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 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

As of May 1, 2006 there were 17,905,803 shares of Common Stock, $0.01 par value per share, outstanding.

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 month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for any other interim period or the year ending December 31, 2006.

On May 20, 2005, a jury determined that bcgi and the other defendants infringed or are infringing two Freedom Wireless patents. The jury damages and post-trial damages (through October 12, 2005) plus interest and court costs awarded by the District Court total approximately $165 million (bcgi and each co-defendant carrier are jointly liable for specific amounts).

The Company is appealing the entire judgment and could ultimately settle the litigation. However, there can be no assurance that the Company will prevail on appeal or be able to settle, or be able to settle on acceptable terms. 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 $64.3 million with respect to the Freedom Wireless litigation, excluding the Company’s legal costs which are expensed as incurred. However, the actual loss, if any, may be significantly higher or lower than the amount accrued and may ultimately exceed the Company’s ability to pay. If the Company is unable to successfully manage its business during the appeals process, if the Company’s appeal is unsuccessful or if the Company is unable to reach an acceptable settlement agreement, then it may not be able to continue its ongoing operations or may need to seek protection under the U. S. Bankruptcy Code. See Note 5 for a more detailed discussion of this and other litigation.

The above matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

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.

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 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 upon sell through to a customer.

For multiple element arrangements, the Company determines fair value of each undelivered element and the Company recognizes revenue based on the residual value method. 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 and restricted cash 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 and municipal auction rate securities maturing in less than thirty-six months.

Substantially all of the Company’s short-term investments have contractual maturities of twelve months or less. Because of the short term to maturity, amortized costs approximate fair values for all of these securities. Realized and unrealized gains and losses were not material.

In connection with the Freedom Wireless judgment discussed in Note 5 to the Consolidated Financial Statements, in July 2005 the Company entered into a Funding of Security for Appeal Agreement (“Appeal Agreement”) with Cingular Wireless whereby the Company placed $41 million in escrow as security for any potential joint liability associated with the litigation. At March 31, 2006, this escrow amount (including interest earned to date) totaled $41.9 million and is recorded as restricted cash.

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 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 specify 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.

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. 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 estimates.

Results of operations for the Company’s Indian and Israeli subsidiaries were translated into United States dollars using the average exchange rates during the applicable periods. Assets and liabilities were translated into United States dollars using the exchange rate on the balance sheet date. Resulting translation adjustments were recorded in Accumulated Other Comprehensive Loss.

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.

Components of comprehensive income include net income 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, restricted cash, short and long-term investments and accounts receivable.

The Company maintains cash, cash equivalents, restricted cash, 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 is in the process of expanding its sales territories globally, including 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.

The following table summarizes sales in excess of 10% of total revenues, as a percentage of total revenues, to major customers for the three months ended March 31:

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” (“98-1 costs”). 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.

The Company also capitalizes internal software development costs in accordance with Financial and Accounting Standards Board (“FASB”) Statement No. 86 (“FAS 86”), “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.” This statement specifies that costs incurred internally in creating a computer software product shall be charged to expense when incurred as research and development until technological feasibility has been established for the product (“FAS 86 costs”). Technological feasibility is established upon completion of all planning, designing, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements. The Company ceases capitalization of internally developed software when the product is made available for general release to customers and thereafter, any maintenance and customer support is charged to expense when related revenue is recognized or when those costs are incurred. The Company continually evaluates the recoverability of capitalized costs and if the success of new product releases is less than it anticipates, then a write-down of capitalized costs may be made which could adversely affect its results in the reporting period in which the write-down occurs.

Internally capitalized costs increased to $804,000 for the three month period ended March 31, 2006 compared to $603,000 for the three month period ended March 31, 2005. Amortization of FAS 86 costs begins when the solution is made available for general release and amortization of 98-1 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. When indicators of impairment exist and the carrying value of intangibles and long-lived assets, other than goodwill, may not be recoverable, the Company compares 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 Condensed Consolidated Statement of Income. The estimated undiscounted cash flows for each of the Company’s long-lived assets could differ materially from the actual results.

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 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 each operating unit, which includes bcgi Access Management, bcgi Payment, Real-Time Billing and Voyager Billing with its carrying amount, including goodwill. Fair value for each operating unit is determined using a discounted cash flow valuation model, which requires judgments to be made by management regarding estimating future cash flows, economic life and discount rates, among other assumptions. If the carrying amount of the operating unit’s net assets exceeds the fair value of that operating unit, the Company would evaluate any impairment loss under the next step of the impairment test. The estimated discounted cash flows for each operating unit could differ materially from the actual results. The intangible assets are being amortized over a four to seven year life.

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards 123(R), Share-Based Payment (“SFAS No, 123(R)”), as interpreted by SEC Staff Accounting Bulletin No. 107 (“SAB No. 107”). Effective with the adoption of SFAS No. 123(R), the Company is recognizing stock-based compensation expense, which is based on the fair value of the award on the date of grant, ratably over the related service period, net of estimated forfeitures (Note 3 — Stock Based Compensation in the Notes to the Condensed Consolidated Financial Statements).

The determination of the fair value of a stock-based compensation award on the date of grant is impacted by a number of factors, including the use of a particular fair value model, the Company’s stock price, and certain assumption regarding highly complex and subjective variables. Included among the variables that impact the fair value of an award are the expected life of the stock compensation award, the Company’s common stock price volatility, risk-free interest rate and dividend yield. The assumptions used in calculating the fair value of the Company’s stock compensation awards represent its best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and the Company uses different assumptions, stock-based compensation expense could be materially different from what has been recorded in the current period.

Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period plus the impact, if dilutive, of common share equivalents, which comprise stock options For purposes of computing diluted earnings per share, weighted average common share equivalents do not include stock options with an exercise price that exceeds the average market price of the Company’s Common Stock for the respective period. Accordingly, for the three months ended March 31, 2006 and 2005, options to purchase 5,000 and 2,009,000 shares, respectively, of Common Stock have been excluded from the computation.

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

On December 16, 2004, and as amended on April 14, 2005, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004) (“SFAS 123”), Share-Based Payment (Statement No. 123(R)) (“SFAS123(R)”), which is a revision of SFAS 123, Accounting for Stock-Based Compensation. SFAS 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 SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of income based on their fair values. Pro forma disclosure is no longer an alternative.

On January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective method as permitted under SFAS 123(R). Under this transition method, compensation cost recognized in the first quarter of fiscal 2006 includes: (a) compensation cost for all share-based payments granted prior to but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). In accordance with the modified prospective method of adoption, the Company’s results of operations and financial position for prior periods have not been restated.

The Company’s 2005 Stock Incentive Plan (the “Incentive Plan”) was adopted by the Board of Directors and approved by its stockholders in 2005. The Incentive Plan provides for the grants of options, restricted stock awards, stock appreciation rights and other stock-based awards to employees, officers, directors and consultants and advisors to the Company and its subsidiaries. The Incentive Plan replaced the Company’s prior Stock Option Plans (the “Option Plans”), under which no further awards may be granted although options continue to remain outstanding until cancelled or exercised. A total of 1,500,000 options were approved under the Incentive Plan in addition to 600,000 shares that may also be issued under the Incentive Plan which expire, terminate, or are otherwise surrendered, canceled or forfeited, under the Option Plans. Additionally, 50,000 shares of restricted stock may be issued under the Incentive Plan and shall be counted against the 1,500,000 option limit as two and four-tenths shares for each share of common stock issued upon settlement of such awards.

Under the Incentive Plan, the Company may grant options that are intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”), or options not intended to qualify as incentive stock options (“Non-Statutory Options”). Incentive stock options may only be granted to the Company’s employees. The maximum number of shares with respect to which options or other awards may be granted to any employee under the Incentive Plan shall not exceed 100,000 shares of Common Stock during any calendar year. All options granted have 10-year terms and generally vest and become exercisable over one to three years.

The Company’s 2004 Employee Stock Purchase Plan (the “Purchase Plan”) was adopted by the Board of Directors and approved by the shareholders of the Company in June 2004. The Purchase Plan authorizes the issuance of up to a total of 357,531 shares of Common Stock to participating employees. The Purchase Plan was terminated by the Board of Directors on March 1, 2006. Under APB Opinion No. 25, the Company was not required to recognize stock-based compensation expense for the cost of stock options or shares issued under the Company’s Purchase Plan. Upon adoption of SFAS 123(R), the Company recorded stock-based compensation expense related to the Purchase Plan.

The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award. The fair value of options granted during the first quarter of 2006 and 2005 was calculated using the following estimated weighted average assumptions:

The Company groups its employees into three distinct groups, options and awards granted to the board of directors, executives and non-executive employees. Based on historical information the three groups have acted differently over time.

Expected volatility – the Company is responsible for estimating volatility and has considered a number of factors when estimating volatility. Historical volatility during the period is commensurate with the expected term of the Company’s stock options over the past several years, excluding several periods of time that the Company’s stock price experienced significant increases or decreases due to the Freedom Wireless lawsuit. The Company believes that this past stock price volatility, excluding the above mentioned periods, is likely to be indicative of future stock price behavior.

Expected term – the Company uses historical employee exercise and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. The Company believes that this historical data is currently the best estimate of the expected term of a new option.

Risk-free interest rate – the yield on U.S. Treasury Constant Maturity securities for a period that is commensurate with the expected term assumption is used as the risk-free interest rate.

Expected dividend yield – from inception there has been no cash dividend declared by the Company’s Board of Directors.

The Company used the graded attribution method to recognize expense for all options granted prior to the adoption of SFAS 123(R). Upon adoption of SFAS 123(R) on December 31, 2005, the Company continued to use the same graded attribution method to recognize expense for options granted after December 31, 2005.

The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company currently expects, based on an analysis of its historical forfeitures that approximately 97% of its options will actually vest, and therefore has applied an annual forfeiture rate of 6-14% to all unvested options as of March 31, 2006. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.

The adoption of SFAS 123(R) on January 1, 2006 had the following impact on the first quarter of fiscal 2006 results: operating loss before tax and net income was lower by $159,000 and the effects on basic and diluted EPS were not material.

The following table details the effect on net income and earnings per share had stock-based compensation expense been recorded for the first three months of fiscal 2005 based on the fair-value method under SFAS 123. The reported and pro forma net income and earnings per share for the first quarter of fiscal 2006 are the same since stock-based compensation expense was calculated under the provisions of SFAS 123.

In 2005, prior to the adoption of SFAS 123(R), 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 $6.57 per share. Options to purchase 1,139,291 shares of the Company’s Common Stock became exercisable immediately as a result of the vesting acceleration. The aggregate number of options to purchase shares of the Company’s Common Stock held by directors and executive officers that were accelerated pursuant to this acceleration is 455,326. 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 $2.4 million of stock-based compensation for all options whose vesting was accelerated. The Company took this action to limit the negative impact on the Company’s results from operations beginning in 2006 when SFAS 123(R) became effective for the Company.

A summary of the activity under the Company’s stock option plans as of March 31, 2006 and changes during the three-month period then ended, is presented below:

As of March 31, 2006, there was $591,000 of total unrecognized compensation cost related to unvested share-based awards. That cost is expected to be recognized over a weighted-average period of 1.54 years.

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 which is recorded in other assets on the Company’s Consolidated Balance Sheet.

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. To date no interest payments have been 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. The Company performed an asset impairment test for the Notes as of December 31, 2005 and concluded that no impairment existed.

In March 2000, Freedom Wireless, Inc. filed a suit against the Company and a number of its current or former carrier customers (including Verizon Wireless, Cingular Wireless, AT&T Wireless Services, CMT Partners and Western Wireless Corp.) in the United States District Court in Massachusetts (“District Court”). In February 2005, Verizon Wireless 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. On May 20, 2005, a jury determined that the Company and the remaining defendants infringed or are infringing two Freedom Wireless patents. The jury damages and post-trial damages through October 12, 2005, plus interest and court costs awarded by the District Court totaled approximately $165 million (the Company and each carrier co-defendant are jointly liable for specific amounts). The Company has an obligation to indemnify the other defendants for damages they may incur with respect to any infringement by its technology.

In July 2005, the Company entered into an agreement with Cingular Wireless whereby the Company placed $41 million into escrow for the purpose of using these funds as security to Cingular. In exchange for placing the funds into escrow, Cingular has posted bonds totaling $191 million, the amount required by the District Court to stay the execution of the judgment that concerns the joint infringement by the Company and Cingular, pending appeal. Cingular has also agreed to dismiss, without prejudice, the action filed by Cingular against the Company in May 2005. Cingular filed this action in an effort to enforce Cingular’s indemnity rights against the Company as a result of the Freedom Wireless judgment. Cingular is not obligated to provide the security for the payment of any portion of the damages for which Cingular is not jointly liable. The agreement does not alter the Company’s obligation to indemnify Cingular. At March 31, 2006, this escrow amount (including interest earned to date) totaled $41.9 million and is recorded as restricted cash.

On December 15, 2005, the U.S. Court of Appeals for the Federal Circuit (“Appeals Court”) approved the Company’s appeal to stay the injunction that was previously granted by the District Court. Therefore, the Company’s carrier customers, including co-defendant Cingular Wireless, may continue to use the Company’s Real-Time Billing service during the appeals process. In addition, the Appeals Court did not require the Company and/or the other defendants to post additional security for any potential damages that may accrue during the appeals process.

In October 2005, the Company filed to appeal the District Court judgment with the Appeals Court. The Company’s principal appeal brief was filed in April, 2006, and the appeal process is expected to continue into 2007. If the Company’s appeal is unsuccessful or if the Company cannot successfully manage its business during the appeal process, the Company may not be able to continue its ongoing operations or may need to seek protection under the U. S. Bankruptcy Code.

Freedom Wireless Patent Infringement Lawsuits Against bcgi, Sprint Nextel Corporation 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 the Company and Sprint Nextel Corporation, and the second against the Company, Alltel Corporation and several other of the Company’s carrier customers. These lawsuits allege that the Company and each of the named carrier customers infringe the same two patents related to the current judgment 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 the Company does not infringe these patents and that the patents are invalid.

While the Company continues to believe that it does not infringe these patents and believes that the patents are invalid and that the size of the damages awarded bears no relationship to a reasonable royalty that bcgi or any company would have paid for a license of the patents, in light of the adverse judgment, the Company believes it is probable that a loss has been incurred. 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 litigation and in accordance with FAS 5 and FIN 14, the Company accrued an estimated loss of $64.3 million in 2005 with respect to the Freedom Wireless litigation. However, the actual loss, if any, may be significantly higher or lower than the amount accrued and could be higher than the current judgment of $165 million, which exceeds the Company’s ability to pay.

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 Chief Executive Officer and the Chief Financial Officer on behalf of persons who purchased the Company’s common stock between November 15, 2000 and May 20, 2005. The complaint was amended on October 12, 2005 to modify the commencement date to June 6, 2002. 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. The Company has responded to the amended complaint and filed for a motion to dismiss the suit. The Company intends 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. The Company is not named in the complaint. Verizon has notified the Company that the Company may be asked to indemnify them in this case under its Prepaid Wireless Services Agreement for that portion of any liability specific to Verizon Wireless prepaid offered through use of the Company’s services. The complaint does not specify damages as it relates to Verizon Wireless prepaid. The Company has provided documents and deposition testimony in response to a subpoena that 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 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 the Company will prevail. However, the Company does not believe that these matters (other than as disclosed) will have a material adverse effect on the Company’s consolidated financial position, although an adverse outcome of any of these matters could have a material adverse effect on the Company’s consolidated results of operations or cash flows in future quarters or in the quarter or annual period in which one or more of these matters are resolved.

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 lawsuits and the Verizon Indemnification Complaint.

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.

On September 6, 2005, the Board of Directors of the Company declared a dividend of one right (each, a “Right”) for each outstanding share of the Company’s common stock, $.01 par value per share (the “Common Stock”), to shareholders of record at the close of business on September 19, 2005 (the “Record Date”). Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, $.01 par value per share (the “Series A Junior Preferred Stock”), at a purchase price of $35.00 (the “Purchase Price”) in cash, subject to adjustment.

Initially, the Rights are not exercisable and will be attached to all certificates representing outstanding shares of Common Stock, and no separate Rights Certificates will be distributed. The Rights will separate from the Common Stock, and the distribution date (the “Distribution Date”) will occur, upon the earlier of (i) the close of business on the tenth business day (or such later date as may be determined by the Board of Directors) following the later of (a) the first date of a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock or (b) the first date on which an executive officer of the Company has actual knowledge that an Acquiring Person has become such (the “Stock Acquisition Date”) or (ii) the close of business on the tenth business day (or such later date as may be determined by the Board of Directors) following the commencement of a tender offer or exchange offer (other than a Permitted Offer (as defined in the Rights Agreement)) that would result in a person or group

beneficially owning 15% or more of the outstanding shares of Common Stock. The Distribution Date may be deferred in circumstances determined by the Board of Directors. In addition, certain inadvertent acquisitions will not trigger the occurrence of the Distribution Date. Until the Distribution Date (or earlier redemption or expiration of the Rights), (i) the Rights will be evidenced by the Common Stock certificates outstanding on the Record Date, together with a Summary of Rights to be mailed to record holders, or by new Common Stock certificates issued after the Record Date which contain a notation incorporating the Rights Agreement by reference, (ii) the Rights will be transferred with and only with such Common Stock certificates, and (iii) the surrender for transfer of any certificates for Common Stock outstanding (with or without a copy of the Summary of Rights or such notation) will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate.

The Rights are not exercisable until the Distribution Date and will expire upon the close of business on September 6, 2015 (the “Final Expiration Date”) unless earlier redeemed or exchanged. In the event that any person becomes an Acquiring Person, unless the event causing the 15% threshold to be crossed is a Permitted Offer (as defined in the Rights Agreement), then, promptly following the first occurrence of such event, each holder of a Right (except as provided below and in Section 7(e) of the Rights Agreement) shall thereafter have the right to receive, upon exercise, that number of shares of Common Stock of the Company (or, in certain circumstances, cash, property or other securities of the Company) which equals the exercise price of the Right divided by 50% of the current market price (as defined in the Rights Agreement) per share of Common Stock at the date of the occurrence of such event. However, Rights are not exercisable following such event until such time as the Rights are no longer redeemable by the Company as described below. Notwithstanding any of the foregoing, following the occurrence of such event, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. The event summarized in this paragraph is referred to as a “Section 11(a)(ii) Event.”

In the event that, at any time after any person becomes an Acquiring Person, (i) the Company is consolidated with, merged with and into, or consummates a share exchange with, another entity, and the Company is not the surviving or acquiring entity of such consolidation, merger or share exchange (other than a transaction that follows a Permitted Offer) or if the Company is the surviving or acquiring entity, but shares of its outstanding Common Stock are changed or exchanged for stock or securities (of any other person) or cash or any other property, or (ii) more than 50% of the Company’s assets or earning power is sold or transferred, each holder of a Right (except Rights which previously have been voided as set forth above) shall thereafter have the right to receive, upon exercise, that number of shares of common stock of the acquiring company which equals the exercise price of the Right divided by 50% of the current market price (as defined in the Rights Agreement) of such common stock at the date of the occurrence of the event. The events summarized in this paragraph are referred to as “Section 13 Events.” A Section 11(a)(ii) Event and Section 13 Events are collectively referred to as “Triggering Events.”

At any time after the occurrence of a Section 11(a)(ii) Event, when no person owns a majority of the Common Stock, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such Acquiring Person which have become void), in whole or in part, at an exchange ratio of one share of Common Stock, or one one-thousandth of a share of Series A Junior Preferred Stock (or of a share of a class or series of the Company’s Preferred Stock having equivalent rights, preferences and privileges), per Right (subject to adjustment).

The Purchase Price payable, and the number of units of Series A Junior Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Series A Junior Preferred Stock, (ii) if holders of the Series A Junior Preferred Stock are granted certain rights or warrants to subscribe for Series A Junior Preferred Stock or convertible securities at less than the then-current market price (as defined in the Rights Agreement) of the Series A Junior Preferred Stock, or (iii) upon the distribution to holders of the Series A Junior Preferred Stock of evidences of indebtedness or assets (excluding regular periodic cash dividends paid out of earnings or retained earnings) or of subscription rights or warrants (other than those referred to above). The number of Rights associated with each share of Common Stock is also subject to adjustment in the event of a stock split of the Common Stock or a stock dividend on the Common Stock payable in Common Stock or subdivisions, consolidations or combinations of the Common Stock occurring, in any such case, prior to the Distribution Date.

With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments amount to at least 1% of the Purchase Price. No fractional shares of Series A Junior Preferred Stock (other than fractions which are integral multiples of one one-thousandth of a share of Series A Junior Preferred Stock) will be issued and, in lieu thereof, an adjustment in cash will be made based on the market price of the Series A Junior Preferred Stock on the last trading date prior to the date of exercise.

Series A Junior Preferred Stock purchasable upon exercise of the Rights will not be redeemable. Each share of Series A Junior Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors, a minimum preferential quarterly dividend payment of $10 per share or, if greater, an aggregate dividend of 1,000 times the dividend declared per share of Common Stock. In the event of liquidation, the holders of the Series A Junior Preferred Stock will be entitled to a minimum preferential liquidation payment of $1,000 per share, plus an amount equal to accrued and unpaid dividends, and will be entitled to an aggregate payment of 1,000 times the payment made per share of Common Stock. Each share of Series A Junior Preferred Stock will have 1,000 votes, voting together with the Common Stock. In the event of any merger, consolidation, share exchange or other transaction in which Common Stock is changed or exchanged, each share of Series A Junior Preferred Stock will be entitled to receive 1,000 times the amount received per share of Common Stock. These rights are protected by customary antidilution provisions. Because of the nature of the Series A Junior Preferred Stock’s dividend, liquidation and voting rights, the value of one one-thousandth of a share of Series A Junior Preferred Stock purchasable upon exercise of each Right should approximate the value of one share of Common Stock.

Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. Although the distribution of the Rights should not be taxable to shareholders or to the Company, shareholders may, depending upon the circumstances, recognize taxable income in the event that the Rights become exercisable for Common Stock (or other consideration) of the Company or for common stock of the acquiring company as set forth above.

Any provision of the Rights Agreement, other than the redemption price, may be amended by the Board prior to such time as the Rights are no longer redeemable. Once the Rights are no longer redeemable, the Board’s authority to amend the Rights is limited to correcting ambiguities or defective or inconsistent provisions in a manner that does not adversely affect the interest of holders of Rights.

The Rights are intended to protect the shareholders of the Company in the event of an unfair or coercive offer to acquire the Company and to provide the Board with adequate time to evaluate unsolicited offers.

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.

The Company’s operating units 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, primarily to determine worldwide product direction, pricing and other important operating unit decisions, but without profit and loss responsibility for a large portion of the expenses of each unit. The Chief Operating Officer predominantly utilizes consolidated or departmental cost data rather than operating unit data to make critical financial decisions. Revenues for each business are recorded and tracked separately. Most of the Company’s revenues are generated by Real-Time Billing. Other revenues include revenues from products other than Real-Time Billing.

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 Income 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 Plan are based on years of service and compensation.

The components of net periodic benefit costs for the three months ended March 31, 2006 and 2005 are as follows (unaudited and in thousands):

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We deliver products and services that enable mobile operators and Mobile Virtual Network Operators (“MVNOs”) worldwide to differentiate their offerings and increase market penetration while reducing costs. Our access management, prepaid and postpaid billing and payment solutions enable operators to address new market needs. These solutions help our customers compete effectively by attracting and retaining additional subscriber customers, thereby increasing their ability to drive additional revenue, while lowering their operating costs. We offer our fully managed services and licensed products to wireless operators worldwide, selling through both direct and indirect channels.

Our bcgi Billing product line includes our prepaid wireless product, Real-Time Billing, and our postpaid product, Voyager Billing. Voyager Billing serves U.S. operators and MVNO’s, and our revenues are earned principally on a per subscriber basis for generating a postpaid subscriber’s monthly bill. We generate revenues from our Real-Time Billing product as a managed service principally as a percentage of wireless customer revenue or by processing prepaid wireless minutes. 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, bcgi Professional Services 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 or completion of installation for licensed sales.

While we have not generated significant bcgi Access Management revenues related to our Mobile Guardian products to date, we expect that we will generate future revenues from these products by charging wireless operators on a per subscriber per month basis, a per transaction basis, or on a one-time subscriber license basis, plus maintenance and other services.

In the U.S., we typically generate revenues from bcgi Payment by charging wireless operators a transaction fee for the services performed and paying the financial partners a fee for enabling the transaction. Internationally, we license technology to wireless operators to support their payment processing needs.

During the quarter ended March 31, 2006, we entered into a multi-year software license agreement with leading billing, customer care and employee care provider Convergys Corporation, a licensee of Freedom Wireless. Under the terms of the agreement, Convergys will license a range of bcgi products, including Real-Time Billing, Payment Manager and Mobile Guardian^®. We believe this channel partnership further strengthens our bcgi Global Alliance Program and can help extend the reach and appeal of bcgi’s products and services by effectively leveraging the combined distribution power of the two companies.

On May 20, 2005, a jury determined that bcgi and the other defendants infringed or are infringing two Freedom Wireless patents. The jury damages and post-trial damages (through October 12, 2005) plus interest and court costs awarded by the District Court total approximately $165 million (bcgi and each carrier co-defendant are jointly liable for specific amounts). We have an obligation to indemnify the other defendants for damages they may incur with respect to any infringement by our technology.

In October 2005, we filed to appeal the District Court judgment with the Appeals Court. Our principal appeal brief was filed in April, 2006, and the appeal process is expected to continue into 2007. If our appeal is unsuccessful or if we cannot successfully manage our business during the appeal process, we may not be able to continue our ongoing operations or may need to seek protection under the U. S. Bankruptcy Code.

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 $64.3 million in 2005, excluding our legal charges which are expensed as incurred. However, the actual loss, if any, may be significantly higher or lower than the amount accrued and could be higher than the current judgment of $165 million, which exceeds our ability to pay.

Our net revenues decreased 6% to $24.7 million in the first quarter of 2006 compared to $26.4 million in the first quarter of 2005. Sprint Nextel Corporation accounted for 66% of total net revenues in the first quarter of 2006. This represents an increase as a percentage of total revenues from 29% for the three months ended March 31, 2005, due in large part to a decrease in total revenues from other customers. Our operating loss of $755,000 in the first quarter of 2006 represents a decrease of $2.9 million compared to operating income $2.2 million in the first quarter of 2005. The decrease in operating income from 2005 to 2006 is primarily due to:

We anticipate that revenues and earnings will decrease for the second quarter of 2006 compared to the first quarter of 2006 and that we will incur a net loss. These expectations are due to our anticipation that, as previously disclosed, customer migrations will continue in the second quarter, specifically Verizon Wireless, which we anticipate will be fully migrated off our Real-Time Billing platform by June, 2006, and Cingular Wireless, which we expect will continue its migration off our platform during the second quarter of 2006 and will be fully migrated later in 2006. Those carriers, along with Alltel Corporation, who migrated off our Real-Time Billing platform in the first quarter of 2006, collectively comprised approximately 19%, or $4.6 million, of our first quarter 2006 revenues. We expect that these carriers will comprise a lower percentage of revenue in the second quarter as these migrations continue and as Sprint Nextel, who represented approximately 66% of total net revenue in the first quarter, is expected to increase its revenue in dollars and as a percentage of our total net revenue.

We plan to continue to invest in and focus on our customer and product diversification strategy which includes support of bcgi Access Management, bcgi Payment and Voyager Billing products as well as expansion into new domestic and international wireless markets, including the developing MVNO market. As part of this diversification strategy, we are offering more of our products on a licensed sale basis which is expected to result in less predictability in our future sales trends.

Our net revenues from Real-Time Billing decreased by 11% in the three month period ended March 31, 2006 compared to the same period in 2005. As of March 31, 2006, we had 3.75 million subscribers on our Real-Time Billing platform, 40,000 lower than March 31, 2005. This decrease in subscribers was the principal factor in the revenue decline and primarily due to the conversions from Verizon Wireless, Cingular Wireless and Alltel Corporation, who, as previously disclosed, have been migrating or have migrated off our Real-Time billing platform. Some of this decline was offset by growth in subscribers from Sprint Nextel. A decrease in the average billed rate per minute of use (“MOU”) of 53% compared to the first quarter of 2005 also partially contributed to the Company’s revenue decline. This decrease was partially offset by the increase in the average number of billed MOUs per subscriber per month to 175, which was 46% higher than the first quarter of 2005. These changes in average billed rate and average usage per subscriber per month are principally due to customers with lower contractual pricing and higher average usage becoming a larger proportion of Real-Time Billing revenues, in addition to customary volume discounts for those customers.

We anticipate that revenues will decrease for the second quarter of 2006 compared to the first quarter of 2006. This is due to our anticipation that revenues we generate from Verizon Wireless and Cingular Wireless will continue to decline and operators who migrated off our Real-Time Billing platform in the first quarter of 2006, including Alltel Corporation, will generate substantially lower revenues for us in the second quarter of 2006. Although we expect growth and higher revenues from Sprint Nextel Corporation in the first quarter of 2006, we do not expect that any increase will offset the revenue declines from other carriers. This expectation is also due to anticipated decreases in our average billed rate per minute since customers with lower contractual pricing are expected to continue to comprise a larger portion of our revenues.

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 44% in the first quarter of 2006 compared to the same period in 2005. The increase in revenues for the three month period ended March 31, 2006 was due primarily to our success in diversifying our revenues through sales of our expanded product offerings.

Cost of revenues primarily include the salaries and benefits of personnel who support our managed services platform and our licensed product offerings, along with costs for maintenance, telecommunications, travel and other support costs. Cost of revenues increased to 29% of revenues in the first quarter of 2006 from 24% in the first quarter of 2005. The increase in cost of revenues in the three month period resulted primarily from increased software and equipment maintenance costs, increased utilities costs and additional personnel, wages and related costs to support our launch of new customers, including Amp’d Mobile, and our investments in professional services and global licensing strategy. The increase as a percentage of revenues was also effected by the decrease in revenue and the relatively fixed nature of our costs which were not fully absorbed.

Engineering, research and development (“ER&D”) 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 ER&D expenses in absolute dollars for the three month period ended March 31, 2006 compared to the same period in 2005 primarily resulted from additional personnel, wages and related costs of approximately $427,000 principally to support the ongoing feature and functionality enhancements related to all of our products. The personnel acquired through our acquisition of PureSight, Inc. and its Israeli subsidiary, PureSight LTD. (PureSight) also contributed to the increase in personnel, wages and related costs.

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 in absolute dollars increased in the three month period ended March 31, 2006 compared to the same period in 2005 primarily due to $962,000 in additional expenses related to our international sales and diversification strategy, partially offset by $314,000 due to the timing of a major worldwide trade show that occurred in the second quarter of 2006 as compared to the first quarter in 2005. Sales and marketing expenses in absolute dollars are expected to increase in the second quarter of 2006 due to ongoing investment related to our expansion into new domestic and international wireless markets, including the developing MVNO market.

General and administrative (G&A) expenses include salaries and benefits of employees and other expenses that provide our administrative support. G&A expenses in the first quarter of 2006 were relatively consistent with the same quarter in 2005 and increased as a percentage of revenue.

General and administrative legal expenses primarily represent costs incurred to defend the Freedom Wireless litigation. The decrease in expense for the three month period ended March 31, 2006 compared to the same quarter of 2005 was due to the Freedom Wireless trial occurring in the first quarter of 2005 and less time spent by our legal advisors on Freedom related matters in the first quarter of 2006. General and administrative legal expenses are expected to range between $1.0 million to $1.5 million in the second quarter of 2006 compared with $1.2 million in the first quarter of 2006, although this amount may vary depending on the nature of our legal proceedings.

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 deprecation expense for the three month period ended March 31, 2006 compared to the same quarter of 2005 was due to certain equipment and software becoming fully depreciated in 2005.

Interest income increased to $687,000 for the three month period ended March 31, 2006 compared to $400,000 for the three month period ended March 31, 2005. Interest income was earned primarily from restricted cash and investments, which were purchased using the cash generated from operations, from the sale of our teleservices business in 2000 and from the proceeds from our public offerings. Although our combined cash and investment positions decreased as of March 31, 2006 compared to March 31, 2005, higher average interest rates during the first quarter of 2006 resulted in higher interest income compared to the first quarter of 2005. If we ultimately make a cash payment relating to the Freedom Wireless litigation, this would likely substantially reduce our cash and investment balances and therefore reduce future interest income. Interest income is expected to increase slightly in the second quarter of 2006 compared to the first quarter of 2006.

The income tax benefit for the three months ended March 31, 2006 was $975,000, compared to an income tax provision of $918,000 (36% effective tax rate) for the three months ended March 31, 2005. The benefit recorded in the three month period ended March 31, 2006 reflects a one-time income tax benefit recorded in the first quarter 2006 due to favorable resolutions of income tax items from our Internal Revenue Service audit which we had previously reserved that resulted in the reversal of a portion of the valuation allowance against certain deferred tax assets that are now realizable.

As of March 31, 2006, cash, cash equivalents, restricted cash and short-term investments decreased 13% to $70.3 million compared to $80.8 million at December 31, 2005, primarily due to the timing of accounts receivable payments and payment of year end accruals. The net cash used in operations of $7.7 million for the three months ended March 31, 2006 resulted from:

Our investing activities used $7.1 million of net cash for the three months ended March 31, 2006. We spent approximately $2.4 million for the purchase of telecommunications equipment and software to enhance our managed services platform as well as further develop our licensed products. Internally capitalized costs totaled $804,000 for the three months ended March 31, 2006 compared to $603,000 for the three months ended March 31, 2005. In addition, we purchased $3.6 million in short-term investments, net of sales. We expect to contribute approximately $1.5 million to fund our defined benefit plan, a contribution which we intend to make every year in our second quarter.

Our financing activities provided cash of $198,000 for the three months ended March 31, 2006, from proceeds from the issuance of common stock under the Employee Stock Purchase Plan.

Subject to the outcome of the Freedom Wireless litigation, including license fees that may be payable, 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. An adverse final judgment, license fee payable or a settlement in the Freedom Wireless litigation would likely (when paid) adversely impact our liquidity and capital resources. Depending on the amount of the adverse judgment, settlement or license fee, the negative impact to our liquidity and capital resources could be material and we may need to seek protection under 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 March 31, 2006 (in thousands):

The discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of those financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to bad debts, capitalized software and labor, long-lived assets, goodwill and intangible asset impairment, legal expenses, contingencies and income taxes. 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. 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, implementation services and bcgi Professional 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 and payment 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. This revenue is recognized in the month in which it is earned upon sell through to a customer.

For multiple element arrangements, we determine fair value of each undelivered element and we recognize revenue based on the residual value method. 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 or when the services are performed. Vendor-specific objective evidence of fair value for maintenance and support is based upon the amount charged when the service is sold separately, which is typically the contract’s renewal rate. Vendor-specific objective evidence of fair value for installation and other services is based upon standard pre-established rates.

In addition to recording revenues net of any penalties incurred related to outages on our managed services platform and estimated amounts that may be disputed, we evaluate the collectability of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet their financial obligations (e.g. bankruptcy filings, substantial downgrading of credit scores) or disputed amounts, 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. We are expensing legal costs related to the Freedom Wireless lawsuit as incurred due to the lengthy and unpredictable proceedings which have made it difficult to reasonably estimate legal costs for the lawsuit. Other litigation will continue to be accounted for in accordance with our accounting policy, and generally, we develop an estimate of probable costs in consultation with our outside legal counsel who is handling the case. There can be no assurance that our expenses will not exceed our estimates.

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

We also capitalize internal software development costs in accordance with Financial and Accounting Standards Board (“FASB”) Statement No. 86 (“FAS 86”), “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.” This statement specifies that costs incurred internally in creating a computer software product shall be charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of all planning, designing, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements. We cease capitalization of internally developed software when the product is made available for general release to customers and thereafter, any maintenance and customer support is charged to expense when related revenue is recognized or when those costs are incurred. We continually evaluate the recoverability of capitalized costs and if the success of new product releases is less than we anticipate, then a write-down of capitalized costs may be made which could adversely affect our results in the reporting period in which the write-down occurs.

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 Condensed Consolidated Statement of Income. The estimated undiscounted cash flows for each of our long-lived assets could differ materially from the actual 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 each operating unit, which includes bcgi Access Management, bcgi Payment, Real-Time Billing and Voyager Billing with its carrying amount, including goodwill. Fair value for each operating unit is determined using a discounted cash flow valuation model, which requires judgments to be made by management regarding estimating future cash flows, economic life and discount rates, among other assumptions. If the carrying amount of the operating unit’s net assets exceeds the fair value of that operating unit, we would evaluate any impairment loss under the next step of the impairment test. The estimated discounted cash flows for each operating unit could differ materially from the actual results.

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 $1.6 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 determining the fair market value of assets acquired and their useful lives. Different assumptions could yield materially different results.

Our 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 depends 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.

While we have considered the current facts and circumstances of the tax benefit from the ultimate loss, if any, relating to the Freedom Wireless judgment in assessing the amount of our valuation allowance, there is no assurance that the valuation allowance will not need to be increased in the future to cover deferred tax assets that may not be realizable. Any increase in the valuation allowance could have a material adverse impact on our income tax provision and net income in the period in which such determination is made.

On January 1, 2006, we adopted Statement of Financial Accounting Standards 123(R), Share-Based Payment (“SFAS No, 123(R)”), as interpreted by SEC Staff Accounting Bulletin No. 107 (“SAB No. 107”). Effective with the adoption of SFAS No. 123(R), we recognize stock-based compensation expense, which is based on the fair value of the award on the date of grant, ratably over the related service period, net of estimated forfeitures (Note 3 — Stock Based Compensation in the Notes to the Condensed Consolidated Financial Statements).

The determination of the fair value of a stock-based compensation award on the date of grant is impacted by a number of factors, including the use of a particular fair value model, our stock price, and certain assumption regarding highly complex and subjective variables. Included among the variables that impact the fair value of an award are the expected life of the stock compensation award, our common stock price volatility, risk-free interest rate and dividend yield. The assumptions used in calculating the fair value of our stock compensation awards represent our best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and we use different assumptions, stock-based compensation expense could be materially different from what has been recorded in the current period.

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.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2006. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2006, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the three months ended March 31, 2006 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 (including Verizon Wireless, Cingular Wireless, AT&T Wireless Services, CMT Partners and Western Wireless Corp.) in the District Court. In February 2005, Verizon Wireless 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. On May 20, 2005, a jury determined that bcgi and the remaining defendants infringed or are infringing two Freedom Wireless patents. The jury damages and post-trial damages (through October 12, 2005) plus interest and court costs awarded by the District Court total approximately $165 million (bcgi and each carrier co-defendant are jointly liable for specific amounts). We have an obligation to indemnify the other defendants for damages they may incur with respect to any infringement by our technology.

In July 2005, we entered into the Appeal Agreement with Cingular Wireless whereby we placed $41 million into escrow for the purpose of using these funds as security to Cingular. In exchange for placing the funds into escrow, Cingular has posted bonds totaling approximately $191 million, the amount required by the District Court to stay the execution of the amount of the judgment that concerns the joint infringement by us and Cingular, pending appeal. Cingular has also agreed to dismiss, without prejudice, the indemnification action filed by Cingular against us in May 2005. Cingular filed this action in an effort to enforce Cingular’s indemnity rights against us as a result of the Freedom Wireless judgment. Cingular is not obligated to provide the security for the payment of any portion of the damages for which Cingular is not jointly liable. The agreement does not alter our obligation to indemnify Cingular. At March, 2006, this escrow amount (including interest earned to date) totaled $41.9 million and is recorded as restricted cash.

On December 15, 2005, the Appeals Court approved our appeal to stay the injunction that was previously granted by the District Court. Therefore, our carrier customers, including co-defendant Cingular Wireless, may continue to use our Real-Time Billing service during the appeals process. In addition, the Appeals Court did not require bcgi and/or the other defendants to post additional security for any potential damages that may accrue during the appeals process.

Freedom Wireless Patent Infringement Lawsuits Against bcgi, Sprint Nextel Corporation 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 Sprint Nextel Corporation, and the second against us, Alltel Corporation and several other of our carrier customers. These lawsuits allege that we and each of our named carrier customers infringe the same two patents related to the current judgment 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 that the patents are invalid.

While we continue to believe that we do not infringe these patents and believe that the patents are invalid and that the size of the damages awarded bears no relationship to a reasonable royalty that bcgi or any company would have paid for a license of the patents, in light of the adverse judgment, we believe it is probable that a loss has been incurred. 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 litigation and in accordance with FAS 5 and FIN 14, we accrued an estimated loss of $64.3 million in 2005 with respect to the Freedom Wireless litigation. However, the actual loss, if any, may be significantly higher or lower than the amount accrued and could be higher than the current judgment of $165 million, which exceeds our ability to pay.

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 was amended on October 12, 2005 to modify the commencement date to June 6, 2002. 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 have responded to the amended complaint and filed for a motion to dismiss the suit. 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. We are not named in the complaint. 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. The complaint does not specify damages as it relates to Verizon Wireless prepaid. We have provided documents and deposition testimony in response to a subpoena that has been served on us. The lawsuit is currently in the discovery phase and at this time it is not possible to determine the potential 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.

If we lose, in whole or significant part, our appeal of the Freedom Wireless lawsuit in the U.S. Court of Appeals for the Federal Circuit (“Appeals Court”) or the lawsuits with Freedom Wireless in United States District Court in Massachusetts (“District Court”), it would have a material adverse impact on our business, including potential asset impairment charges and the possibility of bankruptcy, impairing our ability to continue as a going concern.

Although we have filed to appeal the entire judgment in the Freedom Wireless lawsuit involving us and Cingular, the Appeals Court may uphold the judgment in whole or in part, which currently stands at $165 million and exceeds our ability to pay. If the final judgment after the appeal is adverse to us and exceeds our ability to pay, we would need to seek protection under the U.S. Bankruptcy Code. In addition, any significant delay in the Appeals Court issuing a final ruling could impair our business going forward due to ongoing uncertainty and additional legal costs.

Freedom Wireless has also filed two separate patent infringement lawsuits against us and Sprint Nextel Corporation and us and Alltel Corporation and other carriers. Although we are contesting the lawsuits, there can be no assurance of a favorable outcome in these matters. We are obligated to indemnify Sprint Nextel, Alltel and the other carriers for damages they may incur with respect to any finding of infringement by bcgi’s technology.

Regardless of the outcome in these lawsuits, we have already incurred approximately $28.0 million in legal and other costs as of March 31, 2006 and will continue to incur significant expenses to support our ongoing defense. Ongoing legal costs may fluctuate from time to time, depending on the nature of our legal proceedings.

We may continue to seek a settlement agreement with Freedom Wireless but we may not be able to reach a reasonable settlement or we may reach a settlement that could negatively impact our financial performance.

We have engaged in settlement discussions with Freedom Wireless at various times; however, we have been unable to reach mutual agreement with Freedom Wireless and the other defendants in the cases. We continue to believe that we do not infringe the Freedom Wireless patents and believe that the patents are invalid, and that the size of the damages awarded bears no relationship to a reasonable royalty that bcgi or any company would have paid for a license of the patents. Nevertheless, in light of the adverse judgment and the negative effect that it is having on our business, we may continue to engage in additional settlement discussions with Freedom Wireless. Despite our desire to reach a reasonable settlement agreement, we may not be able to do so. Even if we are able to obtain a settlement, any settlement agreement and license may carry terms unfavorable to us and may significantly restrict our cash and/or future ability to generate profits. Additionally, a settlement may not be able to mitigate the adverse impact the judgment has already had on our business.

The Funding of Security for Appeal (“Appeal Agreement”) with Cingular Wireless, in addition to any future requirement to provide additional security on our own, may substantially reduce our working capital and access to cash.

With the current uncertainties facing us and the potential for unforeseen changes in our business and 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 may not have access to the $41.9 million placed in escrow as security for our appeal. We also may need to provide additional security for potential additional damages or royalties. If we are unable to secure additional capital or finance sufficient assets, we may need to seek protection under 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.

A putative class action complaint was filed in June 2005 and has been subsequently amended in the District Court, against us, our Chief Executive Officer and our Chief Financial Officer on behalf of persons who purchased our common stock between June 6, 2002 and May 20, 2005. The amended 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 significant challenges retaining existing customers, vendors and employees and attracting new customers, vendors and employees, all of which has had 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 has and will likely continue to significantly impact our existing business in the following ways:

As a result, even if we are successful in our appeal and in the other Freedom Wireless lawsuits, our business may have been irreparably harmed. If our business substantially deteriorates further, we may need to seek protection under the U.S. Bankruptcy Code before our appeal is decided.

The loss or significant reduction of business from Sprint Nextel Corporation 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. For the three months ended March 31, 2005, 66% of our total revenue received was from Sprint Nextel Corporation, whose contract with us expires in the first quarter of 2007. We can provide no assurance that Sprint Nextel will continue to use our services beyond the term of their contract with us. If and when this contract is renewed, the contractual rate 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. If we were to lose Sprint Nextel as a customer, our business would be materially and adversely impacted, and we would likely need to seek protection under the U.S. Bankruptcy Code. 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 new products, including bcgi Access Management, Payment Manager and Real-Time Billing.

We have introduced bcgi Access Management, Payment Manager and Real-Time Billing product offerings to the global 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. To date, we have not had any significant deployments of these products, and in light of the current status of the Freedom Wireless litigation, our ability to sell new products is impaired. 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, as discussed in the overview section of management’s discussion and analysis of financial condition and results of operations, we anticipate that our global expansion and expanded product suite may 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 Wireless, Cingular and Alltel generate less revenue and due to customer concerns regarding our viability. 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 fall 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 and could potentially result in the delisting of our stock.

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. 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 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, 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 sales and 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, Spain, Mexico 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 has been 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. Additionally, we may be restricted from making acquisitions that would be attractive to us due to the uncertainty associated with the Freedom Wireless litigation. We also may not be able to successfully integrate past or future acquisitions. 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, including but not limited to goodwill and other intangible 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 Freedom Wireless litigation has made it more challenging for us to attract and retain critical employees. 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 operators.

We have historically provided our solutions almost exclusively to wireless carriers. The market for solutions to wireless operators 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 operators and the wireless operators themselves who provide, or can provide, in-house services similar to ours. These wireless operators, 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.

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)

Condensed Consolidated Balance Sheets		4
Condensed Consolidated Statements of Income		5
Condensed Consolidated Statements of Cash Flows		6
Notes to Condensed Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22

Item 3. Quantitative and Qualitative Disclosures About Market Risk		31

Item 4. Controls and Procedures		31

PART II. OTHER INFORMATION:

Item 1. Legal Proceedings		32

Item 1A. Certain Factors That May Affect Future Results		33

Item 6. Exhibits		40

SIGNATURES		41


	March 31, 2006			December 31, 2005
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	—		$	14,601
Restricted cash		41,910			41,466
Short-term investments		28,378			24,749
Accounts receivable, net of allowance of $1,134 in 2006 and $949 in 2005		22,624			14,830
Tax refund receivable		909			—
Prepaid expenses and other assets		4,150			3,443

Total current assets		97,971			99,089
Property and equipment:
Building, land and leasehold improvements		14,196			14,204
Telecommunications systems & software		104,521			107,131
Furniture and fixtures		771			811
Systems in development		2,325			3,445

		121,813			125,591
Less allowance for depreciation and amortization		71,246			72,308

		50,567			53,283
Intangible assets, net		3,050			3,279
Goodwill		10,293			10,258
Other assets		9,528			9,382

Total assets	$	171,409		$	175,291

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,193		$	1,589
Accrued expenses		8,122			12,244
Accrued estimated loss from litigation		64,300			64,300
Deferred revenue		4,408			4,449
Income taxes payable		—			1,895

Total current liabilities		79,023			84,477
Non-current liabilities:
Accrued pension liability		4,756			4,468

Commitments and contingencies (Note 5)
Shareholders’ equity:
Preferred stock, $.01 par value, 1,965,000 shares authorized, none issued and outstanding		—			—
Series A junior preferred stock, $.01 par value, 35,000 shares authorized, none issued and outstanding		—			—
Common stock, voting, par value $.01 per share, 35,000,000 shares authorized; 17,905,803 and 17,737,421 shares issued and outstanding at March 31, 2006 and December 31, 2005, respectively		179			177
Additional paid-in capital		106,572			106,232
Deferred compensation		—			(15	)
Accumulated deficit		(18,825	)		(19,732	)
Accumulated other comprehensive loss		(296	)		(316	)

Total shareholders’ equity		87,630			86,346

Total liabilities and shareholders’ equity	$	171,409		$	175,291


	Three months ended March 31,
	2006			2005
NET REVENUES
Real-time billing revenues	$	21,646		$	24,224
Other		3,071			2,128

	$	24,717		$	26,352

EXPENSES:
Cost of revenues*		7,172			6,227
Engineering, research and development		4,622			4,029
Sales and marketing		3,216			2,436
General and administrative		3,914			3,745
General and administrative – legal charges		1,230			2,210
Depreciation and amortization		5,318			5,554

Operating income (loss)		(755	)		2,151
Interest income		687			400

Income (loss) before income taxes		(68	)		2,551
Provision (benefit) for income taxes		(975	)		918

Net income	$	907		$	1,633

Basic net income per share	$	0.05		$	0.09
Weighted average common shares outstanding – basic		17,775			17,602

Diluted net income per share	$	0.05		$	0.09
Weighted average common shares outstanding – diluted		17,780			17,726


	Three months ended March 31,
	2006			2005
OPERATING ACTIVITIES
Net income	$	907		$	1,633
Adjustments to reconcile net income to net cash used in operations:
Depreciation and amortization		5,318			5,554
Deferred income taxes		—			(135	)
Stock compensation expense		159			—
Changes in operating assets and liabilities:
Accounts receivable, net		(7,794	)		(4,047	)
Prepaid expenses and other assets		(853	)		(638	)
Accounts payable, accrued expenses and deferred revenue		(2,909	)		(3,600	)
Income taxes receivable/payable		(2,804	)		917
Other non-current liabilities		288			245

Net cash used in operating activities		(7,688	)		(71	)

INVESTING ACTIVITIES
Increase in restricted cash		(444	)		—
Payment of earnout of acquired business		(682	)		(591	)
Purchases of short-term investments		(20,662	)		(17,811	)
Sales of short-term investments		17,032			16,066
Increase in other investments		20			(454	)
Purchases of property and equipment		(2,375	)		(4,616	)

Net cash used in investing activities		(7,111	)		(7,406	)

FINANCING ACTIVITIES
Proceeds from exercise of stock options		—			18
Proceeds from issuance of common stock		198			354

Net cash provided by financing activities		198			372

Decrease in cash and cash equivalents		(14,601	)		(7,105	)
Cash and cash equivalents at beginning of period		14,601			9,467

Cash and cash equivalents at end of period	$	—		$	2,362

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes	$	1,831		$	4


	Three months ended March 31,
(in thousands)	2006		2005
Net income as reported	$	907	$	1,633
Securities valuation adjustment, net of tax		19		(49	)
Foreign currency translation, net of tax		1		—

Comprehensive income	$	927	$	1,584


Large accelerated filer ¨		Accelerated filer ¨		Non-accelerated filer x


	2006		2005
Sprint Nextel Corporation	66	%	29	%
Verizon Wireless	—	%	27	%
Cingular Wireless	—	%	20	%


	2006	2005
Denominator:
Denominator for basic net income per share	17,775	17,602
Effect of dilutive employee stock options	5	124

Denominator for diluted net income per share	17,780	17,726


	Three Months Ended
	March 31, 2006	March 31, 2005
Options granted	411,300	307,210
Weighted-average exercise price	$1.13	$7.21
Weighted-average grant date fair-value	$0.86	$3.79
Assumptions:
Expected volatility	64.6% - 78.1%	62.1% - 78.5%
Expected term (in years)	4.5 – 6.5	3 – 5
Risk-free interest rate	4.36% - 4.73%	3.39% - 4.17%
Expected dividend yield	—	—


	Three Months Ended March 31, 2005
Net income as reported	$	1,633
Add: Stock-based employee compensation expense included in reported net income		—
Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of tax benefit		(2,395	)

Pro forma net loss	$	(762	)

Basic net income (loss) per share:
As reported	$	0.09
Pro forma	$	(0.04	)
Diluted net income (loss) per share:
As reported	$	0.09
Pro forma	$	(0.04	)


	Restricted Stock and Options Outstanding	Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Terms in Years	Aggregate Intrinsic Value
Options outstanding at December 31, 2005	3,954,180	$	8.03
Options granted	441,239	$	1.24
Options exercised	—		—
Options forfeited	21,380	$	1.47
Options expired	41,872	$	9.69

Options outstanding at March 31, 2006	4,332,167	$	7.42	6.64	$	958,215
Options Exercisable at March 31, 2006	3,346,072	$	9.08	5.82	$	54,488
Options vested or expected to vest at March 31, 2006 (1)	4,210,470	$	7.49	6.56	$	845,648


	2006		2005
Components of net periodic benefit costs
Service cost	$	155	$	128
Interest cost		85		72
Amortization of unrecognized net prior service cost		48		45

Net periodic benefit costs	$	288	$	245


	Three months ended March 31,
	2006				2005
	Total		% of Total Net Revenues		Total		% of Total Net Revenues
Real-time billing	$	21,646	88	%	$	24,224	92	%
Other		3,071	12	%		2,128	8	%

Total net revenue	$	24,717	100	%	$	26,352	100	%


	Total		Payment due by period
	Total		within 1 year		2-3 years		4-5 years		More than 5 years
Contractual Obligations:
Operating leases	$	2,707	$	1,296	$	1,389	$	22	$	—
Purchase commitments		5,596		4,826		767		3		—

Total	$	8,303	$	6,122	$	2,156	$	25	$	—


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)