##### Table of Contents




SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 10549





FORM 10-Q





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





For the quarterly period ended September 30, 2002





or





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





Commission file number: 0-28432





Boston
Communications Group, Inc.


(Exact name of registrant as specified in its charter)





Massachusetts

04-3026859(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)





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 the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date.





As of October 21, 2002, the Company had outstanding 17,383,351 shares of common stock, $.01 par value per share.







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INDEX





PART I.    FINANCIAL INFORMATION:

PageItem 1.

Financial Statements (Unaudited)Consolidated Balance Sheets

3Consolidated Statements of Operations

4Consolidated Statements of Cash Flows

5Notes to Consolidated Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

11Certain Factors That May Affect Future Results

17Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19Item 4.

Controls and Procedures

20PART II.    OTHER INFORMATION:Item 1.

Legal Proceedings

20Item 6.

Exhibits and Reports on Form 8-K

21





This Quarterly Report contains forward-looking statements that involve risks and
uncertainties, including without limitation, statements regarding the prepaid subscriber base, average billed minutes of use (MOU) and Prepaid Wireless Services revenues, after tax charges for legal costs associated with the Freedom Wireless suit,
increase in MOUs resulting in increased volume discounts for carriers, leveraging fixed costs to yield higher Prepaid Wireless Services gross margins in 2002 and beyond, roaming revenues, engineering, research and development, sales and marketing,
and depreciation and amortization expenses, general and administrative expenses and the source of funds for capital investments. The Companys actual results may differ significantly from the results discussed in the forward-looking statements.





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 believes, anticipates, plans, expects, intends, and similar expressions are intended to identify forward-looking statements, although not all
forward-looking statements contain these words.





There are a number of important factors that could cause actual events or the
Companys actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth under the captions Notes To Consolidated Financial Statements,
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 in this
Quarterly Report on Form 10-Q. The factors discussed herein do not reflect the potential future impact of any mergers, acquisitions or dispositions. The Company does not assume any obligation to update any forward-looking statements made herein.




2




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BOSTON COMMUNICATIONS GROUP, INC.


CONSOLIDATED BALANCE SHEETS


(In thousands, except share and per share amounts)


(Unaudited)





September 30,


December 31,2002


2001ASSETSCurrent assets:Cash and cash equivalents

$
33,117


$
37,646Short-term investments


21,002



22,607Accounts receivable, net of allowance for billing adjustments anddoubtful accounts of $1,071 in 2002 and $1,169 in 2001


12,903



10,782Inventory


845



1,036Deferred income taxes


1,385



2,352Prepaid expenses and other assets


1,286



1,490Total current assets


70,538



75,913Property and equipment:Telecommunications systems & software


82,773



70,566Furniture and fixtures


616



612Building and leasehold improvements


1,928



1,895Systems in development


5,422



3,02790,739



76,100Less allowance for depreciation and amortization


48,902



37,30541,837



38,795Goodwill


1,641



1,641Other assets


197



204Total assets

$
114,213


$
116,553LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
2,467


$
1,428Accrued expenses


8,795



11,353Deferred revenue


1,818



2,489Income taxes payable


676



673Current maturities of capital lease obligations






740Total current liabilities


13,756



16,683Commitments and contingencies:Deferred income taxes


3,040



3,040Shareholders equity:Preferred Stock, $.01 par value, 2,000,000 shares authorized, none issued and outstanding






Common Stock, voting, par value $.01 per share, 35,000,000 shares authorized;17,379,642 and 17,293,281 shares issued and outstanding in 2002 and 2001, respectively


174



173Additional paid-in capital


100,193



99,600Treasury Stock (273,420 and 101,420 shares in 2002 and 2001, respectively), at cost


(2,131
)


(673
)Accumulated deficit


(819
)


(2,270
)Total shareholders equity


97,417



96,830Total liabilities and shareholders equity

$
114,213


$
116,553





See accompanying notes.




3




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BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except per share amounts)


(Unaudited)





Three months ended September
30,


Nine months ended September
30,2002

2001


2002

2001REVENUES:Prepaid Wireless Services

$
14,522

$
11,169


$
40,982

$
37,636Roaming Services


1,743


3,109



5,017


9,661Prepaid Systems


1,061


1,609



3,741


4,69617,326


15,887



49,740


51,993EXPENSES:Cost of Prepaid Wireless Services revenues *


4,134


3,458



12,095


11,231Cost of Prepaid Wireless Services revenues  legal expenses





3,629



3,297


3,629Cost of Roaming Services revenues *


1,674


2,556



4,715


8,213Cost of Prepaid Systems revenues *


444


761



1,735


2,196Engineering, research and development


2,286


1,794



6,363


6,000Sales and marketing


976


905



3,082


3,445General and administrative


1,433


1,350



4,374


4,687Depreciation and amortization


4,255


3,936



12,876


11,75615,202


18,389



48,537


51,157Operating income (loss)


2,124


(2,502
)


1,203


836Interest income, net


402


546



1,214


1,892Other expense





(894
)





(894
)Income (loss) before income taxes


2,526


(2,850
)


2,417


1,834Provision (benefit) for income taxes


1,010


(1,140
)


966


732Net income (loss)

$
1,516

($
1,710
)

$
1,451

$
1,102Basic net income per common share:Net income

$
0.09

($
0.10
)

$
0.08

$
0.06Weighted average common shares outstanding


17,080


17,112



17,100


17,062Diluted net income per share:Net income

$
0.09

($
0.10
)

$
0.08

$
0.06Weighted average common shares outstanding


17,518


17,112



17,499


17,476





* exclusive of depreciation, which is shown separately below


See accompanying notes.




4




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BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)


(Unaudited)





Nine months ended September 30,2002


2001OPERATING ACTIVITIESNet income

$
1,451


$
1,102Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


12,876



11,756Deferred income taxes


967



291Non-cash other expense






600Non-recurring charge


3,297



3,629Changes in operating assets and liabilities:Accounts receivable


(2,121
)


2,037Inventory


191



(103
)Prepaid expenses and other assets


211



(34
)Accounts payable, accrued expenses and deferred revenue


(5,487
)


(7,952
)Income taxes payable


3



(744
)Net cash provided by operations


11,388



10,582INVESTING ACTIVITIESPurchases of property and equipment


(15,918
)


(6,992
)Sales of short-term investments


6,103



4,135Purchases of short-term investments


(4,498
)


(24,621
)Net cash used in investing activities


(14,313
)


(27,478
)FINANCING ACTIVITIESProceeds from exercise of stock options and employee stock purchase plan


594



1,244Repurchase of common stock


(1,458
)


Repayment of capital leases


(740
)


(880
)Net cash provided by (used in) financing activities


(1,604
)


364Decrease in cash and cash equivalents


(4,529
)


(16,532
)Cash and cash equivalents at beginning of period


37,646



50,499Cash and cash equivalents at end of period


33,117


$
33,967





See accompanying notes.




5




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





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




The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2002.





The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date, but does
not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.





|For |  | further information, refer to the consolidated financial statements and footnotes thereto included in the Companys annual report on Form 10-K for the year
ended December 31, 2001.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|2. |  | Earnings Per Share
|-- |  | ------------------




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





Three months ended September
30,


Nine months ended September
30,(in 000s, except per share amounts)

2002

2001


2002

2001Numerator for basic and diluted earnings per share:Net income (loss)

$
1,516

($
1,710
)

$
1,451

$
1,102Denominator:Denominator for basic net income per share


17,080


17,112



17,100


17,062Effect of dilutive employee stock options


438






399


414Denominator for diluted net income per share


17,518


17,112



17,499


17,476Basic net income per common share

$
0.09

($
0.10
)

$
0.08

$
0.06Diluted net income per common share

$
0.09

($
0.10
)

$
0.08

$
0.06





|3. |  | Inventory
|-- |  | ---------




Inventories
consisted of the following at:


|
|

(in 000s)

September 30, 2002

December 31, 2001Purchased parts

$
469

$
130Work-in-process


376


906$
845

$
1,036




6




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##### Table of Contents




|4. |  | Segment Reporting
|-- |  | -----------------




(in
000s except percentages)





Three months ended September 30,

Prepaid Wireless Services


Roaming Services


Prepaid Systems


Eliminations


Total2002Revenues

$
14,522


$
1,743


$
3,148


$
(2,087
)

$
17,326Gross margin


10,388



69



1,431



(814
)


11,074Gross margin percentage


72
%


4
%


45
%






64
%2001Revenues

$
11,169


$
3,109


$
1,690


($
81
)

$
15,887Gross margin (1)


4,082



553



880



(32
)


5,483Gross margin percentage (1)


37
%


18
%


52
%






35
%Nine months ended September 30,

Prepaid Wireless Services


Roaming Services


Prepaid Systems


Eliminations


Total2002Revenues

$
40,982


$
5,017


$
7,438


$
(3,697
)

$
49,740Gross margin (2)


25,590



302



3,448



(1,442
)


27,898Gross margin percentage (2)


62
%


6
%


46
%






56
%2001Revenues

$
37.636


$
9,661


$
5,919


($
1,223
)

$
51,993Gross margin (1)


22,776



1,448



2,977



(477
)


26,724Gross margin percentage (1)


61
%


15
%


50
%






51
%





| | (1) |  | The results for the three and nine months ended September 30, 2001 include a special charge of $3.6 million principally for estimated legal expenses which were
expected to be incurred in connection with the Freedom Wireless patent infringement suit, which special charge is classified as a cost of Prepaid Wireless Services.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (2) |  | The results for the nine months ended September 30, 2002 include a special charge of $3.3 million principally for estimated legal expenses which were expected
to be incurred in connection with the Freedom Wireless patent infringement suit, which special charge is classified as a cost of Prepaid Wireless Services.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|5. |  | Recent Accounting Pronouncements
|-- |  | --------------------------------




In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141 (FAS 141), Business Combinations and No. 142 (FAS 142) Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill is no longer amortized but is subject to annual impairment tests in accordance with FAS 142.




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The Company adopted the new rules on accounting for goodwill in the first quarter of 2002. The Company
has performed the first of the required impairment tests of goodwill and determined that its goodwill was not impaired upon the adoption of FAS 142. The Company will perform the annual impairment test in the fourth quarter. The goodwill is
attributable to the Prepaid Wireless Services segment. The effect of no longer amortizing goodwill under FAS 142 is as follows:





(in 000s, except per share amounts)

Three months ended September
30,


Nine months ended September
30,2002

2001


2002

2001Reported net income (loss)

$
1,516

($
1,710
)

$
1,451

$
1,102Goodwill amortization





151






453Adjusted net income (loss)


1,445


(1,559
)


1,451


1,555Basic earnings per shareReported net income


0.09


(0.10
)


0.08


0.06Goodwill amortization





0.01






0.03Adjusted net income


0.09


(0.09
)


0.08


0.09Diluted earnings per shareReported net income


0.09


(0.10
)


0.08


0.06Goodwill amortization





0.01






0.03Adjusted net income

$
0.09

($
0.09
)

$
0.08

$
0.09





In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (FAS 143), which addresses accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets that result from acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for lease obligations. The Company is required to adopt FAS 143 in the first quarter of fiscal 2003. The impact of such adoption is not expected to be material to the Companys consolidated financial statements.





In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (FAS 146),
which supercedes EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) and addresses financial accounting and reporting for
costs associated with exit or disposal activities. Under this pronouncement, a liability for a cost associated with an exit or disposal activity must be recognized when the liability is incurred. Severance pay, in many cases, would be recognized
over time rather than up front. If the benefit arrangement requires employees to render future service beyond a minimum retention period, a liability should be recognized as employees render service over the future service period even if
the benefit formula used to calculate an employees termination benefit is based on length of service. The Company is required to adopt FAS 146 on December 31, 2002. The impact of such adoption is not expected to be material to the
Companys consolidated financial statements.





|6. |  | ContingenciesLegal
|-- |  | -------------------




In March 2000, Freedom Wireless, Inc. filed a suit against the Company and a number of wireless carriers. The suit alleges that the defendants infringe two patents held by Freedom Wireless, Inc. and seeks damages in an unspecified
amount as well as injunctive relief, which could significantly restrict the Companys ability to conduct its business if the Company is found to have infringed the Freedom Wireless patents. In addition, the Company has an obligation to
indemnify the other defendants for damages they may incur with respect to any infringement. The suit is currently in the discovery phase. The Company does not believe that it infringes these patents and believes that it has meritorious defenses to
the action.





In the fourth quarter of 2000, the third quarter of 2001 and the first quarter of 2002, the Company recorded special charges
of $2.6 million, $3.6 million and $3.3 million, respectively, principally to accrue for legal expenses estimated by the Companys outside counsel to be incurred in the defense of the patent infringement suit brought by Freedom Wireless.
However, due to the lengthy and unpredictable discovery process, which has made it difficult to reasonably estimate legal costs in the suit, the Company has decided to account for Freedom Wireless legal costs as incurred in the future rather than
accrue the entire amount of such costs when they become probable. This accounting treatment had no impact on the third quarter of 2002. However, beginning in the fourth quarter of 2002, the Company expects to generate quarterly after tax charges of
approximately $550,000 per quarter for legal costs associated with the Freedom Wireless suit until it is resolved. 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 were to prevail in the case, the amount of the damages could be substantial and the Companys business, financial condition and results of operations would be materially adversely affected.




8




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The components of the legal charges, payments and unpaid expenses incurred are as follows (in
thousands):





Initial charges

Payments

12/31/00 Balance

Additional charges

Payments

12/31/01 Balance

Additional charges

Payments

Unpaid expenses incurred

9/30/02 BalanceCash charges:Legal fees primarily for Freedom Wireless suit

$
2,600

$
114

$
2,486

$
3,629

$
3,427

$
2,688

$
3,297

$
3,990

$
1,269

$
726





In December 1999, the Company was named as a defendant in a suit filed in United States
District Court for the Northern District of Iowa by a former supplier (the Supplier) of materials to a subsidiary of the Company. The Company and the Companys supplier signed a purchase contract for an unspecified number of
components in 1997, pursuant to which the Supplier became the Companys sole supplier for a certain system component in 1997 and early 1998. The Company subsequently changed suppliers. The suit alleges that the Company breached the
confidentiality clause of the contract and interfered with actual and prospective contracts of the Supplier with other customers. The Supplier initially claimed misappropriation of trade secrets and sought an injunction, but it has since dropped
these claims. The Supplier also dropped the claim of tortious interference with contract but added a claim of fraudulent misrepresentation. The Supplier seeks damages in excess of $1 million on the fraudulent misrepresentation claim. The Company
believes that the claim is without merit. Discovery has been completed and motions for summary judgment are pending before the Court.





On
January 4, 2002, a carrier customer sent a letter to the Company stating that it is entitled to indemnification from the Company with respect to certain claims pending in a patent infringement case brought by Ronald A. Katz Technology Licensing,
L.P. against the carrier customer in the United States District Court for the Eastern District of Pennsylvania. In the suit, the plaintiff claims infringement of fourteen patents by the defendants, and seeks damages in an unspecified amount. The
letter asserts that the Company must indemnify the carrier customer to the extent any of the claims in the complaint may relate to the services provided by the Company to the carrier customer pursuant to the Prepaid Wireless Calling Service
Agreement and any other agreements between the carrier customer and the Company. The Company has engaged outside counsel to represent it. At this stage, it is not possible to determine whether there is a valid claim for indemnification, or the
likely outcome of such claim.





On July 26, 2002, a carrier customer sent a letter to the Company notifying the Company of the pendency of
a lawsuit brought by Philip S. Jackson against the carrier customer and seven other companies in the United States District Court for the Northern District of Illinois. In the suit, the plaintiff alleges patent infringement by the defendants in
using, selling or offering to sell automated interactive telephone systems, voice messaging services or answering devices. The letter asserts that the Company must indemnify the carrier customer to the extent any of the claims in the complaint
relate to the services provided by the Company to the carrier customer pursuant to the Prepaid Wireless Calling Service Agreement and any other agreements between the carrier customer and the Company. The suit seeks damages in an unspecified amount.
The Company has retained outside counsel. At this stage it is not possible to determine whether there is a valid claim for indemnification, or the likely outcome of such claim.





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




9




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|7. |  | Subsequent Event
|-- |  | ----------------




On
October 31, 2002, the Company acquired all of the assets and certain liabilities of Infotech Solutions Corporation (Infotech) for $3.5 million in cash, plus additional contingent cash consideration of up to $3.5 million based on the attainment of
certain defined annual revenues earned from 2003 through 2005. Infotech provides billing software to the wireless marketplace and enables the Company to deliver a suite of solutions to wireless carriers for handling all aspects of postpaid, prepaid
and hybrid subscriber management. These solutions include comprehensive point-of-sale capabilities, inventory management, real-time transaction processing for voice, data and m-Commerce, proactive voice messaging, Web-based customer care and payment
processing. At this time, it is not practicable to provide a purchase price allocation, however, goodwill and other intangible assets are expected to be generated once the valuation process is complete.




10




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MANAGEMENTS DISCUSSION AND ANALYSIS


OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Consolidated Results of Operations





The
Companys total revenues increased 9% from $15.9 million for the three months ended September 30, 2001 to $17.3 million for the three months ended September 30, 2002 and decreased 4% from $52.0 million for the nine months ended September 30,
2001 to $49.7 million for the nine months ended September 30, 2002. During the three-month period, the increase was primarily attributable to a 30% increase in the Companys Prepaid Wireless Services revenues, partially offset by a 44% decline
in the revenues of the Companys non-core Roaming Services business, and a 34% decrease in Prepaid Systems revenues, excluding inter-segment sales. For the nine month period, the decrease primarily resulted from a 48% decline in the revenues of
the Companys Roaming Services business and a 20% decrease in Prepaid Systems revenues, excluding inter-segment sales, partially offset by a 9% increase in Prepaid Wireless Services revenues.





The Company generated operating income of $2.1 million during the three months ended September 30, 2002 compared to an operating loss of $2.5 million for the
corresponding period in 2001. Excluding the effects of special charges related to costs of ongoing litigation in the three months ended September 30, 2001 the Company generated operating income of $1.1 million, whereas there were no special charges
in the three months September 30, 2002. The Company generated operating income of $1.2 million during the nine months ended September 30, 2002 compared to operating income of $836,000 for the corresponding period in the prior year, representing a
44% increase. Excluding the effects of special charges related to costs of ongoing litigation in the nine months ended September 30, 2001 and 2002, the Company generated operating income of $4.5 million for both periods. For the three-month period,
the increase in operating income was primarily due to increased Prepaid Wireless Services revenues and gross margin partially offset by the special charge of $3.6 million recorded in the first quarter of 2001 relating primarily to legal expenses for
the Freedom Wireless patent infringement suit, as well as by decreased Roaming Services revenues and gross margin and increases in engineering, research and development expense and depreciation expense. The specifics of each segments revenues
and gross margins are discussed in greater detail below.





Segment Data


(in thousands except percentages)





Three months ended September 30,

Prepaid Wireless Services


Roaming Services


Prepaid Systems


Eliminations


Total2002Revenues

$
14,522


$
1,743


$
3,148


$
(2,087
)

$
17,326Gross margin


10,388



69



1,431



(814
)


11,074Gross margin percentage


72
%


4
%


45
%






64
%2001Revenues

$
11,169


$
3,109


$
1,690


($
81
)

$
15,887Gross margin (1)


4,082



553



880



(32
)


5,483Gross margin percentage (1)


37
%


18
%


52
%






35
%Nine months ended September 30,

Prepaid Wireless Services


Roaming Services


Prepaid Systems


Eliminations


Total2002Revenues

$
40,982


$
5,017


$
7,438


$
(3,697
)

$
49,740Gross margin (2)


25,590



302



3,448



(1,442
)


27,898Gross margin percentage (2)


62
%


6
%


46
%






56
%2001Revenues

$
37.636


$
9,661


$
5,919


($
1,223
)

$
51,993Gross margin (1)


22,776



1,448



2,977



(477
)


26,724Gross margin percentage (1)


61
%


15
%


50
%






51
%




11




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##### Table of Contents




|(1) |  | The results for the three and nine months ended September 30, 2001 include a special charge of $3.6 million principally for estimated legal expenses which were
expected to be incurred in connection with the Freedom Wireless patent infringement suit, which special charge is classified as a cost of Prepaid Wireless Services.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(2) |  | The results for the nine months ended September 30, 2002 include a special charge of $3.3 million principally for estimated legal expenses which were expected
to be incurred in connection with the Freedom Wireless patent infringement suit, which special charge is classified as a cost of Prepaid Wireless Services.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Prepaid Wireless Services





Prepaid Wireless Services revenues increased 31% from
$11.1 million for the three months ended September 30, 2001 to $14.5 million for the three months ended September 30, 2002 and increased 9% from $37.6 million to $41.0 million for the nine months ended September 30, 2001 and 2002, respectively. The
revenue increase for the three month period ended September 30, 2002 compared to the corresponding period in the prior year was primarily a result of a 67% increase in the average billed minutes of use (MOUs) per subscriber from 57 at September 30,
2001 to 95 at September 30, 2002. The higher billed MOUs resulted primarily from an increase in the Companys digital subscribers and increased usage in response to the Companys carrier customers promoting more competitively priced and
full-featured prepaid offerings. The increase for the nine month period ended September 30, 2002 compared to the corresponding period in the prior year was also due to the increase in billed MOUs. The Companys subscribers remained consistent
at 2.4 million at September 30, 2001 and September 30, 2002, as growth in the subscriber base since September 30, 2001 has been offset by the write off of 600,000 non-performing subscribers at December 31, 2001. The Company expects that its
subscriber base, average billed MOUs and revenues will increase as existing and prospective carrier customers aggressively market the Companys full-featured, prepaid offerings which appeal to higher quality digital subscribers who tend to talk
more on their prepaid phones. In addition, in July 2002 the Company announced a new contract with Cingular Wireless that expands the number of markets served by the Company. The Company has also converted existing Cingular prepaid subscribers that
were served by competitors platforms. In October 2002, the Company announced an agreement with Nextel Communications, Inc. Nextel, conjunction with BOOST Mobile LLC, launched a prepaid product in California and Nevada that specifically targets
the youth market. The Company expects that the anticipated revenue growth will be tempered, however, as carriers who generate higher MOUs avail themselves of volume pricing discounts offered by the Company.





In October 2002, the Company acquired all of the assets and certain liabilities of Infotech Solutions Corporation. The Company plans to integrate Infotechs
Voyager billing and customer care product into the Companys prepaid wireless business operations to leverage the Companys existing assets. Beginning in the fourth quarter of 2002, Voyager revenues will be included with the existing
Prepaid Wireless Services and Payment Services revenues, to be renamed Billing and Transaction Processing Services on the income statement.





Gross margin for Prepaid Wireless Services increased from 69% of such revenues, excluding a special charge of $3.6 million for legal expenses, for the three months ended September 30, 2001 to 72% of such revenues for the three months
ended September 30, 2002, resulting primarily from higher revenues. Including a special charge of $3.6 million for legal expenses, the gross margin for Prepaid Wireless Services was 37% for the three months ended September 30, 2001. Excluding
special charges, the gross margins were consistent at 70% of Prepaid Wireless Services revenues for the nine months ended September 30, 2001 and 2002, respectively. Including special charges of $3.6 million and $3.3 million for legal expenses,
respectively, the gross margin for Prepaid Wireless Services was 61% and 62% of Prepaid Wireless Services revenues for the nine months ended September 30, 2001 and 2002, respectively. The Company expects that to the extent that subscribers and MOUs
grow, it will be able to leverage its fixed cost infrastructure to yield higher gross margins in the fourth quarter of 2002 and beyond.





The charge for legal expenses consisted primarily of estimated probable fees and expenses that the Company expected to incur in the defense of the patent infringement suit brought by Freedom Wireless and







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represented managements best estimate based upon the current facts and circumstances. Due to the lengthy and unpredictable discovery process, which has made it difficult to reasonably
estimate legal costs in the Freedom Wireless suit, the Company has decided to account for Freedom Wireless legal costs as incurred in the future rather than accrue the entire amount of such costs when they become probable. This accounting treatment
had no impact on the third quarter of 2002. However, beginning in the fourth quarter of 2002, the Company expects to generate quarterly after tax charges of approximately $550,000 per quarter for legal costs associated with the Freedom Wireless suit
until it is resolved.





Roaming Services





Roaming Services revenues decreased 45% from $3.1 million for the three months ended September 30, 2001 to $1.7 million for the three months ended September 30, 2002 and decreased 48% from $9.7 million for the nine months
ended September 30, 2001 to $5.0 million for the nine months ended September 30, 2002. The decrease in Roaming Services revenues was primarily attributable to consolidation in the industry and advancements in handset technology that have improved
registered roaming capabilities. The Company anticipates that these trends will continue and, therefore, Roaming Services revenues are expected to continue to decrease at similar rates compared to prior periods.





Gross margins for Roaming Services decreased from 18% for the three months ended September 30, 2001 to 4% for the three months ended September 30, 2002 and from
15% of Roaming Services revenues for the nine months ended September 30, 2001 to 6% for the nine months ended September 30, 2002. The decreases primarily resulted from lower revenues, slightly higher telecommunications costs and the resulting lower
absorption of fixed costs. Roaming Services margins are expected to remain consistent or decline slightly going forward.





Prepaid
Systems





Prepaid Systems revenues, excluding inter-segment revenues, decreased 31% from $1.6 million for the three months ended
September 30, 2001 to $1.1 million for the three months ended September 30, 2002 and decreased 21% from $4.7 million for the nine months ended September 30, 2001 to $3.7 million for the same period in 2002. The decrease in Prepaid Systems revenues,
excluding inter-segment revenues, primarily resulted from a decrease in sales of voice mail systems that were discontinued in December 2001 and the timing of shipments. Gross Prepaid Systems revenues increased 82% from $1.7 million in the three
months ended September 30, 2001 to $3.1 million in the three months ended September 30, 2002 and increased 25% from $5.9 million in the nine months ended September 30, 2001 to $7.4 million in the nine months ended September 30, 2002. The increase in
gross Prepaid Systems revenues was primarily due to increased inter-segment revenues to support new customers and growth from existing customers of the Prepaid Wireless Services business. Prepaid Systems revenues are expected to increase in the
fourth quarter of 2002.





Gross margins for Prepaid Systems, excluding inter-segment revenues, increased from 53% of Prepaid Systems
revenues in the third quarter of 2001 to 58% of such revenues in the third quarter of 2002 and increased from 53% of such revenues for the nine months ending September 30, 2001 to 54% of such revenues for the corresponding period in 2002. For the
three-month and nine-month period, the increases resulted primarily from recurring service revenues and system upgrades that were sold to existing customers and which typically yield higher margins.




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Operating Data





Three months ended September 30,2002


2001($ in 000s)

Total

% of Total Revenues


Total

% of Total RevenuesTotal revenues

$
17,326

100
%

$
15,887

100
%Engineering, research and development


2,286

13
%


1,794

11
%Sales and marketing


976

6
%


905

6
%General and administrative


1,433

8
%


1,350

8
%Depreciation and amortization


4,255

25
%


3,936

25
%Nine months ended September 30,2002


2001($ in thousands)

Total

% of Total Revenues


Total

% of Total RevenuesTotal revenues

$
49,740

100
%

$
51,993

100
%Engineering, research and development


6,363

13
%


6,000

12
%Sales and marketing


3,082

6
%


3,445

7
%General and administrative


4,374

9
%


4,687

9
%Depreciation and amortization


12,876

26
%


11,756

23
%





Engineering, research and development expenses





Engineering, research and development expenses primarily include the salaries and benefits for software development and engineering personnel associated with the
development, implementation and maintenance of existing and new services. Engineering, research and development expenses increased from 11% of total revenues for the three months ended September 30, 2001 to 13% for the three months ended September
30, 2002, and from 12% of total revenues for the nine months ended September 30, 2001 to 13% of total revenues for the nine months ended September 30, 2002. The increases primarily resulted from devoting additional resources to expanding and
enhancing the features and functionality of the Companys IVSN and transaction processing platform, in addition to resources devoted to the Companys Payment Services initiatives. The Company spent $8.3 million and $8.7 million on
engineering, research and development (including capitalized software labor costs) for the nine months ended September 30, 2001 and 2002, respectively. The Company intends to continue to increase its engineering, research and development
expenditures in absolute dollars to support ongoing and future development and enhancements of its prepaid and other wireless services.





Sales and marketing expenses





Sales and marketing expenses include direct sales and product management salaries
and benefits, commissions, travel and entertainment expenses, in addition to the cost of trade shows, direct mail and other promotional expenses. As a percentage of total revenues, sales and marketing expenses remained consistent at 6% for the three
months ended September 30, 2001 and 2002, respectively, and decreased from 7% to 6% for the nine months ended September 30, 2001 and 2002, respectively. In absolute dollars, sales and marketing expenses decreased for the nine months ended September
30, 2002, as the Company continued to effectively manage its costs. Sales and marketing expenses are expected to increase in absolute dollars for the fourth quarter of 2002 to support the Companys expected growth in Prepaid Wireless Services
and bcgi Payment Services, as well as additional costs resulting from the Infotech acquisition.





General and administrative
expenses





General and administrative expenses include salaries and benefits of employees and other expenses that provide
administrative support to the Company. As a percentage of total revenues, general and administrative expenses remained consistent at 8% of total revenues for the three months ended September 30, 2001 and 2002 and remained consistent at 9% of total
revenues for the nine months ended September 30, 2001 and 2002. In absolute dollars, general and administrative expenses decreased for the nine months ended September 30, 2002 as the Company




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continued to effectively manage its costs. General and administrative costs are expected to remain consistent in absolute dollars in the fourth quarter of 2002 and are expected to decrease as a
percentage of revenues in 2003.





Depreciation and amortization expense





Depreciation and amortization expense includes depreciation of telecommunications systems and software, furniture and fixtures and building and leasehold improvements. The Company provides
for depreciation using the straight-line method over the estimated useful lives of the assets, which range from three to twenty years. Goodwill related to acquisitions was amortized over eight years during 2001 but, in accordance with FAS 142, is no
longer being amortized. Depreciation and amortization expense remained consistent at 25% of total revenues for the three months ended September 30, 2001 and 2002 and increased from 23% to 26% of total revenues for the nine months ended September 30,
2001 and 2002, respectively. The increase over the nine-month period was primarily due to additional capital being deployed to support the Companys Prepaid Wireless Services existing and projected new business. The Company expects that
depreciation and amortization expense will increase during the fourth quarter of 2002 and throughout 2003, as a result of the continued deployment of capital to support the Cingular expansion, the Nextel launch, other anticipated new business and
growth and continued enhancements in Prepaid Wireless Services. In addition, the Company expects that amortization related to the Infotech acquisition will also increase depreciation and amortization going forward.





Interest income, net





Net interest income
decreased 26% from $546,000 for the three-month period ended September 30, 2001 to $402,000 for the three months ended September 30, 2002 and 37% from $1.9 million in the nine-month period ended September 30, 2001 to $1.2 million in the nine-month
period ended September 30, 2002. Interest income is earned primarily from investments, which were provided by cash generated from operations, the sale of the Teleservices business and the proceeds from the Companys public offerings. The
decline in interest income in 2002 principally resulted from lower interest rates in the marketplace and from the lower cash and short-term investment balances.





Provision for income taxes





The income tax rate remained consistent at 40% for the three and nine-month
periods ended September 30, 2001 and 2002.





Liquidity and Capital Resources





Cash, cash equivalents and short-term investments decreased 10% to $54.1 million at September 30, 2002 compared to $60.3 million at December 31, 2001. Net cash provided by operations of
$11.4 million for the nine months ended September 30, 2002 resulted from depreciation and amortization of $12.9 million and non-recurring charges of $3.3 million. These amounts were partially offset by a decrease of $5.5 million in accounts payable
and accrued expenses due to the timing of payments and an increase of $2.1 million in the Companys accounts receivable due to increased revenues. The Companys DSO increased slightly from 69 days at June 30, 2002 to 72 days at September
30, 2002.





The Companys investing activities utilized $14.3 million of net cash for the nine months ended September 30, 2002. The
Company expended $15.9 million during the nine months ended September 30, 2002, primarily for telecommunications systems equipment and software for expansion of the Companys IVSN and transaction processing platform, which was primarily offset
by $1.6 million in net sales of short-term investments. The Company will use approximately $3.5 million in cash to pay for the Infotech acquisition in the fourth quarter of 2002. In addition, the Company anticipates that it will continue to make
significant capital investments for additional equipment and enhanced feature capabilities to support growth, new business and the continued enhancement of its Prepaid Wireless Services and other enhanced services. Specifically, the Company expects
to spend $6 to $8 million in the fourth quarter of 2002 and approximately $20 million in 2003 on capital expenditures. The source of funds for these investments is expected to be from cash flows anticipated to be generated from operations or the
Companys short-term investments. The Companys financing activities utilized $1.6 million in net




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cash during the nine months ended September 30, 2002, principally due to the repurchase of 172,000 shares of the Companys common stock.





The Company believes that its cash and cash equivalents, short-term investments and the funds anticipated to be generated from operations will be sufficient to finance the Companys
operations for at least the next 12 months.





|Significant |  | Accounting Policies
|----------- |  | -------------------




Revenue Recognition





The Company earns prepaid wireless services revenues by processing prepaid wireless
minutes and earns roaming services revenues by processing wireless calls for unregistered wireless subscribers who have roamed outside of their service area. These revenues are recognized when the service is provided and are recorded net of
estimated billing adjustments and outages. The Company recognizes revenue from the sale of prepaid systems at the time the systems are shipped unless there is acceptance criteria for which the Company does not recognize revenue until acceptance
occurs. Installation revenue is deferred until the entire installation is complete. Maintenance revenue is deferred and recognized over the term of the relevant maintenance agreement.





Legal Costs





The Company accrues 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 6 to the Consolidated Financial Statements, the Company accrued its best estimate of the probable
cost of certain current litigation, but is now expensing legal costs related to the Freedom Wireless lawsuit as incurred. Other litigation is still being accounted for under this policy and the related estimate has been developed in consultation
with the Companys outside counsel who is handling the case. There can be no assurances that the Companys expenses will not exceed the Companys estimate.





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 deployment of assets for internal use are capitalized in accordance with FASB 86 and SOP
98-1, respectively. The direct labor and related overhead costs of development of computer software are capitalized when technological feasibility has been established. The direct labor, travel and related overhead 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 expected use, anticipated future undiscounted net cash flows and changes in hardware and
software technologies.





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





Impairment of Long Lived Assets





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




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Allowance for Bad Debts





The Company evaluates the collectibility of its accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customers inability to meet its
financial obligations (e.g. bankruptcy filings, substantial downgrading of credit scores), the Company records a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes
will be collected. For all other customers, the Company recognizes reserves for bad debts 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 its financial obligations), the Companys estimates of the recoverability of amounts could be adversely affected.





Certain Factors That May Affect Future Results





Historically, a significant portion of the Companys
revenues in any particular period has been attributable to a limited number of customers in the wireless telecommunications business. This concentration of customers is expected to intensify in 2002 compared to the prior year due to the increased
MOUs of some of the Companys largest customers and carrier consolidation. Specifically, Verizon Wireless represented 49% of the Companys consolidated revenues in the nine months ended September 30, 2002. The Companys dependence on
Verizon is expected to continue until the Companys new carrier customers and expanded programs generate more revenue. The Companys revenues and earnings may also fluctuate from quarter to quarter, based on the volume of minutes of usage
generated and the rates per minute paid to the Company by these customers. In addition, financial and operating difficulties of the Companys customers may have an adverse impact on the Companys future revenues and financial and operating
results. Certain Prepaid Wireless Services contracts expire in 2003 and beyond. When and if each of the contracts is renewed, some contractual rates per minute may be lower than in previous years. If subscriber levels and minutes of usage decline,
revenue and gross margins could be adversely affected due to these lower rates. These contracts are not exclusive and therefore do not prevent the Companys customers from using competitors prepaid platforms. A loss of business from any
of the Companys major customers, including non-renewal of contracts or a decrease in business due to factors outside the Companys control, would have a material adverse effect on the Companys business, financial condition and
results of operations.





The Companys success and ability to compete is dependent in part upon its proprietary technology and its
ability to protect such technology. The Company continues to defend its proprietary technology against patent infringement litigation, including the Freedom Wireless lawsuit. There can be no assurances that the Companys expenses to defend the
Freedom Wireless suit will not exceed the Companys estimates. In addition, if the Company is found to infringe on the Freedom Wireless patents, the amount of damages and indemnification obligations to the Companys carrier customers would
likely be substantial. In addition, an adverse judgment could result in an injunction against the Company or require the Company to alter its prepaid processing methodology. Any of these results would likely have a material adverse effect on the
Companys business, financial condition and results of operations. Indeed, if any patent infringement judgments are entered against the Company or unauthorized copying or misuse of the Companys technology were to occur to any substantial
degree, the Companys business, financial condition and results of operations could be materially adversely affected.





The
Companys operations are dependent on its ability to maintain its computer, switching and other telecommunications equipment and systems in effective working order and to protect its systems against damage from fire, natural disaster, power
loss, telecommunications failure, computer viruses or similar events. Although the Company has built redundancy into its network with its Waltham, Massachusetts second data processing site and other redundant features, there are still parts of the
network that are not redundant at this time. In addition, the Waltham site may not protect the Company from a natural disaster within the greater Boston, Massachusetts area. The Company is currently devoting significant resources toward the growth
and enhancement of its Prepaid Wireless Services to enhance system reliability and redundancy and to expand its IVSN and hosting environment. The Company has experienced network outages that have resulted in reductions in revenue due to penalty
clauses contained in certain of the Companys carrier customer contracts. There can be no assurance that the Company will successfully support and enhance its IVSN and transaction processing platform effectively to avoid future system outages
and any associated loss in revenue or damage to the Companys reputation. Nor can there be any assurances that the Companys IVSN and transaction processing platform will successfully support current and future growth. If the Company is
not successful in supporting current and future growth, or if outages intensify either in frequency or duration, there could be a material adverse effect on the Companys business, operating results and financial condition.




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The Company historically has provided its services almost exclusively to wireless carriers. Although the
wireless telecommunications market experienced growth in the past, growth has recently slowed. The market for services to wireless carriers is highly competitive and subject to rapid change as new technologies are continually introduced in the
wireless marketplace. Many wireless carriers are also providing, or can provide in-house, the services that the Company offers or similar services that are marketed to the same consumer base as the Companys services. In addition, the Company
anticipates continued growth and competition in the wireless carrier services industry and, consequently, the entrance of new competitors in the future. An important factor in the future success of the Companys Prepaid Wireless Services will
be the Companys ability to provide, at competitive prices, more functionality and features than those typically available in other competitive offerings. The Company is also dependent on its wireless carrier customers to market and sell
prepaid to consumers. The Company continues to invest in new features and additional technologies including bcgi Payment Services (bcgi Mobile Commerce Payment Services, bcgi ATM Recharge and the Distribution Technology Partners
Program), Voyager billing and customer care and other new applications to expand and enhance its real-time transaction processing services business. There can be no assurances that there will be a market for prepaid programs, including the
Companys Prepaid Wireless Services offering, or these technologies, that the Company or the Companys carrier customers will be successful in marketing and selling these technologies in the marketplace or that the Company will be able to
leverage its existing infrastructure to provide these services in a cost effective manner. An increase in competition or the inability of the Company to provide, at competitive prices, more functionality and features, could result in price
reductions and loss of market share and could have a material adverse effect on the Companys business, financial condition or results of operations. In addition, if the Company does not continue to upgrade its software and hosting environment
as new wireless technologies evolve, including but not limited to 2.5G and 3G technologies, the Company could risk the loss of existing and prospective customers.





The Company has experienced fluctuations in its quarterly operating results and such fluctuations may continue and could intensify. The Company has expended significant amounts of capital to support
the agreements it has secured with its carrier customers. The Companys quarterly operating results may vary significantly depending on a number of factors including variations in customer rates per minute, as well as the Companys ability
to generate additional MOUs and prepaid subscriber additions and to minimize prepaid subscriber churn (percentage of total subscribers that terminate service on the network), the timing of the introduction or acceptance of new services offered by
the Company or its competitors, changes in the mix of services provided by the Company, the loss of customers, seasonal trends, network outages, variations in the level of prepaid system sales, changes in the Companys operating expenses, the
ability to identify, hire and retain qualified personnel and general economic conditions. Due to all of the foregoing factors, it is possible that in some future quarter the Companys results of operations will be below prior results or the
expectations of public market analysts and investors. In such event, the price of the Companys common stock would likely be materially and adversely affected.





The Companys forecasts include the acquisition of Infotech. There can be no assurances that the Company will be able to integrate Infotech in a cost effective manner or at all, to retain key
personnel, to successfully manage or maintain relationships with new or existing customers or suppliers. Also, there can be no assurance that the Company can effectively integrate, market and sell Infotechs suite of solutions with the
Companys technology. In addition, there can be no assurances that the Infotech acquisition will not be dilutive to the earnings of the Company. If the Company is unable to integrate Infotech in a cost effective manner, retain key personnel,
successfully manage and maintain relationships with new or existing customers or suppliers, and effectively integrate Infotechs suite of solutions, the Companys overall business, results and financial condition could be materially and
adversely affected.





The Company expects that demand for its Roaming Services will continue to decline as consolidation in the wireless
industry reduces the number of unregistered roamers and as handset technology continues to improve registered roaming capabilities. Although the Company has been successful in both reducing costs to support Roaming Services and in maintaining
profitability, there can be no assurance that the Company will be successful in reducing costs at a greater rate than the decline in revenue going forward or that the Roaming Services business will continue to generate profits for the Company.




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





The Companys operations are supported by many hardware components and software applications from third party vendors, sometimes licensed from single vendors. There can be no assurances that these
hardware components and software applications will function in accordance with specifications agreed upon by the Company and its vendors, that these suppliers will continue to license this software to the Company or, if any supplier terminates its
agreement with the Company, that the Company will be able to develop or otherwise procure software from another supplier on a timely basis and at commercially acceptable prices. If the hardware and software do not function as specified or if the
Company can no longer license software from certain vendors or otherwise obtain the software, the Companys business, financial condition and results of operations could be materially and adversely affected. In addition, Worldcom, Inc., who
currently provides certain telecommunications services to the Company, has filed for Chapter 11 bankruptcy. Although the Company has backup and redundancy plans in place, if there are any significant decreases in service levels, or if Worldcom is no
longer able to provide certain services to the Company, the Companys business, financial condition and results of operations could be materially and adversely affected during the transition period to a replacement carrier.





The Company currently prices and sells all of its systems to international customers in U.S. dollars. In addition, many Prepaid Systems customers are
multinational corporations that are publicly traded in the U.S. or the United Kingdom. All payments are received in U.S. dollars which protects the Company from foreign currency fluctuations. While these provisions serve to protect the Company from
accounts receivable losses, there can be no assurances that Prepaid Systems sales to foreign countries will not result in losses due to devaluation of foreign currencies or other international business conditions outside of the Companys
control. The Company depends on a limited number of personnel to sell Prepaid Systems. If the Company fails to retain such personnel or if such personnel fail to perform at an adequate level, the Companys ability to effectively market and sell
Prepaid Systems could be diminished, which could materially and adversely affect the Systems business. In addition, under the current economic conditions, many corporations are reducing their capital budgets dramatically. If there are any such
reductions in the capital budgets of the Companys customers, demand for the Companys Prepaid Systems offerings could be reduced and could materially adversely affect the operations of the Systems business.





The Company has a number of patents pending to protect its proprietary technology in the United States and internationally. If these patents are not approved,
the Companys technology may not be protected from infringement by third parties and the Company may be subject to additional patent infringement lawsuits or royalty payments to use the technology, which could have a material adverse affect on
the Companys business, financial condition and results of operations.





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





|Item |  | 3.
Quantitative and Qualitative Disclosures About Market Risk
|---- |  | -------------------------------------------------------------




The Company maintains an
investment portfolio in accordance with its Investment Policy. The primary objectives of its Investment Policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Although the Companys investments
are subject to credit risk, the Companys Investment Policy specifies credit quality standards for its investments and limits the amount of credit exposure from any single issue, issuer or type of investment. While the Companys
investments are also subject to interest rate risk and will decrease in value if market interest rates increase, the Company typically holds all of its investments until maturity. However, since




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the investments are typically held to maturity and are generally conservative in nature and of relatively short duration, interest rate risk is mitigated. The Company does not use derivative
financial instruments for either hedging foreign currency exposure risk or speculative trading purposes.





Accordingly, the Company does
not believe that there is any material market risk exposure with respect to derivative or other financial instruments which would require disclosure under this item.





|Item |  | 4.
Controls and Procedures
|---- |  | --------------------------




Evaluation of disclosure controls and procedures. Based
on their evaluation of the Companys disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Quarterly Report on Form
10-Q, the Companys chief executive officer and chief financial officer have concluded that the Companys disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and are operating in an effective manner.





Changes in internal controls.Not applicable.








PART II. OTHER INFORMATION:





|Item |  | 1.
Legal Proceedings
|---- |  | --------------------




In March 2000, Freedom Wireless, Inc. filed a suit against the
Company and a number of wireless carriers. The suit alleges that the defendants infringe two patents held by Freedom Wireless, Inc. and seeks damages in an unspecified amount and injunctive relief, which could significantly restrict the
Companys ability to conduct its business if an unfavorable judgment is reached. The Company has an obligation to indemnify the other defendants for damages they may incur with respect to any infringement. The suit is currently in the discovery
phase. The Company does not believe that it infringes these patents and believes that it has meritorious defenses to the action.





The
Company estimates that quarterly after tax expenses to defend this case will be approximately $550,000 until this matter is resolved. However, there can be no assurances that the Companys expenses will not exceed the Companys estimate.
If Freedom Wireless were to prevail in the case, the amount of the damages could be substantial and the Companys business, financial condition and results of operations would be materially adversely affected.





In December 1999, the Company was named as a defendant in a suit filed in United States District Court for the Northern District of Iowa by a former supplier
(the Supplier) of materials to a subsidiary of the Company. The Company and the Supplier signed a purchase contract for an unspecified number of components in 1997 pursuant to which the Supplier became the Companys sole supplier
for a certain system component in 1997 and early 1998. The Company subsequently changed suppliers. The suit alleges that the Company breached the confidentiality clause of the contract and interfered with actual and prospective contracts of the
Supplier with other customers. The Supplier initially claimed misappropriation of trade secrets and sought an injunction, but it has since dropped these claims. The Supplier also dropped the claim of tortious interference with contract and added a
claim of fraudulent misrepresentation. The Supplier seeks damages in excess of $1 million on the fraudulent misrepresentation claim. The Company believes that the claim is without merit. Discovery has been completed and motions for summary judgment
are pending before the Court.





On January 4, 2002, a carrier customer sent a letter to the Company stating that it is entitled to
indemnification from the Company with respect to certain claims pending in a patent infringement case brought by Ronald A. Katz Technology Licensing, L.P. against the carrier customer in the United States District Court for the Eastern District of
Pennsylvania. The plaintiff claims infringement of fourteen patents by the defendants in the case, and seeks damages in an unspecified amount. The letter asserts that the Company must indemnify the carrier customer to the extent any




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of the claims in the complaint may relate to the services provided by the Company to the carrier customer pursuant to the Prepaid Wireless Calling Service Agreement and any other agreements
between the carrier customer and the Company. The Company has engaged outside counsel to represent it. At this stage it is not possible to determine whether there is a valid claim for indemnification, or the likely outcome of such claim.





On July 26, 2002, a carrier customer sent a letter to the Company notifying the Company of the pendency of a lawsuit brought by Philip
S. Jackson against the carrier customer and seven other companies in the United States District Court for the Northern District of Illinois. The suit alleges patent infringement by the defendants in using, selling or offering to sell automated
interactive telephone systems, voice messaging services or answering devices. The letter asserts that the Company must indemnify the carrier customer to the extent any of the claims in the complaint relate to the services provided by the Company to
the carrier customer pursuant to the Prepaid Wireless Calling Service Agreement and any other agreements between the carrier customer and the Company. The suit seeks damages in an unspecified amount. The Company has retained outside counsel. At this
stage it is not possible to determine whether there is a valid claim for indemnification, or the likely outcome of such claim.





|Item |  | 6.
Exhibits and Reports on Form 8-K
|---- |  | -----------------------------------




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




NONE





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




NONE





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.





Boston Communications Group, Inc.


(Registrant)





Date: November 14, 2002

By: /s/ Karen A. WalkerKaren A. Walker Vice President, Financial Administration and Chief Financial Officer
(Principal Financial and Accounting Officer and Duly Authorized Officer)





STATEMENT PURSUANT TO 18 U.S.C. §1350





Pursuant to 18 U.S.C. §1350, each of the undersigned certifies that this Quarterly Report on Form 10-Q for the period ended September 30, 2002 fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Boston
Communications Group, Inc.





Date: November 14, 2002

/s/ Edward H SnowdenEdward H. Snowden President and Chief Executive Officer





Date: November 14, 2002

/s/ Karen A. WalkerKaren A. Walker Vice President, Financial Administration and Chief Financial Officer




21




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##### Table of Contents

CERTIFICATIONS





I, Edward H. Snowden, certify that:





| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Boston Communications Group, Inc.;
| | -- |  | ----------------------------------------------------------------------------------------




| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date: November 14, 2002

/s/ Edward H. SnowdenEdward H. Snowden President and Chief Executive Officer




---

##### Table of Contents




I, Karen A. Walker, certify that:





| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Boston Communications Group, Inc.;
| | -- |  | ----------------------------------------------------------------------------------------




| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date: November 14, 2002

/s/ Karen A. WalkerKaren A. Walker Vice President, Financial Administration and Chief Financial
Officer