10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2004

OR

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

For the transition period from              to             

Commission file number 0-27512

CSG SYSTEMS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware	47-0783182
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

7887 East Belleview, Suite 1000

Englewood, Colorado 80111

(Address of principal executive offices, including zip code)

(303) 796-2850

(Registrant’s telephone number, including area code)

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 Rule 12b-2 of the Exchange Act).    YES  x    NO  ¨

Shares of common stock outstanding at August 4, 2004: 52,034,990.

CSG SYSTEMS INTERNATIONAL, INC.

FORM 10-Q For the Quarter Ended June 30, 2004

INDEX

		Page No.
Part I -	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 (Unaudited)	3
	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2004 and 2003 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	41
Part II -	OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 2.	Changes in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities	42
Item 4.	Submission of Matters to Vote of Security Holders	42
Item 6.	Exhibits and Reports on Form 8-K	43
Signatures		45
Index to Exhibits		46

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CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	June 30, 2004			December 31, 2003
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	129,004		$	105,397
Short-term investments		2,197			—
Total cash, cash equivalents and short-term investments		131,201			105,397
Trade accounts receivable-
Billed, net of allowance of $6,942 and $11,145		123,720			130,691
Unbilled and other		13,756			18,042
Deferred income taxes		5,971			9,134
Income taxes receivable		4,353			35,076
Other current assets		12,000			11,697
Total current assets		291,001			310,037
Property and equipment, net of depreciation of $94,134 and $89,529		33,827			38,218
Software, net of amortization of $70,069 and $62,957		31,414			37,780
Goodwill		217,778			219,199
Client contracts, net of amortization of $56,143 and $50,973		52,772			57,458
Deferred income taxes		49,485			53,327
Other assets		8,893			8,756
Total assets	$	685,170		$	724,775
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	—		$	45,137
Client deposits		19,317			17,175
Trade accounts payable		21,187			21,291
Accrued employee compensation		28,129			32,415
Deferred revenue		57,870			52,655
Income taxes payable		15,894			20,723
Arbitration charge payable		—			25,181
Other current liabilities		20,725			25,818
Total current liabilities		163,122			240,395
Non-current liabilities:
Long-term debt, net of current maturities		230,000			183,788
Deferred revenue		4,381			3,270
Other non-current liabilities		5,306			6,537
Total non-current liabilities		239,687			193,595
Stockholders’ equity:
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; zero shares issued and outstanding		—			—
Common stock, par value $.01 per share; 100,000,000 shares authorized; 17,526,955 and 8,911,634 shares reserved for employee stock purchase plan, stock incentive plans, and convertible debt securities; 52,029,424 and 53,788,062 shares outstanding		597			593
Additional paid-in capital		292,721			281,784
Deferred employee compensation		(2,646	)		(4,458	)
Accumulated other comprehensive income:
Unrealized gain (loss) on short-term investments, net of tax		(2	)		1
Cumulative translation adjustments		6,755			6,519
Treasury stock, at cost, 7,636,496 and 5,499,796 shares		(211,110	)		(171,111	)
Accumulated earnings		196,046			177,457
Total stockholders’ equity		282,361			290,785
Total liabilities and stockholders’ equity	$	685,170		$	724,775

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
	(unaudited)						(unaudited)
Revenues:
Processing and related services	$	80,895		$	91,041		$	162,027		$	182,217
Software		8,109			12,148			15,746			22,312
Maintenance		23,653			22,828			48,704			45,231
Professional services		17,006			16,344			33,550			34,533
Total revenues		129,663			142,361			260,027			284,293
Cost of revenues:
Cost of processing and related services		34,619			35,557			68,425			69,676
Cost of software and maintenance		17,162			17,395			33,436			35,705
Cost of professional services		15,616			14,673			29,766			33,228
Total cost of revenues		67,397			67,625			131,627			138,609
Gross margin (exclusive of depreciation)		62,266			74,736			128,400			145,684
Operating expenses:
Research and development		14,382			16,922			30,222			32,420
Selling, general and administrative		22,242			32,184			45,465			62,020
Depreciation		3,517			4,334			7,153			8,933
Restructuring charges		145			993			2,296			4,152
Total operating expenses		40,286			54,433			85,136			107,525
Operating income		21,980			20,303			43,264			38,159
Other income (expense):
Interest expense		(2,684	)		(3,482	)		(6,238	)		(7,356	)
Write-off of deferred financing costs		(6,569	)		—			(6,569	)		—
Interest and investment income, net		273			443			556			731
Other, net		(537	)		2,443			(1,050	)		2,829
Total other		(9,517	)		(596	)		(13,301	)		(3,796	)
Income before income taxes		12,463			19,707			29,963			34,363
Income tax provision		(4,707	)		(7,988	)		(11,374	)		(13,937	)
Net income	$	7,756		$	11,719		$	18,589		$	20,426
Basic net income per common share:
Net income available to common stockholders	$	0.15		$	0.23		$	0.36		$	0.40
Weighted average common shares		51,285			51,355			51,483			51,330
Diluted net income per common share:
Net income available to common stockholders	$	0.15		$	0.23		$	0.36		$	0.40
Weighted average common shares		52,096			51,656			52,175			51,570

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Six months ended
	June 30, 2004			June 30, 2003
	(unaudited)
Cash flows from operating activities:
Net income	$	18,589		$	20,426
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation		7,153			8,933
Amortization		13,572			12,366
Restructuring charge for abandonment of facilities		595			683
Loss on short-term investments		3			—
Write-off of deferred financing costs		6,569			—
Deferred income taxes		7,046			1,958
Tax benefit of stock options exercised		423			9
Stock-based employee compensation		7,945			2,709
Changes in operating assets and liabilities:
Trade accounts and other receivables, net		11,654			(3,496	)
Other current and noncurrent assets		(401	)		(546	)
Arbitration charge payable		(25,181	)		—
Income taxes payable/receivable		27,454			481
Accounts payable and accrued liabilities		(9,064	)		(4,690	)
Deferred revenue		5,794			20,530
Net cash provided by operating activities		72,151			59,363
Cash flows from investing activities:
Purchases of property and equipment		(2,785	)		(2,920	)
Purchases of short-term investments		(6,813	)		(11	)
Proceeds from sale of short-term investments		4,610			—
Acquisition of businesses and assets, net of cash acquired		(852	)		(2,335	)
Acquisition of and investments in client contracts		(1,185	)		(1,030	)
Net cash used in investing activities		(7,025	)		(6,296	)
Cash flows from financing activities:
Proceeds from issuance of common stock		4,833			855
Repurchase of common stock		(40,448	)		—
Proceeds from long-term debt		230,000			—
Payments on long-term debt		(228,925	)		(21,075	)
Payments of deferred financing costs		(7,158	)		(87	)
Net cash used in financing activities		(41,698	)		(20,307	)
Effect of exchange rate fluctuations on cash		179			227
Net increase in cash and cash equivalents		23,607			32,987
Cash and cash equivalents, beginning of period		105,397			94,424
Cash and cash equivalents, end of period	$	129,004		$	127,411
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for-
Interest	$	5,009		$	5,774
Income taxes		(25,172	)		9,625

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The accompanying unaudited condensed consolidated financial statements as of June 30, 2004 and December 31, 2003, and for the three and six months ended June 30, 2004 and 2003, have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, and pursuant to the instructions to Form 10-Q and the rules and regulations of the Securities and Exchange Commission (the “SEC”). 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 of the financial position and operating results have been included. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, filed with the SEC (the “Company’s 2003 10-K”). The results of operations for the three and six months ended June 30, 2004, are not necessarily indicative of the expected results for the entire year ending December 31, 2004.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Postage. The Company passes through to its clients the cost of postage that is incurred on behalf of those clients, and typically requires an advance payment on expected postage costs. These advance payments are included in “client deposits” in the accompanying Condensed Consolidated Balance Sheets and are classified as current liabilities regardless of the contract period. The Company nets the cost of postage against the postage reimbursements, and includes the net amount in processing and related services revenues. The total cost of postage incurred on behalf of clients that has been netted against processing and related services revenues for the three months ended June 30, 2004 and 2003 was $44.0 million and $38.5 million, respectively, and for the six months ended June 30, 2004 and 2003 was $88.3 million and $76.4 million, respectively.

Stock-Based Compensation Expense. During the fourth quarter of 2003, the Company adopted the fair value method of accounting for stock-based awards in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), using the prospective method of transition as outlined in SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure — An Amendment of FASB Statement No. 123” (“SFAS 148”). The adoption of SFAS 123 was effective as of January 1, 2003. Under the prospective method of transition, all stock-based awards granted, modified, or settled on or after January 1, 2003, are accounted for in accordance with SFAS 123. Stock-based awards granted prior to January 1, 2003, continue to be accounted for in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations (“APB 25”), and follow the disclosure provisions of SFAS 123 and SFAS 148. As a result, the Company has restated its condensed consolidated financial statements for the three and six months ended June 30, 2003 to reflect the inclusion of additional stock-based compensation expense of $0.2 million and $0.3 million, respectively.

At June 30, 2004, the Company had five stock-based compensation plans. The Company recorded stock-based compensation expense of $3.8 million and $1.4 million, respectively, for the three months ended June 30, 2004 and 2003 and $7.9 million and $2.7 million, respectively, for the six months ended June 30, 2004 and 2003. Stock-based compensation expense is included in the following income statement captions in the accompanying Condensed Consolidated Statements of Income (in thousands):

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	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Cost of processing and related services	$	643	$	13	$	1,264	$	16
Cost of software and maintenance		251		4		469		5
Cost of professional services		299		5		574		8
Research and development		459		11		930		14
Selling, general and administrative		2,148		1,381		4,708		2,666
Total stock-based compensation expense	$	3,800	$	1,414	$	7,945	$	2,709

Awards under the Company’s stock-based compensation plans generally vest over periods ranging from three to four years. Because the Company follows APB 25 for all stock-based awards granted prior to January 1, 2003, and the prospective method of transition under SFAS 148 for stock-based awards granted, modified, or settled on or after January 1, 2003, compensation expense recorded in the Company’s accompanying Consolidated Statements of Income is less than what would have been recognized if the fair value based method under SFAS 123 had been applied to all awards for all periods. Had compensation expense for the Company’s five stock-based compensation plans been based on the fair value at the grant dates for awards under those plans for all periods, consistent with the methodology of SFAS 123, the Company’s net income and net income per share available to common stockholders for the three and six months ended June 30, 2004 and 2003, would approximate the pro forma amounts as follows (in thousands, except per share amounts):

	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Net income, as reported	$	7,756		$	11,719		$	18,589		$	20,426
Add: Stock-based compensation expense included in reported net income, net of related tax effects		2,362			879			4,938			1,684
Deduct: Total stock-based compensation expense determined under the fair value-based method for all awards, net of related tax effects		(3,814	)		(5,258	)		(7,667	)		(10,604	)
Net income, pro forma	$	6,304		$	7,340		$	15,860		$	11,506
Net income per share:
Basic – as reported	$	0.15		$	0.23		$	0.36		$	0.40
Basic – pro forma		0.12			0.14			0.31			0.22
Diluted – as reported		0.15			0.23			0.36			0.40
Diluted – pro forma		0.12			0.14			0.31			0.22

Reclassification and Restatement. Certain June 30, 2003 amounts have been reclassified to conform to the June 30, 2004 presentation. In addition, as discussed above, the Company restated 2003 amounts to reflect the adoption of SFAS 123 effective January 1, 2003.

3. DEBT

Convertible Debt Securities

On June 2, 2004, the Company completed an offering of $230.0 million of 2.5% senior subordinated convertible contingent debt securities due June 15, 2024 (the “Convertible Debt Securities”) to qualified buyers pursuant to Rule 144A under the Securities Act of 1933.

The Company used the proceeds from the Convertible Debt Securities, along with available cash, cash equivalents

7

and short-tem investments, to: (i) repay the outstanding balance of $198.9 million and terminate its 2002 Credit Facility (including the revolving credit facility); (ii) repurchase 2.1 million shares of the Company’s common stock for $40.0 million (market price of $18.72 per share) from the initial purchasers of the Convertible Debt Securities; and (iii) pay debt issuance costs of $6.9 million, of which $6.3 million consisted of underwriting commissions.

The Convertible Debt Securities are unsecured, subordinated to any of the Company’s future senior debt, and senior to the Company’s future junior subordinated debt. The Convertible Debt Securities, issued at a price of 100% of their principal amount, bear interest at a rate of 2.5% per annum, which is payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2004. The $6.9 million of deferred financing costs related to the Convertible Debt Securities issuance are being amortized to interest expense over seven years. The Convertible Debt Securities are callable by the Company for cash, on or after June 20, 2011, at a redemption price equal to 100% of the principal amount of the Convertible Debt Securities, plus accrued interest. The Convertible Debt Securities can be put back to the Company by the holders for cash at June 15, 2011, 2016 and 2021, or upon a change of control, at a repurchase price equal to 100% of the principal amount of the Convertible Debt Securities, plus any accrued interest.

Commencing with the six-month period beginning June 15, 2011, the Company will pay contingent interest equal to 0.25% of the average trading price of the Convertible Debt Securities during any six-month period if the average trading price of the Convertible Debt Securities for the five consecutive trading days ending on the second trading day immediately preceding the first day of the six-month period equals 120% or more of the principal amount of the Convertible Debt Securities.

The Convertible Debt Securities are convertible into the Company’s common stock, under the specified conditions below, at an initial conversion rate of 37.3552 shares per $1,000 principal amount of Convertible Debt Securities, which is equal to a conversion price of $26.77 per share and represents a maximum of 8.6 million shares of potentially issuable Company common stock. The conversion rate can be adjusted in the future for certain events, to include stock dividends, stock splits/reverse splits, the issuance of warrants to purchase Company stock at a price below the then-current market price, cash dividends, and certain purchases by the Company of its common stock pursuant to a tender offer or exchange offer.

Holders of the Convertible Debt Securities can convert their securities: (i) at any time the price of the Company’s common stock trades over $34.80 per share (130% of the $26.77 conversion price) for a specified period of time; (ii) at any time the trading price of the Convertible Debt Securities fall below 98% of the average conversion value for the Convertible Debt Securities for a specified period of time; (iii) upon the Company exercising its right to redeem the Convertible Debt Securities at any time after June 20, 2011; and (iv) at any time upon the occurrence of specified corporate transactions, to include a change in control.

The Company has the right to settle the Convertible Debt Securities upon conversion by delivering Company common stock, cash or any combination of Company common stock and cash. At any time prior to maturity, the Company may irrevocably elect at its sole discretion to satisfy in cash 100% of the principal amount of the Convertible Debt Securities converted after the date of such election. After such election, the Company may still satisfy its conversion obligation, to the extent it exceeds the principal amount in cash or common stock, or a combination of cash and common stock.

As of June 30, 2004, the Convertible Debt Securities were not registered with the SEC. The Company has entered into a registration rights agreement with the initial purchasers, in which the Company has agreed to: (i) file a shelf registration statement with the SEC for the benefit of the holders of the Convertible Debt Securities within 90 days of the completion of the Convertible Debt Securities offering; (ii) use reasonable best efforts to cause such registration statement to become effective as promptly as possible, but in no event later than 180 days from the completion of the Convertible Debt Securities offering; and (iii) keep the registration statement effective for a specified period of time. If the Company defaults on the registration rights agreement, it will be required to pay additional interest at a rate of 0.25% per annum on the principal amount of the Convertible Debt Securities up to and including the 90th day following such default, and additional interest at a rate of 0.50% per annum on the principal amount of the Convertible Debt Securities from and after the 91^st day following such default. On July 16, 2004, the Company filed, with the SEC, a shelf registration statement on Form S-3 for the Convertible Debt Securities.

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The fair value of the Convertible Debt Securities as of June 30, 2004, based upon quoted market prices, was approximately $237 million. The contingent interest feature of the Convertible Debt Securities discussed above is considered an embedded derivative that is required to be bifurcated and accounted for as a freestanding derivative financial instrument. The fair value of this derivative financial instrument, as of June 30, 2004, was not significant.

2002 Credit Facility

New Amendments. During the first quarter of 2004, the Company entered into two amendments to its 2002 Credit Facility. The Second Amendment was made to clarify the Company’s ability to repurchase its common stock in certain situations pursuant to the Company’s stock-based compensation plans. The Third Amendment was made in conjunction with the Company signing the Comcast Contract (see Note 7).

Mandatory Prepayment. In March 2004, the Company made a $30 million mandatory prepayment on its 2002 Credit Facility using the proceeds from income tax refunds received in the first quarter of 2004. This $30 million mandatory prepayment, required under the First Amendment to the 2002 Credit Facility, was to be paid on or before July 30, 2004.

Repayment and Termination. As discussed above, the Company used a portion of the proceeds from the Convertible Debt Securities to repay and terminate the 2002 Credit Facility. As a result, the Company wrote-off unamortized deferred financing costs attributable to the 2002 Credit Facility of $6.6 million during the second quarter of 2004.

4. STOCKHOLDERS’ EQUITY AND EQUITY COMPENSATION PLANS

Modifications to Stock-Based Compensation Awards. During the first quarter of 2004, the Company modified the terms of approximately 406,000 shares of unvested restricted stock, and 116,000 unvested stock options held by key members of management (members other than executive management) to include a provision which allows for full vesting of the stock-based awards upon a change in control of the Company. Unless such an event occurs, the stock-based awards will continue to vest as set forth in the original terms of the agreements. This modification did not have a significant impact on total stock-based compensation expense in the first quarter of 2004.

1996 Employee Stock Purchase Plan. During the second quarter of 2004, the Company’s stockholders approved a 500,000 share increase in the authorized number of shares available under the 1996 Employee Stock Purchase Plan, bringing the total number of authorized shares to be sold under the plan to 958,043. As of June 30, 2004, 534,909 shares remain eligible for purchase under the plan.

Stock Repurchase Program. Effective June 2, 2004, the Company’s Board of Directors approved a five million increase in the number of shares the Company is authorized to repurchase under its stock repurchase program, bringing the total number of authorized shares to 15.0 million. During the second quarter of 2004 (in conjunction with the issuance of the Convertible Debt Securities) the Company repurchased 2.1 million shares of its common stock for $40.0 million (market price of $18.72 per share). As of June 30, 2004, the total shares repurchased under the Company’s stock repurchase program since its inception in August 1999 totaled 8.5 million shares, at a total repurchase price of approximately $240 million (weighted-average price of $28.28 per share). At June 30, 2004, the total remaining number of shares authorized for repurchase under the program totaled 6.5 million shares.

5. EARNINGS PER COMMON SHARE

Earnings per common share (“EPS”) has been computed in accordance with SFAS No. 128, “Earnings Per Share”. Basic EPS is computed by dividing income available to common stockholders (the numerator) by the weighted average number of common shares outstanding during the period (the denominator). Diluted EPS is consistent with the calculation of basic EPS while considering the effect of potentially dilutive common shares outstanding during the period. Unvested shares of restricted stock are not included in the basic EPS calculation. Basic and diluted EPS are presented on the face of the Company’s Condensed Consolidated Statements of Income.

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No reconciliation of the basic and diluted EPS numerators is necessary for the three and six months ended June 30, 2004 and 2003, as net income is used as the numerator for each period. The reconciliation of the EPS denominators is included in the following table (in thousands):

	Three Months Ended June 30,		Six Months Ended June 30,
	2004	2003	2004	2003
Basic common shares outstanding	51,285	51,355	51,483	51,330
Dilutive effect of stock options	403	112	341	102
Dilutive effect of unvested restricted stock	408	189	351	138
Dilutive effect of Convertible Debt Securities	—	—	—	—
Diluted common shares outstanding	52,096	51,656	52,175	51,570

The following table sets forth the potential common shares that were excluded from the EPS computation as their effect was anti-dilutive (in thousands):

	Three Months Ended June 30,		Six Months Ended June 30,
	2004	2003	2004	2003
Common stock options	799	5,817	993	6,420
Unvested restricted stock	529	—	816	—
Total	1,328	5,817	1,809	6,420

The Convertible Debt Securities were excluded from the computation of diluted EPS since none of the contingent conversion features have been met as of June 30, 2004 (see Note 3). Under application of existing GAAP, the Convertible Debt Securities are not included within the computation of diluted EPS until one of the contingent conversion features has been met.

6. COMPREHENSIVE INCOME

The Company’s components of comprehensive income were as follows (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2004			2003		2004			2003
Net income	$	7,756		$	11,719	$	18,589		$	20,426
Other comprehensive income (loss), net of tax, if any:
Foreign currency translation adjustments		(764	)		4,947		237			2,903
Unrealized gain (loss) on short-term investments		(3	)		—		(3	)		7
Comprehensive income	$	6,989		$	16,666	$	18,823		$	23,336

7. SIGNIFICANT CLIENTS

Comcast Corporation

Arbitration Resolution. During 2002 and 2003, the Company was involved in various legal proceedings with its largest client, Comcast Corporation (“Comcast”), consisting principally of arbitration proceedings related to the Comcast Master Subscriber Agreement. In October 2003, the Company received the final ruling in the arbitration proceedings. The Comcast arbitration ruling included an award of $119.6 million to be paid by the Company to Comcast. The award was based on the arbitrator’s determination that the Company had violated the most favored nations (“MFN”) clause of the Comcast Master Subscriber Agreement. The Company recorded the impact from the

10

arbitration ruling in the third quarter of 2003 as a charge against its revenues. In the fourth quarter of 2003, the Company paid approximately $95 million of the arbitration award to Comcast, and in January 2004, the Company paid the remaining portion of the arbitration award of approximately $25 million. In addition to the arbitration award, the Company paid to Comcast interest of $1.1 million, of which $0.1 million was reflected as interest expense in the first quarter of 2004.

Signing of New Comcast Contract. In March 2004, the Company signed a new contract with Comcast (the “Comcast Contract”). The Comcast Contract superseded the former Comcast Master Subscriber Agreement that was set to expire at the end of 2012. The term of the new agreement runs through December 31, 2008. See Note 9 for discussion of the client contracts intangible asset related to the Comcast Contract.

Echostar Communications

Signing of New Contract Amendment. Echostar Communications (“Echostar”) is the Company’s second largest client. In February 2004, the Company signed the Thirtieth Amendment to the Echostar Master Subscriber Agreement, extending the term of the Echostar Master Subscriber Agreement until March 1, 2006. The Echostar Master Subscriber Agreement was previously set to expire at the end of 2004.

8. SEGMENT INFORMATION

The Company serves its clients through its two operating segments: the Broadband Services Division (the “Broadband Division”) and the Global Software Services Division (the “GSS Division”). The Company’s operating segment information and corporate overhead costs are presented below (in thousands, except percentages).

	Three Months Ended June 30, 2004
	Broadband Division			GSS Division			Corporate			Total
Processing revenues	$	80,278		$	617		$	—		$	80,895
Software revenues		935			7,174			—			8,109
Maintenance revenues		4,546			19,107			—			23,653
Professional services revenues		254			16,752			—			17,006
Total revenues		86,013			43,650			—			129,663
Segment operating expenses (1)		48,699			42,682			16,157			107,538
Contribution margin (loss) (1)	$	37,314		$	968		$	(16,157	)	$	22,125
Contribution margin percentage		43.4	%		2.2	%		N/A			17.1	%
Certain non-cash expenses:
Amortization of investment in client contracts (3)	$	2,992		$	—		$	—		$	2,992
Other intangible assets amortization		—			3,760			—			3,760
Depreciation		1,688			942			887			3,517
Stock-based compensation		1,095			824			1,881			3,800
Total	$	5,775		$	5,526		$	2,768		$	14,069

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	Three Months Ended June 30, 2003 (2)
	Broadband Division			GSS Division			Corporate			Total
Processing revenues	$	90,433		$	608		$	—		$	91,041
Software revenues		466			11,682			—			12,148
Maintenance revenues		5,079			17,749			—			22,828
Professional services revenues		212			16,132			—			16,344
Total revenues		96,190			46,171			—			142,361
Segment operating expenses (1)		53,448			48,213			19,404			121,065
Contribution margin (loss) (1)	$	42,742		$	(2,042	)	$	(19,404	)	$	21,296
Contribution margin (loss) percentage		44.4	%		(4.4	)%		N/A			15.0	%
Certain non-cash expenses:
Amortization of investment in client contracts (3)	$	1,664		$	—		$	—		$	1,664
Other intangible assets amortization		—			3,367			—			3,367
Depreciation		2,327			1,072			935			4,334
Stock-based compensation		38			20			1,356			1,414
Total	$	4,029		$	4,459		$	2,291		$	10,779
	Six Months Ended June 30, 2004
	Broadband Division			GSS Division			Corporate			Total
Processing revenues	$	160,722		$	1,305		$	—		$	162,027
Software revenues		1,823			13,923			—			15,746
Maintenance revenues		9,673			39,031			—			48,704
Professional services revenues		398			33,152			—			33,550
Total revenues		172,616			87,411			—			260,027
Segment operating expenses (1)		97,954			85,251			31,262			214,467
Contribution margin (loss) (1)	$	74,662		$	2,160		$	(31,262	)	$	45,560
Contribution margin percentage		43.3	%		2.5	%		N/A			17.5	%
Certain non-cash expenses:
Amortization of investment in client contracts (3)	$	5,087		$	—		$	—		$	5,087
Other intangible assets amortization		—			7,313			—			7,313
Depreciation		3,475			1,915			1,763			7,153
Stock-based compensation		2,194			1,654			4,097			7,945
Total	$	10,756		$	10,882		$	5,860		$	27,498

	Six Months Ended June 30, 2003 (2)
	Broadband Division		GSS Division		Corporate		Total
Processing revenues	$	180,882	$	1,335	$	—	$	182,217
Software revenues		2,135		20,177		—		22,312
Maintenance revenues		10,108		35,123		—		45,231
Professional services revenues		582		33,951		—		34,533
Total revenues		193,707		90,586		—		284,293
Segment operating expenses (1)		105,083		99,535		37,364		241,982

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Contribution margin (loss) (1)	$	88,624		$	(8,949	)	$	(37,364	)	$	42,311
Contribution margin (loss) percentage		45.8	%		(9.9	)%		N/A			14.9	%
Certain non-cash expenses:
Amortization of investment in client contracts (3)	$	3,304		$	—		$	—		$	3,304
Other intangible assets amortization		—			7,808			—			7,808
Depreciation		4,855			2,213			1,865			8,933
Stock-based compensation		76			41			2,592			2,709
Total	$	8,235		$	10,062		$	4,457		$	22,754

(1) Segment operating expenses and contribution margin (loss) exclude restructuring charges of $0.1 million and $1.0 million, respectively, for the three months ended June 30, 2004 and 2003, and $2.3 million and $4.2 million, respectively, for the six months ended June 30, 2004 and 2003.

(2) During the fourth quarter of 2003, the Company adopted the fair value method of accounting for stock-based awards in accordance with SFAS 123, using the prospective method of transition (see Note 2). The adoption of SFAS 123 was effective as of January 1, 2003. As a result, the segment operating results for the three and six months ended June 30, 2003 have been restated to reflect the inclusion of additional stock-based compensation expense of $0.2 million and $0.3 million, respectively.

(3) Amortization related to investments in client contracts has been reflected as a reduction in processing and related services revenues in the segment information presented above and in the accompanying Condensed Consolidated Statements of Income.

Reconciling information between reportable segments contribution margin and the Company’s consolidated totals is as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Segment contribution margin	$	22,125		$	21,296		$	45,560		$	42,311
Restructuring charges		(145	)		(993	)		(2,296	)		(4,152	)
Operating income		21,980			20,303			43,264			38,159
Interest expense		(2,684	)		(3,482	)		(6,238	)		(7,356	)
Write-off of deferred financing costs		(6,569	)		—			(6,569	)		—
Other		(264	)		2,886			(494	)		3,560
Income before income taxes	$	12,463		$	19,707		$	29,963		$	34,363

Of the $0.1 million and $2.3 million restructuring charges recorded in the three and six months ended June 30, 2004, zero and $0.2 million relate to the Broadband Division, $0.1 million and $1.4 million relate to the GSS Division, and zero and $0.7 million relate to Corporate. Of the $1.0 million and $4.2 million restructuring charges recorded in the three and six months ended June 30, 2003, $1.0 million and $4.1 million relate to the GSS Division, and zero and $0.1 million relate to Corporate.

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9. LONG LIVED ASSETS

Goodwill. The Company does not have any intangible assets with indefinite lives other than goodwill. The changes in the carrying amount of goodwill by operating segment for the six months ended June 30, 2004 was as follows (in thousands):

	Broadband Division		GSS Division			Consolidated
Balance as of December 31, 2003	$	623	$	218,576		$	219,199
Impairment losses		—		—			—
Adjustment to Kenan Business acquired assets and assumed liabilities		—		(1,508	)		(1,508	)
Effects of changes in foreign currency exchange rates and other		—		87			87
Balance as of June 30, 2004	$	623	$	217,155		$	217,778

Other Intangible Assets. The Company’s intangible assets subject to amortization consist of client contracts and software. As of June 30, 2004 and December 31, 2003 the carrying values of these assets were as follows (in thousands):

	June 30, 2004							December 31, 2003
	Gross Carrying Amount		Accumulated Amortization			Net Amount		Gross Carrying Amount		Accumulated Amortization			Net Amount
Client contracts	$	108,915	$	(56,143	)	$	52,772	$	108,431	$	(50,973	)	$	57,458
Software		101,483		(70,069	)		31,414		100,737		(62,957	)		37,780
Total	$	210,398	$	(126,212	)	$	84,186	$	209,168	$	(113,930	)	$	95,238

The aggregate amortization related to intangible assets for the three months ended June 30, 2004 and 2003 was $6.8 million and $5.0 million, respectively, and for the six months ended June 30, 2004 and 2003 was $12.4 million and $11.1 million, respectively. Based on the June 30, 2004 net carrying value of these intangible assets, the estimated aggregate amortization for each of the five succeeding fiscal years ending December 31 are: 2004 – $25.6 million; 2005 – $25.1 million; 2006 – $21.4 million; 2007 – $13.6 million; and 2008 – $11.8 million. These amounts have been revised from the amounts disclosed as of December 31, 2003, primarily as a result of the change in amortization related to the Comcast client contracts intangible asset, as discussed below.

Carrying Value of the GSS Division’s Intangible Assets. As of June 30, 2004, there was approximately $31 million in net intangible assets (software) and approximately $217 million of goodwill that was attributable to the GSS Division, which included the assets from the Kenan Business, ICMS, Davinci, and plaNet acquisitions. Due to the poor economic conditions of the global telecommunications industry, and the resulting impacts this situation had on the GSS Division’s business, to include declining revenues, segment contribution losses, and the initiation of various cost reduction and restructuring programs since the acquisition of the Kenan Business in early 2002, the Company performed certain financial analyses (including work by an outside valuation firm) during the second quarter of 2003 and concluded that based on such work, there had been no impairment of the GSS Division’s goodwill or its other long-lived assets. In addition, the Company performed its annual goodwill impairment test in the third quarter of 2003, and concluded that no impairment of the GSS Division’s goodwill had occurred at that time.

As of June 30, 2004, the Company concluded that no events or changes in circumstances have occurred since that time to warrant an impairment assessment of the GSS Division’s goodwill and/or other long-lived intangible assets. The Company will continue to monitor the carrying value of these assets during the period of economic recovery for the telecommunications industry and will perform its annual goodwill impairment testing in the third quarter of 2004. If the current economic conditions take longer to recover than anticipated, it is reasonably possible that a review for impairment of the goodwill and/or related long-lived intangible assets in the future may indicate that these assets are impaired, and the amount of impairment could be substantial.

Carrying Value of Broadband Division’s Intangible Assets. As of June 30, 2004, the Broadband Division had client contracts intangible assets with a net carrying value of approximately $53 million. Of this amount, approximately $50 million related to the Comcast Contract. As discussed in Note 7 above, during the first quarter of 2004, the

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Company signed a new contract with Comcast. The Company has evaluated the carrying value of this intangible asset in light of the net cash flows expected to be generated from the Comcast Contract, and has concluded that there was no impairment to this asset as a result of the new Comcast Contract. However, as a result of the shortened term of the Comcast Contract, effective in March 2004, the Company was required to accelerate the amortization of this intangible asset. The Company’s revised estimated amortization of all client contracts intangible assets, reflecting the accelerated amortization resulting from the Comcast Contract, for each of the five succeeding fiscal years ending December 31 are: 2004 - $11.2 million; 2005 - $12.1 million; 2006 - $12.0 million; 2007 - $12.0 million; and 2008 - $11.8 million.

10. RESTRUCTURING CHARGES

Cost Reduction Initiatives. Due to the economic decline in the global telecommunications industry and the uncertainty in the timing and the extent of any economic turnaround within the industry, beginning in the third quarter of 2002 and continuing through the third quarter of 2003, the Company implemented several cost reduction initiatives resulting in restructuring charges. In addition, in response to the expected reduction in revenues resulting from the Comcast arbitration ruling received in October 2003, the Company implemented a cost reduction initiative in the fourth quarter of 2003. A summary of the Company’s cost reduction initiatives through June 30, 2004 is as follows:

• During the third quarter of 2002, the cost reduction initiative consisted of: (i) involuntary employee terminations from all areas of the Company of approximately 300 people (approximately 10% of the Company’s then current workforce); (ii) limited hiring of new employees; (iii) a reduction of the Company’s facilities and infrastructure support costs, including facility consolidations and abandonments; and (iv) reductions in costs in several discretionary spending areas, such as travel and entertainment. Substantially all of the involuntary employee terminations were completed during the third quarter of 2002, with the remainder completed during the fourth quarter of 2002.

• During the first quarter of 2003, the cost reduction initiative consisted of involuntary employee terminations of approximately 70 people (approximately 2% of the Company’s then current workforce). All of these involuntary employee terminations were completed by the end of the first quarter of 2003, and consisted principally of individuals within the GSS Division.

• During the second and third quarters of 2003, the cost reduction initiative consisted principally of involuntary employee terminations of approximately 60 people (approximately 2% of the Company’s then current workforce). All of these involuntary employee terminations were completed by the end of the third quarter of 2003, and consisted principally of individuals within the GSS Division.

• During the fourth quarter of 2003, the cost reduction initiative consisted of: (i) involuntary employee terminations from all areas of the Company of approximately 130 people (approximately 5% of the Company’s then current workforce), with the greatest percentage of these terminations occurring within the Broadband Division; (ii) a reduction of costs related to certain of the Company’s employee compensation and fringe benefit programs, to include a wage freeze; (iii) limited hiring of new employees; (iv) movement of certain product support and/or software research and development functions to lower cost locales; and (v) a reduction in costs in several discretionary spending areas. The fourth quarter of 2003 cost reduction initiative was substantially completed in the first six months of 2004, with additional involuntary employee terminations of approximately 40 people (2% of the Company’s then current workforce), all occurring within the GSS Division. Approximately 73% of the involuntary termination benefits accrued as of June 30, 2004 are expected to be paid by the end of the third quarter of 2004.

Restructuring Charges. As a result of the cost reduction initiatives described above, during the three months ended June 30, 2004 and 2003, the Company recorded restructuring charges of $0.1 million and $1.0 million, respectively. During the six months ended June 30, 2004 and 2003, the Company recorded restructuring charges of $2.3 million and $4.2 million, respectively. The restructuring costs have been reflected as a separate line item on the accompanying Condensed Consolidated Statements of Income. The components of the restructuring charges are as follows (in thousands):

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	Three Months Ended June 30,					Six Months Ended June 30,
	2004		2003			2004		2003
Involuntary employee terminations	$	145	$	999		$	1,699	$	3,471
Facility abandonments		—		(29	)		595		654
All other		—		23			2		27
Total restructuring charges	$	145	$	993		$	2,296	$	4,152

The involuntary employee terminations component of the restructuring charges relates primarily to severance payments and job placement assistance for those terminated employees. The facility abandonments component of the restructuring charges relates to office facilities that are under long-term lease agreements that the Company has abandoned. The facility abandonments charge is equal to the present value of the future costs associated with those abandoned facilities, net of the estimated proceeds from any future sublease agreements. The Company has used estimates to arrive at both the future costs of the abandoned facilities and the proceeds from any future sublease agreements. The Company will continue to evaluate its estimates used in recording the facility abandonments charge. As a result, there may be additional charges or reversals in the future related to the facilities that had been abandoned as of June 30, 2004.

Restructuring Reserves. The activity in the business restructuring reserves during the six months ended June 30, 2004 is as follows (in thousands):

	Termination Benefits			Facility Abandonments			Other			Total
December 31, 2003, balance	$	2,118		$	13,121		$	—		$	15,239
Charged to expense during period		1,699			595			2			2,296
Cash payments		(3,317	)		(480	)		(2	)		(3,799	)
Amortization of liability for facility abandonments		—			(3,080	)		—			(3,080	)
Other		—			84			—			84
June 30, 2004, balance	$	500		$	10,240		$	—		$	10,740

Of the $10.7 million business restructuring reserve as of June 30, 2004, $6.6 million was included in current liabilities and $4.1 million was included in non-current liabilities.

11. INCOME TAXES

The Company was in a domestic net operating loss (“NOL”) position for 2003 as a result of the Comcast $119.6 million arbitration charge (see Note 7). The Company’s income tax receivable as of December 31, 2003 was $35.1 million, which resulted from the Company’s ability to claim a refund for 2003 income taxes already paid, and from its ability to carry back the Company’s NOL to prior years. During the first quarter of 2004, the Company received approximately $34 million of this income tax receivable, and identified additional income tax receivable amounts during its final preparation of the 2003 U.S. Federal income tax return, which was filed in March 2004. As a result, the Company’s June 30, 2004, income taxes receivable is $4.4 million, which is expected to be collected within the next 12 months.

12. COMMITMENTS, GUARANTEES AND CONTINGENCIES

Product Warranties. The Company generally warrants that its products and services will conform to published specifications, or to specifications provided in an individual client arrangement, as applicable. The typical warranty period is 90 days from delivery of the product or service. The typical remedy for breach of warranty is to correct or

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replace any defective deliverable, and if not possible or practical, the Company will accept the return of the defective deliverable and refund the amount paid to the Company under the client arrangement that is allocable to the defective deliverable. Historically, the Company has incurred minimal warranty costs, and as a result, does not maintain a warranty reserve.

Product Indemnifications. The Company’s software arrangements generally include a product indemnification provision that will indemnify and defend a client in actions brought against the client that claim the Company’s products infringe upon a copyright, trade secret, or valid patent. Historically, the Company has not incurred any significant costs related to product indemnification claims, and as a result, does not maintain a reserve for such exposure.

Contingent Consideration. Contingent consideration represents an arrangement to provide additional consideration to the seller in a business combination if contractually specified conditions related to the acquired entity are achieved. In the Davinci Business Acquisition, which closed in December 2002, the stock purchase agreement included contingent consideration related to the amount of the Company revenues in 2004, 2005 and 2006 associated with CSG Total Care (formerly Davinci’s m-Care solution). The maximum contingent consideration that could be paid out over the three years is $2.3 million. As of June 30, 2004, the Company had not accrued any amount for the 2004 portion of the contingent consideration as the outcome of the contingency is not determinable beyond a reasonable doubt.

Claims for Company Non-performance. The Company’s arrangements with its clients typically cap the Company’s liability for breach to a specified amount of the direct damages incurred by the client resulting from the breach. From time-to-time, the Company’s arrangements may also include provisions for possible liquidated damages or other financial remedies for non-performance by the Company, or in the case of certain of the Company’s out-sourced customer care and billing solutions, provisions for damages related to service level performance requirements. The service level performance requirements typically relate to system availability and timeliness of service delivery. As of June 30, 2004, the Company believes it had adequate reserves to cover any reasonably anticipated exposure as a result of the Company’s nonperformance for any past or current arrangements with its clients.

Legal Proceedings. From time-to-time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. In the opinion of the Company’s management, the Company is not presently a party to any material pending or threatened legal proceedings.

13. SALE OF ADELPHIA ACCOUNTS RECEIVABLE

In June 2002, one of the Company’s larger Broadband Division clients, Adelphia Communications (“Adelphia”), filed for bankruptcy protection. At that time, the Company adjusted its allowance for doubtful accounts and deferred revenue balances for the estimated realizability of Adelphia’s pre-bankruptcy accounts receivable. In the second quarter of 2004, the Company sold, without recourse, $8.0 million of Adelphia pre-bankruptcy accounts receivable to an independent third party for $6.3 million. The Company has accounted for the transfer of the pre-bankruptcy accounts receivable as a “sale” using the guidance of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets” and has removed the accounts receivable from the accompanying Condensed Consolidated Balance Sheet. The Company has no continuing involvement or retained interest in the transferred accounts receivable, and as a result of a bankruptcy court order stipulating to the amount of the pre-bankruptcy accounts receivable, there is no risk that the account receivable will be put back to the Company. The excess of the cash received over the net carrying value of the pre-bankruptcy accounts receivable at the date of sale, totaling $3.5 million, was recognized in earnings in the accompanying Condensed Consolidated Statements of Income during the second quarter of 2004, with $1.3 million recorded as processing revenues (primarily for services performed prior to the bankruptcy filing in June 2002) and $2.2 million as a reduction of bad debt expense.

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CSG SYSTEMS INTERNATIONAL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

	Three months ended June 30,										Six months ended June 30,
	2004					2003					2004					2003
	Amount			% of Revenue		Amount			% of Revenue		Amount			% of Revenue		Amount			% of Revenue
Revenues:
Processing and related services	$	80,895		62.4	%	$	91,041		64.0	%	$	162,027		62.3	%	$	182,217		64.1	%
Software		8,109		6.3			12,148		8.5			15,746		6.1			22,312		7.9
Maintenance		23,653		18.2			22,828		16.0			48,704		18.7			45,231		15.9
Professional services		17,006		13.1			16,344		11.5			33,550		12.9			34,533		12.1
Total revenues		129,663		100.0			142,361		100.0			260,027		100.0			284,293		100.0
Cost of revenues:
Cost of processing and related services		34,619		26.7			35,557		25.0			68,425		26.3			69,676		24.5
Cost of software and maintenance		17,162		13.2			17,395		12.2			33,436		12.9			35,705		12.6
Cost of professional services		15,616		12.1			14,673		10.3			29,766		11.4			33,228		11.7
Total cost of revenues		67,397		52.0			67,625		47.5			131,627		50.6			138,609		48.8
Gross margin (exclusive of depreciation)		62,266		48.0			74,736		52.5			128,400		49.4			145,684		51.2
Operating expenses:
Research and development		14,382		11.1			16,922		11.9			30,222		11.6			32,420		11.4
Selling, general and administrative		22,242		17.2			32,184		22.6			45,465		17.5			62,020		21.8
Depreciation		3,517		2.7			4,334		3.0			7,153		2.8			8,933		3.1
Restructuring charges		145		0.1			993		0.7			2,296		0.9			4,152		1.5
Total operating expenses		40,286		31.1			54,433		38.2			85,136		32.8			107,525		37.8
Operating income		21,980		16.9			20,303		14.3			43,264		16.6			38,159		13.4
Other income (expense):
Interest expense		(2,684	)	(2.1	)		(3,482	)	(2.4	)		(6,238	)	(2.4	)		(7,356	)	(2.6	)
Write-off of deferred financing costs		(6,569	)	(5.0	)		—		—			(6,569	)	(2.5	)		—		—
Interest and investment income, net		273		0.2			443		0.3			556		0.2			731		0.3
Other, net		(537	)	(0.4	)		2,443		1.6			(1,050	)	(0.4	)		2,829		1.0
Total other		(9,517	)	(7.3	)		(596	)	(0.5	)		(13,301	)	(5.1	)		(3,796	)	(1.3	)
Income before income taxes		12,463		9.6			19,707		13.8			29,963		11.5			34,363		12.1
Income tax provision		(4,707	)	(3.6	)		(7,988	)	(5.6	)		(11,374	)	(4.4	)		(13,937	)	(4.9	)
Net income	$	7,756		6.0	%	$	11,719		8.2	%	$	18,589		7.1	%	$	20,426		7.2	%
Basic net income per common share:
Net income available to common stockholders	$	0.15				$	0.23				$	0.36				$	0.40
Weighted average common shares		51,285					51,355					51,483					51,330
Diluted net income per common share:
Net income available to common stockholders	$	0.15				$	0.23				$	0.36				$	0.40
Weighted average common shares		52,096					51,656					52,175					51,570

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The information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto (the “Financial Statements”) included in this Form 10-Q and the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2003 (our “2003 10-K”).

Forward-Looking Statements

This report contains a number of forward-looking statements relative to our future plans and our expectations concerning the global customer care and billing industry, as well as the converging telecommunications industry it serves, and similar matters. These forward-looking statements are based on assumptions about a number of important factors, and involve risks and uncertainties that could cause actual results to differ materially from estimates contained in the forward-looking statements. Some of the risks that are foreseen by management are contained in Exhibit 99.01 “Safe Harbor for Forward-Looking Statements Under the Private Securities Litigation Reform Act of 1995—Certain Cautionary Statements and Risk Factors”. Exhibit 99.01 constitutes an integral part of this report, and readers are strongly encouraged to review this exhibit closely in conjunction with MD&A.

Management Overview

The Company. We are a global leader in next-generation billing and customer care solutions for the cable television, direct broadcast satellite, advanced IP services, next-generation mobile, and fixed wireline markets. Our combination of proven and future-ready solutions, delivered in both outsourced and licensed formats, enables our clients to deliver high quality customer service, improve operational efficiencies and rapidly bring new revenue-generating products to market. We are a S&P Midcap 400 company. We serve our clients through two operating segments: the Broadband Services Division (the “Broadband Division”) and the Global Software Services Division (the “GSS Division”).

General Market Conditions. Beginning in early 2001, the economic state of the global telecommunications industry deteriorated, resulting from (among other reasons) a general global economic downturn, network and plant overcapacity, and limited availability of capital. This trend continued into 2003. During this time frame, many companies operating within this industry publicly reported decreased revenues and earnings, and several companies filed for bankruptcy protection. Most telecommunications companies reduced their operating costs and capital expenditures to cope with the market conditions during these times. Since our clients operate within this industry sector, the economic state of this industry directly impacts our business, limiting the amount of money spent on customer care and billing products and services, as well as increasing the likelihood of uncollectible accounts receivable and lengthening the cash collection cycle.

Recent public reports, as well as our recent experiences with our client base, are providing signs of economic improvement within this industry sector. However, public reports are mixed as to whether the recovery is real, and whether the recovery is sustainable. If a turnaround in general market conditions occurs, it will likely be slow, and a full, sustained recovery, if it occurs at all, may take several years. In addition, public reports indicate that even though there are signs of market improvements, telecommunications companies appear to be spending at a cautious pace, possibly awaiting economic recovery within their own respective business before fully utilizing their capital budgets. As a result, we continue to be cautiously optimistic in our outlook, as our ability to increase our revenues and operating performance is highly dependent upon the pace at which the market recovers, the spending patterns of our client base, and ultimately, our success in selling new products and services to new and existing clients. There can be no assurance that the market will recover or that our client base will increase their spending activities, regardless of the market conditions, and even if so, that we will be successful in increasing our revenues and operating performance.

Broadband Division. The Broadband Division generates its revenues by providing outsourced customer care and billing services with its core product, CSG CCS/BP (“CCS”), to North American (primarily the United States)

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broadband service providers, primarily for cable television, Internet, and satellite television product offerings. The market for the Broadband Division’s products and services is highly competitive, resulting in significant pricing pressures for contract renewals.

A summary of the key business matters for the Broadband Division in the second quarter of 2004 is as follows:

• The Broadband Division’s second quarter of 2004 revenues totaled $86.0 million, compared to second quarter of 2003 revenues of $96.2 million (an 11% decrease) and first quarter of 2004 revenues of $86.6 million (a 1% decrease). The decrease in Broadband Division revenues between the second quarter of 2004 and the second quarter of 2003 relates primarily to the lower revenues from our largest client, Comcast Corporation (“Comcast”). See additional discussions of this matter below.

• During the second quarter of 2004, we signed a new five-year customer care and billing services contract with Adelphia Communications (“Adelphia”), which includes services related to Adelphia’s delivery of Voice over IP services. The Adelphia services contract was subject to bankruptcy court approval, which was received during the current quarter. In conjunction with signing of this new contract, we sold, without recourse, $8.0 million of Adelphia pre-bankruptcy accounts receivable to an independent third party for $6.3 million. After taking into consideration the amounts of our allowance for doubtful accounts and deferred revenues related to this matter, this transaction resulted in $3.5 million of earnings benefit in the current quarter, with $1.3 million recorded as processing revenues (primarily for services performed prior to the bankruptcy filing in June 2002) and $2.2 million as a reduction of bad debt expense.

• The Broadband Division has substantially completed its significant architectural upgrade to CCS and related services and software products, and has successfully migrated several clients to the new platform. See the “Business” section of our 2003 10-K for additional discussion of this effort.

• The Broadband Division continues to invest in the product and services necessary to support our clients’ rollout of Voice over IP. In particular, we helped Time Warner continue to rollout Voice over IP services in several markets during the quarter.

GSS Division. The GSS Division was established as a result of our acquisition of the Kenan Business from Lucent Technologies (“Lucent”) in February 2002. The GSS Division is a global provider of convergent billing and customer care software and services that enables telecommunications service providers to bill their customers for existing and next-generation services, including mobile and wireline telephony, Internet, cable television, and satellite.

The GSS Division’s revenues consist of software license and maintenance fees, and various professional and consulting services related to its software products (principally, implementation services). The market for the GSS Division’s products and services is highly competitive, resulting in significant pricing pressures for both new and existing client purchases. Historically, approximately 75% of the GSS Division’s revenues have been generated outside the U.S. We expect that a similar percentage of the GSS Division’s 2004 revenues will be generated outside the U.S.

A summary of the key business matters for the GSS Division in the second quarter of 2004 is as follows:

• The GSS Division’s second quarter of 2004 revenues totaled $43.7 million, compared to second quarter of 2003 revenues of $46.2 million (a 5% decrease) and first quarter of 2004 revenues of $43.8 million (relatively flat between sequential quarters). Our GSS Division had a positive contribution margin in the second quarter of 2004 of $1.0 million, compared to a negative contribution margin in the second quarter of 2003 of $(2.0) million and a positive contribution margin in the first quarter of 2004 of $1.2 million. The improvement in contribution margin year-over-year is primarily due to lower operating expenses resulting primarily from various cost reduction initiatives.

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• The GSS Division expanded its relationship with existing customers as well as added new customers in the Asia Pacific region. Sichuan Telecom and Shanghai Telecom both will be using the Kenan FX framework to support their subscribers in the Chinese market. This brings the total number of customers that selected the Kenan FX framework to 16, including six additions during the second quarter of 2004.

Other Key Events.

• During the second quarter of 2004, we reorganized our executive management team. Jack Pogge, President and Chief Operating Officer, ended his employment with our company on May 28, 2004 to coincide with our annual meeting of stockholders. Neal Hansen, CEO and Chairman, assumed the additional role of President. Additionally, William Fisher, President of our GSS Division, announced that he was resigning from our company. Neal Hansen has assumed the leadership of the GSS Division. During the second quarter of 2004, we recorded expense of $2.5 million related to these executive management departures in accordance with the terms of their employment agreements. This expense is included in SG&A expense in the accompanying Condensed Consolidated Statements of Income, and is included in corporate overhead costs in our segment results.

• On June 2, 2004, we completed an offering of $230.0 million of 2.5% senior subordinated convertible contingent debt securities due June 15, 2024 (the “Convertible Debt Securities”) to qualified buyers pursuant to Rule 144A under the Securities Act of 1933. We used the proceeds from the Convertible Debt Securities, along with available cash, cash equivalents and short term investments, to: (i) repay the outstanding balance of $198.9 million and terminate our 2002 Credit Facility (our bank debt); (ii) repurchase 2.1 million shares of our common stock for $40.0 million (market price of $18.72 per share) from the initial purchasers of the Convertible Debt Securities; and (iii) pay debt issuance costs of $6.9 million. As a result of the retirement of our existing debt, we wrote-off unamortized deferred financing costs attributable to the 2002 Credit Facility of $6.6 million during the second quarter of 2004. This write-off amount is reflected as a separate line item in the accompanying Condensed Consolidated Statements of Income. See Note 3 to the Financial Statements for further details of the Convertible Debt Securities.

• During the second quarter of 2004, our Board of Directors increased the number of shares we are authorized to repurchase under our stock repurchase program by five million, to a total of 15.0 million shares.

Significant Client Relationships

Comcast

Background. Comcast is our largest client. During the second quarters of 2004 and 2003, revenues from Comcast represented approximately 15% and 25%, respectively, of our total consolidated revenues. The decrease in the percentage between the second quarters of 2004 and 2003 relates primarily to the impact of the new pricing Comcast received as a result of the October 2003 arbitration ruling, which is discussed below. Total revenues generated from Comcast in the first two quarters of 2004 were approximately 17% of our total consolidated revenues. We expect that the percentage of our total consolidated revenues in 2004 related to Comcast will represent a percentage comparable to that of the first two quarters of 2004 (i.e., approximately 16%-17%), and continue to expect that revenues from Comcast will be in-line with or exceed their contractual minimums.

Arbitration Resolution. During 2002 and 2003, we were involved in various legal proceedings with Comcast, consisting principally of arbitration proceedings related to the Comcast Master Subscriber Agreement. In October 2003, we received the final ruling in the arbitration proceedings. The Comcast arbitration ruling included an award of $119.6 million to be paid by us to Comcast. The award was based on the arbitrator’s determination that we had

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violated the most favored nations (“MFN”) clause of the Comcast Master Subscriber Agreement. We recorded the impact from the arbitration ruling in the third quarter of 2003 as a charge to the Broadband Division’s revenues. In the fourth quarter of 2003, we paid approximately $95 million of the arbitration award to Comcast, and in January 2004, we paid the remaining portion of the arbitration award of approximately $25 million. In addition to the arbitration award, we paid to Comcast interest of $1.1 million, of which $0.1 million was reflected as interest expense in the first quarter of 2004. See the “Comcast and AT&T Broadband Business Relationship” section of the MD&A section of our 2003 10-K for additional discussion of the results of the Comcast arbitration ruling.

Signing of New Comcast Contract. In March 2004, we signed a new contract with Comcast (the “Comcast Contract”). The Comcast Contract superseded the former Comcast Master Subscriber Agreement that was set to expire at the end of 2012. Under the new agreement, we expect to continue to support Comcast’s video and high-speed Internet customers at least through December 31, 2008. The pricing inherent in the Comcast Contract was consistent with that of the arbitration ruling in October 2003, and as a result, did not materially change our revenue expectations for 2004, except for the impact of the accelerated amortization of the client contracts intangible asset related to the Comcast Contract, as discussed below. The Comcast Contract was approved by our Bank Group in March 2004 via the Third Amendment to our 2002 Credit Facility.

The Comcast Contract includes annual financial minimums for 2004, 2005 and 2006 of $85 million, $75 million and $60 million, respectively (total of $220 million). In addition, the Comcast Contract eliminated the exclusive right we had under our previous contract with Comcast to provide customer care and billing services for the entire 13 million AT&T Broadband customer base (acquired by Comcast in November 2002). Although the elimination of our exclusive rights to process these customers increases the risk of customer deconversions from our system, such risk is mitigated to a certain degree by the annual financial minimums. The Comcast Contract is included in the exhibits to our periodic filings with the Securities and Exchange Commission (“SEC”). The document is available on the Internet and we encourage readers to review this document for further details.

Impact of Comcast Contract on Client Contracts Intangible Asset. We have a long-lived client contracts intangible asset related to our Comcast Contract that has a net carrying value as of June 30, 2004 of approximately $50 million. During the first quarter of 2004, we evaluated the carrying value of this intangible asset in light of the net cash flows expected to be generated from the Comcast Contract, and concluded that there was no impairment to this asset as a result of the new Comcast Contract. No events have occurred or additional facts have become available during the second quarter of 2004 that would cause us to change our first quarter of 2004 conclusion. However, as a result of the shortened term of the Comcast Contract, effective in March 2004, we were required to accelerate the amortization of this intangible asset. Total amortization related to the Comcast Contract for the three months ended June 30, 2004 and 2003, was $2.8 million and $1.4 million, respectively, and for the six months ended June 30, 2004 and 2003, was $4.7 million and $2.9 million, respectively. The increase in amortization recorded in the second quarter of 2004 was $0.9 million when compared to the first quarter of 2004. Going forward, this amortization will be approximately $3 million per quarter through the end of the contract term of December 31, 2008. The entire amount of the amortization of the client contracts intangible asset is recorded as a reduction in processing revenues, as opposed to amortization expense, in the accompanying Condensed Consolidated Statements of Income.

Significant Client Concentration Risk. We expect to continue to generate a significant percentage of our future revenues under the Comcast Contract. There are inherent risks whenever a large percentage of total revenues are concentrated with one client. One such risk is that, should Comcast terminate its contract in whole or in part for any of the reasons stated above, or significantly reduce the number of customers processed on our system, it could have a material adverse effect on our financial condition and results of operations (including possible impairment, or significant acceleration of the amortization of the Comcast client contracts intangible asset).

Echostar

Background. Echostar is our second largest client. During the second quarters of 2004 and 2003, revenues from Echostar represented approximately 14% and 11%, respectively, of our total consolidated revenues. Total revenues generated from Echostar in the first two quarters of 2004 were approximately 14% of our total consolidated revenues. We expect that the percentage of our total consolidated revenues in 2004 related to Echostar will represent a percentage comparable to that of the first two quarters of 2004 (i.e., approximately 13%-14%).

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Signing of New Echostar Contract Amendment. In February 2004, we signed the Thirtieth Amendment to the Echostar Master Subscriber Agreement, extending the term of the Echostar Master Subscriber Agreement until March 1, 2006. The Echostar Master Subscriber Agreement was set to expire at the end of 2004. The pricing inherent in the amended Echostar contract did not materially change our revenue expectations going forward. The Echostar Master Subscriber Agreement, to include all amendments, is included in the exhibits to our periodic filings with the SEC. The document is available on the Internet and we encourage readers to review this document for further details.

Significant Client Concentration Risk. We expect to continue to generate a significant percentage of our future revenues under the Echostar contract. As stated above, the Echostar contract runs through March 1, 2006. The failure of Echostar to further renew its contract, representing a significant part of its business with us, could have a material adverse effect on our financial condition and results of operations.

Dilution Related to Convertible Debt Securities

Under the existing application of GAAP, the Convertible Debt Securities are not included within the computation of diluted earnings per share until the period in which one of the contingent conversion features has been met. However, in July 2004, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) announced that it had reached a tentative consensus with respect to Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” The EITF’s tentative consensus states that contingently convertible debt instruments should be included in diluted earnings per share (if dilutive) regardless of whether any of the contingent conversion features have been met. The EITF has invited public comments on its tentative consensus and expects to consider such comments in its September 2004 meeting. If the tentative consensus is made final by the EITF, and then ratified by the FASB (at which time the rule becomes part of GAAP), our diluted earnings per share amounts reported since the issuance of the Convertible Debt Securities in June 2004 may be required to be restated, and the amount of the restatement may be significant to our Financial Statements. Under the current structure of the Convertible Debt Securities, we would be required to calculate such dilution using the “as if converted” method. Under this method, the after tax impact of the interest expense related to the Convertible Debt Securities is added to the numerator in our diluted earnings per share calculation, and the 8.6 million potentially issuable shares related to the conversion of the Convertible Debt Securities is added to the denominator.

Stock-Based Compensation Expense

As discussed in greater detail in Note 2 to the Financial Statements, in 2003 we adopted the fair value method of accounting for our stock-based awards under SFAS No. 123, using the prospective method of transition outlined in SFAS No. 148. In addition, we completed our exchange of certain stock options for restricted stock (also referred to by us as our “tender offer”) in December 2003. As a result, our stock-based compensation expense is significantly higher in 2004 when compared to 2003. Stock-based compensation expense is included in the following income statement captions, and included in the various segment results, in the accompanying Financial Statements (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Statements of Consolidated Income:
Cost of processing and related services	$	643	$	13	$	1,264	$	16
Cost of software and maintenance		251		4		469		5
Cost of professional services		299		5		574		8
Research and development		459		11		930		14
Selling, general and administrative		2,148		1,381		4,708		2,666
Total stock-based compensation expense	$	3,800	$	1,414	$	7,945	$	2,709

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Segment Results:
Broadband Division		1,095		38		2,194		76
GSS Division		824		20		1,654		41
Corporate		1,881		1,356		4,097		2,592
Total stock-based compensation expense	$	3,800	$	1,414	$	7,945	$	2,709

Critical Accounting Policies

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to select appropriate accounting policies, and to make judgments and estimates affecting the application of those accounting policies. In applying our accounting policies, different business conditions or the use of different assumptions may result in materially different amounts reported in our financial statements.

We have identified the most critical accounting policies upon which our financial status depends. The critical accounting policies were determined by considering accounting policies that involve the most complex or subjective decisions or assessments. The most critical accounting policies identified relate to: (i) revenue recognition; (ii) allowance for doubtful accounts receivable; (iii) impairment of long-lived assets; (iv) business restructuring; (v) loss contingencies; (vi) income taxes; (vii) business combinations and asset purchases; (viii) stock-based compensation expense; and (ix) capitalization of internal software development costs. These critical accounting policies and our other significant accounting policies are discussed in our 2003 10-K.

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

Results of Operations – Consolidated Basis

Total Revenues. Total revenues for the three months ended June 30, 2004 decreased 8.9% to $129.7 million, from $142.4 million for the three months ended June 30, 2003. The decrease between periods is primarily due to lower processing revenues from Comcast as a result of the arbitration ruling and the impact of the new Comcast Contract pricing, as discussed above.

We use the location of the client as the basis of attributing revenues to individual countries. Revenues by geographic region for the second quarters of 2004 and 2003 were as follows (in thousands):

	Three Months Ended June 30,
	2004		2003
North America (principally the United States)	$	96,304	$	107,273
Europe, Middle East and Africa (principally Europe)		20,174		23,653
Asia Pacific		9,000		5,173
Central and South America		4,185		6,262
Total revenues	$	129,663	$	142,361

For revenues generated outside North America, no single country accounts for more than 5% of our total revenues.

See the “Results of Operations – Operating Segments” section below for a detailed discussion of revenues and related changes between periods on a segment basis.

Cost of Revenues. See our 2003 10-K for a description of the types of costs that are included in the individual line items for cost of revenues.

Cost of Processing and Related Services. The cost of processing and related services for the three months ended June 30, 2004 decreased 2.6% to $34.6 million, from $35.6 million for the three months ended June 30, 2003. The decrease between periods is primarily due to a reduction in certain personnel costs, to include the impact of the cost reduction

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initiatives discussed below, and is also reflective of our continued focus on cost controls in this area. Processing costs as a percentage of related processing revenues were 42.8% (gross margin of 57.2%) for the three months ended June 30, 2004 compared to 39.1% (gross margin of 60.9%) for the three months ended June 30, 2003. The increase in processing costs as a percentage of related revenues is primarily due to the lower Comcast revenues in the second quarter of 2004. We expect our quarterly gross margin percentages for processing services for the remainder of 2004 to be in a range more comparable to that of the second quarter.

Cost of Software and Maintenance. The combined cost of software and maintenance of $17.2 million for the three months ended June 30, 2004, was relatively flat, when compared to $17.4 million for the three months ended June 30, 2003. The decrease between periods is primarily due to a reduction in certain personnel costs, to include the impact of the cost reduction initiatives discussed below. This decrease was essentially offset by an increase in other various costs necessary to support our products and clients (e.g., third party software costs). The cost of software and maintenance as a percentage of related revenues was 54.0% (gross margin of 46.0%) for the three months ended June 30, 2004 as compared to 49.7% (gross margin of 50.3%) for the three months ended June 30, 2003. As discussed below, fluctuations in the quarterly gross margin for software and maintenance revenues are an inherent characteristic of software companies, which can be impacted by, among others things, the timing of executed contracts in any one quarter.

Cost of Professional Services. The cost of professional services for the three months ended June 30, 2004 increased 6.4% to $15.6 million, from $14.7 million for the three months ended June 30, 2003. The increase between periods is primarily due to an increase in certain project-specific support costs (e.g., contractors and subcontractor costs). This increase was offset to a certain degree by a reduction in certain personnel costs, to include the impact of the cost reduction initiatives discussed below. A fluctuation in such support costs between periods is not considered unusual, and is dependent upon the timing of work performed, and the number of professional services projects in progress during the two periods. The cost of professional services as a percentage of related revenues was 91.8% (gross margin of 8.2%) for the three months ended June 30, 2004, as compared to 89.8% (gross margin of 10.2%) for the three months ended June 30, 2003. As discussed below, fluctuations in the quarterly gross margin for professional services revenues are an inherent characteristic of professional services companies.

Cost of professional services in the second quarter of 2004 reflects a sequential increase of $1.4 million when compared to the first quarter of 2004 amount of $14.2 million. This increase relates primarily to the timing of certain project-specific support costs, and is not considered unusual in nature.

Gross Margin. As a result of the Kenan Business acquisition, our revenues from software licenses, maintenance services and professional services have increased and have become a larger percentage of our total revenues. Variability in quarterly revenues and operating results are inherent characteristics of companies that sell software licenses, provide maintenance services, and perform professional services. Our quarterly revenues for software licenses, maintenance services and professional services revenues may fluctuate, depending on various factors, including the timing of executed contracts and the delivery of contracted services or products. See Exhibit 99.01 for additional discussion of factors that may cause fluctuations in quarterly revenues and operating results. However, the costs associated with software and maintenance revenues, and professional services revenues are not subject to the same degree of variability (i.e., these costs are generally fixed in nature within a relatively short period of time), and at times, might be required to be recorded in a period different than the period in which the related revenue is recognized, and thus, fluctuations in our software and maintenance, professional services, and overall gross margins and related gross margin percentages, will likely occur between periods.

The overall gross margin for the three months ended June 30, 2004 decreased 16.7% to $62.3 million from $74.7 million for the three months ended June 30, 2003. The overall gross margin percentage decreased to 48.0% for the three months ended June 30, 2004, compared to 52.5% for the three months ended June 30, 2003. The decrease in the overall gross margin and overall gross margin percentage relate primarily to the decrease in gross margin for processing services, primarily due to the lower Comcast revenues in 2004.

Research and Development Expense. R&D expense decreased 15.0% to $14.4 million for the three months ended June 30, 2004, from $16.9 million for the three months ended June 30, 2003. The decrease in the amount of R&D expense between periods is primarily due to a reduction in certain personnel costs, to include the impact of the cost reduction

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initiatives discussed below. As a percentage of total revenues, R&D expense decreased to 11.1% for the three months ended June 30, 2004, from 11.9% for the three months ended June 30, 2003. We did not capitalize any internal software development costs during the three months ended June 30, 2004 and 2003.

During the second quarter of 2004, we focused our development and enhancement efforts on:

• various R&D projects for the GSS Division, including the Kenan FX business framework (which is discussed in greater detail in the “Business” section of our 2003 10-K), which was introduced in late 2003, and includes enhancements to the existing versions of the Kenan Business product suite, as well as new modules; and

• enhancements to CCS and related Broadband Division software products to increase the functionalities and features of the products, to include the architectural upgrade to CCS (which is discussed in greater detail in the “Business” section of our 2003 10-K), and Voice over IP functionalities.

R&D expense for the second quarter of 2004 reflects a sequential decrease of $1.4 million when compared to the first quarter of 2004 amount of $15.8 million. The decrease is not considered unusual, and relates to several factors, including the decrease in certain R&D personnel costs between periods, as well as the shifting of certain costs from R&D to cost of revenues as result of the completion of the development cycle for certain projects. At this time, we expect our investment in R&D over time will approximate our historical investment rate of 10-12% of total revenues. We expect this investment will be focused on the CCS and the Kenan Business product suites, as well as additional stand-alone products as they are identified.

Selling, General and Administrative Expense. SG&A expense for the three months ended June 30, 2004, decreased 30.9% to $22.2 million, from $32.2 million for the three months ended June 30, 2003. As a percentage of total revenues, SG&A expense decreased to 17.2% for the three months ended June 30, 2004, from 22.6% for the three months ended June 30, 2003. The decrease in SG&A expense relates primarily to a decrease in legal fees due to the Comcast arbitration concluding in October 2003 (such costs were approximately $6 million in the second quarter of 2003), and to a much lesser degree: (i) a reduction in certain personnel costs, to include the impact of the cost reduction initiatives discussed below; and (ii) the reduction of bad debt expense in the second quarter of 2004, primarily related to the sale of the Adelphia pre-bankruptcy receivables discussed above. These decreases were offset to a certain degree by $2.5 million of expense recorded in the second quarter of 2004 related to our executive management departures discussed above.

SG&A expense for the second quarter of 2004 reflects a sequential decrease of $1.0 million when compared to the first quarter of 2004 amount of $23.2 million. During the second quarter of 2004, we reduced our bad debt expense by $2.9 million, primarily related to the sale of the Adelphia pre-bankruptcy receivables discussed above, with such decrease offset to a substantial degree by $2.5 million of expense recorded in the second quarter of 2004 related to our executive management departures. For the remainder of 2004, we expect SG&A expense to be in a range comparable to that of the last two quarters.

Depreciation Expense. Depreciation expense for the three months ended June 30, 2004 decreased 18.9% to $3.5 million, from $4.3 million for the three months ended June 30, 2003. The decrease in depreciation expense relates to the decrease in capital expenditures made during the last twelve months as a result of our focus on cost controls. The capital expenditures during the second quarter of 2004 consisted principally of computer hardware and related equipment. Depreciation expense for all property and equipment is reflected separately in the aggregate and is not included in the cost of revenues or the other components of operating expenses.

Restructuring Charges. Our restructuring charges relate to various cost reduction initiatives implemented primarily as a result of market conditions, and the Comcast arbitration ruling. See Note 10 to our Financial Statements for a more detailed discussion of our cost reduction initiatives and related restructuring charges, including the current activity in the accrued liabilities related to the restructuring charges. We believe that the operational impact from these initiatives will not negatively impact our ability to service our current or future clients.

Cost Reduction Initiatives Related to Market Conditions

In response to poor economic conditions within the global telecommunications industry, during 2003 and 2002, we implemented several cost reduction initiatives, consisting primarily of involuntary employee terminations

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and facility abandonments, with the greatest percentage of the involuntary terminations occurring within the GSS Division. These cost reduction initiatives resulted in material restructuring charges in both 2003 and 2002. In the aggregate, these various initiatives were targeted at reducing operating expenses by approximately $60 million annually, based on various measurement points. These programs were substantially completed by the end of the second quarter of 2003.

Cost Reduction Initiatives Related to the Comcast Arbitration Ruling.

In response to the expected reduction in revenues resulting from the Comcast arbitration ruling, during the fourth quarter of 2003, we implemented a cost reduction initiative, consisting primarily of involuntary employee terminations and a reduction of costs related to certain of our employee compensation and fringe benefit programs, with the greatest percentage of the involuntary employee terminations occurring within the Broadband Division. This cost reduction initiative resulted in material restructuring charges in the fourth quarter of 2003 and the first quarter of 2004. This initiative was targeted at reducing operating expenses by approximately $30 million, when compared to the third quarter 2003 annualized operating expense run rate. This program was substantially completed by the end of the first quarter of 2004.

Summary of Restructuring Charges.

The components of the restructuring charges included in total operating expenses, and the impact (net of related estimated income tax expense) these restructuring charges had on net income and diluted earnings per share, for the three months ended June 30, 2004 and 2003 are as follows (in thousands, except diluted earnings per share):

	Three Months Ended June 30,
	2004		2003
Involuntary employee terminations	$	145	$	999
Facility abandonments		—		(29	)
All other		—		23
Total restructuring charges	$	145	$	993
Impact of restructuring charges on results of operations (i.e., have reduced operating results):
Net income	$	90	$	590
Diluted earnings per share	$	0.00	$	0.01

We recorded restructuring charges related to involuntary employee terminations and various facility abandonments during the three months ended June 30, 2004 and 2003. The accounting for facility abandonments require significant judgments in determining the restructuring charges, primarily related to the assumptions regarding the timing and the amount of any potential sublease arrangements for the abandoned facilities, and the discount rates used to determine the present value of the liabilities. We continually evaluate these assumptions, and adjust the related facility abandonment reserves based on the revised assumptions at that time. In addition, we continually evaluate ways to cut our operating expenses through restructuring opportunities, to include the utilization of our workforce and current operating facilities. As a result, there is a reasonable possibility that we may incur additional material restructuring charges in the future.

Operating Expenses/Income. Operating income for the three months ended June 30, 2004, was $22.0 million or 16.9% of total revenues, compared to $20.3 million or 14.3% of total revenues for the three months ended June 30, 2003. The increase in these measures between years relates to the various factors discussed above, and is reflective of our successful efforts to reduce our operating expenses in response to the lower revenues from Comcast.

Total expenses of $107.7 million in the second quarter of 2004 reflect a sequential decrease of $1.4 million when compared to $109.1 million for the first quarter of 2004. Absent the impact of the restructuring charges, total expenses during the last two quarters are somewhat comparable. During the second half of 2004, we expect total expenses to trend upward, when compared to the second quarter of 2004. This increase is primarily the result of expected increases in personnel costs over this time period, primarily as a result of our decision to provide wage increases to our employees

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commencing in the third quarter of 2004, and our decision to increase the number of personnel in certain product delivery and support functions in anticipation of business opportunities in these areas in the near future. We expect our 2004 full year operating margin to range between 16% and 17%.

Interest Expense. Interest expense for the three months ended June 30, 2004, decreased 22.9% to $2.7 million, from $3.5 million for the three months ended June 30, 2003. The weighted-average balance of our long-term debt for the three months ended June 30, 2004 was approximately $209 million, compared to approximately $257 million for the three months ended June 30, 2003. The weighted-average interest rate on our debt borrowings for the three months ended June 30, 2004, including the amortization of deferred financing costs and commitment fees on our revolving credit facility, was 4.9%, compared to 5.1% for the three months ended June 30, 2003.

As a result of our issuance of the Convertible Debt Securities, we anticipate that our quarterly interest expense going forward will be $1.7 million, which includes interest at 2.5% on the $230 million principal balance, and amortization of deferred financing costs, resulting in an estimated overall weighted-average interest rate of 2.9% per annum.

Write-off of Deferred Financing Costs. As discussed above, as result of the repayment and termination of the 2002 Credit Facility, resulting from our issuance of the Convertible Debt Securities, we wrote-off unamortized deferred financing costs attributable to the 2002 Credit Facility of $6.6 million during the second quarter of 2004, which had the effect of reducing our second quarter of 2004 diluted earnings per share by $0.08.

Other, net. Other expense for the three months ended June 30, 2004, was $(0.5) million compared to other income of $2.4 million for the three months ended June 30, 2003. These amounts consist primarily of foreign currency transaction gains and losses. The change between years relates primarily to the change in the foreign currency exchange rates of the U.S. dollar against the Euro and British pound.

Income Tax Provision. For the three months ended June 30, 2004, we recorded an income tax provision of $4.7 million, or an effective income tax rate of approximately 38%, compared to an effective income tax rate of approximately 41% for the three months ended June 30, 2003.

As of June 30, 2004, our net deferred income tax assets of $55.5 million were related primarily to our domestic operations, and represented approximately 8% of total assets. We continue to believe that sufficient taxable income will be generated to realize the benefit of these deferred income tax assets. Our assumptions of future profitable domestic operations are supported by the strong operating performance of the Broadband Division over the last several years, and our expectations of future profitability.

Results of Operations - Operating Segments

We serve our clients through our two operating segments: the Broadband Division and the GSS Division. See our 2003 10-K for further discussion of the operations of each operating segment and the related product and service offerings, and the components of segment operating results.

Operating segment information and corporate overhead costs for the three months ended June 30, 2004 and 2003, are presented in Note 8 to our Financial Statements.

Broadband Division

Total Revenues. Total Broadband Division revenues for the three months ended June 30, 2004 decreased 10.6% to $86.0 million, from $96.2 million for the three months ended June 30, 2003 primarily due to a decrease in processing revenues as discussed in more detail below.

Processing revenues. Processing revenues for the three months ended June 30, 2004 decreased 11.2% to $80.3 million, compared to $90.4 million for the three months ended June 30, 2003. The decrease in processing revenues was due primarily to lower processing revenues from Comcast for the three months ended June 30, 2004. Processing revenues for the first quarter of 2004 were $80.4 million.

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Total amortization of the client contract intangible asset related to the Comcast Contract (which is reflected as a reduction of processing revenues) for the first and second quarters of 2004 was $1.9 million and $2.8 million, respectively. The increase in amortization between quarters reflects the impact of the acceleration in such amortization effective with the new Comcast Contract in March 2004, as discussed above. Going forward, this amortization will be approximately $3 million per quarter through the end of the Comcast Contract term of December 31, 2008.

Total domestic customer accounts processed on our systems as of June 30, 2004 were 43.7 million, which is relatively flat when compared to the 43.5 million customer accounts as of March 31, 2004. The annualized revenue per unit (“ARPU”) for the second quarter of 2004 was $7.42 compared to $7.38 for the first quarter of 2004. These ARPU measures include $0.12 (related to $1.3 million of revenue related to the sale of the Adelphia pre-bankruptcy accounts receivable mentioned above) and $0.14 (related to $1.5 million of revenue related open items resolved in contracts renewed in the first quarter of 2004), respectively, in non-recurring processing revenues for which no comparable items are expected in the third quarter of 2004. As a result, we expect our third quarter ARPU to range from $7.10 to $7.25. We expect this to result in approximately $79 million to $80 million of total consolidated processing revenues for the third quarter of 2004.

Segment Operating Expenses and Contribution Margin. Broadband Division operating expenses for the three months ended June 30, 2004 decreased 8.9% to $48.7 million, from $53.4 million for the three months ended June 30, 2003. The decrease in the Broadband Division’s operating expenses is due primarily to the fourth quarter 2003 cost reduction initiative (principally a reduction in personnel costs), and to a lesser degree, a reduction in bad debt expense (primarily related to the sale of the Adelphia pre-bankruptcy accounts receivable). These decreases were offset to a certain degree by an increase in stock-based compensation between periods.

Broadband Division contribution margin decreased 12.7% to $37.3 million (contribution margin percentage of 43.4%) for the three months ended June 30, 2004, from $42.7 million (contribution margin percentage of 44.4%) for the three months ended June 30, 2003. The Broadband Division contribution margin and contribution margin percentage decreased between periods primarily due to lower revenues from Comcast for the three months ended June 30, 2004. The relatively small decrease of 1.0% in the contribution margin percentage between periods in light of the significant reduction in revenues is reflective of our successful efforts to reduce our Broadband Division’s operating expenses in response to the lower revenues from Comcast.

Total non-cash charges related to depreciation, amortization (shown as a reduction of processing revenues), and stock-based compensation expense included in the determination of the Broadband Division’s contribution margin for the three months ended June 30, 2004 and 2003 were $5.8 million and $4.0 million, respectively. The increase in non-cash charges is due primarily to the acceleration of amortization related to the Comcast Contract intangible asset as discussed above and additional stock-based compensation.

GSS Division

Total Revenues. Total GSS Division revenues for the three months ended June 30, 2004 decreased 5.5% to $43.7 million, as compared to $46.2 million for the three months ended June 30, 2003, with the decrease due primarily to a decrease in software revenues as discussed in more detail below.

Software Revenues. Software revenues for the three months ended June 30, 2004 decreased 38.6% to $7.2 million, from $11.7 million for the three months ended June 30, 2003. The decrease in software revenues was primarily due to the timing of executed software contracts and related revenue recognition between quarters, and the general market conditions. As discussed above, fluctuations in revenue from software sales between quarters is an inherent characteristic of software companies and is expected to continue in future periods.

Software revenues for the second quarter of 2004 reflect a sequential increase of $0.5 million when compared to the first quarter of 2004 amount of $6.7 million. We expect software revenues for the remainder of 2004 to trend up depending upon the pace at which the market recovers, and our success in selling additional software licenses.

Maintenance Revenues. Maintenance revenues for the three months ended June 30, 2004 increased 7.7% to $19.1 million, from $17.7 million for the three months ended June 30, 2003. This increase in maintenance revenues was

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due primarily to: (i) the renewal of certain maintenance contracts subsequent to the second quarter of 2003; (ii) the resolution of collectibility concerns for certain clients; and (iii) an increase in the installed software license base as a result of new sales since the end of the second quarter of 2003. We expect the GSS Divisions’ quarterly maintenance revenues for the remainder of 2004 to be comparable to the second quarter of 2004.

Professional Services Revenues. Professional services revenues for the three months ended June 30, 2004 increased 3.8% to $16.8 million, from $16.1 million for the three months ended June 30, 2003. The increase in revenues is not considered unusual, and is due primarily to the timing of work performed, and the number of professional services projects in progress during the two periods.

Professional services revenues for the second quarter of 2004 reflect a sequential increase of $0.4 million when compared to the first quarter of 2004 amount of $16.4 million. We expect professional services revenues for the remainder of 2004 to trend up, depending upon the pace at which the market recovers, and our success in selling additional software licenses and Kenan FX upgrade projects.

Segment Operating Expenses and Contribution Margin/Loss. GSS Division operating expenses for the three months ended June 30, 2004 decreased 11.5% to $42.7 million, from $48.2 million for the three months ended June 30, 2003. The decrease in GSS Division operating expenses is due primarily to a reduction in various personnel costs, to include the impact of the cost reduction initiatives discussed above.

The GSS Division’s contribution margin for the three months ended June 30, 2004 was $1.0 million (contribution margin percentage of 2.2%) as compared to a contribution loss for the three months ended June 30, 2003 of $(2.0) million (negative contribution margin percentage of 4.4%). The increase in contribution margin between quarters is due primarily to the reduction in GSS Division operating expenses between periods, as discussed above.

Total non-cash charges related to depreciation, amortization, and stock-based compensation expense included in the determination of the GSS Division’s contribution margin/loss for the three months ended June 30, 2004 and 2003 were $5.5 million and $4.5 million, respectively. The increase in non-cash charges is due primarily to additional stock-based compensation.

We expect the GSS Division to have a positive contribution margin for 2004.

Corporate

Corporate Operating Expenses. Corporate overhead expenses for the three months ended June 30, 2004 decreased 16.7% to $16.2 million, from $19.4 million for the three months ended June 30, 2003. The decrease in operating expenses related primarily to a decrease in legal fees as a result of completion of the Comcast arbitration proceedings. We incurred approximately $6 million of legal fees in the three months ended June 30, 2003 in defense of the Comcast litigation, with no comparable amount for 2004. This decrease is offset to a certain degree by $2.5 million of expense in the three months ended June 30, 2004 related to executive management departures as discussed above.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

Results of Operations – Consolidated Basis

Total Revenues. Total revenues for the six months ended June 30, 2004 decreased 8.5% to $260.0 million, from $284.3 million for the six months ended June 30, 2003. The decrease between periods is primarily due to lower processing revenues from Comcast.

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We use the location of the client as the basis of attributing revenues to individual countries. Revenues by geographic region for the six months ended June 30 were as follows (in thousands):

	Six Months Ended June 30,
	2004		2003
North America (principally the United States)	$	193,218	$	213,877
Europe, Middle East and Africa (principally Europe)		38,615		43,544
Asia Pacific		17,988		13,314
Central and South America		10,206		13,558
Total revenues	$	260,027	$	284,293

For revenues generated outside North America, no single country accounts for more than 5% of our total revenues.

See the “Results of Operations - Operating Segments” section below for a detailed discussion of revenues and related changes between periods on a segment basis.

Cost of Processing and Related Services. The cost of processing and related services for the six months ended June 30, 2004 decreased 1.8% to $68.4 million, from $69.7 million for the six months ended June 30, 2003. The decrease between periods is primarily due to a reduction in certain personnel costs, to include the impact of the cost reduction initiatives discussed below, and is also reflective of our continued focus on cost controls in this area. Processing costs as a percentage of related processing revenues were 42.2% (gross margin of 57.8%) for the six months ended June 30, 2004 compared to 38.2% (gross margin of 61.8%) for the six months ended June 30, 2003. The increase in processing costs as a percentage of related revenues is primarily due to the lower Comcast revenues in the first half of 2004.

Cost of Software and Maintenance. The combined cost of software and maintenance for the six months ended June 30, 2004 decreased 6.4% to $33.4 million, from $35.7 million for the six months ended June 30, 2003. The decrease is primarily due to: (i) a reduction in personnel costs between periods, resulting from the cost reduction initiatives discussed above; and (ii) the first half of 2003 having approximately $1 million of amortization related to the acquired Kenan Business client contracts, which became fully amortized in February 2003. These decreases were offset to a certain degree by an increase in other various costs necessary to support our products and clients (e.g., third party software costs, contractors, etc.). The cost of software and maintenance as a percentage of related revenues was 51.9% (gross margin of 48.1%) for the six months ended June 30, 2004 as compared to 52.9% (gross margin of 47.1%) for the six months ended June 30, 2003. As discussed above, fluctuations in the quarterly gross margin for software and maintenance revenues are an inherent characteristic of software companies, which can be impacted by, among other things, the timing of executed contracts in any one quarter.

Cost of Professional Services. The cost of professional services for the six months ended June 30, 2004 decreased 10.4% to $29.8 million, from $33.2 million for the six months ended June 30, 2003. The decrease relates primarily to a reduction in personnel costs, to include the impact of the cost reduction initiatives discussed above. The decrease was offset to a certain degree by an increase in certain project-specific support costs (e.g., contractors and subcontractor costs). The cost of professional services as a percentage of related revenues was 88.7% (gross margin of 11.3%) for the six months ended June 30, 2004, as compared to 96.2% (gross margin of 3.8%) for the six months ended June 30, 2003. The increase in the gross margin measures between periods is due to the 2003 gross margin being negatively impacted by the difficulties we experienced on the Proximus implementation project during 2003, to include recording a loss accrual of $1 million on such contract in the first quarter of 2003.

Gross Margin. The overall gross margin for the six months ended June 30, 2004 decreased 11.9% to $128.4 million from $145.7 million for the six months ended June 30, 2003. The overall gross margin percentage decreased to 49.4% for the six months ended June 30, 2004, compared to 51.2% for the six months ended June 30, 2003. The decrease in the overall gross margin and overall gross margin percentage relate primarily to the decrease in gross margin for processing services primarily due to the lower Comcast revenues.

Research and Development Expense. R&D expense for the six months ended June 30, 2004, decreased 6.8% to $30.2 million, from $32.4 million for the six months ended June 30, 2003. The decrease in the R&D expenditures between periods is primarily due to a reduction of R&D costs, to include a reduction of personnel as a result of the cost reduction initiatives discussed above. As a percentage of total revenues, R&D expense increased to 11.6% for the six months ended June 30, 2004, from 11.4% for the six months ended June 30, 2003. We did not capitalize any internal software development costs during the six months ended June 30, 2004 and 2003.

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During the first six months of 2004, we focused our development and enhancement efforts on:

• various R&D projects for the GSS Division, including the Kenan FX business framework (which is discussed in greater detail in the “Business” section of our 2003 10-K), which was introduced in late 2003, and includes enhancements to the existing versions of the Kenan Business product suite, as well as new modules; and

• enhancements to CCS and related Broadband Division software products to increase the functionalities and features of the products, to include the architectural upgrade to CCS (which is discussed in greater detail in the “Business” section of our 2003 10-K), and Voice over IP functionalities.

Selling, General and Administrative Expense. SG&A expense for the six months ended June 30, 2004, decreased 26.7% to $45.5 million, from $62.0 million for the six months ended June 30, 2003. As a percentage of total revenues, SG&A expense decreased to 17.5% for the six months ended June 30, 2004, from 21.8% for the six months ended June 30, 2003. The decrease in SG&A expense relates primarily to: (i) a decrease in legal fees due to the Comcast arbitration concluding in October 2003 (such costs were approximately $11 million in the first six months of 2003); and to a much lesser degree (ii) a reduction in certain personnel costs, to include the impact of the cost reduction initiatives discussed above. These decreases were offset to a certain degree by $2.5 million of expense recorded in the second quarter of 2004 related to our executive management departures mentioned above, and an increase in stock-based compensation between periods.

Depreciation Expense. Depreciation expense for the six months ended June 30, 2004 and 2003 decreased by 19.9% to $7.2 million, from $8.9 million for the six months ended June 30, 2003. The decrease in depreciation expense relates to the decrease in capital expenditures made during the last twelve months as a result of our focus on cost controls. The capital expenditures during the last six months of 2003 and first six months of 2004 consisted principally of: (i) computer hardware and related equipment; (ii) statement production equipment; and (iii) facilities and internal infrastructure expansion. Depreciation expense for all property and equipment is reflected separately in the aggregate and is not included in the cost of revenues or the other components of operating expenses.

Restructuring Charges. Our restructuring charges relate to the cost reduction initiatives mentioned above. The components of the restructuring charges included in total operating expenses, and the impact (net of related estimated income tax expense) these restructuring charges had on net income and diluted earnings per share, for the six months ended June 30, 2004 and 2003 are as follows (in thousands, except diluted earnings per share):

	Six Months Ended June 30,
	2004		2003
Involuntary employee terminations	$	1,699	$	3,471
Facility abandonments		595		654
All other		2		27
Total restructuring charges	$	2,296	$	4,152
Impact of restructuring charges on results of operations (i.e., have reduced operating results):
Net income	$	1,424	$	2,468
Diluted earnings per share	$	0.02	$	0.05

Operating Expenses/Income. Operating income for the six months ended June 30, 2004, was $43.3 million or 16.6% of total revenues, compared to $38.2 million or 13.4% of total revenues for the six months ended June 30, 2003. The increase in these measures between years relates to the various factors discussed above, and is reflective of our successful efforts to reduce our operating expenses in response to the lower revenues from Comcast.

Interest Expense. Interest expense for the six months ended June 30, 2004, decreased 15.2% to $6.2 million, from $7.4 million for the six months ended June 30, 2003. The weighted-average balance of our long-term debt for the six months ended June 30, 2004 was approximately $218 million, compared to approximately $263 million for the six months ended June 30, 2003. The weighted-average interest rate on our debt borrowings for the six months ended June 30, 2004, including the amortization of deferred financing costs and commitment fees on our revolving credit facility, was 5.4%, compared to 5.3% for the six months ended June 30, 2003.

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Write-off of Deferred Financing Costs. As discussed above, as result of the repayment and termination of the 2002 Credit Facility, we wrote-off unamortized deferred financing costs attributable to the 2002 Credit Facility of $6.6 million during the second quarter of 2004, which had the effect of reducing our diluted earnings per share by $0.08 for the first six months of 2004.

Other, net. Other expense for the six months ended June 30, 2004, was $(1.1) million compared to other income of $2.8 million for the six months ended June 30, 2003. These amounts consist primarily of foreign currency transaction gains and losses. The change between years relates primarily to the change in the foreign currency exchange rates of the U.S. dollar against the Euro and British pound.

Income Tax Provision. For the six months ended June 30, 2004, we recorded an income tax provision of $11.4 million, or an effective income tax rate of approximately 38%, compared to an effective income tax rate of 41% for the six months ended June 30, 2003.

The effective income tax rate for the first six months of 2004 represents our estimate of the effective income tax rate for 2004. The estimate of 38% for 2004 is based on various assumptions, with the primary assumptions related to our estimate of total pretax income, the status of certain income tax contingencies, foreign tax credit utilization, and the amounts and sources of foreign pretax income. The actual effective income tax rate for 2004 could deviate from the 38% estimate based on our actual experiences with these items, as well as others.

Results of Operations - Operating Segments

Operating segment information and corporate overhead costs for the six months ended June 30, 2004 and 2003 are presented in Note 8 to our Financial Statements.

Broadband Division

Total Revenues. Total Broadband Division revenues for the six months ended June 30, 2004 decreased 10.9% to $172.6 million, from $193.7 million for the six months ended June 30, 2003, primarily due to a decrease in processing revenues as discussed in more detail below.

Processing revenues. Processing revenues for the six months ended June 30, 2004 decreased 11.1% to $160.7 million, compared to $180.9 million for the six months ended June 30, 2003. The decrease in processing revenues was due primarily to lower processing revenues from Comcast for the six months ended June 30, 2004.

Segment Operating Expenses and Contribution Margin. Broadband Division operating expenses for the six months ended June 30, 2004 decreased 6.8% to $98.0 million, from $105.1 million for the six months ended June 30, 2003. The decrease in the Broadband Division’s operating expenses is due primarily to the fourth quarter 2003 cost reduction initiative (principally a reduction in personnel costs), and to a lesser degree, a reduction in bad debt expense (primarily related to the sale of the Adelphia pre-bankruptcy accounts receivable). These decreases were offset to a certain degree by an increase in stock-based compensation between periods.

Broadband Division contribution margin decreased 15.8% to $74.7 million (contribution margin percentage of 43.3%) for the six months ended June 30, 2004, from $88.6 million (contribution margin percentage of 45.8%) for the six months ended June 30, 2003. The Broadband Division contribution margin and contribution margin percentage decreased between periods primarily as a result the impact of the lower revenues from Comcast. The relatively small decrease of 2.5% in the contribution margin percentage between periods in light of the significant reduction in revenues is reflective of our successful efforts to reduce our Broadband Division’s operating expenses in response to the lower revenues from Comcast.

Total non-cash charges related to depreciation, amortization (shown as a reduction of processing revenues), and stock-based compensation expense included in the determination of the Broadband Division’s contribution margin for the six months ended June 30, 2004 and 2003 were $10.8 million and $8.2 million, respectively. The increase in non-cash charges is due primarily to the acceleration of amortization related to the Comcast Contract intangible asset as discussed above and an increase in stock-based compensation.

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GSS Division

Total Revenues. Total GSS Division revenues for the six months ended June 30, 2004 decreased 3.5% to $87.4 million, as compared to $90.6 million for the six months ended June 30, 2003, with the decrease due primarily to a decrease in software revenue as discussed in more detail below.

Software Revenue. Software revenue for the six months ended June 30, 2004 decreased 31.0% to $13.9 million, from $20.2 million for the six months ended June 30, 2003. The decrease in software revenues was primarily due to the timing of executed software contracts and related revenue recognition between periods, and general market conditions. As discussed above, fluctuations in revenue from software sales between periods is an inherent characteristic of software companies and is expected to continue in future periods.

Maintenance Revenue. Maintenance revenue for the six months ended June 30, 2004 increased 11.1% to $39.0 million, from $35.1 million for the six months ended June 30, 2003. This increase in maintenance revenues was due primarily to: (i) the renewal of certain maintenance contracts subsequent to the second quarter of 2003; (ii) the resolution of collectibility concerns for certain clients; and (iii) an increase in the installed software license base as a result of new sales since the end of the second quarter of 2003.

Professional Services Revenue. Professional services revenue for the six months ended June 30, 2004 decreased 2.4% to $33.2 million, from $34.0 million for the six months ended June 30, 2003. The decrease in revenues is not considered unusual, and is due primarily to the timing of work performed, and the number of professional service projects in progress during the two periods.

Segment Operating Expenses and Contribution Margin/Loss. GSS Division operating expenses for the six months ended June 30, 2004 decreased 14.4% to $85.3 million, from $99.5 million for the six months ended June 30, 2003. The decrease in GSS Division operating expenses is due primarily to a reduction in various personnel costs, to include the impact of the cost reduction initiatives discussed above.

The GSS Division’s contribution margin for the six months ended June 30, 2004 was $2.2 million (contribution margin percentage of 2.5%) as compared to a contribution loss for the six months ended June 30, 2003 of $(8.9) million (negative contribution margin percentage of 9.9%). The increase in contribution margin between periods is due primarily to the reduction in GSS Division operating expenses between periods, as discussed above.

Total non-cash charges related to depreciation, amortization, and stock-based compensation expense included in the determination of the GSS Division’s contribution margin/loss for the six months ended June 30, 2004 and 2003 were $10.9 million and $10.1 million, respectively. The increase in non-cash charges is due primarily to an increase in stock-based compensation.

Corporate

Corporate Operating Expenses. Corporate overhead expenses for the six months ended June 30, 2004, decreased 16.3% to $31.3 million, from $37.4 million for the six months ended June 30, 2003. The decrease in operating expenses related primarily to a decrease in legal fees as a result of completion of the Comcast arbitration proceedings. We incurred approximately $11 million of legal fees in the six months ended June 30, 2003 in defense of the Comcast litigation, with no comparable amount for 2004. This decrease is offset by $2.5 million of expense in the six months ended June 30, 2004 related to executive management departures as discuss above, and an increase in stock-based compensation.

Liquidity

Cash and Liquidity. As of June 30, 2004, our principal sources of liquidity included cash, cash equivalents, and short-term investments of $131.2 million, compared to $105.4 million as of December 31, 2003. We generally invest our excess cash balances in low-risk cash equivalents and short-term investments to limit our exposure to market risks.

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Historically, we have looked to a revolving credit facility as a potential source of liquidity. For example, up until June 2, 2004, as part of the 2002 Credit Facility, we had a $40 million revolving credit facility available. On June 2, 2004, the 2002 Credit Facility was repaid and terminated, including the revolving credit facility. Based upon our current level of cash, cash equivalents and short-term investments and our ability to generate cash flows from operating activities, we do not deem it critical to our short-term liquidity needs to have a revolving credit facility in place at this time. However, to ensure that we have maximum flexibility in pursuing business opportunities as they present themselves, we are currently in discussions with a select number of large financial institutions to enter into a new revolving credit facility.

Our cash, cash equivalents, and short-term investment balances as of the end of the indicated periods were located in the following geographical regions (in thousands):

	June 30, 2004		March 31, 2004		December 31, 2003
North America (principally the U.S.)	$	61,729	$	55,193	$	50,779
Europe, Middle East and Africa (principally Europe)		52,174		31,034		37,270
Asia Pacific		4,775		5,688		4,453
Central and South America (CALA)		12,523		13,821		12,895
Total cash, cash equivalents and short-term investments	$	131,201	$	105,736	$	105,397

In July 2004, approximately $8 million of cash was transferred from CALA (from our Brazilian subsidiary) to North America in the ordinary course of our operations. We generally have ready access to substantially all of our cash and short-term investment balances, but do face limitations on moving cash out of certain foreign jurisdictions. As of June 30, 2004, the cash, cash equivalents, and short-term investments subject to such limitations were not significant.

Cash Flows From Operating Activities. We calculate our cash flows from operating activities in accordance with generally accepted accounting principles, beginning with net income, adding back the impact of non-cash items (e.g., depreciation, amortization, stock-based compensation expense, etc.), and then factoring in the impact of changes in working capital items. See our 2003 10-K for a description of the primary uses and sources of our cash flows from operating activities.

Our net cash flows provided by (used in) operating activities for the quarterly and year-to-date totals for the indicated periods were as follows (in thousands). These amounts are reflected in our Condensed Consolidated Statements of Cash Flows.

	Quarter Totals			Year-to- Date Totals
2003 (1):
March 31	$	22,222		$	22,222
June 30		37,141			59,363
September 30		39,446			98,809
December 31		(38,456	)		60,353
2004:
March 31 (2)		31,965			31,965
June 30 (3)		40,186			72,151

(1) The negative cash flows from operating activities of $(38.5) million in the fourth quarter of 2003 relates primarily to the approximately $95 million paid to Comcast during the fourth quarter of 2003 as a result of the arbitration ruling. Absent this amount, we generated strong quarterly cash flows from operating activities for 2003, primarily as a result of our improved cash collections of our international accounts receivable during the last two quarters of 2003. This improved collections performance allowed us to pay amounts to Comcast with available corporate funds, without having to draw on our revolving credit facility.

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(2) Cash flows from operations for the first quarter of 2004 reflects the impact of the approximately $25 million arbitration payment made to Comcast during the first quarter of 2004 and the receipt of income tax refunds of approximately $34 million.

(3) Approximately $14 million of the cash flows from operations for the second quarter of 2004 can be attributed to the sale of certain Adelphia pre-bankruptcy accounts receivable to a third party and to higher than normal cash collections of accounts receivable within the GSS Division.

We believe this table illustrates our ability to consistently generate strong quarterly cash flows, and the importance of managing our working capital items, in particular, timely collections of our accounts receivable. Absent any unusual fluctuations in working capital items, we expect our 2004 annual cash flows from operating activities to range from $115 million to $130 million.

The key balance sheet items impacting our cash flows from operating activities are as follows.

Billed Accounts Receivable

Our billed accounts receivable balance by geographic region (based on the location of the client) as of the end of the indicated periods are as follows (in thousands):

	June 30, 2004			March 31, 2004			December 31, 2003
North America (principally the U.S.)	$	88,256		$	98,637		$	101,156
Europe, Middle East and Africa (principally Europe )		25,842			32,424			20,216
Asia Pacific		9,813			13,308			14,287
Central and South America		6,751			4,659			6,177
Total billed accounts receivable		130,662			149,028			141,836
Less allowance for doubtful accounts		(6,942	)		(11,397	)		(11,145	)
Total billed accounts receivable, net of allowance	$	123,720		$	137,631		$	130,691

Management of our billed accounts receivable is one of the primary factors in maintaining strong quarterly cash flows from operating activities. Our billed trade accounts receivable balance includes billings for several non-revenue items (primarily postage, sales tax, and deferred revenue items). As a result, we evaluate our performance in collecting our accounts receivable through our calculation of days billings outstanding (“DBO”) rather than a typical days sales outstanding (“DSO”) calculation. DBO is calculated based on the billing for the period (including non-revenue items) divided by the average monthly net trade accounts receivable balance for the period. Our target range for our DBO is 65-75 days.

Our gross and net billed trade accounts receivable and related allowance for doubtful accounts receivable (“Allowance”), as of the end of the indicated periods, and our DBOs for the quarters then ended, are as follows (in thousands, except DBOs):

Quarter Ended	Gross		Allowance			Net Billed		DBO
2003:
March 31	$	182,573	$	(12,609	)	$	169,964	68
June 30		183,189		(14,093	)		169,096	79
September 30		162,810		(13,728	)		149,082	78
December 31		141,836		(11,145	)		130,691	67
2004:
March 31		149,028		(11,397	)		137,631	66
June 30		130,662		(6,942	)		123,720	66

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The above table illustrates our improvement in managing our accounts receivable since the middle of 2003. The increase in the net billed accounts receivable balance between December 31, 2003 and March 31, 2004 was primarily the result of the timing of new invoices and cash collections. The decrease in both the gross and net billed accounts receivable between March 31, 2004 and June 30, 2004 relates primarily to the sale of the Adelphia pre-bankruptcy accounts receivable to a third party, and the success we experienced collecting accounts receivable within the GSS Division during the second quarter of 2004. The $4.5 million decrease in the Allowance between March 31, 2004 and June 30, 2004 relates primarily to the sale of the aforementioned Adelphia pre-bankruptcy accounts receivable.

We continue to experience success in collecting our accounts receivable in India. As of June 30, 2003, our accounts receivable balance from clients in India was approximately $19 million. As of March 31, 2004, that accounts receivable balance had declined to $7.7 million, and the balance as of June 30, 2004 was $7.0 million. The June 30, 2004 balance includes new invoices of $3.2 million sent during the second quarter of 2004 related to additional products and services purchased by these Indian clients.

Unbilled Accounts Receivable and Other Receivables

Revenue earned and recognized prior to the scheduled billing date of an item is reflected as unbilled accounts receivable. Unbilled accounts receivable are an inherent characteristic of certain software and professional services transactions and may fluctuate between quarters, as these types of transactions typically have scheduled invoicing terms over several quarters, as well as certain milestone billing events. Our unbilled accounts receivable and other receivables as of the end of the indicated periods are as follows (in thousands):

2003:
March 31	$	25,555
June 30		27,093
September 30		25,498
December 31		18,042
2004:
March 31		14,409
June 30		13,756

We have consciously managed the unbilled receivables down since the middle of 2003, and going forward, we are targeting a range comparable to that of the last several quarters. The June 30, 2004 unbilled accounts receivable balance consists primarily of several projects with various milestone and contractual billing dates which have not yet been reached, and unbilled accounts receivable related to billing cutoffs for certain processing services. A substantial percentage of the June 30, 2004 unbilled accounts receivable is scheduled to be billed and collected by the end of the third quarter of 2004. However, there can be no assurances that the fees will be billed and collected within the expected time frames.

Income Taxes Receivable

We were in a domestic net operating loss (“NOL”) position for 2003 as a result of the Comcast $119.6 million arbitration charge discussed above. Our income tax receivable as of December 31, 2003 was $35.1 million, which resulted from our ability to claim a refund for 2003 income taxes already paid, and from our ability to carry back our NOL to prior years. During the first quarter of 2004, we received approximately $34 million of this income tax receivable, and identified additional income tax receivable amounts during our final preparation of our 2003 U.S. Federal income tax return, which was filed in March 2004. As a result, our June 30, 2004, income taxes receivable is $4.4 million, which is expected to be collected within the next 12 months.

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Deferred Revenue

Client payments and billed amounts due from clients in excess of revenue recognized are recorded as deferred revenue. Deferred revenue balances broken out by source of revenue as of the end of the indicated periods are as follows (in thousands):

	June 30, 2004		March 31, 2004		December 31, 2003		September 30, 2003		June 30, 2003		March 31, 2003
Processing	$	7,274	$	7,010	$	6,888	$	6,029	$	6,509	$	3,726
Software		6,784		8,518		5,017		6,406		6,471		5,035
Maintenance		38,336		36,093		34,593		32,701		38,985		38,140
Professional services		9,857		9,645		9,427		12,421		14,994		15,035
Total	$	62,251	$	61,266	$	55,925	$	57,557	$	66,959	$	61,936

The changes in total deferred revenues between December 31, 2003 and June 30, 2004 relates primarily to the timing of invoices for such products and services, and the related revenue recognition for such items. The majority of our maintenance agreements renew in the first and fourth fiscal quarters of the year.

Arbitration Charge Payable

The arbitration charge payable reflected in our Financial Statements relates to the $119.6 million Comcast arbitration award. We paid approximately $95 million of this amount in the fourth quarter of 2003. During the first quarter of 2004, we paid the remaining approximately $25 million.

Investing Activities. Our investing activities typically consist of purchases of property and equipment and investments in client contracts intangible assets, and business acquisitions.

Purchases/Sales of Short-term Investments

We generally invest our excess cash balances in low-risk, short-term investments to limit our exposure to market risks. These short-term investments are readily convertible back into cash. During the first half of 2004, we purchased $6.8 million and sold $4.6 million of short-term investments. We are currently evaluating the possible uses of our excess cash balances and may purchase additional short-term investments in the future.

Property and Equipment/Client Contracts

Our capital expenditures for the six months ended June 30, 2004 and 2003 for property and equipment, and investments in client contracts were as follows (in thousands):

	2004		2003
Property and equipment	$	2,785	$	2,920
Client contracts		1,185		1,030

As of June 30, 2004, we did not have any material commitments for capital expenditures or for investments in client contracts intangible assets. Our budgeted capital expenditures for 2004 are approximately $15 million. However, at this time, we believe our capital expenditures will be substantially less than this amount.

Business and Asset Acquisitions

Historically, our business model has not included a significant amount of business acquisition activity. However, in order to expand our international business, in 2002 we acquired several different businesses and related assets for $270.6 million. This consisted principally of the Kenan Business acquisition in February 2002. See our 2003 10-K for a more detailed discussion of our most recent acquisitions. During the six months ended June 30, 2004, there have been no business acquisitions and $0.9 million of asset acquisitions.

Financing Activities. Our financing activities typically consist of various debt-related transactions, and activities with our common stock.

Long-Term Debt

During the first quarter of 2004, we made the mandatory $30 million prepayment which was due no later than July 2004. This payment was made with the proceeds from our $34 million of income tax refunds received in March 2004.

In June 2004, we completed our offering of the Convertible Debt Securities, as discussed in greater detail in Note 3 to the Financial Statements. We used a portion of the $230 million of proceeds from the Convertible Debt Securities to repay the outstanding balance of $198.9 million and terminate our 2002 Credit Facility. In connection with the issuance of the Convertible Debt Securities, we incurred debt issuance costs of $6.9 million.

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Common Stock

Proceeds from the issuance of common stock relate to our various stock-based compensation plans. The $4.8 million of cash received from the issuance of common stock for the six months ended June 30, 2004 relates primarily to the exercise of stock options in the second quarter of 2004.

Repurchase of Common Stock

During the second quarter of 2004, we repurchased and then cancelled 12,362 shares of common stock pursuant to our stock-based compensation plans.

During the second quarter of 2004, our Board of Directors increased the number of shares we are authorized to repurchase under our stock repurchase program by five million, bringing the total authorized shares under the program to 15.0 million. During the six months ended June 30, 2004 and 2003, we purchased 2.1 million shares (in conjunction with the issuance of the Convertible Debt Securities) and zero shares, respectively, of our common stock. A summary of the activity to date for this repurchase program is as follows (in thousands, except per share amounts):

	2004		2003	2002		2001		2000		1999		Total
Shares repurchased		2,137	—		1,573		3,020		1,090		656		8,476
Total amount paid	$	39,999	—	$	18,920	$	109,460	$	51,088	$	20,242	$	239,709
Weighted-average price per share	$	18.72	—	$	12.02	$	36.25	$	46.87	$	30.88	$	28.28

At June 30, 2004, the total remaining number of shares available for repurchase under the program totaled 6.5 million shares.

Capital Resources

We continue to make investments in client contracts, capital equipment, facilities, and research and development, and at our discretion, may continue to make stock repurchases under our stock repurchase program. In addition, as part of our growth strategy, we are continually evaluating potential businesses and asset acquisitions. We had no significant capital commitments as of June 30, 2004.

The Convertible Debt Securities bear interest at a rate of 2.5% per annum, which is payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2004. The Convertible Debt Securities are callable by us for cash, on or after June 20, 2011. The Convertible Debt Securities can be put back to us by the holders for cash at June 15, 2011, 2016 and 2021, or upon a change of control (as defined), at a repurchase price equal to 100% of the principal amount of the Convertible Debt Securities, plus any accrued interest. As a result, in the near-term, we expect our annual debt service costs related to Convertible Debt Securities to be limited to the annual interest costs of $5.8 million.

We believe that our current cash, cash equivalents, and short-term investments, together with cash expected to be generated from future operating activities, will be sufficient to meet our anticipated cash requirements through at least the next 12 months. In addition, as discussed above, we are currently evaluating whether or not to enter into a new revolving credit agreement as an additional source of capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As discussed in our 2003 10-K, we have historically been exposed to various market risks, including changes in interest rates and foreign currency exchange rates. Market risk is the potential loss arising from adverse changes in market rates and prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

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Interest Rate Risk.

As of June 30, 2004, our long-term debt consists of $230.0 million of 2.5% senior subordinated convertible contingent debt securities due June 15, 2024 (“the Convertible Debt Securities”). The Convertible Debt Securities are convertible into shares of our common stock under specified conditions, unless previously redeemed by us or put back to us by the holders. The interest rate on the Convertible Debt Securities is fixed and provides for semi-annual interest payments of $2.9 million each June 15 and December 15, beginning on December 15, 2004. Commencing with the six-month period beginning June 15, 2011, we will pay contingent interest equal to 0.25% of the average trading price of the Convertible Debt Securities if the average trading price equals 120% or more of the principal amount of the Convertible Debt Securities. We will also be required to pay additional interest of 0.25% to 0.50% per annum on the principal amount of the Convertible Debt Securities if we default on a registration rights agreement associated with the Convertible Debt Securities. With our filing with the SEC of a Form S-3 registration statement on July 16, 2004, we are in compliance with all aspects of the registration rights agreement as of June 30, 2004. See Note 3 to our Financial Statements for additional information related to the Convertible Debt Securities.

Foreign Exchange Rate Risk.

Our approximate percentage of total revenues generated outside the U.S. for the years ended December 31, 2003 and 2002 was 32% and 25%, respectively. Our approximate percentage of total revenues generated outside the U.S. for the six months ended June 30, 2004 and 2003 were 26% and 25%, respectively. Refer to our 2003 10-K for further discussion of our foreign exchange rate risk.

We continue to evaluate whether we should enter into derivative financial instruments for the purposes of managing our foreign currency exchange rate risk, but, as of the date of this filing, we have not entered into such instruments. A hypothetical adverse change of 10% in the June 30, 2004 foreign currency exchange rates would not have a material impact upon our results of operations.

Market Risk Related to Short-term Investments. Our cash and cash equivalents as of June 30, 2004 were $129.0 million. Our cash balances are typically “swept” into overnight money market accounts on a daily basis, and at times, are placed into somewhat longer term cash equivalent instruments. We have minimal market risk for our cash and cash equivalents due to the relatively short maturities of the instruments. Our short-term investments as of June 30, 2004 were $2.2 million. We do not utilize any derivative financial instruments for purposes of managing our market risks related to short-term investments. We generally invest our excess cash balances in low-risk, short-term investments to limit our exposure to market risks.

Currently, we utilize short-term investments as a means to invest our excess cash only in the U.S. The day-to-day management of our cash equivalents and short-term investments in the U.S. is done by the money management branch of one of the largest financial institutions in the U.S. This financial institution manages our cash equivalents and short-term investments based upon strict and formal investment guidelines established by us. Under these guidelines, investments are limited to highly liquid, short-term government and corporate securities that have a credit rating of A-1 / P-1 or better.

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Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures

As required by Rule 13a-15(b), our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), conducted an evaluation as of the end of the period covered by this report of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e). Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Internal Control Over Financial Reporting

As required by Rule 13a-15(d), our management, including the CEO and CFO, also conducted an evaluation of our internal control over financial reporting, as defined by Rule 13a-15(f), to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, the CEO and CFO concluded that there has been no such change during the quarter covered by this report.

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CSG SYSTEMS INTERNATIONAL, INC.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time-to-time, we are involved in litigation relating to claims arising out of its operations in the normal course of business. In the opinion of our management, we are not presently a party to any material pending or threatened legal proceedings.

Item 2. Changes in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities

Refer to Note 3 of our Financial Statements for the information required to be provided under Item 701 of Regulation S-K related to our completion of an offering of $230.0 million of 2.5% senior subordinated convertible contingent debt securities on June 2, 2004.

The following table presents information with respect to purchases of company common stock we made during the three months ended June 30, 2004 by CSG Systems International, Inc. or any “affiliated purchaser” of CSG Systems International, Inc., as defined in Rule 10b-18(a)(3) under the Exchange Act.

Period	Total Number of Shares Purchased2	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan or Programs1
April 1 - April 30	—		—	—	3,661,108
May 1 - May 31	12,362	$	19.09	—	3,661,108
June 1 - June 30	2,136,700	$	18.72	2,136,700	6,524,408
Total	2,149,062	$	18.72	2,136,700

¹ In August 1999, our Board of Directors approved a stock repurchase program which authorized us to purchase up to a total of five million shares of our common stock from time-to-time as business conditions warrant. In September 2001, our Board of Directors amended the program to authorize us to purchase an additional five million shares, for a total of ten million shares. Effective June 2, 2004, our Board of Directors amended the program to authorize us to purchase an additional five million shares, for a total of 15 million shares. The stock repurchase program does not have an expiration date.

² The total number of shares purchased that are not part of the stock repurchase program represents shares purchased and cancelled in connection with minimum tax withholdings as the result of the vesting of restricted stock under our stock-based compensation plans.

Item 3. None

Item 4. Submission of Matters to Vote of Security Holders

(a) The 2004 annual meeting of stockholders of CSG Systems International, Inc. (the “Annual Meeting”) was held on May 28, 2004.

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(b) The following persons were elected as directors at the Annual Meeting:

Class I (expiring in 2007)

Janice I. Obuchowski

The following directors’ term of office continued after the Annual Meeting:

George F. Haddix

Neal C. Hansen

Bernard W. Reznicek

Frank V. Sica

Donald V. Smith

(c) Votes were cast or withheld at the Annual Meeting as follows:

(i) Election of director:

Director	For	Withheld
Janice I. Obuchowski	45,922,121	2,494,551

(ii) Increase the authorized shares under the 1996 Stock Incentive Plan by 500,000:

For	Against	Abstain
39,287,429	906,710	12,664

Item 5. None

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

4.1(1)	Indenture dated as of June 2, 2004 between the Registrant and Deutsche Bank Trust Company Americas relating to the CODES
4.2(1)	Registration Rights Agreement dated as of June 2, 2004 between the Registrant and Lehman Brothers Inc.
10.02	CSG Employee Stock Purchase Plan
10.21A*	Thirty-Sixth and Thirty-Seventh Amendments to CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and Echostar Satellite Corporation
31.01	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.01	Safe Harbor for Forward-Looking Statements Under the Private Securities Litigation Reform Act of 1995 – Certain Cautionary Statements and Risk Factors

(1) Incorporated by reference to the exhibit of the same number to the Registrant’s Registration Statement No. 333-117427 on Form S-3.

* Portions of the exhibit have been omitted pursuant to an application for confidential treatment, and the omitted portions have been filed separately with the Commission.

(b) Reports on Form 8-K

• Form 8-K dated May 20, 2004, under Item 5, Other Events and Regulation FD Disclosure, was filed with the Securities and Exchange Commission and stated that Jack Pogge, President and Chief Operating Officer, will end his employment with the company on May 28, 2004 to coincide with the company’s annual meeting of shareholders and William Fisher, President Global Software Services Division, is resigning from the company effective September 30, 2004. Neal Hansen, CEO and Chairman, will assume the additional role of President and assume leadership of the GSS Division.

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• Form 8-K dated May 25, 2004, under Item 5, Other Events and Regulation FD Disclosure, was filed with the Securities and Exchange Commission which included a press release dated May 25, 2004. The press release announced that the Company intends to offer, subject to market and other conditions, $200 million of Senior Subordinated Convertible Contingent Debt Securities due 2024 in a private placement to qualified institutional buyers pursuant to exemptions from the registration requirements of the Securities Act of 1933.

• Form 8-K dated May 27, 2004, under Item 5, Other Events and Regulation FD Disclosure, was filed with the Securities and Exchange Commission which included a press release dated May 27, 2004. The press release announced the pricing of the Company’s offering of $200 million of 2.5% Senior Subordinated Convertible Contingent Debt Securities due 2024 in a private placement to qualified institutional buyers pursuant to exemptions from the registration requirements of the Securities Act of 1933.

• Form 8-K dated June 2, 2004, under Item 5, Other Events and Regulation FD Disclosure, was filed with the Securities and Exchange Commission which included a press release dated June 2, 2004. The press release announced the closing of the Company’s offering of $200 million of 2.5% Senior Subordinated Convertible Contingent Debt Securities due 2024 in a private placement to qualified institutional buyers pursuant to exemptions from the registration requirements of the Securities Act of 1933. In addition, the initial purchasers of the Securities exercised their right to purchase an additional $30 million aggregate principal amount of the Securities, bringing the total offering to $230 million.

• Form 8-K dated July 27, 2004, under Item 12, Results of Operations and Financial Condition, was filed with the Securities and Exchange Commission which included a press release dated July 27, 2004. The press release announced the Company’s second quarter earnings release.

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SIGNATURES

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

Dated: August 6, 2004

CSG SYSTEMS INTERNATIONAL, INC.

/s/ Neal C. Hansen

Neal C. Hansen

Chairman and Chief Executive Officer

(Principal Executive Officer)

/s/ Peter E. Kalan

Peter E. Kalan

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

/s/ Randy R. Wiese

Randy R. Wiese

Senior Vice President and Chief Accounting Officer

(Principal Accounting Officer)

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CSG SYSTEMS INTERNATIONAL, INC.

INDEX TO EXHIBITS

Exhibit Number	Description
4.1(1)	Indenture dated as of June 2, 2004 between the Registrant and Deutsche Bank Trust Company Americas relating to the CODES
4.2(1)	Registration Rights Agreement dated as of June 2, 2004 between the Registrant and Lehman Brothers Inc.
10.02	CSG Employee Stock Purchase Plan
10.21A*	Thirty-Sixth and Thirty-Seventh Amendments to CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and Echostar Satellite Corporation
31.01	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.01	Safe Harbor for Forward-Looking Statements Under the Private Securities Litigation Reform Act of 1995 – Certain Cautionary Statements and Risk Factors

(1) Incorporated by reference to the exhibit of the same number to the Registrant’s Registration Statement No. 333-117427 on Form S-3.

* Portions of the exhibit have been omitted pursuant to an application for confidential treatment, and the omitted portions have been filed separately with the Commission.

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EX-10.02

Exhibit 10.02

CSG SYSTEMS INTERNATIONAL, INC.

1996 EMPLOYEE STOCK PURCHASE PLAN

ARTICLE I

GENERAL

1.1 Purpose of the Plan. The purpose of the CSG Systems International, Inc. 1996 Employee Stock Purchase Plan (the “Plan”) is to provide Eligible Employees of the Company and its Subsidiaries with a program for the regular purchase of Shares from the Company through periodic payroll deductions and dividend reinvestments, thereby giving Participants the opportunity to acquire a proprietary interest in the success of the Company. The Plan authorizes the sale and issuance of Shares pursuant to sub-plans adopted by the Company and, to the extent permitted under applicable law, by the Chief Executive Officer of the Company or his or her delegate which are designed to achieve desired tax or other objectives in particular locations outside of the United States.

1.2 Definitions. For purposes of the Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise:

(a) “Adjusted Price” means an amount equal to eighty-five percent (85%) of the Fair Market Value on the last trading day of the Plan Month for which an Adjusted Price is being determined.

(b) “Agent” means the independent agent appointed pursuant to Section 1.4.

(c) “Company” means CSG Systems International, Inc., a Delaware corporation.

(d) “Eligible Employee” means a person who is of majority age in his or her domicile state or other applicable jurisdiction and is a full-time or part-time employee of the Company or a Subsidiary, except that a temporary employee and an employee who has been designated by the Board of Directors of the Company as an executive officer of the Company or is otherwise subject to the provisions of Section 16(b) of the Securities Exchange Act of 1934 shall not be eligible to participate in the Plan.

(e) “Fair Market Value” means the last sale price of the Shares as quoted on the Nasdaq National Market System on the trading day for which the

determination is being made, or, in the event that no such sale takes place on such day, the average of the reported closing bid and asked prices on such day, or, if the Shares are listed on a national securities exchange, the last reported sale price on the principal national securities exchange on which the Shares are listed or admitted to trading on the trading day for which the determination is being made, or, if no such reported sale takes place on such day, the average of the closing bid and asked prices on such day on the principal national securities exchange on which the Shares are listed or admitted to trading, or, if the Shares are neither quoted on such National Market System nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices in the over-the-counter market on the day for which the determination is being made as reported through Nasdaq, or, if bid and asked prices for the Shares on such day are not reported through Nasdaq, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in the Shares selected for such purpose by the Chief Executive Officer of the Company, or, if none of the foregoing is applicable, the fair market value of the Shares as determined in good faith by the Chief Executive Officer of the Company in his sole discretion.

(f) “Participant” means an Eligible Employee who has elected to participate in the Plan pursuant to Section 2.1.

(g) “Plan Month” means each calendar month during the term of the Plan.

(h) “Shares” means shares of Common Stock, $0.01 par value per share, of the Company.

(i) “Subsidiary” means a corporation or other entity of which not less than 50% of the voting shares or other voting interests are held by the Company or a Subsidiary, whether or not such corporation or other entity now exists or hereafter is organized or acquired by the Company or a Subsidiary. The plural form of such word is “Subsidiaries”.

1.3 Effective Date and Term of Plan. The Plan shall become effective on September 1, 1996. The Plan shall remain in effect indefinitely, subject to termination by the Board of Directors of the Company as of the end of any Plan Month and subject to the provisions of Section 1.5.

1.4 Appointment and Removal of the Agent. The Company shall appoint an independent bank, trust company, brokerage firm, or other financial institution to administer the Plan (including but not limited to the establishment of such procedures as reasonably may be necessary to accomplish such administration in a manner consistent with the purposes of the Plan), keep the records of the Plan reflecting the interests of Participants, hold Shares acquired under the Plan on behalf of Participants, and generally act as the agent of Participants in the manner and to the extent provided in the Plan. The Agent may resign at any time by giving written notice of such

2

resignation to the Company at least thirty (30) days prior to the effective date of such resignation. The Company may remove the Agent at any time by giving written notice of such removal to the Agent at least thirty (30) days prior to the effective date of such removal. In the event of the resignation or removal of the Agent, the Company promptly shall appoint a new Agent. The Company shall provide the names and addresses of all Participants to the Agent to facilitate direct communications by the Agent to the Participants.

1.5 Shares Available Under the Plan. The maximum number of shares which the Company may issue under the Plan on and after the date of the 2004 annual meeting of stockholders of the Company is the sum of (a) the number of Shares which were available for issuance under the Plan as of the day immediately preceding the date of the 2004 annual meeting of stockholders of the Company plus (b) 500,000 Shares; and the Company shall reserve and keep available for issuance under the Plan such maximum number of shares. In the event of an increase in the number of outstanding Shares by reason of a stock dividend or stock split, the number of Shares then remaining available for issuance under the Plan shall be increased proportionately.

1.6 Action by the Company. Whenever an action is required by or permitted to the Company under the Plan, unless otherwise expressly provided by the Plan or the Board of Directors of the Company, such action shall be taken by the Chief Executive Officer of the Company or his or her delegate.

ARTICLE II

PLAN PARTICIPATION

2.1 Enrollment and Payroll Deductions. Participation in the Plan is voluntary. An Eligible Employee may elect to participate in the Plan by completing and delivering to the Company enrollment and payroll deduction authorization forms prescribed by the Company authorizing periodic payroll deductions by the Company from such Eligible Employee’s wages of the periodic amount specified by such Eligible Employee. Payroll deductions with respect to an Eligible Employee shall commence as soon as administratively practicable but not later than the first payroll date in the Plan Month next following the Plan Month in which the enrollment and payroll deduction authorization forms of such Eligible Employee are received and accepted by the Company. If a Participant’s wages are paid on a biweekly schedule, then the biweekly payroll deduction amount specified by such Participant in his or her payroll deduction authorization form must be a minimum of $10.00 and may not exceed $500.00; in the case of Participants whose compensation is paid in a currency other than United States dollars, the applicable limits shall be the approximate equivalents of such minimum and maximum amounts fixed from time to time by the Company in administratively convenient units of such other currency. If a Participant’s wages are paid on a schedule other than biweekly, then the periodic payroll deductions referred to in this Section 2.1 shall be made with respect to such Participant in accordance with such schedule as reflected on such Participant’s payroll deduction authorization form; and the Company shall proportionately adjust the minimum and maximum permitted payroll deductions applicable to such

3

Participant. A Participant may change his or her periodic payroll deduction amount by written notice to the Company in such form as the Company may specify; such change shall be effective as soon as administratively practicable but not later than the first payroll date in the Plan Month next following the Plan Month in which the change form is received and accepted by the Company. A Participant may cease participation in the Plan as of any payroll date by giving written notice of such cessation to the Company in such form as the Company may specify at least fifteen (15) days prior to such payroll date, in which event such Participant may not re-enter the Plan for ninety (90) days after the effective date of such cessation of participation in the Plan.

2.2 Issuance of Shares. On the last business day of each Plan Month, the Company shall notify the Agent in written or electronic form of the aggregate United States dollar amount withheld for each Participant during such Plan Month and shall instruct the transfer agent for the Shares to issue to the Agent (in such form or nominee name as the Agent may direct) as an original issuance of authorized but unissued Shares or as the reissuance of Shares held by the Company as treasury shares (and shall provide such transfer agent with such additional documentation as may be required for such purpose) that number of full Shares which is equal to (a) the aggregate United States dollar amount withheld pursuant to the Plan for all Participants during such Plan Month divided by (b) the Adjusted Price. Upon the issuance or reissuance of such number of full Shares, the amount referred to in clause (a) of the preceding sentence shall be deemed to have been paid to and received by the Company, and shall be appropriately reflected on the books of the Company, as the consideration for such number of newly issued or reissued full Shares; however, if the Agent’s record-keeping systems permit, a fractional share resulting from the calculation referred to in the preceding sentence may be taken into account in the Plan records maintained by the Agent. For purposes of determining the United States dollar amount withheld from the wages of Participants whose compensation is paid in a currency other than United States dollars, the amount withheld in such other currency shall be converted to United States dollars on the basis of the applicable exchange rate quoted in The Wall Street Journal for the next-to-the-last business day of the Plan Month involved.

2.3 Allocation of Shares. The Agent shall allocate the Shares acquired by the Agent pursuant to Section 2.2 for a particular Plan Month among those Participants whose payroll deductions provided the funds used to acquire such Shares. Such allocation shall be made in the Plan records maintained by the Agent in proportion to the United States dollar amount of funds so provided by each Participant and, if fractional shares are involved, shall be made to three decimal places. Subject to the provisions of Section 2.5, the Agent shall hold in its name or the name of its nominee, for the benefit of all Participants, all shares acquired under the Plan. At least annually, and at such other times as the Agent may determine to be appropriate, the Agent shall send a statement directly to each Participant, showing with respect to such Participant acquisitions of Shares, dividends credited, sales or distributions of Shares, and any applicable commissions or fees charged to such Participant during the period covered by such statement.

2.4 Dividends and Distributions. Dividends and other distributions by the Company with respect to Shares held by the Agent under the Plan shall be allocated or otherwise dealt with by the Agent as follows:

4

(a) Cash Dividends. Cash dividends received by the Agent on Shares allocated to Participants’ Plan accounts shall be used by the Agent to acquire additional Shares for such Participants by remitting the aggregate amount of such cash dividends to the Company to be added to the amount applied to the next acquisition of Shares from the Company pursuant to Section 2.2.

(b) Stock Dividends and Stock Splits. Stock dividends and stock splits shall be credited to Participants having Shares allocated to their Plan accounts to the extent that such stock dividends and stock splits are attributable to such Shares.

(c) Stock Rights. If the Company makes available to its stockholders generally rights to subscribe to additional Shares or other securities, such rights accruing on Shares held by the Agent under the Plan shall be sold by the Agent and the net proceeds of such sale shall be applied to the acquisition from the Company of additional Shares for Participants in the same manner as cash dividends are applied.

2.5 Issuance of Stock Certificates; Sales of Shares. Upon the request of a Participant, the Agent will cause a stock certificate for some or all of the full Shares in such Participant’s Plan account to be issued and delivered to such Participant as promptly as practicable. Upon the issuance of such certificate, such Participant’s Plan account will be appropriately debited. Upon the request of a Participant, the Agent will sell for the account of such Participant any or all of the Shares in such Participant’s Plan account and shall remit the proceeds of such sale, net of applicable brokerage commissions (if any), to such Participant as promptly as practicable. If a Participant requests that sale proceeds be remitted to such Participant in a currency other than United States dollars, then the requested currency exchange will be made at the prevailing rate for transactions of the size involved as determined in the sole discretion of the Agent or its designee for such purpose, and such Participant will bear all expenses incurred by the Agent in effecting such currency exchange. Requests by Participants pursuant to this Section 2.5 may be made in writing or by such electronic or other means as the Agent may provide.

2.6 Stockholder Rights. A Participant will have the right to vote the Shares in his or her Plan account in accordance with the Agent’s customary procedures for the voting of shares held in “street name” or other similar types of accounts. A Participant shall have no rights as a stockholder of the Company with respect to any Shares held in such Participant’s Plan account until a certificate for such Shares has been issued in the name of such Participant and reflected in the stockholder records of the Company.

2.7 Expenses. The Company will bear all of the expenses of administering the Plan, including but not limited to the Agent’s fees and any transfer taxes and expenses of transferring Shares to Participants. However, a Participant will bear any expenses incurred by the Agent in selling Shares held for such Participant under the Plan, including but not limited to applicable brokerage commissions and currency exchange expenses.

5

2.8 Termination of Eligibility. If a Participant ceases to be eligible to participate in the Plan for any reason, including but not limited to the termination of such Participant’s employment by the Company or a Subsidiary, then such Participant may no longer participate in the Plan through payroll deductions. If a Participant ceases to be eligible to participate in the Plan for a reason other than such Participant’s death, then the Agent shall maintain such Participant’s Plan account pending the Agent’s receipt of instructions either from the Participant or from the Company as to the sale of or the issuance of a stock certificate for the Shares in such Plan account in accordance with Section 2.5 If a Participant dies, then the Agent shall maintain the deceased Participant’s Plan account pending the Agent’s receipt of instructions as to the disposition of such account from the duly authorized representative of the deceased Participant’s estate.

2.9 Termination of Plan. If the Company terminates the Plan, then the Agent shall cause a stock certificate for the full Shares in a Participant’s Plan account to be issued and delivered to such Participant as promptly as practicable and shall sell for the account of such Participant any fractional Shares in such Participant’s Plan account and remit the proceeds of such sale, net of applicable brokerage commissions (if any), to such Participant as promptly as practicable. However, in its discretion, the Company may provide additional alternatives for the disposition of the Shares in a Participant’s Plan account upon the termination of the Plan.

2.10 Rules for Foreign Jurisdictions. Notwithstanding any other provisions of the Plan to the contrary, the Company and, to the extent permitted under applicable law, the Chief Executive Officer of the Company or his or her delegate may, in its or his or her sole discretion, amend or vary the terms of the Plan in order to conform such terms to the requirements of each non-U.S. jurisdiction where a Subsidiary is located or to meet the goals and objectives of the Plan with respect to the Eligible Employees employed in such non-U.S. jurisdiction. Each of the Company, and to the extent permitted under applicable law, the Chief Executive Officer of the Company or his or her delegate may, where it or he or she deems appropriate in its or his or her sole discretion, establish one or more sub-plans for such purposes. The Company and, to the extent permitted under applicable law, the Chief Executive Officer of the Company or his or her delegate may, in its or his or her sole discretion, establish administrative rules and procedures to facilitate the operation of the Plan in such non-U.S. jurisdictions. For purposes of clarity, the terms of the Plan which vary for a particular non-U.S. jurisdiction shall be reflected in a written addendum to the Plan for such non-U.S. jurisdiction.

ARTICLE III

MISCELLANEOUS

3.1 Interpretation. The Chief Executive Officer of the Company or his or her delegate shall have the authority to establish rules and regulations for the operation of the Plan, to interpret the Plan, and to decide any and all questions which may arise in connection with the Plan. Any delegate of the Chief Executive Officer of the Company for purposes of the Plan shall not make any discretionary decision which pertains directly to such delegate as a Participant.

6

3.2 Nonassignability. No Participant shall have any right to sell, assign, transfer, pledge, or otherwise encumber or convey such Participant’s Plan account or any Shares credited to such account, or any part thereof, prior to such Participant’s actual receipt of a certificate for such Shares or the proceeds of the sale of such Shares. No Plan account shall be subject to attachment, garnishment, or seizure for the payment of any debts, judgments, alimony, child support, or separate maintenance owed by a Participant nor be transferable by operation of law in the event of a Participant’s bankruptcy or insolvency.

3.3 Employment Rights. An Eligible Employee’s election to participate in the Plan and the Company’s acceptance of such Eligible Employee’s enrollment in the Plan shall not be deemed to constitute a contract of employment between such Eligible Employee and the Company or any Subsidiary. No provision of the Plan shall be deemed to give any Participant any right (i) to be retained in the employ or other service of the Company or any Subsidiary for any specific length of time, (ii) to interfere with the right of the Company or any Subsidiary to discipline or discharge the Participant at any time, (iii) to hold any particular position or responsibility with the Company or any Subsidiary, or (iv) to receive any particular compensation from the Company or any Subsidiary.

3.4 Withholding; Payroll Taxes. To the extent required by applicable laws and regulations in effect at the time payroll deductions pursuant to the Plan are made from a Participant’s wages, the Company or the Subsidiary by whom such Participant’s wages are paid shall withhold from the remaining portion of such wages any taxes or other obligations required to be withheld from such wages by federal, state, local, or other laws by reason of such payroll deductions and the purchase of Shares under the Plan for the benefit of such Participant at a price less than Fair Market Value.

3.5 Transfer Upon Death. The Plan account of a Participant may be transferred by will or the laws of descent and distribution upon the death of such Participant, but the Company may require any transferee of a deceased Participant’s Plan account to elect with respect to the Shares in such transferred Plan account either to receive a certificate for all full Shares and the net sale proceeds of any fractional Share or to sell all of the Shares and receive the net proceeds of such sale.

3.6 Amendment. The Board of Directors of the Company may amend the Plan at any time in whole or in part without terminating the Plan; however, no amendment of the Plan shall decrease the number of Shares already credited to the Plan accounts of Participants. If the Board of Directors of the Company changes the discount from Fair Market Value at which Shares are to be acquired under the Plan, then the Company shall not implement such change until the then Participants have been notified of such change and have been given a reasonable opportunity to cease participation in the Plan.

3.7 Plan Year. The plan year shall be the calendar year, except that the first plan year shall begin on the effective date of the Plan and end on December 31, 1996.

3.8 Securities Law Compliance. The obligation of the Company to sell and issue Shares pursuant to the Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance, or sale of such Shares and to the satisfaction of any legal preconditions to such issuance or sale.

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3.9 Governing Law. The provisions of the Plan shall be governed by and construed according to the laws of the State of Delaware.

3.10 Number and Gender. Unless the context otherwise requires, for all purposes of the Plan, words in the singular include their plural, words in the plural include their singular, and words of one gender include the other genders.

3.11 Successors. The provisions of the plan shall be binding upon and inure to the benefit of the Company, each Participant, and their respective heirs, personal representatives, successors, and permitted assigns (if any).

3.12 Section Titles. The titles of the various sections of the Plan are for convenient reference only and shall not be considered in the interpretation of the Company.

8

EX-10.21A

EXHIBIT 10.21A

Pages where confidential treatment has been requested are stamped “Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission,” and places where information has been redacted have been marked with (***).

THIRTY-SIXTH AMENDMENT

TO

CSG MASTER SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT

BETWEEN

CSG SYSTEMS, INC.

AND

ECHOSTAR SATELLITE L.L.C.

This Thirty-Sixth Amendment (the “Amendment”) is made by and between CSG Systems, Inc., a Delaware corporation (“CSG”) and EchoStar Satellite L.L.C. (“Customer”). CSG and Customer entered into a certain CSG Master Subscriber Management System Agreement dated April 1, 1999, as amended, (the “Agreement”), and now desire to amend the Agreement in accordance with the terms and conditions set forth in this Amendment. If the terms and conditions set forth in this Amendment shall be in conflict with the Agreement, the terms and conditions of this Amendment shall control. Any terms in initial capital letters or all capital letters used as a defined term but not defined in this Amendment shall have the meaning set forth in the Agreement. Upon execution of this Amendment by the parties, any subsequent reference to the Agreement between the parties shall mean the Agreement as amended by this Amendment. Except as amended by this Amendment, the terms and conditions set forth in the Agreement shall continue in full force and effect according to their terms.

CSG and Customer agree as follows:

1. Pursuant to the Twenty-Sixth Amendment (as modified by the Thirty-Fifth Amendment), the parties extended the Increased Capacity Term to the existing LPAR through March 31, 2004. Customer desires, and CSG agrees to provide an increase in the capacity in accordance with the chart set forth below (“Customer Additional Capacity”) for the remainder of 2004. As a point of clarification, the increase of *** ******* *** ****** **** (***) MIPS is not over and above the *** ******* ********** (***) MIPS provided in April 2004. Therefore, for the fees set forth in Paragraph 2 below, Customer desires and CSG agrees to extend the Increased Capacity Term to the existing LPAR as defined below. In the event Customer wishes to terminate the additional capacity prior to December 31, 2004, Customer shall provide CSG with ninety (90) days prior written notice. Upon receipt of Customer’s written notice, CSG shall use commercially reasonable efforts to re-deploy the additional capacity during the remainder of the Increased Capacity Term. If CSG is able to re-deploy the additional capacity, Customer shall not be responsible for the remaining monthly fees (set forth in Paragraph 2 below) associated with the additional capacity. However, if CSG is unable to re-deploy the additional capacity, Customer agrees to pay the remaining monthly fees through the expiration of the Increased Capacity Term. During the Increased Capacity Term, Customer agrees to use commercially reasonable efforts to maintain a ninety five percent (95%) or lower usage of the available CPU. CSG shall provide additional capacity (“CSG Additional Capacity”) estimated to maintain Customer’s ****** *********** (***) usage of the available CPU at no additional cost to Customer in accordance with the chart set forth below. The parties further agree that in the event the number of MIPS needed to maintain ****** **** ******* (***) usage of the available CPU does not require full utilization of the MIPS provided by the CSG Additional Capacity, CSG may, in its sole discretion, re-deploy any spare MIPS from the CSG Additional Capacity. In the event Customer wishes to maintain or increase the capacity, the parties shall negotiate in good faith and execute such agreement in writing.

Customer Additional Capacity for 2004:

April	*** MIPS
May – December	*** MIPS

CSG Additional Capacity for 2004

June	*** MIPS
July	*** MIPS
August	*** MIPS
September	*** MIPS
October	*** MIPS
November	*** MIPS
December	*** MIPS

#2047134

08/03/04

CONFIDENTIAL AND PROPRIETARY INFORMATION - FOR USE BY AUTHORIZED EMPLOYEES OF THE PARTIES HERETO ONLY AND IS NOT

FOR GENERAL DISTRIBUTION WITHIN OR OUTSIDE THEIR RESPECTIVE COMPANIES

“Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission.”

2. Customer agrees to pay the following fees for the increase in the existing capacity:

April 2004	$***
May 2004	$***
June – December 2004	$***/month

3. Customer desires to dedicate additional MIPS to its testing (“IOT”) environment. Therefore, for the fees set forth below, CSG shall provide an additional *** MIPS per month from June, 2004 through September, 2004. Customer shall provide CSG sixty (60) days written notice of its intent to continue purchasing MIPS for its IOT environment beyond September 31, 2004. In addition, Customer may provide CSG ninety (90) days written notice of its intent to decrease up to *** MIPS allocated to either (a) Customer’s IOT environment, or (b) Customer’s LPAR after September 31, 2004, effective on the first day of a calendar month. Customer may also elect in writing to move a portion of the MIPS from the Customer Additional Capacity to Customer’s IOT environment, provided, however, Customer shall provide thirty (30) days prior written notice and such election may not occur more than once.

Fees for IOT Capacity (*** MIPS/month):

June 2004 – December 2004 $***/month

IN WITNESS WHEREOF, the parties execute this Amendment on the date last signed below.

CSG SYSTEMS, INC. (“CSG”)		ECHOSTAR SATELLITE L.L.C. (“CUSTOMER”)
By:	/s/ Edward C. Nafus	By:	/s/ Dr.-Ing. Germar Schaefer
Name:	Edward C. Nafus	Name:	Dr.-Ing. Germar Schaefer
Title:	Pres, BBS	Title:	SVP, Chief Information Officer
Date:	6/15/04	Date:	6/14/04

#2047134

08/03/04

CONFIDENTIAL AND PROPRIETARY INFORMATION - FOR USE BY AUTHORIZED EMPLOYEES OF THE PARTIES HERETO ONLY AND IS NOT

FOR GENERAL DISTRIBUTION WITHIN OR OUTSIDE THEIR RESPECTIVE COMPANIES

“Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission.”

THIRTY-SEVENTH AMENDMENT

TO

CSG MASTER SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT

BETWEEN

CSG SYSTEMS, INC.

AND

ECHOSTAR SATELLITE L.L.C.

This Thirty-Seventh Amendment (the “Amendment”) is made by and between CSG Systems, Inc., a Delaware corporation (“CSG”) and EchoStar Satellite L.L.C. (“Customer”). CSG and Customer entered into a certain CSG Master Subscriber Management System Agreement dated April 1, 1999, as amended, (the “Agreement”), and now desire to amend the Agreement in accordance with the terms and conditions set forth in this Amendment. If the terms and conditions set forth in this Amendment shall be in conflict with the Agreement, the terms and conditions of this Amendment shall control. Any terms in initial capital letters or all capital letters used as a defined term but not defined in this Amendment shall have the meaning set forth in the Agreement. Upon execution of this Amendment by the parties, any subsequent reference to the Agreement between the parties shall mean the Agreement as amended by this Amendment. Except as amended by this Amendment, the terms and conditions set forth in the Agreement shall continue in full force and effect according to their terms.

CSG and Customer agree as follows:

Customer’s Monthly On-Line Allowance Per Subscriber set forth in Schedule F (as amended by the Thirtieth Amendment, paragraph eight (8), section c) shall be amended to increase the number of Memos stored on-line from *** to *** per active subscriber.

IN WITNESS WHEREOF, the parties execute this Amendment on the date last signed below.

CSG SYSTEMS, INC. (“CSG”)		ECHOSTAR SATELLITE L.L.C. (“CUSTOMER”)
By:	/s/ Edward C. Nafus	By:	/s/ Dr.-Ing. Germar Schaefer
Name:	Edward C. Nafus	Name:	Dr.-Ing. Germar Schaefer
Title:	Pres, BBS	Title:	SVP, Chief Information Officer
Date:	6/3/04	Date:	5/28/04

#205-0577

08/03/04

CONFIDENTIAL AND PROPRIETARY INFORMATION - FOR USE BY AUTHORIZED EMPLOYEES OF THE PARTIES HERETO ONLY AND IS NOT

FOR GENERAL DISTRIBUTION WITHIN OR OUTSIDE THEIR RESPECTIVE COMPANIES

EX-31.01

Exhibit 31.01

CERTIFICATIONS PURSUANT TO

SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Neal C. Hansen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CSG Systems International, Inc.;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

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

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986]

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal controls over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2004	/s/ Neal C. Hansen
	Neal C. Hansen
	Chairman and Chief Executive Officer

EX-31.02

Exhibit 31.02

CERTIFICATIONS PURSUANT TO

SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Peter E. Kalan, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CSG Systems International, Inc.;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

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

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986]

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal controls over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2004	/s/ Peter E. Kalan
	Peter E. Kalan
	Executive Vice President and Chief Financial Officer

EX-32.01

Exhibit 32.01

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The certification set forth below is being submitted in connection with the Quarterly Report on Form 10-Q (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

Neal C. Hansen, the Chief Executive Officer and Peter E. Kalan, the Chief Financial Officer of CSG Systems International Inc., each certifies that, to the best of his knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of CSG Systems International, Inc.

August 6, 2004

/s/ Neal C. Hansen

Neal C. Hansen

Chairman and Chief Executive Officer

August 6, 2004

/s/ Peter E. Kalan

Peter E. Kalan

Executive Vice President and Chief Financial Officer

EX-99.01

Exhibit 99.01

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

CERTAIN CAUTIONARY STATEMENTS AND

RISK FACTORS

CSG Systems International, Inc. and its subsidiaries (collectively, the “Company” or forms of the pronoun “we”) or their representatives from time-to-time may make or may have made certain forward-looking statements, whether orally or in writing, including without limitation, any such statements made or to be made in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contained in our various SEC filings or orally in conferences or teleconferences. We wish to ensure that such statements are accompanied by meaningful cautionary statements, so as to ensure to the fullest extent possible the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995.

ACCORDINGLY, THE FORWARD-LOOKING STATEMENTS ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO AND ARE ACCOMPANIED BY THE FOLLOWING MEANINGFUL CAUTIONARY STATEMENTS IDENTIFYING CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.

This list of factors is likely not exhaustive. We operate in a rapidly changing and evolving business involving the converging global telecommunications industry (e.g., cable television, DBS, wireline and wireless telephony, Internet and high speed data, etc.), and new risk factors will likely emerge. Management cannot predict all of the important risk factors, nor can it assess the impact, if any, of such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those in any forward-looking statements.

ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT FORWARD-LOOKING STATEMENTS WILL BE ACCURATE INDICATORS OF FUTURE ACTUAL RESULTS, AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER FROM RESULTS PROJECTED IN FORWARD-LOOKING STATEMENTS AND THAT SUCH DIFFERENCES MAY BE MATERIAL.

WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES FROM COMCAST AND ECHOSTAR, AND THE LOSS OF THEIR BUSINESS WOULD MATERIALLY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We generate approximately one-third of our total consolidated revenues from our two largest clients, Comcast and Echostar. We expect to continue to generate a significant percentage of our future revenues from Comcast and Echostar. Concentration of a large percentage of total revenues with a limited number of clients imposes certain risks to our business. Our financial condition and results of operations (including possible impairment, or significant acceleration of the amortization of client contracts intangible assets) could be materially adversely affected by:

• Comcast’s or Echostar’s termination of or failure to renew their contracts with us, in whole or in part for any reason; or

• a significant reduction in the number of Comcast or Echostar customers processed on our system.

We recently renewed our contract with Echostar. However, such contract expires in 2006, and there is no assurance that such contract will be renewed on terms satisfactory to us, or at all.

Our industry is highly competitive, and the possibility that a major client may move all or a portion of its customers to a competitor has increased. While our clients may incur costs in switching to our competitors, they may do so for a variety of reasons, including if we do not maintain favorable relationships, do not provide satisfactory services and products, or for reasons associated with price. The Comcast Contract contains provisions establishing annual financial minimums for 2004, 2005 and 2006, which we currently expect to exceed based on the current number of

customers on our system. Under the terms of the Comcast Contract, which does not include exclusivity for us, Comcast could remove one or more regions from or significantly reduce the number of customers on our system without automatically incurring a financial penalty. We have been working, particularly since the arbitration ruling with Comcast, towards creating a favorable relationship with Comcast and the different Comcast regions we service. However, there can be no assurance that we can achieve or maintain that relationship with Comcast or that Comcast will not move customers for any particular region to a competitor’s system.

OUR BROADBAND DIVISION, WHICH ACCOUNTS FOR A SUBSTANTIAL PORTION OF OUR REVENUES, IS DEPENDENT ON THE U.S. CABLE TELEVISION AND SATELLITE INDUSTRIES.

The Broadband Division generates its revenues by providing products and services to the U.S. and Canadian cable television and satellite industries. Although our dependence on these industries has been lessened by earning additional revenues outside the U.S. as a result of the Kenan Business acquisition, revenues from the U.S. cable television and satellite industries are still expected to provide a large percentage of our, and substantially all of the Broadband Division’s, total revenues in the foreseeable future. A decrease in the number of customers served by our clients, loss of business due to non-renewal of client contracts, industry and client consolidations, movement of customers from our systems to another vendor’s system as a result of regionalization strategies by our clients, and/or changing consumer demand for services could have a material adverse effect on our results of operations. There can be no assurance that new entrants into the video market will become our clients. Also, there can be no assurance that video providers will be successful in expanding into other segments of the converging telecommunications industry. Even if major forays into new markets are successful, we may be unable to meet the special billing and customer care needs of that market.

VARIABILITY OF OUR QUARTERLY REVENUES AND OUR FAILURE TO MEET REVENUE AND EARNINGS EXPECTATIONS WOULD NEGATIVELY AFFECT THE MARKET PRICE FOR OUR COMMON STOCK AND OUR CONVERTIBLE DEBT SECURITIES.

Variability in quarterly revenues and operating results are inherent characteristics of the software and professional services industries. Common causes of a failure to meet revenue and operating expectations in these industries include, among others:

• the inability to close and/or recognize revenue on one or more material software transactions that may have been anticipated by management in any particular period;

• the inability to timely renew one or more material software maintenance agreements, or renewing such agreements at lower rates than anticipated; and

• the inability to timely and successfully complete an implementation project and meet client expectations, due to factors discussed in greater detail below.

We expect software license, software maintenance services, and professional services revenues to become an increasingly larger percentage of our total revenues in the future. Consequently, as our total revenues grow, so too does the risk associated with meeting financial expectations for revenues derived from our software licenses, software maintenance services, and professional services offerings. As a result, there is a proportionately increased likelihood that we may fail to meet revenue and earnings expectations of the analyst community. Should we fail to meet analyst expectations, by even a relatively small amount, it would most likely have a disproportionately negative impact upon the market price for our common stock and for our Convertible Debt Securities.

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WE FACE SIGNIFICANT COMPETITION IN OUR INDUSTRY.

The market for our products and services is highly competitive. We directly compete with both independent providers of products and services and in-house systems developed by existing and potential clients. In addition, some independent providers are entering into strategic alliances with other independent providers, resulting in either new competitors, or competitors with greater resources. Many of our current and potential competitors have significantly greater financial, marketing, technical, and other competitive resources than our company, many with significant and well-established international operations. There can be no assurance that we will be able to compete successfully with our existing competitors or with new competitors.

OUR INABILITY TO TIMELY AND SUCCESSFULLY COMPLETE A COMPLEX IMPLEMENTATION PROJECT AND MEET CLIENT EXPECTATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Our GSS Division provides a variety of implementation services in conjunction with its software arrangements. The nature of the efforts required to complete the implementations can range from relatively short and noncomplex projects to long and complex projects. These implementation projects typically range from six to twelve months in length, but can be longer or shorter depending upon the specifics of the project. The length and complexity of an individual project is dependent upon many factors including, but not limited to, the following:

• the level of software customization, if any, required in the implementation;

• the complexity of the client’s business, and the client’s intended use of our products and services to address their business needs;

• whether the project includes multiple software product implementations or services;

• the extent of efforts required to integrate our products with the client’s other computer systems and business processes;

• the amount and type of data that is required to be converted from the client’s old application system to the newly implemented system;

• the geographic location of the implementation project;

• whether the arrangement includes additional vendors participating in the overall project, including, but not limited to, prime and subcontractor relationships with our company; and

• the responsibility we have assumed for the overall project completion. For example, from time to time we may assume a prime contractor (or prime integrator) role in a project in addition to our software implementation responsibilities. Prime contractor roles are inherently more difficult and/or complex as we take on the additional responsibility of managing other vendors as part of the project.

Lengthy and/or complex projects carry a greater degree of business risk than those projects that are short and/or noncomplex in nature. Our inability to timely and successfully complete a project and meet client expectations could have a material adverse effect on our financial condition and results of operations by impacting the:

• amount and timing of revenue recognition. We generally account for our software implementation projects using the percentage-of-completion method of accounting. We apply various judgments and estimates in following this accounting method, the primary one being the determination of the estimated effort required to complete a project. Significant increases between quarters in the total estimated effort required to complete a project accounted for in this manner can result in a reduction in anticipated quarterly revenues, and possibly, the reversal of previously recognized revenue;

• overall profitability of a project. Many of our projects are priced on a fixed-fee basis or the amount of fees that can be billed on a time-and-materials basis is capped. As a result, unexpected costs and/or delays can result in the projects being less profitable than originally anticipated or even unprofitable (i.e., a loss contract). In addition, our products may be considered mission critical customer management systems by our clients. As a result, an arrangement may include penalties and/or potential damages for our failure to perform under the agreed-upon terms of the arrangement; and/or

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• timing of invoicing and/or collection of arrangement fees. Our ability to invoice and collect arrangement fees may be dependent upon our meeting certain contractual milestones, or may be dependent on the overall project status in certain situations in which we act as a subcontractor to another vendor on a project. As a result, the status of and/or delays in a project can impact the timing of invoicing and collection of our arrangement fees.

OUR BUSINESS IS DEPENDENT UPON THE ECONOMIC CONDITION OF THE GLOBAL TELECOMMUNICATIONS INDUSTRY.

Beginning in early 2001, the economic state of the global telecommunications industry deteriorated. This trend continued into 2003. During this time frame, many companies operating within this industry publicly reported decreased revenues and earnings, and several companies filed for bankruptcy protection. Most telecommunications companies reduced their operating costs and capital expenditures to cope with the market condition during these times. Since our clients operate within this industry sector, the economic state of this industry directly impacts our business, potentially limiting the amount of money spent on customer care and billing products and services, as well as increasing the likelihood of uncollectible accounts receivable and lengthening the cash collection cycle.

Recent public reports, as well as our recent experiences with our client base, are providing signs of economic improvement within this industry sector. However, the public reports are mixed as to whether the recovery is real and whether the recovery is sustainable. If a turnaround in the market conditions occurs, it will likely be slow, and a full, sustained recovery, if it occurs at all, may take several years. Since a significant amount of our GSS Division’s business comes from international sources within this industry sector, the pace at which the market recovers presents a significant risk to our ability to timely collect our accounts receivable, maintain profitability, and grow this segment of our business.

OUR INTERNATIONAL OPERATIONS SUBJECT US TO ADDITIONAL RISKS.

We currently conduct a significant amount of our business outside the United States. We are subject to certain risks associated with operating internationally including:

• difficulties with product development meeting local requirements;

• fluctuations in foreign currency exchange rates for which a natural or purchased hedge does not exist or is ineffective;

• longer collection cycles for client billings or accounts receivable, as well as heightened client collection risks, especially in countries with highly inflationary economies and/or with restrictions on the movement of cash out of the country;

• compliance with laws and regulations related to the collection, use, and disclosure of certain personal information relating to clients’ customers, such as privacy laws, that are more strict than those currently in force in the United States;

• reduced protection for intellectual property rights in some countries;

• inability to recover value added taxes and/or goods and services taxes in foreign jurisdictions; and

• potential adverse impact to our overall effective income tax rate resulting from, among other things:

• operations in foreign countries with higher tax rates than the United States;

• the inability to utilize certain foreign tax credits; and

• the inability to utilize some or all of losses generated in one or more foreign countries.

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SUBSTANTIAL IMPAIRMENT OF THE GSS DIVISION’S GOODWILL AND OTHER INTANGIBLE ASSETS IN THE FUTURE MAY BE POSSIBLE.

As of June 30, 2004, there was approximately $31 million in net intangible assets (software) and approximately $217 million of goodwill that was attributable to the GSS Division, which included the assets from the Kenan Business, ICMS, Davinci, and plaNet acquisitions. Key drivers of the value assigned to these acquisitions are the global telecommunications industry client base and the software assets acquired. We performed our annual goodwill impairment test in the third quarter of 2003, and concluded that no impairment of the GSS Division’s goodwill had occurred at that time. As of June 30, 2004, we concluded that no events or changes in circumstances have occurred since that time to warrant an impairment assessment of the GSS Division’s goodwill and/or other long-lived intangible assets. We will continue to monitor the carrying value of these assets during the period of economic recovery for the telecommunications industry and will perform our annual goodwill impairment testing in the third quarter of 2004. If the current economic conditions take longer to recover than anticipated, it is reasonably possible that a review for impairment of the GSS Division’s goodwill and/or related long-lived intangible assets in the future may indicate that these assets are impaired, and the amount of impairment could be substantial.

A REDUCTION IN DEMAND FOR OUR KEY CUSTOMER CARE AND BILLING PRODUCTS AND SERVICES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Historically, a substantial percentage of our total revenues have been generated from our core service bureau processing product, CSG CCS/BP, or CCS, and related services. These CCS products and services are expected to provide a large percentage of our, and most of the Broadband Division’s, total revenues in the foreseeable future.

Historically, a substantial percentage of the GSS Division’s revenues have been generated from its core customer care and billing system product, CSG Kenan FX (formerly CSG Kenan/BP), and associated software maintenance services and professional services. CSG Kenan FX software licenses and related software maintenance services and professional services are expected to provide a large percentage of the GSS Division’s total revenues in the foreseeable future.

Any reduction in demand for CCS and/or CSG Kenan FX and related services discussed above could have a material adverse effect on our financial condition and results of operations, including possible impairments to related goodwill and other intangible assets.

CLIENT BANKRUPTCIES COULD ADVERSELY AFFECT OUR BUSINESS, AND ANY ACCOUNTING RESERVES WE HAVE ESTABLISHED MAY NOT BE SUFFICIENT.

The economic state of the telecommunications industry increases the risk of our clients filing for bankruptcy protection. Indeed, certain of our clients have filed for bankruptcy protection, with Adelphia Communications representing the largest one for us. Companies involved in bankruptcy proceedings pose greater financial risks to us, consisting principally of possible claims of preferential payments for certain amounts paid to us prior to the bankruptcy filing date, as well as increased collectibility risk for accounts receivable, particularly those accounts receivable that relate to periods prior to the bankruptcy filing date. We consider such risks in assessing our revenue recognition and the collectibility of accounts receivable related to our clients that have filed for bankruptcy protection. We establish accounting reserves for our estimated exposure on these items. However, there can be no assurance that our accounting reserves related to these items are adequate. Should any of the factors considered in determining the adequacy of the overall reserves change adversely, an adjustment to the provision for doubtful account receivables may be necessary. Because of the potential significance of these items, such an adjustment could be material.

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WE MAY INCUR ADDITIONAL MATERIAL RESTRUCTURING CHARGES IN THE FUTURE.

Since the third quarter of 2002, we have recorded material restructuring charges related to involuntary employee terminations and various facility abandonments. The accounting for facility abandonments requires significant judgments in determining the restructuring charges, primarily related to the assumptions regarding the timing and the amount of any potential sublease arrangements for the abandoned facilities, and the discount rates used to determine the present value of the liabilities. We continually evaluate these assumptions, and adjust the related facility abandonment reserves based on the revised assumptions at that time. Moreover, we continually evaluate ways to reduce our operating expenses through restructuring opportunities, including the utilization of our workforce and current operating facilities. As a result, there is a reasonable possibility that we may incur additional material restructuring charges in the future.

WE MAY NOT BE ABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY.

The market for customer care and billing systems is characterized by rapid changes in technology and is highly competitive with respect to the need for timely product innovations and new product introductions. In particular, the Broadband Division has substantially completed its architectural upgrade to CCS and related services and software products to further support convergent broadband services including cross-service bundling, convergent order entry and advanced service provisioning capabilities. We have migrated several clients to the new platform. CCS’s advanced convergent solution is expected to be the Broadband Division’s next generation product offering.

In addition, during late 2003, we introduced CSG Kenan FX, which combined certain software technologies we had previously developed with the best of the CSG Kenan/BP product family. CSG Kenan FX is the result of an 18-month research and development project that resulted in a business framework consisting of pre-integrated products and modules that make services available via a common middle layer. CSG Kenan FX is expected to be the GSS Division’s primary product offering in future periods.

We believe that our future success in sustaining and growing our revenues depends upon continued market acceptance of our current products, including CCS and CSG Kenan FX, and our ability to continuously adapt, modify, maintain, and operate our products to address the increasingly complex and evolving needs of our clients, without sacrificing the reliability or quality of the products. As a result, substantial research and development will be required to maintain the competitiveness of our products and services in the market. Technical problems may arise in developing, maintaining and operating our products and services as the complexities are increased. Development projects can be lengthy and costly, and are subject to changing requirements, programming difficulties, a shortage of qualified personnel, and unforeseen factors which can result in delays. In addition, we may be responsible for the implementation of new products, and depending upon the specific product, may also be responsible for operations of the product. There is an inherent risk in the successful implementation and operations of these products as the technological complexities increase. There can be no assurance:

• of continued market acceptance of our current products;

• that we will be successful in the timely development of product enhancements or new products that respond to technological advances or changing client needs; or

• that we will be successful in supporting the implementation and/or operations of product enhancements or new products.

See the above risk factor, “our inability to timely and successfully complete a complex implementation project and meet client expectations could have a material adverse effect on our financial condition and results of operations”, for additional risks related to implementation projects.

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THE CONSOLIDATION OF THE GLOBAL TELECOMMUNICATIONS INDUSTRY MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.

The global telecommunications industry is undergoing significant ownership changes at an accelerated pace. One facet of these changes is that telecommunications service providers are consolidating, decreasing the potential number of buyers for our products and services. Such client consolidations carry with them the inherent risk that the consolidators may choose to move their purchased customers to a competitor’s system. In addition, consolidation in the global telecommunications industry may put at risk our ability to leverage our existing relationships. Should this consolidation result in a concentration of customer accounts being owned by companies with whom we do not have a relationship, or with whom competitors are entrenched, it could negatively affect our ability to maintain or expand our market share, thereby having a material adverse effect to our results of operations.

FAILURE TO ATTRACT AND RETAIN OUR KEY MANAGEMENT AND OTHER HIGHLY SKILLED PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

Our future success depends in large part on the continued service of our key management, sales, product development, and operational personnel. We are particularly dependent on our executive officers. We believe that our future success also depends on our ability to attract and retain highly skilled technical, managerial, operational, and marketing personnel, including, in particular, personnel in the areas of research and development and technical support. Competition for qualified personnel at times can be intense, particularly in the areas of research and development, conversions, software implementations, and technical support, especially now that market conditions are improving and the demand for such talent is increasing. In addition, our restructuring activities adversely impact our workforce as a result of involuntary terminations of employees and may adversely impact our ability to retain key personnel and recruit new employees when there is a need. For these reasons, we may not be successful in attracting and retaining the personnel we require, which could have a material adverse effect on our ability to meet our commitments and new product delivery objectives.

FAILURE TO PROTECT OUR PROPRIETARY INTELLECTUAL PROPERTY RIGHTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We rely on a combination of trade secret and copyright laws, nondisclosure agreements, and other contractual and technical measures to protect our proprietary rights in our products. We also hold a limited number of patents on some of our newer products, but do not rely upon patents as a primary means of protecting our rights in our intellectual property. There can be no assurance that these provisions will be adequate to protect our proprietary rights. Although we believe that our intellectual property rights do not infringe upon the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against us or our clients.

Historically, the vast majority of our revenue has come from domestic sources, limiting the need to develop a strong international intellectual property protection program. With the Kenan Business acquisition, we have clients using our products in many countries. As a result, we need to continually assess whether there is any risk to our intellectual property rights in many countries throughout the world. Should these risks be improperly assessed or if for any reason should our right to develop, produce and distribute our products anywhere in the world be successfully challenged or be significantly curtailed, it could have a material adverse effect on our financial condition and results of operations.

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THE DELIVERY OF OUR PRODUCTS AND SERVICES IS DEPENDENT ON A VARIETY OF MAINFRAME AND DISTRIBUTED SYSTEM COMPUTING ENVIRONMENTS AND TELECOMMUNICATIONS NETWORKS, WHICH MAY NOT BE AVAILABLE OR MAY BE SUBJECT TO SECURITY ATTACKS.

The delivery of our products and services is dependent on a variety of mainframe and distributed system computing environments, which we will collectively refer to herein as “systems.” We provide such computing environments through both out-sourced arrangements, such as our data processing arrangement with First Data Corporation, as well as internally operating numerous distributed servers in geographically dispersed environments. The end users are connected to our systems through a variety of public and private telecommunications networks, which we will collectively refer to herein as “networks,” and are highly dependent upon the continued availability and uncompromised security of our networks and systems to conduct their business operations. Our networks and systems are subject to the risk of failure as a result of human and machine error, acts of nature and intentional, unauthorized attacks from computer “hackers.” Security attacks on distributed systems throughout the industry are more prevalent than on mainframe systems due to the open nature of those computer systems. In addition, we continue to expand our use of the Internet with our product offerings thereby permitting, for example, our clients’ customers to use the Internet to review account balances, order services or execute similar account management functions. Opening up our networks and systems to permit access via the Internet increases their vulnerability to unauthorized access and corruption, as well as increasing the dependency of the systems’ reliability on the availability and performance of the Internet’s infrastructure. As a means to mitigate certain risks in this area of our business, we have implemented a business continuity plan, and test certain aspects of this plan on a periodic basis. In addition, we periodically undergo a security review of our systems by independent parties, and have implemented a plan intended to mitigate the risk of an unauthorized access to the networks and systems, including network firewalls, procedural controls, intrusion detection systems and antivirus applications.

The method, manner, cause and timing of an extended interruption or outage in our networks or systems are impossible to predict. As a result, there can be no assurances that our networks and systems will not fail, or that our business continuity plans will adequately mitigate any damages incurred as a consequence. Should our networks or systems experience an extended interruption or outage, have their security compromised or data lost or corrupted, it would impede our ability to meet product and service delivery obligations, and likely have an immediate impact to the business operations of our clients. This would most likely result in an immediate loss to us of revenue or increase in expense, as well as damaging our reputation. Any of these events could have both an immediate, negative impact upon our financial condition and our short-term revenue and profit expectations, as well as our long-term ability to attract and retain new clients.

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