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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 10549



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FORM 10-Q



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



For the quarterly period ended March 31, 2005



or



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



Commission file number: 0-28432



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Boston Communications Group, Inc.

(Exact name of registrant as specified in its charter)



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



55 Middlesex
Turnpike, Bedford, Massachusetts 01730

(Address of principal executive offices)



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





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



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



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



Indicate the number of shares outstanding of
each of the issuers classes of common stock as of the latest practicable date. As of May 3, 2005, the Company had outstanding 17,639,384 shares of common stock, $.01 par value per share.



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INDEX



|         |  |                                                                                                                                      |  |   
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------ |  | --
|PART I.  |  | FINANCIAL INFORMATION:                                                                                                               |  |   
|         |  |                                                                                                                                     
|Item 1.  |  | Financial Statements (Unaudited)                                                                                                     |  |   
|         |  |                                                                                                                                     
|         |  | Condensed Consolidated Balance Sheets                                                                                                |  | 4 
|         |  | Condensed Consolidated Statements of Income                                                                                          |  | 5 
|         |  | Condensed Consolidated Statements of Cash Flows                                                                                      |  | 6 
|         |  | Notes to Condensed Consolidated Financial Statements                                                                                 |  | 7 
|         |  |                                                                                                                                     
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations Certain Factors That May Affect Future Results |  | 15
|         |  |                                                                                                                                     
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                           |  | 27
|         |  |                                                                                                                                     
|Item 4.  |  | Controls and Procedures                                                                                                              |  | 28
|         |  |                                                                                                                                     
|PART II. |  | OTHER INFORMATION:                                                                                                                   |  |   
|         |  |                                                                                                                                     
|Item 1.  |  | Legal Proceedings                                                                                                                    |  | 28
|         |  |                                                                                                                                     
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                          |  | 29
|         |  |                                                                                                                                     
|Item 6.  |  | Exhibits                                                                                                                             |  | 29



This Quarterly Report contains
forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties, including without limitation, statements regarding:



| |  |  | Earnings per share;
| | - |  | -------------------



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



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



| |  |  | Legal expenses related to the Freedom Wireless, Inc. (Freedom Wireless) lawsuit;
| | - |  | ----------------------------------------------------------------------------------



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



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



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



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



| |  |  | Capital expenditures;
| | - |  | ---------------------



| |  |  | Defined Benefit Plan contributions;
| | - |  | -----------------------------------



| |  |  | Financing of investments and contingent consideration payments with cash and short-term investments; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Expectations regarding new product offerings.
| | - |  | ---------------------------------------------



These statements are based on the current beliefs and assumptions of management.



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



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



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BOSTON COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)



|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                            |  | March 31,2005 |         |   | December 31,2004 |  
|                                                                                                                                                                            |  | (unaudited)   |         |   |                  |  
|ASSETS                                                                                                                                                                      |  |               |         |   |                  |   |         |  
|Current assets:                                                                                                                                                             |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                   |  | $             | 2,362   |   |                  | $ | 9,467   |  
|Short-term investments                                                                                                                                                      |  |               | 69,981  |   |                  |   | 68,285  |  
|Accounts receivable, net of allowance of $442 in 2005 and $474 in 2004                                                                                                      |  |               | 21,405  |   |                  |   | 17,358  |  
|Deferred income taxes                                                                                                                                                       |  |               | 454     |   |                  |   | 319     |  
|Prepaid expenses and other assets                                                                                                                                           |  |               | 3,451   |   |                  |   | 2,907   |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|Total current assets                                                                                                                                                        |  |               | 97,653  |   |                  |   | 98,336  |  
|Property and equipment:                                                                                                                                                     |  |               |         |   |                  |   |         |  
|Building, land and leasehold improvements                                                                                                                                   |  |               | 14,668  |   |                  |   | 14,576  |  
|Telecommunications systems & software                                                                                                                                       |  |               | 95,277  |   |                  |   | 93,895  |  
|Furniture and fixtures                                                                                                                                                      |  |               | 876     |   |                  |   | 789     |  
|Systems in development                                                                                                                                                      |  |               | 6,898   |   |                  |   | 3,842   |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|                                                                                                                                                                            |  |               | 117,719 |   |                  |   | 113,102 |  
|Less allowance for depreciation and amortization                                                                                                                            |  |               | 62,948  |   |                  |   | 57,543  |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|                                                                                                                                                                            |  |               | 54,771  |   |                  |   | 55,559  |  
|Intangible assets, net                                                                                                                                                      |  |               | 2,300   |   |                  |   | 2,450   |  
|Goodwill                                                                                                                                                                    |  |               | 4,753   |   |                  |   | 4,753   |  
|Other assets                                                                                                                                                                |  |               | 7,461   |   |                  |   | 6,913   |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|Total assets                                                                                                                                                                |  | $             | 166,938 |   |                  | $ | 168,011 |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                        |  |               |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                            |  | $             | 747     |   |                  | $ | 312     |  
|Accrued expenses                                                                                                                                                            |  |               | 8,800   |   |                  |   | 13,386  |  
|Deferred revenue                                                                                                                                                            |  |               | 3,713   |   |                  |   | 3,753   |  
|Income taxes payable                                                                                                                                                        |  |               | 2,508   |   |                  |   | 1,591   |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                   |  |               | 15,768  |   |                  |   | 19,042  |  
|Non-current liabilities:                                                                                                                                                    |  |               |         |   |                  |   |         |  
|Accrued pension liability                                                                                                                                                   |  |               | 3,721   |   |                  |   | 3,476   |  
|Deferred income taxes                                                                                                                                                       |  |               | 7,046   |   |                  |   | 7,046   |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|Total non-current liabilities                                                                                                                                               |  |               | 10,767  |   |                  |   | 10,522  |  
|Commitments and contingencies                                                                                                                                               |  |               |         |   |                  |   |         |  
|Shareholders equity:                                                                                                                                                       |  |               |         |   |                  |   |         |  
|Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued and outstanding                                                                                   |  |               |        |   |                  |   |        |  
|Common stock, voting, par value $.01 per share, 35,000,000 shares authorized; 17,639,384 and 17,581,625 shares issued at March 31, 2005 and
December 31, 2004, respectively |  |               | 176     |   |                  |   | 176     |  
|Additional paid-in capital                                                                                                                                                  |  |               | 104,442 |   |                  |   | 104,070 |  
|Retained earnings                                                                                                                                                           |  |               | 36,063  |   |                  |   | 34,430  |  
|Accumulated other comprehensive loss                                                                                                                                        |  |               | (278    | ) |                  |   | (229    | )
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|Total shareholders equity                                                                                                                                                  |  |               | 140,403 |   |                  |   | 138,447 |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                                                                                  |  | $             | 166,938 |   |                  | $ | 168,011 |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  



See accompanying notes.



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BOSTON COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited and in thousands, except per share amounts)



|                                           |  |                             |        |      |   |        |  
|------------------------------------------ |  | --------------------------- | ------ | ---- | - | ------ | -
|                                           |  | Three months endedMarch 31, |       
|                                           |  | 2005                        |        | 2004 |  
|NET REVENUES                               |  | $                           | 26,351 |      | $ | 27,245 |  
|                                           |  |                            
|EXPENSES:                                  |  |                             |        |      |   |        |  
|Cost of revenues*                          |  |                             | 6,677  |      |   | 6,378  |  
|Engineering, research and development      |  |                             | 4,757  |      |   | 3,796  |  
|Sales and marketing                        |  |                             | 2,476  |      |   | 1,872  |  
|General and administrative                 |  |                             | 2,529  |      |   | 2,086  |  
|General and administrative  legal charges |  |                             | 2,210  |      |   | 1,150  |  
|Depreciation and amortization              |  |                             | 5,554  |      |   | 5,469  |  
|                                           |  |                             |        |      |   |        |  
|Operating income                           |  |                             | 2,148  |      |   | 6,494  |  
|Interest income                            |  |                             | 403    |      |   | 312    |  
|                                           |  |                             |        |      |   |        |  
|Income before income taxes                 |  |                             | 2,551  |      |   | 6,806  |  
|Provision for income taxes                 |  |                             | 918    |      |   | 2,722  |  
|                                           |  |                             |        |      |   |        |  
|Net income from continuing operations      |  |                             | 1,633  |      |   | 4,084  |  
|Net loss from discontinued operations      |  |                             |       |      |   | (11    | )
|                                           |  |                             |        |      |   |        |  
|Net income                                 |  | $                           | 1,633  |      | $ | 4,073  |  
|                                           |  |                             |        |      |   |        |  
|Basic net income per share:                |  |                             |        |      |   |        |  
|Continuing operations                      |  | $                           | 0.09   |      | $ | 0.22   |  
|Net income                                 |  | $                           | 0.09   |      | $ | 0.22   |  
|Weighted average common shares outstanding |  |                             | 17,602 |      |   | 18,277 |  
|                                           |  |                            
|Diluted net income per share:              |  |                             |        |      |   |        |  
|Continuing operations                      |  | $                           | 0.09   |      | $ | 0.22   |  
|Net income                                 |  | $                           | 0.09   |      | $ | 0.22   |  
|Weighted average common shares outstanding |  |                             | 17,726 |      |   | 18,720 |  

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



See accompanying notes.



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BOSTON COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)



|                                                                                                             |  |                             |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                             |  | Three months endedMarch 31, |        
|                                                                                                             |  | 2005                        |         |   | 2004 |  
|OPERATING ACTIVITIES                                                                                         |  |                             |         |   |      |   |         |  
|Net income from continuing operations                                                                        |  | $                           | 1,633   |   |      | $ | 4,084   |  
|Adjustments to reconcile net income from continuing operations to net cash provided by (used in) operations: |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                                                |  |                             | 5,554   |   |      |   | 5,469   |  
|Deferred income taxes                                                                                        |  |                             | (135    | ) |      |   |        |  
|Changes in operating assets and liabilities:                                                                 |  |                             |         |   |      |   |         |  
|Accounts receivable, net                                                                                     |  |                             | (4,047  | ) |      |   | (1,058  | )
|Prepaid expenses and other assets                                                                            |  |                             | (638    | ) |      |   | (592    | )
|Accounts payable, accrued expenses and deferred revenue                                                      |  |                             | (3,600  | ) |      |   | (2,058  | )
|Income taxes payable                                                                                         |  |                             | 917     |   |      |   | 2,235   |  
|Other non-current liabilities                                                                                |  |                             | 245     |   |      |   | 200     |  
|                                                                                                             |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) operating activities of continuing operations                                 |  |                             | (71     | ) |      |   | 8,280   |  
|Loss from discontinued operations                                                                            |  |                             |        |   |      |   | (11     | )
|Net change in operating assets and liabilities of discontinued operations                                    |  |                             |        |   |      |   | (2      | )
|                                                                                                             |  |                             |         |   |      |   |         |  
|Net cash used in operating activities of discontinued operations                                             |  |                             |        |   |      |   | (13     | )
|                                                                                                             |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) operations                                                                    |  |                             | (71     | ) |      |   | 8,267   |  
|                                                                                                             |  |                            
|INVESTING ACTIVITIES                                                                                         |  |                             |         |   |      |   |         |  
|Payment of earnout of acquired business                                                                      |  |                             | (591    | ) |      |   | (424    | )
|Purchases of short-term investments                                                                          |  |                             | (17,811 | ) |      |   | (16,538 | )
|Sales of short-term investments                                                                              |  |                             | 16,066  |   |      |   | 17,005  |  
|Increase in other investments                                                                                |  |                             | (454    | ) |      |   |        |  
|Purchases of property and equipment                                                                          |  |                             | (4,616  | ) |      |   | (4,371  | )
|                                                                                                             |  |                             |         |   |      |   |         |  
|Net cash used in investing activities                                                                        |  |                             | (7,406  | ) |      |   | (4,328  | )
|                                                                                                             |  |                            
|FINANCING ACTIVITIES                                                                                         |  |                             |         |   |      |   |         |  
|Proceeds from exercise of stock options                                                                      |  |                             | 18      |   |      |   | 212     |  
|Proceeds from issuance of common stock                                                                       |  |                             | 354     |   |      |   | 334     |  
|                                                                                                             |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                                                    |  |                             | 372     |   |      |   | 546     |  
|                                                                                                             |  |                            
|Increase (decrease) in cash and cash equivalents                                                             |  |                             | (7,105  | ) |      |   | 4,485   |  
|Cash and cash equivalents at beginning of period                                                             |  |                             | 9,467   |   |      |   | 2,960   |  
|                                                                                                             |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                                   |  | $                           | 2,362   |   |      | $ | 7,445   |  
|                                                                                                             |  |                             |         |   |      |   |         |  
|SUPPLEMENTAL CASH FLOW INFORMATION                                                                           |  |                             |         |   |      |   |         |  
|Cash paid for income taxes                                                                                   |  | $                           | 4       |   |      | $ | 696     |  
|                                                                                                             |  |                             |         |   |      |   |         |  



See accompanying notes.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|1. | Basis of Presentation
|-- | ---------------------



The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States
for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2005
are not necessarily indicative of the results that may be expected for the year ending December 31, 2005 or any other interim period.



The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United States for complete financial statements.



For further information, refer to the condensed consolidated financial statements and footnotes thereto included in the Companys annual report on
Form 10-K for the year ended December 31, 2004.



|2. | Summary of Significant Accounting Policies
|-- | ------------------------------------------



Principles of Consolidation



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



Reclassifications



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



Revenue Recognition



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



The Company earns revenues in various ways through its managed services business:



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



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



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



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



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For the Companys licensed systems sales, the Company typically recognizes revenue from the sale of
systems at the time the systems are shipped or delivered to the customer, depending on shipping terms. In the event there are acceptance terms, the Company defers revenue until acceptance has occurred.



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



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



Cash, Cash Equivalents and Short-Term Investments



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



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



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



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



Estimates



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



Legal Costs



The Company accrues the costs of settlements, damages and, under certain conditions, costs of defense when such costs are probable and estimable;
otherwise, such costs are expensed as incurred. As discussed in Note 4 to the Condensed Consolidated Financial Statements, the Company began to expense legal costs related to the Freedom Wireless lawsuit as incurred due to the lengthy and
unpredictable discovery process, which had made it difficult to continue to reasonably estimate legal costs for the suit. Other litigation will continue to be accounted for in accordance with the Companys accounting policy, and generally, the
Company develops an estimate of probable costs in consultation with the Companys outside legal counsel who is handling the case. There can be no assurance that the Companys expenses will not exceed its estimate.



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Income Taxes



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



Comprehensive
Income



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



|                                            |  |                              |       |   |      |   |       |  
|------------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ----- | -
|                                            |  | Three months ended March 31, |      
|(in thousands)                              |  | 2005                         |       |   | 2004 |  
|Net income as reported                      |  | $                            | 1,633 |   |      | $ | 4,073 |  
|Securities valuation adjustment, net of tax |  |                              | (49   | ) |      |   | (20   | )
|                                            |  |                              |       |   |      |   |       |  
|Comprehensive income                        |  | $                            | 1,584 |   |      | $ | 4,053 |  
|                                            |  |                              |       |   |      |   |       |  



Concentrations of
Credit Risk



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



The Company maintains cash, cash equivalents, short-term investments and long-term investments primarily with high credit quality financial institutions
and monitors the amount of credit exposure to any one financial institution, thereby mitigating credit risk.



The Companys managed services business allows wireless operators throughout the United States to utilize its real-time billing capabilities,
enabling such operators to offer prepaid wireless calling to their subscribers, offer various ways to replenish their accounts, to purchase digital content and to provide their subscribers with a monthly postpaid wireless bill. In addition, the
Company sells licensed systems internationally, principally in North and South America and Africa. The Company generally does not require collateral from its customers, although upfront payments for a portion of the total sale are typically required
prior to shipment.



Property and Equipment



Property and equipment are recorded at cost and are depreciated on a
straight-line basis over the estimated useful lives of the assets, which range from 3 to 20 years. Systems in development primarily represent internally capitalized labor and purchased hardware and software to be used in the Companys managed
services and licensed products business that are not yet placed into service and will be depreciated and amortized when placed in service over 3 to 5 years.



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



Research and development costs are charged to expense as incurred. However,
costs incurred for the development of computer software or deployment of assets for internal use are capitalized. The direct labor and payroll-related costs of development of computer software, primarily for the coding and testing of the software,
are capitalized in accordance with the American Institute of Certified Public Accountants Statement of Position 98-1 Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The direct labor, travel and
payroll-related costs to deploy assets for internal use are



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capitalized until the asset is placed in service. The capitalized costs are subject to an ongoing assessment of recoverability based on the Companys
anticipated use, anticipated future undiscounted net cash flows and changes in hardware and software technologies.



Amortization of capitalized software development costs begins when the solution is made available for general release and amortization of internal use
costs begins when the related asset is first placed in service. These costs are amortized on a straight-line basis over a three-year period.



Impairment of Long Lived Assets



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



The Company accounts for goodwill in accordance with FAS 142 Goodwill and Other Intangible Assets. Under FAS
142, goodwill is not amortized but is subject to annual impairment tests. The Company evaluates goodwill for impairment annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. Goodwill is tested for impairment by comparing the carrying amount of goodwill to the estimated future undiscounted cash flows of the lowest level of related assets. If this review indicates that goodwill is not recoverable, the
carrying amount would be reduced to fair value based on a discounted cash flow analysis taking into consideration the time value of money and investment risk factors.



Stock-Based Compensation



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



During the first quarter of 2005, the Company accelerated the
vesting of certain unvested stock options. These stock options were awarded to employees, officers and directors under the Companys 2000 Stock Option Plan and 2004 Stock Incentive Option Plan and had exercise prices that were greater than
$7.75 per share. Options to purchase 866,331 shares of bcgi Common Stock became exercisable immediately as a result of the vesting acceleration. The aggregate number of options to purchase shares of bcgi Common Stock held by directors
and executive officers that were accelerated pursuant to this acceleration is 310,496. The exercise prices and number of shares subject to the accelerated options were unchanged. The acceleration of the vesting of these options did not result in a
charge based on generally accepted accounting principles. For pro forma disclosure requirements under FAS 123, the Company recognized an additional $1.8 million of stock-based compensation for all options whose vesting was accelerated. The Company
took this action because it will limit the negative impact on the Companys results from operations beginning in 2006 when FAS 123(R) takes effect for the Company.



Because of the acceleration of vesting described above, the fact that most options vest over several years and additional
option grants are expected to be made subsequent to March 31, 2005, the results of applying the fair value method may have a materially different effect on pro forma net income in future years.



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Had compensation expense for the Companys Stock Plans been determined consistent with FAS No. 123,
the pro forma net income and net income per share would have been as follows for the three months ended March 31, (in thousands, except per-share information):



|                                                                                                                                    |  |      |        |   |      |   |       |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | -
|                                                                                                                                    |  | 2005 |        |   | 2004 |  
|Net income as reported                                                                                                              |  | $    | 1,633  |   |      | $ | 4,073 |  
|Add: Stock-based employee compensation expense included in reported net income                                                      |  |      |       |   |      |   |      |  
|Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of tax
benefit |  |      | (2,395 | ) |      |   | (759  | )
|                                                                                                                                    |  |      |        |   |      |   |       |  
|Pro forma net income (loss)                                                                                                         |  | $    | (762   | ) |      | $ | 3,314 |  
|                                                                                                                                    |  |      |        |   |      |   |       |  
|Basic net income (loss) per share:                                                                                                  |  |      |        |   |      |   |       |  
|As reported                                                                                                                         |  | $    | 0.09   |   |      | $ | 0.22  |  
|Pro forma                                                                                                                           |  | $    | (0.04  | ) |      | $ | 0.18  |  
|Diluted net income (loss) per share:                                                                                                |  |      |        |   |      |   |       |  
|As reported                                                                                                                         |  | $    | 0.09   |   |      | $ | 0.22  |  
|Pro forma                                                                                                                           |  | $    | (0.04  | ) |      | $ | 0.18  |  



Basic and Diluted
Net Income Per Share



Basic earnings per share is computed
using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period plus the impact, if dilutive, of common share
equivalents, which are stock options. For purposes of computing diluted earnings per share, weighted average common share equivalents do not include stock options with an exercise price that exceeds the average market price of the Companys
Common Stock for the respective period. Accordingly, for the three months ended March 31, 2005 and 2004 options to purchase 2,009,000 and 1,055,000 shares, respectively, of Common Stock have been excluded from the computation.



The following table sets forth a reconciliation of basic and diluted shares
for the three months ended March 31 (unaudited and in thousands except for shares):



|                                             |  |        |  |       
|-------------------------------------------- |  | ------ |  | ------
|                                             |  | 2005   |  | 2004  
|Denominator:                                 |  |        |  |       
|Denominator for basic net income per share   |  | 17,602 |  | 18,277
|Effect of dilutive employee stock options    |  | 124    |  | 443   
|                                             |  |        |  |       
|Denominator for diluted net income per share |  | 17,726 |  | 18,720
|                                             |  |        |  |       



Recent Accounting
Pronouncements



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



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



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



|3. | Other Assets
|-- | ------------



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



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



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



|4. | Contingencies
|-- | -------------



Legal



In March 2000, Freedom Wireless, Inc. filed a suit against the Company and a number of its wireless carrier customers. The suit is being tried in the
United States District Court in Massachusetts and alleges that the defendants infringe two patents held by Freedom Wireless, Inc. and seeks damages as well as injunctive relief. If there is a ruling that the Company infringed the Freedom Wireless
patents, it could significantly restrict the Companys ability to conduct business. In addition, the Company has an obligation to indemnify the other defendants for damages they may incur with respect to any infringement by the Companys
technology. The trial began on February 28, 2005 and is expected to be completed in mid-May 2005. In 2005, Verizon Wireless, which was a defendant in the case, reached a settlement with Freedom Wireless and is therefore no longer a defendant in the
case. The Company was not part of the settlement discussions and the terms of the settlement are not public. The Company does not believe that it infringes these patents and believes that the patents are invalid in light of prior art and other
reasons.



The Company is not presently able to estimate the
potential losses, if any, related to the Freedom Wireless lawsuit. Freedom Wireless is seeking damages in excess of $250 million from the Company and the other remaining co-defendants, whom bcgi has agreed to indemnify. If Freedom Wireless
prevails in this case and is awarded the amount of damages which they are seeking frombcgi and the other co-defendants, this amount would exceed the Companys ability to pay.



From time to time, as a normal incidence of the nature of the Companys
business, various claims, charges and litigation are asserted or commenced against the Company arising from, or related to, contractual matters, patents, trademarks, personal injury, and personnel and employment disputes. As to such claims and
litigation, the Company can give no assurance that it will prevail. However, the Company does not believe



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that these matters (other than as disclosed) will have a material adverse effect on its consolidated financial position, although an adverse outcome of any
of these matters could have a material adverse effect on its consolidated results of operations or cash flows in future quarters or in the quarter or annual period in which one or more of these matters are resolved.



Indemnifications



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



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



With respect to customer agreements, these provisions generally obligate the Company to indemnify the customer against losses, expenses, liabilities and
damages that may be awarded against the customer in the event the Companys systems or services infringe upon a patent or other intellectual property right of a third party. The agreements generally limit the scope of and remedies for such
indemnification obligations in certain respects, including but not limited to geographical limitations and the right to replace or modify an infringing product or service.



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



|5. | Segment Reporting and Discontinued Operations
|-- | ---------------------------------------------



FAS No. 131, Disclosures about Segments of an Enterprise and Related Information established standards for reporting information about
operating segments in annual financial statements and requires selected information about operating segments in interim financial statements. It also established standards for related disclosures about products and services, and geographic areas.
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources
and in assessing performance. The Companys chief operating decision-maker is the President and Chief Executive Officer. Historically, the Companys reportable operating segments consisted of Billing and Transaction Processing Services,
Roaming Services and Prepaid Systems. The Companys Billing and Transaction Processing Services solutions allowed wireless carriers to access the Companys managed services network and transaction processing platform, enabling such
carriers to offer prepaid wireless calling, replenishment capabilities and postpaid billing and customer care to their subscribers. The Roaming Services solution provided wireless carriers the ability to generate revenues from subscribers who are
not covered under traditional roaming agreements by arranging payment for roaming calls. The Prepaid Systems solution assembled and marketed prepaid systems to international carriers and is no longer reported as a separate segment, as it is deemed
to be not material, representing less than 10% of consolidated revenues and operations for all periods presented.



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In March 2004, the Company ceased providing its ROAMERplus solution, effectively discontinuing its
Roaming Services segment. Pursuant to Statement of Financial Accounting Standards 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), the consolidated financial statements reflect this as a
discontinued operation. Revenues for the Roaming Services segment were $563,000 for the three months ended March 31, 2004.



|6. | Retirement Plans
|-- | ----------------



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



The
components of net periodic benefit costs for the three months ended March 31, 2005 and 2004 are as follows (unaudited and in thousands):



|                                                    |  |      |     |      |   |    
|--------------------------------------------------- |  | ---- | --- | ---- | - | ---
|                                                    |  | 2005 |     | 2004
|Components of net periodic benefit costs            |  |      |     |      |   |    
|Service cost                                        |  | $    | 128 |      | $ | 103
|Interest cost                                       |  |      | 72  |      |   | 54 
|Amortization of unrecognized net prior service cost |  |      | 45  |      |   | 43 
|                                                    |  |      |     |      |   |    
|Net periodic benefit costs                          |  | $    | 245 |      | $ | 200
|                                                    |  |      |     |      |   |    



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MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Overview



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



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



While there were no bcgiAccess Management revenues in the first quarter of 2005, we expect that we will generate revenues from this
product by charging wireless operators as a percentage of their revenues or on a per subscriber or account basis. For bcgiPayment, we typically generate revenues by charging wireless operators a transaction fee for the services performed and
paying the financial partners a fee for enabling the transaction. bcgiNetwork is expected to generate revenues on a managed services basis by charging wireless operators a fee for each subscriber or transaction processed or as a percentage
of revenue.



Our net revenues decreased 3% to $26.4 million in the first
quarter of 2005 compared to $27.2 million in the first quarter of 2004. Our operating income of $1.6 million in the first quarter of 2005 is a decrease of 61% over $4.1 million in the first quarter of 2004.



In 2004, Verizon Wireless began to use its own internal prepaid billing platform, and began
adding new subscribers and converting existing subscribers from our Real-Time Billing platform to its platform. Conversions have been ongoing and are expected to continue through the fourth quarter of 2005. Additionally, while our Cingular Wireless
contract expires in the first half of 2006, Cingular Wireless has substantially reduced its sales efforts for its TDMA prepaid offering, which is the only prepaid offering that bcgi supports for Cingular Wireless. Thus, we anticipate that we
will continue to have fewer gross additions from Cingular Wireless and that all of its current subscribers will stop being hosted on our Real-Time Billing platform over time.



We anticipate that earnings per share for the second quarter of 2005 will approximate $0.03 to $0.06, including approximately $2.2 to $2.9
million of legal costs, primarily associated with the Freedom Wireless lawsuit. We have not provided guidance for the remainder of 2005 since we cannot anticipate the rate and timing of Verizon Wireless and Cingular Wireless subscribers
departure from our Real-Time Billing platform and therefore, the corresponding rate of revenue decline. In addition, Verizon Wireless may terminate our existing prepaid wireless services agreement upon 90 days written notice. We plan to continue to
focus on our customer and product diversification strategy that includes investment in all of our new and existing products that we are marketing on a global basis. Based on these factors and other trends, we are estimating that revenues will range
from $24.0 to $26.0 million for the second quarter of 2005.



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Revenues



Our net revenues, which are generated primarily from Real-Time Billing, decreased 3% to $26.4 million in the first quarter of 2005 compared to $27.2 million in the first
quarter of 2004. The decrease in revenues was due primarily to our prepaid subscriber base decreasing by 270,000, bringing our subscribers to 3.79 million at March 31, 2005. The decrease in our prepaid subscriber base is due primarily to subscriber
losses from Verizon Wireless and Cingular Wireless exceeding Nextel Communications and other customer additions. In future quarters, our prepaid subscribers are expected to decrease as a result of the Verizon Wireless conversions and the reduced
sales efforts of Cingular Wireless. In addition, the Real-Time Billing average billed rate per minute declined by approximately 16% for the quarter ended March 31, 2005 compared to the same quarter in the previous year. The decline in the average
billed rate per minute is due primarily to lower contractual rates for customers who signed contracts more recently making up a larger percentage of Real-Time Billing revenue. Off setting these decreases was a 3% increase in total average billed
minutes of use per subscriber per month to 120 minutes for the quarter ended March 31, 2005 compared to the quarter ended March 31, 2004. The increase in total average billed minutes of use per subscriber per month is due primarily to our customers
with higher average billed minutes per subscriber per month making up a larger percentage of Real-Time Billing revenue. Nextel Communications, Verizon Wireless and Cingular Wireless accounted for 29%, 27% and 20% of total revenues, respectively, in
the first quarter of 2005.



Cost of revenues



Cost of revenues primarily include the salaries and benefits of personnel who support our
managed services network and our licensed product offerings along with costs for maintenance, telecommunications, travel, facilities and other support costs. Cost of revenues increased to 25% of revenues in the first quarter of 2005 from 23% in the
first quarter of 2004. The increase in cost of revenues resulted primarily from additional personnel and wages to support our investments in professional services and global licensing.



Operating Data

(unaudited and in
thousands)



|                                      |  |                              |        |                    |      |   |       |   |                    |  |     |  
|------------------------------------- |  | ---------------------------- | ------ | ------------------ | ---- | - | ----- | - | ------------------ |  | --- | -
|                                      |  | Three months ended March 31, |       
|                                      |  | 2005                         |        |                    | 2004 |  
|                                      |  | Total                        |        | % of TotalRevenues |      |   | Total |   | % of TotalRevenues | 
|Total revenues                        |  | $                            | 26,351 |                    | 100  | % |       | $ | 27,245             |  | 100 | %
|Engineering, research and development |  |                              | 4,757  |                    | 18   | % |       |   | 3,796              |  | 14  | %
|Sales and marketing                   |  |                              | 2,476  |                    | 9    | % |       |   | 1,872              |  | 7   | %
|General and administrative            |  |                              | 2,529  |                    | 10   | % |       |   | 2,086              |  | 8   | %
|General and administrative  legal    |  |                              | 2,210  |                    | 8    | % |       |   | 1,150              |  | 4   | %
|Depreciation and amortization         |  |                              | 5,554  |                    | 21   | % |       |   | 5,469              |  | 20  | %



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. The increase in engineering, research and development
expenses in the first quarter of 2005 compared to the same quarter of 2004 primarily resulted from additional personnel, wages and related costs of approximately $819,000 principally to support the development of bcgi Access Management and
bcgiPayment, along with the enhancement of the features and functionality of our existing and other new products. Engineering, research and development expenses in absolute dollars are expected to remain consistent in the second quarter of
2005 compared with $4.8 million in the first quarter of 2005.



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##### Table of Contents

Sales and marketing expenses



Sales and marketing expenses include direct sales and product management salaries, commissions, travel and entertainment expenses, in
addition to the cost of trade shows, direct mail and other promotional expenses. The increase in sales and marketing expenses in the first quarter of 2005 compared to the same quarter in the previous year was due primarily to $460,000 in additional
expense related to major industry tradeshows we exhibited at in the first quarter of 2005. Sales and marketing expenses in absolute dollars are expected to increase slightly in the second quarter of 2005 as we continue to strengthen our
international presence and add resources to augment our international sales team.



General and administrative expenses



General and
administrative expenses include salaries and benefits of employees and other expenses that provide our administrative support. The increase in general and administrative expenses in the first quarter of 2005 compared to the same quarter of 2004 was
principally due to additional wages of approximately $314,000 to support our diversification strategy. General and administrative expenses in absolute dollars are expected to remain consistent in the second quarter of 2005 compared with $2.5 million
in the first quarter of 2005.



General and administrative expenses 
legal charges



General and administrative legal expenses primarily
represent legal expenses to defend the patent infringement suit initiated by Freedom Wireless. The increase in expense in the first quarter of 2005 compared to the same quarter of 2004 was due to higher costs associated with the commencement of the
trial on February 28, 2005. With additional expected trial days in the second quarter of 2005, we expect to incur legal expenses of approximately $2.2 to $2.9 million. This cost is expected to be substantially less per quarter than historical
amounts beginning in the third quarter of 2005, during the anticipated appeals process by either party following the completion of the trial. There can be no assurance that costs to defend the Freedom Wireless suit will not exceed our estimate. If
Freedom Wireless prevails in this case, the amount of damages could be substantial and our business, financial condition and results of operations would be materially adversely affected.



Depreciation and amortization expense



Depreciation and amortization expense includes depreciation of telecommunications systems and software, building, furniture and equipment and leasehold improvements. We
provide for depreciation using the straight-line method over the estimated useful lives of the assets, which range from three to twenty years.



Interest income



Interest income increased to $403,000 in 2005 compared to $312,000 in 2004. Interest income was earned primarily from investments, which were purchased using the cash generated from operations, from the sale of our
teleservices business in 2000 and from the proceeds from our public offerings. Although our combined cash and investment positions decreased as of March 31, 2005, higher average interest rates during the periods resulted in increased levels of
interest income compared to the previous year.



Provision for income taxes



The effective income tax rate for the three months ended March 31, 2005
was 36% compared to 40% for the three months ended March 31, 2004. The income tax rate was 36% in 2005 primarily due to predominantly consistent anticipated tax benefits, including tax credits and tax-exempt interest, on a lower level of income.



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Discontinued Operations



In March 2004, we ceased providing our ROAMERplus solution, effectively discontinuing our Roaming Services segment. This business generated a net loss of
$11,000 for the three months ended March 31, 2004.



Liquidity and
Capital Resources



As of March 31, 2005, cash, cash equivalents and
short-term investments decreased 7% to $72.3 million compared to $77.8 million at December 31, 2004, primarily due to the timing of accounts receivable payments. The net cash used by operations of $71,000 in the first quarter of 2005 resulted from
$1.6 million in net income, along with adjustments for depreciation and amortization of $5.6 million, increased receivables of $4.0 million caused by an increase in our days sales outstanding from 63 at as of December 31, 2004 to 73 at March 31,
2004 as a large payment was received in early April and a decrease in accounts payable and accrued expense of $2.6 million as a result of paying down year-end accruals.



Our investing activities utilized $7.4 million of net cash for the three months ended March 31, 2005. We spent approximately $4.6 million
for the purchase of telecommunication equipment and software to enhance our managed services platform as well as further develop our licensed products. Internally capitalized costs totaled $603,000 for the three months ended March 31, 2005 compared
to $780,000 for the three months ended March 31, 2004. In addition, we purchased $1.7 million in short-term investments, net of sales. We expect to continue our investment in new and existing products which should result in our capital expenditures
to be approximately $5.0 to $6.0 million for the second quarter of 2005. We expect to contribute approximately $1.5 million to fund our defined benefit plan in the second quarter of 2005, and we intend to continue to make such contributions once
each year for the foreseeable future. We intend to pay such amounts from our cash, cash equivalants and short-term investments.



Our financing activities provided cash of $372,000 for the three months ended March 31, 2005 primarily from proceeds from the exercise of stock options and the issuance
of common stock under the Employee Stock Purchase Plan.



Subject to the outcome
of the Freedom Wireless lawsuit, we believe that our cash, cash equivalents and short-term investments will be sufficient to finance our operations for at least the next twelve months and for the foreseeable future thereafter.



We have non-cancelable operating lease commitments for office space and equipment, many of
which are renewable at our option as well as various other commitments for equipment and telecommunications services under which we are contractually obligated beyond the current period. The following table summarizes our contractual obligations as
of March 31, 2005 (in thousands):



|                         |  |       |       |                       |   |           |  |           |       |                  |   |     |  |   |  
|------------------------ |  | ----- | ----- | --------------------- | - | --------- |  | --------- | ----- | ---------------- | - | --- |  | - | -
|                         |  |       |       | Payment due by period
|                         |  | Total |       | within1 year          |   | 2-3 years |  | 4-5 years |       | More than5 years
|Contractual Obligations: |  |       |       |                       |   |           |  |           |       |                  |   |     |  |   |  
|Operating leases         |  | $     | 1,917 |                       | $ | 1,572     |  | $         | 302   |                  | $ | 43  |  | $ | 
|Purchase commitments     |  |       | 3,727 |                       |   | 2,206     |  |           | 1,424 |                  |   | 97  |  |   | 
|                         |  |       |       |                       |   |           |  |           |       |                  |   |     |  |   |  
|Total                    |  | $     | 5,644 |                       | $ | 3,778     |  | $         | 1,726 |                  | $ | 140 |  | $ | 
|                         |  |       |       |                       |   |           |  |           |       |                  |   |     |  |   |  



Off-Balance Sheet Arrangements



During the first quarter of 2005, we did not engage in:



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



| |  |  | Material trading activities in non-exchange traded commodity contracts, or
| | - |  | --------------------------------------------------------------------------



| |  |  | Material transactions with persons or entities that benefit from their non-independent relationship with us.
| | - |  | ------------------------------------------------------------------------------------------------------------



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Critical Accounting Policies and Estimates



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



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



| |  |  | Revenue recognition and allowance for bad debts
| | - |  | -----------------------------------------------



| |  |  | Legal costs
| | - |  | -----------



| |  |  | Research and development, software development costs and costs capitalized for internal use
| | - |  | -------------------------------------------------------------------------------------------



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



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



Revenue Recognition and Allowance for Bad Debts



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



We recognize our revenues in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition and application of
Emerging Issues Task Force Issue No. 00-21 Revenue Arrangements with Multiple Deliverables. We earn revenues in various ways, depending on the type of transaction. For our managed services business, we earn revenues in the following
ways:



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



| |  |  | For Voyager Billing, we earn revenues by generating a postpaid subscribers monthly bill.
| | - |  | -----------------------------------------------------------------------------------------



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



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



For multiple element arrangements, we determine the fair value of each element based on our
specific objective evidence for that element and allocate total revenue from these arrangements to each element based on its fair value.



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For our licensed systems business, we typically recognize revenue from the sale of systems at the time the systems are shipped or delivered to the customer,
depending on shipping terms. In the event there are acceptance terms, we defer revenue until acceptance has occurred. Installation revenue is deferred until the installation is complete. Revenues from maintenance and support and other services are
based on vendor-specific objective evidence of fair value and recognized ratably over the term of the maintenance and support contract period or when the services are performed. Vendor-specific objective evidence of fair value for maintenance and
support is based upon the amount charged when the service is sold separately, which is typically the contracts renewal rate. Vendor-specific objective evidence of fair value for installation and other services is based upon standard
pre-established rates.



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



Legal Costs



We accrue the costs of settlements, damages and, under certain
conditions, costs of defense when such costs are probable and estimable; otherwise, such costs are expensed as incurred. As discussed in Note 4 to the Consolidated Financial Statements, we are expensing legal costs related to the Freedom Wireless
lawsuit as incurred due to the lengthy and unpredictable proceedings which had made it difficult to reasonably estimate legal costs for the lawsuit.



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



Research and development costs are charged to expense as incurred. However, costs incurred for the development of computer software or for
the deployment of assets for internal use are capitalized. The direct labor and payroll-related costs of development of computer software, primarily for coding and testing of software, are capitalized in accordance with the American Institute of
Certified Public Accountants Statement of Position 98-1 Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The direct labor, travel and payroll-related costs to deploy assets for internal use are
capitalized until the asset is placed in service. We make judgments regarding the specific time that can be capitalized based upon the type of project and type of work being performed. The capitalized costs are subject to an ongoing assessment of
recoverability based on managements judgment, which contemplates the anticipated future undiscounted net cash flows and changes in hardware and software technologies.



Internally capitalized costs totaled $603,000 for the three months ended March 31, 2005 and $780,000 for the three months ended March 31,
2004. Amortization of capitalized software development costs begins when the solution is made available for general release and amortization of internal use costs begins when the related asset is first placed into service. These costs are amortized
on a straight-line basis over a three-year period.



Impairment of
Long-Lived and Intangible Assets and Goodwill



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



| |  |  | Significant underperformance relative to expected historical or projected future operating results;
| | - |  | ---------------------------------------------------------------------------------------------------



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



| |  |  | Significant negative industry or economic trends.
| | - |  | -------------------------------------------------



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



For impairment tests of goodwill, we utilize the enterprise-wide approach, which is based on the aggregate market value of our common stock,
to determine the fair value of our reporting segments and compare that to our consolidated net book value to determine if an impairment loss may exist.



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



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



Management determined the fair value of the assets acquired by considering the anticipated
cash flows to be generated from the existing products, the valuation of customer relationships, the estimated life of the technology acquired and other assumptions. The valuation of completed technology was primarily based on future cash flow
projections over the estimated economic life adjusted for an incremental obsolescence rate discounted to present value. We estimated that the useful life of the acquired technology is five years. Significant judgments and estimates are involved in
determining the fair market value of assets acquired and their useful lives. Different assumptions could yield materially different results.



Income Taxes



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



New Accounting Pronouncements



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



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



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



Certain Factors That May Affect Future Results



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



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



The
trial began on February 28, 2005 and is expected to be completed in mid-May 2005. We cannot yet assess our potential liability, if any. Any adverse outcome, including the following, would have a material adverse effect on our business, financial
condition and results of operations:



| |  |  | Injunctive relief against us, which could significantly restrict our ability to conduct our business;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | An adverse judgment against us for significant monetary damages;
| | - |  | ----------------------------------------------------------------



| |  |  | A settlement on unfavorable terms;
| | - |  | ----------------------------------



| |  |  | Obligations to the other defendants to indemnify them for damages;
| | - |  | ------------------------------------------------------------------



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



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



Freedom Wireless is seeking damages in excess of $250 million from us and the other remaining
co-defendants, who bcgi has agreed to indemnify. If Freedom Wireless prevails in this case and is awarded the amount of damages which they are seeking from us and the other co-defendants, this amount would exceed our ability to pay.



Regardless of the outcome, we will continue to incur significant expenses to
defend this lawsuit. We have incurred approximately $19.0 million in legal costs as of March 31, 2005 to defend this lawsuit, and expect to incur approximately $2.2 to $2.9 million in legal expenses in the second quarter of 2005. This cost is
expected to substantially less per quarter than historical amounts beginning in the third quarter of 2005, during the anticipated appeals process by either party following the completion of the trial. There can be no assurance that costs to defend
the Freedom Wireless suit will not exceed our estimate.



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



Verizon Wireless may terminate our existing prepaid wireless services agreement upon 90 days
written notice. Verizon Wireless began converting subscribers from our platform to its internal platform in the fourth quarter 2004. Conversions have been ongoing and are expected to continue through the fourth quarter 2005. In addition, because
Cingular Wireless has substantially reduced marketing efforts for our Real-Time Billing offering and began offering prepaid service on their GSM network through one of our competitors, we expect that subscribers from Cingular Wireless TDMA
prepaid service that we currently support will churn off of our platform over time. Thus, revenues from Verizon and Cingular will substantially decrease, resulting in a reduction of overall revenue from our Real-Time Billing business from these two
customers.



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



Historically, a significant portion of our revenues in any particular period has been attributable to a limited number of customers in the wireless telecommunications
business. The following table summarizes the percentage of our total revenue received from Nextel Communications, Verizon Wireless and Cingular Wireless for the three months ended March 31, 2005:



|                      |  |    |  
|--------------------- |  | -- | -
|Nextel Communications |  | 29 | %
|Verizon Wireless      |  | 27 | %
|Cingular Wireless     |  | 20 | %



Most of our customer contracts are not
exclusive. Therefore, our wireless operator customers have used and/or tested and continue to use and/or test their own services or services of our competitors in certain markets. In addition, certain of our contracts are up for renewal in 2005 and
beyond. If and when each of the contracts is renewed, some contractual rates may be lower than in previous years and at lower rates than we have estimated. In addition, we depend on our wireless customers to market and sell our solutions to
consumers. We can provide no assurance that they will do so successfully, and therefore, that there will be a significant market for our mobile services platform.



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



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



We have recently introducedbcgiAccess Management, Payment Manager and bcgiNetwork product offerings to the marketplace.The acceptance of these new products is critical to our strategy to diversify and grow our revenue base. Our success in gaining acceptance of these offerings will depend on our ability to
integrate these products into existing wireless operator billing platforms. In addition, the success of bcgiAccess Management will depend on wireless operator and subscriber acceptance of the capabilities of this product.The failure
or delay of any of these offerings to be accepted in the marketplace could have a material adverse effect on our business, financial condition and results of operations.



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



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



| |  |  | The lack of acceptance or delayed acceptance of our newest solutions, including bcgiAccess Management and Payment Manager;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | Decreased demand for our licensed solutions, caused by reductions in capital budgets of our customers, changing technologies and other reasons beyond our control;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Delays in recognizing revenue on any transaction;
| | - |  | -------------------------------------------------



| |  |  | Delays or deferrals of customer shipments and/or implementations of our products;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Variations in volumes of minutes of use generated by our wireless customers subscribers;
| | - |  | -----------------------------------------------------------------------------------------



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



| |  |  | Rates charged and paid by our customers;
| | - |  | ----------------------------------------



| |  |  | Impact and acceptance of existing solutions or the introduction of competing solutions by wireless operators, including those who are currently our customers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our wireless customers ability to generate additional prepaid subscribers using our solutions;
| | - |  | -----------------------------------------------------------------------------------------------



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



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



| |  |  | The relatively long sales cycles for many of our products;
| | - |  | ----------------------------------------------------------



| |  |  | Changes in the mix of solutions we provide;
| | - |  | -------------------------------------------



| |  |  | Seasonal trends, particularly in the second and third quarters when wireless operators are not usually marketing and selling prepaid services as aggressively as in the first and
fourth quarters of the year; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



We expect that our revenues and net income will decline in future quarters, as Verizon and
Cingular generate less revenue. Also, a significant portion of our expenses is fixed. Accordingly, our results of operations are particularly sensitive to fluctuations in revenues. If our revenues fall below our expectations, we would most likely
not be able to reduce our fixed or other expenses in time to sufficiently respond to such a shortfall. Additionally, due to all of the foregoing factors, it is possible that in some future quarter our results of operations will be below our
expectations and/or the expectations of public market analysts and investors. In such event, the price of our common stock would likely be materially and adversely affected.



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



Our business will not be successful if we do not develop and offer more functionality and
features in our solutions than those available in competitive offerings or if we are unable to develop new solutions to offer our wireless customers. Also, there can be no assurance that we will successfully support and enhance our real-time billing
platform effectively or that our network will successfully support current and future growth. In addition, we may be unable to leverage our existing infrastructure to provide enhancements to our current solutions or new solutions



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cost-effectively. If we cannot develop and provide more desirable functionality and features than our competitors, if we cannot sell our new solutions,
including bcgi Access Management, bcgi Network or bcgi Payment, or if we are unable to keep our costs down to provide new and enhanced solutions at competitive prices, we would likely lose market share or be required to reduce
our pricing, which would have a material adverse effect on our business, financial condition and results of operations. In addition, if we do not successfully continue to upgrade our software and hosting environment as new wireless technologies
evolve, including but not limited to 3G technology, we may lose existing and prospective customers.



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



We are expanding our operations internationally and expect to derive a greater portion of our revenues from customers outside the United States. Our international
operations are subject to a variety of risks, including:



| |  |  | General economic conditions in each country or region;
| | - |  | ------------------------------------------------------



| |  |  | The overlap of different tax regimes;
| | - |  | -------------------------------------



| |  |  | Fluctuations in currency exchange rates and difficulties in transferring funds from certain countries;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | The difficulty of managing an organization operating in various countries;
| | - |  | --------------------------------------------------------------------------



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



| |  |  | Longer payment cycles and difficulties in collecting accounts receivable;
| | - |  | -------------------------------------------------------------------------



| |  |  | Import and export licensing requirements;
| | - |  | -----------------------------------------



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



| |  |  | Reduced protection for intellectual property rights in some countries.
| | - |  | ----------------------------------------------------------------------



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



We rely on complex information technology systems and
networks to operate our business. If any significant system or network disruption occurs, we will be subject to financial penalties that could adversely affect our business and operating results.



We rely on the efficient and uninterrupted operation of complex information technology
systems and networks. All information technology systems and networks are potentially vulnerable to damage or interruption from a variety of sources, including but not limited to computer viruses, security breaches, natural disasters, fire, power
loss, terrorism, war, telecommunication failure or similar events. We have implemented various measures to guard against these risks, however, each quarter we have experienced network outages, some of which have resulted in significant reductions in
revenue due to penalty clauses contained in certain of our wireless customer contracts. Our Bedford and Woburn, Massachusetts facilities are redundant and each facility is able to provide all significant processing functions of our network. We still
may not be protected from a natural disaster within the greater Boston, Massachusetts area. There may also be system or network disruptions if new or upgraded business management systems are defective or are not installed properly. However, there
can be no assurance that a system or network failure or significant disruption will not have a material adverse impact on our business and our operating results. In addition, in the event of such a disruption or failure, we may incur significant
costs to remedy the damages caused by such a situation.



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



Our success and ability to compete depends in part upon our proprietary technology and our ability to protect such technology. We have a number of patent applications pending to protect our proprietary technology in the United States and
internationally. If these patent applications are not approved, we may not be able to prevent others from



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using similar technologies and we may be subject to additional patent infringement lawsuits or royalty payments to use the technology. We rely on a
combination of contractual provisions, confidentiality procedures, and patent, trademark, trade secret and copyright laws to protect the proprietary aspects of our technology. These legal protections afford only limited protection and competitors
may gain access to our intellectual property that may result in the loss of customers. In addition, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our technology or to obtain and use our
proprietary information. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of the proprietary rights of others. Any litigation could result in substantial
costs and diversion of resources with no assurance of success and could seriously harm our business and operating results.



We may never realize the anticipated benefits of any acquisitions.



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



| |  |  | Possible decreases in capital resources or dilution to existing stockholders;
| | - |  | -----------------------------------------------------------------------------



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



| |  |  | Difficulties of operating a new business;
| | - |  | -----------------------------------------



| |  |  | Potential inherited liability for the past actions of the acquired company;
| | - |  | ---------------------------------------------------------------------------



| |  |  | Risk that any acquired companys internal controls may not be adequate;
| | - |  | -----------------------------------------------------------------------



| |  |  | Diversion of managements attention from other business concerns;
| | - |  | -----------------------------------------------------------------



| |  |  | Limited ability to predict future operating results of the acquired company; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | Potential loss of key employees and customers of the acquired company.
| | - |  | ----------------------------------------------------------------------



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



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



We
have expanded our operations rapidly and continue to invest in new products and features, including expanding internationally. This has created significant demands on our technical, management, operational, development and administrative personnel
and other resources. Any additional expansion by us may further strain our management, financial and other resources. There can be no assurance that our systems, procedures, controls and existing space will be adequate to support expansion of our
operations or that we will be successful in our expansion strategy. Inability of our management to manage operational changes effectively, would materially and adversely affect the quality of our solutions, our ability to retain key personnel and
our business, financial condition and results of operations.



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



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



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



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



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



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



Changes in government regulations could adversely impact our business.



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



Item 3. Quantitative and Qualitative Disclosures About Market Risk



We maintain an investment portfolio in accordance with our Investment Policy. The primary objectives of our Investment Policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize
yields. Although our investments are subject to credit risk, our policy specifies credit quality standards for our investments and limits the amount of credit exposure from any single issue, issuer or type of investment. Our investments are also
subject to interest rate risk and will decrease in value if market interest rates increase. However, since our investments are generally conservative in nature and are of a relatively short duration and some are held to maturity, interest rate risk
is mitigated.



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



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Item 4. Controls and Procedures



Management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act) as of March 31, 2005. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that, as of March 31,
2005, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our CEO and CFO by others within those entities, particularly during the
period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.



No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the three
months ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



PART II. OTHER INFORMATION:



Item 1. Legal Proceedings



In March
2000, Freedom Wireless, Inc. filed a suit against us and a number of our wireless carrier customers. The suit is being tried in the United States District Court in Massachusetts and alleges that the defendants infringe two patents held by Freedom
Wireless, Inc. and seeks damages as well as injunctive relief. If there were a ruling that we infringed the Freedom Wireless patents, it could significantly restrict our ability to conduct business. In addition, we have an obligation to indemnify
the other defendants for damages they may incur with respect to any infringement by our technology. The trial began on February 28, 2005 and is expected to be completed in mid May 2005. In 2005, Verizon Wireless, who was a defendant in the case,
reached a settlement with Freedom Wireless and is therefore no longer a defendant in the case. We were not part of the settlement discussions and the terms of the settlement are not public. We do not believe that we infringe these patents and
believe that the patents are invalid in light of prior art and other reasons.



We are not presently able to estimate the potential losses, if any, related to the Freedom Wireless lawsuit. Freedom Wireless is seeking damages in excess of $250 million from us and the other remaining co-defendants, whom bcgi has
agreed to indemnify. If Freedom Wireless prevails in this case and is awarded the amount of damages which they are seeking from us and the other co-defendants, this amount would exceed our ability to pay.



We account for costs related to this case as incurred due to the lengthy and unpredictable
proceedings which make it difficult to reasonably estimate legal costs. The total costs to defend the case through March 31, 2005 were $19.0 million. We expect to incur approximately $2.2 to $2.9 million in legal expenses in the second quarter of
2005. This cost is expected to be substantially less per quarter than historical amounts beginning in the third quarter of 2005, during the anticipated appeals process by either party following the completion of the trial. There can be no assurance
that costs to defend the Freedom Wireless suit will not exceed our estimate.



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



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



(c) In June 2004, our board of directors approved the repurchase by us of up to an aggregate of 2,000,000 shares of our common stock pursuant to the repurchase program. The program will expire at the earliest
occurrence of any of the following events:



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



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



| | c. | June 10, 2005.
| | -- | --------------



No shares were repurchased under the repurchase program during the quarter ended March 31, 2005.



Item 5. Other information



(b) None



Item 6. Exhibits



Exhibits



|     |  |                                                                                                   
|---- |  | --------------------------------------------------------------------------------------------------
|10.1 |  | Amendment #1 dated May 3, 2005 to Employment Agreement with E. Y. Snowden, dated February 10, 1998
|     | 
|10.2 |  | Change of Control Agreement with Karen A. Walker, dated May 3, 2005                               
|     | 
|10.3 |  | Change of Control Agreement with William Wessman, dated May 3, 2005                               
|     | 
|10.4 |  | Change of Control Agreement with Paul Tobin, dated May 3, 2005                                    
|     | 
|10.5 |  | Change of Control with Fritz von Mering, dated May 3, 2005                                        
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)                               
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)                               
|     | 
|32   |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b)   



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SIGNATURES



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



Date: May 9, 2005



Boston Communications Group, Inc.(Registrant)By:

/s/ Karen A. WalkerKaren A. WalkerVice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)




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