers. Prepaid wireless services revenues in 1996 of $312,000 were generated
in markets where C2C was commercially available. As of December 31, 1996, 21 C2C
network switches were deployed in various markets throughout the United States.
Of these switches, fifteen were fully operational and processing live
transactions by the end of the year. System revenues of $4.7 million in 1996
consist principally of prepaid and voice systems sold by VST and Wireless
Americas Corporation (WAC), both acquired by the Company in 1996.


Cost of service revenues
------------------------

Cost of service revenues increased as a percentage of service revenues from
76.3% to 79.6% in the years ended December 31, 1995 and 1996, respectively. The
increase in cost of service revenues as a percentage of service revenues was
primarily due to the high initial operating costs as subscribers are added and
usage is generated on the C2C network and, to a lesser extent, due to higher per
minute cellular network charges for roaming service revenues.

Cost of system revenues
-----------------------

Cost of system revenues totaling $2.6 million represent costs associated with
systems sold in 1996.


Engineering, research and development expenses
----------------------------------------------

Engineering, research and development expenses increased 281.4% from $839,000 in
the year ended December 31, 1995 to $3.2 million in the year ended December 31,
1996 and increased as a percentage of revenues from 2.5% to 6.4% in the years
ended December 31, 1995 and 1996, respectively. This increase was principally
due to costs associated with the Company's hiring of new personnel to support
the development, implementation and deployment of the C2C network for its
prepaid service, and to a lesser extent, additional personnel to support the
expansion of its teleservices.


Sales and marketing expenses
----------------------------

Sales and marketing expenses increased 52.6% from $1.9 million in the year ended
December 31, 1995 to $2.9 million in the year ended December 31, 1996, and
increased as a percentage of revenues from 5.7% to 5.8% in the years ended
December 31, 1995 and 1996, respectively. The increase in sales and marketing
expenses was due primarily to additional expenditures to support the more sales
intensive prepaid service business and to support concentrated sales and
marketing efforts related to teleservices.


                                      -23-
<PAGE>
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS
                                  (CONTINUED)
                                        
Management fees
---------------

Management fees of $1.0 million and $252,000 for the years ended December 31,
1995 and 1996, respectively, represent the costs associated with payroll and
certain benefit costs of senior management personnel.

General and administrative expenses
-----------------------------------

General and administrative expenses increased 76.9% from $1.3 million in the
year ended December 31, 1995 to $2.3 million in the year ended December 31,
1996. Total general and administrative expenses increased as a percentage of
revenues from 3.8% to 4.5% in the years ended December 31, 1995 and 1996,
respectively. This increase was primarily attributable to an increased number of
employees and related expenses to support the Company's growth and to the costs
of senior management personnel that were classified as management fees through
March 31, 1996.


Depreciation and amortization expense
-------------------------------------

Depreciation and amortization expense increased 136.2% from $889,000 in the year
ended December 31, 1995 to $2.1 million in the year ended December 31, 1996.
This increase was due primarily to amortization of goodwill from the Company's
two acquisitions and depreciation of additional technical equipment and software
to support the Company's roaming services, teleservices and prepaid wireless
services. In addition, the expansion of the Company's call centers and Systems
assembly facility resulted in increased depreciation of furniture, equipment and
leasehold improvements.


Interest income (expense)
-------------------------

Interest expense was $151,000 in the year ended December 31, 1995 and interest
income was $589,000 in the year ended December 31, 1996. Interest expense in
1995 resulted from interim period borrowings under the Company's Account
Purchase Agreement which was terminated in 1996. Interest income was earned in
1996 from investments of the proceeds of the Company's initial public offering
(IPO) and was partially offset by interest expense from the Account Purchase
Agreement and capital leases.


Provision (benefit) for income taxes
------------------------------------

The income tax benefit of $1.0 million for the year ended December 31, 1995 was
attributable to the Company's reversal of its valuation reserve. The income tax
expense of $600,000 for the year ended December 31, 1996 yielded a 50% income
tax rate. The income tax rate in 1996 was due primarily to the non-deductibility
of goodwill from the VST and WAC acquisitions.

Income (loss) from continuing operations
----------------------------------------

The Company recognized income from continuing operations of $2.1 million in the
year ended December 31, 1995 and $610,000 in the year ended December 31, 1996.
The decrease in income from continuing operations reflects the increased
depreciation, telecommunication costs and personnel costs associated with the
deployment of the C2C network and the expansion of the Company's facilities.
This decrease in income from continuing operations in 1996 was partially offset
by operating profit earned by VST from system sales.

Loss from discontinued operations
---------------------------------

The loss of $165,000 from discontinued operations in the year ended December 31,
1995 represents the loss from operations of $129,000 associated with the
Company's cellular sales and service business and the loss on sale of that
business of $36,000.

                                      -24-
<PAGE>
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS
                                  (CONTINUED)


Selected Quarterly Operating Results
------------------------------------

The following table sets forth certain unaudited quarterly results of operations
of the Company for the eight quarters in the two year period ended December 31,
1997, including such amounts expressed as a percentage of revenues. This
quarterly information is unaudited, has been prepared on the same basis as the
audited Consolidated Financial Statements and, in the opinion of the Company's
management, reflects all necessary adjustments, consisting only of normal
recurring adjustments 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.

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED
                              MARCH 31,   JUNE 30,   SEPT. 30,  DEC. 31,   MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,
                                 1996       1996       1996       1996        1997       1997        1997       1997
-----------------------------------------------------------------------------------------------------------------------
<S>                             <C>        <C>        <C>        <C>        <C>         <C>        <C>         <C>
(In Thousands)
Revenues:
 Roaming services               $ 7,214    $ 8,327     $ 8,873   $ 7,820     $ 7,012    $ 8,048     $ 9,241   $  8,160
 Teleservices                     3,847      3,303       3,272     2,991       3,789      4,375       4,369      4,476
 Prepaid wireless services           --         69          42       201         790      1,513       2,571      2,665
 System sales                        92      1,141       1,726     1,733       4,028      2,417       1,852      2,793
-----------------------------------------------------------------------------------------------------------------------
    Total revenues               11,153     12,840      13,913    12,745      15,619     16,353      18,033     18,094
Expenses:
 Cost of service revenues         8,311      9,465       9,763     9,067       9,419     10,882      11,954     11,925
 Cost of system revenues             37        553       1,076       910       2,640      1,095         814      1,652
 Engineering, research and
    development                     419        744         957     1,101       1,029      1,168       1,593      1,643
 Sales and marketing                558        638         680     1,073       1,063      1,230       1,358      1,438
 Management fees                    252         --          --        --          --         --          --         --
 General and
    administration                  482        621         607       618         649        824         833      1,164
 Depreciation and
    amortization                    359        477         557       716         890      1,203       1,534      1,919
 Impairment of long-lived
    assets                           --         --          --        --          --         --          --        569
-----------------------------------------------------------------------------------------------------------------------
    Total expenses               10,418     12,498      13,640    13,485      15,690     16,402      18,086     20,310
-----------------------------------------------------------------------------------------------------------------------
Operating income (loss)             735        342         273      (740)        (71)       (49)        (53)    (2,216)
Interest income (expense)            (6)       (75)        341       329         262        135         254        434
-----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing 
  operations before income taxes    729        267         614      (411)        191         86         201     (1,782)
Provision (benefit) for
  income taxes                      300        123         283      (106)         98         43         100       (429)
-----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
  operations                    $   429    $   144     $   331   $  (305)    $    93    $    43     $   101   $ (1,353)
=======================================================================================================================
</TABLE>

                                      -25-
<PAGE>
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS
                                  (CONTINUED)

                       AS A PERCENTAGE OF TOTAL REVENUES
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                    MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MARCH 31,   JUNE 30,   SEPT. 30   DEC. 31,
                                      1996       1996        1996       1996        1997       1997       1997       1997
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>         <C>        <C>         <C>        <C>         <C>        <C>        <C>        
Revenues:
  Roaming services                       64.7%      64.8%       63.8%      61.4%       44.9%      49.2%      51.2%      45.1%
  Teleservices                           34.5       25.7        23.5       23.5        24.3       26.8       24.2       24.7
  Prepaid wireless services                --        0.5         0.3        1.6         5.0        9.2       14.3       14.7
  System sales                            0.8        9.0        12.4       13.5        25.8       14.8       10.3       15.5
-----------------------------------------------------------------------------------------------------------------------------------
    Total revenues                      100.0      100.0       100.0      100.0       100.0      100.0      100.0      100.0
Expenses:
  Cost of service revenues               74.5       73.7        70.1       71.1        60.3       66.6       66.3       65.9
  Cost of system revenues                 0.3        4.3         7.7        7.1        16.9        6.7        4.5        9.1
  Engineering, research and
    development                           3.8        5.8         6.9        8.7         6.6        7.1        8.8        9.1
  Sales and marketing                     5.0        5.0         4.9        8.4         6.8        7.5        7.5        8.0
  Management fees                         2.3         --          --         --          --         --         --         --
  General and
    administrative                        4.3        4.8         4.4        4.9         4.2        5.0        4.6        6.4
  Depreciation and
    amortization                          3.2        3.7         4.0        5.6         5.7        7.4        8.5       10.6
  Impairment of long-lived assets          --         --          --         --          --         --         --        3.1
-----------------------------------------------------------------------------------------------------------------------------------
    Total expenses                       93.4       97.3        98.0      105.8       100.5      100.3      100.2      112.2 
-----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss)                   6.6        2.7         2.0       (5.8)       (0.5)      (0.3)      (0.2)     (12.2)
Interest income (expense)                (0.1)      (0.6)        2.4        2.6         1.7        0.8        1.4        2.4
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
  operations before income taxes          6.5        2.1         4.4       (3.2)        1.2        0.5        1.2       (9.8)
Provision (benefit) for
income taxes                              2.7        1.0         2.0       (0.8)        0.6        0.2        0.6       (2.3)
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations                                3.8%       1.1%        2.4%      (2.4)%       0.6%       0.3%       0.6%      (7.5)%
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE> 

                                      -26-
<PAGE>
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS
                                  (CONTINUED)


The Company has experienced fluctuations in its quarterly operating results and
anticipates that such fluctuations will continue and could intensify. The
Company's quarterly operating results may vary significantly depending on a
number of factors, including the timing of the introduction or acceptance of new
services offered by the Company or its competitors, changes in the mix of
services provided by the Company, changes in regulations affecting the wireless
industry, changes in the Company's operating expenses, personnel changes, and
general economic conditions. In particular, the Company's roaming services
revenues are affected by the frequency and volume of use of the Company's
roaming services, which may be influenced by seasonal trends, as well as changes
in demand during particular periods due to a higher or lower incidence of
temporary suspension of inter-carrier roaming agreements in certain markets.
Teleservices revenues may be influenced by the requirements of one or more of
the Company's significant teleservices customers, including engagement of the
Company for implementing or assisting in implementing special projects of
limited duration.

Because a significant portion of the Company's operating expenses are committed
in advance, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, unexpected revenue
shortfalls could cause significant variations in operating results from quarter
to quarter and could have a material adverse effect on the Company's results of
operations. As a result, the Company believes that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as an indication of likely future performance.

During 1997, the Company made significant investments in personnel and
infrastructure to support the ongoing development and deployment of the C2C
network. These strategic investments have negatively impacted earnings and the
Company expects that these strategic investments will continue to negatively
impact earnings in the short-term.


Liquidity and Capital Resources
-------------------------------

Cash, cash equivalents and short-term investments increased from $21.4 million
in 1996 to $33.7 million in 1997. The increase was due primarily to proceeds of
$35.8 million from the Company's public offering in 1997. Net cash provided by
operations was $4.4 million in 1997 due primarily to $5.5 million in
depreciation and amortization expense, resulting from a significant investment
in telecommunications systems and equipment, offset by a net loss of $1.1
million in 1997.

The Company's investing activities utilized $19.6 million of net cash in 1997.
The proceeds of the public offering were invested in short-term investments to
finance the growth of the business. In addition, $1.4 million was paid to
purchase the remaining 20% interest in WAC. The Company expended $28.6 million
to purchase property and equipment to support the expansion and growth of its
business. These purchases included $21.5 million of telecommunications systems
equipment and software to support the expansion of the Company's C2C network.
The Company anticipates that over the next 12 months significant capital
investments will be made to support service enhancements and additional nodes to
support the C2C network.

The Company's financing activities generated net cash of $37.9 million in 1997.
Through a public offering, the Company raised proceeds of $35.8 million, which
are being utilized for capital expenditures for the C2C network and for general
corporate purposes, including working capital.  A portion of the net proceeds
may also be used for the acquisitions of businesses, products and technologies
which are complimentary to those of the Company.  The Company currently has no
plans, commitments or negotiations with respect to any such transactions.

The Company entered into capital leases in 1997 to finance $3.2 million of
telecommunications equipment and software to expand and enhance teleservices and
prepaid wireless services.

The Company believes that its short-term investments and the funds anticipated
to be generated from operations will be sufficient to finance the Company's
operations for at least the next 18 months.

The Company has begun to review its computer systems for Year 2000 compliance 
and has designed a plan to test whether their systems will conform to Year 2000 
requirements. The Company is expensing all costs associated with these system 
changes and does not anticipate that these costs will have a material impact on 
its financial position or results of operations. Although management does not 
expect Year 2000 issues to have a material impact on its business or results of 
operations, there can be no assurance that there will not be interruptions of 
operations or other limitations of system functionality.

                                      -27-
<PAGE>
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS
                                  (CONTINUED)


Certain Factors That May Affect Future Results
----------------------------------------------

This Annual Report contains forward-looking statements that involve risks and
uncertainties including statements regarding increased research and development
expenditures, costs of deploying and supporting the C2C network, increased
expenditures for sales and marketing and greater costs of depreciation and
amortization. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. A number of uncertainties
exist that could affect the Company's future operating results, including,
without limitation, technological changes in the Company's industry, the ability
of the Company to continue to successfully support its C2C network, the ability
of the Company's carrier customers to successfully market and sell C2C prepaid
wireless services, the Company's ability to retain existing customers and
attract new customers, increased competition and general economic factors.

Historically, a significant portion of the Company's revenues in any particular
period have been attributable to a limited number of customers. This
concentration of customers can cause the Company's revenues and earnings to
fluctuate from quarter to quarter, based on the volume of call traffic generated
through these customers, the services being performed for the teleservices
programs and the level of system sales. A significant decrease in business from
any of the Company's major customers, including a decrease in business due to
factors outside of the Company's control, would have a material adverse effect
on the Company's business, financial condition and results of operations.

The Company historically has provided its services almost exclusively to
wireless carriers.  Although the wireless telecommunications market has
experienced significant growth in recent years, there can be no assurance that
such growth will continue at similar rates, or at all, or that wireless carriers
will continue to use the Company's services.  In addition, prepaid wireless and
PCS services are relatively new services in new markets, and if these markets do
not grow as expected or if the carriers in these markets do not use the
Company's services, the Company's business, financial condition and results of
operations would be materially and adversely affected.

The Company's future success depends, in large part, on the continued use of its
existing services and systems, the acceptance of new services in the wireless
industry and the Company's ability to develop new services and systems or adapt
existing services or systems to keep pace with changes in the wireless telephone
industry. Further, a rapid shift away from the use of wireless in favor of other
services, could affect demand for the Company's service offerings and could
require the Company to develop modified or alternative service offerings to
address the particular needs of the providers of such new services. There can be
no assurance that the Company will be successful in developing or marketing its
existing or future service offerings or systems in a timely manner, or at all.

The Company is currently devoting significant resources toward the enhancement
and deployment of its prepaid wireless services and systems, including continued
expansion of its C2C network. There can be no assurance that the Company will
successfully support and enhance the C2C network effectively, that the market
for the Company's prepaid service will continue to develop, or that the
Company's C2C network will successfully support current and future growth.
Furthermore, the Company has expanded significant amounts of capital to support
the C\\2\\C agreements it has secured with its carrier customers. Because
C\\2\\C revenues are principally generated by prepaid subscriber minutes of use,
the Company's C\\2\\C revenues can be impacted by the carrier's ability to
successfully market and sell prepaid services. In addition, teleservices
revenues associated with billing inquiry support for C\\2\\C customers are
becoming a more significant portion of teleservices revenues and therefore these
revenues are dependent upon the size and growth of the C\\2\\C subscriber base.

The Company has expanded its operations rapidly creating significant demands on
the Company's administrative, operational, development and financial personnel
and other resources. Additional expansion by the Company may further strain the
Company's management, financial and other resources. There can be no assurance
that the Company's systems, procedures, controls and existing space will be
adequate to support expansion of the Company's operations. If the Company's
management is unable to manage growth effectively, the quality of the Company's
services, its ability to retain key personnel and its business, financial
condition and results of operations could be materially and adversely affected.

                                      -28-
<PAGE>
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS
                                  (CONTINUED)

The market for services to wireless carriers is highly competitive and subject
to rapid change. A number of companies currently offer one or more of the
services offered by the Company. In addition, many wireless carriers are
providing or can provide, in-house, the services that the Company offers. In
addition, the Company anticipates continued growth and competition in the
wireless carrier services industry and consequently, the entrance of new
competitors in the future. An increase in competition could result in price
reductions and loss of market share and could have a material adverse effect on
the Company's business, financial condition or results of operations.

The Company's success and ability to compete is dependent in part upon its
proprietary technology. If unauthorized copying or misuse of the Company's
technology were to occur to any substantial degree, the Company's business,
financial condition and results of operations could be materially adversely
affected. In addition, some of the software used to support the Company's
services is licensed by the Company from single vendors, which are small
corporations. There can be no assurance that these suppliers will continue to
license this software to the Company or, if any supplier terminates its
agreement with the Company, that the Company will be able to develop or
otherwise procure software from another supplier on a timely basis and at
commercially acceptable prices.

The Company's operations are dependent on its ability to maintain its computer,
switching and other telecommunications equipment and systems in effective
working order and to protect its systems against damage from fire, natural
disaster, power loss, telecommunications failure or similar events. Any damage,
failure or delay that causes interruptions in the Company's operations could
have a material adverse effect on the Company's business, financial condition
and results of operations.

                                      -29-
<PAGE>
 
                                  APPENDIX B

                                      -30-
<PAGE>
 
                          CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                                                                       DECEMBER 31,
                                                                                      1997       1996
-------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>        <C>
Assets
Current assets:
 Cash and cash equivalents                                                          $ 23,601   $   923
 Short-term investments                                                               10,103    20,498
 Accounts receivable, net of allowance for billing adjustments and
  doubtful accounts of $1,304 in 1997 and $1,242 in 1996                              12,445    11,060
 Inventory                                                                             1,550     1,189
 Deferred income taxes                                                                 1,564     1,334
 Prepaid expenses                                                                        630       495
-------------------------------------------------------------------------------------------------------
   Total current assets                                                               49,893    35,499
Property and equipment:
 Telecommunication systems                                                            34,907     9,169
 Furniture and equipment                                                               5,739     3,359
 Leasehold improvements                                                                1,725       903
 Systems in development                                                                3,639     2,658
-------------------------------------------------------------------------------------------------------
                                                                                      46,010    16,089
Less allowances for depreciation and amortization                                      7,923     3,183
-------------------------------------------------------------------------------------------------------
                                                                                      38,087    12,906
Goodwill, net                                                                          4,067     3,159
Other assets                                                                           1,338       395
-------------------------------------------------------------------------------------------------------
   Total assets                                                                     $ 93,385   $51,959
-------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
 Accounts payable                                                                   $  2,786   $ 1,371
 Accrued expenses                                                                      7,304     7,205
 Income taxes payable                                                                    466       490
 Current maturities of capital lease obligations                                       1,127        --
-------------------------------------------------------------------------------------------------------
   Total current liabilities                                                          11,683     9,066
 
Capital lease obligations, net of current maturities                                   1,598        --
 
Commitments and contingencies
Shareholders' equity:
  Preferred Stock, par value $.01 per share, 2,000,000 shares authorized,
  0 shares issued and outstanding                                                         --        --
 Common Stock, voting, par value $.01 per share, 35,000,000 shares authorized,
  16,273,947 shares in 1997 and 12,725,749 shares in 1996 issued and outstanding         163       127
 Additional paid-in capital                                                           91,029    52,738
 Treasury Stock (46,420 shares at cost)                                                 (372)     (372)
 Accumulated deficit                                                                 (10,716)   (9,600)
-------------------------------------------------------------------------------------------------------
   Total shareholders' equity                                                         80,104    42,893
-------------------------------------------------------------------------------------------------------
   Total liabilities and shareholders' equity                                       $ 93,385   $51,959
-------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.

                                      -31-
<PAGE>
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                                  1997       1996      1995
---------------------------------------------------------------------------------------------
<S>                                                             <C>        <C>       <C>
Revenues:
 Roaming services                                                $32,461   $32,234   $25,446
 Teleservices                                                     17,009    13,413     8,774
 Prepaid wireless services                                         7,539       312        --
 System sales                                                     11,090     4,692        --
---------------------------------------------------------------------------------------------
                                                                  68,099    50,651    34,220
Expenses:
 Cost of service revenues                                         44,180    36,606    26,100
 Cost of system revenues                                           6,201     2,576        --
 Engineering, research and development                             5,433     3,221       839
 Sales and marketing                                               5,089     2,949     1,934
 Management fees                                                      --       252     1,008
 General and administrative                                        3,470     2,328     1,321
 Depreciation and amortization                                     5,546     2,109       889
 Impairment of long-lived assets                                     569        --        --
---------------------------------------------------------------------------------------------
                                                                  70,488    50,041    32,091
---------------------------------------------------------------------------------------------
Operating income (loss)                                           (2,389)      610     2,129
Interest income (expense)                                          1,085       589      (151)
---------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes      (1,304)    1,199     1,978
Provision (benefit) for income taxes                                (188)      600    (1,030)
---------------------------------------------------------------------------------------------
Income (loss) from continuing operations                          (1,116)      599     3,008
Discontinued operations:
 Loss from operations                                                 --        --      (129)
 Loss on disposal                                                     --        --       (36)
---------------------------------------------------------------------------------------------
Loss from discontinued operations                                     --        --      (165)
---------------------------------------------------------------------------------------------
Net income (loss)                                                 (1,116)      599     2,843
Accretion of dividends on redeemable preferred stock                  --      (451)     (950)
---------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders               $(1,116)  $   148   $ 1,893
---------------------------------------------------------------------------------------------
Basic net income (loss) available to common shareholders:
 Continuing operations                                           $ (0.08)  $  0.02   $  0.62
 Net income (loss)                                               $ (0.08)  $  0.02   $  0.57
 Shares used in computing basic net income (loss) per share       14,007     8,352     3,336
 
Diluted net income (loss) available to common shareholders:
 Continuing operations                                           $ (0.08)  $  0.01   $  0.24
 Net income (loss)                                               $ (0.08)  $  0.01   $  0.22
 Shares used in computing diluted net income (loss) per share     14,359    10,884     8,692
---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.

                                      -32-
<PAGE>
 
 CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE> 
<CAPTION> 
                                                      SHAREHOLDERS' EQUITY                                               
                            -------------------------------------------------------------------                          
                               REDEEMABLE                        CONVERTIBLE                                              
                             PREFERRED STOCK  TREASURY STOCK   PREFERRED STOCK    COMMON STOCK                              
                            ----------------------------------------------------------------------                           
                             SHARES  DOLLARS  SHARES  DOLLARS  SHARES DOLLARS    SHARES    DOLLARS                            
--------------------------------------------------------------------------------------------------
<S>                          <C>    <C>      <C>     <C>      <C>      <C>   <C>        <C>      
                                                                                               
Balance at January 1, 1995   11,871 $ 14,946      --       --     850     $ 1  3,335,985      $ 33   
  Accretion of dividends                                                                       
   on Redeemable                                                                               
   Preferred Stock               --      950      --       --      --      --         --        --    
  Net income                     --       --      --       --      --      --         --        --    
--------------------------------------------------------------------------------------------------
Balance at December 31,                                                                        
  1995                       11,871   15,896      --       --     850       1  3,335,985        33    
  Conversion of                                                                                
   Convertible                                                                                 
   Preferred Stock               --       --      --       --    (850)     (1) 5,004,608        50    
  Accretion of dividends                                                                       
   on Redeemable                                                                               
   Preferred Stock               --      451      --       --      --      --         --        --    
  Redemption of                                                                                
   Redeemable                                                                                  
   Preferred Stock and                                                                         
   Accreted Dividends       (11,871) (16,347)     --       --      --      --         --        --    
  Issuance of Common                                                                           
   Stock                         --       --      --       --      --      --  4,183,928        42    
  Exercise of Common                                                                           
   Stock options                 --       --      --       --      --      --    201,228         2     
  Treasury Stock                                                                               
   Purchase                      --       --  46,420     (372)     --      --         --        --    
  Net income                     --       --      --       --      --      --         --        --    
--------------------------------------------------------------------------------------------------
Balance at December 31,                                                                        
  1996                           --       --  46,420     (372)     --      -- 12,725,749       127                             
  Issuance of Common                                                                           
   Stock and options             --       --      --       --      --      --  3,000,000        30    
  Exercise of Common                                                                             
   Stock options                 --       --      --       --      --      --    548,198         6
Net loss                         --       --      --       --      --      --         --        --
--------------------------------------------------------------------------------------------------
Balance at December 31,                                                                        
  1997                           -- $     --  46,420    $(372)     --     $--   16,273,947    $163
--------------------------------------------------------------------------------------------------
<CAPTION> 

                                     SHAREHOLDERS' EQUITY      
---------------------------------------------------------------------------
                                          ACCRETIONS                
                                         OF DIVIDENDS               
                                ADDI-     ON REDEEM-                  SHARE-
                               TIONAL      ABLE PRE-      ACCU-      HOLDERS'
                               PAID IN      FERRED       MULATED      EQUITY
                               CAPITAL      STOCK        DEFICIT     (DEFICIT)
------------------------------------------------------------------------------
<S>                           <C>        <C>             <C>         <C>
Balance at January 1, 1995    $ 1,016      $(3,075)      $(8,566)     $(10,591)
  Accretion of dividends                                            
   on Redeemable                                                    
   Preferred Stock                 --         (950)           --          (950)
  Net income                       --           --         2,843         2,843
-------------------------------------------------------------------------------
Balance at December 31,                                             
  1995                          1,016       (4,025)       (5,723)       (8,698)
  Conversion of                                                     
   Convertible                                                      
   Preferred Stock                (49)          --            --            --
  Accretion of dividends                                            
   on Redeemable                                                    
   Preferred Stock                 --         (451)           --          (451)
  Redemption of                                                     
   Redeemable                                                       
   Preferred Stock and                                              
   Accreted Dividends              --        4,476        (4,476)           --
  Issuance of Common                                                
   Stock                       51,745           --            --        51,787
  Exercise of Common                                                
   Stock options                   26           --            --            28
  Treasury Stock                                                    
   Purchase                        --           --            --          (372)
  Net income                       --           --           599           599
--------------------------------------------------------------------------------
Balance at December 31,                                             
  1996                         52,738           --        (9,600)       42,893
  Issuance of Common                                                
   Stock and options           35,769           --            --        35,799
  Exercise of Common                                                  
   Stock options                2,522           --            --         2,528
  Net loss                         --           --        (1,116)       (1,116)
------------------------------------------------------------------------------
Balance at December 31,                                                                       
 1997                         $91,029      $    --      $(10,716)     $ 80,104
------------------------------------------------------------------------------
</TABLE> 
See accompanying notes.                                

                                      -33-
<PAGE>
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)
<TABLE>                    
<CAPTION>                  
                                                                   YEAR ENDED DECEMBER 31,
                                                                 1997        1996       1995
--------------------------------------------------------------------------------------------------
<S>                                                         <C>         <C>          <C>
OPERATING ACTIVITIES       
Income (loss) from continuing operations                      $ (1,116)   $   599      $ 3,008
Adjustments to reconcile   
net income (loss) to net cash
provided by (used in)      
operating activities:      
  Depreciation and amortization                                  5,546      2,109          888
  Deferred income taxes                                           (230)       466       (1,800)
  Impairment of long-lived assets                                  569         --           --
Changes in operating       
   assets and liabilities, 
   excluding effects of    
   discontinued            
   operations and business 
   acquisitions:           
    Accounts receivable                                         (1,385)    (3,208)      (2,655)
    Inventory                                                     (361)    (1,128)          --
    Prepaid expenses and other assets                             (151)      (547)         (51)
    Accounts payable and accrued expenses                        1,514        524        1,225
    Income taxes payable                                           (24)      (297)         679
--------------------------------------------------------------------------------------------------
                                                                 4,362     (1.482)       1,294
Loss from discontinued operations                                   --         --         (166)
Adjustments to reconcile loss from
 discontinued operations:  
 Loss on disposal of discontinued operations                        --         --           37
 Cash flow related to results of operations until
  disposal date                                                     --         --          803
--------------------------------------------------------------------------------------------------
                                                                    --         --          674
--------------------------------------------------------------------------------------------------
 Net cash provided by (used in) operations                       4,362     (1,482)       1,968
 
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired                 (1,398)      (846)          --
Purchase of short-term investments                             (12,976)   (26,937)          --
Sale of short-term investments                                  23,371      6,439           --
Purchase of property and equipment                             (28,552)    (8,093)      (2,993)
Net proceeds from sale of lines of business                         --         --        1,074
--------------------------------------------------------------------------------------------------
Net cash used in investing activities                          (19,555)   (29,437)      (1,919)
 
FINANCING ACTIVITIES
Proceeds from exercise of stock options                          2,528         28           --
Proceeds from issuance of stock                                 35,799     49,787           --
Repurchase of redeemable preferred stock                            --    (16,347)          --
Purchase of treasury stock                                          --       (372)          --
Repayment of long-term capital leases                             (456)    (1,507)          --
--------------------------------------------------------------------------------------------------
Net cash provided by financing activities                       37,871     31,589           --
--------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents                           22,678        670           49
--------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year                     923        253          204
--------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                    $   23,601   $    923      $   253
--------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE> 

                                      -34-
<PAGE>
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                        
1. BASIS OF PRESENTATION

The Company

Boston Communications Group, Inc. (the Company) develops, markets and provides
specialized roaming services, teleservices and prepaid wireless services to the
wireless telephone industry. The Company also manufactures prepaid and voice
system equipment.

2. SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

The Company earns revenues by providing teleservices, processing prepaid
wireless calls and processing wireless calls for individuals who have roamed
outside of their service area. Revenue is recognized when the service is
provided and is recorded net of estimated chargebacks and other billing
adjustments. The Company recognizes revenue from the sale of systems at the time
the systems are shipped.

Principles of Consolidation

The financial statements include 100% of the accounts and operations of the
Company and all of its majority-owned subsidiaries. All intercompany accounts
and transactions have been eliminated.

Investments

The Company accounts for its marketable securities under the Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain
Instruments in Debt and Equity Securities." The Company has classified all of
its securities as available-for-sale, and are thus reported at fair market
value. Interest on all securities is reported as interest income.

Investments with maturities between three and twelve months are considered
short-term investments. The Company's short-term investments consist of debt
securities such as corporate notes and marketable direct obligations of the
United States Treasury. The following is a summary of available-for-sale
securities(in thousands):
<TABLE>
<CAPTION>
                                    December 31,
                                   1997     1996
--------------------------------------------------
<S>                              <C>      <C>
Corporate notes                   $10,103  $ 3,965
U.S. Treasury bills                    --   16,533
--------------------------------------------------
  Total short-term investments    $10,103  $20,498
==================================================
</TABLE>

Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, 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.

Concentrations of Credit Risk

The Company's roaming customers are individuals who place wireless calls from
service areas which are not covered by traditional roaming agreements. These
calls are forwarded by wireless carriers to the Company for processing. Each
transaction is small in size and the Company minimizes credit risk by validating
appropriate billing information. Teleservices are provided to wireless carriers
located throughout the country. The Company's prepaid wireless services provide
carriers, throughout the United States and Canada, with an alternative billing
facility for their wireless customers. Accounts are not activated until payment
is received by the carrier. The Company sells its voice systems in North America
and its prepaid systems in North and South America and Europe.

                                      -35-
<PAGE>
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)



The Company has roaming, teleservice and prepaid wireless service agreements
with, and sells its systems to numerous carriers, 10 of which accounted for
84.6%, 82.4% and 74.5% of the Company's total revenues for the years ended
December 31, 1995, 1996 and 1997, respectively. The following table summarizes
sales in excess of 10% of total revenues, as a percentage of total revenues, to
major customers:
<TABLE>
<CAPTION>
 
                                           YEAR ENDED DECEMBER 31,
                                            1997     1996     1995
--------------------------------------------------------------------
<S>                                       <C>       <C>      <C>
Ameritech Cellular                           11.6%    14.8%    15.0%
Bell Atlantic Mobile                         11.6     12.3     13.9
Southern New England Telephone Corp.           --       --     11.9
Southwestern Bell Mobile Systems, Inc.       10.6       --       --
BellSouth Cellular Corp.                       --     11.4       --
</TABLE>

Inventory

Inventory, which consists of computer hardware and electronic components, is
recorded at the lower of cost (first-in, first-out method) or market. Inventory
is categorized as follows at December 31, (in thousands):
<TABLE>
<CAPTION>
                    1997    1996
---------------------------------
<S>                <C>     <C>
 
Raw materials      $1,114  $  984
Work in process       127     129
Finished goods        309      76
---------------------------------
                   $1,550  $1,189
=================================
</TABLE>

Property and Equipment

Property and equipment are recorded at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets, which range from 3 to 7
years. Systems in development represent the cost of purchased hardware and
software to be used in switching equipment not yet placed into service and will
be depreciated between 3 and 5 years. Interest paid on funds borrowed to finance
the purchase of telecommunications systems is capitalized while in development.
During 1997, $46,000 in interest was capitalized.

In accordance with Financial Accounting Standards Board No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," the Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If it is determined that the carrying amount of an asset cannot
be fully recovered, an impairment loss is recognized.  During 1997, the Company
recorded an impairment loss of $569,000 for equipment which could no longer be
used in its business.  The Company intends to sell these assets in 1998 and has
adjusted the net book value of the equipment to the estimated sales value of
$955,000.

Goodwill

Goodwill represents the excess of cost of acquired businesses over the fair
market value of all net assets acquired. Goodwill is being amortized on a
straight-line basis over an eight year period. Accumulated amortization totaled
$296,000 and $786,000 as of December 31, 1996 and 1997, respectively.

Engineering, Research and Development

Costs associated with engineering, research and development are expensed as
incurred.

                                      -36-
<PAGE>
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) in accounting for its stock-
based compensation plans, rather than the alternative fair value accounting
method provided for under Financial Accounting Standards Board Statement No.
123, "Accounting for Stock-Based Compensation," as this alternative requires the
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, since the exercise price of options
granted under these plans equals the market price of the underlying stock on the
date of grant, no compensation expense is required.

Net Income (Loss) Per Share

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share.  Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities.  Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share.  Pursuant to the previous requirements of the Securities and
Exchange Commission (SEC), common shares and common share equivalents issued by
the Company during the twelve-month period prior to the initial public offering
of the Company's common stock had been included in the calculations as if they
were outstanding for all periods prior to the offering in June 1996 whether or
not they were anti-dilutive.

In February 1998, the SEC issued Staff Accounting Bulletin 98 which, among other
things, conformed prior SEC requirements to Statement 128 and eliminated
inclusion of such shares in the computation of earnings per share.  All earnings
per share amounts for all periods have been presented and where appropriate,
restated to conform to the Statement 128 and SEC requirements.

Accounting Pronouncements

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information."  Both SFAS No. 130 and SFAS No. 131 are effective for fiscal years
beginning after December 15, 1997.  The Company believes that the adoption of
these new accounting standards will not have a material impact on the Company's
consolidated financial statements.

3. DISCONTINUED OPERATIONS

On March 31, 1995, the Company sold the net assets of its cellular sales and
service subsidiary for $573,000.

The results of the discontinued operations for the year ended December 31, 1995
are summarized below:

(In thousands)
-----------------------------
Revenues             $1,001  
-----------------------------
Operating loss       $ (129) 
-----------------------------
Loss on disposal     $  (36) 
-----------------------------

                                      -37-
<PAGE>
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

4. ACQUISITIONS

In February 1996, the Company acquired the net assets of Voice Systems
Technology Inc. (VST), a company which develops and markets prepaid and voice
processing systems, for approximately $2.5 million ($500,000 cash and 265,373
shares of common stock). VST had revenues and net income for the 11 months ended
February 29, 1996 of $2.1 million and $9,000, respectively. The acquisition has
been accounted for under the purchase method of accounting and the results of
operations have been included in the Company's results of operations from the
date of acquisition. The allocation of the purchase price is based on the fair
market value of assets and liabilities acquired and the excess over those
amounts is accounted for as goodwill. The allocation of the purchase price is as
follows:
<TABLE>
<CAPTION>
(in thousands)
-----------------------------------------------
<S>                                  <C>
 
Property and equipment                  $  106
Accounts receivable, net                    51
Other current assets                        68
Accounts payable and accrued expenses     (312)
Other current liabilities                  (59)
Goodwill                                 2,683
-----------------------------------------------
                                        $2,537
===============================================
</TABLE> 
On January 31, 1996, the Company acquired 17.5% of the stock in WAC for $35,000.
WAC marketed and sold prepaid equipment in Latin America. On October 23, 1996,
the Company acquired an additional 62.5% of the stock of WAC for $916,500. The
purchase has been reflected in the Company's consolidated balance sheet. Results
of WAC's operations from the date of acquisition through December 31, 1996 have
been included in the Company's consolidated results.

The following unaudited pro forma information has been prepared assuming that
these acquisitions had taken place at the beginning of the respective period.
The unaudited pro forma information includes adjustments for interest expense
that would have been incurred to finance the purchase, amortization of goodwill
resulting from the purchase, elimination of the effect of transactions between
the Company and WAC and income taxes. There is no impact to 1995 from the WAC
transaction as WAC operations began in 1996. The unaudited pro forma financial
information is not necessarily indicative of the results of operations as if the
transactions had been effected on the assumed dates (in thousands, except per
share data):
<TABLE>
<CAPTION>
 

DECEMBER 31,                    1996        1995
---------------------------------------------------
                                  (UNAUDITED)
<S>                       <C>           <C>
Net revenues                   $51,873     $36,288
---------------------------------------------------
Net income available to
  common stockholders          $     1     $ 1,558
---------------------------------------------------
Net income per common share    $  0.00     $  0.17
===================================================
</TABLE>

In August 1997, the Company paid $1.4 million  to purchase the final 20%
interest in WAC and recorded this amount as goodwill, which is being amortized
over eight years.  WAC was subsequently merged into VST.

                                      -38-
<PAGE>
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

5. ACCRUED EXPENSES

Accrued expenses consist of the following:
<TABLE>
<CAPTION>
 
 
                                                                DECEMBER 31,
(In thousands)                                                1997       1996
-------------------------------------------------------------------------------      
<S>                                                   <C>             <C>            
                                                                                     
Billing adjustments and chargebacks                          $1,216      $1,240      
Cellular airtime                                              1,544       2,447      
Payroll                                                       1,183         931      
Telecommunication costs                                         779         442      
Deferred revenue                                                426         105      
Billing services                                                351         296      
Other                                                         1,805       1,744      
-------------------------------------------------------------------------------      
                                                             $7,304      $7,205      
===============================================================================      
</TABLE>

6. 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:
<TABLE>
<CAPTION>
 
                                                            DECEMBER 31,
                                                           1997      1996
---------------------------------------------------------------------------
<S>                                                      <C>       <C>
 
Deferred tax assets:
  Net operating loss carryforwards                       $   884    $  712
   Allowance for doubtful accounts, billing
   adjustments and chargebacks                               747       801
  Minimum tax credit carryforwards                           128       128
  Accrued expenses and other                                 665       298
  Asset impairment                                           200      ----
---------------------------------------------------------------------------
Total deferred tax assets                                  2,624     1,939
 
Deferred tax liabilities:
  Tax over book depreciation and amortization expense     (1,060)     (605)
---------------------------------------------------------------------------
Total deferred tax liabilities                            (1,060)     (605)
---------------------------------------------------------------------------
Net deferred tax assets                                  $ 1,564    $1,334
===========================================================================
</TABLE>

                                      -39-
<PAGE>
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)



The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
 
                                    YEAR ENDED DECEMBER 31,
                                     1997    1996     1995
-----------------------------------------------------------
<S>                               <C>      <C>    <C>
 
Current:
  Federal                          $   -   $  51   $   110
  State                               42      83       660
-----------------------------------------------------------
                                      42     134       770
Deferred:
  Federal                           (209)    423    (1,530)
  State                              (21)     43      (270)
-----------------------------------------------------------
                                    (230)    466    (1,800)
-----------------------------------------------------------
Income tax provision (benefit)     $(188)  $ 600   $(1,030)
===========================================================
</TABLE>

The Company had fully reserved for its deferred tax assets through December 31,
1994.  Based upon management's assessment that future operating results were
more likely than not to generate operating income to recognize the deferred tax
asset, a substantial portion of the valuation allowance was reversed.

The Company utilized $2.6 million in 1995 and $2.0 million in 1996 of federal
net operating loss carryforwards to offset taxable income. The valuation
allowance decreased $3.1 million and $162,000 during 1995 and 1996,
respectively, due primarily to the utilization of net operating loss
carryforwards and to the reversal of a significant portion of the valuation
allowance.

At December 31, 1997, the Company has approximately $2.6 million of net
operating loss carryforwards for federal income tax return purposes available
for use in future years that expire beginning in 2006.

A reconciliation of the statutory rate to the effective rate is as follows:
<TABLE>
<CAPTION>
 
 
                                                    YEAR ENDED DECEMBER 31,
                                                    1997      1996     1995
----------------------------------------------------------------------------
<S>                                              <C>        <C>      <C>
Federal provision (benefit) at statutory rate        (34)%      34%      34%
State income provision,
  net of federal benefit                              (6)        6        6
Permanent differences                                 26        12        1
Change in valuation allowance                         --        --      (65)
Benefit of net operating loss                         (0)       (2)     (28)
----------------------------------------------------------------------------
                                                     (14)%      50%    (52)%
----------------------------------------------------------------------------
</TABLE>


Income taxes paid were $68,000 in 1995, $352,000 in 1996 and $83,000 in 1997.

                                      -40-
<PAGE>
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

7. Capital Stock

Common Stock
On April 26, 1996, the Company authorized 35,000,000 shares of a new class of
common stock and effected a recapitalization of the Company (the "1996
Recapitalization"). All outstanding shares of the Company's class A, B, C and D
common stock were exchanged for an aggregate of 3,335,985 shares of Common
Stock. In addition, the terms and conditions of the Company's three classes of
convertible preferred stock were modified, without changing the total number of
shares of Common Stock into which the preferred stock can be converted. The
convertible preferred shares were converted to 5,004,608 shares of Common Stock
upon the closing of the initial public offering.

Public Offerings
In 1996, the Company sold in its initial public offering (IPO) 3,918,555 shares
of its common stock yielding net proceeds of $49.8 million. The proceeds were
used to redeem preferred stock and to repay an existing line of credit and
capital leases.  Upon the closing of the IPO, the Company redeemed all 11,871
outstanding shares of redeemable preferred stock at a redemption price of $1,000
per share.  In addition, the Company paid approximately $4.5 million in accreted
dividends on the redeemable preferred stock.

In 1997, the Company sold in a public offering 3,000,000 shares of its common
stock yielding net proceeds of $35.8 million. The proceeds are being used for
capital and other expenditures in connection with the expansion of the C2C
network.  In addition, the Company used $1.4 million of the net proceeds to
purchase the remaining 20% interest in WAC.

Preferred Stock
The Board of Directors are authorized, subject to certain limitations prescribed
by law, without further shareholder approval, to issue from time to time up to
an aggregate of 2,000,000 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. The
Company has no present plans to issue any shares of Preferred Stock.

Stock Option Plan
The Company's 1996 Stock Option Plan (the 1996 Plan) was adopted by the Board of
Directors and approved by the stockholders of the Company in 1996. The 1996 Plan
provides for the grant of stock options to employees, officers and directors,
consultants and advisors to, the Company and its subsidiaries. Under the 1996
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 (the "Code") ("incentive stock options"), or options not
intended to qualify as incentive Stock options ("non-statutory options").
Incentive stock options may only be granted to employees of the Company. A total
of 1,264,792 shares of Common Stock may be issued upon the exercise of options
granted under the 1996 Plan. The maximum number of shares with respect to which
options may be granted to any employee under the 1996 Plan shall not exceed
200,000 shares of Common Stock during any calendar year. The 1996 Plan replaces
the 1994 Stock Option Plan which granted 355,738 options and was terminated in
1996. All options granted have 10 year terms and generally vest and become
exercisable over four or five years.

In 1997 the Company's 1998 Stock Option Plan (the 1998 Plan) was adopted by the
Board of Directors, subject to the approval of the stockholders of the Company.
A total of 600,000 shares of common stock may be issued upon the exercise of
options granted under the 1998 Plan, which generally vest and become exercisable
over four or five years.  No options were granted under this plan in 1997.

In 1996, the Company granted non-qualified options to purchase 653,278 and
93,551 at exercise prices of $5.75 and $10.00, respectively, which were deemed
fair market value as determined by the Company.

                                      -41-
<PAGE>
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement.

The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1997: risk-free interest rates of 5.9% and 6.4%,
respectively, no dividend yield, the volatility factor of the expected market
price of the Company's common stock was 0.5 and a weighted-average expected life
of the option of 5 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.  Because
the Company's employee stock 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 employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except for per share information):
<TABLE> 
<CAPTION> 

                                             DECEMBER 31,
                                          1997         1996
-------------------------------------------------------------    
<S>                                 <C>            <C>           
Pro forma net loss                      $(3,474)     $(1,086)    
-------------------------------------------------------------    
Pro forma net loss per share            $ (0.24)     $ (0.10)    
-------------------------------------------------------------    
</TABLE> 

Stock option information is as follows:
<TABLE>
<CAPTION>
 
                                           1997                   1996               1995
--------------------------------------------------------------------------------------------------
                                                 WEIGHTED               WEIGHTED          WEIGHTED
                                                 AVERAGE                AVERAGE           AVERAGE
                                                 EXERCISE               EXERCISE          EXERCISE
                                     OPTIONS      PRICE     OPTIONS      PRICE   OPTIONS   PRICE
--------------------------------------------------------------------------------------------------
<S>                                 <C>         <C>       <C>         <C>       <C>      <C>
Outstanding -- beginning of year    1,666,359     $ 8.86    355,758     $ 0.14   324,629     $0.14
 Granted                            1,124,342       5.87  1,548,329       9.76    31,129      0.14
 Exercised                           (538,630)      4.62   (201,228)      0.14        --        --
 Canceled                            (834,417)     11.18    (36,500)     13.61        --        --
--------------------------------------------------------------------------------------------------
Outstanding--end of year            1,417,654     $ 6.74  1,666,359     $ 8.86   355,758     $0.14
==================================================================================================
</TABLE>

The following table summarizes the stock options outstanding and exercisable as
of December 31, 1997:
<TABLE>
<CAPTION>
--------------------------------------------
  OPTIONS          OPTIONS       EXERCISE
 EXERCISABLE     OUTSTANDING      PRICE
--------------------------------------------
<S>              <C>          <C>
       --             42,243  $         0.14
    362,224        1,054,378    4.88 -  7.00
    24,691            88,691    9.38 - 12.50
    31,000           232,342  $12.75 - 14.50
--------------------------------------------
    417,915        1,417,654
============================================
</TABLE>

                                      -42-
<PAGE>
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

There are 91,859 options available for grant at December 31, 1997.  There were
683,165 options exercisable at December 31, 1996 at a weighted-average exercise
price of $5.65. The weighted-average fair value of options granted during 1996
and 1997 was $4.69 and $3.44, respectively. The weighted-average contractual
life of options outstanding at December 31, 1996 and 1997 was 9.2 years.

Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and approved by the shareholders of the
Company in April 1996. The Purchase Plan authorizes the issuance of up to a
total of 225,000 shares of Common Stock to participating employees.

Certain employees of the Company who have been employed by the Company for a
minimum of twelve 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 90%
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 the last day of the Offering Period) in
excess of $25,000. The Compensation Committee may, in 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.

8.  NET INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net income
(loss) per share:

<TABLE>
<CAPTION>
       Year Ended December 31,
(In thousands)                                                 1997      1996     1995
                                                             --------------------------
<S>                                                          <C>        <C>     <C> 
Numerator for basic and fully diluted earnings per share:

Net income (loss) available to common shareholder:
Continuing operations                                         $(1,116)  $   599  $2,058
-----------------------------------------------------------   -------   -------  ------
Net income                                                    $(1,116)  $   599  $1,893
-----------------------------------------------------------   -------   -------  ------
 
Denominator:
Denominator for basic earnings per share -
weighted average shares                                        14,007     8,352   3,336
-----------------------------------------------------------   -------   -------  ------
 
Effect of dilutive securities:
Employee stock options                                            352       238     352
Conversion of preferred stock                                     ---     2,294   5,004
                                                              -------   -------  ------
Dilutive potential common shares                                  352     2,532   5,356
-----------------------------------------------------------   -------   -------  ------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversion                                                     14,359    10,884   8,692
-----------------------------------------------------------   -------   -------  ------
 
Basic net income (loss) available to common
shareholder per common share:
Continuing operations                                         $ (0.08)  $  0.02  $ 0.62
-----------------------------------------------------------   -------   -------  ------
Net income (loss)                                             $ (0.08)  $  0.02  $ 0.57
-----------------------------------------------------------   -------   -------  ------
 
Diluted net income (loss) available to common
shareholder per common share:
Continuing operations                                         $ (0.08)     0.01    0.24
-----------------------------------------------------------   -------   -------  ------
Net income (loss)                                               (0.08)     0.01    0.22
-----------------------------------------------------------   -------   -------  ------
 
</TABLE>

                                      -43-
<PAGE>
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)
                                        
Options to purchase 248,342 shares of common stock greater than $10.30 per share
were outstanding during 1997 but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price for the common shares and therefore the effect would be
antidilutive.


9.  COMMITMENTS

The Company entered into a capital lease for $1.5 million in 1996 which was
fully repaid in 1996 and entered into a capital lease for $3.2 million in 1997.
The accumulated amortization of the assets under capital lease was $271,000 at
December 31, 1997.  The Company also has non-cancelable operating lease
commitments for office space. Rent expense approximated $443,000 in 1995,
$881,000 in 1996 and $1.2 million in 1997.  Future minimum payments under non-
cancelable capital leases and operating leases as of December 1997, are as
follows (in thousands):
<TABLE>
<CAPTION>
 
                             Capital  Operating
Year ending December 31,      leases    leases
----------------------------------------------
<S>                         <C>        <C>
 
1998                           $1,318   $1,246
1999                            1,145    1,136
2000                              562      778
2001                               --      198
2002                               --       38
----------------------------------------------
Total minimum
 lease payments                $3,025   $3,396
                               ======   ======
Amounts representing
 interest                         300
                               ------
Present value of net
 minimum payments               2,725
Current portion                 1,127
                               ------
                               $1,598
                               ======
</TABLE> 

10. RELATED-PARTY TRANSACTIONS

Pursuant to a management agreement, the Company paid annual fees in the amount
of $1.0 million in 1995 and $252,000 in 1996 to a management company affiliated
with certain shareholders of the Company. These amounts represent the payroll
and certain benefit costs of six senior management personnel responsible for the
operations of the Company.

The management agreement was terminated in March, 1996 and the employees of the
management company became employees of the Company. The management fees
previously incurred by the Company under the management agreement closely
approximate the actual payroll and related benefits currently being directly
incurred by the Company, and the Company believes that these amounts are
reasonable and comparable to those that would have been incurred with an
unrelated third party. Additionally, the Company leased office space from
another company affiliated with certain shareholders of the Company under a
leasing arrangement which was terminated in August 1996. The Company recorded
rent expense of $68,000 in 1995 and $40,000 in 1996 in connection with this
lease. Another company, affiliated with certain shareholders of the Company,
received $462,000 in connection with the repurchase of redeemable preferred
stock of the affiliated company's investment and its accreted dividends.

                                      -44-
<PAGE>
 
               Report of Ernst & Young LLP, Independent Auditors



Board of Directors and Shareholders
Boston Communications Group, Inc.

We have audited the accompanying consolidated balance sheets of Boston
Communications Group, Inc. and subsidiaries as of December 31, 1997 and 1996 and
the related consolidated statements of operations, redeemable preferred stock
and shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1997.  Our audits also included the financial
statements schedule listed in the Index at Item 14(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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Boston
Communications Group, Inc. and subsidiaries at December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
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.



                              Ernst & Young LLP



Boston, Massachusetts
February 6, 1998

                                      -45-
<PAGE>
 
                                 EXHIBIT INDEX

EXHIBIT
  NO.             DESCRIPTION
-------           -----------

*3.1           Restated Articles of Organization of the Company, as amended.

*3.3           Amended and Restated By-Laws of the Company.

*10.1          +1994 Stock Option Plan.

*10.2          +1996 Stock Option Plan.

*10.3          +1996 Employee Stock Purchase Plan.

**10.3.1       +Amendment Number 1, dated August 30, 1996, to 1996 Employee
                Stock Purchase Plan

*10.5          Billing and Related Services Agreement dated April 19, 1995
               between the Company and OAN Services, Inc. ("OAN").

*10.7          Software license Agreement dated March 30, 1995 between the
               Company and Innovative Telecom Corporation ("ITC").

*10.8          Service Bureau Agreement dated April 7, 1995 between the Company
               and ITC.

*10.9          BCG-ITC Strategic Partnership Agreement Addendum Dated March 31,
               1996 between the Company and ITC.

*10.10         License Agreement dated April 23, 1996 between the Company and
               MicroDimensions, Inc.

*10.11         Gateway Service Agreement dated June 5, 1995 between the Company
               and SNET Diversified Group, Inc.

                                      -46-
<PAGE>
 
**10.12        Frontier Service Agreement dated June 6, 1996 between the Company
               and Frontier Communications of the West, Inc.

*10.15         Commercial Lease dated January 24, 1996 between the Company and
               Cummings Properties Management, Inc.
 
**10.15.1      Commercial Lease dated February 26, 1996 between the Company and
               Cummings Property Management, Inc. (Amendment No. 1).
 
**10.15.2      Amendment No. 2, dated August 8, 1996, to the commercial lease
               between the Company and Cummings Property Management, Inc.

**10.15.3      Amendment No. 3, dated February 5, 1997, to the commercial lease
               between the Company and Cummings Property Management, Inc.

*10.16         Lease dated November 30, 1994, as amended, between the Company
               and Teachers Realty Corporation.

*10.17         Commercial/Industrial Lease dated September 27, 1995 between
               the Voice Systems Technology Inc. ("VST") and Schleuter 
               Properties.

*10.22         Agreement dated April 22, 1996 between the Company and MDTelecom,
               Inc. ("MDT").

**10.23        Memorandum of Understanding dated January 1, 1997 between the
               Company and Milcon Communications (Hong Kong) Ltd.

*10.24         Subscription and Sale Agreement dated April 23, 1996 between the
               Company and MDT.

*10.25         Source Code Release Agreement dated April 23, 1996 between the
               Company and MDT.

*10.26         End-User Purchase and License Agreement between the Company and
               Teloquent Communications Corporation.

**10.27        Software License and Services Agreement dated October 30, 1996
               between the Company and Oracle Corporation.

**10.28        Software License and Services Agreement dated September 24, 1996
               between the Company and Oracle Corporation.
 
***10.30       Registration Rights Agreement dated February 29, 1996 between 
               the Company and Michael J. Buchel, Zuyus Investment Company,
               Peter T. Zuyus, Jr., Joseph Giegerich, Terrence G Hare III, J.
               Michael Looney and John M. Freese, Sr.
                  
***10.31       Amendment, dated December 16, 1996, to the Registration Rights
               Agreement, dated February 29, 1996.
                             
***10.32       Amendment, dated December 16, 1996, to the Registration Rights
               Agreement, dated February 29, 1996.
 

                                      -47-
<PAGE>
 
****10.33      Commercial Lease dated April 1, 1997 between the Company
               and Cummings Properties Management, Inc.
 
#10.34         Master Equipment Lease Agreement between Boston Communications 
               Group, Inc. and Fleet Capital Corp. dated August 20, 1997
                             
#10.35         Distribution Rights Agreement between Voice Systems Technology 
               Inc. d/b/a Boston Communications Group and Motorola dated May 
               15, 1997
 
#10.36         Long Distance Service Agreement between Boston Communications 
               Group, Inc. and AT&T Corp. dated July 10, 1997
                             
10.38          Billing and Related Services Agreement between the Company and 
               AT&T Corp. dated October 14, 1997

21             Subsidiaries of the Registrant.

23             Consent of Ernst & Young LLP, Independent Auditors.

27             Financial Data Schedules.
 


*  Incorporated by reference to the Company's Registration Statement on Form S-1
filed June 17, 1996 (File No. 333-4128)
** Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1996.
*** Incorporated by reference to the Company's Form 10-Q for the quarter ended
March 31, 1997.
**** Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1997.
# Incorporated by reference to the Company's Form 10-Q for the quarter ended
September 30, 1997.
+ Management contract or compensatory plan or arrangement filed as an exhibit
  pursuant to Item 14(c) of this Report.

                                      -48-
<PAGE>
 
                                                              SCHEDULE II



              BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES

                       VALUATION AND QUALIFYING ACCOUNTS

                                (IN THOUSANDS)

<TABLE>
<CAPTION>

 
 COL. A                                    COL. B               COL. C             COL. D        COL. E     
 -----------                               -------       ----------------------    ------        ------     
                                                               ADDITIONS                                     
                                                         ----------------------                                   
                                                                     CHARGED TO                                
                                                                     ----------                                
                                           BALANCE AT    CHARGED TO  OTHER                                     
                                           ----------    ----------  -----                                     
                                           BEGINNING OF  COSTS AND   ACCOUNTS      DEDUCTIONS    BALANCE AT    
                                           ------------  ---------   --------      -----------   ----------    
DESCRIPTION                                PERIOD        EXPENSES    DESCRIBE (1)  DESCRIBE (2)  END OF PERIOD 
-----------                                ------------  ---------   ---------     ---------     -------------  
<S>                                    <C>             <C>          <C>         <C>           <C> 
Year ended December 31, 1997:
 Reserves and allowances deducted
  from asset accounts:
  Allowance for billing adjustments
   and uncollectible accounts                 $1,242            --         $636         $574         $1,304
 
Year ended December 31, 1996:
 Reserves and allowances deducted
   from asset accounts:
   Allowance for billing adjustments
     and uncollectible accounts                  884            30          896          564          1,242

Year ended December 31, 1995:
 Reserves and allowances deducted
  from asset accounts:
  Allowance for billing adjustments
   and uncollectible accounts                    546            --          642          304            884


</TABLE> 
(1) Billing adjustments recorded as a reduction of revenue.
(2) Settlement of billing adjustments.

                                      -49-