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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 10549

FORM 10-Q

For the quarterly period ended September 30, 2004

or

Commission file number: 0-28432

Boston Communications Group, Inc.

(Exact name of registrant as specified in its charter)

100 Sylvan Road, Woburn, Massachusetts 01801

(Address of principal executive offices)

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date. As of November 1, 2004, the Company had outstanding 17,560,192 shares of common stock, $.01 par value per share.

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This Quarterly Report contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties, including without limitation, statements regarding the expectations regarding our new product offerings, expansion into new markets, Verizon Wireless’ timetable to transfer subscribers from our platform to their internal prepaid platform, diversification of our product and customer base, total revenues, bcgi Mobile Guardian revenues, earnings per share, billing and transaction processing services revenues, sales and marketing expenses, depreciation and amortization, costs to defend the Freedom Wireless lawsuit and the belief that the Company does not infringe on the Freedom Wireless patents, additional capital investments, payment of additional contingent cash consideration to Infotech Solutions Corporation, and the ability to finance our operations for the next 12 months. 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.

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BOSTON COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

See accompanying notes.

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BOSTON COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share amounts)

See accompanying notes.

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BOSTON COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

See accompanying notes.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

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

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

Reclassifications

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

Revenue Recognition

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

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

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

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

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The Company typically recognizes revenue for its Prepaid Systems business from the sale of systems at the time the systems are shipped or delivered to the customer, depending on contract terms. In the event there are acceptance terms that are not perfunctory, the Company defers revenue until acceptance has occurred. The fair value of installation revenue, based on vendor-specific objective evidence, is deferred until the entire installation is complete. Revenues from maintenance and support services are recognized ratably over the term of the contract period, which is generally one year, based on vendor-specific objective evidence of fair value. Vendor-specific objective evidence of fair value is based upon the amount charged when the service is sold separately, which is typically the contract’s renewal rate.

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

Legal Costs

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

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

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

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

Impairment of Long-Lived Assets

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

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

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

Stock Based Compensation

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

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

(in thousands, except per-share amounts)

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Comprehensive Income

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

Legal

In March 2000, Freedom Wireless, Inc. filed a suit against the Company and a number of the Company’s wireless carrier customers. The suit is being tried in the United States District Court in Massachusetts and alleges that the defendants infringe two patents held by Freedom Wireless, Inc. and seeks damages in an unspecified amount as well as injunctive relief. If there was a ruling that the Company infringed the Freedom Wireless patents, it could significantly restrict the Company’s ability to conduct business. In addition, the Company has an obligation to indemnify the other defendants for damages they may incur with respect to any infringement by the Company’s technology. On August 10, 2004, the plaintiff and the defendant each had four summary judgment motions denied by the court, bringing the case closer to the trial phase. The suit is in the pre-trial phase and the trial is scheduled to begin on January 31, 2005. The Company does not believe that it infringes these patents and believes that the patents are invalid in light of prior art and other reasons.

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

Indemnifications

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

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

With respect to customer agreements, these provisions generally obligate the Company to indemnify the customer against losses, expenses, liabilities and damages that may be awarded against the customer in the event the Company’s systems or services infringe upon a patent or other intellectual property right of a third

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party. The agreements generally limit the scope of and remedies for such indemnification obligations in certain respects, including but not limited to geographical limitations and the right to replace or modify an infringing product or service. The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of these agreements.

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

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 September 30, 2004 and 2003 options to purchase 1,636,000 and 227,000 shares, respectively, of Common Stock have been excluded from the computation. In addition, for the nine months ended September 30, 2004 and 2003 options to purchase 1,246,000, and 80,000 shares, respectively, of Common Stock have been excluded from the computation.

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):

The Company’s reportable operating segments consist of Billing and Transaction Processing Services and

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Prepaid Systems. The Company’s Billing and Transaction Processing Services solutions allow wireless carriers to access the Company’s real-time subscriber management network and transaction processing platform, enabling such carriers to offer prepaid wireless calling, payment services replenishment capabilities and postpaid billing and customer care to their subscribers. The real-time subscriber management network and transaction processing platform also enables bcgi Mobile Guardian, a Web-based solution that allows end-users to actively manage their wireless usage and access. The Prepaid Systems segment has been operating from the Company’s Tulsa location where it assembles and markets prepaid systems principally to international carriers. In September 2004, the Company began the process of consolidating the Tulsa operations into the corporate headquarters in Massachusetts. As a result of this consolidation, the Company does not expect to be reporting Prepaid Systems as a separate segment in 2005.

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

(in thousands, except percentages)

Due to industry consolidation and a change in the fundamentals of inter-carrier roaming, resulting in a continued decline in profitability, the Company ceased providing its ROAMERplus solution in March 2004, effectively discontinuing its Roaming Services segment. Pursuant to Statement of Financial Accounting Standards 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”), the condensed consolidated financial statements have been reclassified to reflect this discontinued operation. Accordingly, the operating results of the Roaming Services segment have been segregated as a discontinued operation in the Condensed Consolidated Statements of Operations and Consolidated Statements of Cash Flows. In addition, 2003 amounts have been restated to reflect Roaming Services as discontinued operations.

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At September 30, 2004 there was $39,000 in accounts receivable related to the Roaming Services segment. Revenues for the Roaming Services segment were $0 and $924,000 for the three months ended September 30, 2004 and 2003, respectively, and $563,000 and $2.8 million for the nine months ended September 30, 2004 and 2003, respectively.

Defined Benefit Plan

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

The components of net periodic benefit costs for the three and nine months ended September 30, 2004 and 2003 are as follows (unaudited and in thousands):

Effective July 1, 2004, companies incorporated in Massachusetts became subject to Chapter 156D of the Massachusetts Business Corporation Act. Chapter 156D eliminates the concept of treasury shares and provides that shares reacquired by a company are to be treated as authorized but unissued shares of common stock. As a result of this change, the Company has reclassified, for balance sheets presented, shares previously classified as treasury shares as authorized but unissued shares of common stock. At December 31, 2003 the Company had 273,420 shares at a cost of $2.1 million classified as treasury stock.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

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

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

In the third quarter of 2004, we generated revenues of $27.0 million and diluted earnings per share of $0.24. These results were driven by the growth in our billing and transaction processing services revenues, which increased 4% to $25.6 million for the three months ended September 30, 2004 compared to $24.7 million for the three months ended September 30, 2003 and increased 13% to $79.1 million for the nine months ended September 30, 2004 compared to $69.8 million for the nine months ended September 30, 2003. The increase in billing and transaction processing services revenues principally resulted from an increase in our prepaid subscriber base from 3.58 million subscribers at September 30, 2003 to 3.91 million subscribers at September 30, 2004. The increase in our subscriber base resulted from additional subscriber growth from certain of our carrier customers, partially offset by the loss of subscribers from Verizon Wireless.

Verizon Wireless accounted for 51% of our total revenues for the year ended December 31, 2003 and 41% of our total revenues for the three months ended September 30, 2004. Our existing prepaid wireless services agreement with Verizon Wireless is in its auto-renewal term and may be terminated by either party upon 90 days written notice. In June 2004, Verizon Wireless began activating new retail subscribers on their internal prepaid platform, and in October 2004 began to convert subscribers off bcgi’s platform. The subscriber conversions are expected to be completed by the third quarter of 2005, although we can provide no assurance that conversions will not be completed sooner than expected.

We currently support Cingular Wireless’ TDMA prepaid program, which represented 23% of our total revenues for the year ended December 31, 2003 and for the three months ended September 30, 2004, under a contract that expires in the first half of 2005. Cingular Wireless has begun offering GSM service to certain of its prepaid subscribers. Since we only support its TDMA business, we expect that Cingular Wireless’s subscribers we currently support will expire off our network over time.

We are seeking to mitigate the impact of the expected loss of prepaid wireless revenues from our two largest customers by focusing on diversifying our revenues, as we enable growth from other existing customers and target new and current customers with our expanded product offerings. Over the past nine months, our revenue growth has been principally generated from customers other than Verizon and Cingular. In 2004, we introduced bcgi Mobile Guardian, a unique offering that provides Web-based tools for parents and enterprises seeking to better manage postpaid wireless usage of their children or employees. This solution has generated significant interest from both existing and prospective national and regional carrier customers and we expect to generate revenue from this solution in 2005. In addition, Nextel further expanded its youth-oriented, pay-as-you-go service, branded as BOOST Mobile, into seven major new markets during the past quarter using the bcgi Prepaid Wireless solution. Nextel, which represented 14% of our total revenues for the three months ended September 30, 2004, up from 11% for the three months ended June 30, 2004, has added approximately 400,000 net subscribers during the nine months ended September 30, 2004. Finally, we continue to expand our presence across the regional wireless and mobile virtual network operator (MVNO) marketplace with all of our new and existing solutions.

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Although we cannot anticipate the level at which Verizon Wireless will convert subscribers off bcgi’s platform and do not have sufficient information on how Cingular Wireless’s nationwide GSM network will impact our subscriber base, given our baseline of revenues and related trends, we anticipate that for the fourth quarter ending December 31, 2004, our total revenues will range between $24 million and $26 million. Additionally, we anticipate that our earnings per share for the quarter ending December 31, 2004 will approximate $0.14 to $0.18, including approximately $0.02-0.03 per share of legal costs, primarily associated with the Freedom Wireless lawsuit.

Segment Data

(in thousands, except percentages)