Form 10-Q

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date. As of August 5, 2005, the Company had outstanding 17,644,344 shares of common stock, $.01 par value per share.

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

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

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

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

The accompanying unaudited financial statements have been prepared on a going concern basis in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. This basis contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Operating results for the three and six month periods ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005 or any other interim period.

On May 20, 2005, the jury in the Freedom Wireless patent infringement lawsuit issued a verdict of $128 million against the Company and the other co-defendants, including Cingular Wireless LLC, for past damages through December 31, 2004, an amount which exceeds the Company’s ability to pay. Based on management’s assessment of the potential outcomes of the case and in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (FAS 5) and FASB Interpretation 14, Reasonable Estimation of the Amount of a Loss (FIN 14), the Company has accrued an estimated loss of $24 million with respect to the Freedom Wireless verdict, excluding additional legal charges which are expensed as incurred. However, the actual loss, if any, may be significantly higher or lower than the amount accrued.

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

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2004 and Form 8-K filed on June 24, 2005.

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

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

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

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

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

For the Company’s licensed systems sales, the Company typically recognizes revenues from the sale of systems at the time the systems are shipped or delivered to the customer, depending on shipping terms. In the event there are acceptance terms, the Company defers revenue until acceptance has occurred. In addition, certain software is licensed to distributors, who pay licensing fees to the Company as they sell the software to their customers and the revenue is recognized in the month it is earned.

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

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

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

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

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

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

In connection with the Freedom Wireless verdict discussed in Note 4 to the Condensed Consolidated Financial Statements, on July 27, 2005, the Company entered into a Funding of Security for Appeal Agreement with Cingular Wireless whereby the Company has agreed to place $41 million in escrow as security for any potential liability associated with the litigation. This agreement is subject to mutual acceptance of an escrow agent and related escrow terms.

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

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

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

The income tax benefit for the six months ended June 30, 2005 was $4.8 million, compared to an income tax provision of $5.9 million (39.5% effective tax rate) for the six months ended June 30, 2004. The benefit recorded in the current year reflects the Company’s assessment of its ability to realize the tax benefit from the ultimate loss, if any, from the Freedom Wireless litigation.

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

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

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

The Company’s managed services business allows wireless operators throughout the United States to utilize its real-time billing capabilities, enabling such operators to offer prepaid wireless calling to their subscribers, offer various ways to replenish their accounts and to purchase digital content. Wireless operators also utilize the Company’s managed services business to provide their subscribers with a monthly postpaid wireless bill. In addition, the Company sells licensed systems internationally, most recently in North and South America and Africa, however the Company is in the process of expanding its sales territories through Europe, Latin America and Asia, among other areas. The Company generally does not require collateral from its customers, although upfront payments for a portion of the total sale are typically required prior to shipment. In addition, certain software is licensed to distributors, who pay licensing fees to the Company as they sell the software to their customers.

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

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

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

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

The Company accounts for goodwill in accordance with FAS 142 “Goodwill and Other Intangible Assets.” Under FAS 142, goodwill is not amortized but is subject to annual impairment tests. The Company evaluates goodwill for impairment annually in the fourth quarter or whenever events or changes in circumstances

indicate that the carrying amount may not be recoverable. Goodwill is tested for impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.

As a result of the Freedom Wireless lawsuit verdict discussed in Note 4 to the Condensed Consolidated Financial Statements, the Company performed an asset impairment test for its long-lived assets and goodwill in the quarter ended June 30, 2005 and concluded that no impairment existed.

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

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

Since the Company accelerated vesting as described above for the first quarter of 2005, the expense for the six months ended June 30, 2005 is substantially higher than normal levels, and the expense for the three months ended June 30, 2005 is somewhat lower than typical levels. As a result, the results of applying the fair value method may have a materially different effect on pro forma net income (loss) in future years than the amounts shown below.

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

Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed using the weighted average number of common shares outstanding during the period plus the impact, if dilutive, of common share equivalents, which are stock options. For purposes of computing diluted earnings (loss) per share, weighted average common share equivalents do not include stock options with an exercise price that exceeds the average market price of the Company’s Common Stock for the respective period. In addition, during loss periods, no stock options are included as their effect would be anti-dilutive. Accordingly, for the three months ended June 30, 2005 and 2004, options to purchase 3,397,000 and 1,048,000 shares, respectively, of Common Stock have been excluded from the computation. In addition, for the six months ended June 30, 2005 and 2004, options to purchase 3,397,000 and 1,048,000 shares, respectively, of Common Stock have been excluded from the computation.

The following table sets forth a reconciliation of basic and diluted shares for the three and six months ended June 30 (unaudited and in thousands except for shares):

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

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

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

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

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

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

In March 2000, Freedom Wireless, Inc. filed a suit against the Company and a number of its current or former carrier customers (Verizon Wireless, Cingular Wireless LLC, AT&T Wireless Services, CMT Partners and Western Wireless Corp.). The suit was tried in the United States District Court in Massachusetts and alleged that the defendants infringe two patents held by Freedom Wireless, Inc. and sought damages as well as injunctive relief. On May 20, 2005, a jury determined that bcgi and certain of the other defendants infringed or are infringing the two Freedom Wireless patents. The jury damages award was in the total amount of $128 million for past damages through December 31, 2004, an amount which exceeds the Company’s ability to pay. Of this amount, bcgi and Cingular (which includes AT&T Wireless Services and CMT Partners) are jointly and severally liable for $127.8 million and bcgi and Western Wireless for $200,000. Interest and damages for infringement by bcgi and Cingular from January 1, 2005 to the date of the judgment may also be awarded. Additionally, the jury found that bcgi willfully infringed the patents and as a result, the Court may award treble damages and attorney’s fees. Any enhanced damages for willfulness would be the responsibility of bcgi. The Court, however, also has discretion to reduce the amount of the jury’s damages award. bcgi intends to file a motion for remittitur to ask the Court to reduce the level of damages awarded.

The Company has an obligation to indemnify the other defendants for damages they may incur with respect to any infringement by the Company’s technology. In 2005, Verizon Wireless, which was a defendant in the case, reached a settlement with Freedom Wireless and, as a result, was removed as a defendant in the case. The Company was not part of the settlement discussions and the terms of the settlement are not public.

The Court has not issued a final judgment on the suit since there are still matters pending before the Court. Following the issuance of the jury verdict, a non-jury trial for inequitable conduct was held. In this case, which concluded on July 26, 2005 and is pending before the Court, bcgi argued that the Freedom Wireless patents are unenforceable because Freedom breached its duty of candor and good faith to the Patent and Trademark Office (PTO) by knowingly withholding material prior art from the PTO. The Court has ordered the plaintiff and defendants to file proposed findings of fact and conclusions of law with the Court no later than August 15, 2005. If the Court rules in favor of bcgi and its co-defendants in the inequitable conduct trial, the patents held by Freedom Wireless would become unenforceable, a decision that Freedom Wireless, Inc. may choose to appeal. The Company intends to file motions for judgment as a matter of law and a motion for a new trial or, in the alternative, as noted above, a reduction in the damages awarded by the jury. The Company expects that the Court would rule on each of these matters in addition to determining the final judgment on the case in due course, sometime after August 15, 2005.

If the Court rules against bcgi and the co-defendants in the non-jury trial, the Company expects to appeal the Court’s decision to the Court of Appeals for the Federal Circuit. The appeal process can take 12-18 months or longer. In the event of an appeal, the Court may require the defendants to provide collateral or post a bond. The bond could approximate 110% of the final damages amount, which, depending on the final judgment, could exceed bcgi’s ability to pay. If the Company is unable to provide adequate collateral or post a sufficient bond, or an injunction is entered and not stayed, or if the Company is unable to get an adverse judgment reversed and is unable to negotiate a commercially acceptable license with Freedom Wireless to allow bcgi to continue to provide its products and services, then it will not be possible for the Company to provide the prepaid wireless or Real-Time Billing service bureau as currently offered in the United States. In that event, the Company may not be able to continue its ongoing operations or may need to seek protection under Chapter 11 of the U. S. Bankruptcy Code. If the plaintiff files for an injunction, the Court could rule that the Company may not use the alleged infringing technology.

In order to mitigate the risk that bcgi will be unable to post sufficient collateral on its own, the Company entered into an agreement with Cingular Wireless LLC, a co-defendant in the case. This agreement is subject to mutual acceptance of an escrow agent and related escrow terms. Under the terms of this agreement, bcgi has agreed to place $41 million into escrow for the purpose of using these funds as security in the event that a bond or other security must be posted for more than $41 million. In exchange for placing the funds into escrow, if a final judgment in the lawsuit is rendered against bcgi and its co-defendants, and the joint and several damages exceed $41 million, Cingular has agreed to post security in the form of an appeal bond or otherwise in an amount that, when added to bcgi’s $41 million, is determined by the court to be adequate security to stay the execution of the judgment. Cingular has also agreed to dismiss, without prejudice, the action filed by Cingular against bcgi in May 2005. Cingular originally filed this action in an effort to enforce Cingular’s indemnity rights against bcgi as a result of the Freedom Wireless verdict. This agreement is expected to allow bcgi to proceed with an appeal and potentially avoid exposure to bankruptcy while the appeal is pending, in the event that a final judgment against bcgi in this lawsuit is rendered for joint and several damages that exceed $41 million. Cingular is not obligated to provide the security for the payment of any portion of the damages for which Cingular is not jointly and severally liable. The agreement does not alter bcgi’s obligation to indemnify Cingular.

While the Company does not believe that it infringes these patents and believes that the patents are invalid in light of prior art and other reasons, in light of the adverse jury verdict, the Company believes it is probable that a loss contingency exists. Although the ultimate amount of such loss, if any, is not currently known, accounting guidelines under Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (FAS 5) and FASB Interpretation 14, Reasonable Estimation of the Amount of a Loss (FIN

14), specify that if a loss can be reasonably estimated, it should be recorded. Based on managements’ assessment of the potential outcomes of the case and in accordance with FAS 5 and FIN 14, the Company has accrued an estimated loss of $24 million with respect to the Freedom Wireless verdict. However, the actual loss, if any, may be significantly higher or lower than the amount accrued.

Freedom Wireless Patent Infringement Lawsuits Against bcgi, Nextel Communications and Alltel Corporation

On May 20, 2005, Freedom Wireless filed two separate lawsuits in the U.S. District Court for the District of Massachusetts, the first against bcgi and Nextel Communications, and the second against bcgi and Alltel Corporation. To date, the Company has not been served. These lawsuits allege that bcgi and each of its named carrier customers infringe the same two patents held by Freedom Wireless, Inc. and seek damages as well as injunctive relief. The Company has an obligation to indemnify its customers for damages they may incur with respect to any infringement by the Company’s technology. The Company intends to contest the lawsuits vigorously and believes that it does not infringe these patents and believes that the patents are invalid in light of prior art and other reasons.

On May 23, 2005, a complaint was filed by Cingular Wireless LLC seeking judgment in indemnity against bcgi. The complaint seeks judgment for contractual indemnification against bcgi in an amount equal to Cingular’s money damages and other relief as determined by the Court in the Freedom Wireless patent infringement lawsuit. Cingular has agreed to dismiss, without prejudice, this complaint, subject to the completion of the agreement between bcgi and Cingular to escrow $41 million of bcgi’s cash.

In June 2005, a putative class action complaint was filed in the U.S. District Court for the District of Massachusetts, against the Company, the Company’s Chief Executive Officer and its Chief Financial Officer on behalf of persons who purchased its common stock between November 15, 2000 and May 20, 2005. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act as well as Rule 10b-5 promulgated thereunder by allegedly failing to disclose adverse facts regarding the Freedom Wireless, Inc. lawsuit, including that the Company had willfully infringed the Freedom Wireless patents. Within ten days of the appointment of a lead counsel and a lead plaintiff in this case, the parties will submit for the Court’s consideration a proposed schedule for this case, including defendants’ time to respond to the complaint by motion to dismiss or otherwise. The Company intends to contest the lawsuit vigorously and believes that it and the two executive officers named as defendants have meritorious defenses to the allegations set forth in the lawsuit.

On April 28, 2005, a complaint by Aerotel Corporation was filed against Verizon alleging infringement by Verizon Communications, Verizon Wireless and others of a patent on prepaid technology. Verizon has notified the Company that it may be asked to indemnify them in this case under the Company’s Prepaid Wireless Services Agreement for that portion of any liability specific to Verizon Wireless prepaid offered through the use of bcgi’s service. The complaint does not specify damages as it relates to Verizon Wireless prepaid. A subpoena for documents and deposition testimony has been served on the Company. The lawsuit is currently in the discovery phase and at this time it is not possible to determine the potential cause of outcome of this indemnification claim.

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

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

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

With respect to customer agreements, these provisions generally obligate the Company to indemnify the customer against losses, expenses, liabilities and damages that may be awarded against the customer in the event the Company’s systems or services infringe upon a patent or other intellectual property right of a third party. The agreements generally limit the scope of and remedies for such indemnification obligations in certain respects, including but not limited to geographical limitations and the right to replace or modify an infringing product or service. Certain of the Company’s carrier customers are currently seeking to require the Company to indemnify them for losses incurred, or that may be incurred, in connection with the Freedom Wireless and Aerotel litigation.

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

FAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial statements. It also established standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision-maker is the Chief Operating Officer. Historically, the Company’s reportable operating segments consisted of Billing and Transaction Processing Services, Roaming Services and Prepaid Systems. The Company’s Billing and Transaction Processing Services solutions allowed wireless carriers to access the Company’s managed services network and transaction processing platform, enabling such carriers to offer prepaid wireless calling, replenishment capabilities and postpaid billing and customer care to their subscribers. The Roaming Services solution provided wireless carriers the ability to generate revenues from subscribers who are not covered under traditional roaming agreements by arranging payment for roaming calls. The Prepaid Systems solution assembled and marketed prepaid systems to international wireless operators. Beginning in 2004, Prepaid Systems was no longer reported as a separate segment, as it was deemed to be not material, representing less than 10% of consolidated revenues, total assets and operations for all periods presented.

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

In the second quarter of 2005, the Company realigned its operating units to consist of bcgi Payment, bcgi Access Management, Real-Time Billing and Voyager Billing. A general manager has been assigned to manage each of these businesses which are classified as operating units. Revenue for each business is recorded and tracked separately. The Company is currently in the process of determining direct and indirect cost allocations to these businesses and, as such, does not currently possess operating financial results in accordance with the disclosures required by SFAS 131. The Company anticipates that sufficient reliable and consistent information will be available later in 2005. Until such information is available, the Company cannot disclose the information required by FAS No. 131. Revenues for the Company’s operating units are as follows (unaudited and in thousands):

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

The components of net periodic benefit costs for the three and six months ended June 30, 2005 and 2004 are as follows (unaudited and in thousands):

In June 2005, the Company acquired the assets and certain liabilities of PureSight, Inc. and its Israeli subsidiary, PureSight LTD. (PureSight), a provider of advanced content recognition solutions for mobile operators, ISPs and enterprises. The Company paid $6.7 million in cash for PureSight, including acquisition costs. Management determined the fair value of the assets and certain liabilities acquired by considering the anticipated cash flows to be generated from the existing products, the valuation of customer contracts and relationships and non-compete agreements, the estimated life of the technology acquired and other factors. Identifiable intangible assets of $1.7 million consist of acquired technology, customer contracts and relationships, trademarks and non-compete agreements and are being amortized over four to seven years. The results of operations of PureSight are included in the Company’s Condensed Consolidated Statement of Operations from the date of acquisition. The Company expects the acquisition to be slightly dilutive in the near-term.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Certain Factors That May Affect Future Results

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

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

Our Voyager Billing revenues are earned by generating a subscriber’s monthly bill.

While there have been no bcgi Access Management revenues related to our Mobile Guardian products to date, we expect that we will generate revenues from these products by charging wireless operators on a per subscriber per month basis, or on a one-time subscriber license basis.

For bcgi Payment, we typically generate revenues by charging wireless operators a transaction fee for the services performed and paying the financial partners a fee for enabling the transaction. This technology can also be purchased on a licensed basis.

Our net revenues decreased 7% to $25.6 million in the second quarter of 2005 compared to $27.7 million in the second quarter of 2004 and decreased 5% to $52.0 million for the six months ended June 30, 2005 compared to $54.9 million for the six months ended June 30, 2004. Principally as a result of the $24.0 million estimated loss from the Freedom Wireless lawsuit recorded in the three months ended June 30, 2005, our net loss was $17.9 million in the second quarter of 2005 compared to $5.0 million in net income in the second quarter of 2004 and the $16.2 million net loss for the six months ended June 30, 2005 compared to $9.1 million in net income for the six months ended June 30, 2004.

On May 20, 2005, a jury in the Freedom Wireless patent infringement lawsuit issued a verdict of $128 million against us and the other co-defendants, including Cingular Wireless LLC, for past damages through December 31, 2004, an amount which exceeds our ability to pay. Based on management’s assessment of the potential outcomes of the case and in accordance with FAS 5 and FIN 14, we have accrued an estimated loss of $24 million with respect to the Freedom Wireless verdict, excluding additional legal charges which are expensed as incurred. However, the actual loss, if any, may be significantly higher or lower than the amount accrued.

The non-jury trial on inequitable conduct concluded on July 26, 2005 and the Court has ordered the plaintiff and defendants to file proposed findings of fact and conclusions of law with the Court on August 15, 2005. We intend to file motions for judgment as a matter of law and a motion for a new trial or, in the alternative, a reduction in the damages awarded by the jury. bcgi expects that the Court will rule on each of these matters in addition to determining the final judgment on the case in due course, sometime after August 15, 2005. The potential outcomes

Either the plaintiff or the defendants can file for appeal within 30 days of the final judgment. The appeal process can take 12-18 months, or longer.

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

We anticipate that earnings per share for the third quarter of 2005 will approximate break-even to a $0.04 loss per share, including approximately $3.0 to $4.0 million of legal costs, primarily associated with the Freedom Wireless lawsuit. We have not provided guidance for the remainder of 2005 since we cannot anticipate the rate and timing of Verizon Wireless’ and Cingular Wireless’ subscriber departures from our Real-Time Billing platform and therefore, the corresponding rate of revenue decline. In addition, Verizon Wireless may terminate our existing prepaid wireless services agreement upon 90 days written notice. We plan to continue to focus on our customer and product diversification strategy that includes investment in all of our new and existing products that we are marketing on a global basis. Based on these factors and other trends, we are estimating that revenues will range from $23.0 to $25.0 million for the third quarter of 2005.

Our net revenues from Real-Time Billing decreased by 9% in the second quarter of 2005 compared to the second quarter of 2004. The decrease in revenues was due primarily to our prepaid subscriber base decreasing by 240,000, bringing our subscribers to 3.8 million at June 30, 2005, along with a decrease in our average billed rate per minute. The decrease in our prepaid subscriber base is due primarily to the number of subscriber losses from Verizon Wireless and Cingular Wireless exceeding the number of subscriber additions from Nextel Communications and other customers. The Real-Time Billing average billed rate per minute declined by approximately 14% for the quarter ended June 30, 2005 compared to the same quarter in the previous year. The decline in the average billed rate per minute is due primarily to lower contractual rates and volume discounts for customers who signed contracts recently and who represent a larger percentage of total Real-Time Billing revenue. Average billed minutes of use per subscriber per month were 116 minutes for the quarter ended June 30, 2005, which was consistent with the same period in 2004.

Our net revenues from Real-Time Billing decreased by 7% in the six month period ended June 30, 2005 compared to the same period in 2004. The decrease in revenues was due primarily to our average prepaid subscriber base decreasing by 176,000, bringing our average subscribers to 3.8 million for the six month period ended June 30, 2005, and to the decrease in the average billed rate per minute. The decrease in our average prepaid subscriber base is due primarily to subscriber losses from Verizon Wireless and Cingular Wireless exceeding the number of subscriber additions from Nextel Communications and other customers. The Real-Time Billing average billed rate per minute declined by approximately 16% for the six months ended June 30, 2005 compared to the same six month

period in the previous year. The decline in the average billed rate per minute is due primarily to lower contractual rates for customers who signed contracts more recently and who represent a larger percentage of total Real-Time Billing revenue.

In future quarters, we expect our prepaid subscriber base to further decrease, as we anticipate that Verizon Wireless conversions and subscriber churn from Cingular Wireless will exceed subscriber growth from other customers.

Other revenues are generated from our other three operating units, bcgi Payment, bcgi Access Management and Voyager Billing. Our net revenues from these operating units increased by 14% and 15% in the second quarter and first six months of 2005 compared to the same periods in 2004. The increase in revenues for both the three and six month periods ended June 30, 2005 was due primarily to our efforts to diversify our revenues with new products and customers.

Nextel Communications, Verizon Wireless and Cingular Wireless accounted for 37%, 22% and 16% of total revenues, respectively, in the second quarter of 2005. In addition, Nextel Communications, Verizon Wireless and Cingular Wireless accounted for 33%, 25% and 18% of total revenues, respectively, in the six month period ended June 30, 2005.

Cost of total revenues primarily include the salaries and benefits of personnel who support our managed services network and our licensed product offerings, along with costs for maintenance, telecommunications, travel, facilities and other support costs. Cost of total revenue increased to 27% of total revenue in the second quarter of 2005 from 23% in the second quarter of 2004. Cost of total revenue increased to 26% of total revenue in the six months ended June 30, 2005 from 23% in the same six month period in 2004. The increase in absolute dollars of cost of total revenue in both the three and six month periods resulted primarily from additional personnel and wages to support our investments in professional services and global licensing.

Engineering, research and development expenses primarily include the salaries and benefits for software development and engineering personnel associated with the development, implementation and maintenance of existing and new software. The increase in engineering, research and development expenses for the three month period ended June 30, 2005 compared to the same quarter in 2004 resulted primarily from additional personnel, wages and related costs of approximately $600,000 principally to support the development of bcgi Access Management and bcgi Payment, along with the enhancement of the features and functionality of our other products.

The increase in engineering, research and development expenses for the six month period ended June 30, 2005 compared to the same period in 2004 primarily resulted from additional personnel, wages and related costs of approximately $1.5 million principally to support the development of bcgi Access Management and bcgi Payment, along with the enhancement of the features and functionality of our other products. Engineering, research and development expenses in absolute dollars are expected to increase in the third quarter of 2005 compared with $4.3 million in the second quarter of 2005 primarily due to a full quarter of expense for the additional personnel from our June 2005 asset acquisition of PureSight, Inc. and PureSight Ltd.

Sales and marketing expenses include direct sales and product management salaries, commissions, travel and entertainment expenses, in addition to the cost of trade shows, direct mail and other promotional expenses. Sales and marketing expenses increased in the three month period ended June 30, 2005 compared to the same period in 2004 primarily due to $575,000 in additional expense related to the expansion of our international sales focus.

Sales and marketing expenses increased in the six month period ended June 30, 2005 compared to the same period in 2004 principally due to $1.1 million in additional expense related to our international focus, including additional personnel for our international sales team and attendance at a major worldwide tradeshow. Sales and marketing expenses in absolute dollars are expected to increase in the third quarter of 2005 compared with $2.3 million in the second quarter of 2005 as we continue to strengthen our international presence by adding resources to augment our international sales efforts.

General and administrative expenses include salaries and benefits of employees and other expenses that provide our administrative support. General and administrative expenses increased for the three month period ended June 30, 2005 compared to the same period in 2004, principally due to higher legal costs of approximating $250,000 and expanded regulatory requirements and related costs for public companies totaling approximately $110,000.

The increase in general and administrative expenses for the six month period ended June 30, 2005 compared to the same period in 2004 was due to additional wages of approximately $300,000 to support our diversification strategy, higher costs associated with outside legal support of approximately $275,000 and expanded regulatory requirements and related costs for public companies totaling approximately $200,000. General and administrative expenses in absolute dollars are expected to remain consistent in the third quarter of 2005 compared with $2.6 million in the second quarter of 2005.

General and administrative legal expenses primarily represent legal expenses to defend the patent infringement suit initiated by Freedom Wireless. The increase in expense for both the three and six month periods ended June 30, 2005 compared to the respective year-earlier periods was due to higher costs associated with the commencement of the trial on February 28, 2005. We expect to incur approximately $3.0 to $4.0 million in legal expenses in the third quarter of 2005.

On May 20, 2005, a jury determined that bcgi and certain of our current or former carrier customer defendants (Cingular Wireless LLC, AT&T Wireless Services, CMT Partners and Western Wireless Corp.) infringed or are infringing two Freedom Wireless patents. The jury damages award was in the total amount of $128 million for past damages through December 31, 2004, an amount which exceeds bcgi’s ability to pay. bcgi and each carrier are jointly and severally liable for specific amounts. While we do not believe that we infringe these patents and believe that the patents are invalid in light of prior art and other reasons, in light of the adverse jury verdict, we believe it is probable that a loss contingency exists. Although the ultimate amount of such loss, if any, is not currently known, accounting guidelines under Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (FAS 5) and FASB Interpretation 14 Reasonable Estimation of the Amount of a Loss (FIN 14), specify that if a loss can be reasonably estimated, it should be recorded. Based on management’s assessment of the potential outcomes of the case and in accordance with FAS 5 and FIN 14, we have accrued an estimated loss of $24 million with respect to the Freedom Wireless verdict, excluding additional legal charges which are expensed as incurred. However, the actual loss, if any, may be significantly higher or lower than the amount accrued.

Depreciation and amortization expense includes depreciation of telecommunications systems and software, building, furniture and equipment and leasehold improvements. We provide for depreciation using the straight-line method over the estimated useful lives of the assets, which range from three to twenty years. The decrease in depreciation and amortization expense in absolute dollars for both the three and six month periods ended June 30, 2005 compared to the same period in 2004 was primarily due to certain capital equipment that became fully depreciated in the first half of 2005.

Interest income increased to $408,000 for the three month period ended June 30, 2005 compared to $251,000 for the three month period ended June 30, 2004 and increased to $808,000 for the six month period ended June 30, 2005 from $563,000 for the six month period ended June 30, 2004. Interest income was earned primarily from investments, which were purchased using the cash generated from operations, from the sale of our teleservices business in 2000 and from the proceeds from our public offerings. Although our combined cash and investment positions decreased as of June 30, 2005, higher average interest rates during the periods resulted in increased levels of interest income compared to the previous year. If we ultimately incur a loss on the Freedom Wireless litigation or pledge a substantial portion of our cash to collateralize an appeal bond, this may substantially reduce our cash and investment balances and therefore reduce future interest income.

The income tax benefit for the six months ended June 30, 2005 was $4.8 million, compared to an income tax provision or $5.9 million (39.5% effective tax rate) for the six months ended June 30, 2004. The benefit recorded in the current year reflected our assessment of our ability to realize the tax benefit from the ultimate loss, if any, from the Freedom Wireless litigation.

In June 2005, we acquired the assets and certain liabilities of PureSight, Inc. and its Israeli subsidiary, PureSight Ltd. (PureSight), a provider of advanced content recognition solutions for mobile operators, ISPs and enterprises. We paid $6.7 million in cash for PureSight, including acquisition costs. Management determined the fair value of the assets and certain liabilities acquired by considering the anticipated cash flows to be generated from the existing products, the valuation of customer contracts and relationships and non-compete agreements, the estimated life of the technology acquired and other factors. Identifiable intangible assets of $1.7 million consist of acquired technology, customer contracts and relationships, trademarks and non-compete agreements and are being amortized over four to seven years. The results of operations of PureSight are included in our Condensed Consolidated Statement of Operations from the date of acquisition.

In March 2004, we ceased providing our ROAMERplus solution, effectively discontinuing our Roaming Services segment. This business generated a net loss of $11,000 for the six months ended June 30, 2004.

As of June 30, 2005, cash, cash equivalents and short-term investments decreased 20% to $62.1 million compared to $77.8 million at December 31, 2004, primarily due to investing activities. The net cash provided by operations of $2.5 million in the six months ended June 30, 2005 resulted from a $16.2 million net loss, along with adjustments for depreciation and amortization of $10.8 million, increased receivables of $4.7 million caused by an increase in our days sales outstanding from 63 as of December 31, 2004 to 81 at June 30, 2005 (principally due to a $3.0 million payment that was received in early July 2005) and an increase in accounts payable, accrued expense, deferred revenue and income taxes payable of $18.7 million. The increase in accounts payable, accrued expenses, deferred revenue and income taxes payable is a result of the $24.0 million estimated loss contingency recorded in the Freedom Wireless patent infringement lawsuit, partially offset by decreases in income tax, bonus and equipment accruals as of December 31, 2004 that were subsequently paid.

Our investing activities utilized $10.4 million of net cash for the six months ended June 30, 2005. We spent approximately $9.4 million for the purchase of telecommunication equipment and software to enhance our managed services platform as well as further develop our licensed products. Internally capitalized costs were $1.8 million for the six month period ended June 30, 2005 and were $1.9 million for the same period in 2004. In addition, we acquired a business for approximately $6.7 million and contributed $1.5 million to fund our defined benefit plan, a contribution which we intend to make every year in our second quarter. We expect to continue our investment in new and existing products, resulting in capital expenditures of approximately $5.0 to $7.0 million for the third quarter of 2005.

Our financing activities provided cash of $375,000 for the six months ended June 30, 2005 primarily from proceeds from the exercise of stock options and the issuance of common stock under the Employee Stock Purchase Plan.

On July 27, 2005, we entered into an agreement with Cingular and have agreed to place $41 million of cash into escrow which will be restricted cash in that it would be intended to be used to post a bond or other security to stay the execution of judgment, in the event that the Freedom Wireless lawsuit contains joint and several liability of more than $41 million. This agreement is subject to mutual acceptance of an escrow agent and related escrow terms.

Subject to the outcome of the Freedom Wireless litigation, we believe that our cash, cash equivalents and short-term investments will be sufficient to finance our operations for at least the next twelve months and for the foreseeable future thereafter. Any amount of adverse final judgment in the Freedom Wireless litigation would likely (when paid) adversely impact our liquidity and capital resources. In addition, our liquidity and capital resources would be adversely impacted if we are required to post a bond in excess of our existing assets which could be securitized in

order to obtain a bond. This bond could include any liability specific to bcgi only, including willful infringement. If a bond is required to be posted by bcgi which is in excess of our means, we may need to seek protection under Chapter 11 of the U.S. Bankruptcy Code.

We have non-cancelable commitments for equipment, operating lease commitments for office space, many of which are renewable at our option, as well as various other commitments for telecommunications services. We include in our commitments those agreements under which we are contractually obligated and agreements that are cancelable, but which we do not anticipate canceling. The following table summarizes our contractual obligations as of June 30, 2005 (in thousands):

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

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

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

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

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

For our licensed systems sales, we typically recognize revenue from the sale of systems at the time the systems are shipped or delivered to the customer, depending on shipping terms. In the event there are acceptance terms, we defer revenue until acceptance has occurred. In addition, certain software is licensed to distributors, who pay licensing fees to us as they sell the software to their customers and this revenue is recognized in the month in which it is earned.

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

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

We accrue for loss contingencies in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (FAS 5) and FASB Interpretation 14 Reasonable Estimation of the Amount of a Loss (FIN 14), which specifies that if a loss is probable and can be reasonably estimated, it should be recorded.

Furthermore, when some amount within the range appears at the time to be a better estimate than any other amount within the range, that amount shall be accrued. When no amount within the range is a better estimate than any other amount, however, the minimum amount in the range shall be accrued. There can be no assurance as to whether the actual loss will be higher or lower than the amount which is accrued.

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

Internally capitalized costs increased to $1.2 million for the three month period ended June 30, 2005 compared to $1.1 million for the three month period ended June 30, 2004 and decreased to $1.8 million for the six month period ended June 30, 2005 from $1.9 million for the same period in 2004. Amortization of capitalized software development costs begins when the solution is made available for general release and amortization of internal use costs begins when the related asset is first placed into service. These costs are amortized on a straight-line basis over a three-year period.

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

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

We account for goodwill in accordance with FAS 142 “Goodwill and Other Intangible Assets.” Under FAS 142, goodwill is not amortized but is subject to annual impairment tests. We evaluate goodwill for impairment annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is tested for impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.

In October 2002, we acquired the assets and certain liabilities of Infotech Solutions Corporation (“ISC”) and determined the fair value of the assets acquired and liabilities assumed. The principal asset acquired was completed technology of $1.0 million related to billing software solutions for the wireless marketplace as well as customer contracts of $200,000. We may be required to pay additional contingent cash consideration based on ISC attaining certain defined annual revenue targets in 2005, which will be accounted for as additional goodwill. At June 30, 2005, we recorded an estimated contingent cash consideration liability for 2005 of $380,000.

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

In June 2005, we acquired the assets and certain liabilities of PureSight and determined the fair value of the assets acquired and liabilities assumed. The principal assets acquired were completed technology related to advanced content recognition solutions for mobile operators, ISPs and enterprises, non-compete agreements, customer contracts and relationships and trademarks valued at approximately $1.7 million.

Management determined the fair value of the assets acquired by considering the anticipated cash flows to be generated from the existing products, the valuation of customer relationships, the estimated life of the technology acquired and other assumptions. The valuation of completed technology was primarily based on future cash flow projections over the estimated economic life adjusted for an incremental obsolescence rate discounted to present value. We estimated that the useful life of the acquired technology is four to seven years.

Significant judgments and estimates are involved in our acquisitions to determine the fair market value of assets acquired and their useful lives. Different assumptions could yield materially different results.

As a result of the Freedom Wireless lawsuit verdict and related accounting, we performed an asset impairment test for our long-lived assets and goodwill in the quarter ended June 30, 2005 and concluded that no impairment existed.

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

The income tax benefit for the six months ended June 30, 2005 was $4.8 million, compared to an income tax provision of $5.9 million (39.5% effective tax rate) for the six months ended June 30, 2004. The benefit recorded in the current year reflects our assessment of our ability to realize the tax benefit from the ultimate loss, if any, from the Freedom Wireless litigation.

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

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

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

An unfavorable final judgment in the Freedom Wireless lawsuit would have a material adverse impact on our business, including potential asset impairment charges and the possibility of a Chapter 11 bankruptcy filing and would impair our ability to continue as a going concern.

Although we are awaiting the Court’s rulings in the non-jury trial on inequitable conduct that concluded on July 26, 2005, and we intend to file motions for judgment as a matter of law and a motion for a new trial or, in the alternative, a reduction in the damages awarded by the jury, there can be no assurance that we will be successful on any of these motions or that Freedom Wireless will not appeal a decision adverse to them. In addition, if the Court rules against us and our co-defendants in the non-jury trial, we expect to appeal the Court’s decision to the Court of Appeals for the Federal Circuit. However, there can be no assurance that we will receive a favorable outcome from the appeal process.

If the original jury verdict of $128 million, or a higher amount, is ultimately upheld, this amount would exceed our ability to pay, and we may need to seek protection under Chapter 11 of the U.S. Bankruptcy Code. Even if we are successful in reducing the amount of such jury award, there can be no assurance that a reduced award would not still exceed our ability to pay. In addition, any significant delay in the Court issuing a final judgment could impair our business going forward due to ongoing uncertainty and additional legal costs.

At any time during the aforementioned proceedings, we may seek a settlement with Freedom Wireless and/or a license to use Freedom Wireless’ patents. Any such settlement or license may carry terms unfavorable to us and may significantly restrict our cash and/or future ability to generate profits.

In addition, following the initial verdict in the Freedom Wireless lawsuit, Freedom Wireless filed two separate patent infringement lawsuits against us and Nextel Communications and Alltel Corporation, respectively. Although we are contesting the lawsuits, there can be no assurance of a favorable outcome in these matters, and we are obligated to indemnify Nextel and Alltel for damages they may incur with respect to any finding of infringement by bcgi’s technology.

Regardless of the outcome, we will continue to incur significant expenses to defend this lawsuit. We have incurred approximately $23.1 million in legal and other costs as of June 30, 2005 to defend this lawsuit, and expect to incur approximately $3.0 to $4.0 million in legal expenses in the third quarter 2005. Ongoing legal costs may fluctuate from time to time, depending on the nature of our legal proceedings.

In order to appeal the verdict in the Freedom Wireless lawsuit, we may be required to provide collateral or post a bond or may be enjoined from conducting our business as currently conducted, either of which could adversely affect and/or restrict our business during the appeal process.

As a condition to the filing of an appeal in the Freedom Wireless lawsuit, the Court may require the defendants to provide collateral or post a bond. The bond may approximate 110% of the final damages amount, which, depending on the final judgment, could exceed our ability to pay. We may be required to pledge a substantial portion of our assets to collateralize an appeal bond, which could significantly restrict our ability to operate our business and execute on our strategic plan. In addition, Freedom Wireless may seek to enjoin us from providing our prepaid wireless and Real-Time Billing in the United States while an appeal is pending. If we are unable to provide adequate collateral or post a sufficient bond, or an injunction is entered and not stayed, then we will not be able to provide the prepaid wireless or Real-Time Billing service as currently offered in the United States. In that event, we may not be able to continue our ongoing operations or may need to seek protection under Chapter 11 of the U. S. Bankruptcy Code.

If the final judgment in the Freedom Wireless lawsuit exceeds our ability to pay, execution of judgment is not stayed and Cingular does not post bond for us, this would likely result in our need to seek protection under Chapter 11 of the U.S. Bankruptcy Code.

In July 2005, we entered into an agreement with Cingular Wireless LLC, a co-defendant in the case. Under the terms of this agreement, we agreed to place $41 million into escrow for the purpose of using these funds as security in the event that a bond or other security must be posted for more than $41 million. This agreement is subject to mutual acceptance of an escrow agent and related escrow terms. In exchange for placing the funds into escrow, if a final judgment in the lawsuit is rendered against us and our co-defendants, and the joint and several damages exceed $41 million, Cingular has agreed to post security in the form of an appeal bond or otherwise in an amount that, when added to our $41 million, is determined by the Court to be adequate security to stay the execution of the judgment. This agreement may allow us to proceed with an appeal and to avoid exposure to bankruptcy while the appeal is pending, in the event that a final judgment against us in this lawsuit is rendered for joint and several damages that exceed $41 million. Cingular is not obligated to provide the security for the payment of any portion of the damages for which Cingular is not jointly and severally liable. However, in the event that Cingular does not post a bond with us to appeal the case, this could result in our need to seek protection under Chapter 11 of the U.S. Bankruptcy Code.

The agreement with Cingular Wireless LLC may substantially reduce bcgi’s working capital and access to cash.

With the current uncertainties facing bcgi and the potential for unforeseen changes in our estimates, including but not limited to loss of customers and/or higher than expected legal costs, we may need additional working capital. In such circumstances, we would not have access to the $41 million placed in escrow as security for an appeal. If we are unable to secure additional capital or finance sufficient assets, we may need to seek protection under Chapter 11 of the U.S. Bankruptcy Code.

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

In June 2005, a putative class action complaint was filed in the U.S. District Court for the District of Massachusetts, against us, our Chief Executive Officer and our Chief Financial Officer on behalf of persons who purchased our common stock between November 15, 2000 and May 20, 2005. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act as well as Rule 10b-5 promulgated thereunder by allegedly failing to disclose adverse facts regarding the Freedom Wireless, Inc. lawsuit, including that we had willfully infringed the Freedom Wireless patents. We intend to contest the lawsuit vigorously and believe that bcgi and the two executive officers named as defendants have meritorious defenses to the allegations set forth in the lawsuit.

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

As the uncertainty surrounding the status of the Freedom Wireless lawsuits continues, we face challenges with our potential and existing customers, vendors and employees, all of which could have a material adverse effect on our business.

The status of the Freedom Wireless lawsuit remains unresolved and may remain unresolved for an indefinite period of time. This uncertainty will likely impact our existing business in the following ways:

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

Verizon Wireless may terminate our existing prepaid wireless services agreement upon 90 days written notice. Verizon Wireless began converting subscribers from our platform to its internal platform in the fourth quarter of 2004. Conversions have been ongoing and are expected to continue into 2006. In addition, because Cingular Wireless has substantially reduced marketing efforts for prepaid service on their TDMA network and began offering prepaid service on their GSM network through one of our competitors, we expect that subscribers from Cingular Wireless’ TDMA prepaid service that we currently support will churn off of our platform over time. Thus, revenues from Verizon and Cingular will substantially decrease, resulting in a reduction of overall revenue from our Real-Time Billing business from these two customers.

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

Historically, a significant portion of our revenues in any particular period has been attributable to a limited number of customers in the wireless telecommunications business. The following table summarizes the percentage of our total revenue received from Nextel Communications, Verizon Wireless and Cingular Wireless for the three months ended June 30, 2005:

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

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

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

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

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

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

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

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

Our business will not be successful if we do not develop and offer more functionality and features in our solutions than those available in competitive offerings or if we are unable to develop new solutions to offer our wireless customers. Also, there can be no assurance that we will successfully support and enhance our real-time billing platform effectively or that our network will successfully support current and future growth. In addition, we may be unable to leverage our existing infrastructure to provide enhancements to our current solutions or new solutions cost-effectively. If we cannot develop and provide more desirable functionality and features than our competitors, if we cannot sell our new solutions, including bcgi Access Management, bcgi Network or bcgi Payment, or if we are unable to keep our costs down to provide new and enhanced solutions at competitive prices, we would likely lose market share or be required to reduce our pricing, which would have a material adverse effect on our business, financial condition and results of operations. In addition, if we do not successfully continue to upgrade our software and hosting environment as new wireless technologies evolve, including but not limited to 3G technology, we may lose existing and prospective customers.

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

We are expanding our operations internationally and expect to derive a greater portion of our revenues from customers outside the United States. Additionally, we have recently acquired businesses in India and Israel and opened sales offices in Singapore and the United Kingdom. Our international operations are subject to a variety of risks, including:

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

We entered into a strategic investment agreement with an early stage entity with which we have a commercial relationship.

In exchange for cash totaling $1.5 million, we received secured convertible promissory notes for the same amount. The notes are convertible at any time into the borrower’s common stock or preferred stock, as defined in the agreement. If the entity does not execute on its strategic plan, our investment could become impaired and therefore, may not be recovered.

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

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

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

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

A key part of our growth and diversification strategy is to engage in acquisitions. We regularly review acquisition opportunities and have acquired companies in the recent past. There can be no assurance that we will be able to identify any appropriate acquisition candidates or that any identified acquisition opportunities will be available on terms and conditions acceptable to us. We may not be able to successfully integrate recent or future acquired companies and personnel. Acquisitions involve numerous risks, including, among other things:

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

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

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

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

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

We have historically provided our solutions almost exclusively to wireless carriers. The market for solutions to wireless carriers is highly competitive and subject to rapid change as new technologies are continually introduced in the wireless marketplace. We anticipate continued growth and competition in the wireless services industry and, consequently, the entrance of new competitors in the future. Our competitors include independent providers of prepaid and other solutions to wireless carriers and the wireless carriers themselves who provide, or can provide, in-house services similar to ours. These wireless carriers, and many of the independent service providers, have

significantly greater financial and other resources than we do. In addition, the wireless industry is subject to consolidation, which could potentially result in the loss of carrier customers and/or subscribers. Competitive pressures may make it difficult for us to acquire and retain customers and may require us to reduce the price of our service solutions. We cannot be certain that we will be able to compete successfully with existing or new competitors. Our failure to maintain and enhance our competitive position would limit our ability to retain and increase our market share, resulting in serious harm to our business and operating results.

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

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

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

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

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

Management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of June 30, 2005. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that, as of June 30, 2005, our disclosure controls and procedures were

(1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our CEO and CFO by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the three months ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

In March 2000, Freedom Wireless, Inc. filed a suit against us and a number of our current or former carrier customers (Verizon Wireless, Cingular Wireless LLC, AT&T Wireless Services, CMT Partners and Western Wireless Corp.). The suit was tried in the United States District Court in Massachusetts and alleged that the defendants infringe two patents held by Freedom Wireless, Inc. and sought damages as well as injunctive relief. On May 20, 2005, a jury determined that bcgi and certain of the other defendants infringed or are infringing the two Freedom Wireless patents. The jury damages award was in the total amount of $128 million for past damages through December 31, 2004, an amount which exceeds our ability to pay. Of this amount, bcgi and Cingular which (includes AT&T Wireless Services and CMT Partners) are jointly and severally liable for $127.8 million and bcgi and Western Wireless for $200,000. Interest and damages for infringement by bcgi and Cingular from January 1, 2005 to the date of the judgment may also be awarded. Additionally, the jury found that bcgi willfully infringed the patents and as a result, the Court may award treble damages and attorney’s fees. Any enhanced damages for willfulness would be the responsibility of bcgi. The Court, however, also has discretion to reduce the amount of the jury’s damages award. bcgi intends to file a motion for remittitur to ask the Court to reduce the level of damages awarded.

We have an obligation to indemnify the other defendants for damages they may incur with respect to any infringement by our technology. In 2005, Verizon Wireless, which was a defendant in the case, reached a settlement with Freedom Wireless and, as a result, was removed as a defendant in the case. We were not part of the settlement discussions and the terms of the settlement are not public.

The Court has not yet issued a final judgment on the suit since there are still matters pending before the Court. Following the issuance of the jury verdict, a non-jury trial for inequitable conduct was held. In this case, which concluded on July 26, 2005 and is pending before the Court, bcgi argued that the Freedom Wireless patents are unenforceable because Freedom breached its duty of candor and good faith to the Patent and Trademark Office (PTO) by knowingly withholding material prior art from the PTO. The Court has ordered the plaintiff and defendants to file proposed findings of fact and conclusions of law with the Court no later than August 15, 2005. If the Court rules in favor of us and our co-defendants in the inequitable conduct trial, the patents held by Freedom Wireless would become unenforceable, a decision that Freedom Wireless, Inc. may choose to appeal. We intend to file motions for judgment as a matter of law and a motion for a new trial or, in the alternative as noted above, a reduction in the damages awarded by the jury. We expect that the Court would rule on each of these matters in addition to determining the final judgment on the case in due course, sometime after August 15, 2005.

If the Court rules against us and our co-defendants in the non-jury trial, we expect to appeal the Court’s decision to the Court of Appeals for the Federal Circuit. The appeal process can take 12-18 months or longer. In the event of an appeal, the Court may require the defendants to provide collateral or post a bond. The bond could approximate 110% of the final damages amount, which, depending on the final judgment, could exceed our ability to pay. If we are unable to provide adequate collateral or post a sufficient bond, or an injunction is entered and not stayed, or if we are unable to get an adverse judgment reversed and are unable to negotiate a commercially acceptable license with Freedom Wireless to allow us to continue to provide our products and services, then it will not be possible for us to

provide the prepaid wireless or Real-Time Billing service as currently offered in the United States. In that event, we may not be able to continue our ongoing operations or may need to seek protection under Chapter 11 of the U. S. Bankruptcy Code. If the plaintiff files for an injunction, the Court could rule that we may not use the alleged infringing technology.

In order to mitigate the risk that we will be unable to post sufficient collateral on our own, we entered into an agreement with Cingular Wireless LLC, a co-defendant in the case. This agreement is subject to mutual acceptance of an escrow agent and related escrow terms. Under the terms of this agreement, we have agreed to place $41 million into escrow for the purpose of using these funds as security in the event that a bond or other security must be posted for more than $41 million. In exchange for placing the funds into escrow, if a final judgment in the lawsuit is rendered against us and our co-defendants, and the joint and several damages exceed $41 million, Cingular has agreed to post security in the form of an appeal bond or otherwise in an amount that, when added to our $41 million, is determined by the court to be adequate security to stay the execution of the judgment. Cingular has also agreed to dismiss, without prejudice, the action filed by Cingular against us in May 2005. Cingular originally filed this action in an effort to enforce Cingular’s indemnity rights against us as a result of the Freedom Wireless verdict. This agreement is expected to allow us to proceed with an appeal and potentially avoid exposure to bankruptcy while the appeal is pending, in the event that a final judgment against us in this lawsuit is rendered for joint and several damages that exceed $41 million. Cingular is not obligated to provide the security for the payment of any portion of the damages for which Cingular is not jointly and severally liable. The agreement does not alter bcgi’s obligation to indemnify Cingular.

While we do not believe that we infringe these patents and believe that the patents are invalid in light of prior art and other reasons, in light of the jury verdict we believe it is probable that a loss contingency exists. Although the ultimate amount of such loss, if any, is not currently known, accounting guidelines under Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (FAS 5) and FASB Interpretation 14, Reasonable Estimation of the Amount of a Loss (FIN 14), specifies that if a loss is probable and can be reasonably estimated, it should be recorded. Based on management’s assessment of the potential outcomes of the case and in accordance with FAS 5 and FIN 14, we have accrued an estimated loss of $24 million with respect to the Freedom Wireless verdict. However, the actual loss, if any, may be significantly higher or lower than the amount accrued.

Freedom Wireless Patent Infringement Lawsuits Against bcgi, Nextel Communications and Alltel Corporation

On May 20, 2005, Freedom Wireless filed two separate lawsuits in the U.S. District Court for the District of Massachusetts, the first against us and Nextel Communications, and the second against us and Alltel Corporation. To date, we have not been served. These lawsuits allege that we and each of our named carrier customers infringe the same two patents held by Freedom Wireless, Inc. and seek damages as well as injunctive relief. We have an obligation to indemnify our customers for damages they may incur with respect to any infringement by our technology. We intend to contest the lawsuits vigorously and believe that we do not infringe these patents and believe that the patents are invalid in light of prior art and other reasons.

In June 2005, a putative class action complaint was filed in the U.S. District Court for the District of Massachusetts, against us, our Chief Executive Officer and our Chief Financial Officer on behalf of persons who purchased our common stock between November 15, 2000 and May 20, 2005. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act as well as Rule 10b-5 promulgated thereunder by allegedly failing to disclose adverse facts regarding the Freedom Wireless, Inc. lawsuit, including that we had willfully infringed the Freedom Wireless patents. Within ten days of the appointment of a lead counsel and a lead plaintiff in this case, the parties will submit for the Court’s consideration a proposed schedule for this case, including defendants’ time to respond to the complaint by motion to dismiss or otherwise. We intend to contest the lawsuit vigorously and believe that bcgi and the two executive officers named as defendants have meritorious defenses to the allegations set forth in the lawsuit.

On April 28, 2005, a complaint by Aerotel Corporation was filed against Verizon alleging infringement by Verizon Communications, Verizon Wireless and others of a patent on prepaid technology. Verizon has notified us that we may be asked to indemnify them in this case under our Prepaid Wireless Services Agreement for that portion of any liability specific to Verizon Wireless prepaid offered through use of our services. A subpoena for documents and deposition testimony has been served to us. A subpoena for documents and deposition testimony has been served on us. The complaint does not specify damages as it relates to Verizon Wireless prepaid. The lawsuit is currently in the discovery phase and at this time it is not possible to determine the potential course of outcome of this indemnification claim.

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

In June 2004, our board of directors approved the repurchase by us of up to an aggregate of 2,000,000 shares of our common stock pursuant to our repurchase program. The program expired in June 2005 with a total of 838,500 shares purchased. No shares were repurchased under the repurchase program during the quarter ending June 30, 2005.

We held our 2005 Annual Meeting of Shareholders on June 8, 2005. At our Annual meeting, the following actions were taken:

In addition, Gerald McGowan, Gerald Segel, Daniel E. Somers, James A. Dwyer, Jr., Paul R. Gudonis and Frederick E. von Mering are continuing directors.

(a) On June 8, 2005, our shareholders ratified the adoption of our 2005 Stock Incentive Plan, the full text of which is attached as Exhibit 10.1.

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


Boston Communications Group, Inc.
(Registrant)

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


PART I.	FINANCIAL INFORMATION:

Item 1.	Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations Certain Factors That May Affect Future Results	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	36

PART II.	OTHER INFORMATION:

Item 1.	Legal Proceedings	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 4.	Submission of Matters to a Vote of Security Holders	39

Item 6.	Exhibits	40


	June 30, 2005			December 31, 2004
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,883		$	9,467
Short-term investments		60,208			68,285
Accounts receivable, net of allowance of $650 in 2005 and $474 in 2004		22,229			17,358
Tax refund receivable		966			—
Deferred income taxes		120			319
Prepaid expenses and other assets		3,370			2,907

Total current assets		88,776			98,336
Property and equipment:
Building, land and leasehold improvements		14,231			14,576
Telecommunications systems & software		99,202			94,900
Furniture and fixtures		918			789
Systems in development		8,132			2,837

		122,483			113,102
Less allowance for depreciation and amortization		67,974			57,543

		54,509			55,559
Intangible assets, net		4,578			2,450
Goodwill		9,164			4,753
Other assets		9,171			6,913

Total assets	$	166,198		$	168,011


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,725		$	312
Accrued expenses		8,528			13,386
Accrued estimated loss from litigation		24,000			—
Deferred revenue		3,391			3,753
Income taxes payable		—			1,591

Total current liabilities		37,644			19,042
Non-current liabilities:
Accrued pension liability		3,965			3,476
Deferred income taxes		1,948			7,046

Total non-current liabilities		5,913			10,522
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued and outstanding		—			—
Common stock, voting, par value $.01 per share, 35,000,000 shares authorized; 17,642,886 and 17,581,625 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively		176			176
Additional paid-in capital		104,445			104,070
Retained earnings		18,201			34,430
Accumulated other comprehensive loss		(181	)		(229	)

Total shareholders’ equity		122,641			138,447

Total liabilities and shareholders’ equity	$	166,198		$	168,011


	Three months ended June 30,					Six months ended June 30,
	2005			2004		2005			2004
NET REVENUES	$	25,615		$	27,650	$	51,967		$	54,895

EXPENSES:
Cost of revenues*		6,793			6,459		13,470			12,837
Engineering, research and development		4,306			3,497		9,061			7,293
Sales and marketing		2,313			1,667		4,789			3,539
General and administrative		2,621			2,125		5,150			4,211
General and administrative – legal charges		4,319			450		6,529			1,600
Estimated loss from litigation		24,000			—		24,000			—
Depreciation and amortization		5,204			5,490		10,758			10,959

Operating income (loss)		(23,941	)		7,962		(21,790	)		14,456
Interest income		408			251		808			563

Income (loss) before income taxes		(23,533	)		8,213		(20,982	)		15,019
Provision/(benefit) for income taxes		(5,671	)		3,211		(4,753	)		5,933

Net income (loss) from continuing operations		(17,862	)		5,002		(16,229	)		9,086
Net loss from discontinued operations		—			—		—			(11	)

Net income (loss)	$	(17,862	)	$	5,002	$	(16,229	)	$	9,075

Basic net income (loss) per share:
Continuing operations	$	(1.01	)	$	0.27	$	(0.92	)	$	0.50
Net income (loss)	$	(1.01	)	$	0.27	$	(0.92	)	$	0.50
Weighted average common shares outstanding		17,641			18,295		17,622			18,286

Diluted net income (loss) per share:
Continuing operations	$	(1.01	)	$	0.27	$	(0.92	)	$	0.49
Net income (loss)	$	(1.01	)	$	0.27	$	(0.92	)	$	0.48
Weighted average common shares outstanding		17,641			18,735		17,622			18,728


	Six months ended June 30,
	2005			2004
OPERATING ACTIVITIES
Net income (loss) from continuing operations	$	(16,229	)	$	9,086
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operations:
Depreciation and amortization		10,758			10,959
Deferred income taxes		(4,899	)		108
Accrued estimated loss from litigation		24,000			—
Changes in operating assets and liabilities:
Accounts receivable, net		(4,663	)		(5,373	)
Tax refund receivable		(966	)		—
Prepaid expenses and other assets		(739	)		(772	)
Accounts payable, accrued expenses and deferred revenue		(3,534	)		(347	)
Income taxes payable		(1,754	)		1,181
Other non-current liabilities		489			461

Net cash provided by operating activities of continuing operations		2,463			15,303
Loss from discontinued operations		—			(11	)
Net change in operating assets and liabilities of discontinued operations		—			(260	)

Net cash used in operating activities of discontinued operations		—			(271	)

Net cash provided by operations		2,463			15,032

INVESTING ACTIVITIES
Acquisition of business		(6,651	)		—
Payment of earnout of acquired business		(591	)		(410	)
Purchases of short-term investments		(33,523	)		(31,043	)
Sales of short-term investments		41,648			31,995
Purchase of long-term investments		(1,955	)		(1,517	)
Purchases of property and equipment		(9,350	)		(10,039	)

Net cash used in investing activities		(10,422	)		(11,014	)

FINANCING ACTIVITIES
Proceeds from exercise of stock options		21			375
Proceeds from issuance of common stock		354			335
Repurchase of common stock		—			(4,935	)

Net cash provided by (used in) financing activities		375			(4,225	)

Decrease in cash and cash equivalents		(7,584	)		(207	)
Cash and cash equivalents at beginning of period		9,467			2,960

Cash and cash equivalents at end of period	$	1,883		$	2,753


SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes	$	1,789		$	4,961


(in thousands)	Three months ended June 30,						Six months ended June 30,
(in thousands)	2005			2004			2005			2004
Net income (loss) as reported	$	(17,862	)	$	5,002		$	(16,229	)	$	9,075
Securities valuation adjustment, net of tax		98			(206	)		49			(226	)
Foreign currency translation, net of tax		(1	)		—			(1	)		—

Comprehensive income (loss)	$	(17,765	)	$	4,796		$	(16,181	)	$	8,849


	Three months ended June 30,		Six months ended June 30,
	2005	2004	2005	2004
Denominator:
Denominator for basic net income (loss) per share	17,641	18,295	17,622	18,286
Effect of dilutive employee stock options	—	440	—	442

Denominator for diluted net income (loss) per share	17,641	18,735	17,622	18,728


	Three months ended June 30,
	2005				2004
	Total		% of Total Revenues		Total		% of Total Revenues
Real-Time Billing	$	23,348	91	%	$	25,667	93	%
Other		2,267	9	%		1,983	7	%

Total revenues	$	25,615	100	%	$	27,650	100	%


	Six months ended June 30,
	2005				2004
	Total		% of Total Revenues		Total		% of Total Revenues
Real-Time Billing	$	47,573	92	%	$	51,070	93	%
Other		4,394	8	%		3,825	7	%

Total revenues	$	51,967	100	%	$	54,895	100	%


			Payment due by period
	Total		within 1 year		2-3 years		4-5 years		More than 5 years
Contractual Obligations:
Operating leases	$	2,148	$	1,548	$	569	$	31	$	—
Purchase commitments		7,726		6,200		1,498		28		—

Total	$	9,874	$	7,748	$	2,067	$	59	$	—


Nextel Communications	37	%
Verizon Wireless	22	%
Cingular Wireless	16	%


	Number of Shares/Votes
	For	Withheld
Paul J. Tobin	15,145,073	1,299,583
E.Y. Snowden	15,315,653	1,129,003
Brian E. Boyle	15,038,205	1,406,451


10.1		2005 Stock Incentive Plan

10.2		Form of Nonstatutory Stock Option Agreement for employees pursuant to the Company’s 2005 Stock Incentive Plan

10.3		Form of Nonstatutory Stock Option Agreement for Directors pursuant to the Company’s 2005 Stock Incentive Plan

10.4		Form of Restricted Stock Agreement for Directors pursuant to the Company’s 2005 Stock Incentive Plan

10.5		Form of Restricted Stock Agreement Granted Under 2005 Stock Incentive Plan

10.6		Form of Incentive Stock Option Agreement for Executive Officers pursuant to the Company’s 2005 Stock Incentive Plan

10.7		PureSight Asset Purchase Agreement, dated May 20, 2005, between Cellular Express Inc. and bcgi Technologies Ltd., as Buyers, and Puresight, Inc. and PureSight Ltd. as sellers

10.8		Change of Control Agreement between the Company and Thomas M. Erskine, dated May 3, 2005

10.9		Change of Control Agreement between the Company and Ersin Galioglu, dated May 3, 2005

10.10		Change of Control Agreement between the Company and James Anderson, dated May 3, 2005

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

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

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