##### Table of Contents

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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, 2004



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.)



100 Sylvan Road,
Woburn, Massachusetts 01801

(Address of principal executive offices)



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



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



---



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



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



Indicate the number of shares outstanding of each of the issuers classes of common
stock as of the latest practicable date. As of May 3, 2004, the Company had outstanding 18,317,946 shares of common stock, $.01 par value per share.



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##### Table of Contents

INDEX



|                               |  |                                                                                      
|------------------------------ |  | -------------------------------------------------------------------------------------
|PART I. FINANCIAL INFORMATION:
|Item 1.                        |  | Financial Statements (Unaudited)                                                     
|                               | 
|                               |  | Condensed Consolidated Balance Sheets                                                
|                               | 
|                               |  | Condensed Consolidated Statements of Operations                                      
|                               | 
|                               |  | Condensed Consolidated Statements of Cash Flows                                      
|                               | 
|                               |  | Notes to Condensed Consolidated Financial Statements                                 
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
|                               | 
|                               |  | Certain Factors That May Affect Future Results                                       
|                               | 
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                           
|                               | 
|Item 4.                        |  | Controls and Procedures                                                              
|                              
|PART II. OTHER INFORMATION:   
|                               | 
|Item 1.                        |  | Legal Proceedings                                                                    
|                               | 
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                     



This Quarterly Report contains
forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties, including without limitation, statements regarding the diversification of our product and customer base,
earnings per share for the three month period ended June 30, 2004, growth of our billing and transaction processing services revenues, billing and transaction processing services gross margin, prepaid systems revenues, prepaid systems gross margin,
additional capital investments, legal expenses for the Freedom Wireless, Inc. (Freedom Wireless) lawsuit and the belief that the Company does not infringe on the Freedom Wireless patents, and the ability to finance our operations for the next 12
months with cash on hand and cash to be generated from profitable operations. These statements are based on the current beliefs and assumptions of management.



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



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



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##### Table of Contents

BOSTON COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)



|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                            |  | March 31,2004 |         |   | December 31,2003 |  
|ASSETS                                                                                                                                                                      |  |               |         |   |                  |   |         |  
|Current assets:                                                                                                                                                             |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                   |  | $             | 7,445   |   |                  | $ | 2,960   |  
|Short-term investments                                                                                                                                                      |  |               | 63,067  |   |                  |   | 63,553  |  
|Accounts receivable, net of allowance for billing adjustments and doubtful accounts of $897 in 2004 and $878 in 2003                                                        |  |               | 19,394  |   |                  |   | 18,386  |  
|Inventory                                                                                                                                                                   |  |               | 556     |   |                  |   | 679     |  
|Deferred income taxes                                                                                                                                                       |  |               | 1,260   |   |                  |   | 1,260   |  
|Prepaid expenses and other assets                                                                                                                                           |  |               | 2,892   |   |                  |   | 2,121   |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|Total current assets                                                                                                                                                        |  |               | 94,614  |   |                  |   | 88,959  |  
|Property and equipment:                                                                                                                                                     |  |               |         |   |                  |   |         |  
|Building and leasehold improvements                                                                                                                                         |  |               | 11,078  |   |                  |   | 10,989  |  
|Telecommunications systems & software                                                                                                                                       |  |               | 86,482  |   |                  |   | 86,418  |  
|Furniture and fixtures                                                                                                                                                      |  |               | 547     |   |                  |   | 540     |  
|Systems in development                                                                                                                                                      |  |               | 12,867  |   |                  |   | 10,789  |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|                                                                                                                                                                            |  |               | 110,974 |   |                  |   | 108,736 |  
|Less allowance for depreciation and amortization                                                                                                                            |  |               | 53,467  |   |                  |   | 50,098  |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|                                                                                                                                                                            |  |               | 57,507  |   |                  |   | 58,638  |  
|Intangible assets, net                                                                                                                                                      |  |               | 860     |   |                  |   | 920     |  
|Goodwill                                                                                                                                                                    |  |               | 4,163   |   |                  |   | 4,177   |  
|Other assets                                                                                                                                                                |  |               | 1,934   |   |                  |   | 1,897   |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|Total assets                                                                                                                                                                |  | $             | 159,078 |   |                  | $ | 154,591 |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                        |  |               |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                            |  | $             | 2,523   |   |                  | $ | 1,844   |  
|Accrued expenses                                                                                                                                                            |  |               | 7,758   |   |                  |   | 12,363  |  
|Deferred revenue                                                                                                                                                            |  |               | 5,166   |   |                  |   | 3,788   |  
|Income taxes payable                                                                                                                                                        |  |               | 2,995   |   |                  |   | 760     |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                   |  |               | 18,442  |   |                  |   | 18,755  |  
|Non-current liabilities:                                                                                                                                                    |  |               |         |   |                  |   |         |  
|Accrued pension liability                                                                                                                                                   |  |               | 832     |   |                  |   | 632     |  
|Deferred income taxes                                                                                                                                                       |  |               | 7,003   |   |                  |   | 7,003   |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|Total non-current liabilities                                                                                                                                               |  |               | 7,835   |   |                  |   | 7,635   |  
|Commitments and contingencies                                                                                                                                               |  |               |         |   |                  |   |         |  
|Shareholders equity:                                                                                                                                                       |  |               |         |   |                  |   |         |  
|Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued and outstanding                                                                                   |  |               |        |   |                  |   |        |  
|Common stock, voting, par value $.01 per share, 35,000,000 shares authorized; 18,588,806 and 18,522,448 shares issued at March 31, 2004 and
December 31, 2003, respectively |  |               | 186     |   |                  |   | 185     |  
|Additional paid-in capital                                                                                                                                                  |  |               | 113,508 |   |                  |   | 112,962 |  
|Treasury stock; 273,420, at cost                                                                                                                                            |  |               | (2,131  | ) |                  |   | (2,131  | )
|Retained earnings                                                                                                                                                           |  |               | 21,303  |   |                  |   | 17,230  |  
|Accumulated other comprehensive loss                                                                                                                                        |  |               | (65     | ) |                  |   | (45     | )
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|Total shareholders equity                                                                                                                                                  |  |               | 132,801 |   |                  |   | 128,201 |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                                                                                  |  | $             | 159,078 |   |                  | $ | 154,591 |  
|                                                                                                                                                                            |  |               |         |   |                  |   |         |  



See accompanying notes.



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##### Table of Contents

BOSTON COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                                                                              |  |                             |        |   |      |   |       
|------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------
|                                                                                                              |  | Three months endedMarch 31,
|                                                                                                              |  | 2004                        |        |   | 2003
|REVENUES:                                                                                                     |  |                             |        |   |      |   |       
|Billing and Transaction Processing Services                                                                   |  | $                           | 26,556 |   |      | $ | 21,074
|Prepaid Systems                                                                                               |  |                             | 689    |   |      |   | 1,056 
|                                                                                                              |  |                             |        |   |      |   |       
|                                                                                                              |  |                             | 27,245 |   |      |   | 22,130
|EXPENSES:                                                                                                     |  |                             |        |   |      |   |       
|Cost of Billing and Transaction Processing Services revenues*                                                 |  |                             | 5,865  |   |      |   | 4,990 
|Cost of Prepaid Systems revenues*                                                                             |  |                             | 513    |   |      |   | 567   
|Engineering, research and development                                                                         |  |                             | 3,796  |   |      |   | 2,869 
|Sales and marketing                                                                                           |  |                             | 1,872  |   |      |   | 1,567 
|General and administrative                                                                                    |  |                             | 2,086  |   |      |   | 1,885 
|General and administrative  legal expenses                                                                   |  |                             | 1,150  |   |      |   | 915   
|Depreciation and amortization                                                                                 |  |                             | 5,469  |   |      |   | 4,392 
|                                                                                                              |  |                             |        |   |      |   |       
|                                                                                                              |  |                             | 20,751 |   |      |   | 17,185
|Operating income                                                                                              |  |                             | 6,494  |   |      |   | 4,945 
|Interest income                                                                                               |  |                             | 312    |   |      |   | 336   
|                                                                                                              |  |                             |        |   |      |   |       
|Income from continuing operations before income taxes                                                         |  |                             | 6,806  |   |      |   | 5,281 
|Provision for income taxes                                                                                    |  |                             | 2,722  |   |      |   | 2,007 
|                                                                                                              |  |                             |        |   |      |   |       
|Income from continuing operations                                                                             |  |                             | 4,084  |   |      |   | 3,274 
|Discontinued operations (Note 6):                                                                             |  |                             |        |   |      |   |       
|Income (loss) from discontinued operations, net of income taxes of ($8) and $9 in 2004 and 2003, respectively |  |                             | (11    | ) |      |   | 14    
|                                                                                                              |  |                             |        |   |      |   |       
|Net income                                                                                                    |  | $                           | 4,073  |   |      | $ | 3,288 
|                                                                                                              |  |                             |        |   |      |   |       
|Basic net income per share:                                                                                   |  |                             |        |   |      |   |       
|Continuing operations                                                                                         |  | $                           | 0.22   |   |      | $ | 0.19  
|Net income                                                                                                    |  | $                           | 0.22   |   |      | $ | 0.19  
|Weighted average common shares outstanding                                                                    |  |                             | 18,277 |   |      |   | 17,479
|Diluted net income per share:                                                                                 |  |                             |        |   |      |   |       
|Continuing operations                                                                                         |  | $                           | 0.22   |   |      | $ | 0.18  
|Net income                                                                                                    |  | $                           | 0.22   |   |      | $ | 0.18  
|Weighted average common shares outstanding                                                                    |  |                             | 18,720 |   |      |   | 18,340

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



See accompanying notes.



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BOSTON COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                                             |  |                             |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                             |  | Three months endedMarch 31, |        
|                                                                                                             |  | 2004                        |         |   | 2003 |  
|OPERATING ACTIVITIES                                                                                         |  |                             |         |   |      |   |         |  
|Net income from continuing operations                                                                        |  | $                           | 4,084   |   |      | $ | 3,274   |  
|Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                                                |  |                             | 5,469   |   |      |   | 4,392   |  
|Changes in operating assets and liabilities:                                                                 |  |                             |         |   |      |   |         |  
|Accounts receivable                                                                                          |  |                             | (1,058  | ) |      |   | (2,609  | )
|Inventory                                                                                                    |  |                             | 123     |   |      |   | (118    | )
|Prepaid expenses and other assets                                                                            |  |                             | (715    | ) |      |   | (891    | )
|Accounts payable, accrued expenses and deferred revenue                                                      |  |                             | (2,482  | ) |      |   | 253     |  
|Income taxes payable                                                                                         |  |                             | 2,235   |   |      |   | 1,177   |  
|Other non-current liabilities                                                                                |  |                             | 200     |   |      |   |        |  
|                                                                                                             |  |                             |         |   |      |   |         |  
|Net cash provided by operating activities of continuing operations                                           |  |                             | 7,856   |   |      |   | 5,478   |  
|                                                                                                             |  |                             |         |   |      |   |         |  
|Income (loss) from discontinued operations                                                                   |  |                             | (11     | ) |      |   | 14      |  
|Net change in operating assets and liabilities of discontinued operations                                    |  |                             | (2      | ) |      |   | 41      |  
|                                                                                                             |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) operating activities of discontinued operations                               |  |                             | (13     | ) |      |   | 55      |  
|                                                                                                             |  |                             |         |   |      |   |         |  
|Net cash provided by operations                                                                              |  |                             | 7,843   |   |      |   | 5,533   |  
|                                                                                                             |  |                            
|INVESTING ACTIVITIES                                                                                         |  |                             |         |   |      |   |         |  
|Purchases of property and equipment                                                                          |  |                             | (4,371  | ) |      |   | (14,535 | )
|Purchases of short-term investments                                                                          |  |                             | (16,538 | ) |      |   | (18,359 | )
|Sales of short-term investments                                                                              |  |                             | 17,005  |   |      |   | 4,400   |  
|                                                                                                             |  |                             |         |   |      |   |         |  
|Net cash used in investing activities                                                                        |  |                             | (3,904  | ) |      |   | (28,494 | )
|                                                                                                             |  |                            
|FINANCING ACTIVITIES                                                                                         |  |                             |         |   |      |   |         |  
|Proceeds from exercise of stock options                                                                      |  |                             | 212     |   |      |   | 2,221   |  
|Proceeds from issuance of common stock                                                                       |  |                             | 334     |   |      |   | 299     |  
|                                                                                                             |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                                                    |  |                             | 546     |   |      |   | 2,520   |  
|                                                                                                             |  |                             |         |   |      |   |         |  
|Increase / (decrease) in cash and cash equivalents                                                           |  |                             | 4,485   |   |      |   | (20,441 | )
|Cash and cash equivalents at beginning of period                                                             |  |                             | 2,960   |   |      |   | 31,146  |  
|                                                                                                             |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                                   |  | $                           | 7,445   |   |      | $ | 10,705  |  
|                                                                                                             |  |                             |         |   |      |   |         |  
|SUPPLEMENTAL CASH FLOW INFORMATION                                                                           |  |                             |         |   |      |   |         |  
|Cash paid for income taxes                                                                                   |  | $                           | 696     |   |      | $ | 825     |  
|                                                                                                             |  |                             |         |   |      |   |         |  



See accompanying notes.



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##### Table of Contents

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, 2004
are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.



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



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



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



Reclassifications



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



Revenue Recognition



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



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



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



| | 2) | bcgiPayment Services - the Company earns revenues by processing transactions on behalf of wireless carriers subscribers; and
| | -- | -----------------------------------------------------------------------------------------------------------------------------



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



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



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



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##### Table of Contents

The Company typically recognizes revenue for its Prepaid Systems business from the sale of systems at the
time the systems are shipped or delivered to the customer, depending on shipping terms. In the event there are acceptance terms, the Company defers revenue until acceptance has occurred. The fair value of installation revenue, based on
vendor-specific objective evidence, is deferred until the entire installation is complete. Revenues from maintenance and support services are recognized ratably over the term of the contract period, which is generally one year, based on
vendor-specific objective evidence of fair value. Vendor-specific objective evidence of fair value is based upon the amount charged when the service is sold separately, which is typically the contracts renewal rate.



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



Legal Costs



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



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



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



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



Impairment of Long-Lived Assets



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



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##### Table of Contents

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



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



Stock Based Compensation



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



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



|                                                                                                                                    |  |                             |       |   |      |   |       |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                                                                                                                    |  | Three months endedMarch 31, |      
|                                                                                                                                    |  | 2004                        |       |   | 2003 |  
|Net income as reported                                                                                                              |  | $                           | 4,073 |   |      | $ | 3,288 |  
|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 |  |                             | (759  | ) |      |   | (644  | )
|                                                                                                                                    |  |                             |       |   |      |   |       |  
|Pro forma net income                                                                                                                |  | $                           | 3,314 |   |      | $ | 2,644 |  
|                                                                                                                                    |  |                             |       |   |      |   |       |  
|Basic net income per share:                                                                                                         |  |                             |       |   |      |   |       |  
|As reported                                                                                                                         |  | $                           | 0.22  |   |      | $ | 0.19  |  
|Pro forma                                                                                                                           |  | $                           | 0.18  |   |      | $ | 0.15  |  
|Diluted net income per share:                                                                                                       |  |                             |       |   |      |   |       |  
|As reported                                                                                                                         |  | $                           | 0.22  |   |      | $ | 0.18  |  
|Pro forma                                                                                                                           |  | $                           | 0.18  |   |      | $ | 0.14  |  



Comprehensive
Income



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



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##### Table of Contents

|                                                 |  |                             |       |   |      |   |      
|------------------------------------------------ |  | --------------------------- | ----- | - | ---- | - | -----
|                                                 |  | Three Months EndedMarch 31,
|                                                 |  | 2004                        |       |   | 2003
|Net Income                                       |  | $                           | 4,073 |   |      | $ | 3,288
|Unrealized loss on available-for-sale securities |  |                             | (20   | ) |      |   |     
|                                                 |  |                             |       |   |      |   |      
|Comprehensive Income                             |  | $                           | 4,053 |   |      | $ | 3,288
|                                                 |  |                             |       |   |      |   |      



3. Contingencies



Legal



In March 2000, Freedom Wireless, Inc. filed a suit against the Company and a number of wireless carriers. The suit is being
tried in the United States District Court in Massachusetts and alleges that the defendants infringe two patents held by Freedom Wireless, Inc. and seeks damages in an unspecified amount as well as injunctive relief. If there was a ruling that the
Company infringed the Freedom Wireless patents, it could significantly restrict the Companys ability to conduct business. In addition, the Company has an obligation to indemnify the other defendants for damages they may incur with respect to
any infringement by the Companys technology. The suit is in the pre-trial phase and various summary judgment motions have been filed by both parties in the case. The Court is expected to rule on these motions in the normal course of
proceedings. 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 expects to incur, on average, approximately $1 million per quarter for legal costs until the Freedom Wireless matter is resolved. However,
this cost will likely continue to vary from quarter to quarter, depending on the timing of proceedings. There can be no assurances that the Companys expenses to defend the Freedom Wireless suit will not exceed the Companys estimate. If
Freedom Wireless prevails in this case, the amount of damages could be substantial and the Companys business, financial condition and results of operations would be materially adversely affected.



On November 10, 2003, a putative class action complaint was filed in U.S.
District Court for the District of Massachusetts against the Company, its Chief Executive Officer and Chief Financial Officer on behalf of persons who purchased the Companys common stock between June 12, 2003 and July 16, 2003. The complaint
alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act, as well as Rule 10b-5 promulgated thereunder by allegedly failing to disclose material adverse information about the Companys business, operations and future
prospects, specifically with respect to the Companys contract negotiations with Verizon Wireless. The Company intends to vigorously contest this lawsuit and believes that the lawsuit is without merit and that the Company and the other named
defendants have highly meritorious defenses to the allegations made in this lawsuit. The Company is not presently able to estimate the potential losses, if any, related to this lawsuit.



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



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##### Table of Contents

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. The Company believes its internal development processes and other policies
and practices limit its exposure related to the indemnification provisions of these agreements.



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



|4. | Earnings Per Share
|-- | ------------------



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



(in thousands, except per share amounts)



|                                                    |  |                             |        |   |      |   |       
|--------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------
|                                                    |  | Three months endedMarch 31,
|                                                    |  | 2004                        |        |   | 2003
|Numerator for basic and diluted earnings per share: |  |                             |        |   |      |   |       
|Income from continuing operations                   |  | $                           | 4,084  |   |      | $ | 3,274 
|Income (loss) from discontinued operations          |  |                             | (11    | ) |      |   | 14    
|                                                    |  |                             |        |   |      |   |       
|Net income                                          |  | $                           | 4,073  |   |      | $ | 3,288 
|                                                    |  |                             |        |   |      |   |       
|Denominator:                                        |  |                             |        |   |      |   |       
|Denominator for basic net income per share          |  |                             | 18,277 |   |      |   | 17,479
|Effect of dilutive employee stock options           |  |                             | 443    |   |      |   | 861   
|                                                    |  |                             |        |   |      |   |       
|Denominator for diluted net income per share        |  |                             | 18,720 |   |      |   | 18,340
|                                                    |  |                             |        |   |      |   |       
|Basic net income per common share:                  |  |                             |        |   |      |   |       
|Income from continuing operations                   |  | $                           | 0.22   |   |      | $ | 0.19  
|Income (loss) from discontinued operations          |  |                             |       |   |      |   |      
|                                                    |  |                             |        |   |      |   |       
|Net income per common share                         |  | $                           | 0.22   |   |      | $ | 0.19  
|                                                    |  |                             |        |   |      |   |       
|Diluted net income per common share:                |  |                             |        |   |      |   |       
|Income from continuing operations                   |  | $                           | 0.22   |   |      | $ | 0.18  
|Income (loss) from discontinued operations          |  |                             |       |   |      |   |      
|                                                    |  |                             |        |   |      |   |       
|Net income per common share                         |  | $                           | 0.22   |   |      | $ | 0.18  
|                                                    |  |                             |        |   |      |   |       



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##### Table of Contents

|5. | Segment Reporting
|-- | -----------------



The Companys reportable operating segments consist of Billing and Transaction Processing Services and Prepaid Systems. The Companys Billing
and Transaction Processing Services solutions allow wireless carriers to access the Companys real-time subscriber management network and transaction processing platform, enabling such carriers to offer prepaid wireless calling, payment
services replenishment capabilities and postpaid billing and customer care to their subscribers. The real-time subscriber management network and transaction processing platform also enables bcgiMobile Guardian, a Web-based solution that
allows end-users to actively manage their wireless usage and access. The Prepaid Systems segment assembles and markets prepaid systems to carriers.



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



(in thousands, except percentages)



|                             |  |                                           |        |   |                |   |       |       |  |   |        |  
|---------------------------- |  | ----------------------------------------- | ------ | - | -------------- | - | ----- | ----- |  | - | ------ | -
|Three months ended March
31, |  | Billing andTransactionProcessing Services |        |   | PrepaidSystems |   |       | Total | 
|2004                         |  |                                           |        |   |                |   |       |       |  |   |        |  
|Revenues                     |  | $                                         | 26,556 |   |                | $ | 689   |       |  | $ | 27,245 |  
|                             |  |                                           |        |   |                |   |       |       |  |   |        |  
|Gross margin                 |  |                                           | 20,691 |   |                |   | 176   |       |  |   | 20,867 |  
|                             |  |                                           |        |   |                |   |       |       |  |   |        |  
|Gross margin percentage      |  |                                           | 78     | % |                |   | 26    | %     |  |   | 77     | %
|                             |  |                                           |        |   |                |   |       |       |  |   |        |  
|2003                         |  |                                           |        |   |                |   |       |       |  |   |        |  
|Revenues                     |  | $                                         | 21,074 |   |                | $ | 1,056 |       |  | $ | 22,130 |  
|                             |  |                                           |        |   |                |   |       |       |  |   |        |  
|Gross margin                 |  |                                           | 16,084 |   |                |   | 489   |       |  |   | 16,573 |  
|                             |  |                                           |        |   |                |   |       |       |  |   |        |  
|Gross margin percentage      |  |                                           | 76     | % |                |   | 46    | %     |  |   | 75     | %
|                             |  |                                           |        |   |                |   |       |       |  |   |        |  



|6. | Discontinued Operations
|-- | -----------------------



Due to industry consolidation and a change in the fundamentals of inter-carrier roaming, resulting in a continued decline in profitability, the Company
ceased providing its ROAMERplus solution in March, 2004, effectively discontinuing its Roaming Services segment. Pursuant to Statement of Financial Accounting Standards 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (FAS 144), the condensed consolidated financial statements have been reclassified to reflect this discontinued operation. Accordingly, the operating results of the Roaming Services segment have been segregated as a
discontinued operation in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows. In addition, 2003 amounts have been restated to reflect Roaming Services as discontinued operations. At March 31, 2004 there were $140,000
in assets classified as accounts receivable and $400,000 in liabilities classified as accrued expenses related to the Roaming Services segment. Revenues for the Roaming Services segment were $563,000 and $937,000 for the three months ended March 31,
2004 and 2003, respectively.



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##### Table of Contents

|7. | Retirement Plans
|-- | ----------------



Defined Benefit Plan



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



The components of net periodic
benefit costs for the three months ended March 31, 2004 and 2003 are as follows (in thousands):



|                                                    |  |      |     |      |   |    
|--------------------------------------------------- |  | ---- | --- | ---- | - | ---
|                                                    |  | 2004 |     | 2003
|Components of net periodic benefit costs            |  |      |     |      |   |    
|Service cost                                        |  | $    | 103 |      | $ | 82 
|Interest cost                                       |  |      | 54  |      |   | 39 
|Amortization of unrecognized net prior service cost |  |      | 43  |      |   | 23 
|                                                    |  |      |     |      |   |    
|Net periodic benefit costs                          |  | $    | 200 |      | $ | 144
|                                                    |  |      |     |      |   |    



|8. | Recent Accounting Pronouncements
|-- | --------------------------------



In December 2003, the FASB issued a revised version of Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), entitled
FIN 46 (revised December, 2003) (FIN 46(R)), which is an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements. FIN 46(R) addresses consolidation by business enterprises of variable interest entities
and requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risks
will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed. FIN 46 applied immediately to variable interest entities created after January 31, 2003
and to variable interest entities in which an enterprise obtains an interest after that date. FIN 46(R) applies to certain types of entities for periods beginning after March 15, 2004. The Company adopted the provisions of FIN 46(R) as of January 1,
2004 and there was no effect on its financial position or results of operations.



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##### Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Overview



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



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



In the first
quarter of 2004, we generated revenues of $27.2 million and diluted earnings per share of $0.22. These results were driven by the growth in our billing and transaction processing services revenues, which increased 26% to $26.6 million for the three
months ended March 31, 2004 compared to $21.1 million for the three months ended March 31, 2003. The increase in billing and transaction processing services revenues principally resulted from an increase in our prepaid subscriber base from 3.35
million subscribers at March 31, 2003 to 4.06 million subscribers at March 31, 2004, as well as an increase in our average billed minutes of use (which includes minutes of use processed by our platform from which we earn revenues). The increase in
our subscriber base resulted from additional subscriber growth from certain of our carrier customers. In March 2004, the Company ceased providing its ROAMERplus solution, effectively discontinuing its Roaming Services segment.



In the first quarter of 2004, Nextel announced the expansion of BOOST Mobile, its
youth-oriented, pay-as-you-go service, into several major new markets utilizing the bcgi Prepaid Wireless solution. BOOST Mobile first marketed this offering in California and Nevada beginning in September 2002, and had over 400,000
subscribers by December 31, 2003. While the BOOST Mobile offering was made available in several major markets in April 2004, including the New York Tri-State area, the greater Chicago area (including Minneapolis), Philadelphia, Texas, Florida and
the Washington D. C. area, it was not accompanied by marketing promotion at that time.



We also introducedbcgiMobile Guardian in the first quarter of 2004, a first-of-its-kind solution, that provides unique, Web-based tools for use by parents and employers seeking to better manage wireless usage of their children or
employees. For the first time, people administering multiple wireless accounts will have the power to easily customize parameters controlling how much each phone can be used in a given time period, who may place calls to the phone and whom can be
called from the phone. We have received significant interest from existing and prospective national and regional carrier customers and we expect that it should further diversify our product and customer base.



We anticipate that our earnings per share for the second quarter of 2004 will approximate
$0.23 to $0.25, including approximately $0.03 per share of legal costs, primarily associated with the Freedom Wireless lawsuit. We have not provided guidance for the remainder of 2004 due to the uncertainty of our future relationship with Verizon
Wireless. Verizon Wireless accounted for 51% of our total revenues in 2003 and 48% of our total revenues for the three months ended March 31, 2004. On July 11, 2003, Verizon Wireless notified us that they intend to test their own internal prepaid
platform in 2004, which could potentially displace the prepaid solutions we currently provide Verizon Wireless. Our existing prepaid wireless



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##### Table of Contents

services agreement with Verizon Wireless is in its auto-renewal term and may be terminated by either party upon 90 days
written notice. If Verizon Wireless tests are successful, they could begin adding prepaid subscribers to their internal platform without our knowledge or assistance. Additionally, if Verizon Wireless stops using, or materially reduces its usage of,
our prepaid wireless services for any reason, which may include Verizon Wireless providing its own prepaid services in-house, our results of operations and financial condition will be materially adversely affected. In an effort to mitigate the
impact of this potential loss, we continue to pursue our strategy to diversify our revenue base by offering new and enhanced solutions, expanding relationships with existing customers and evaluating key acquisition opportunities.



Segment Data

(in thousands, except percentages)



|                             |  |                                           |        |   |                 |   |       |       |  |   |        |  
|---------------------------- |  | ----------------------------------------- | ------ | - | --------------- | - | ----- | ----- |  | - | ------ | -
|Three months ended March
31, |  | Billing andTransactionProcessing Services |        |   | Prepaid Systems |   |       | Total | 
|2004                         |  |                                           |        |   |                 |   |       |       |  |   |        |  
|Revenues                     |  | $                                         | 26,556 |   |                 | $ | 689   |       |  | $ | 27,245 |  
|                             |  |                                           |        |   |                 |   |       |       |  |   |        |  
|Gross margin                 |  |                                           | 20,691 |   |                 |   | 176   |       |  |   | 20,867 |  
|                             |  |                                           |        |   |                 |   |       |       |  |   |        |  
|Gross margin percentage      |  |                                           | 78     | % |                 |   | 26    | %     |  |   | 77     | %
|                             |  |                                           |        |   |                 |   |       |       |  |   |        |  
|2003 (1)                     |  |                                           |        |   |                 |   |       |       |  |   |        |  
|Revenues                     |  | $                                         | 21,074 |   |                 | $ | 1,056 |       |  | $ | 22,130 |  
|                             |  |                                           |        |   |                 |   |       |       |  |   |        |  
|Gross margin                 |  |                                           | 16,084 |   |                 |   | 489   |       |  |   | 16,573 |  
|                             |  |                                           |        |   |                 |   |       |       |  |   |        |  
|Gross margin percentage      |  |                                           | 76     | % |                 |   | 46    | %     |  |   | 75     | %
|                             |  |                                           |        |   |                 |   |       |       |  |   |        |  

---

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



Billing and Transaction Processing Services



Billing and transaction processing services revenues consist primarily of revenues from
our three primary solution sets: bcgiReal-Time Subscriber Management solutions (which includes bcgi Prepaid Wireless, bcgi Mobile GuardianTMand bcgi Network GovernorTM), bcgi Voyager Billing
and Customer Care and bcgi Payment Services. Billing and transaction processing services revenues increased 26% to $26.6 million for the three months ended March 31, 2004 from $21.1 million for the three months ended March 31, 2003. The
revenue increase for the three month period ended March 31, 2004 compared to the corresponding period in the previous year was primarily a result of the 21% increase in the subscriber base to 4.06 million as of March 31, 2004 from 3.35 million as of
March 31, 2003. The increase in our subscriber base resulted from additional subscriber growth from certain of our carrier customers. The revenue increase also resulted from an increase in average billed minutes of use per subscriber to 116 per
month for the three-month period ended March 31, 2004 from 106 for the three-month period ended March 31, 2003. The higher average billed minutes of use resulted primarily from more attractive features and more competitive pricing offered by our
carrier customers to their subscribers. These revenue increases were offset by a decrease of approximately 11% in our average billed rate per minute compared to the three-month period in the prior year, principally due to carriers availing
themselves of our volume pricing discounts. We expect billing and transaction processing revenues to increase slightly in the second quarter of 2004 compared to the three months ended March 31, 2004.



Gross margins for billing and transaction processing services increased to 78% of billing and
transaction processing services revenues for the three months ended March 31, 2004 compared to 76% of such revenues for the three months ended March 31, 2003. Gross margins increased due mainly to increased revenue and to our corresponding largely
fixed cost infrastructure. Although we incurred additional costs



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##### Table of Contents

associated with supporting our new growth opportunities including Nextels market expansion and our bcgi
Mobile Guardian launch, our increased revenues, combined with our predominantly fixed cost infrastructure, resulted in the increase in gross margin. For the second quarter of 2004, we expect that the gross margin will remain consistent compared to
the three months ended March 31, 2004.



Prepaid Systems



Prepaid systems revenues decreased to $689,000 for the three months ended March 31, 2004
from $1.1 million for the three months ended March 31, 2003. The decrease in prepaid systems revenues resulted primarily from fewer system sales during the quarter, offset in part by an increase in recurring service contracts revenue. Our prepaid
system sales levels are not easily predictable and often fluctuate on an annual and quarter-to-quarter basis. We expect prepaid systems revenues to increase by approximately 200% in the second quarter of 2004 compared to the three months ended March
31, 2004.



Gross margins for prepaid systems decreased to 26% of prepaid
systems revenues for the three months ended March 31, 2004 from 46% for the three months ended March 31, 2003. The decrease for the three months ended March 31, 2004 was due mainly to fixed costs not absorbed at lower levels of system sales. Due to
the higher expected revenues, prepaid systems gross margin is expected to increase as a percentage of revenues in the second quarter of 2004 compared to the three months ended March 31, 2004.



Operating Data

(in thousands)



|                                      |  |                              |        |                    |      |   |       |   |                    |  |     |  
|------------------------------------- |  | ---------------------------- | ------ | ------------------ | ---- | - | ----- | - | ------------------ |  | --- | -
|                                      |  | Three months ended March 31, |       
|                                      |  | 2004                         |        |                    | 2003 |  
|                                      |  | Total                        |        | % of TotalRevenues |      |   | Total |   | % of TotalRevenues | 
|Total revenues                        |  | $                            | 27,245 |                    | 100  | % |       | $ | 22,130             |  | 100 | %
|Engineering, research and development |  |                              | 3,796  |                    | 14   | % |       |   | 2,869              |  | 13  | %
|Sales and marketing                   |  |                              | 1,872  |                    | 7    | % |       |   | 1,567              |  | 7   | %
|General and administrative            |  |                              | 2,086  |                    | 8    | % |       |   | 1,885              |  | 9   | %
|General and administrative  legal    |  |                              | 1,150  |                    | 4    | % |       |   | 915                |  | 4   | %
|Depreciation and amortization         |  |                              | 5,469  |                    | 20   | % |       |   | 4,392              |  | 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 new and existing solutions. The increase in engineering, research and development
expenses resulted from additional resources devoted to expanding and enhancing the features and functionality of our billing and transaction processing services business, as well as additional resources added to support our growth and new solutions,
including our newest product, bcgi Mobile Guardian.



Sales and
marketing expenses



Sales and marketing expenses include direct sales and
product management salaries, commissions, travel and entertainment expenses, in addition to the cost of trade shows, direct mail and other promotional expenses. In absolute dollars, sales and marketing expenses increased primarily to support our
marketing efforts for our newest solution, bcgi Mobile Guardian.



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##### Table of Contents

General and administrative expenses



General and administrative expenses include salaries and benefits of employees and other expenses that provide administrative support. In
absolute dollars, general and administrative expenses increased due to additional resources and costs associated with enhanced regulatory requirements and an increase in legal costs incurred to enhance our intellectual property portfolio.



General and administrative expenses  legal expenses



General and administrative-legal expenses increased, primarily for legal expenses to
defend the patent infringement lawsuit initiated by Freedom Wireless. This level of expenses represented a 26% increase compared to expenses for the three months ended March 31, 2003. We expect to incur, on average, approximately $1 million per
quarter (before taxes) for legal costs until the Freedom Wireless matter is resolved. However, this cost will likely continue to vary from quarter to quarter, depending on the timing of proceedings.



Depreciation and amortization expense



Depreciation and amortization expense includes depreciation of telecommunications systems
and software, building, furniture, equipment and leasehold improvements. We provide for depreciation and amortization using the straight-line method over the estimated useful lives of the assets, which range from three to twenty years. The increase
in depreciation and amortization expense was primarily due to more capital deployed to support growth and continued enhancements in billing and transaction processing services, including bcgi Mobile Guardian.



Interest income



Interest income decreased 7% to $312,000 for the three months ended March 31, 2004 from $336,000 for the three months ended March 31, 2003.
Although our combined cash and investment positions increased as of March 31, 2004, lower average interest rates during the period resulted in decreased levels of interest income for the period compared to the three months ended March 31, 2003.



Provision for income taxes



The income tax provision of $2.7 million for the three months ended March 31, 2004, yielded
a 40% income tax rate compared to an income tax provision of $2.0 million for the three months ended March 31, 2003, that yielded a 38% rate. The increase in the income tax rate is primarily due to the recognition of net operating loss carryforwards
in the prior year that were completely utilized during the year ended December 31, 2003.



Discontinued Operations



In March 2004,
we ceased providing our ROAMERplus solution, effectively discontinuing our Roaming Services segment. This business generated a net loss of $11,000 for the three months ended March 31, 2004 and net income of $14,000 for the three months ended
March 31, 2003. At March 31, 2004, the discontinued Roaming Services segment had net liabilities of $261,000, which are expected to be liquidated by the end of 2004.



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##### Table of Contents

Liquidity and Capital Resources



Cash, cash equivalents and short-term investments increased to $70.5 million at March 31, 2004 compared to $66.5 million at December 31,
2003. Net cash provided by operations of $7.8 million for the three months ended March 31, 2004 resulted from net income of $4.1 million, adjustments for depreciation and amortization of $5.5 million and an increase in income taxes payable of $2.2
million. These amounts were partially offset by a $2.5 million decrease in accounts payable, accrued expenses and deferred revenue, as certain year end accruals were paid in the first quarter, and an increase in accounts receivable of $1.0 million,
primarily due to increased revenues.



Our investing activities utilized $3.9
million of net cash for the three months ended March 31, 2004. During this same period, we utilized approximately $4.4 million for capital expenditures, including approximately $780,000 for internally capitalized labor. We anticipate that, during
2004, we will make capital investments of approximately $17-$18 million for additional equipment and software to support enhanced feature capabilities and growth of our billing and transaction processing services. Also, we may pay additional
contingent cash consideration of up to $3.1 million to Infotech Solutions Corporation in 2005 and 2006, if we achieve certain defined annual revenue targets for calendar years 2004 and 2005. We intend to finance such capital investments or
contingent consideration payments from short-term investments or cash flow generated from operations.



Our financing activities provided cash of $546,000 during the three months ended March 31, 2004 due to proceeds from the exercise of stock options and the issuance of common stock.



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



|                         |  |       |       |                       |   |          |  |          |       |                  |   |     |  |   |  
|------------------------ |  | ----- | ----- | --------------------- | - | -------- |  | -------- | ----- | ---------------- | - | --- |  | - | -
|                         |  |       |       | Payment due by period
|                         |  | Total |       | Within 1year          |   | 2-3years |  | 4-5years |       | More than5 years
|Contractual obligations: |  |       |       |                       |   |          |  |          |       |                  |   |     |  |   |  
|Operating leases         |  | $     | 3,180 |                       | $ | 1,653    |  | $        | 1,451 |                  | $ | 76  |  | $ | 
|Purchase commitments     |  |       | 3,431 |                       |   | 2,589    |  |          | 573   |                  |   | 264 |  |   | 5
|                         |  |       |       |                       |   |          |  |          |       |                  |   |     |  |   |  
|Total                    |  | $     | 6,611 |                       | $ | 4,242    |  | $        | 2,024 |                  | $ | 340 |  | $ | 5
|                         |  |       |       |                       |   |          |  |          |       |                  |   |     |  |   |  



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



Off Balance Sheet Arrangements



During the three months ended March 31, 2004, we did not engage in:



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



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



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





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Critical Accounting Policies and Estimates



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



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



Revenue Recognition and Allowance for Bad Debts



Our revenue recognition policy is critical because revenue is a key component affecting our operations. In addition, revenue recognition determines the timing of certain expenses, such as commissions and bonuses. We
follow very specific and detailed guidelines in recognizing revenue; however, certain judgments relating to the elements required for revenue recognition affect the application of our revenue policy. Revenue results are difficult to predict and any
shortfall in revenue, changes in judgments concerning recognition of revenue, changes in uncollectible or bad debt estimates, changes in mix, amount of international sales or delays in recognizing revenue, could cause operating results to vary
significantly from quarter to quarter.



We recognize our revenues in accordance
with Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition and application of Emerging Issues Task Force Issue No. 00-21 Revenue Arrangements with Multiple Deliverables. We earn billing and
transaction processing services revenues in various ways, depending on the type of transaction. For bcgi Prepaid Wireless, we earn revenues principally by processing prepaid wireless minutes, net of any penalties incurred related to outages
on our platform. For bcgiPayment Services, we earn revenues by processing transactions on behalf of wireless carriers subscribers. For bcgi Voyager Billing and Customer Care, we earn revenues by generating a subscribers
monthly bill. Each of these revenues is recognized when the service is provided. For license fees, special projects and implementation services, revenues are typically recognized ratably over the remaining life of the contract with the carrier. 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.



For our prepaid 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 entire installation is
complete. Revenues from maintenance and support 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 is based upon the amount charged when the service is sold separately, which is typically the contracts renewal rate.



In addition to recording revenues net of any penalties incurred related to outages on our prepaid 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



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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 3 to the condensed consolidated financial statements, we are
expensing legal costs related to the Freedom Wireless lawsuit as incurred due to the lengthy and unpredictable proceedings, which made it difficult to reasonably estimate legal costs for the lawsuit. Amounts accrued and recognized as expense are
based on estimates from outside legal counsel and managements judgment and could change if events and circumstances change.



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 labor 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 $780,000 for the three months ended March 31, 2004 and $932,000 for the three months ended March 31,
2003. Amortization of capitalized software development costs begins when the solution is made available for general release and amortization of internal use costs begins when the related asset is first placed into service. These costs are amortized
on a straight-line basis over a three-year period.



Impairment of
Long-Lived and Intangible Assets and Goodwill



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



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



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



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



When indicators of impairment exist and the carrying value of intangibles and long-lived assets, other than goodwill, may not be recoverable, we compare the projected
undiscounted cash flows from these assets, which are determined considering a number of factors including past operating results, budgets, economic projections, market trends and solution development cycles, to their carrying value. If the carrying
value of the long-lived asset exceeds the estimated undiscounted cash flows, the asset is considered impaired and the carrying value is then compared to the assets fair value. If the carrying value exceeds the fair value, an impairment loss
equal to the excess is recorded immediately in the Consolidated 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.



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For impairment tests of goodwill, we have determined that our goodwill is attributed to our billing and transaction
processing services and prepaid systems businesses as a single unit. As such, we utilize the enterprise-wide approach, which is based on the aggregate market value of our common stock, to determine the fair value our reporting segments and compare
that to our consolidated net book value to determine if an impairment loss exists.



Certain Factors That May Affect Future Results



The loss or significant reduction of business from one of our major customers, including 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. Verizon Wireless represented 48% and Cingular Wireless represented 22% of our consolidated revenues for the three months ended March 31, 2004.



On July 11, 2003, Verizon Wireless notified us that they intend to test their own internal
prepaid platform in 2004, which could potentially displace the prepaid solutions we currently provide Verizon Wireless. Our existing prepaid wireless services agreement with Verizon Wireless is in its auto-renewal term and may be terminated by
either party upon 90 days written notice. If Verizon Wireless tests are successful, they could begin adding prepaid subscribers to their internal platform without our knowledge or assistance. Additionally, if Verizon Wireless stops using, or
materially reduces its usage of, our prepaid wireless services for any reason, which may include Verizon Wireless providing its own prepaid services in-house, our results of operations and financial condition will be materially adversely affected.
Additionally, even if Verizon Wireless renews its prepaid wireless services agreement with us, we expect their pricing and, therefore our revenues from Verizon Wireless, would decrease.



We currently provide prepaid wireless solutions for Cingular Wirelesss TDMA markets, and Cingular Wireless uses other vendors to
provide prepaid wireless service in its existing GSM markets. As Cingular Wireless expands the build-out of its GSM network overlay, there is no guarantee that Cingular Wireless will not migrate its existing TDMA prepaid business onto the GSM
network. Additionally, we do not expect that we will be chosen as a supplier for prepaid solutions on Cingular Wireless GSM network. If Cingular Wireless prepaid TDMA customers migrate to GSM technology or, if Cingular Wireless adds
customers to its GSM network instead of its TDMA network, our revenue from this TDMA business will decrease. Our current contract with Cingular Wireless expires in the first half of 2005.



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



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



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



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



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The suit is in the pre-trial phase and various summary judgment motions have been filed by both parties in the case. The
court is expected to rule on these motions in the normal course of proceedings. We cannot yet assess our potential liability, if any. Our failure to prevail in this matter would have any or all of the following material adverse effects 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------



Regardless of the outcome, we will continue to incur significant expenses to defend this
lawsuit. We have incurred approximately $14.7 million in legal costs as of March 31, 2004 to defend this lawsuit, and we expect to incur approximately $1 million per quarter in legal costs until the Freedom Wireless matter is resolved. However, this
cost will likely continue to vary from quarter to quarter, depending on the timing of proceedings. Moreover, this lawsuit may divert the efforts and attention of our management team from normal business operations. Finally, we may become subject to
additional patent infringement lawsuits in the future.



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



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



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



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



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



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our carrier customers. Also, there can be no assurance that we will successfully support and enhance our real-time
subscriber management network and billing and transaction processing platform effectively or that our network will successfully support current and future growth. In addition, we may be unable to leverage our existing infrastructure to provide
enhancements to our current solutions or new solutions cost-effectively. If we cannot develop and provide more functionality and features than our competitors, if we cannot sell our new solutions to our customers, or if we are unable to keep our
costs down to provide new and enhanced solutions, we would likely lose market share or be required to reduce our margins, which would have a material adverse effect on our business, financial condition and results of operations. In addition, if we
do not continue to upgrade our software and hosting environment as new wireless technologies evolve, including but not limited to SIM, 2.5G and 3G technologies, we may lose existing and prospective customers.



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



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



We may never
realize the anticipated benefits of any acquisitions.



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



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



| |  | 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.





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



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



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.



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



A class action lawsuit has been brought against us and two of our senior executives in the United States District Court for the District of Massachusetts on behalf of a putative class of purchasers of our common stock
between June 12, 2003 and July 16, 2003 inclusive. The lawsuit claims violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seeks unspecified damages, attorneys fees and costs.
The lawsuit asserts, among other things, that during the alleged class period we failed to disclose material adverse information about our business, operations and future prospects.



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



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



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



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



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



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



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



| |  | Extent of our carriers emphasis on promoting prepaid solutions and the timing of related marketing initiatives, including our carriers allocation of marketing resources
for initiatives other than prepaid wireless services, such as wireless number portability, data services, new technologies, etc.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



Due to all of the foregoing factors, it is possible that in some future quarter our results
of operations will be below prior results or the expectations of public market analysts and investors. In such event, the price of our common stock would likely be materially and adversely affected.



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



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



Changes in international economic conditions could harm our prepaid systems business.



We currently price and sell all of our prepaid systems to international customers in U.S. dollars. In addition, many prepaid systems customers are multinational corporations. We currently receive payments in U.S.
dollars in order to protect us from foreign currency fluctuations. However, in the future, prepaid systems sales to foreign countries may result in losses due to devaluation of foreign currencies or other international business conditions beyond our
control.



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



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telephone industry, result in new competitors or industry consolidation, limit the number of potential customers for our
solutions or impede our ability to offer competitive solutions to the wireless market or otherwise have a material adverse effect on our business, financial condition and results of operations.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



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



Item 4. Controls and Procedures



Management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
March 31, 2004. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of March 31, 2004, our disclosure controls and procedures were (1) designed to ensure that material information relating to us,
including our consolidated subsidiaries, is made known to our chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they
provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and
forms.



No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



PART II. OTHER INFORMATION:



Item 1. Legal Proceedings



In March 2000,
Freedom Wireless, Inc. filed a suit against us and a number of wireless carriers. The suit is being tried in the United States District Court in Massachusetts and alleges that the defendants infringe two patents held by Freedom Wireless, Inc. and
seeks damages in an unspecified amount as well as injunctive relief. If there were a ruling that we infringed the Freedom Wireless patents, it could significantly restrict our ability to conduct business. In addition, we have an obligation to
indemnify the other defendants for damages they may incur with respect to any infringement by our technology. The suit is in the pre-trial phase and various summary judgment motions have been filed by both parties in the case. The Court is expected
to rule on these motions in the normal course of its proceedings. We do not believe that we infringe these patents and believe that the patents are invalid in light of prior art and other reasons.



In the fourth quarter of 2000, the third quarter of 2001 and the first quarter of 2002, we
recorded special charges of $2.6 million, $3.6 million and $3.3 million, respectively, principally to accrue for legal expenses estimated by our outside legal counsel to be incurred in the defense of the patent infringement suit brought by Freedom
Wireless. However, due to the lengthy and unpredictable proceedings, which made it difficult to reasonably estimate legal costs in the Freedom Wireless suit, commencing in the third quarter of 2002, we began accounting for costs related to this case
as incurred. As a result, for the three months ended March 31, 2004, we recorded charges of $1.2 million for legal expenses.





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



On November 10, 2003, a putative class action complaint was filed in the U.S. District Court for the District of Massachusetts, against us,
our Chief Executive Officer and our Chief Financial Officer on behalf of persons who purchased our common stock between June 12, 2003 and July 16, 2003. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act
as well as Rule 10b-5 promulgated thereunder by allegedly failing to disclose material adverse information about our business, operations and future prospects, specifically with respect to our contract negotiations with Verizon Wireless. We intend
to vigorously contest this lawsuit and we believe the lawsuit is without merit and that we and the other named defendants have highly meritorious defenses to the allegations made in the lawsuit. We are not presently able to estimate the
potential losses, if any, related to this lawsuit.



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



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Item 6. Exhibits and Reports on Form 8-K



| | a) | Exhibits
| | -- | --------



| | 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
| | ---- | -------------------------------------------------------------------



| | 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
| | ---- | -------------------------------------------------------------------



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



| | b) | Reports on Form 8-K
| | -- | -------------------



On February 3, 2004, we filed a current report on Form 8-K to report, under Items 9 and 12, our financial results for the fourth quarter and year ended
December 31, 2003.



On February 3, 2004, we filed a current
report on Form 8-K to report, under Item 9, the signing of a multi-year contract to provide prepaid wireless services to Nextel Communications, Inc. to support a market expansion of its Boost Mobile branded pay-as-you-go offering.



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 10, 2004 |  |  |  | Boston Communications Group, Inc. (Registrant)
|                   |  |  |  |                                               
|                   |  |  |  |                                                |  | By: |  | /s/    Karen A. Walker                                                                                                                                         
|                   |  |  |  |                                                |  |     |  |                                                                                                                                                                
|                   |  |  |  |                                                |  |     |  | Karen A. Walker Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized
Officer)