**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

### **Washington, D.C. 20549**

**FORM 10-K**

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**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)**

### **OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended DECEMBER 31, 2005**

| Commission  |   |                                                  |   | IRS Employer        |
|-------------|--------|-------------------------------------------------------|--------|---------------------|
| File Number |   | Exact name of  registrant as specified in its charter |   | Identification  No. |
| **1-12577** |   | **SITEL  CORPORATION**                                |   | **47-0684333**      |

 

**MINNESOTA**

(State or Other Jurisdiction of Incorporation or Organization)

| **7277 WORLD COMMUNICATIONS DRIVE OMAHA, NEBRASKA** |   | **68122**  |   |
|-----------------------------------------------------|--------|------------|--------|
| (Address of  Principal Executive Offices)           |   | (Zip Code) |   |

 

**(402) 963-6810**

 (Registrant’s Telephone Number, Including AreaCode)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OFTHE ACT:

|                                |   | **Name of  Each Exchange**   |
|--------------------------------|--------|------------------------------|
| **Title of  Each Class**       |   | **On Which  Registered**     |
| Common Stock,  $.001 Par Value |   | The New York  Stock Exchange |

 

SECURITIES REGISTEREDPURSUANT TO SECTION 12(G) OF THE ACT:

**Not Applicable**

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.YES o NOx

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.YES o NOx

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days. YES oNOx

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definitionof “accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act.  (Check one):

Large acceleratedfiler   o   Acceleratedfiler   x   Non-accelerated filer   o   

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12-2 of the Exchange Act).

YES  o  NO  x

The aggregatemarket value of the voting stock held by non-affiliates of the registrant as ofJune 30, 2005 was $174,216,902 based upon the closing price of $2.11 for suchstock as reported by the New York Stock Exchange on such date. Solely forpurposes of this calculation, persons holding of record more than 5% of theCompany’s stock have been included as “affiliates.”

**COMMON STOCK,$.001 PAR VALUE — 74,507,364 SHARES OUTSTANDING AS OF August 31, 2006**

 

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**SITELCORPORATION AND SUBSIDIARIES**

**TABLE OF CONTENTS**
| Forward-Looking Statements                         |   |
|----------------------------------------------------|--------|
| **PART I**                                         |   |   |   |
| Item  1                                            | – | Business |   |
|                                               |   | General |   |
|                                               |   | Industry Overview |   |
|                                               |   | Our Business |   |
|                                               |   | Organizational Structure |   |
|                                               |   | The Services We Offer |   |
|                                               |   | Markets and Clients |   |
|                                               |   | The Industries We Serve |   |
|                                               |   | Information Technology |   |
|                                               |   | Human Resource  Management |   |
|                                               |   | Multi-shore  Distribution Strategy |   |
|                                               |   | Competition |   |
|                                               |   | Reporting Segments  and Geographical Information |   |
|                                               |   | Available Information |   |
|                                               |   | Government Regulation |   |
|                                               |   | Quarterly  Results and Seasonality |   |
| Item  1A                                           | -      | Risk Factors |   |
| Item 1B                                            | -      | Unresolved  Staff Comments. |   |
| Item  2                                            | – | Properties |   |
| Item 3                                             | – | Legal Proceedings |   |
| Item 4                                             | – | Submission  of Matters to a Vote of Security Holders |   |
|                                               |   |   |   |
| **PART II**                                        |   |   |   |
| Item 5                                             | – | Market for  Registrant’s Common Equity and Related Stockholder Matters |   |
| Item 6                                             | – | Selected  Financial Data |   |
| Item 7                                             | – | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                               |   | General |   |
|                                               |   | General Business Risks |   |
|                                               |   | Critical  Accounting Policies and Estimates |   |
|                                               |   | Results of Operations |   |
|                                               |   | Financial  Condition and Liquidity |   |
|                                               |   | Other Matters |   |
| Item 7A                                            | – | Quantitative  and Qualitative Disclosures about Market Risk |   |
| Item 8                                             | – | Financial  Statements and Supplementary Data |   |
| Item 9                                             | – | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure |   |
| Item 9A                                            | – | Controls and  Procedures |   |
| Item 9B                                            | -      | Other Information |   |
|                                               |   |   |   |
| **PART III**                                       |   |   |   |
| Item 10                                            | – | Directors  and Executive Officers of the Registrant |   |
| Item 11                                            | – | Executive  Compensation |   |
| Item 12                                            | – | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |   |
| Item 13                                            | – | Certain  Relationships and Related Transactions |   |
| Item 14                                            | – | Principal  Accountant Fees and Services |   |
|                                               |   |   |   |
| **PART IV**                                        |   |   |   |
| Item 15                                            | – | Exhibits  and Financial Statement Schedules |   |
| Signatures                                         |   |
|                                               |   |   |   |
| **TABLE OF CONTENTS – Financial  Statements** |   |

 

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**EXPLANATORY NOTE:**  Asdescribed in Management’s Discussion and Analysis of Financial Condition andResults of Operations, SITEL Corporation has restated its previously filedconsolidated financial statements as of December 31, 2004, and for the fiscalyears ended December 31, 2001 through 2004 included in its Annual Report onForm 10-K for the fiscal year ended December 31, 2004, which was filed with theSecurities and Exchange Commission on March 16, 2005.  In addition, we have restated each ofthe three-month periods covered by the interim quarterly reports for the fiscalyear 2005 and 2004. We identifiederrors in our financial statements related to accounting irregularities at ourBrazilian subsidiary including interest and penalties on unpaid taxobligations; deferred recognition of expenses; errors in revenue recording;intentional falsification of financial results; and intentionalmisclassification of recorded amounts.

Wealso recorded other adjustments that were previously deemed immaterial.

As a result of the errors referred to above, the netloss for the fiscal years ended December 31, 2004, 2003, 2002, and 2001 wasunderstated by $1.9 million, $3.0 million, $1.4 million, and $0.2 million,respectively.

The errors described above impacted our results forthe quarterly periods in the two years ended December 31, 2005.  As a result, we have restated the unauditedselected quarterly financial data included in Note 14 to the ConsolidatedFinancial Statements as appropriate.

As reported in our Item 9A, we have reportedmaterial weaknesses in our internal control over financial reporting.  We have determined that these weaknessescontributed to the restatements referred to above and we have not yet completedour remediation.

**Forward-Looking Statements**

Wemake statements in this report that are considered forward-looking statementswithin the meaning of the Securities Exchange Act of 1934. Sometimes thesestatements will contain words such as “believes,” “expects,” “intends,” “should,”“will,” “plans,” and other similar words. These statements are not guaranteesof our future performance and are subject to risks, uncertainties, and otherimportant factors that could cause our actual performance or achievements to bematerially different from those we project. These risks, uncertainties, andfactors include, but are not limited to: conclusion of the IRS ruling requestprocess, conclusion of discussions with the SEC regarding the irregularities atthe foreign subsidiary, effectiveness of cost control initiatives, reliance onmajor clients, conditions affecting clients’ industries, clients’ budgets andplans, unanticipated labor, contract or technical difficulties, delays in rampup of services under contracts, ability to negotiate contracts on acceptableterms, contract termination provisions, the demand for off-shore services,reliance on major subcontractors and strategic partners, risks associated withmanaging a global business, fluctuations in operating results, reliance on telecommunications and computer technology,dependence on labor force, industry regulation, general and localeconomic conditions, competitive pressures in our industry and in our clients’industries, uncertainties of litigation, foreign currency risks, the effects ofleverage, dependency on credit availability, restrictions imposed by the termsof indebtedness, and dependence on keypersonnel.

Giventhese uncertainties, you should not place undue reliance on theseforward-looking statements. Please see the other sections of this report and ourother periodic reports filed with the Securities and Exchange Commission formore information on these factors.

## **PART I**

**Item 1.  Business**

**General**

References in thisreport to “we”, “our”, “SITEL”, and the “Company” are to SITEL Corporation andits subsidiaries, collectively.

We are a leader inthe customer touch marketplace providing business process consulting,outsourcing and technology to clients in the automotive, consumer, financialservices, government, insurance, technology, telecommunications, travel andutility sectors.

·                  We specialize inthe design, implementation, and operation of multi-channel contact centersolutions

·                  We enable ourclients to find, acquire and retain customers to enhance both the efficiencyand the value of these relationships throughout the customer lifecycle.

·                  We support thecustomer management strategies of many of the world’s leading brands.

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·                  Through SITELSolutions, we leverage world-classoperations across our global platform of people, processes, and technology tohelp existing and new clients develop sophisticated customer support solutions.

·                  We manageapproximately two million customer contacts per day via telephone, e-mail,Internet, traditional mail and other media

·                  Weserve both outsourced and in-house contact centers focused on deliveringimproved service quality, productivity and efficiency.

Our global footprint currently supports over 300 clients and includesoperations in North America, Europe, North Africa, Asia Pacific, and LatinAmerica. SITEL’s business model is comprised of 32 business units, whichdeliver in-country market support for local clients and leverage our globalplatform to provide single-point, multi-country solutions on behalf ofmultinational clients.  We represent manyof the world’s leading brand names from our current delivery platform, whichincludes:

·                  Approximately 39,000 employees,

·                  Over 27,900 workstations,

·                  89 contact centers located in 27 countries,

·                  Service to clients in 56 countries,

·                  Communication in more than 32 languages anddialects.

From our founding in 1985, our philosophy regarding the business weprovide remains unchanged.  We operateour contact centers based on the core belief that people do business withpeople, even in an age of online communications and e-mail transactions. Ourservices are designed to enhance the quality of customer interactions, at everystage in the customer lifecycle.

**Industry Overview**

Since SITEL’sfounding, the contact center industry has evolved dramatically.  Twenty years ago the service mix wasprimarily comprised of phone-based services for outbound customer acquisitionand level-one customer service.  Now, inaddition to these traditional outsourced services, the industry supportsmulti-tiered inbound customer support and technical help-desk services,business process solutions, professional services, and receivables management.

The industry hasevolved from supporting primarily low technology, single-facility environmentsto one that provides leading edge technology solutions for multi-nationalcorporations in multi-center environments. Today, companies are increasingly focused on optimizing their brandsthrough differentiated customer service, and on increasing the value of theircustomer relationships through cross-sell and up-sell programs. Fueling thistrend is the continued growth in consumer use of the Internet and e-mail, andthe increasingly remote nature of customer interactions. Companies now face abusiness imperative to deliver consistent levels of quality customer service regardlessof the channel of communication chosen.

Contact center-based customer management activity is becoming central tothe way leading organizations choose to enhance customer loyalty and retention.IDC, a respected industry analysis group, estimates that the worldwidecontact outsource business will grow from $51 billion in the year 2005 to $92billion by the year 2010 or a compound annual growth rate of 12.4%.Corporations are increasingly shifting key business processes from internaloperations to outsourced partners.  Thisbusiness process outsourcing momentum is creating opportunities for the contactcenter outsourcing market.

The outsourcedcontact center industry provides corporations improved financial returns andhigher end-customer satisfaction. As the outsourced industry continues toevolve, it is anticipated that growth will be further fueled by an improvedability of outsourcers to deliver integrated technology and communicationsolutions.  Companies will continue torealize the benefits associated with a focus on their core competencies andwill rely on service providers like SITEL to deliver comprehensive contactcenter solutions.  The contact centeroutsourcing industry continues to establish offshore and nearshore locations,now often referred to as best-shore or multi-shore strategies, to serve clientsseeking diversified labor markets. Likewise, industry analysts such as IDC,Datamonitor, and Forrester are beginning to uniquely identify and segment thefew contact center companies, such as SITEL, that are positioned anddifferentiated in this global realm.

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**OurBusiness**

SITELdesigns, builds, and operates contact centers to deliver integrated customerinteraction solutions for companies around the world. Through SITEL Services,with industry leading delivery of interactive contact center customer careservices, SITEL Solutions, with sophisticated solutions to complex BPOchallenges of multi-national companies, and SITEL Systems, with an ITinfrastructure utilized to give SITEL a competitive advantage while being aprofit generator from third party sales, SITEL has again positioned itself inahead of its competitors in market place. Our strategy for aligning withour clients involves mature methodologies centered on these three key phases ofprogram development and operation. Because some clientsrequire different levels of support during each of these phases, weare able to leverage our global experience and expertise in localmarkets to tailor a solution and delivery model as needed.  Our multi-tiered approach to clientengagement for both business-to-customer (B2C) and business-to-business (B2B)programs enables us to align our solution as closely as possible with ourclients’ unique business goals.

Each of oursolutions showcase our ability to add value to our clients’ primarybusiness objectives by:

·                  offeringcustomers a consistent method of contact, through the communication channels oftheir choice,

·                  improving brandimage through consistent and accurate handling of customer contacts,

·                  providingcustomer service professionals with access to accurate, up-to-date information,driving timely customer issue resolution,

·                  capturingcustomer service information for analysis and conversion into marketopportunities,

·                  providinga flexible and scalable state-of-the-art operating environment that canaccommodate dynamic shifts in volume, workload, and associated staffingrequirements,

·                  integratingoperations platforms, enabling work inter-flow between outsourced customercontact centers, other third party vendors, and internal centers as necessary,and

·                  implementing self-servicestrategies and tools to further improve performance and reduce costs throughincreased efficiency.

**Organizational Structure**

Our organizationalstructure is unique within the industry. We align and empower our 32 businessunits to provide client-centric customer support services using best practicesgained from our global experience.  Byleveraging our global expertise and the local knowledge gained from servingclients in specific markets, we are able to deliver a client-centric model thatcreates positive results for our clients in each world region.  Individual business units know their markets,their geographies, the local rules and regulations and have specialized industryexpertise to perform and relate to companies in their market.

More and more companiesare consolidating the number of outsource customer contact center vendors andcontracting with a company that can serve them across geographies.  Our Global Solutions team develops,implements, and manages customized industry-specific management solutions for ourglobal clients.  This structure, incombination with local business unit delivery, ensures best practice processesare delivered with the necessary local customization, improving outcomes forour global clients.  Our SITEL Systemsgroup provides world-class, on-demand access to contact center technology.  This allows clients to capitalize on SITEL’stechnology infrastructure and methodologies regardless of size orlocation.  Furthermore, it creates accessto a global footprint via SITEL’s global routing engine.

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**TheServices We Offer**

SITEL provides innovative and efficient customersupport services and solutions. We view every customercontact as an opportunity to build our clients’ brand equity and strengthenrelationships with our clients’ customers. We offer a suite of servicesaddressing every stage of the customer or product lifecycle, as well asoperational and technology professional services that are designed to optimizeevery aspect of the day-to-day operation of both outsourced and in-housecontact centers. We give a partial list below of services we offer for variousphases of customer contact management**:**
| Technical Support                                                                                                                                                                                                                                                                                                                                                       | ** ** | **Customer Care**                                                                                                                                                                                                                                                                                                                                                              | ** ** | **Customer Acquisition**                                                                                                                                                                                                                                                                                                                      | ** ** | **Receivables Management**                                                                                                                                                                                                                                                                                                         |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *Level  0-4 Technical Support*                                                                                                                                                                                                                                                                                                                                          | * *   | *360^ Customer Support*                                                                                                                                                                                                                                                                                                                                                        | * *   | *Pre-sales, Sales, Post-sales*                                                                                                                                                                                                                                                                                                                | * *   | *Early to Late Stage Receivables*                                                                                                                                                                                                                                                                                                  |
| ·   Troubleshooting·   Hardware  support·   Software  support·   Internet  support·   PC/server  support·   Up-sell/cross-sell·   Corporate  helpdesk·   Warranty·   Post  warranty | * *   | ·   Repeat  purchases·   Cross-sell/up-sell·   Account  change·**   **Issue resolution·   Billing  information·   Reservations·   Loyalty  clubs·   Investor  inquiries·   Warranty  calls | * *   | ·   Inbound  sales·   Outbound  sales·   Order  taking·   Lead  generation·   DRTV/bureau·   Product  information·   Subscription  renewals·   Database  management

* * | * *   | ·   Pre  charge-off·   Post  charge-off·   Early  fraud·   Credit  activation·   Property  recovery·   Skip  tracing·   Disaster  prevention·   Recovery

* * |

 

**Markets and Clients**

Our business units implement and operate customized industry-specificcustomer support solutions by geography and by specific vertical markets.  They have primary responsibility foroperations, sales and marketing efforts in their defined area. Within thisframework, we focus on all sized corporations in the automotive, consumer,financial services, insurance, technology, telecommunications and ISP, andutilities sectors. Theseindustries accounted for approximately 9.3%, 11.2%, 17.0%, 5.9%, 24.4%, 19.3%,and 7.4%, respectively, of our 2005 revenue. Sales in other industries,including media services, travel, healthcare, government and various others,accounted for 5.5% of 2005 revenue. Weserve over 300 clients in 27 countries. Note 10 to the Consolidated Financial Statements provides informationabout our revenue by geographic region. Our top 20 clients accounted for66.0% of our revenue in 2005, and may includemultiple independently managed business units within the clients’ affiliatedgroup.  Hewlett-Packard Company businessunits were responsible for 11.6% of our total revenue in 2005.  General Motors Corporation business unitswere responsible for 11.3% of our total revenue in 2005.  Our primary contract with GeneralMotors expired in December 2005. We did nothave any other clients under common control that generated more than 10% of ourtotal revenue for the year ended December 31, 2005.

**TheIndustries We Serve**

SITEL leverages aglobal suite of best practices in operations, technological and human resourcesto deliver peerless customer interaction across multiple touch points. Weprovide specialized systems, solutions, and services tailored to the specificbusiness challenges of a broad range of vertical industries, including:Automotive; Consumer; Financial Services; Insurance; Technology;Telecommunications and ISP, Utilities and Media Services.

**Automotive**

We support end-to-endservice capability: customer care for the entire customer lifecycle, includingpre-sales support, new purchase assistance, customer service andtroubleshooting, warranty support, and remote roadside assistance; andafter-sales solutions that leverage customer data to identify new marketingopportunities and generate increased customer loyalty and demand. We provideservice for complete dealer networks and all associated dealer supportactivities. All of our solutions operate on a flexible technology platform withthe ability to integrate multiple legacy data centers, product knowledge bases,and third-party systems.

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**Consumer**

For consumer goodscompanies, the keys to leveraging a contact center to stay competitive are:effective management of the customer relationship; identifying the mostvaluable prospects and customers; converting this knowledge into improvedmarketing and sales performance; and providing high quality care that increasescustomer loyalty and demand. We provide a comprehensive suite of solutions enablingmanufacturers, resellers, e-commerce, and catalog companies to managerelationships across the entire customer lifecycle.

**Financial Services**

We design, build,and operate innovative and cost-effective marketing, sales, and customer caresolutions for banks, credit grantors, mortgage companies, and diversifiedfinancial institutions that enable these companies to stay competitive. Makingthe contact center the strategic point of channel management, our account teamsare able to leverage sophisticated customer databases (i.e. accountinformation, demographics, preferences, purchase/contact history) to refinesales, marketing and service offerings for individuals or target groups.

**Insurance**

Insurancecompanies have long relied on outsourcers for basic sales and customer servicesupport.  We continue to provide thesetraditional industry services while also expanding into broader, end-to-end,solutions. Globally, SITEL provides outsourced contact center solutions for manytypes of insurance providers, including general, property & casualty, andlife & health.  Our capabilitiesextend to sales and service across a full range of insurance products fromnon-underwritten, guaranteed issue products such as hospital accidentprotection, hospital indemnity protection, health care discount plans,mechanical breakdown and credit protection, to fully underwritten property& casualty and life products.

In North Americaour Insurance business unit operates a fully functional licensing anddevelopment department, as well as state certified training centers, leveragingover 220 licensed in-house agents to provide services for insurance companiesthroughout the United States and Canada

**Technology**

SITEL supports awide range of customer contact solutions for the entire lifecycle of technologycustomers, across a wide array of high tech products and services (includingsupport for PC/OEM, peripheral, software products, PDAs, wireless devices andother personal technology). We provide sales, customer service,cross-sell/up-sell, and tier 1-4 technical support for these clients.

**Telecommunications and ISP**

We enable local,long distance, and wireless providers, telecommunications equipmentmanufacturers and ISP companies worldwide to meet business challenges and growtheir customer base through a broad range of cost-effective customer-focusedprograms.  In addition to traditional product and servicesupport solutions, we deliver advanced order management, provisioning,and B2B support, and have developedspecific end-to-end solutions for ISP and wireless service providers.

**Utilities**

Customerinteraction solutions from SITEL help electric, gas, and water utilitiesworldwide remain competitive and build stronger customer relationships throughimproved customer care, integrated billing and payment, and crisis managementprograms. Utilities benefit from increased customer retention and lowercost-of-service, while customers benefit from more convenient billing andpayment options, better integration between the contact center and field representatives,and improved customer service and responsiveness.  Inaddition to traditional customer support services, we have developed processesto support the industry including:  leadgeneration, loyalty campaign programs,

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appointment setting and scheduling, database management programs, andend-to-end solutions for supporting the customer from connection to payment.

**Media Services**

Media Services specializes infour segments: Broadband/Satellite and associated products and services,Publishing, Recordings, and Media Entertainment.  SITEL works with theindustry’s largest cable and satellite companies and has proven success inmeeting highly competitive and cost conscious business needs for a wide rangeof services, including: customer care/sales, multi-tier technical support, andoutbound sales.  SITEL has a proven trackrecord of working with Media Services companies to improve customer loyalty andcustomer demand by consistently providing a high level of service acrossmultiple centers and channels.

**InformationTechnology**

While our global system solutions and experience is vast, there are somekey differentiated components that our clients find compelling.  Our latest on-demand, global technicalinfrastructure, called SystemOneä, allows our clients to utilizeenterprise-class technology on a global basis based upon real-time needs anddemand.  We currently have over 3,000seats in four continents utilizing our SystemOne technical solution.  Furthermore, we have designed and implementedclient (or industry) specific applications to provide highly customizedsolutions to clients’ specific requirements.

In addition to our SystemOne Solution and our Global Routing Engine,SITEL’s end-to-end technical solutions include:

·                  **Customer Facing Enablements**, such as IVR, E-mail, Web, and Fax;

·                  **Voice of the Customer**, such as Custom Application Development,Speech Recognition, Text to Speech, Customer, Surveys, and Quality AssuranceTools;

·                  **Contact Management,**such as Auto Dialing, CTI, Scheduling andForecasting (WFM), and Data Mining;

·                  **Key Design Considerations,**such as Customer Education Protocols, CustomerSegmentation Strategies, Contact Valuation, and Knowledge Management.

Critical technology components that facilitate the worldwide, effectiveand efficient delivery of our infrastructure includes:

·                  **Technical Delivery,**such as Private Connectivity, NetworkIsolation, Encryption, and VPN Connection;

·                  **Monitoring/Visibility,**such as Intrusion Detection, Virus Detection,Network Anomaly Monitoring, and Event Monitoring;

·                  **Physical Security**, such as****ControlledAccess, Disaster Recovery/Continuity, Power Protection, and Hardened DataCenters;

·                  **Policy and Procedure**, such as Information Security, Change Control, Audit Procedures, andProject Methodology.

**Human Resource Management**

Efficient management and operation of large-scale contact centersolutions is a highly people intensive business. One of our core competenciesis managing a diverse, worldwide workforce.

We seek to locate customer contact centers in communities and cities withfavorable workforce demographics and populations with necessary languageskills. We are committed to equal employment opportunity in every market weserve.

To build rewarding careers for our employees and enable effectiveplanning for future growth:

·                  we provide a learning environment that deliversinstructor led and on the job training as well as e-learning opportunitiesthrough SITEL University;

·                  we focus on developing employee skills andpromoting from within so that employees can take on challenges that help thecompany group both domestically and globally; and

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·                  we employ a global reward and recognition programthat is instrumental in keeping employees motivated and focused on goals andobjectives.

As of December 31, 2005, we had approximately 39,000 employees.  In our European region, employees in Belgium,Germany, Sweden, and Spain are within the scope of government sponsoredcollective bargaining agreements and are represented by either a labor union ora statutory work council arrangement. In countries with labor unions or workcouncils, our ability to reduce our workforce or wage rates is subject toagreement or consultation with the appropriate labor union or works council. Weconsider relations with our employees to be good.

**Multi-shoreDistribution Strategy**

The use of multi-shore facilities to serve clients’ customers fromvarious locations offers a reliable, cost efficient, and flexible managementstrategy for our clients.  OurEnglish-speaking locations include the United States, Jamaica, India, Panama,and Canada.  The Spanish-speaking marketis primarily served by Spain, Mexico, Colombia, Panama and Argentina.  French-speaking customers are primarily servedvia France, Morocco, and Canada.  Indesigning a multi-shore strategy, SITEL has developed an evaluation toolcalled, PIMä, which is our Process Identification Modelfor identifying a client’s readiness to outsource, as well as defining a sitesupport strategy.

**Competition**

We are one of thelargest independent companies executing contact center solutions. Our largestU.S based direct competitors include:

·            APACCustomer Service, Inc.,

·            SykesEnterprises, Incorporated,

·            TeleTechHoldings, Inc., and

·            Convergys Corporation.

The industry inwhich we compete is competitive and segmented. In addition to the companies listed above, we compete with a variety ofcompanies that include niche providers, large conglomerates, regional players,single-country providers, and consulting companies. We also compete within-house customer service departments throughout the world.  In-house departments continue to comprise thelargest segment of contact center expenditures.

Datamonitor’sindustry research practice has recently defined global contact center outsourceproviders as those that operate on more than one continent.  SITEL is a dominant example of a globalcontact center outsource provider with one of the largest geographic footprintsin the industry.

**Reporting Segments and Geographical Information**

Informationregarding reporting segment and geographical information is set forthin Note 10 to the Consolidated Financial Statements.

# **Available Information**

We makeavailable, free of charge through our Internet website athttp://www.sitel.com, our annual report on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K, and amendments to those reports filedor furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Actof 1934, as soon as reasonably practicable after such material iselectronically filed with or furnished to the Securities and ExchangeCommission.

**GovernmentRegulation**

The nature of ourbusiness makes us subject to various laws and regulations that primarilyconcern teleservices, web-services, insurance, collection agencies, andthe collection and use of private consumer data.

In the UnitedStates, various federal and state statutes and regulations impact each of theseareas.

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Outbound andinbound telephone sales practices in the U.S. are subject to the FederalTelephone Consumer Protection Act of 1991 and the Federal TelemarketingConsumer Fraud and Abuse Protection Act of 1994.  The Federal Trade Commission (FTC) and theFederal Communications Commission (FCC) have each promulgated regulationsaffecting outbound telephone sales practices and, to a lesser extent, theupselling portion of inbound calls.

In 2003, the FTCand FCC expanded their respective regulations governing telephone salespractices.  The expanded regulationsestablished the FTC-FCC’s national “do not call” registry for consumers notwanting unsolicited telephone sales calls (with exceptions for pre-existingbusiness relationships or prior express consent and with a conditional safeharbor for human error).  Also, the FTCenacted a strict 3% per day per calling campaign restriction on outbound callabandonment.

Many states haveenacted or are considering enacting similar or more restrictive provisionsaffecting telephone sales practices.  TheFTC, FCC and state attorney generals are permitted to file enforcement actionsagainst sellers and telemarketers for violations of various teleservicesregulations.  Consumers may also filecivil actions for violations adversely affecting them.

There are alsomany federal and state laws and regulations in the U.S. that govern web-services,collection agency licensing and practices, and the collection and use ofprivate consumer data.  Some key federallaws affecting our business in this regard include the Gramm-Leach-Bliley Act,Health Insurance Portability and Accountability Act of 1996, Fair Debt CollectionPractices Act and Fair Credit Reporting Act. Concerns about “right of privacy” issues have increasingly been at theforefront of regulatory developments due to the dramatic increase in theavailability of information about consumers as a result of technologicaladvances.

Outside the UnitedStates, the majority of other countries where we have substantial operationsgenerally has not yet enacted detailed regulatory frameworks for teleservices,although a number of countries are considering this.  The Canadian Radio-Television andTelecommunications Commission (CRTC) enacted new telemarketing regulations inMay 2004 mirroring in part the U.S. regulations.  The CRTC, however, stayed its new regulationsin September 2004 pending its determination of applications to review andmodify some of the new regulations.   TheEuropean Union (EU) has adopted various directives impacting the teleservicesindustry.  EU member countries are invarious stages of implementing these directives.

Many othercountries, including those in the EU, have enacted or proposed laws thatregulate consumer privacy and the collection and use of consumer data.  Many of these laws are based on the privacyprinciples established by the Organization for Economic Co-operation and Development(OCED) in its Guidelines on the Protection of Privacy and Transborder Flows ofPersonal Data.  These laws typicallylimit the use and disclosure of personally identifiable information tospecified, lawful purposes; impose rules on the transfer and processing ofpersonal data; and provide individuals with a right to access and correctinaccurate personal information.  It isillegal to transfer personal data outside the EU to a country the EU has notapproved as having adequate data protection measures unless the national dataprotection commissioner has given permission or the exporter and importer haveentered a contract containing certain model clauses protecting the data.

Also, the variousclient industries we serve within the U.S. or internationally are subject todifferent types and degrees of government regulations.  Compliance with these industry-specificregulations is generally the legal or contractual responsibility of ourclients, but we are sometimes directly affected too.  For example, our employees who sell certainU.S. insurance products are typically required to be licensed by stateinsurance commissions and may also be required to participate in regularcontinuing education programs.  Anotherexample is our UK subsidiary, which has obtained regulated status from the U.K.Financial Services Authority to handle outsourced mortgages and generalinsurances sales and services pursuant to regulations that became effectiveJanuary 14, 2005 under the Financial Services and Markets Act 2000.

We rely on ourclients and their advisors to develop or approve the scripts and clientinformation we use in making or receiving customer contacts. We typicallyrequire our clients by contract to indemnify us against claims and expensesthat may arise from their products or services, scripts or directives.

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Overall,compliance to date with applicable laws, regulations and industry guidelineshas not had a material adverse effect on our global business.  In the U.S., compliance with the expanded FTCand FCC regulations and the increasing regulation of teleservices at the statelevel has imposed significant additional costs and burdens, especially upon ouroutbound customer acquisition business. However, our North American outbound customer acquisition business representsonly a relatively small percentage of our overall worldwide business, about3.3% of our 2005 global revenue, compared to 4.5% in 2004 and 6.7% in 2003.

Other proposedlaws and regulations are in early stages of consideration, and we cannot yetdetermine the impact those might have on our business.  Governments, trade associations, and industryself-regulatory groups may enact even more burdensome laws, regulations andguidelines, which might directly affect our business, or affect our clients’businesses and thus indirectly our business, in material and adverse ways.  Existing and future laws and regulations mayalso require our clients to change their products or services in ways thatcould diminish the commercial viability of those products or services orrequire us to modify our contact center solutions to continue effectivelymeeting our clients’ needs.

**QuarterlyResults and Seasonality**

We have experienced, and expect to continue to experience, quarterlyvariations in our results of operations mostly due to:

·                  the timing of our clients’ customer managementinitiatives and customer acquisition and loyalty campaigns,

·                  the commencement of new contracts and thediscontinuance or termination of existing contracts,

·                  revenue mix,

·                  the timing of additional operating, selling, andadministrative expenses to support new business, and

·                  the timing of recognition of incentive fees.

We experience periodicfluctuations in our results of operations related to both the start-up costsassociated with expansion and the implementation of clients’ customermanagement activities. In addition, our business generally tends to be slowerin the third quarter due to summer holidays in Europe.

**Item1A.  Risk Factors**

**The Company has materialweaknesses in internal control over financial reporting and cannot assure youthat additional material weaknesses will not be identified in the future.  Our failure to implement and maintaineffective internal control over financial reporting could result in materialmisstatements in the financial statements.**

Management has identified material weaknesses in our internal controlover financial reporting that resulted in the restatement of our previouslyissued financial statements for the fiscal years 2001 through 2004, includinginterim periods in 2004, and the first three quarters of 2005. See “Item 9A.Controls and Procedures”.  We cannotassure you that additional material weaknesses in our internal control overfinancial reporting will not be identified in the future.  Any failure to maintain or implement requirednew or improved controls, or any difficulties that may be encountered in theirimplementation, could result in additional significant deficiencies or materialweaknesses, cause the Company to fail to meet its periodic reportingobligations or result in material misstatements in the Company’s financialstatements. Any such failure could also adversely affect the results ofperiodic management evaluations and annual auditor reports regarding theeffectiveness of the Company’s internal control over financial reportingrequired under Section 404 of the Sarbanes-Oxley Act of 2002 and the rulespromulgated under Section 404.  Theexistence of material weaknesses could result in errors in our financialstatements that could result in a restatement of financial statements.

**Our exploration of strategicalternatives may create uncertainties that could affect our business**

On November 23, 2005, we announced that we had retained Citigroup as ourfinancial advisor and established a special committee of independent directorsand James Lynch to evaluate various strategies to enhance long-term stockholdervalue, including but not limited to our potential sale.  At this stage, we are uncertain as to whatstrategic alternatives may be available to us, whether we will elect to pursueany such strategic alternatives, or what impact any particular strategicalternative will have on our stock price if pursued. There are variousuncertainties and risks relating to our exploration of strategic alternatives,including:

· theexploration of strategic alternatives may distract management and disruptoperations, which could have a material adverse effect on our operatingresults;

· we maynot be able to successfully achieve the benefits of any strategic alternativeundertaken by us;

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· theprocess of exploring strategic alternatives may be time consuming andexpensive; and

· perceived uncertainties as to our futuredirection may result in the loss of employees or business partners.

**We cannot predict the ultimateoutcome of our ongoing discussions with the SEC regarding irregularitiesidentified in our Brazilian subsidiary that raised the possibility of FCPAviolations**

In connection with certain irregularities identified in our Brazilsubsidiary that raised the possibility of FCPA violations, we contacted theSecurities Exchange Commission Enforcement Division on March 1, 2006.  We’ve reported to the SEC on the results ofthe internal investigation into the irregularities.  We are responding to the SEC’s requests forfurther information.  We cannot predictthe ultimate outcome of the ongoing discussions with the SEC. The outcome couldinclude the institution of administrative or civil injunctive proceedingsinvolving the Company and/or current or former Company employees, officersand/or directors, the imposition of fines and other penalties, remedies and/orsanctions and/or a referral to other governmental agencies.

**Ourcredit facilities contain restrictive covenants that may limit our ability topursue or expand our business strategy, including the pay down of certainindebtedness***.*

Our creditfacilities with Wells Fargo Foothill, Inc. and Ableco Finance LLC as Agentslimit, and in some circumstances prohibit, our ability to incur additionalindebtedness, pay dividends, make investments or other restricted payments,sell or otherwise dispose of assets, effect a consolidation or merger, andengage in other activities.  We arerequired under the credit facilities to maintain compliance with certainfinancial ratios and thresholds.  We maynot be able to maintain these ratios and thresholds.  Covenants in the credit facilities may impairour ability to pursue or expand our business strategies.  Our ability to comply with these covenantsand other provisions of the credit facilities may be affected by our operatingand financial performance, changes in business conditions or results ofoperations, or other events beyond our control. In addition, if we do not comply with these covenants, the lenders underthe credit facilities may accelerate our debt repayment under the creditfacilities.  We have pledged asubstantial part of our consolidated assets and two-thirds of the stock of ourfirst tier foreign subsidiaries to secure the debt under our creditfacilities.  Certain of our foreignsubsidiaries have pledged substantially all of their assets to secureintercompany notes owed to borrowers under the credit facilities; theintercompany notes and pledges have been assigned to the Agents under thecredit facilities.  If the indebtednessunder the credit facilities is accelerated, we cannot assure that our assetswill be sufficient to repay all outstanding indebtedness in full.

**Our level of indebtedness, andthe security provided for this indebtedness, could adversely affect ourbusiness and our ability to fulfill our obligations.**

At December 31, 2005, we had approximately $137.1 million of outstandingindebtedness on a consolidated basis, of which approximately $110.6 million wasunder our credit facilities with Wells Fargo Foothill, Inc. and Ableco FinanceLLC as Agents.  Outstanding borrowingsunder our credit facilities are secured by a pledge of a substantial part ofour consolidated assets, including a pledge of two-thirds of the stock of ourfirst tier foreign subsidiaries. Most of the debt of our subsidiaries ispledged by certain or substantially all of the assets of thosesubsidiaries.  This level of indebtednessand related security could have important consequences to us and our investorsbecause it could:

·                                          Make it more difficult for us to satisfy ourdebt service and other obligations

·                                          Increase our vulnerability to general adverseeconomic and industry conditions

·                                          Require us to dedicate a substantial portionof our cash flow from operations to make payments on our indebtedness, therebyreducing the availability of our cash flow to fund other corporate purposes andgrow our business

·                                          Limit our flexibility in planning for, orreacting to, changes in our business and the industry

·                                          Place us at a competitive disadvantage to ourcompetitors that are not as highly leveraged

·                                          Limit, along with the financial and otherrestrictive covenants in our and our subsidiaries’ indebtedness, among otherthings, our ability to borrow additional funds as needed or take advantage ofbusiness opportunities as they arise.

To the extent we become more leveraged, the risks described above wouldincrease.  Further, our actual cashrequirements in the future may be greater than expected.  Accordingly, our cash flow from operationsmay not be sufficient to repay at maturity all of the outstanding debt as itbecomes due and, in that event, we may not be able to borrow money, sell assetsor otherwise raise funds on acceptable terms or at all to refinance our debt asit becomes due.

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**We have had to obtain waivers andamendments under our existing credit facilities to avoid future defaults orcure past defaults.  We may not be ableto obtain future waivers and amendments without significant fees or at all,which could materially adversely affect our financial condition.**

In 2006 we sought and obtained waivers and amendments under our creditfacilities with Wells Fargo Foothill, Inc. and Ableco Finance LLC as Agents toaddress defaults which related primarily to matters arising out of and relatedto our investigation of irregularities at our Brazilian subsidiary andtechnical errors in the filings of our US federal tax returns for fiscal years2001-2003.  We paid amendment fees of$250,000 to the Agents in connection with these prior waivers andamendments.  If future waivers oramendments are needed, we can expect to incur significant fees to obtain them.

**Our revenue is generated from alimited number of clients, and the loss of one or more of our significantclients or the reduction in margin due to a renegotiation or a substantialreduction of the amount of services performed by us for a significant client,could have a material adverse effect on our business.**

A significant portion of our revenue is derived fromrelatively few clients. Our top 20 clients accounted for 66.0%, 67.0%, and71.2% of our revenue for the years ended December 31, 2005, 2004, and 2003,respectively.  Some of our top 20 clientsinclude multiple independently managed business units within the clients’affiliated group. General Motors Corporation (General Motors) business unitswere responsible for 11.3%, 14.9%, and 21.2 % of our total revenue for theyears ended December 31, 2005, 2004 and 2003, respectively.  On April 21, 2004, we announced the signingof a new contract with General Motors to continue to provide customer supportservices for their North American Vehicle Sales, Service, and Marketing Groupthrough December 31, 2005.  An existingagreement under which we supported OnStar operations terminated effective June22, 2004. Our primary contract with General Motors expired in December 2005. Inaddition, Hewlett-Packard Company business units were responsible for 11.6% and11.3% of our revenue for the years ended December 31, 2005 and 2004, respectively.  We did not have any other clients undercommon control that generated more than 10% of our revenue for the yearspresented.

We provide services to our clients pursuant tocontracts, many of which may be terminated for convenience and most of which donot have minimum volume requirements. There can be no assurance that ourclients will not terminate their contracts before their scheduled expirationdate or that the volumes of their programs will not be reduced. In any of theseevents, there can be no assurance that we would be able to replace a client orprogram with any other client or program that would generate a comparableamount of revenue or profits. Consequently, the loss of one or more of oursignificant clients, or the substantial reduction of the amount of servicesperformed by us for a significant client, could have a material adverse effecton our business, results of operations and financial condition.

**We incurred net losses in four of thelast five fiscal years.  If we incurfuture net losses we may need additional capital to meet our future cashrequirements and execute our business strategy.**

We incurred net losses in fiscal years 2001-2004, as well as an operatingloss in 2001.  We may not be able tosustain or increase the profitability we established in 2005.  If revenues grow slower than we anticipate oroperating expenses exceed our expectations, our financial results may bematerially impacted. Furthermore, the cash requirements of certain of oursubsidiaries may continue to put pressure on our capital resources andliquidity, and we may not be able to continue to fund them if our operationsare not profitable. Particularly in view of the restrictions imposed by ourcredit facilities, our ability to continue our operations could be jeopardizedif we incur future net losses.

**Consolidation among our major clientscould materially adversely affect our business.**

We serve clients in industries that have experienced asignificant level of consolidation in recent years. We cannot assure thatadditional consolidations will not occur in which our clients acquireadditional businesses or are acquired. Such consolidations may result in thetermination of an existing client contract that would result in a decrease ofour revenue.

**If our clients are not successful,the amount of business that they outsource and the prices that they are willingto pay for such services may be diminished and could result in reduced revenuefor us.**

Our revenue is dependent on the success of ourclients. If our clients are not successful, the amount of business that theyoutsource may be diminished. Thus, although we have signed contracts with ourclients, particularly if there are no minimum volume requirements, there can beno assurance that the level of revenue to be received from such contracts willmeet expectations. In addition, several clients, particularly in thecommunications and technology industries, have experienced substantial pricecompetition. As a result, we may face increasing price pressure from suchclients, which could negatively affect our operating performance. Furthermore,a general economic downturn can produce a slowdown in the growth rate at whichcertain billing and customer management services are outsourced, and such aslowdown can have an adverse effect on the growth of our business and ourrevenue.

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**Our growth and financial results arelargely dependent on continued demand for our services from clients in theindustries we serve.**

We generate a majority ofour revenue from clients in the automotive, consumer, financial services,insurance, technology, telecommunications and ISP, and utilities industries.These industries accounted for approximately 9.3%, 11.2%, 17.0%, 5.9%, 24.4%, 19.3%, and 7.4%, respectively, of our 2005revenue.  Sales in other industries,including media services, travel, healthcare, government and various others,accounted for 5.5% of 2005 revenue.  Ourgrowth and financial results are largely dependent on continued demand for ourservices from clients in these industries and current trends in such industriesto outsource certain customer management services. A general economic downturnin any of these industries or a slowdown or reversal of the trend in any ofthese industries to outsource certain customer management services could have amaterial adverse effect on our business, results of operations and financialcondition.

**We are susceptible to business andpolitical risks from international operations that could result in reducedrevenue or earnings.**

We operate businesses in many countries outside theUnited States, which are located throughout North America, Europe, AsiaPacific, Latin America, and North Africa. Expansion of our existinginternational operations and entry into additional countries would require managementattention and financial resources. In addition, there are certain risksinherent in conducting business internationally including: exposure to currencyfluctuations, longer payment cycles, greater difficulties in accountsreceivable collection, difficulties in complying with a variety of foreignlaws, unexpected changes in regulatory requirements, difficulties in staffingand managing foreign operations, political instability and potentially adversetax consequences. To the extent that we do not manage our internationaloperations successfully, our business could be adversely affected and ourrevenue and earnings could be reduced.

**Our operating results fluctuatequarterly depending, among other things, the timing of clients’ marketingcampaigns and customer service initiatives and commencement of new contracts.**

We have experienced and expect to continue toexperience quarterly variations in our results of operations, principally dueto the timing of clients’ marketing campaigns and customer service initiativesand the commencement of new contracts, revenue mix and the timing of additionalselling, general and administrative expenses to support new business. Wetypically incur significant start-up costs when we expand into a new region orobtain a significant new customer support services contract. Since we cannotcontrol the implementation date of our clients’ programs, there can be noassurance that the initial revenue derived from a new call center will besufficient to cover that center’s costs of start-up and initial operation. Inaddition, our business tends to be slower in the third quarter due to summerholidays in Europe. Our planned operating expenditures are based upon revenueforecasts, and if revenue is below expectations in any given quarter, operatingresults would likely be materially affected.

**Our failure to keep ourtelecommunications and computer technology up-to-date may prevent us fromremaining competitive.**

Our continued success will depend on our continuinginvestment in sophisticated telecommunications and computer technology. Therecan be no assurance that we will be successful in anticipating technologicalchanges or in selecting and developing new and enhanced technology (includingintegration of a common set of service and reporting standards across ourbusiness units) in time to remain competitive on a global basis. Our businessis highly dependent on our computer and telecommunications equipment andsoftware systems. The temporary or permanent loss of these systems, throughcasualty or operating malfunction, could have a material adverse effect on ourbusiness, results of operations and financial condition.  See “Business - Information Technology” inthis Form 10-K.

**Any interruptions in service or theinability of telephone companies to provide additional capacity to meet ourneeds would adversely affect our growth and could adversely affect our existingbusiness.**

Our business is materially dependent upon serviceprovided worldwide by various local and long distance telephone companies. Anyinterruptions in service or the inability of telephone companies to provideadditional capacity to meet our needs would adversely affect our growth andcould adversely affect our existing business. Further, we continue to expand toless developed areas of the world where telephone service may be considerablyless reliable than it is in developed areas. Also, rate increases imposed bytelephone companies will increase our operating expenses and could adverselyaffect our operating margins if we were unable to pass the increases through toour clients.

**The markets for our services arehighly competitive, subject to rapid change, and highly fragmented.**

The worldwide-outsourced customer support serviceindustry is extremely competitive and fragmented, with low barriers to entry.Although we are a leading global provider of these services, there can be noassurance that additional

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competitors with greater resources than us will notenter the industry or that our clients will not choose to conduct internallymore of these activities.  See “Business- Competition” in this Form 10-K.  Whilemany companies provide outsourced customer support services, we believe no onecompany is dominant in the industry. There are numerous and varied providers ofour services, including firms specializing in call center operations, temporarystaffing and personnel placement companies, general management consultingfirms, divisions of large hardware and software companies and niche providersof outsourced customer contact management services, many of whom compete inonly certain markets. Our competitors include many companies who may possesssubstantially greater resources, greater name recognition and a moreestablished customer base than we do. In addition to our competitors, manycompanies who might utilize our services or the services of one of ourcompetitors may utilize in-house personnel to perform such services. Increasedcompetition, our failure to compete successfully, pricing pressures, loss ofmarket share and loss of clients could have a material adverse effect on ourbusiness, results of operations and financial condition.

Many of our large clients purchase outsourced customersupport services primarily from a limited number of preferred vendors. We haveexperienced and continue to anticipate significant pricing pressure from theseclients in order to remain a preferred vendor. These companies also requirevendors to be able to provide services in multiple locations. Although webelieve we can effectively meet our clients’ demands, there can be no assurancethat we will be able to compete effectively with other outsourced customersupport services companies. We believe that the most significant competitivefactors in the sale of our services include quality, advanced technologycapabilities, global coverage, reliability, scalability, security, industryexperience, price and tailored service offerings.

**Management and operation oflarge-scale contact center solutions is a highly people intensive business.**

Outsourced customer support services are very laborintensive. There can be no assurance that our labor costs will not increase orthat we will be able to employ a sufficient number of people to sustain ourcurrent volume of business or support our planned growth. Some of our customersupport services activities, particularly insurance product sales and technicalsupport activities, require highly trained employees. Our worldwide presencealso necessitates retaining personnel fluent in languages and dialects spokenand written by customers of our clients. We must maintain separate humanresource departments in each region of the world we operate. As we expand ouroperations into new countries, we must become familiar with local laws andcustoms, which vary significantly around the world. There can be no assurancethat we will gain the expertise necessary to effectively manage our humanresources programs as we expand our business into new countries. See “Business- Human Resource Management” in this Form 10-K.

**We have operations in many parts ofthe world and therefore our results of operations can be impacted by foreignexchange fluctuations.**

We are exposed to market risks associated primarilywith changes in foreign currency exchange rates. We have operations in manyparts of the world.  Revenue and expensesof those operations are typically denominated in the currency of the country ofoperations. Because our financial statements are presented in U.S. dollars, anysignificant fluctuations in the currency exchange rates between the U.S. dollarand the currencies of countries in which we operate will affect our results ofoperations and our financial statements. Our largest exposure to currency risksis related to the British pound and the Euro.

**We are subject to the risk of litigation andregulatory proceedings or actions in connection with the restatement of priorperiod financial statements.**

We have restatedour previously issued financial statements for the fiscal years 2001 through2004, including interim periods in 2004, and the first three quarters of 2005.We may in the future be subject to class action suits, other litigation orregulatory proceedings or actions arising in relation to the restatement of ourprior period financial statements. Any expenses incurred in connection withthis potential litigation or regulatory proceeding or action not covered byavailable insurance or any adverse resolution of this potential litigation orregulatory proceeding or action could have a material adverse effect on ourbusiness, results of operations, cash flows and financial condition. Further,any litigation or regulatory proceeding or action may be time consuming, and itmay distract our management from the conduct of our business.

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**Thenature of our business makes us subject to various laws and regulations.**

Our business is subject to various governmental laws,regulations and codes of practice. There can be no assurance that additionalgovernmental regulation in the United States or Europe, or new governmentalregulations in other areas of the world in which we conduct operations, wouldnot limit the activities of our clients, or us or significantly increase thecost of regulatory compliance.

Several of the industries in which our clients operateare subject to varying degrees of government regulation; particularly theinsurance and financial services industries. Generally, compliance with theseregulations is the responsibility of our clients. However, we could be subjectto a variety of enforcement or private actions for our failure or the failureof our clients to comply with such regulations. For example, in the UnitedStates, customer service representatives who sell certain insurance productsare required to be licensed by various state insurance commissions andparticipate in regular continuing education programs, thus requiring us tocomply with the extensive regulations of these state commissions. As a result,changes in these regulations or their interpretations could materially increaseour operating costs.

In addition, there is increasing concern amongconsumers, legislators and regulators about “right of privacy” issuesassociated with data on consumers that is obtained by, and used in, customersupport services and other industries. During 2003, both the FTC and FCC substantiallybroadened their respective regulations governing telephone sales practices. See“Business - Government Regulation” in this Form 10-K.

**We arehighly dependent on the efforts of our senior management team.**

We are highly dependent on the efforts of our seniormanagement team. The loss of the services of several members of seniormanagement could have a material adverse effect on us. As we continue to grow,we will need to recruit and retain additional qualified management personnel,particularly at the business unit level.

**Adecline in the trend toward outsourcing or in the trend toward migrationoffshore or difficulties in our offshore operations could materially adverselyimpact our business.**

Our business and growth depend in large part on theindustry trend toward outsourced customer support management services.Outsourcing means that an entity contracts with a third party, such as us, toprovide customer support services rather than perform such services in-house.There has been an increasing amount of political discussion and debate relatedto worldwide outsourcing, particularly from the United States to offshorelocations. There is federal and state legislation currently pending related tothis issue.  A change in the politicalenvironment in the United States or the adoption and enforcement of legislationand regulations curbing the use of offshore customer contact managementsolutions and services could effectively have a material adverse effect on ourbusiness, results of operations, and financial condition.  There can be no assurance that theoutsourcing trend will continue, as organizations may elect to perform suchservices themselves. A significant change in this trend could have a materialadverse effect on our business, results of operations, and financialcondition.  Furthermore, while we nowhave operated in offshore markets for more than five years, there can be noassurance that we will be able to successfully conduct and expand suchoperations, and a failure to do so could also have a material adverseeffect.   The continued expansionoffshore to meet the demand of new clients and the needs of certain of ourclients that are migrating call volumes to offshore operations could result inadditional excess capacity in the countries that they are migrating from(particularly the U.S. and U.K.).  As aresult of this migration offshore, we have experienced and expect that we willcontinue to experience duplicative operating costs and site closure costs relatedto the ramp-down of certain contact centers, particularly in the U.S. and U.K.To date we have closed several centers and expect to close additional centersas a result of this shift offshore. The success of our offshore operations willbe subject to numerous contingencies, some of which are beyond our control,including general and regional economic conditions, prices for our services,competition, changes in regulation and other risks.   In addition, as with all of our operationsoutside of the United States, we are subject to various additional political,economic, and market uncertainties in offshore locations.

**Continuedwar and terrorist attacks or other civil disturbances could lead to economicweakness and could disrupt our operations resulting in a decrease of ourrevenue and earnings.**

In March 2003, the United States went to war againstIraq and, in September 2001, the United States was a target of unprecedentedterrorist attacks. In March 2004, Spain, the location of one of our largestbusiness units, was a target of a terrorist attack.  These attacks have caused uncertainty in theglobal financial markets and in the United States economy. The war and anyadditional terrorists attacks may lead to continued armed hostilities orfurther acts of terrorism and civil disturbances in the United States orelsewhere, which may contribute to economic instability in the United Statesand

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disrupt our operations. Such disruptions could causeservice interruptions or reduce the quality level of the services that weprovide, resulting in a reduction of our revenue. In addition, these activitiesmay cause our clients to delay or defer decisions regarding their use of ourservices which would delay our receipt of additional revenue.

**Servicefees we charge may not cover our costs.**

Some of our contractsallow us to increase our service fees if and to the extent certain cost orprice indices increase; however, many of our significant contracts do notcontain such provisions and some contracts require us to decrease our servicefees if, among other things, we do not achieve certain performance objectives.Increases in our service fees that are based upon increases in cost or priceindices may not fully compensate us for increases in labor and other costsincurred in providing services.

**Ifwe do not effectively manage our capacity, our results of operations could beadversely affected.**

Our profitability isinfluenced significantly by the capacity use of our contact centers. We attemptto maximize the use of our contact centers; however, because most of our businessis inbound, we have significantly higher use during peak (weekday) periods thanduring off-peak (night and weekend) periods. We have experienced periods ofexcess capacity, particularly in our shared contact centers, and occasionallyhave accepted short-term assignments to use the excess capacity. In addition,we have experienced, and in the future may experience, at least short-term,excess peak period capacity when we open a new contact center or terminate orcomplete a large client program. There can be no assurance that we will be ableto achieve or maintain optimal contact center capacity use. We generally incurthe same operating costs regardless of the level of use of our contact centers.

**Asignificant uninsured loss or a loss in excess of our insurance coverage couldmaterially adversely affect our financial condition.**

Our operations aredependent upon our ability to protect our contact centers, computer andtelecommunications equipment and software******systems against damage from fire, powerloss, telecommunications interruption or******failure, natural disaster and other similarevents. In the event we******experiencea temporary or permanent interruption at one or more of our contact******centers, throughcasualty, operating malfunction or otherwise, our business could be materiallyadversely affected and we may be required to pay contractual damages to someclients or allow some clients to terminate or renegotiate their contracts withus. We maintain property and business interruption insurance; however, such insurancemay not adequately compensate us for any losses we may incur.

**Ourforecasts and other forward-looking statements are based upon variousassumptions that are subject to significant uncertainties that may result inour failure to achieve our forecasted results.**

From time to time inpress releases, conference calls and otherwise, we may publish or makeforecasts or other forward-looking statements regarding our future results,including estimated revenues, earnings per share and other operating and financialmetrics.  Our forecasts are based uponvarious assumptions that are subject to significant uncertainties and anynumber of them may prove incorrect. Further, our achievement of any forecasts depends upon numerous factors,many of which are beyond our control. Consequently, we cannot assure you that our performance will beconsistent with management forecasts. Variations from forecasts and other forward-looking statements may bematerial and adverse.

**The trading price of our common stockis subject to significant fluctuations.**

The trading price of our common stock fluctuates.Factors such as fluctuations in our financial performance and that of ourcompetitors, as well as general market conditions, could have a significantimpact on the future trading prices of our common stock. The trading pricesalso may be affected by changes in interest rates and other factors beyond ourcontrol.

**We have the ability to issueadditional equity securities, which would lead to dilution of our issued andoutstanding common stock.**

The issuance of additional equity securities orsecurities convertible into equity securities would result in dilution ofthen-existing stockholders’ equity interests in us. Our board of directors hasthe authority to issue, without shareholder approval, up to 200,000,000 sharesof common stock, of which approximately 74,507,364 shares were outstanding asof August 31, 2006.

**We have the ability to issuepreferred shares without shareholder approval.**

Our common stock may be subordinate to classes ofpreferred shares issued in the future in the payment of dividends and otherdistributions made with respect to the common stock, including distributionsupon liquidation or dissolution. Our board of directors is authorized to issuepreferred shares without first obtaining shareholder approval. We have

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previously designated for use in connection with ourrights plan a series of 200,000 shares of preferred stock. If we issuepreferred shares, it will create additional securities that may have dividendor liquidation preferences senior to the common stock. If we issue convertiblepreferred shares, a subsequent conversion may dilute the current commonshareholders’ interest.

**Certain provisions of our charter andMinnesota law may make it difficult for a third party to acquire us, even insituations that may be viewed as desirable by our shareholders.**

The Business Corporation Act of the State of Minnesotacontains provisions that may delay or prevent an attempt by a third party toacquire control of our company. Our charter and bylaws contain provisions thatauthorize the issuance of preferred shares, and establish advance noticerequirements for director nominations and actions to be taken at shareholdermeetings. These provisions could also discourage or impede a tender offer,proxy contest or other similar transaction involving control of us, even ifviewed favorably by shareholders.

**Our rights and the rights of ourshareholders to take action against our directors and officers are limited,which could limit shareholder recourse in the event of actions not inshareholder best interests.**

Minnesota law provides that a director has noliability in that capacity if he or she performs his or her duties in goodfaith, in a manner he or she reasonably believes to be in our best interestsand with the care that an ordinarily prudent person in a like position woulduse under similar circumstances. Our charter authorizes and requires us toindemnify our directors and officers for actions taken by them in those capacitiesto the extent permitted by Minnesota law. In addition, our charter limits theliability of our directors and officers for money damages, except for:

·                  liability basedon a breach of the duty of loyalty to the corporation or the stockholders;

·                  liability foracts or omissions not in good faith or that involved intentional misconduct ora knowing violation of law;

·                  liability basedon an improper distribution under Minnesota Statutes Section 302A.559 or onviolations of state securities laws under Minnesota Statutes Section 80A.23;

·                  liability forany transaction from which the director derived an improper personal benefit;or

·                  liability forany act or omission occurring prior to the date Article VI of our charterbecame effective.

As a result, our shareholders and we may have morelimited rights against our directors and officers than might otherwise exist.

**Minnesota law may discourage a thirdparty from acquiring us.**

The Minnesota Business Corporation Act containsprovisions that may delay or prevent an attempt by a third party to acquirecontrol of our company. These provisions include (i) prohibiting us fromengaging in a “business combination” with an “interested shareholder” for aperiod of four years after the date of the transaction in which the personbecame an interested shareholder unless certain requirements are met and (ii)requiring disinterested shareholder approval for certain “control shareacquisitions.” These provisions could also discourage or impede a tender offer,proxy contest or other similar transaction involving control of us, even ifviewed favorably by shareholders.

**Item 1B.Unresolved Staff Comments**

Not applicable

18

----

 

**Item 2. Properties**

Our executive offices are located in Omaha, Nebraska.

As of December 31, 2005, we operated company centersin various facilities that we lease andclient centers that are on client premises as shown in the table below.  
|                            | ** ** | **Company** | ** ** | **Client**  | ** ** | **Total**      | ** ** | **Number of** | ** ** |
|----------------------------|------------|-------------|------------|-------------|------------|----------------|------------|--------------------|------------|
| **Facility Location** | ** ** | **Centers** | ** ** | **Centers** | ** ** | **Facilities** | ** ** | **Workstations**   | ** ** |
|                       |       |        |       |        |       |           |       |               |       |
| Argentina                  |       | —      |       | 1           |       | 1              |       | 180                |       |
| Australia                  |       | 2           |       | —      |       | 2              |       | 247                |       |
| Belgium                    |       | 1           |       | —      |       | 1              |       | 656                |       |
| Brazil                     |       | 2           |       | 3           |       | 5              |       | 1,519              |       |
| Canada                     |       | 8           |       | 1           |       | 9              |       | 2,755              |       |
| Colombia *                 |       | 2           |       | 1           |       | 3              |       | 984                |       |
| Denmark                    |       | 1           |       | —      |       | 1              |       | 40                 |       |
| France                     |       | 2           |       | 2           |       | 4              |       | 757                |       |
| Germany                    |       | 4           |       | —      |       | 4              |       | 1,645              |       |
| India *                    |       | 1           |       | —      |       | 1              |       | 1,045              |       |
| Italy                      |       | 1           |       | —      |       | 1              |       | 220                |       |
| Jamaica *                  |       | 1           |       | —      |       | 1              |       | 187                |       |
| Mexico *                   |       | 4           |       | —      |       | 4              |       | 1,566              |       |
| Morocco                    |       | 1           |       | —      |       | 1              |       | 391                |       |
| Netherlands                |       | 2           |       | —      |       | 2              |       | 594                |       |
| New Zealand                |       | 1           |       | 2           |       | 3              |       | 421                |       |
| Panama *                   |       | 2           |       | 2           |       | 4              |       | 1,089              |       |
| Philippines                |       | 1           |       | —      |       | 1              |       | 597                |       |
| Poland                     |       | 1           |       | —      |       | 1              |       | 129                |       |
| Portugal                   |       | 1           |       | —      |       | 1              |       | 193                |       |
| Singapore                  |       | 1           |       | —      |       | 1              |       | 143                |       |
| Spain                      |       | 8           |       | 3           |       | 11             |       | 4,421              |       |
| Sweden                     |       | 1           |       | 3           |       | 4              |       | 284                |       |
| United Kingdom             |       | 4           |       | —      |       | 4              |       | 1,520              |       |
| United States              |       | 16          |       | 3           |       | 19             |       | 6,299              |       |
|  Totals:              |       | 68          |       | 21          |       | 89             |       | 27,882             |       |

 

----

*centers in our jointventures

 

Wecontract and operate out of client centers to support specific clientinitiatives. We believe our current facilities are adequate for our currentoperations, but additional facilities will be required to support growth. Webelieve suitable additional or alternative space will be available as needed oncommercially reasonable terms.

**Item 3. Legal Proceedings**

From time to time, during the normal course ofbusiness, we may make certain indemnities, commitments and guarantees underwhich we may be required to make payments in relation to certain transactions.  These include, for example:  (i) indemnities to clients pertaining toclaims based on our negligence or willful misconduct, and (ii) indemnitiesinvolving the accuracy of representations and warranties in certain contracts.

From time to time,we are involved in litigation incidental to our business. We cannot predict theultimate outcome of such litigation with certainty, but management believes,after consultation with counsel, except for the items discussed below for thereasons mentioned below, that the resolution of such matters will not have amaterial adverse effect on our consolidated financial position or results ofoperations.

19

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On March 1, 2006, we contacted the U.S. Securities and ExchangeCommission Enforcement Division and reported that we had identified accountingand other irregularities in our Brazil subsidiary that raised the possibilityof violations of the U.S. Foreign Corrupt Practices Act.  We completed an internal investigation intothese irregularities, with the assistance of independent outside counsel inBrazil.  The investigation did not revealany prior involvement or knowledge regarding the irregularities by any officeror director of the Company.  We havetaken and are taking remedial actions. We restated our financial statements for the fiscal years 2001 through2004 and for the quarters ended March 31, June 30, and September 30, 2005 as aresult of errors in the prior financial statements identified as a result ofthe investigation.  We reported to theSEC on the results of the internal investigation and are responding to the SEC’srequests for further information.  Wecannot predict the ultimate outcome of the ongoing discussions with the SEC.The outcome could include the institution of administrative or civil injunctiveproceedings involving the Company and/or current or former Company employees,officers and/or directors, the imposition of fines and other penalties,remedies and/or sanctions and/or a referral to other governmental agencies.

Two of our clientshave received letters from time to time containing an offer to license andsuggesting that the client might be infringing certain patents related tocomputerized telephonic voice response systems without the license. The clientshave indicated that if any infringement occurred the client would seekcontractual indemnity from us. In such an event, we would expect to seekcontractual indemnity from certain of our vendors. Any such contractualindemnity we might obtain may not be sufficient to cover all of the costs ofinvestigating and resolving such matter. We might also seek a license under thepatents. Any such license may not be available under commercially reasonableterms. Any license costs would increase the cost of doing business in thefuture and may or may not be fully reflected in our pricing. To our knowledge,no litigation has been initiated against our clients or us concerning thismatter. At this stage, due to the inherent uncertainties, we are unable topredict whether this matter may have a material adverse effect on our businessor on our financial condition or results of operation.

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

Not applicable.

## **PART II**

**Item 5. Marketfor Registrant’s Common Equity and Related Stockholder Matters**

Our common stockis traded on the New York Stock Exchange under the symbol SWW. The followingtable sets forth the high and low sale prices of our common stock for thequarters indicated, as reported by the New York Stock Exchange. 
| ** **     | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $        | 2.50       |     | $          | 1.70 |   | $ | 3.31 |   | $ | 2.31 |   |
| Second Quarter |       | $        | 2.19       |     | $          | 1.59 |   | $ | 4.46 |   | $ | 2.52 |   |
| Third Quarter  |       | $        | 3.03       |     | $          | 2.12 |   | $ | 4.43 |   | $ | 1.56 |   |
| Fourth Quarter |       | $        | 3.25       |     | $          | 2.55 |   | $ | 2.54 |   | $ | 1.86 |   |

 

***Shares Outstanding and Holders ofCommon Stock***

As of August 31, 2006, we had 74,507,364 shares of common stockoutstanding and 486 record holders of our common stock.

***Dividend Policy***

We have not declared or paid any cash dividends on our common stocksince our inception. The Board of Directors currently intends to retain allearnings for use in the business for the foreseeable future. Furthermore, ourCredit Agreements contain restrictions on the payment of cash dividends.

20

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**Item 6. SelectedFinancial Data**

The following Selected Financial Data should beread in conjunction with Management’s Discussion and Analysis of FinancialCondition and Results of Operations beginning on the following page, theConsolidated Financial Statements beginning on page F-3, and the Notes toConsolidated Financial Statements beginning on page F-7. 
| **Years Ended December 31,**                                               | ** ** | **2005**                                                           | ** **    | **2004**       | ** ** | **2003**       | ** ** | **2002**       | ** ** | **2001**       | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|---------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|
| ** **                                                                                | ** ** | ** **                                                         | ** **    | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| ** **                                                                                | ** ** | **(in thousands, except per share data)** | ** **    |
| **Consolidated  Statement of Operations Data:**                                           | ** ** | ** **                                                         | * *      | * *       | * *   | * *       | * *   | * *       | * *   | * *       | * *   |
| **Revenue**                                                                               | ** ** | **$**                                                              | **1,037,179** |           | $          | 956,135        |       | $              | 846,087    |           | $          | 769,884 |   | $ | 724,734 |   |
|                                                                                      | ** ** | ** **                                                         |          |           |       |           |       |           |       |           |       |
| Operating  expenses                                                                       | ** ** | **1,012,080**                                                      |          | 939,005        |       | 833,865        |       | 740,143        |       | 708,463        |       |
| Asset impairment  and restructuring expenses (a)                                          | ** ** | **6,614**                                                          |          | 16,993         |       | 3,004          |       | 1,444          |       | 26,185         |       |
| **Operating  income (loss)**                                                              | ** ** | **18,485**                                                         |          | 137            |       | 9,218          |       | 28,297         |       | (9,914         | )          |
|                                                                                      | ** ** | ** **                                                         |          |           |       |           |       |           |       |           |       |
| Interest expense,  net                                                                    | ** ** | **(13,006**                                                        | **)**         | (13,104        | )          | (12,516        | )          | (11,736        | )          | (11,717        | )          |
| Equity in  earnings (loss) of affiliates                                                  | ** ** | **722**                                                            |          | 681            |       | 1,417          |       | 3,441          |       | (297           | )          |
| Other expense,  net                                                                       | ** ** | **(545**                                                           | **)**         | (698           | )          | (438           | )          | (519           | )          | (2,244         | )          |
| **Income  (loss) before income taxes, minority interest and change in accounting method** | ** ** | **5,656**                                                          |          | (12,984        | )          | (2,319         | )          | 19,483         |       | (24,172        | )          |
|                                                                                      | ** ** | ** **                                                         |          |           |       |           |       |           |       |           |       |
| Income tax  expense (benefit) (e)                                                         | ** ** | **642**                                                            |          | 14,732         |       | 4,789          |       | 10,443         |       | (2,317         | )          |
| Minority interest                                                                         | ** ** | **2,240**                                                          |          | 724            |       | 658            |       | 1,812          |       | 947            |       |
| **Income  (loss) before change in accounting method**                                     | ** ** | **2,774**                                                          |          | (28,440        | )          | (7,766         | )          | 7,228          |       | (22,802        | )          |
|                                                                                      | ** ** | ** **                                                         |          |           |       |           |       |           |       |           |       |
| Cumulative effect  of a change in accounting for goodwill (b)                             | ** ** | **—**                                                         |          | —         |       | —         |       | (18,399        | )          | —         |       |
| **Net  income (loss) (c)**                                                                | ** ** | **$**                                                              | **2,774**     |           | $          | (28,440        | )          | $              | (7,766     | )              | $          | (11,171 | ) | $ | (22,802 | ) |
|                                                                                      | ** ** | ** **                                                         |          |           |       |           |       |           |       |           |       |
| **Weighted  average common shares outstanding:**                                          | ** ** | ** **                                                         |          |           |       |           |       |           |       |           |       |
| Basic                                                                                     | ** ** | **74,137**                                                         |          | 73,684         |       | 73,877         |       | 74,225         |       | 73,424         |       |
| Diluted                                                                                   | ** ** | **74,466**                                                         |          | 73,684         |       | 73,877         |       | 74,335         |       | 73,424         |       |
|                                                                                      | ** ** | ** **                                                         |          |           |       |           |       |           |       |           |       |
| **Income  (loss) before change in accounting method per common share:**                   |       |                                                               |          |           |       |           |       |           |       |           |       |
| Basic                                                                                     | ** ** | **$**                                                              | **0.04**      |           | $          | (0.39          | )          | $              | (0.11      | )              | $          | 0.10 |   | $ | (0.31 | ) |
| Diluted                                                                                   | ** ** | **$**                                                              | **0.04**      |           | $          | (0.39          | )          | $              | (0.11      | )              | $          | 0.10 |   | $ | (0.31 | ) |
|                                                                                      | ** ** | ** **                                                         |          |           |       |           |       |           |       |           |       |
| **Net  income (loss) per common share:**                                                  | ** ** | ** **                                                         |          |           |       |           |       |           |       |           |       |
| Basic                                                                                     | ** ** | **$**                                                              | **0.04**      |           | $          | (0.39          | )          | $              | (0.11      | )              | $          | (0.15 | ) | $ | (0.31 | ) |
| Diluted                                                                                   | ** ** | **$**                                                              | **0.04**      |           | $          | (0.39          | )          | $              | (0.11      | )              | $          | (0.15 | ) | $ | (0.31 | ) |

 
| **At December 31,**                         | ** ** | **2005**            | ** ** | **2004**       | ** ** | **2003**       | ** ** | **2002**       | ** ** | **2001**       | ** ** |
|---------------------------------------------|------------|---------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|
| ** **                                  | ** ** | ** **          | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| ** **                                  | ** ** | **(in  thousands)** | ** ** |
| **Balance  Sheet Data:**                    | ** ** | ** **          | * *   | * *       | * *   | * *       | * *   | * *       | * *   | * *       | * *   |
| Working capital                             | ** ** | **$**               | **90,517** |           | $          | 77,620         |       | $              | 85,568     |           | $          | 79,429 |   | $ | 72,710 |   |
| Total assets                                | ** ** | **418,445**         |       | 399,423        |       | 406,275        |       | 352,727        |       | 356,557        |       |
| Long-term debt,  net of current portion (d) | ** ** | **114,463**         |       | 99,530         |       | 109,423        |       | 107,475        |       | 107,495        |       |
| Stockholders’ equity                   | ** ** | **118,386**         |       | 125,230        |       | 145,940        |       | 137,545        |       | 139,394        |       |
|                                             |            |                     |            |                |            |                |            |                |            |                |            |  |  |  |  |  |

 

----

*(a)**  **We discuss asset impairmentand restructuring expenses in Note 12 to the Consolidated Financial Statements.*

*(b)**  **We discuss the cumulativeeffect of a change in accounting for goodwill in Note 1 to the ConsolidatedFinancial Statements.*

*(c)  During 2002, we adopted the provisions ofSFAS 142, Goodwill and Other Intangible Assets, and ceased amortizinggoodwill.  If we had not amortized ourgoodwill during the year ended December 31, 2001 our net loss would have been$(19,360).*

*(d)  On December 1, 2004, we redeemed $10 millionof our 9.25% Senior Subordinated Notes and in August of 2005 we refinanced ourlong-term debt, see Note 5 in the Consolidated Financial Statements.*

*(e)  We discuss incometax expense in Note 6 to the Consolidated Financial Statements.*

21

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As described inNote 2 to the December 31, 2005 Consolidated Financial Statements andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations included elsewhere in this Form 10-K, we have restated ourconsolidated financial statements for the years ended December 31, 2004, 2003,2002, and 2001 to reflect additional adjustments in the Consolidated Statementsof Operations primarily associated with interest and penalties on unpaid taxobligations; deferred recognition of expenses; errors in revenue recording; intentionalfalsification of financial results; and intentional misclassification ofrecorded amounts at our Brazilian subsidiary. As a result, we are restating our financial statements for all periodsreflected in this table for these items. The restated amounts above reflect the adjustments enumerated in Note 2to the Consolidated Financial Statements and the following adjustments to the2003 balance sheet and for years prior to fiscal 2003:
|                                                                                       | ** ** | **2002**                | ** ** | **2001**                | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                            | ** ** | **As**                  | ** ** | ** **              | ** ** | **As** | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **previously**          | ** ** | **As**                  | ** ** | **previously** | ** ** | **As** | ** ** |
| ** **                                                                            | ** ** | **reported**            | ** ** | **restated**            | ** ** | **reported** | ** ** | **restated** | ** ** |
| ** **                                                                            | ** ** | **(in thousands)** | ** ** | **(in thousands)** | ** ** |
| Statement of  Operational Data:                                                       |       |                    |       |                    |       |   |   |   |   |
| Revenue                                                                               |       | $                       | 770,211    |                    | $          | 769,884 |   | $ | 725,048 |   | $ | 724,734 |   |
| Operating  expenses                                                                   |       | 739,457                 |       | 740,143                 |       | 708,565 |   | 708,463 |   |
| Operating income  (loss)                                                              |       | 29,310                  |       | 28,297                  |       | (9,702 | ) | (9,914 | ) |
| Interest expense,  net                                                                |       | (11,250                 | )          | (11,736                 | )          | (11,642 | ) | (11,717 | ) |
| Other income  (expense), net                                                          |       | (636                    | )          | (519                    | )          | (2,309 | ) | (2,244 | ) |
| Income (loss)  before income taxes, minority interest and change in accounting method |       | 20,865                  |       | 19,483                  |       | (23,950 | ) | (24,172 | ) |
| Income tax  expense (benefit)                                                         |       | 10,437                  |       | 10,443                  |       | (2,317 | ) | (2,317 | ) |
| Income (loss)  before change in accounting method                                     |       | 8,616                   |       | 7,228                   |       | (22,580 | ) | (22,802 | ) |
| Net income (loss)                                                                     |       | (9,783                  | )          | (11,171                 | )          | (22,580 | ) | (22,802 | ) |
| Income (loss)  before change in accounting method per share:                          |       |                    |       |                    |       |   |   |   |   |
| Basic & Diluted                                                                   |       | $                       | 0.12       |                    | $          | 0.10 |   | $ | (0.31 | ) | (0.31 | ) |
| Income (loss) per  share:                                                             |       |                    |       |                    |       |   |   |   |   |
| Basic &  Diluted                                                                  |       | $                       | (0.13      | )                       | $          | (0.15 | ) | $ | (0.31 | ) | (0.31 | ) |
|                                                                                       |            |                         |            |                         |            |  |  |  |  |  |  |  |  |

 
|                                                       | ** ** | **2003**            | ** ** | **2002**            | ** ** | **2001**            | ** ** |
|-------------------------------------------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                            | ** ** | **As**              | ** ** | ** **          | ** ** | **As**              | ** ** | ** ** | ** ** | **As** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **previously**      | ** ** | **As**              | ** ** | **previously**      | ** ** | **As** | ** ** | **previously** | ** ** | **As** | ** ** |
| ** **                                            | ** ** | **reported**        | ** ** | **restated**        | ** ** | **reported**        | ** ** | **restated** | ** ** | **reported** | ** ** | **restated** | ** ** |
| ** **                                            | ** ** | **(in  thousands)** | ** ** | **(in  thousands)** | ** ** | **(in  thousands)** | ** ** |
| Balance Sheet  Data:                                  |       |                |       |                |       |                |       |   |   |   |   |   |   |
| Cash and cash  equivalents                            |       | $                   | 29,850     |                | $          | 30,131              |       | $ | 34,142 |   | $ | 34,137 |   | $ | 22,156 |   | $ | 22,365 |   |
| Trade accounts  receivable                            |       | 175,542             |       | 175,711             |       | 128,643             |       | 128,966 |   | 129,180 |   | 129,410 |   |
| Prepaid expenses  and other assets                    |       | 17,436              |       | 17,464              |       | 15,730              |       | 15,591 |   | 13,333 |   | 13,008 |   |
| Total current  assets                                 |       | 225,937             |       | 226,415             |       | 183,656             |       | 183,835 |   | 171,027 |   | 171,566 |   |
| Property and  equipment, net                          |       | 90,233              |       | 90,345              |       | 86,883              |       | 87,293 |   | 91,293 |   | 91,721 |   |
| Other assets                                          |       | 8,139               |       | 7,844               |       | 8,062               |       | 8,223 |   | 8,255 |   | 8,379 |   |
| Total Assets                                          |       | 405,980             |       | 406,275             |       | 351,977             |       | 352,727 |   | 355,466 |   | 356,557 |   |
| Revolving credit  facitility and other current debt   |       | 22,894              |       | 23,405              |       | 5,404               |       | 5,634 |   | — |   | 177 |   |
| Current portion  of capital lease obligations         |       | 3,181               |       | 3,301               |       | 1,951               |       | 2,000 |   | 2,366 |   | 2,366 |   |
| Trade accounts  payable                               |       | 27,374              |       | 27,050              |       | 28,612              |       | 28,170 |   | 25,068 |   | 25,154 |   |
| Accrued wages,  salaries and bonuses                  |       | 38,817              |       | 38,721              |       | 28,283              |       | 28,377 |   | 26,014 |   | 26,794 |   |
| Accrued operating  expenses                           |       | 37,347              |       | 40,858              |       | 30,129              |       | 31,584 |   | 34,953 |   | 34,027 |   |
| Income taxes  payable                                 |       | 628                 |       | 628                 |       | 1,788               |       | 1,770 |   | 4,087 |   | 4,476 |   |
| Total current  liabilities                            |       | 137,125             |       | 140,847             |       | 103,038             |       | 104,406 |   | 98,350 |   | 98,856 |   |
| Long-term debt,  excluding current portion            |       | 100,000             |       | 100,619             |       | 100,000             |       | 100,000 |   | 100,000 |   | 100,000 |   |
| Capital lease  obligations, excluding current portion |       | 8,684               |       | 8,804               |       | 7,307               |       | 7,475 |   | 7,040 |   | 7,495 |   |
| Other liabilities                                     |       | 5,073               |       | 5,924               |       | 1,394               |       | 2,226 |   | 1,755 |   | 2,531 |   |
| Total Liabilities                                     |       | 253,162             |       | 258,475             |       | 212,035             |       | 214,402 |   | 207,678 |   | 209,415 |   |
| Minority interest                                     |       | 1,869               |       | 1,861               |       | 780                 |       | 780 |   | 7,748 |   | 7,748 |   |
| Accumulated other  comprehensive income (loss)        |       | 329                 |       | 255                 |       | (17,262             | )          | (16,898 | ) | (26,148 | ) | (26,201 | ) |
| Accumulated  deficit                                  |       | (17,044             | )          | (21,979             | )          | (12,193             | )          | (14,174 | ) | (2,369 | ) | (2,962 | ) |
| Total  stockholders’ equity                      |       | 150,949             |       | 145,940             |       | 139,162             |       | 137,545 |   | 140,040 |   | 139,394 |   |
| Total Liabilities and  Stockholders’ Equity      |       | 405,980             |       | 406,275             |       | 351,977             |       | 352,727 |   | 355,466 |   | 356,557 |   |
|                                                       |            |                     |            |                     |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

22

----

** **

**Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

As described inthe explanatory note above and in Note 2 to the Consolidated FinancialStatements, we have restated our consolidated financial statements as of December31, 2004 and for the two years ended December 31, 2004.  Amounts in this section have been updated toreflect these restatements.

##### **General**

References in thisreport to “we”, “our”, “SITEL”, and the “Company” are to SITEL Corporation andits subsidiaries, collectively.

We are a leading global provider of outsourced customer supportservices. We specialize in the design, implementation, and operation ofmulti-channel contact center solutions. We support the customer managementstrategies of large and medium size corporations in North America, Europe, AsiaPacific, and Latin America. We provide customer acquisition, customer care,technical support and risk management services on an outsourced basis, as wellas operational and information technology professional services for bothoutsourced and in-house contact centers. We serve clients primarily in the automotive, consumer, financial services,insurance, technology, telecommunications and ISP, and utilities sectors.

In Management’sDiscussion and Analysis, we provide information about our general businessrisks, critical accounting policies and estimates, results of operations,financial condition and liquidity, and certain other matters affecting ouroperating results for the periods covered by this report.

As you read thisdiscussion and analysis, refer to our Consolidated Statements of Operations,which present the results of our operations for 2005, 2004, and 2003, and aresummarized on the following pages. We analyze and explain the differencesbetween periods for the components of net income (loss) in the followingsections. Our analysis is important in making decisions about your investmentin SITEL Corporation.

We previouslyannounced a profit improvement plan to structure the Company to achieve at leasta 4% to 6% operating margin by the end of 2005. This profit improvement plan was comprised of a set of initiatives thatincluded a plan to rationalize underutilized facilities, eliminate losses frombusiness units that are underperforming, right size support functions to betterutilize human and physical assets, reduce and further leverage IT andtelecommunication costs, and improve the operating performance of all of ourfacilities through enhanced efficiency. We also continued to focus on our performance-basedpricing initiatives, invoice and contract management, and statement of workchange controls.

On December 3, 2004, we committed to a restructuring plan to reduce ongoing operating expenses, consolidate facilities, and reduce our workforce. The plan included closing certain facilities in North America and Europe and reducing headcount by a total of approximately 170 employees throughout the Company. The plan also included disposing of certain capital equipment.  A significant portion of this restructuring plan was completed during the fourth quarter of 2004, with the remainder completed throughout 2005.

On July 7, 2005,in continuation of the profit improvement plan, we committed to additionalactions to reduce ongoing operating expenses, consolidate facilities, andreduce our workforce. The additional actions included closing and consolidatingcertain facilities in Northern Europe and reducing net headcount by a total ofapproximately 40 employees through severance, in addition to 20 expected throughattrition.  On December 28, 2005, weannounced additional headcount reductions across the company to reduce ourworkforce.

As a result of accounting irregularities identified at ourBrazilian subsidiary, we have restatedour previously filed consolidated financial statements as of December 31, 2004and for the four fiscal years ended December 31, 2004 included in our AnnualReport on Form 10-K for the fiscal year ended December 31, 2004, which wasfiled with the Securities and Exchange Commission on March 16, 2005. Inaddition, we have restated each of the three-month periods covered bythe interim quarterly reports for the fiscal year 2005 and 2004. We have determined that thesubsidiary’s former controller, in violation of Company policies, engaged in improperaccounting practices and the avoidance of local tax obligations and causedmisleading records to be created to prevent the Company’s senior managementfrom detecting this misconduct. The irregularities were identified during aninternal audit and procedural review of the business unit.

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Additionally, aspart of the restatement process, we also recorded other adjustments that werepreviously deemed immaterial.

As a result of the restatement, we have determinedthat it is more likely than not that we will not realize the full tax benefitof our net operating losses in Brazil. Consequently, the restatement amountsare presented on a pre-tax basis as we do not expect to realize any significanttax benefit from the additional expenses.

Summary of restatementitems for the years ended December 31:
|                                                        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Net loss as  originally reported                       |       | $        | (26,567    | )        | $          | (4,812   | )          | $        | (9,783     | ) | $ | (22,580 | ) |
|                                                   |       |     |       |     |       |     |       |     |       |
| Tax obligations,  including interest and penalties (A) |       | (1,123   | )          | (827     | )          | (453     | )          | (124     | )          |
| Deferred expense  recognition (B)                      |       | (565     | )          | (637     | )          | (639     | )          | (390     | )          |
| Errors in  revenue recording (C)                       |       | (144     | )          | (267     | )          | (337     | )          | (300     | )          |
| Intentional  falsification of records (D)              |       | (310     | )          | (497     | )          | 87       |       | 114      |       |
| Other (E)                                              |       | 269      |       | (726     | )          | (46      | )          | 478      |       |
| Total impact of  restatement adjustments               |       | (1,873   | )          | (2,954   | )          | (1,388   | )          | (222     | )          |
|                                                   |       |     |       |     |       |     |       |     |       |
| Net loss as adjusted                                   |       | $        | (28,440    | )        | $          | (7,766   | )          | $        | (11,171    | ) | $ | (22,802 | ) |

 

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Errors inpreviously issued financial statements were identified in the following areas:

(A) Taxobligations, including interest and penalties

During the years2001 through 2005, certain Brazilian municipal and Federal taxes totalingapproximately $8.3 million were collected and accrued but not paid. As aresult, we incurred accumulated interest of approximately $2.6 million, plusapproximately $1.4 million in penalties as of December 31, 2005. Ourrestated consolidated statements of operations reflect the recognition ofinterest and penalties in the prior period incurred based on laws andregulations in effect at the time.

On April 7, 2006,new legislation was enacted in Brazil that will result in a reduction in theamount of penalties and interest we will be required to pay for unpaidmunicipal taxes. We will record a gain of $1.8 million in the second quarter of2006 resulting from a reduction in the tax obligation recorded as of December31, 2005 for a portion of the cumulative interest and penalties on unpaidmunicipal taxes for the four years ended December 31, 2004.

(B) Deferredexpense recognition

The subsidiaryimproperly deferred expense recognition of certain payments. These paymentsshould have been recorded as expense when incurred rather than deferred.

(C) Errors inrevenue recording

The subsidiaryimproperly recorded revenue related to certain customer invoices including:recording higher revenue than the invoice amount, recording revenue andsubsequently canceling the invoice and recording revenue for invoices that havenot been located or for which cash was not received.

(D) Intentionalfalsification of financial results

The subsidiary’sformer controller intentionally falsified financial reporting records providedto the Company’s senior management.  Theactual results reported to the Company’s senior management were manipulated topresent different reported earnings than actually recorded in the subsidiary’slocal financial records.

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(E) Other

Representsadjustments recorded to correct other miscellaneous items identified in therestatement and other adjustments that were previously deemed immaterial, noneof which are individually significant.

In addition, thesubsidiary’s former controller intentionally misclassified amounts in thebalance sheet. The misclassifications impacted substantially all of the lineitems in the consolidated balance sheets.

The functionalcurrency of our Brazilian subsidiary is the Brazilian Real. The restatementadjustments presented in our prior period financial statements were recordedusing the foreign currency exchange rates in effect in the applicable period.The assets and liabilities are subsequently adjusted for fluctuations inforeign currency exchange rates from the date of the original transaction tothe balance sheet date. Translation gains and losses resulting from therevaluation of the assets and liabilities of the foreign subsidiary to USdollars is included in other comprehensive income, a component of stockholders’equity. The cumulative effect of foreign currency exchange rate fluctuationsfrom the restatement adjustments was a decrease in stockholders’ equity of $0.6million as of December 31, 2004.

In August 2006,our subsidiary in Brazil received an assessment from the Brazilian FederalRevenue Service for approximately 18.2 million Brazilian Real (approximately$7.8 million) of income taxes including penalty and interest through the dateof the assessment for the tax years 2001 through 2003. We believe certaintechnical aspects of the assessment are without merit and have received anopinion from our external Brazilian counsel that it is probable that we will besuccessful in appealing the assessment. Therefore, no tax provision has beenrecorded related to this assessment. However, there can be no assurance that wewill not have to pay the assessment and further penalties and interest or someportion thereof in the future.

As aresult of our restatement of our prior year financial statements, we haveidentified technical errors in the filings of our US federal tax returns forfiscal years 2001 through 2003 and a related accounting error. We haverequested private letter rulings from the Internal Revenue Service, which wouldpermit us to correct the technical errors. We expect to receive favorable rulings from the IRS. Therefore, no taxprovision has been recorded related to this matter. However, there can be noassurance that the IRS will grant any such rulings or, if such rulings aregranted, when they will be received.  Ifthe requested rulings are not granted, we estimate the total cash charge relatingto this matter could be $9 million to $11 million.  An unfavorable ruling could also result in ahigher effective tax rate on our U.S. earnings. We have determined that certain tax deductions previously taken on the2001 US federal tax return would not be allowed after the technical errors arecorrected.  Accordingly, we have reducedour US NOL carryforward by $2.4 million and related deferred tax assets andvaluation allowance by $1 million for all periods presented.

**General Business Risks, Critical Accounting Policiesand Estimates**

**General Business Risks**

Our business success depends on our ability to efficiently deploy ourhuman and capital resources in the delivery of services to our clients.Consequently, the needs of our clients may significantly impact our results ofoperations, financial condition, and liquidity.

Our results of operations and operating cash flows may vary withperiodic wins and losses of client contracts and with changes in the scope ofclient requirements. Our******top20 clients accounted for 66.0%, 67.0%, and 71.2% of our revenue in 2005, 2004,and 2003.  Some of these top 20 clients include multiple independently managed businessunits within the clients affiliated group. General Motors Corporation (GeneralMotors) business units were responsible for 11.3%, 14.9%, and 21.2% of ourtotal revenue for the years ended December 31, 2005, 2004 and 2003,respectively.  On April 21, 2004, weannounced the signing of a new contract with General Motors to continue toprovide customer support services for their North American Vehicle Sales,Service, and Marketing Group through December 31, 2005.  An existing agreement under which wesupported OnStar operations terminated effective June 22, 2004.Our primary contractwith General Motors expired in December 2005. In addition, Hewlett-Packard Company business unitswere responsible for 11.6% and 11.3% of our revenue in 2005 and 2004,respectively.  We did not have any otherclients under common control that generated more than 10% of our total revenuein 2005, 2004 and 2003. The financialfailure of any of these clients or the loss of any or all of their businesscould have an adverse impact on our operating results.

Our liquidity, including our ability to comply with debt covenants, maybe adversely affected if we were to lose a significant client or as a result ofsignificant changes in client demand if we are unable to efficiently re-deployour human and capital resources.

Primarily as a result of matters arising out of and related to ourinvestigation of irregularities at our Brazilian subsidiary, we were not incompliance with certain covenants of our credit agreements with WellsFargo Foothill, Inc. and Ableco Finance LLC as Agents as of September 30, 2005 and December 31, 2005.  We subsequently obtained waivers of thenon-compliance.

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We have operations in many parts of the world and therefore ourfinancial statements can be impacted by foreign exchange fluctuations.Fluctuations of currencies against the U.S. dollar can be substantial andtherefore significantly impact comparisons with prior periods.

In the following sections, we also discuss the importance of ourcritical accounting policies and the use of accounting estimates, and theirpotential impacts on our results of operations.

**Critical Accounting Policies and Estimates**

The process of preparing financial statements requires the use ofestimates on the part of management. These estimates involve judgments withrespect to, among other things, future economic factors that are difficult topredict and are beyond management’s control. As a result, actual results coulddiffer from these estimates.

Our significantaccounting policies and practices are described in Note 1 to the ConsolidatedFinancial Statements. Of those policies, we have identified the following to becritical accounting policies because they are the most important to theportrayal of our results of operations and financial condition, and theyrequire management’s most difficult, subjective, or complex judgments:

***Revenue Recognition***

Werecognize revenue in accordance with applicable accounting standards, includingSecurities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104,*Revenue Recognition*.  We recognize revenue at the time services areperformed based on the rate detailed in the client contract, such as hourly,monthly, per call or per employee.  Aportion of our revenue is often subject to performance standards, such as salesper hour, average handle time, occupancy rate and abandonment rate.  Ourperformance against such standards may result in incentives or penalties, whichare recognized as earned or incurred. In certain circumstances, we receivepayment in advance of providing service. Amounts billed but not earned underthese contracts are excluded from revenue and included in deferred revenue andother in the consolidated balance sheet. Revenue for services performed undercertain collection service agreements is recognized as the related consumerdebts are collected and is calculated based upon a percentage of cash collectedor other agreed upon contractual parameters.

***Trade Accounts Receivable***

We report ourtrade accounts receivable net of an allowance for doubtful accounts, whichrepresents management’s estimates of the amount of our receivables that may notbe collectible, net of recoveries of amounts previously written off. Theseestimates are based on a detailed aging analysis of accounts receivable,historical bad debts, client credit-worthiness, and changes in our clientpayment terms. The financial condition of our clients may deteriorate, whichmay require us to increase our allowance for doubtful accounts. We would recordan increase in the allowance for doubtful accounts as operating, selling, andadministrative expense in our consolidated statements of operations, whichwould reduce our results of operations.

***Property and Equipment***

We record propertyand equipment at cost, and calculate depreciation using the straight-linemethod over the estimated useful lives of the assets, which generally rangefrom 2 to 25 years. We amortize leasehold improvements and assets undercapital leases on a straight-line basis over the shorter of the lease term orthe estimated useful life of the asset. If the actual useful lives of theseassets are less than the estimated depreciable lives, we would record additionaldepreciation expense or losses on disposal to the extent the net book value ofsuch asset is not recovered upon sale.

***Asset Impairment***

We evaluatelong-lived assets for impairment whenever events or changes in circumstancesindicate the carrying amount of an asset may not be recoverable.  Triggering events include a significantchange in the extent or manner in which long-lived assets are being used or inits physical condition, in legal factors, or in the business climate that couldaffect the value of the long-lived assets. The interpretation of such eventsrequires judgment from management as to whether such an event has occurred.

Upon theoccurrence of a triggering event, the carrying amount of a long-lived asset isreviewed to assess whether the recoverable amount has declined below itscarrying amount.  The recoverable amountis the estimated net future cash flows that we expect to recover from thefuture use of the asset, undiscounted and without interest, plus the asset’sresidual value on disposal. Where the recoverable amount of the long-livedasset is less than the carrying value, an

26

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impairment losswould be recognized to write down the asset to its fair value, which is basedon discounted estimated cash flows from the future use of the asset.

The estimated cashflows arising from future use of the asset that are used in the impairmentanalysis requires judgment regarding what we would expect to recover fromfuture use of the asset.  Any changes inthe estimates of cash flows arising from future use of the asset or theresidual value of the asset on disposal based on changes in the marketconditions, changes in the use of the assets, management’s plans, and thedetermination of the useful life of the assets could significantly change the recoverableamount of the asset or the calculation of the fair value and the resultingimpairment loss, which could significantly affect the results of operations.

***Goodwill***

At least annually,or more frequently as changes in circumstances indicate, we will evaluate theestimated fair value of our goodwill. On these evaluation dates, to the extentthat the carrying value of the net assets of any of our reporting units havinggoodwill is greater than their estimated fair value, we will be required totake additional goodwill impairment charges. We are required to make certainassumptions and estimates regarding the fair value of goodwill when assessingfor impairment. Changes in the fact patterns underlying such assumptions andestimates could ultimately result in the recognition of additional impairmentlosses.

During the fourthquarter of the year ended December 31, 2004, we performed our annual goodwillimpairment review and determined that a goodwill impairment charge of $7.7million was required for one of our reporting units.  The impairment charge is included in assetimpairment and restructuring expense in the accompanying consolidated statementof operations for the year ended December 31, 2004. In calculating thegoodwill impairment charge, the fair value of the reporting unit was determinedwith the assistance of an independent third-party valuation specialist using adiscounted cash flow valuation approach. No impairment charges resulted fromthe annual impairment tests for the years ended December 31, 2005 and 2003.

***Deferred Income Taxes***

We record deferredtax assets and liabilities using enacted tax rates in the jurisdictions inwhich we operate for the effect of temporary differences between the book andtax basis of assets and liabilities in accordance with Statement of FinancialAccounting Standards, No. 109, “Accounting for Income Taxes”. If enacted taxrates change, we would adjust the deferred tax assets and liabilities, throughthe provision for income taxes in the period of change, to reflect the enactedtax rate expected to be in effect when the deferred tax items reverse. To theextent that we believe that recovery is not likely, we establish a valuationallowance to reduce the deferred tax assets to the amount that is more likelythan not to be realized. The valuation allowance is based on our estimates offuture taxable income by jurisdiction in which we operate and the period overwhich the deferred tax assets can be recovered. A review of all available positive and negativeevidence needs to be considered, including our current and past performance,the market environment in which we operate, the utilization of past taxcredits, length of carryback and carryforward periods, and existing orprospective contracts that will result in future profits.

Forming a conclusion that a valuationallowance is not needed is difficult when there is negative evidence such ascumulative losses in recent years in certain tax jurisdictions. Cumulativelosses weigh heavily in the overall assessment. We have established valuationallowances for future tax benefits related to net operating losses incurred incertain federal, state and foreign tax jurisdictions. We expect to continue torecord a valuation allowance on future tax benefits in certain tax jurisdictionsuntil an appropriate level of profitability is sustained.

***Self-Insurance Reserves***

We areself-insured in North America for workers’ compensation and health care claimsfor eligible participating employees, subject to certain deductibles andlimitations. The costs include an estimate of expected settlements on pendingclaims and a provision for claims incurred but not reported. These estimatesare based on our assessment of potential liability using an analysis ofavailable information with respect to pending claims, historical experience,and current cost trends. Actual claims results could differ from theseestimates.

***Contingencies***

We consider thelikelihood of various loss contingencies, including tax and legal contingenciesarising in the ordinary course of business, and our ability to reasonablyestimate the amount of loss in determining loss contingencies. An estimatedloss contingency is accrued when it is probable that a liability has beenincurred and the amount of loss can be

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reasonablyestimated. We regularly evaluate current information available to us todetermine whether such accruals should be adjusted.

##### **Results of Operations**

In this section, we discuss our operating results and the factorsaffecting them. We describe our general business risks, critical accountingpolicies, and estimates that are important to our operating results on theprevious pages.  Please refer to thatdiscussion as you read this section.

# **Componentsof Operations**

As you read thissection, please refer to the following table that summarizes our statements ofoperations data on a percentage-of-revenue basis.
| ** **                                                   | ** ** | **2005**    | ** **    | **2004**     | ** **  | **2003**                | ** **   |
|--------------------------------------------------------------|------------|-------------|---------------|--------------|-------------|-------------------------|--------------|
| **Years Ended December 31,**                  | ** ** | **$**       | ** **    | **%**        | ** **  | **$**                   | ** **   | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                                   | ** ** | ** **  | ** **    | ** **   | ** **  | **(restated)**          | ** **   | **(restated)** | ** ** |
| ** **                                                   | ** ** | ** **  | ** **    | ** **   | ** **  | **(in thousands)** | ** **   | ** ** | ** ** | ** ** | ** ** |
| **Revenue**                                                  | ** ** | **$**       | **1,037,179** | *** *** | ***100.0*** | ***%***                 | $            | 956,135 | *** *** | ***100.0*** | ***%*** | $ | 846,087 | *** *** | ***100.0*** | ***%*** |
|                                                         |       |        |          |         |        |                    |         |   |   |   |   |   |   |
| Direct labor and telecommunications expenses                 | ** ** | **629,314** | *** ***  | ***60.7***   | ***%***     | 574,712                 | *** *** | ***60.1*** | ***%*** | 497,533 | *** *** | ***58.8*** | ***%*** |
| Subcontracted and other services expenses                    | ** ** | **51,618**  | *** ***  | ***5.0***    | ***%***     | 50,726                  | *** *** | ***5.3*** | ***%*** | 54,121 | *** *** | ***6.4*** | ***%*** |
| Operating, selling and administrative expenses               | ** ** | **331,148** | *** ***  | ***31.9***   | ***%***     | 313,567                 | *** *** | ***32.8*** | ***%*** | 282,211 | *** *** | ***33.4*** | ***%*** |
| Asset impairment and restructuring expenses                  | ** ** | **6,614**   | *** ***  | ***0.6***    | ***%***     | 9,325                   | *** *** | ***1.0*** | ***%*** | 3,004 | *** *** | ***0.4*** | ***%*** |
| Goodwill impairment                                          | ** ** | **—**  | *** ***  | ***0.0***    | ***%***     | 7,668                   | *** *** | ***0.8*** | ***%*** | — | *** *** | ***0.0*** | ***%*** |
| **Operating  income (loss)**                                 | ** ** | **18,485**  | *** ***  | ***1.8***    | ***%***     | 137                     | *** *** | ***0.0*** | ***%*** | 9,218 | *** *** | ***1.1*** | ***%*** |
|                                                         |       |        |          |         |        |                    |         |   |   |   |   |   |   |
| Interest expense                                             | ** ** | **(13,565** | **)**         | ***-1.3***   | ***%***     | (13,693                 | )            | ***-1.4*** | ***%*** | (12,939 | ) | ***-1.5*** | ***%*** |
| Interest income                                              | ** ** | **559**     | *** ***  | ***0.1***    | ***%***     | 589                     | *** *** | ***0.1*** | ***%*** | 423 | *** *** | ***0.0*** | ***%*** |
| Equity in earnings of affiliates                             | ** ** | **722**     | *** ***  | ***0.1***    | ***%***     | 681                     | *** *** | ***0.1*** | ***%*** | 1,417 | *** *** | ***0.2*** | ***%*** |
| Other expense, net                                           | ** ** | **(545**    | **)**         | ***-0.1***   | ***%***     | (698                    | )            | ***-0.1*** | ***%*** | (438 | ) | ***-0.1*** | ***%*** |
| **Income  (loss) before income taxes and minority interest** | ** ** | **5,656**   | *** ***  | ***0.5***    | ***%***     | (12,984                 | )            | ***-1.4*** | ***%*** | (2,319 | ) | ***-0.3*** | ***%*** |
|                                                         |       |        |          |         |        |                    |         |   |   |   |   |   |   |
| Income tax expense                                           | ** ** | **642**     | *** ***  | ***0.1***    | ***%***     | 14,732                  | *** *** | ***1.5*** | ***%*** | 4,789 | *** *** | ***0.6*** | ***%*** |
| Minority interest                                            | ** ** | **2,240**   | *** ***  | ***0.2***    | ***%***     | 724                     | *** *** | ***0.1*** | ***%*** | 658 | *** *** | ***0.1*** | ***%*** |
| **Net income (loss)**                                        | ** ** | **$**       | **2,774**     | *** *** | ***0.3***   | ***%***                 | $            | (28,440 | ) | ***-3.0*** | ***%*** | $ | (7,766 | ) | ***-0.9*** | ***%*** |

 

**2005 Compared to 2004**

***Revenue***

Revenue increased $81.1million, or 8.5%, in 2005 compared to 2004. The changes in revenue by geographic region are shown in the followingtable:
|               | ** ** | ** ** | ** **  | ** **             | ** ** | **$**      | ** ** | **%**      | ** ** |
|---------------|------------|------------|-------------|------------------------|------------|------------|------------|------------|------------|
| ** **    | ** ** | **2005**   | ** **  | **2004**               | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **    | ** ** | ** ** | ** **  | **(restated)**         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **    | ** ** | ** ** | ** **  | **(in millions)** | ** ** | ** ** | ** ** |
| North America | ** ** | **$**      | **526.6**   |                   | $          | 489.0      |       | $          | 37.6       |   | 7.7 | % |
| Europe        | ** ** | **418.3**  |        | 396.1                  |       | 22.2       |       | 5.6        | %          |
| Asia Pacific  | ** ** | **51.4**   |        | 43.0                   |       | 8.4        |       | 19.5       | %          |
| Latin America | ** ** | **40.9**   |        | 28.0                   |       | 12.9       |       | 46.1       | %          |
| Totals        | ** ** | **$**      | **1,037.2** |                   | $          | 956.1      |       | $          | 81.1       |   | 8.5 | % |

 

The increase in North America revenue in 2005compared to 2004 was due primarily to a $62.4 million increase in customer careand technical support services we provided to a number of our clients, partiallyoffset by a $27.2 million decrease in

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customer acquisition and risk managementbusiness.  The weakening of the U.S.dollar versus the Canadian dollar accounted for $1.1 million of the increase.

European revenue increased $22.2 million in2005 compared to the same period in 2004. Higher sales volumes from new and existing clients resulted in $23.4million of the increase year over year. The strengthening of the U.S. dollar versus the British pound and theEuro partially offset this increase by $1.2 million.

Asia Pacific revenue increased $8.4 millionin 2005 compared to 2004.  Higher salesvolumes from new and existing clients resulted in $6.0 million of the increasein 2005 compared to 2004.  The weakeningof the U.S. dollar versus the New Zealand and Australian dollars resulted inthe remaining $2.4 million of the increase.

Latin America revenue increased $12.9 millionin 2005 compared to the same period in 2004. Higher sales volumes from newand existing clients resulted in $8.3 million of the increase.  The weakening of the U.S. dollar versus theBrazilian Real resulted in the remaining $4.6 million of the increase.

***Direct Labor andTelecommunications Expense***

Direct labor and telecommunications expensesinclude the compensation of our customer service professionals and their firstline supervisors and telephone usage expenses directly related to theproduction of revenue.  Direct labor andtelecommunications expenses as a percentage of revenue can vary based on thenature of the contract, the nature of the work, and the market in which theservices are provided. Accordingly, direct labor and telecommunicationsexpenses as a percentage of revenue can vary, sometimes significantly, fromyear to year.

Direct labor and telecommunications expenses as a percentage of revenueincreased to 60.7% in 2005 compared to 60.1% in 2004.The increase was primarily the result ofhigher direct labor costs, particularly in Europe, and the recording of a benefit in 2004 from a refund of$1.3 million of payroll tax overpayments paid in a prior year as a reduction ofdirect labor and telecommunications expense.

***Subcontractedand Other Services Expenses***

Subcontracted and other services expenses include services provided toclients through subcontractors and other out-of-pocket expenses passed throughto our clients.  Subcontracted andother services expenses increased $0.9 million for the year ended December 31,2005 compared to the same period in 2004.  The increase was primarily theresult of higher subcontracted services provided by our India joint venture.

Subcontractexpenses for services provided by our India joint venture for the years endedDecember 31, 2005 and 2004 were $16.1 million and $15.0 million, respectively.

***Operating,Selling and Administrative Expenses***

Operating, sellingand administrative expenses represent expenses incurred to directly support andmanage the business, including costs of management, administration, technology,facilities, depreciation and amortization, maintenance, sales and marketing,and client support services.

Operating, selling and administrativeexpenses increased $17.6 million, or 5.6% in 2005 compared to 2004.  The weakening of the U.S. dollar compared tothe currency in the primary jurisdictions that we operate in accounted for anincrease of $3.6 million. The remainder of the increase in these expenses wasassociated with our revenue increase. As a percentage of revenue, operating,selling and administrative expenses decreased to 31.9% in 2005 compared to32.8% in 2004.  The decrease is primarilythe result of higher sales volumes while maintaining the existing coststructure.

***Asset Impairmentand Restructuring Expenses***

On July 7, 2005,in continuation of the previously announced profit improvement plan, wecommitted to additional actions to reduce ongoing operating expenses,consolidate facilities, and reduce our workforce. The additional actionsincluded closing and consolidating certain facilities in Northern Europe andreducing net headcount by a total of approximately 40 employees throughseverance, in addition to 20 expected through attrition.  We recorded restructuring expenses of $2.5million for severance and $1.8 million for facility closures during the yearended December 31, 2005 as a result of these actions, in addition to $0.1million for asset impairments.

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As a result of thefacility closures discussed above, we will no longer be able to maintaincertain minimum employment levels required to retain government grants receivedand recorded as a reduction of operating expenses in previous periods.Consequently, we recorded restructuring expense of $3.5 million during the yearended December 31, 2005, to establish a liability for the obligation to repaysuch amounts.

On December 28,2005, we announced additional headcount reductions across the company to reduceour workforce.  We recorded additionalseverance of approximately $1.3 million in the fiscal year ended December 31,2005.  In addition, during the year werecorded $0.7 million of severance expense as a result of previously announcedactions.

During the yearended December 31, 2005, we decided to open previously closed leased facilitiesin North America to temporarily accommodate new business.  In a prior year, we had recorded arestructuring liability for the future scheduled lease payments for the closedfacilities. As a result of the decision to reopen the facilities, we reversedthe remaining $3.3 million restructuring liability.

During the fourthquarter of 2004, we recorded $17.0 million of asset impairment and restructuringexpenses.  In connection with the costreduction portion of the Company’s profit improvement plan, we recorded assetimpairment and restructuring expenses of $7.8 million.  This amount is comprised of $5.3 million ofseverance costs, $1.4 million of asset impairment costs and $1.1 million ofscheduled payments of operating leases for which we will receive no futureeconomic benefit.  In addition, werecorded asset impairment and restructuring expenses of $1.5 million as aresult of a revision to our estimate for non-cancelable lease paymentsassociated with previously announced facility closures.  We also recorded asset impairment andrestructuring expenses of $7.7 million related to the impairment of goodwillrelated to one of our reporting units that has been performing belowexpectations.

The followingtable summarizes these charges in 2005 and 2004:
| Description            | ** ** | **2005**               | ** ** | **2004**               | ** ** |
|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **(in millions)** | ** ** | **(in millions)** | ** ** |
| **Cash  charges:**     | ** ** | ** **             | ** ** | ** **             | ** ** |
| Employee severance     |       | $                      | 4.5        |                   | $          | 5.3 |   |
| Grant Reimbursement    |       | 3.5                    |       | —                 |       |
| Facilities leases      |       | (1.5                   | )          | 2.6                    |       |
| Total cash charges     |       | 6.5                    |       | 7.9                    |       |
| **Non-cash  charges:** | ** ** | ** **             | ** ** | ** **             | ** ** |
| Goodwill impairment    |       | —                 |       | 7.7                    |       |
| Fixed asset disposals  |       | 0.1                    |       | 1.4                    |       |
| Total non-cash charges |       | 0.1                    |       | 9.1                    |       |
| **Total**              |       | $                      | 6.6        |                   | $          | 17.0 |   |

 

***Operating Income***

Operatingincome increased $18.3 million in 2005 compared to 2004 due to the factors discussed above.

***Interest Expense***

Interest expense remained consistent in 2005 compared to 2004.

***Interest Income***

Interest income remained consistent in 2005 compared to 2004.

***Equity inEarnings (loss) of Affiliates***

The equity in earnings (loss) of affiliates remained consistent in 2005compared to 2004.

***Other Expense,Net***

Other expense decreased$0.2 million in 2005 compared to 2004. The decrease was primarily the result of foreign currency remeasurementlosses arising from monetary assets and liabilities denominated in currenciesother than a business unit’s functional currency.

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***Income Tax Expense***

The effective taxrate for 2005 was less than the U.S. statutory rate of 35% partially due to notreflecting any significant tax charges for the current net operating profits incertain federal, state and foreign tax jurisdictions.  During the third quarter of 2005, wedetermined that it was more likely than not that we will realize the fullbenefit of deferred tax assets in certain foreign jurisdictions. Consequently,we recorded a decrease to the existing valuation allowance resulting innon-cash tax benefit of approximately $5.8 million.

The effective taxrate for 2004 was more than the U.S. statutory rate of 35% partially due to notreflecting any significant tax benefits for the current net operating losses incertain federal, state and foreign tax jurisdictions.  During the fourth quarter of 2004, wedetermined that it was more likely than not that we will not realize the fullbenefit of deferred tax assets in certain jurisdictions. Consequently, werecorded an increase to the existing valuation allowance resulting in non-cashtax expense of approximately $10.9 million. This increase in the income taxexpense was partially offset by the reversal of $0.8 million of valuationallowance associated with deferred tax assets in certain of our foreignjurisdictions reflecting foreign net operating losses and other creditcarryforwards that are expected to be utilized.

**2004 Compared to 2003**

***Revenue***

Revenue increased$110.0 million, or 13.0%, in 2004 compared to 2003.  The changes in revenue by geographic regionare shown in the following table:
|               | ** ** | ** **     | ** ** | ** **             | ** ** | **$**      | ** ** | **%**      | ** ** |
|---------------|------------|----------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **    | ** ** | **2004**       | ** ** | **2003**               | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **    | ** ** | **(restated)** | ** ** | **(restated)**         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **    | ** ** | ** **     | ** ** | **(in millions)** | ** ** | ** ** | ** ** |
| North America | ** ** | **$**          | **489.0**  |                   | $          | 479.6      |       | $          | 9.4        |   | 2.0 | % |
| Europe        | ** ** | **396.1**      |       | 318.7                  |       | 77.4       |       | 24.3       | %          |
| Asia Pacific  | ** ** | **43.0**       |       | 32.9                   |       | 10.1       |       | 30.7       | %          |
| Latin America | ** ** | **28.0**       |       | 14.9                   |       | 13.1       |       | 87.9       | %          |
| Totals        | ** ** | **$**          | **956.1**  |                   | $          | 846.1      |       | $          | 110.0      |   | 13.0 | % |

 

The increase in North America revenue in 2004compared to 2003 was due primarily to a $44.1 million increase in customer careand technical support services we provided to a number of our clients,partially offset by a $34.4 million decrease in customer acquisition and riskmanagement business.  The weakening ofthe U.S. dollar versus the Canadian dollar accounted for $5.3 million of theincrease.

European revenue increased $77.4 million in2004 compared to the same period in 2003. Higher sales volumes from new and existing clients resulted in $41.3million of the increase year over year. The weakening of the U.S. dollar versus the British pound and the Euroaccounted for the remaining $36.1 million of the increase.

Asia Pacific revenue increased $10.1 millionin 2004 compared to 2003.  Higher salesvolumes from new and existing clients resulted in $5.3 million of the increasein 2004 compared to 2003.  The weakeningof the U.S. dollar versus the New Zealand and Australian dollars resulted inthe remaining $4.8 million of the increase.

Latin America revenue increased $13.1 millionin 2004 compared to the same period in 2003. This increase was primarily due to the change in how we report ourinvestment in our Panama affiliate. Effective October 1, 2003, we completed the previously announcedrestructuring in the governance of our Latin America joint venture that handlesservices in Panama and other Latin America countries and offshore services inMexico and Central America.  As a result ofthis revision in governance, we reported our investment in our Panama affiliateusing the consolidation method rather than the equity method of accountingeffective October 1, 2003.  As a resultof this change, our Latin America revenue includes the revenue associated withour Panama affiliate.  Consolidation ofour Panama affiliate’s revenue resulted in $10.4 million of the increase in2004 compared to 2003.  Higher salesvolumes resulted in $2.0 million of the increase.  The remaining $0.7 million of the increase inrevenue is a result of the weakening of the U.S. dollar versus the Brazilianreal.

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***Direct Labor andTelecommunications Expenses***

Direct labor and telecommunications expensesinclude the compensation of our customer service professionals and their firstline supervisors and telephone usage expenses directly related to theproduction of revenue.  Direct labor andtelecommunications expenses as a percentage of revenue can vary based on thenature of the contract, the nature of the work, and the market in which theservices are provided. Accordingly, direct labor and telecommunicationsexpenses as a percentage of revenue can vary, sometimes significantly, fromyear to year.

Direct labor and telecommunications expenses as a percentage of revenueincreased to 60.1% in 2004 compared to 58.8% in 2003.The increase was primarily the result ofhigher direct labor costs, particularly in Europe, and the reduced pricing on amajor client contract. This increase waspartially offset by the impact of the recording of a benefit from a refund of$1.3 million of payroll tax overpayments paid in a prior year as a reduction ofdirect labor and telecommunications expense.

***Subcontractedand Other Services Expenses***

Subcontracted and other services expenses include services provided toclients through subcontractors and other out-of-pocket expenses passed throughto our clients.  Subcontracted andother services expenses decreased $3.4 million, or 6.3%, for the year endedDecember 31, 2004 compared to the same period in 2003.  The decrease wasprimarily the result of lower subcontracted IT costs to support clientprograms.

Subcontractexpenses for services provided by our India joint venture for the years endedDecember 31, 2004 and 2003 were $15.0 million and $11.4 million, respectively.

***Operating,Selling and Administrative Expenses***

Operating, sellingand administrative expenses represent expenses incurred to directly support andmanage the business, including costs of management, administration, technology,facilities, depreciation and amortization, maintenance, sales and marketing,and client support services.

Operating, selling and administrativeexpenses increased $31.4 million, or 11.1% in 2004 compared to 2003.  The weakening of the U.S. dollar compared tothe primary jurisdictions that we operate in accounted for an increase of $15.8million.  As a result of the change inaccounting for our Panama affiliate as previously discussed, operating, sellingand administrative expenses increased $3.0 million in 2004 compared to 2003.The remainder of the increase in these expenses was associated with our revenueincrease. As a percentage of revenue, operating, selling and administrativeexpenses decreased to 32.8% in 2004 compared to 33.4% in 2003.  The decrease is primarily the result ofhigher sales volumes while maintaining the existing cost structure.

***Asset Impairmentand Restructuring Expenses***

During the fourthquarter of 2004, we recorded $17.0 million of asset impairment andrestructuring expenses.  In connectionwith the cost reduction portion of the Company’s profit improvement plan, werecorded asset impairment and restructuring expenses of $7.8 million.  This amount is comprised of $5.3 million ofseverance costs, $1.4 million of asset impairment costs and $1.1 million ofscheduled payments of operating leases for which we will receive no futureeconomic benefit.  In addition, werecorded asset impairment and restructuring expenses of $1.5 million as aresult of a revision to our estimate for non-cancelable lease paymentsassociated with previously announced facility closures.  We also recorded asset impairment andrestructuring expenses of $7.7 million related to the impairment of goodwillrelated to one of our reporting units that has been performing below expectations.  The following table summarizes these chargesin 2004:
| Description            | ** ** | **2004**               | ** ** |
|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **(in millions)** | ** ** |
| **Cash  charges:**     | ** ** | ** **             | ** ** |
| Employee severance     |       | $                      | 5.3        |   |
| Facilities leases      |       | 2.6                    |       |
| Total cash charges     |       | 7.9                    |       |
| **Non-cash  charges:** | ** ** | ** **             | ** ** |
| Goodwill impairment    |       | 7.7                    |       |
| Fixed asset disposals  |       | 1.4                    |       |
| Total non-cash charges |       | 9.1                    |       |
| **Total**              |       | $                      | 17.0       |   |

 

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During 2003, inconnection with the closure of our former headquarters facility and the closureof a contact center, we recorded asset impairment and restructuring expenses of$1.6 million, which consisted of the write-off of abandoned leasehold improvementsof $0.4 million and for $1.2 million of scheduled payments of operating leasesfor which we will receive no future economic benefit. In addition, we recordedasset impairment and restructuring expenses of $1.4 million as a result of arevision to our estimate for non-cancelable lease payments associated with apreviously announced facility closure.

***Operating Income***

Operatingincome decreased $9.1 million in 2004 compared to 2003 due to the factors discussed above.

***Interest Expense***

Interest expense increased $0.8 million in 2004 compared to 2003.  This is partially a result of the $0.2million premium paid and the write-off of deferred financing costs related tothe redemption of $10 million in Senior Subordinated Notes.  The remaining increase is due to higheraverage borrowings on the revolving credit facility for 2004 compared to thesame period in 2003.

***Interest Income***

Interest income remained consistent in 2004 compared to 2003.

***Equity inEarnings of Affiliates***

The decrease in equity in earnings of affiliates in 2004 compared to2003 primarily relates to reduced earnings from our India joint venture due tochanges in client mix and higher ramp-up costs.

***Other Expense, Net***

Other expense increased $0.3 million in 2004compared to 2003.  The increase was primarilythe result of foreign currency remeasurement losses arising from monetaryassets and liabilities denominated in currencies other than a business unit’sfunctional currency.

***Income Tax Expense***

The effective taxrate for 2004 was more than the U.S. statutory rate of 35% partially due to notreflecting any significant tax benefits for the current net operating losses incertain federal, state and foreign tax jurisdictions.  During the fourth quarter of 2004, we determinedthat it was more likely than not that we will not realize the full benefit ofdeferred tax assets in certain jurisdictions. Consequently, we recorded anincrease to the existing valuation allowance resulting in non-cash tax expenseof approximately $10.9 million. This increase in the income tax expense waspartially offset by the reversal of $0.8 million of valuation allowanceassociated with deferred tax assets in certain of our foreign jurisdictionsreflecting foreign net operating losses and other credit carryforwards that areexpected to be utilized.The effective tax rate for 2003 wassignificantly more than the U.S. statutory rate which was primarily the resultof not reflecting any significant tax benefits for the current net operatinglosses in certain federal, state and foreign tax jurisdictions.

**Financial Condition and Liquidity**

In this section, we discuss our financial condition and liquidity and thefactors affecting them. We separately discuss cash flows, capital resources,and contractual obligations and commitments. We describe our general businessrisks, critical accounting policies, and estimates that are important to ourfinancial condition and liquidity earlier in this report. Please refer to thatdiscussion as you read this section.

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**Cash Flows**

The following table setsforth summary cash flow data for the periods indicated. Please refer to thissummary as you read our discussion of the sources and uses of cash in eachyear.
| Years Ended December 31, | ** ** | **2005**   | ** ** | **2004**               | ** ** | **2003**       | ** ** |
|-----------------------------------------|------------|------------|------------|------------------------|------------|----------------|------------|
| ** **                              | ** ** | ** ** | ** ** | **(restated)**         | ** ** | **(restated)** | ** ** |
| ** **                              | ** ** | ** ** | ** ** | **(in millions)** | ** ** | ** **     | ** ** |
| **Net  cash provided by (used in):**    |       |       |       |                   |       |           |       |
| Operating activities                    | ** ** | **$**      | **17.0**   |                   | $          | 39.5           |       | $ | 9.4 |   |
| Investing activities                    | ** ** | **(26.3**  | **)**      | (23.8                  | )          | 24.3           |       |
| Financing  activities                   | ** ** | **5.2**    |       | (19.0                  | )          | 12.1           |       |
|                                         |            |            |            |                        |            |                |            |  |  |  |

 

**2005**

**In 2005,cash provided by operating activities resulted primarily from income beforeasset impairment and restructuring expenses, depreciation and amortization, andother charges of $43.6 million, a $2.2 million decrease in other assets, a $1.1million increase in trade accounts payable, and a $13.5 million increase inother liabilities, partially offset by a $43.4 million increase in tradeaccounts receivable.**

**In 2005, we used cash forinvesting activities to purchase $29.2 million of property and equipment andused $0.5 million for dividends paid to a minority interest shareholder.  This was partially offset by $3.3 million inproceeds from the cash surrender value of life insurance.**

**In 2005,**cash provided by financing activities resulted from netborrowings of debt and other obligations of $9.8 million and $0.9 million ofproceeds from the issuance of common stock from the exercise of stock options,offset by the payment of $5.5 million of debt issue costs associated with thenew Credit Facility.

**2004**

**In 2004,cash provided by operating activities resulted primarily from income beforeasset impairment and restructuring expenses, depreciation and amortization, andother charges of $35.0 million, a $2.0 million decrease in other assets, a $5.1million increase in trade accounts payable, and a $7.7 million increase inother liabilities, partially offset by a $10.2 million increase in tradeaccounts receivable.**

**In 2004, weused cash for investing activities to purchase $25.2 million of property andequipment and used $0.9 million to increase investments in affiliates, offsetpartially by a dividend from an affiliate of $1.7 million and other receipts of$0.5 million.**

**In 2004,cash used in financing activities resulted in net repayments of debt and otherobligations of $19.2 million partially offset by $0.2 million of cash receiptsfrom treasury stock reissuances, net, and other receipts.**

**2003**

In 2003, cash provided by operating activities resultedprimarily from income before asset impairment and restructuring expenses,depreciation and amortization, and other charges of $33.9 million and a $8.5million increase in other liabilities, which were partially offset by a $32.2million increase in trade accounts receivable and $1.2 million decrease intrade accounts payable.  

In 2003, we used cash for investing activities mostly to purchase $24.9million of property and equipment and used $1.0 million to increase investmentsin affiliates. This was partially offset by $1.8 million of proceeds fromdividends received from an equity method investee.

In 2003, we received cash from financing activitiesmostly from $3.7 million of net borrowings under our credit facility and $11.9million of net borrowings under other local lines of credit. In 2003, we used cash for financing activities to repay$2.5 million of capital lease obligations. In addition, we used cash topurchase a total of $1.0 million of common stock under our existing stockpurchase program.

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**CapitalResources**

We have historically used funds generated fromoperations, leases of property and equipment, senior subordinated notes, andborrowings under credit facilities with banks to finance business acquisitions,capital expenditures, and working capital requirements.

On August 19, 2005, weentered into a five year $145 million credit facility (the Credit Facility) withcertain lenders. The Credit Facility is comprised of two credit agreements (theCredit Agreements). A Credit Agreement with Wells Fargo Foothill, Inc., enteredinto by US and foreign borrowers, consists of a senior revolving creditfacility (Revolver) of $90 million and an amortizing term loan (Term Loan A) of$20 million, secured by a first lien on the Company’s assets in the UnitedStates and a first lien on our accounts receivable and related assets anddeposit accounts in Canada, the United Kingdom, Ireland and Germany.  A second Credit Agreement with Ableco FinanceLLC, entered into by our US borrowers, provides for a bullet-repayment termloan (Term Loan B) of $35 million secured by a second lien on our assets in theUnited States.  Certain other non-U.S.subsidiaries have guaranteed the obligations of our foreign borrowers.  We have pledged to the lenders intercompanynotes and associated asset pledges from our foreign subsidiaries to the USborrowers.

Borrowings under eachCredit Agreement bear interest, at our option, at either the Prime Rate plusthe Applicable Margins or the LIBOR Rate plus the Applicable Margins (each termas defined in the Credit Agreements). The Term Loan A requires monthlyprincipal payments of $0.3 million each, with the balance payable atmaturity.  On December 31, 2005, theweighted average interest rates applicable to the Revolver and Term Loan A wereeach 6.9% and the interest rate applicable to the Term Loan B was 10.7%.

The Credit Agreementsrequire prepayment from excess cash flow and proceeds of certain asset sales,debt issuances, and extraordinary receipts. We may prepay the term loanswithout prepayment premium under certain circumstances.  If the Credit Facility is terminated duringthe first four years, the applicable prepayment premium is 4% in year one onthe maximum Revolver and any remaining principal of Term Loan A, declining byone percent each year thereafter, and 2% on any remaining principal of TermLoan B, declining by one-half percent each year thereafter.

The Credit Agreementscontain covenants that among other things limit our ability to incurindebtedness; incur liens; liquidate, merge or consolidate with others; sellassets; change the nature of its business; prepay or amend the terms of otherindebtedness; have a change in control; pay dividends or make certain otherrestricted payments; make investments; enter into certain transactions withaffiliates; or permit liens or indebtedness above certain limits in othersubsidiaries.  We must also comply withcertain financial covenants.

The Credit Agreementscontain events of default including failure to make required payments; failureto comply with covenants or other agreements in the Credit Agreements; failureto pay, or the right of acceleration of, certain other indebtedness; certainevents of bankruptcy, insolvency, and injunction; material breach ofrepresentations and warranties; and certain judgments.  Upon the occurrence and continuance of anevent of default, amounts due under the Credit Agreements may be accelerated.

On August 19,2005, we used proceeds of the Revolver under the Credit Facility to repayamounts outstanding under our existing revolving credit facility with FleetCapital Corporation that was to expire on December 27, 2005.

On September 21,2005, we used the proceeds of Term Loan A, Term Loan B, and an additionaldrawing under the Revolver to redeem the outstanding 9.25% Senior SubordinatedNotes (the Notes) that were due March 2006.

At December 31,2005, we had $110.6 million outstanding under the Credit Agreements, of which$3.6 million is included in revolving credit facility and other current debt inthe accompanying consolidated balance sheet. The remainder is included in long-term debt in the accompanyingconsolidated balance sheet.

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Annual repaymentsof the Credit Facility for the years ending December 31, are as follows (inthousands):
|        | ** ** | **Amount** | ** ** |
|--------|------------|------------|------------|
|   |       |       |       |
| 2006   |       | $          | 3,600      |   |
| 2007   |       | 3,600      |       |
| 2008   |       | 3,600      |       |
| 2009   |       | 3,600      |       |
| 2010   |       | 96,160     |       |
| Total  |       | $          | 110,560    |   |

 

AtDecember 31, 2005, we had $33.5 million remaining under the credit facility.

Primarily as a result of matters arising out of andrelated to our investigation of irregularities at our Brazilian subsidiary, wewere not in compliance with certain covenants of our credit agreementswith Wells Fargo Foothill, Inc. and Ableco Finance LLC as Agents as of September 30, 2005 and December 31,2005.   We subsequently obtained waiversof the non-compliance.

Thewaivers addressed defaults, including among other things, (1) the making ofintercompany loans to our Brazilian subsidiary to pay certain taxes, (2) thedelayed submission of our audited financial statements for the year endedDecember 31, 2005 and certain quarterly and monthly unaudited financialstatements, compliance certificates, borrowing base certificates andprojections; (3) our exceeding the maximum leverage ratio of 2.75 to 1.0 forthe four fiscal quarters ended September 30, 2005 based on the restatement ofprior financial statements; and (4) inaccuracies in prior financial statementsand related compliance certificates due to the restatement of such financialstatements.  The waivers also enable usto avoid default related to any delinquent payment of certain U.S. income taxesthat would result if we do not receive the expected favorable IRS rulingsconcerning technical errors in the filings of the Company’s US federal taxreturns for fiscal years 2001-2003.

Wealso secured the lenders’ consent to certain items, including, among otherthings, (1) additional intercompany loans totaling up to $750,000 to theBrazilian subsidiary for working capital; (2) a UK subsidiary using proceeds ofan advance under the WFF Credit Agreement to repay $3.95 million ofintercompany debt to the Company; (3) the Brazilian subsidiary incurringadditional secured indebtedness of up to 2 million Brazilian Reais; and (4)excluding the Brazilian subsidiary’s intercompany loans and previously incurredsecured indebtedness from the Investment, Indebtedness and Lien basket limitations.

Weobtained amendments to the credit agreements to, among other things, (1)increase the Minimum EBITDA requirement to $55 million (from $45 million) forthe twelve month period ending September 30, 2006 and thereafter; and (2)postpone by one quarter the tightening of the Leverage Ratio (debt divided byEBITDA, as defined), now requiring the ratio not to exceed 2.50 to 1 for thefour fiscal quarters ending June 30, 2006, 2.25 to 1 for the four fiscalquarters ending September 30, 2006, and 2.00 to 1 for the four fiscal quartersending thereafter.  The postponement ofthe tightening of the Leverage Ratio will help us maintain compliance with ourloan covenants throughout 2006.

Subsequent toDecember 31, 2005, we paid $8.2 million of the accumulated unpaid taxes andrelated penalties and interest for certain Brazilian municipal taxes for theyears December 31, 2001 through 2005.

OnApril 7, 2006, new legislation was enacted in Brazil that will result in areduction in the amount of penalties and interest we were required to pay forunpaid municipal taxes. We recorded a gain of $1.8 million in the secondquarter of 2006 resulting from a reduction in the tax obligation recorded as ofDecember 31, 2005 for a portion of the cumulative interest and penalties onunpaid municipal taxes for the four years ended December 31, 2004.

We expect to finance our current operations, plannedcapital expenditures, and internal growth for the foreseeable future usingfunds generated from operations, existing cash and available funds under ourcredit facility in addition to lease financing for property and equipment. Weexpect capital expenditures in 2006 to be in the range of $25 million to $40million, as we continue to cover maintenance and technology upgrades, assetreplacements, efficiency investments, and investment for continued growth. Future acquisitions, if any, may requireadditional debt or equity financing.

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Under a stock repurchase program that was authorized byour Board of Directors in February 2001, we may repurchase up to $10 million ofour shares from time to time in the open market or in privately negotiatedtransactions, depending on general business and market conditions. Through thedate of this report, we had repurchased a total of 881,700 shares at a totalcost of $1.5 million.

# **Contractual Obligations andCommitments**

We have various contractual obligations and commitments that aredescribed in the Notes to Consolidated Financial Statements. The followingtable summarizes our contractual obligations and commitments at December 31,2005:
|                  | ** ** | ** ** | ** ** | **Less than** | ** ** | ** **              | ** ** | ** **         | ** ** | **Over**         | ** ** |
|------------------|------------|------------|------------|--------------------|------------|-------------------------|------------|--------------------|------------|------------------|------------|
| ** **       | ** ** | **Total**  | ** ** | **1 year**    | ** ** | **1-3 years**      | ** ** | **4-5 years** | ** ** | **5 years** | ** ** |
| ** **       | ** ** | ** ** | ** ** | ** **         | ** ** | **(in thousands)** | ** ** | ** **         | ** ** | ** **       | ** ** |
| Long-term debt   |       | $          | 112,010    |               | $          | 4,330                   |       | $                  | 7,920      |             | $          | 99,760 |   | $ | — |   |
| Capital leases   |       | 11,128     |       | 2,919              |       | 3,474                   |       | 1,515              |       | 3,220            |       |
| Operating leases |       | 109,177    |       | 36,311             |       | 39,925                  |       | 15,496             |       | 17,445           |       |
| Other debt       |       | 15,774     |       | 15,774             |       | —                  |       | —             |       | —           |       |
| Total            |       | $          | 248,089    |               | $          | 59,334                  |       | $                  | 51,319     |             | $          | 116,771 |   | $ | 20,665 |   |

 

**Off-BalanceSheet Arrangements**

We do not have any obligations that meet the definitionof an off-balance sheet arrangement and that have or are reasonably likely tohave a material effect on our consolidated financial statements.

**Other Matters**

***Quarterly Results and Seasonality***

We have experienced, and expect to continue to experience, quarterlyvariations in our results of operations mostly due to:

·            the timing of our clients’ customer managementinitiatives and customer acquisition and loyalty campaigns,

·            the commencement of new contracts and thediscontinuance and termination of existing contracts,

·            revenue mix,

·            the timing of additional operating, selling, andadministrative expenses to support new business, and

·            the timing of recognition of incentive fees.

We experienceperiodic fluctuations in our results of operations related to both the start-upcosts associated with expansion and the implementation of clients’ customermanagement activities. In addition, our business generally tends to be slowerin the third quarter due to summer holidays in Europe.

***Effects ofInflation***

Inflationhas not had a significant effect on our operations. However, there can be noassurance that inflation will not have a material effect on our operations inthe future.

***Related Party Transactions***

We have made minority interest investments forbusiness and strategic purposes through the purchase of voting common andpreferred stock of companies.  Theseinvestments are included in investments in affiliates in the accompanyingconsolidated balance sheets.  As ofDecember 31, 2005 and 2004, the investment in our India joint venture wasapproximately $3.4 million and $4.1 million respectively.  Subcontractedservices provided by our India joint venture for the years ended December 31,2005, 2004 and 2003 were $16.1 million, $15.0 million, and $11.4 million, respectivelyand are included in subcontracted and other services expenses in theaccompanying consolidated statements of operations. The Company had payables toour India joint venture of $4.8 million and $3.0 million at December 31, 2005and 2004, respectively, which are included in trade accounts payable in theconsolidated financial statements. We received $1.8 million of dividenddistributions from our India joint venture during the year ended December 31,2003.

As of December 31, 2005 and 2004, the investment incertain Latin America affiliates was approximately $13.7 million and $12.4million, respectively.  Of the $13.7million investment in certain Latin America affiliates, approximately $7.7million is equity method goodwill. This equity method goodwill is notamortized.  Subcontracted servicesprovided by 

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our Latin Americajoint ventures for the years ended December 31, 2005, 2004, and 2003 were notmaterial.  We received $1.7 million ofdividend distributions from our Latin America affiliates during the year endedDecember 31, 2004.

***AccountingPronouncements***

In December 2004,the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (R), *Share-Based Payment*, (SFAS 123R). Thisstandard will require the cost of employee compensation paid with equityinstruments to be measured based on grant-date fair values with the costrecorded as compensation expense over the period during which the employee isrequired to perform service in exchange for the award (generally over thevesting period of the award). The proforma disclosures previously permittedunder SFAS 123 no longer will be an alternative to financial statementrecognition. See “Stock-Based Compensation” in Note 1 to the consolidatedfinancial statements for the pro forma net income and net income per shareamounts, for the years ended December 31, 2005, 2004, and 2003, as if we hadused a fair-value-based method similar to the methods required underSFAS 123R to measure compensation expense for employee stock incentiveawards.  In March 2005, the Securitiesand Exchange Commission (SEC) issued Staff Accounting Bulletin(SAB) No. 107, which expressed the views of the SEC regarding theinteraction between SFAS 123R and certain SEC rules and regulations.SAB No. 107 provides guidance related to the valuation of share-basedpayment arrangements for public companies, including assumptions such asexpected volatility and expected term. In April 2005, the SEC approved a rule that delayed the effective dateof SFAS 123R for public companies. As a result, SFAS 123R will beeffective for the Company in the first quarter of 2006 and will apply to all ofour outstanding unvested share-based payment awards as of January 1, 2006and all prospective awards.

In May 2005, theFASB issued SFAS Statement No. 154, *AccountingChanges and Error Corrections,* (SFAS 154).  SFAS 154 is a replacement of AccountingPrinciples Board Opinion No. 20 (APB 20) and FASB Statement No. 3.  SFAS 154 provides guidance on the accountingfor and reporting of accounting changes and error corrections.  It establishes retrospective application, orthe latest practicable date, as the required method for reporting a change inaccounting principle and the reporting of a correction of an error.  SFAS 154 is effective for accounting changesand corrections of error made in fiscal years beginning after December 15, 2005and we will adopt this standard on January 1, 2006.  We do not expect that the adoption of SFAS154 will have a material impact on our consolidated results of operations, financialcondition and cash flows.

In July 2006, theFASB issued FASB Interpretation (FIN) No. 48, *Accountingfor Uncertainty in Income Taxes,* (FIN 48). FIN 48 applies to all taxpositions accounted for under SFAS No. 109, *Accounting for IncomeTaxes,* and defines the confidence level that a tax position mustmeet in order to be recognized in the financial statements. The interpretationrequires that the tax effects of a position be recognized only if it is “more-likely-than-not”to be sustained by the taxing authority as of the reporting date. If a taxposition is not considered “more-likely-than-not” to be sustained then nobenefits of the position are to be recognized. FIN 48 requires additionalannual disclosures and is effective as of the beginning of the first fiscalyear beginning after December 15, 2006. We are currently evaluating the effectthat the adoption of FIN 48 will have on our consolidated results of operationsand financial condition.

**Item 7A. Quantitative and QualitativeDisclosures about Market Risk**

***Foreign Currency Risk***

We are exposed to market risks associated primarily with changes inforeign currency exchange rates. We have operations in many parts of the world;however, both revenue and expenses of those operations are typically denominatedin the currency of the country of operations, providing a natural hedge.

Our financial statements are presented inU.S. dollars and can be impacted by foreign currency exchange fluctuationsthrough both (i) translation risk, which is the risk that the financialstatements for a particular period or as of a certain date depend on theprevailing exchange rates of the various currencies against the U.S. dollar,and (ii) transaction risk, which is the risk that the currency impactof transactions denominated in currencies other than the business unit’sfunctional currency may vary according to currency fluctuations.

With respect totranslation risk, even though the fluctuations of currencies against the U.S.dollar can be substantial and therefore significantly impact comparisons withprior periods, the translation impact is included in accumulated othercomprehensive income, a component ofstockholders’ equity, and does not affect the underlying results ofoperations. Gains and losses related totransactions denominated in a currency other than the functional currency ofthe countries in which we operate including short-term intercompany accountsare included in the consolidated statements of operations.

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***InterestRate Risk***

We are alsoexposed to changes in interest rates on our variable rate borrowings. Interestrates on our capital lease obligations are fixed, but rates on borrowings underour Credit Facility are variable.  Duringthe years ended December 31, 2005, 2004 and 2003, our average borrowings under ourprior Fleet revolving credit facility and the existing Revolver were $26.1million, $9.7 million, and $5.2 million, respectively.  Borrowings under the Term Loan A and TermLoan B were $19.4 million and $35 million, respectively, at December 31, 2005.  A hypothetical 10% change in interest rateswould increase or decrease annual interest expense by approximately $0.9million.

***Investment Risk***

We do not usederivative financial or commodity instruments. Our financial instruments included cash and cash equivalents, accountsreceivable, accounts payable, current and long-term debt.  We consider the amounts presented forfinancial instruments in the consolidated balance sheets, except for the SeniorSubordinated Notes (the Notes) balance at December 31, 2004, to be reasonableestimates of fair value based on maturity dates or other characteristics. Theestimated fair value of the Notes was approximately $90.7 million atDecember 31, 2004. The Company determined the estimated fair value of the Notesusing available market information.  TheNotes were redeemed in September of 2005 as discussed in Note 5 of theconsolidated financial statements.

**Item 8. Financial Statements andSupplementary Data**

The information called for by this item is incorporated by referencefrom our Consolidated Financial Statements beginning on pageF-3 and the related Notes to Consolidated Financial Statements beginning onpage F-7.

**Item 9. Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

None.

**Item 9A. Controls and Procedures**

**(a) Evaluation of Disclosure Controls and Procedures**

Our managementevaluated, with the participation of our Chief Executive Officer and our ChiefFinancial Officer, the effectiveness of our disclosure controls and proceduresas of the end of the period covered by this Annual Report on Form 10-K. As aresult of the material weakness described below, our Chief Executive Officerand our Chief Financial Officer have concluded that our disclosure controls andprocedures are not effective to ensure that information we are required todisclose in reports that we file or submit under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in Securities and Exchange Commission rules and forms.

We do not expect that our disclosure controls andprocedures or our internal control over financial reporting will prevent allerror and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within SITEL have been detected.

In light of the materialweakness described below, we performed additional analyses and other proceduresto ensure that our consolidated financial statements included in this AnnualReport were prepared in accordance with US Generally Accepted AccountingPrincipals (“GAAP”).  These measuresincluded, among other things, expansion of our year-end closing procedures, anddedication of significant internal resources and external consultants toscrutinize account analyses and reconciliations at a detailed level for theinternational subsidiary referenced below. As a result of these and other expanded procedures we concluded that theconsolidated financial statements included in this Annual Report presentfairly, in all material respects, our financial position, results of operationsand cash flows for the periods presented in conformity with GAAP.

**(b)Management’s Report on Internal Control over Financial Reporting**

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting (as defined in Rule 13a-15(f) under the SecuritiesExchange Act of 1934, as amended). Our management assessed the

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effectiveness ofour internal control over financial reporting as of December 31, 2005. Inmaking this assessment, our management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control-Integrated Framework. Based on this assessment, management hasconcluded that, as of December 31, 2005, the Company did not maintain effectiveinternal control over financial reporting due to the existence of the materialweaknesses, as described below.

***Ineffective Regional Management Oversight of our LatinAmerica Business Units***

We concluded thatin Latin America there were ineffective policies and procedures by regionalmanagement in terms of review, supervision and monitoring of our subsidiary inBrazil.  This deficiency contributed tothe existence of the material weakness discussed below.  This deficiency resulted in more than aremote likelihood that a material misstatement to the annual or interimconsolidated financial statements would not be prevented or detected.

****IneffectiveFinancial Reporting and Review Processes in our Brazil Subsidiary****

Our controlenvironment and control activities at our subsidiary in Brazil were ineffective.  This material weakness is the result ofdeficiencies in internal control activities, specifically:

·                Lack ofappropriate control consciousness at the subsidiary;

·                Ineffectivepolicies and procedures regarding documenting and approval of journal entries;

·                Ineffectivepolicies and procedures regarding reconciliation of account balances;

·                Ineffectivepolicies and procedures regarding approval of new vendors and payments tovendors;

·                Failure toappropriately segregate and define certain accounting duties; and

·                Lack ofadequately trained financial and accounting personnel.

These deficienciesresulted in material errors in the recognition of operating, selling andadministrative expenses and interest expense, as well as, other errors in ourconsolidated financial statements.  As aresult, we have restated our consolidated financial statements for the yearsended December 31, 2001 through 2004 and the first, second, and third quartersof 2005.

KPMG LLP, anindependent registered public accounting firm, has issued an audit report onour assessment of internal control over financial reporting which is includedin Item 9A of the Form 10-K Annual Report.

**(c)Changes in Internal Control Over Financial Reporting**

There was nochange in our internal control over financial reporting that occurred duringthe fourth fiscal quarter of the fiscal year covered by this Annual Report onForm 10-K that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

**(d)Remediation Activities**

To address thesematerial weaknesses, we have taken the following actions subsequent to December31, 2005:

1. Performed anextensive review and reconciliation of the accounting records at our Brazilsubsidiary. In addition, the more enhanced reconciliation procedures performedto address this issue subsequent to the 2005 year-end will continue to beperformed in the future to ensure the internal control deficiency isremediated.

2. Replaced thesubsidiary financial and accounting personnel and created a financialcontroller position for the Latin America region to enhance the monitoring andreview for compliance with corporate policies and procedures.

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**(e)Report of Independent Registered Public Accounting Firm**

*Tothe Stockholders and Board of Directorsof SITEL Corporation:*

We have auditedmanagement’s assessment, included in the accompanying Management’s Report onInternal Control over Financial Reporting (Item 9A(b)),**that SITEL Corporation and subsidiaries(the Company) did not maintain effective internal control over financialreporting as of December 31, 2005, because of the effect of material weaknessesidentified in management’s assessment, based on**criteria established in*InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

A materialweakness is a control deficiency, or combination of control deficiencies, thatresults in more than a remote likelihood that a material misstatement of theannual or interim financial statements will not be prevented or detected.  The following material weaknesses have beenidentified and included in management’s assessment as of December 31, 2005:

***Ineffective Regional ManagementOversight of the Latin America Business Units***

The Company had ineffective policies and procedures byregional management in terms of review, supervision and monitoring of theirsubsidiary in Brazil. This deficiency contributed to the existence of thematerial weakness discussed below.  Thisdeficiency resulted in more than a remote likelihood that a materialmisstatement to the annual or interim consolidated financial statements wouldnot be prevented or detected.

***Ineffective Financial Reportingand Review Processes in the Brazil Subsidiary***

The Company’s control environment and control activitiesat the subsidiary in Brazil were ineffective. This material weakness is the result of deficiencies in internal controlactivities, specifically;

a.               Lack of appropriatecontrol consciousness at the subsidiary;

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b.              Ineffective policiesand procedures regarding documenting and approval of journal entries;

c.               Ineffectivepolicies and procedures regarding reconciliation of account balances;

d.              Ineffective policiesand procedures regarding approval of new vendors and payments to vendors;

e.               Failure toappropriately segregate and define certain accounting duties; and

f.                 Lack ofadequately trained financial and accounting personnel.

These deficiencies resulted in material errors in therecognition of operating, selling and administrative expenses and interestexpense, as well as, other errors in the Company’s consolidated financialstatements.  As a result, the Company hasrestated its consolidated financial statements for the years ended December 31,2001 through 2004 and the first, second, and third quarters of 2005.

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of SITELCorporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidatedstatements of operations, stockholders’ equity and cash flows for each of theyears in the three-year period ended December 31, 2005.  These material weaknesses were considered indetermining the nature, timing, and extent of audit tests applied in our auditof the 2005 consolidated financial statements, and this report does not affectour report dated September 13, 2006, which expressed an unqualifiedopinion on those consolidated financial statements.

In our opinion,management’s assessment that the Company did not maintain effective internalcontrol over financial reporting as of December 31, 2005, is fairly stated, inall material respects, based on criteria established in*Internal Control—Integrated Framework*issued by COSO.**Also, in our opinion,because of the effect of the material weaknesses described above on theachievement of the objectives of the control criteria, the Company has notmaintained effective internal control over financial reporting as of December31, 2005, based on criteria established in *Internal Control—Integrated Framework*issued by COSO.
| /s/ KPMG LLP             |   |   |
|--------------------------|--------|--------|
|                     |   |   |
| **KPMG  LLP**            |   |
|                     |   |
| Omaha, Nebraska          |   |
| September 13,  2006 |   |

 

## **Item 9B.  Other information**

**None**

## **PART III**

**Item 10. Directors and Executive Officersof the Registrant**

**Directors**

Rohit M. Desai

Mr.Desai has been a director since April 2000. He is currently Chairman of theBoard’s Nominating/Corporate Governance Committee.  Since 1984, Mr. Desai has been the Chairmanand President of Desai Capital Management Incorporated, an institutionallyfunded equity investment firm that provides capital for management buyouts,acquisitions, and growth investments. Prior to forming Desai Capital Management Incorporated in 1984,Mr. Desai spent 20 years with Morgan Guaranty Trust, an affiliate of J.P.Morgan, where he managed an equity linked investment fund.  Mr. Desai is also a director of IndependenceCommunity Bank Corp., Finlay Enterprises, Inc., and Suncom Wireless Holdings,Inc.  He is 67 years old.

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MathiasJ. DeVito 

Mr.DeVito has been a director since June 2001. Since 1997, Mr. DeVito has been Chairman Emeritus of The Rouse Company,a real estate development firm, recently acquired by General Growth Properties.  From 1984 to 1997, Mr. DeVito was Chairman ofthe Board of The Rouse Company, and he previously served as its Chief ExecutiveOfficer, among other positions.  Prior tojoining The Rouse Company in 1970, Mr. DeVito was a partner with the Piper& Marbury law firm from 1965 to 1970, Assistant Attorney General of theState of Maryland from 1963-1965, and an associate with Piper & Marburyfrom 1957 to 1963. Mr. DeVito is also a director of Suncom Wireless Holdings,Inc.  He is 76 years old. 

Cyrus F. Freidheim, Jr.

Mr. Freidheim has been adirector since October 2005.  He iscurrently Chairman of the Board’s Compensation Committee.  Mr. Freidheim has been Chairman of OldHarbour Partners, an investment firm, since 2004.  From 2002 to 2004, Mr. Freidheim served asChairman and CEO of Chiquita Brands International.  From 1966 to 2002, Mr. Freidheim served asVice Chairman and in other positions with Booz*Allen & Hamilton, Inc. Mr.Friedheim is also on the Board of Directors of HSBC Finance Corp., Inc.,Allegheny Energy, Inc. and Hollinger International Inc.  He is 71 years old.

Robert H. Getz

Mr. Getz was appointed adirector in August 2006. Mr. Getz is a private investor and since 1997 has beena Managing Director and Partner of Cornerstone Equity Investors, L.L.C, aprivate equity firm focused on leveraged buyouts and recapitalization. From1987 to 1996, Mr. Getz served in various management positions, includingManaging Director and Partner from 1992 to 1996, of Prudential EquityInvestors, Inc.  Mr. Getz is also adirector of Novatel Wireless, Inc. and Haynes International, Inc..  He is 44 years old.

Nigel T. Gourlay

Mr. Gourlay has been adirector since June 2003.  Since 2000,Mr. Gourlay has been a partner in Animos LLP, a business consultancy he foundedwhich is based in London, U.K. From 1980 to 2001, Mr. Gourlay served in variousUK and international based positions with British American Tobacco plc, and itsaffiliated companies. Positions included serving as Head/Deputy Head ofbusiness development with responsibility for mergers and acquisitions forBritish American Tobacco plc from 1994 to 2001, Vice President for US Marketingand Sales Administration with Brown and Williamson, USA from 1992 to 1994, andvarious investor relations, finance, administration and internal auditpositions with B.A.T. Industries and its overseas subsidiaries from 1980 to1992.  Mr. Gourlay is currently Chairmanof NWD Group plc.  He is 51 years old. 

David J. Hanger

Mr. Hanger has been adirector since June 2003. Mr. Hanger has over 30 years of experience in thepublishing industry, including various advertising and sales managementpositions with The Economist Newspaper Group. Mr. Hanger was Publisher of The Economist from 1996 to 2005.  Mr. Hanger is also non-executiveDirector of Creston plc, a marketing services group, and Burst Media, aweb-based advertising services company. Mr. Hanger previously served as WorldPresident (2000-2002) of the International Advertising Association. He is 61years old. 

StephenL. Key

Mr.Key was appointed a director in August 2006. Since 2001, Mr. Key has been the Chairman of Key Consulting, LLC, aninvestment firm he founded, and Chief Financial Officer of J.D. WatkinsEnterprises, Inc. From 1995 to 2001, Mr. Key was Executive Vice President andChief Financial Officer of Textron Inc. From 1992 to 1995, Mr. Key served as Executive Vice President and ChiefFinancial Officer of ConAgra, Inc. Mr. Key served in various positions from1968 to 1992 with Ernst & Young, including Managing Partner of the New York

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officefrom 1988 to 1992. Mr. Key is also a director of 1-800 Contacts, Inc.,Greenhill & Co., Inc., and J.D. Watkins Enterprises, Inc.  Mr. Key also serves as a director of theRhode Island School of Design.   He is 63years old.

GeorgeJ. Kubat

Mr. Kubat has been adirector since July 1995.  He iscurrently Chairman of the Board’s Audit Committee.  Since 1992, Mr. Kubat has been the ChiefExecutive Officer and President of Phillips Manufacturing Co., a metal fabricatingcompany based in Omaha.  From 1969 to1992, Mr. Kubat served in various positions with Coopers & Lybrand, mostrecently as Tax Partner In Charge of the Omaha, Nebraska office.  Mr. Kubat is also a trustee of Everest Funds.He is 60 years old.

JamesF. Lynch 

Mr. Lynch founded SITEL in 1985, hasserved as Chief Executive Officer since April 2001, and has served as Chairmanand a director since the Company’s inception. Mr. Lynch previously served asChief Executive Officer from SITEL’s inception to January 1997. He is 57 yearsold.

Mr. Desai was appointedto the Board of Directors upon the closing of Private Equity Investors IV,L.P.’s (“PEI IV”) purchase of 5,555,671 shares of outstanding Company CommonStock in 2000. PEI IV is an affiliate of Desai Capital Management Incorporated.The Company agreed to nominate an individual designated by PEI IV and approvedby the Company and to solicit proxies for the election of such nominee to theBoard so long as PEI IV beneficially owns, in the aggregate, at least 2,222,269shares of the Company’s Common Stock.

Messrs. Getz and Key wereappointed to the Board of Directors pursuant to an agreement between theCompany and JANA Partners LLC effective as of August 4, 2006.  Also pursuant to the agreement, within thenext six (6) months Mr. Kubat will resign from the Board and Charles Pennerwill be appointed to fill the resulting vacancy.  Pursuant to such agreement, JANA Partners LLCagreed to not take certain actions for one year and to support the slate ofdirectors nominated for election by the Company at the 2006 annual meeting ofthe stockholders.

**Executive Officers**
| ** **             | ** ** | ** ** | ** ** | ** **                                                                         | ** ** | **Other Offices or Positions Held**                                                                          |
|------------------------|------------|------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|
| **Name**               | ** ** | **Age**    | ** ** | **Present Office**                                                                 | ** ** | **During Past Five Years**                                                                                   |
| ** **             | ** ** | ** ** | ** ** | ** **                                                                         | ** ** | ** **                                                                                                   |
| James F. Lynch         |       | 57         |       | Chairman of the  Board (since 1985),  Chief Executive Officer  (since April 2001)  |       |                                                                                                         |
|                   |       |       |       |                                                                               |       |                                                                                                         |
| Jorge A. Celaya        |       | 40         |       | Executive Vice  President and  Chief Financial Officer  (since October 2003)       |       | Chief Financial  Officer, NPTest, Inc.; Vice President Finance, Schlumberger Network Solutions               |
|                   |       |       |       |                                                                               |       |                                                                                                         |
| Robert Scott Moncrieff |       | 49         |       | Executive Vice  President,  Marketing and Account Development  (since August 2003) |       | Senior Vice  President – Global Strategic Clients, Senior  Vice President - Marketing SITEL Corporation |

 

**Audit Committee Members and Audit CommitteeFinancial Expert**

Our Board of Directors has a separately designated standing AuditCommittee whose members are:

George J. Kubat, Chairman

Rohit M. Desai

Robert H. Getz

Nigel T. Gourlay

David J. Hanger

StephenL. Key

Each member of the Audit Committee has been determined by our Board ofDirectors to be independent under the standards adopted by the New York StockExchange that are applicable to all directors, as well as the standards adoptedby the SEC which are applicable to audit committee members only, and theadditional requirements adopted by the Board of Directors.    Our Board of Directors has determined thatMr. Kubat qualifies as an “audit committee financial expert” as such termis defined under paragraph (h)(2) of Item 401 of Regulation S-K.

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**Section 16(a) Beneficial OwnershipReporting Compliance**

The Company’s officers and directors, and persons who own more than 10%of the Company’s Common Stock, are required to file reports of ownership andchanges in ownership of the Company’s Common Stock with the Securities andExchange Commission.  Copies of suchreports must also be furnished to the Company. Based solely upon a review of the copies of reports furnished to theCompany and written representations that no other reports were required, theCompany believes that during fiscal 2005 its officers and directors and greaterthan 10% beneficial owners complied with such filing requirements, except asfollows:  a Form 4 report for Rohit M.Desai was one day late with respect to phantom stock units granted to him onDecember 7, 2005.

**Code of Ethics**

The Company has adopted a code of ethics that applies to its chiefexecutive officer, chief financial officer, principal accounting officer andcontroller. The code of ethics may be accessed through the Investors section ofour Internet website listed under Item 1 of this Annual Report on Form 10-Kunder the caption “Available Information”. 

**Item 11.Executive Compensation**

Summary of Cash and Certain Other Compensation

Thefollowing table sets forth information regarding annual and long-termcompensation for the chief executive officer and the other four most highlycompensated executive officers of the Company in office as of December 31, 2005(collectively, the “Named Executive Officers”). 
|                                            | ** ** | **Annual Compensation** | ** ** | **Long-Term  Compensation  Awards  Stock Options** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|---------------------------------------------------------|------------|
| **Name and  Principal Position** | ** ** | **Year**                     | ** ** | **Salary**                                              | ** ** | **Bonus (1)** | ** ** | **Other Annual  Compensation (2)** | ** ** | **(Number of  Shares) (3)** | ** ** | **All Other  Compensation (4)** | ** ** |
|                                       |       |                         |       |                                                    |       |   |   |   |   |   |   |   |   |
| James F. Lynch                             |       | 2005                         |       | $                                                       | 600,000    |   | $ | 225,000 |   | — |   | — |   | $ | 70,909 |   |
| Chairman and                               |       | 2004                         |       | $                                                       | 546,923    |   | — |   | — |   | — |   | $ | 70,909 |   |
| Chief Executive Officer                    |       | 2003                         |       | $                                                       | 500,000    |   | — |   | — |   | — |   | $ | 70,909 |   |
|                                       |       |                         |       |                                                    |       |   |   |   |   |   |   |   |   |
| Jorge A. Celaya (5)                        |       | 2005                         |       | $                                                       | 290,001    |   | $ | 108,750 |   | — |   | — |   | — |   |
| Executive Vice President                   |       | 2004                         |       | $                                                       | 290,001    |   | — |   | — |   | — |   | — |   |
| and Chief Financial Officer                |       | 2003                         |       | $                                                       | 44,616     |   | $ | 100,000 |   | — |   | 300,000 |   | — |   |
|                                       |       |                         |       |                                                    |       |   |   |   |   |   |   |   |   |
| Robert Scott Moncrieff                     |       | 2005                         |       | $                                                       | 265,556    |   | $ | 81,213 |   | $ | 27,072 |   | — |   | — |   |
| Executive Vice President                   |       | 2004                         |       | $                                                       | 239,980    |   | — |   | $ | 31,360 |   | 45,000 |   | — |   |
|                                            |       | 2003                         |       | $                                                       | 183,735    |   | $ | 144,373 |   | $ | 58,373 |   | — |   | — |   |
|                                       |       |                         |       |                                                    |       |   |   |   |   |   |   |   |   |
| Dale W. Saville (5)                        |       | 2005                         |       | $                                                       | 190,385    |   | — |   | $ | 29,730 |   | — |   | $ | 11,296 |   |
| Executive Vice President                   |       | 2004                         |       | $                                                       | 239,385    |   | — |   | — |   | — |   | — |   |
|                                            |       | 2003                         |       | $                                                       | 230,000    |   | — |   | — |   | — |   | — |   |

 

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(1)                                  Representsbonus payments paid after year-end to the Named Executive Officer for suchyear.  For Mr. Celaya, represents a$100,000 payment from the Company in January 2004, in recognition of his lossof anticipated bonus income and certain other benefits with his previousemployer when he joined SITEL. 

(2)                                  For Mr. Scott Moncrieff , in 2004 represents a$10,000 allowance for travel expenses and the balance represents pensioncontributions on Mr. Scott Moncrieff’s behalf and in 2003 a $40,000 allowancefor travel expenses and the

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balance represents pensioncontributions on his behalf.  For Mr.Saville, represents the gain on the sale of the Company’s stock in connectionwith stock options he exercised.

(3)                                  All of the options granted were for shares ofCommon Stock pursuant to the SITEL Corporation 1999 Stock Incentive Plan (the “IncentivePlan”). 

(4)                                  For Mr.Lynch, in 2005, 2004 and 2003 represents $70,909 in premiums paid undersplit-dollar life insurance policy which have represented interest-free loansunder the long-standing arrangement.  ForMr. Saville, represents accrued vacation pay due in connection with thetermination of his employment with the Company. 

(5)                                  Mr. Celayajoined the Company in October 2003.  Mr.Saville resigned from the Company effective September 9, 2005.

**Employmentagreements**

Messrs. Lynch, Celaya andScott Moncrieff have written employment agreements dated February 17,2006.  These executives’ base salariesare $600,000, $290,000 and 140,000£, respectively, and they are eligible toreceive a bonus for 2006 of up to 100% of their base salary under the 2006Management Incentive Plan, based exclusively on the company achieving the 2006EPS targets set by the Compensation Committee. The agreements providearrangements for the executives in the event of termination of employment orchange of control of the Company.  In theevent of a termination of employment without cause or by the executive for goodreason, absent a change of control, the executive will receive a singleseverance payment of one times his annual salary plus target bonus andcontinued benefits for 12 months.  In theevent of a termination of employment without cause or by the executive for goodreason within two years following a change of control, the executive willreceive a single severance payment of two times his annual salary plus targetbonus and continued benefits for 24 months. Any options that have not already vested will vest upon a change ofcontrol.  For purposes of the employmentagreements, a “change of control” means generally (i) a more than 50% change inownership of the Company, (ii) a change in a majority of the Board ofDirectors, or (iii) a sale of all or substantially all of the assets of theCompany.  Cause and good reason aredefined in the employment agreements. The term of each of the employment agreements runs through December 31,2006 and renews annually for one-year terms subject to the terminationprovisions.  The executives must sign arelease of all claims as a condition to receiving severance payments.

**Benefit Plans**

*Stock Option Plan for Replacementof Existing Options (“Replacement Plan”)*and *Stock Option Plan (“EEB Replacement Plan”).*  Under the Replacement Plan, options for4,541,780 shares were granted in 1995, with an option price of $.0025 pershare, as replacements for 3,110,000 options outstanding at February 28, 1995.  Under the EEB Replacement Plan, options for7,381,720 shares were granted in 1995, with an option price of $.0025 pershare, as replacements for 12,655,000 units outstanding at February 28, 1995under the Company’s employee equity benefit plan (“EEB Plan”).  With respect to both of these plans, theoptions were exercisable in five equal annual installments from January 1996 toMay 2000 (or May 2001 in certain cases) and were vested as of the date of thegrant.  The Company recorded theseoptions at the estimated fair market value at date of grant ($2.91), with acorresponding charge to special compensation expense totaling $34.6million.  No further options may begranted under these two plans.

*1995Employee Stock Option Plan (“Employee Plan”).* The Employee Plan provided for the granting ofvarious types of incentive awards (including incentive stock options,nonqualified options, stock appreciation rights, restricted shares, andperformance shares or units) for the issuance of up to an aggregate of9,800,000 shares of Common Stock to employees and independent consultants ofthe Company and its subsidiaries. Vesting terms varied with each grant, and option terms could not exceedten years.  Option prices, set by theCompensation Committee of the Board of Directors, could not be less than thefair market value at date of grant for incentive stock options or less than parvalue for nonqualified stock options. The Employee Plan was replaced by the 1999 Stock Incentive Plan.  No further options may be granted under theEmployee Plan.

*1995Non-Employee Directors Stock Option Plan (“Directors Plan”).*  TheDirectors Plan provided for automatic, formula grants of nonqualified optionsto each non-employee director of the Company. Each non-employee director was granted options to purchase18,000 shares of Common Stock upon election or re-election to a three-yearterm on the Board of

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Directors.  Options vested and became exercisable inthree equal annual installments commencing one year after grant.  The Board of Directors had the authority togrant additional options in their discretion. Vesting and exercise terms could vary with each discretionarygrant.  The option prices under allgrants, whether formula or discretionary, could not be less than the fairmarket value of the Common Stock on the date of grant.  The Directors Plan was replaced by the 1999Stock Incentive Plan.  No further optionsmay be granted under the Directors Plan.

*ExecutiveWealth Accumulation Plan*(“*Wealth Accumulation Plan*”). The Wealth Accumulation Planpermitted executive employees selected by the Compensation Committee to electvoluntary salary reductions of up to 25% of base salary and 100% of incentivecompensation. The Company could voluntarily match a portion of the compensationdeferred by participants. Amounts deferred by participants were fully vestedimmediately and amounts contributed by the Company were subject to a vestingschedule beginning after five years of service with the Company until theearlier of 15 years of service with the Company or death, disability orretirement after age 65 (subject to accelerated vesting in the event of achange of control of the Company). Participants’ accounts earned interest at arate equal to the average of the composite yield on Moody’s Seasoned CorporateBond Yield Index as published by Moody’s Investor’s Services. Participantscould also receive early distribution of their entire vested account in onelump sum payment after having participated in the plan for five years. TheCompany’s obligations under the Wealth Accumulation Plan were unfunded andunsecured. In order to address certain requirements under new U.S. legislationconcerning deferred compensation arrangements and due to limited participation,the Wealth Accumulation Plan was frozen and no further contributions to theplan were permitted after December 31, 2004. The Company terminated the Wealth Accumulation Plan effective January 1,2005.  Participants’ deferredcompensation account balances have been paid out. 

*1999 StockIncentive Plan (“Incentive Plan”).*  The Incentive Plan provides forthe granting of various types of incentive awards (including incentive stockoptions, nonqualified options, stock appreciation rights, performance units,restricted shares, stock bonuses, and other stock-based awards) for theissuance of up to an aggregate of 10,500,000 shares of Common Stock toemployees and independent consultants of the Company and its subsidiaries andnon-employee directors of the Company. Option terms may not exceed ten years. Option prices, set by the Compensation Committee of the Board ofDirectors in the case of employees and independent consultants, and the Boardof Directors in the case of non-employee directors, may not be less than thefair market value at the date of grant for incentive stock options or less thanpar value for nonqualified stock options. At December 31, 2005, there were approximately 6.0 million sharesavailable for issuance pursuant to future grants under the Incentive Plan.

The Company’s optionplans are administered by the Compensation Committee of the Board of Directors,except the Directors Plan which is administered by the Board members who werenot eligible to participate in that plan. The Company’s option plans, otherthan the Incentive Plan, require optionees to enter into a ten-year VotingAgreement in favor of James F. Lynch and to comply with a right of firstrefusal granted to the Company.  Underthe Voting Agreement, each optionee agrees to vote all of the shares acquiredupon exercise of options as directed by Mr. Lynch.  Mr. Lynch is required to release sharescovered by the Voting Agreement under certain circumstances. The right of firstrefusal requires optionees, before selling any shares underlying options, toprovide the Company with written notice of the sale and the right to elect topurchase such shares, and it terminates as to shares sold into the publicmarket.

**Option Grants and Holdings**

*2005 OptionGrants.*  No options or stock appreciation rights weregranted during the year ended December 31, 2005 to the Named ExecutiveOfficers.

*2005 OptionExercises and Holdings.*  The following table summarizes informationfor the Named Executive Officers regarding aggregate option exercises in theyear ended December 31, 2005 and the year-end value of unexercised options topurchase the Company’s Common Stock.  Nostock appreciation rights were exercised during 2005 or were outstanding atDecember 31, 2005.

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**AGGREGATEDOPTION EXERCISES IN 2005 AND**

**YEAR-END OPTION VALUES**
| Name                    | ** ** | **Shares Acquired  on Exercise  (#)** | ** ** | **Value  Realized** | ** ** | **Number of Shares Underlying  Unexercised Options  at 12-31-05 (1)Exercisable/Unexercisable** | ** ** | **Value of Unexercised  In-the-Money Options  at 12-31-05 (2)  Exercisable/Unexercisable** | ** ** |
|-------------------------|------------|-------------------------------------------------|------------|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
|                    |       |                                            |       |                |       |                                                                                                                         |       |                                                                                                                |       |
| James F. Lynch          |       | —                                          |       | —              |       | 152,000/348,000                                                                                                              |       | $74,360/$128,640                                                                                                    |       |
| Jorge A. Celaya         |       | —                                          |       | —              |       | 200,000/100,000                                                                                                              |       | $294,000/$147,000                                                                                                   |       |
| Robert Scott  Moncrieff |       | —                                          |       | —              |       | 32,000/68,000                                                                                                                |       | $10,550/$28,288                                                                                                     |       |
| Dale W. Saville (3)     |       | 98,000                                          |       | $                   | 29,730     |                                                                                                                         | 0/0        |                                                                                                                | $0/$0      |   |
|                         |            |                                                 |            |                     |            |                                                                                                                              |            |                                                                                                                     |            |  |

 

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(1)           Allof the options relate to shares of Common Stock. All of the options weregranted under the Incentive Plan, except for the options held by Robert ScottMoncrieff for 35,000 shares, which were issued under the Employee Plan.  These options have a price threshold forearly exercisability, which is above the exercise price.  The price threshold is an average closingprice for the Common Stock of at least $9.00 over thirty consecutive tradingdays. The option for these 35,000 shares may be exercised after May 12, 2006,and prior to their expiration on November 11, 2006, regardless of whether the pricethreshold has been met.

(2)           Thesevalues have been calculated by subtracting the per share option exerciseprice from the fair market value of the underlying Common Stock.  For purposes of this table, such fair marketvalue is deemed to be the closing price of the Common Stock on the New YorkStock Exchange as of December 30, 2005, the last trading day of 2005, which was$3.12.

(3)           Mr. Saville resigned from the Company effective September 9, 2005.

**PerformanceGraph**

The following line graphcompares the yearly percentage changes in the cumulative stockholder return onthe Common Stock for the past five years commencing December, 2000 with thecumulative total return of a “Competitors Index” (computed by the Company) andwith the Standard and Poors 500 Index through the year ended December 31,2005.  The comparison assumes $100 wasinvested on December 31, 2000 in the Common Stock and in each of the foregoingindices and assumes reinvestment of dividends, if any.

The four largestcompetitors, in terms of market capitalization, were used to compare the “CompetitorsIndex”, using their period end stock prices and respective marketcapitalization values to appropriately weight their stock prices.  The companies included in the “CompetitorsIndex” are APAC Teleservices, Inc., Convergys Corporation, Sykes Enterprses,Incorporated, and Teletech Holdings, Inc.

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In the prior year,comparisons of the four largest competitors included APAC Teleservices, Inc.,West Corporation, Sykes Enterprises, Incorporated, and Teletech Holdings,Inc.  Due to major changes in WestCorporation’s mix of business as a result of recent acquisitions, the Companyno longer considers West Corporation a direct competitor.  Convergys Corporation, a competitor acrossmany markets, has been substituted for West Corporation.  For comparison, the following graph includesthe prior list of competitors.

#### **CompensationCommittee Report on Executive Compensation**

The CompensationCommittee of the Board of Directors is responsible for administering SITEL’sexecutive compensation programs. The Compensation Committee is composed of fiveindependent directors, including two members who were appointed to thecommittee in August 2006. The Compensation Committee regularly reviews theexecutive compensation policies and practices of the Company and establishesthe salaries and bonuses of the executive officers.  The Compensation Committee administers thestock option plans in which executive officers participate.

***Compensation Policie****s*

The Company’scompensation policies are designed to attract and retain highly able andmotivated individuals at all levels of the Company.  In addition, the compensation policies aredesigned to be cost effective and to treat all employees fairly.  The Company’s overall approach tocompensation emphasizes the following: competitive salaries, significant bonuses tied to Company, business unitand individual performance, and an opportunity to build exceptional long-termvalue through equity participation.

In establishingtotal compensation amounts, the Compensation Committee considers historical andprojected Company performance.  TheCompensation Committee also considers the range of compensation paid by otherpublic companies in the outsource contact center industry (including thosecompanies comprising the “Competitors Index” used in the Performance Graphsection of this Proxy Statement) and other relevant industries. Thisinformation forms the basis for the Compensation Committee’s assessment of theCompany’s overall performance and prospects, which underpins the CompensationCommittee’s establishment of total compensation ranges.  The Compensation Committee also occasionallyengages compensation consultants to review and make recommendations to theCompensation Committee on executive compensation programs.  The Compensation Committee makes a subjectivedetermination based upon a collective consideration of the foregoing factorsand information.

The Compensation Committee’s policy is to structure compensation awardsfor executive officers that will be deductible without limitation under Section162(m) of the Internal Revenue Code of 1986, as amended, where doing so willfurther the purposes of the Company’s executive compensation programs.  The Compensation Committee also considers itimportant to

49

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retain flexibility to design compensation programs that recognize afull range of performance criteria important to the Company’s success, evenwhere compensation payable under such programs may not be fully deductible.

***Factors and Criteria of Executive Compensation***

Executive compensation consists primarily of (1) annual compensationand (2) long-term incentives.

***Annual Compensation***

Annual compensation consists of base salary and bonus.  The Company seeks to have competitive basesalaries. Any increases in an individual’s base salary are determined primarilyby individual performance and added responsibilities. Assessment of anindividual’s performance includes consideration of a person’s impact on theCompany’s financial performance as well as their judgment, creativity,effectiveness in developing subordinates, and contributions to the improvementin the quality of the Company’s services and operations.

The 2005 bonus plan for executive officers provided for targetedbonuses equal to up to 75% of base salary based on achievement of predeterminedearnings per share (EPS) targets. Bonuses under the plan were calculated and payable after the end of thefiscal year. Based on the EPS target achieved for 2005, bonuses equal to 37.5%of base salary (representing 50% of the bonus opportunity) were payable to theexecutive officers.  Messrs. Lynch,Celaya and Scott Moncrieff received bonuses of $225,000, $108,750 and $81,213,respectively.    

The 2005 bonus plan for business unit executives and chief operatingofficers provided a bonus potential expressed as a percentage of the executive’sbase salary and based on achievement of objectives generally tied to companyand business unit performance.  Bonusesunder the plan were calculated and payable after the end of the fiscal year.Based on the EPS target achieved for 2005, bonuses representing up to 50% ofthe bonus opportunity were paid to these executives.  In certain cases, the Company also paidcertain discretionary bonuses to certain chief operating officers and businessunit executives who had not achieved their business unit objectives but whowere determined to have made significant progress toward company objectivesunder difficult circumstances.

***Long-TermIncentives***

Stock options are aform of long-term incentive used for executive officers and otheremployees.  This incentive emphasizes thelong-term focus necessary for the Company’s continued success.  Stock options also promote success byaligning employee financial interests with long-term stockholder value. Stockoptions have traditionally been granted broadly and deeply within theCompany.  No options were granted toemployees in 2005.  

We established aperformance-contingent option program for 2006. Under this program, a total of about 1,500,000 options were granted onFebruary 1, 2006 to top-performing employees and other key employees at higherjob levels.   The options may vest inwhole or in part on the dates that we report financial results for 2007 and2008, if the company meets certain performance goals in 2006, 2007, and/or2008.  To the extent the performancegoals have not been met by the date in 2009 that we report financial resultsfor 2008, the options will not vest and will expire on that date.  To the extent the options do vest based onperformance, they expire on February 1, 2016. The options are subject to earlier exercise or earlier termination andthe other terms and provisions of the option agreement and the 1999 StockIncentive Plan.

***Chief Executive Officer Compensation***

Mr. Lynch’s 2005 compensation consisted principally of his $600,000base salary and $225,000 bonus.  Asdiscussed above, Mr. Lynch’s bonus was tied to the Company’sachievement of predetermined EPS targets. 
|   | SUBMITTED BY THE 2005 FISCAL  YEAR |
|--------|------------------------------------|
|   | COMPENSATION  COMMITTEE            |
|   | OF THE BOARD OF  DIRECTORS         |
|   | OF SITEL  CORPORATION              |
|   |                               |
|   | Rohit M. Desai                     |
|   | Mathias J. DeVito                  |
|   | Nigel T. Gourlay                   |

 

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** **

**Item 12.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters**

The following table sets forth certain information as of August 31, 2006with respect to the beneficial ownership of the Common Stock (i) by eachperson or group who, to the knowledge of the Company, was the beneficial owner(as defined in Rule 13d-3 of the Securities Exchange Act of 1934, asamended) of more than 5% of the Common Stock, (ii) by each of the Company’sNamed Executive Officers (identified within Item 11 under the caption Summaryof Cash and Certain Other Compensation) and directors, and (iii) by allexecutive officers and directors of the Company as a group. Unless otherwisenoted, each person or group identified has sole voting and investment powerwith respect to the shares shown.

| Name and Address of Beneficial Owner (1) | ** ** | **Amount  and Nature  of  Beneficial  Ownership** | ** ** | **Percent of  Class** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                             | ** ** | ** **                                             | ** ** | ** **                 | ** ** |
| Jana Partners  LLC (2)                                                 |       | 10,676,665                                             |       | 14.33                      | %          |
| State of  Wisconsin Investment Board (3)                               |       | 7,674,600                                              |       | 10.30                      | %          |
| Heartland  Advisors, Inc. (3)                                          |       | 6,786,800                                              |       | 9.11                       | %          |
| Rohit M. Desai  (4)(7)                                                 |       | 5,712,271                                              |       | 7.66                       | %          |
| Private Equity  Investors IV, L.P. (7)                                 |       | 5,555,671                                              |       | 7.46                       | %          |
| James F. Lynch  (4)(5)(6)                                              |       | 7,195,765                                              |       | 9.91                       | %          |
| Ida Eggens  Kruithof (8)                                               |       | 4,691,348                                              |       | 6.30                       | %          |
| Dimensional Fund  Advisors Inc. (3)                                    |       | 4,026,314                                              |       | 5.40                       | %          |
| George J. Kubat  (4)(9)                                                |       | 406,238                                                |       | *                          |       |
| Jorge A. Celaya  (4)                                                   |       | 300,000                                                |       | *                          |       |
| Mathias J.  DeVito (4)                                                 |       | 194,592                                                |       | *                          |       |
| Robert Scott  Moncrieff (4)                                            |       | 73,000                                                 |       | *                          |       |
| Nigel T. Gourlay  (4)                                                  |       | 61,985                                                 |       | *                          |       |
| David J. Hanger  (4)                                                   |       | 61,985                                                 |       | *                          |       |
| Cyrus F.  Freidheim                                                    |       | 9,559                                                  |       | *                          |       |
| Dale W. Saville  (4) (11)                                              |       | 6,000                                                  |       | *                          |       |
| Robert H. Getz                                                         |       | 1,737                                                  |       | *                          |       |
| Stephen L. Key                                                         |       | 1,737                                                  |       | *                          |       |
|                                                                   |       |                                                   |       |                       |       |
| All executive officers  and directors as a group (12 persons)          |       | 14,236,050                                             |       | 18.88                      | %          |

 

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*      Less than 1% 

(1)          The address of Jana Partners LLC is 536 PacificAvenue, San Francisco, California 94133. The address of the State of Wisconsin Investment Board, an institutionalholder, is P.O. Box 7842, Madison, Wisconsin 53707.  The address of Heartland Advisors, Inc. is 789North Water Street Milwaukee, WI 53202.  The address of Private Equity Investors IV,L.P., an institutional holder, is 410 Park Avenue, Suite 830, New York, NewYork 10022.  The address of Ida EggensKruithof is Villa del Sole A No. 1, 8, Avenue Saint Roman, MC 98000Monaco.  The address of Dimensional FundAdvisors Inc. is 1299 Ocean Avenue, 11th Floor,Santa Monica, California 90401.  

(2)          Based on a Schedule 13D/A filing dated August 4,2006.

(3)          Basedon a Schedule 13G/A filing for the year ended December 31, 2005.  

(4)          Includes the followingshares which may be acquired under stock options which are exercisablecurrently or within 60 days: Mr. Lynch – 196,000; Mr. Desai – 62,000;  Mr. Kubat – 153,000; Mr. Celaya –300,000; Mr. DeVito –  50,000; Mr.Gourlay – 40,000; Mr. Hanger – 40,000; and Mr. Scott Moncrieff –73,000.  Upon

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exercise,voting control over shares issued pursuant to the Company’s 1995 stock optionplans will be held by Mr. Lynch pursuant to a Voting Agreement.

(5)          Includes 10,000 shares held by a 501(c)(3)organization established by Mr. Lynch. Mr. Lynch has shared voting and/or investment power with respect tothese shares but disclaims beneficial ownership.

(6)          Includes2,058,469 owned by other stockholders over which Mr. Lynch exercises votingcontrol pursuant to a Voting Agreement. The Voting Agreement grants Mr. Lynchthe right to vote all shares of Common Stock held by the stockholders signatoryto the Voting Agreement in the manner directed by Mr. Lynch.  Mr. Lynch acquires voting control overadditional shares which are issued pursuant to the Company’s 1995 stock optionplans until such shares are sold by the holders thereof into the public market.

(7)          Based on a Schedule 13Dfiled March 15, 2005.  Private EquityInvestors IV, L.P.’s shares are also included in the number of shares shown forRohit M. Desai.  Pursuant to Rule 13d-4under the Exchange Act, Rohit M. Desai disclaims beneficial ownership of theseshares owned by Private Equity Investors IV, L.P. 

(8)          Based on a Schedule 13Gfiling for the year ended December 31, 2005. Includes 1,642,398 shares owned through Burmel Holding N.V.

(9)          Includes 20,000 sharesowned by a partnership for members of Mr. Kubat’s immediate family. Mr. Kubatshares voting and/or investment power but disclaims beneficial ownership ofthese shares. 

(10)    Based on the last Form4 filed by Mr. Saville prior to leaving the Company.

**Item 13. CertainRelationships and Related Transactions**

**Compensation Committee Interlocks and Insider Participation; CertainTransactions**

TheCompensation Committee members are Cyrus F. Freidheim, Jr. (Chairman), Rohit M.Desai, Mathias J. DeVito, Robert H. Getz, and Nigel T. Gourlay, all independent, non-employee directors.  

Kelvin C. Berens, whoresigned as a director of the Company in August 2006, is the Managing Partnerand owner of more than 10% of the voting stock in the Berens & Tate, P.C.law firm.  The Company engaged Berens& Tate to provide legal services in the areas of labor and employment lawduring 2005 and expects to continue to engage the firm for such services.  The Company paid Berens & Tate $671,499in fees during 2005 and $447,998 in fees for the first eight months of2006.  

**Item 14.Principal Accountant Fees and Services**

Ourindependent auditor for 2005 was KPMG LLP. KPMG billed the following fees for services which fees were paid oraccrued by the Company in each of the last two years:
| ** **          | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Audit Fees          |       | $        | 1,635,671  |     | $          | 1,771,864 |   |
| Audit-Related  Fees |       | 4,040    |       | 58,325   |       |
| Tax Fees            |       | 190,867  |       | 322,718  |       |
| All Other Fees      |       | 12,154   |       | 30,038   |       |
|                |       | $        | 1,839,952  |     | $          | 2,182,945 |   |

 

*Audit Fees -*Audit Fees includes fees for professional services rendered inconnection with the audit of the Company’s consolidated financial statementsincluded in its annual report on Form 10-K and to review the Company’sfinancial statements included in its quarterly reports on Form 10-Q and forprofessional services in connection with statutory audits or regulatoryfilings.

*Audit-Related Fees -*Audit-Related Fees includes fees for employeebenefit plan audits and accounting consultations.

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*Tax Fees -*Tax Fees includes fees for U.S. and international tax advisory, taxplanning and tax compliance services and expatriate tax services.

*All Other Fees -*All Other Fees includes fees for certain agreedupon procedures.

The Audit Committee hasadopted procedures for pre-approval of audit and permitted non-audit servicesby the Company’s independent auditor.  Inaddition to annually engaging the independent auditor to audit the Company’sconsolidated financial statements, the committee must approve all use of theindependent auditor for non-audit services before such use.  The committee may pre-approve permittedservices for a calendar year within a specified dollar limit, by individualproject or in the aggregate.  Thecommittee may also delegate such pre-approval authorization to any member ofthe committee.  The committee haspre-authorized permitted services not exceeding $25,000 between meetings, areport on which must be communicated to the committee at the next regularlyscheduled meeting.  The committeerequires reports on the status of all pre-approved services at the nextregularly scheduled committee meeting. To minimize relationships that couldappear to impair the objectivity of the independent auditor, it is thecommittee’s practice to restrict the permitted non-audit services that may beprovided to the Company by the independent auditor primarily to tax servicesand merger and acquisition due diligence and integration services.

All of the above feesbilled by KPMG in 2005 were pre-approved by the Audit Committee, and there wasno service for which the de minimus exception permitted in certaincircumstances under SEC rules was utilized.

**PART IV**

**Item 15.Exhibits and Financial Statement Schedules**

The following documents are filed as a part of thisreport:

**1.****        SITEL Corporation and Subsidiaries FinancialStatements**– beginning on page F-1 of this report.

·            Report of Independent Registered Public AccountingFirm

·            Consolidated Statements of Operations For TheYears Ended December 31, 2005, 2004, and 2003

·            Consolidated Balance Sheets at December 31, 2005and 2004

·            Consolidated Statements of Stockholders’ EquityFor The Years Ended December 31, 2005, 2004, and 2003

·            Consolidated Statements of Cash Flows For TheYears Ended December 31, 2005, 2004, and 2003

·            Notes to Consolidated Financial Statements

**2.****             ****Grupo SITEL de Mexico, S. A. de C. V. andSubsidiaries Financial Statements**

·            Report of Independent Registered Public AccountingFirm

·            Consolidated Balance Sheets at December 31, 2005and 2004

·            Consolidated Statements of Income For The YearsEnded December 31, 2005, 2004, and 2003

·            Consolidated Statements of Changes in Stockholders’Equity For The Years Ended December 31, 2005, 2004, and 2003

·            Consolidated Statements of Changes in FinancialPosition For The Years Ended December 31, 2005, 2004, and 2003

·            Notes to ConsolidatedFinancial Statements

**3.  Financial Statement Schedule**

Schedules have been omitted because of theabsence of the conditions under which they are required or because theinformation called for is shown in the consolidated financial statements or thenotes thereto.

**4.****     Exhibits**– required by Item 601 ofRegulation S-K:

All exhibits as set forth on the Exhibit Index, which is incorporatedherein by reference.

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d)of the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.
|                                                       |   | SITEL  Corporation |                         |   |
|-------------------------------------------------------|--------|--------------------|------------------------------|--------|
| ** **                                            |   | **(Registrant)**   |                         |   |
| ** **                                            |   | ** **         |                         |   |
| ** **                                            |   | ** **         |                         |   |
| Date:    September 13,  2006 | By     | /s/                | James F. Lynch               |   |   |
| ** **                                            |   | ** **         | **James F. Lynch**           |   |   |
| * *                                              |   | * *           | *Chief Executive Officer*    |   |   |
|                                                  |   |               | (Duly Authorized Officer and |   |   |
|                                                  |   |               | Principal Executive Officer) |   |   |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.
| Signature  | ** ** | **Title**  | ** **                 | **Date**   | ** **                           |
|------------|------------|------------|----------------------------|------------|--------------------------------------|
| ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                           | ** ** | ** ** | ** ** |
| By         | /s/        |       | James F. Lynch             |       | Chairman of the Board,               |   | September 13, 2006 |   |
| ** ** |       |       | **James F. Lynch**         |       | Chief Executive Officer and Director |   |   |   |
| ** ** |       |       | ** **                 |       |                                 |   |   |   |
| By         | /s/        |       | Jorge A. Celaya            |       | Executive Vice President and Chief   |   | September 13, 2006 |   |
| ** ** |       |       | **Jorge A. Celaya**        |       | Financial Officer                    |   |   |   |
|       |       |       |                       |       | (Principal Financial  Officer)       |   |   |   |
|       |       |       |                       |       |                                 |   |   |   |
| By         | /s/        |       | Scott W. Behrens           |       | Senior Vice President and Controller |   | September 13, 2006 | ** ** |
|       |       |       | **Scott  W. Behrens**      |       | (Principal Accounting Officer)       |   |   | ** ** |
|       |       |       | ** **                 |       |                                 |   |   | ** ** |
| By         | /s/        |       | Rohit M. Desai             |       | Director                             |   | September 13, 2006 |   |
| ** ** |       |       | **Rohit M. Desai**         |       |                                 |   |   |   |
| ** ** |       |       | ** **                 |       |                                 |   |   |   |
| By         | /s/        |       | Mathias J.  DeVito         |       | Director                             |   | September 13, 2006 |   |
| ** ** |       |       | **Mathias J. DeVito**      |       |                                 |   |   |   |
| ** ** |       |       | ** **                 |       |                                 |   |   |   |
| By         | /s/        |       | Cyrus F.  Freidheim Jr.    |       | Director                             |   | September 13, 2006 |   |
| ** ** |       |       | **Cyrus F. Freidheim Jr.** |       |                                 |   |   |   |
| ** ** |       |       | ** **                 |       |                                 |   |   |   |
| By         | /s/        |       | Robert H. Getz             |       | Director                             |   | September 13, 2006 |   |
| ** ** |       |       | **Robert H. Getz**         |       |                                 |   |   |   |
| ** ** |       |       | ** **                 |       |                                 |   |   |   |
| By         | /s/        |       | Nigel T. Gourlay           |       | Director                             |   | September 13, 2006 |   |
| ** ** |       |       | **Nigel T. Gourlay**       |       |                                 |   |   |   |
| ** ** |       |       | ** **                 |       |                                 |   |   |   |
| By         | /s/        |       | David J. Hanger            |       | Director                             |   | September 13, 2006 |   |
| ** ** |       |       | **David J. Hanger**        |       |                                 |   |   |   |
| ** ** |       |       | ** **                 |       |                                 |   |   |   |
| By         | /s/        |       | Stephen L. Key             |       | Director                             |   | September 13, 2006 |   |
| ** ** |       |       | **Stephen L. Key**         |       |                                 |   |   |   |
| ** ** |       |       | ** **                 |       |                                 |   |   |   |
| By         | /s/        |       | George J. Kubat            |       | Director                             |   | September 13, 2006 |   |
| ** ** |       |       | **George J. Kubat**        |       |                                 |   |   |   |

** **

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**EXHIBITINDEX**
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                   |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         |       | Amended and Restated Articles of Incorporation (see  Exhibit 3.1 to Registration Statement on Form S-1 No. 33-91092).                                                                                                        |
| 3.1(a)      |       | Articles of Amendment filed September 10, 1996 to  the Amended and Restated Articles of Incorporation (see Exhibit 4.1(a) to the  Company’s Registration Statement on Form S-3 No. 333-13403).                          |
| 3.4         |       | Amended and Restated Bylaws (see Exhibit 3.4 to  Registration Statement on Form S-1 No. 33-91092).                                                                                                                           |
| 3.4(a)      |       | Amended and Restated Bylaws – conformed copy  including Amendment No. 1 (see Exhibit 4.2 to the Company’s Registration  Statement on Form S-3 No. 333-28131).                                                      |
| 3.4(b)      |       | Amendment No. 2 to Amended and Restated Bylaws (see  Exhibit 3.2 to the Company’s Form 10-Q for the quarter ended September 30,  1998).                                                                                 |
| 3.4(c)      |       | Amendment No. 3 to Amended and Restated Bylaws (see  Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended June 30, 2001).                                                                                       |
| 3.4(d)      |       | Amended and Restated Bylaws – conformed copy  including all amendments through March 2, 2001 (see Exhibit 3.2 to the  Company’s Form 10-Q for the quarter ended June 30, 2001).                                    |
| 3.5         |       | Certificate of Designation of Series A Participating  Preferred Stock (see Exhibit A to the Rights Agreement included as Exhibit 1  to the Company’s Registration Statement on Form 8-A filed August 24, 1998).         |
| 4.2         |       | Specimen Common Stock Certificate (see Exhibit 4.2  to the Company’s Annual Report on Form 10-K for the year ended December 31,  1996).                                                                                 |
| 4.3         |       | Rights Agreement (see Exhibit 1 to the Company’s  Registration Statement on Form 8-A filed August 24, 1998).                                                                                                            |
| 9.1         |       | Form of General Voting Agreement (see Exhibit 9.1 to  Registration Statement on Form S-1 No. 33-91092).                                                                                                                      |
| 10.1#       |       | SITEL Corporation Stock Option Plan for Replacement  of Existing Options (see Exhibit 10.1 to Registration Statement on Form S-1  No. 33-91092).                                                                             |
| 10.1(a)#    |       | Amendment No. 1 to SITEL Corporation Stock Option  Plan for Replacement of Existing Options (see Exhibit 10.1(a) to the  Company’s Annual Report on Form 10-K for the year ended December 31, 1996).                    |
| 10.2#       |       | SITEL Corporation Stock Option Plan for Replacement  of EEBs (see Exhibit 10.2 to Registration Statement on Form S-1 No.  33-91092).                                                                                         |
| 10.2(a)#    |       | Amendment No. 1 to SITEL Corporation Stock Option  Plan for Replacement of EEBs (see Exhibit 10.2(a) to the Company’s Annual  Report on Form 10-K for the year ended December 31, 1996).                                |
| 10.3#       |       | Amended and Restated SITEL Corporation 1995 Employee  Stock Option Plan (see Appendix B to the Company’s definitive Proxy Statement  for Annual Meeting of Stockholders, filed September 27, 1996).                     |
| 10.3(a)#    |       | Amendment No. 1 to Amended and Restated SITEL  Corporation 1995 Employee Stock Option Plan (see Exhibit 10.3(a) to the Company’s  Annual Report on Form 10-K for the year ended December 31, 1996).                     |
| 10.3(b)#    |       | Amendment No. 2 to Amended and Restated SITEL  Corporation 1995 Employee Stock Option Plan (see Appendix C to the Company’s  definitive Proxy Statement for the Annual Meeting of Stockholders, filed  April 30, 1997). |
| 10.3(c)#    |       | Amendment No. 3 to Amended and Restated SITEL  Corporation 1995 Employee Stock Option Plan (see Exhibit 10.3(c) to the  Company’s Form 10-Q for the quarter ended March 31, 1998).                                      |
| 10.4#       |       | Amended and Restated SITEL Corporation 1995  Non-Employee Directors Stock Option Plan (see Appendix B to the Company’s  definitive Proxy Statement for the Annual Meeting of Stockholders, filed  April 30, 1997).      |
| 10.4(a)#    |       | Amendment No. 1 to Amended and Restated SITEL  Corporation 1995 Non-Employee Directors Stock Option Plan (see Exhibit 10.1  to the Company’s Form 10-Q for the quarter ended March 31, 1999).                           |
| 10.5#       |       | SITEL Corporation Executive Wealth Accumulation Plan  (see Exhibit 10.5 to Registration Statement on Form S-1 No. 33-91092).                                                                                                 |
| 10.5(a)#    |       | Second Amendment to SITEL Corporation Executive  Wealth Accumulation Plan (see Exhibit 10.5(a) to the Company’s Form 10-Q for  the quarter ended March 31, 1998).                                                       |
| 10.5(b)#    |       | Third Amendment to SITEL Corporation Executive  Wealth Accumulation Plan (see Exhibit 10.2 to the Company’s Form 10-Q for the  quarter ended June 30, 1999).                                                            |
| 10.5(c)#    |       | Freezing of SITEL Corporation Executive Wealth  Accumulation Plan effective December 31, 2004                                                                                                                                |

 

55

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| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                         |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5(d)#    |       | Termination of SITEL Corporation Executive Wealth  Accumulation Plan effective January 1, 2005                                                                                                                                                     |
| 10.6#       |       | SITEL Corporation 1999 Stock Incentive Plan (see  Exhibit 4.1 to the Company’s Registration Statement on Form S-8 No.  333-78241).                                                                                                            |
| 10.6(a)#    |       | Amendment No. 1 to SITEL Corporation 1999 Stock  Incentive Plan (see Exhibit 4.2 to the Company’s Registration Statement on  Form S-8 No. 333-78241).                                                                                         |
| 10.6(b)#    |       | Amendment No. 2 to SITEL Corporation 1999 Stock  Incentive Plan (see Exhibit 10.2 to the Company’s Form 10-Q for the quarter  ended September 30, 2000).                                                                                      |
| 10.6(c)#    |       | Amendment No. 3 to SITEL Corporation 1999 Stock  Incentive Plan (see Appendix A to the Company’s definitive Proxy Statement  for the Annual Meeting of Stockholders, filed March 31, 2003).                                                   |
| 10.7#       |       | Form of Right of First Refusal (see Exhibit 10.7 to  Registration Statement on Form S-1 No. 33-91092).                                                                                                                                             |
| 10.8#       |       | Form of Indemnification Agreement with Outside  Directors (see Exhibit 10.8 to the Company’s Form 10-Q for the quarter ended  August 31, 1995).                                                                                               |
| 10.9#       |       | Form of Indemnification Agreement with Executive  Officers (see Exhibit 10.9 to the Company’s Registration Statement on Form  S-8 No. 33-99434).                                                                                              |
| 10.10#      |       | Amended and Restated SITEL Corporation Employee  Stock Purchase Plan (see Exhibit 10.12 to the Company’s Form 10-Q for the  quarter ended March 31, 1998).                                                                                    |
| 10.11       |       | Loan and Security Agreement with Fleet Capital  Corporation individually as Agent (see Exhibit 10.11 to the Company’s Form  10-K for the year ended December 31, 2002)                                                                        |
| 10.12       |       | Indenture governing $100,000,000 9 1/4% Senior  Subordinated Notes due 2006 (see Exhibit 10.2 to the Company’s Form 8-K filed  March 16, 1998).                                                                                               |
| 10.12(a)    |       | First Supplemental Indenture (see Exhibit 4.2 to the  Company’s Amendment No. 1 to Form S-4 filed August 21, 1998).                                                                                                                           |
| 10.12(b)    |       | Registration Rights Agreement (see Exhibit 4.2 to  the Company’s Registration Statement on Form S-4 filed April 24, 1998).                                                                                                                    |
| 10.13#      |       | 2001 Nonemployee Director Compensation Plan (see  Exhibit 10.20 to the Company’s Form 10-K for the year ended December 31,  2001)                                                                                                             |
| 10.13(a)#   |       | Amendment No. 1 to SITEL Corporation 2001  Nonemployee Director Compensation Plan (see Exhibit 10.13(a) to the Company’s  Form 10-K for the year ended December 31, 2004)                                                                     |
| 10.14#      |       | Summary of compensation arrangements for  non-employee directors as of August 7, 2006 (see Exhibit 10.1 to the  Company’s Form 8-K filed on September 13, 2006)                                                                               |
| 10.15#      |       | Form of director stock option agreement (see Exhibit  10.13(c) to the Company’s Form 10-K for the year ended December 31, 2004)                                                                                                               |
| 10.16#      |       | Jorge A. Celaya Employment Offer Letter (see Exhibit  10.14 to the Company’s Form 10-K for the year ended December 31, 2003)                                                                                                                  |
| 10.17#*     |       | Jorge A. Celaya Employment Agreement                                                                                                                                                                                                               |
| 10.18#*     |       | James F. Lynch Employment Agreement                                                                                                                                                                                                                |
| 10.19#*     |       | Robert Scott Moncrieff Employment Agreement                                                                                                                                                                                                        |
| 10.20#*     |       | Letter regarding Robert Scott Moncrieff stock  options                                                                                                                                                                                             |
| 10.21#      |       | Summary of Dale W. Saville Compensation Arrangements  (see Exhibit 10.21 to the Company’s Form 10-K for the year ended December 31,  2004)                                                                                                    |
| 10.22#      |       | SITEL Corporation 2005 Management Incentive Plan  (see Exhibit 10.22 to the Company’s Form 10-K for the year ended December 31,  2004)                                                                                                        |
| 10.23#*     |       | SITEL Corporation 2006 Management Incentive Plan                                                                                                                                                                                                   |
| 10.24#      |       | Form of Stock Option Agreement for October 16, 1998  Amended and Restated Non-Qualified Stock Option grant to Robert Scott  Moncrieff for 30,000 options (see Exhibit 10.23 to the Company’s Form 10-K  for the year ended December 31, 2004) |

 

56

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| 10.25#  |   | Form of Stock Option Agreement for January 18, 1999  Non-Qualified Stock Option grant to Robert Scott Moncrieff for 5,000 options  (see Exhibit 10.22 to the Company’s Form 10-K for the year ended December 31,  2004)                                                                                                                                                                                                     |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.26#  |   | Form of Stock Option Agreement for the following  Non-Qualified Stock Option grants: Robert Scott Moncrieff on January 3, 2000  for 10,000 options; Robert Scott Moncrieff on January 11, 2001 for 10,000  options; James F. Lynch on April 3, 2001 for 100,000 options; Robert Scott  Moncrieff on January 2, 2004 for 45,000 options (see Exhibit 10.25 to the  Company’s Form 10-K for the year ended December 31, 2004) |
| 10.27#  |   | Form of Stock Option Agreement for the following  March 14, 2002 Incentive Stock Option grants: James F. Lynch for 12,166  options (see Exhibit 10.26 to the Company’s Form 10-K for the year ended  December 31, 2004)                                                                                                                                                                                                     |
| 10.28#  |   | Form of Stock Option Agreement for the following  March 14, 2002 Non-Qualified Stock Options grants: James F. Lynch for 267,834  options (see Exhibit 10.27 to the Company’s Form 10-K for the year ended  December 31, 2004)                                                                                                                                                                                               |
| 10.29#  |   | Form of Stock Option Agreement for the following  March 14, 2002 Incentive Stock Option grants: James F. Lynch for 120,000  options and Dale W. Saville for 30,000 options (see Exhibit 10.28 to the  Company’s Form 10-K for the year ended December 31, 2004)                                                                                                                                                             |
| 10.30#  |   | Form of Stock Option Agreement for October 27, 2003  Incentive Stock Option grant to Jorge A. Celaya (see Exhibit 10.29 to the  Company’s Form-10K for the year ended December 31, 2004)                                                                                                                                                                                                                                    |
| 10.31#  |   | Form of Stock Option Agreement for October 27, 2003  Non-Qualified Stock Option grant to Jorge A. Celaya (see Exhibit 10.30 to the  Company’s Form 10-K for the year ended December 31, 2004)                                                                                                                                                                                                                               |
| 10.32#* |   | Forms of Stock Option Agreements for February 1,  2006 grants of Incentive Stock Options and Non-Qualified Stock Options to  Jorge A. Celaya for 45,000 options and to Robert Scott Mancrieff for 45,000  options                                                                                                                                                                                                                |
| 14      |   | Code of Ethics for CEO and Senior Financial Officers  (see Exhibit 14 to the Company’s Form 10-K for the year ended December 31,  2003).                                                                                                                                                                                                                                                                                    |
| 21*     |   | Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 23*     |   | Independent Auditors’ Consents                                                                                                                                                                                                                                                                                                                                                                                              |
| 31.1*   |   | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                          |
| 31.2*   |   | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                          |
| 32.1*   |   | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                          |
| 32.2*   |   | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                          |

 

----

#                                         Management contract or compensatory plan orarrangement.

*                                       Filed herewith.

57

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**TABLE OF CONTENTS**

**Financial Statements**
| **SITEL Corporation and Subsidiaries Consolidated  Financial Statements**                                                              | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                                                             | ** ** | ** ** |
| Report  of Independent Registered Public Accounting Firm                                                                               |       |       |
|                                                                                                                                   |       |       |
| Consolidated  Statements of Operations For The Years Ended December 31, 2005, 2004, and  2003                                          |       |       |
|                                                                                                                                   |       |       |
| Consolidated  Balance Sheets at December 31, 2005 and 2004                                                                             |       |       |
|                                                                                                                                   |       |       |
| Consolidated  Statements of Stockholders’ Equity For The Years Ended December 31, 2005,  2004, and 2003                           |       |       |
|                                                                                                                                   |       |       |
| Consolidated  Statements of Cash Flows For The Years Ended December 31, 2005, 2004, and  2003                                          |       |       |
|                                                                                                                                   |       |       |
| Notes to  Consolidated Financial Statements                                                                                            |       |       |
|                                                                                                                                   |       |       |
| **Grupo SITEL de Mexico, S. A. de C. V. and  Subsidiaries Consolidated Financial Statements (included in accordance with  Rule 3-09)** | ** ** | ** ** |
| ** **                                                                                                                             | ** ** | ** ** |
| Report of  Independent Registered Public Accounting Firm                                                                               |       |       |
|                                                                                                                                   |       |       |
| Consolidated  Balance Sheets at December 31, 2005 and 2004                                                                             |       |       |
|                                                                                                                                   |       |       |
| Consolidated  Statements of Income For The Years Ended December 31, 2005, 2004, and 2003                                               |       |       |
|                                                                                                                                   |       |       |
| Consolidated  Statements of Changes in Stockholders’ Equity For The Years Ended  December 31, 2005, 2004, and 2003                |       |       |
|                                                                                                                                   |       |       |
| Consolidated  Statements of Changes in Financial Position For The Years Ended  December 31, 2005, 2004, and 2003                       |       |       |
|                                                                                                                                   |       |       |
| Notes to  Consolidated Financial Statements                                                                                            |       |       |

###  

F-1

----

###  

**Report ofIndependent Registered Public Accounting Firm**

*Tothe Stockholders and Board of Directors**of SITEL Corporation:*

We have audited the accompanying consolidated balance sheets of SITELCorporation and subsidiaries (the Company) as of December 31, 2005 and 2004,and the related consolidated statements of operations, stockholders’ equity andcash flows for each of the years in the three-year period endedDecember 31, 2005. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of SITEL Corporation and subsidiariesas of December 31, 2005 and 2004, and the results of their operations and theircash flows for each of the years in the three-year period ended December 31,2005, in conformity with U.S. generally accepted accounting principles.

As discussed innote 2 to the consolidated financial statements, the Company has restated itsconsolidated financial statements as of December 31, 2004, and for the yearsended December 31, 2004 and 2003.

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of the Company’s internalcontrol over financial reporting as of December 31, 2005, based on criteriaestablished in*Internal Control—IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission, and our report dated September 13, 2006, expressed anunqualified opinion on management’s assessment of, and an adverse opinion onthe effective operation of, internal control over financial reporting.
| /s/   KPMG  LLP |       |   |
|---------------------------|------------|--------|
|                      |       |
| **KPMG LLP**              | ** ** |
| ** **                | ** ** |
| ** **                | ** ** |
| Omaha, Nebraska           |       |
| September 13, 2006   |       |

 

F-2

----

**SITELCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(inthousands, except per share data)

** **
| **Years Ended December 31,**                  | ** ** | **2005**   | ** ** | **2004**               | ** ** | **2003**               | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | ** ** | ** ** | **(As restated)** | ** ** | **(As restated)** | ** ** |
| * *                                                     | * *   | * *   | * *   | * *               | * *   | * *               | * *   |
| **Revenue**                                                  |       | $          | 1,037,179  |                   | $          | 956,135                |       | $ | 846,087 |   |
| ** **                                                   | ** ** | ** ** | ** ** | ** **             | ** ** | ** **             | ** ** |
| **Operating expenses:**                                      | ** ** | ** ** | ** ** | ** **             | ** ** | ** **             | ** ** |
| Direct labor and  telecommunications expenses                |       | 629,314    |       | 574,712                |       | 497,533                |       |
| Subcontracted  and other services expenses                   |       | 51,618     |       | 50,726                 |       | 54,121                 |       |
| Operating,  selling and administrative expenses              |       | 331,148    |       | 313,567                |       | 282,211                |       |
| Asset impairment  and restructuring expenses                 |       | 6,614      |       | 9,325                  |       | 3,004                  |       |
| Goodwill  impairment                                         |       | —     |       | 7,668                  |       | —                 |       |
| Total operating  expenses                                    |       | 1,018,694  |       | 955,998                |       | 836,869                |       |
|                                                         |       |       |       |                   |       |                   |       |
| **Operating income (loss)**                                  |       | 18,485     |       | 137                    |       | 9,218                  |       |
| ** **                                                   | ** ** | ** ** | ** ** | ** **             | ** ** | ** **             | ** ** |
| **Other income (expense):**                                  | ** ** | ** ** | ** ** | ** **             | ** ** | ** **             | ** ** |
| Interest expense                                             |       | (13,565    | )          | (13,693                | )          | (12,939                | )          |
| Interest income                                              |       | 559        |       | 589                    |       | 423                    |       |
| Equity in  earnings of affiliates                            |       | 722        |       | 681                    |       | 1,417                  |       |
| Other expense,  net                                          |       | (545       | )          | (698                   | )          | (438                   | )          |
| Total other  expense, net                                    |       | (12,829    | )          | (13,121                | )          | (11,537                | )          |
|                                                         |       |       |       |                   |       |                   |       |
| **Income (loss) before income  taxes and minority interest** |       | 5,656      |       | (12,984                | )          | (2,319                 | )          |
|                                                         |       |       |       |                   |       |                   |       |
| Income tax expense                                           |       | 642        |       | 14,732                 |       | 4,789                  |       |
| Minority interest                                            |       | 2,240      |       | 724                    |       | 658                    |       |
| **Net income (loss)**                                        |       | $          | 2,774      |                   | $          | (28,440                | )          | $ | (7,766 | ) |
|                                                         |       |       |       |                   |       |                   |       |
| **Weighted average common shares  outstanding:**             | ** ** | ** ** | ** ** | ** **             | ** ** | ** **             | ** ** |
| Basic                                                        |       | 74,137     |       | 73,684                 |       | 73,877                 |       |
| Diluted                                                      |       | 74,466     |       | 73,684                 |       | 73,877                 |       |
| ** **                                                   | ** ** | ** ** | ** ** | ** **             | ** ** | ** **             | ** ** |
| **Earnings per share:**                                      | ** ** | ** ** | ** ** | ** **             | ** ** | ** **             | ** ** |
| Basic                                                        |       | $          | 0.04       |                   | $          | (0.39                  | )          | $ | (0.11 | ) |
| Diluted                                                      |       | $          | 0.04       |                   | $          | (0.39                  | )          | $ | (0.11 | ) |

 

*See Notes to Consolidated Financial Statements.*

F-3

----

**SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

(in thousands, except sharedata) 
| **At December 31,**                                                                                                                 | ** ** | **2005**   | ** ** | **2004**               | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|
| ** **                                                                                                                                    | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| **Assets**                                                                                                                                    | ** ** | ** ** | ** ** | ** **             | ** ** |
| **Current  Assets:**                                                                                                                          | ** ** | ** ** | ** ** | ** **             | ** ** |
| Cash and cash  equivalents                                                                                                                    |       | $          | 25,817     |                   | $          | 29,130 |   |
| Trade accounts  receivable (net of allowance for doubtful accounts of $1,710 and $2,391,  respectively)                                       |       | 220,581    |       | 192,204                |       |
| Prepaid expenses  and other assets                                                                                                            |       | 16,038     |       | 16,416                 |       |
| Deferred income  taxes                                                                                                                        |       | 666        |       | 1,251                  |       |
| Total current  assets                                                                                                                         |       | 263,102    |       | 239,001                |       |
|                                                                                                                                          |       |       |       |                   |       |
| **Property  and equipment, net**                                                                                                              |       | 74,411     |       | 85,934                 |       |
|                                                                                                                                          |       |       |       |                   |       |
| **Other  assets:**                                                                                                                            | ** ** | ** ** | ** ** | ** **             | ** ** |
| Goodwill                                                                                                                                      |       | 46,188     |       | 48,276                 |       |
| Investment in  affiliates                                                                                                                     |       | 17,155     |       | 16,466                 |       |
| Other assets                                                                                                                                  |       | 10,380     |       | 8,386                  |       |
| Deferred income  taxes                                                                                                                        |       | 7,209      |       | 1,360                  |       |
| **Total  assets**                                                                                                                             |       | $          | 418,445    |                   | $          | 399,423 |   |
|                                                                                                                                          |       |       |       |                   |       |
| **Liabilities and Stockholders’  Equity**                                                                                                | ** ** | ** ** | ** ** | ** **             | ** ** |
| **Current  liabilities:**                                                                                                                     | ** ** | ** ** | ** ** | ** **             | ** ** |
| Revolving credit  facility and other current debt                                                                                             |       | $          | 20,103     |                   | $          | 19,712 |   |
| Current portion  of capital lease obligations                                                                                                 |       | 2,510      |       | 3,435                  |       |
| Trade accounts  payable                                                                                                                       |       | 29,429     |       | 29,318                 |       |
| Accrued wages,  salaries and bonuses                                                                                                          |       | 53,441     |       | 50,273                 |       |
| Accrued  operating expenses                                                                                                                   |       | 57,193     |       | 48,644                 |       |
| Deferred revenue  and other                                                                                                                   |       | 8,434      |       | 8,892                  |       |
| Income taxes  payable                                                                                                                         |       | 1,475      |       | 1,107                  |       |
| Total current  liabilities                                                                                                                    |       | 172,585    |       | 161,381                |       |
|                                                                                                                                          |       |       |       |                   |       |
| **Long-term  debt and other liabilities:**                                                                                                    | ** ** | ** ** | ** ** | ** **             | ** ** |
| Long-term debt,  excluding current portion                                                                                                    |       | 107,681    |       | 91,020                 |       |
| Capital lease  obligations, excluding current portion                                                                                         |       | 6,782      |       | 8,510                  |       |
| Other  liabilities                                                                                                                            |       | 8,464      |       | 9,788                  |       |
| Deferred income  taxes                                                                                                                        |       | —     |       | 883                    |       |
| Total  liabilities                                                                                                                            |       | 295,512    |       | 271,582                |       |
|                                                                                                                                          |       |       |       |                   |       |
| **Minority  interests**                                                                                                                       |       | 4,547      |       | 2,611                  |       |
|                                                                                                                                          |       |       |       |                   |       |
| **Stockholders’  equity:**                                                                                                               | ** ** | ** ** | ** ** | ** **             | ** ** |
| Common stock,  voting, $0.001 par value 200,000,000 shares authorized, 74,757,729 and  74,433,629 shares issued and outstanding, respectively |       | 75         |       | 74                     |       |
| Additional  paid-in capital                                                                                                                   |       | 169,662    |       | 168,871                |       |
| Accumulated  other comprehensive income                                                                                                       |       | (2,823     | )          | 7,721                  |       |
| Accumulated  deficit                                                                                                                          |       | (47,645    | )          | (50,419                | )          |
| Less treasury  stock, at cost, 651,302 and 707,927 common shares, respectively                                                                |       | (883       | )          | (1,017                 | )          |
| Total stockholders’  equity                                                                                                              |       | 118,386    |       | 125,230                |       |
| **Total liabilities and  stockholders’ equity**                                                                                          |       | $          | 418,445    |                   | $          | 399,423 |   |

 

*See Notes to Consolidated Financial Statements.*

F-4

----

**SITEL CORPORATION AND SUBSIDIARIES**

### **CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

(in thousands, except sharedata)
| ** **                                                                                             | ** ** | ** ** | ** ** | ** **     | ** ** | **Accumulated**        | ** ** | ** **      | ** ** | ** **   | ** ** | ** **             | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|------------------------|------------|-----------------|------------|--------------|------------|------------------------|------------|
| ** **                                                                                             | ** ** | ** ** | ** ** | **Additional** | ** ** | **Other**              | ** ** | ** **      | ** ** | ** **   | ** ** | **Total**              | ** ** |
| ** **                                                                                             | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Comprehensive**      | ** ** | **Accumulated** | ** ** | **Treasury** | ** ** | **Stockholders’** | ** ** |
| **Years Ended December 31, 2005, 2004, and 2003**                   | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Income (Loss)** | ** ** | **Deficit**     | ** ** | **Stock**    | ** ** | **Equity**             | ** ** |
|                                                                                                   |       |       |       |           |       |                   |       |            |       |         |       |                   |       |
| **Balance,  December 31, 2002***(As  originally reported)*                                             |       | $          | 74         |           | $          | 168,706                |       | $               | (17,262    | )            | $          | (12,193                | )          | $ | (163 | ) | $ | 139,162 |   |
|                                                                                                   |       |       |       |           |       |                   |       |            |       |         |       |                   |       |
| Restatement  adjustments prior to January 1, 2003                                                      |       | —     |       | —         |       | 364                    |       | (1,981          | )          | —       |       | (1,617                 | )          |
| **Balance,  December 31, 2002***(As restated)*                                                         |       | 74         |       | 168,706        |       | (16,898                | )          | (14,174         | )          | (163         | )          | 137,545                |       |
|                                                                                                   |       |       |       |           |       |                   |       |            |       |         |       |                   |       |
| Purchase of  709,900 shares of treasury stock                                                          |       | —     |       | —         |       | —                 |       | —          |       | (1,119       | )          | (1,119                 | )          |
| Issuance of  4,704, shares of common stock for options exercised, and 71,023 shares of treasury  stock |       | —     |       | 27             |       | —                 |       | (39             | )          | 146          |       | 134                    |       |
| Other                                                                                                  |       | —     |       | (7             | )          | —                 |       | —          |       | —       |       | (7                     | )          |
| Comprehensive  income (loss):                                                                          |       |       |       |           |       |                   |       |            |       |         |       |                   |       |
| Net loss*(As restated)*                                                                                |       | —     |       | —         |       | —                 |       | (7,766          | )          | —       |       | (7,766                 | )          |
| Currency  translation adjustment *(As restated)*                                                       |       | —     |       | —         |       | 17,153                 |       | —          |       | —       |       | 17,153                 |       |
| Total  comprehensive income (loss) *(As restated)*                                                     |       | —     |       | —         |       | —                 |       | —          |       | —       |       | 9,387                  |       |
| **Balance,  December 31, 2003***(As  restated)*                                                        |       | $          | 74         |           | $          | 168,726                |       | $               | 255        |         | $          | (21,979                | )          | $ | (1,136 | ) | $ | 145,940 |   |
|                                                                                                   |       |       |       |           |       |                   |       |            |       |         |       |                   |       |
| Issuance of  65,494 shares of common stock for options exercised and 47,373 shares of treasury  stock  |       | —     |       | 144            |       | —                 |       | —          |       | 119          |       | 263                    |       |
| Other                                                                                                  |       | —     |       | 1              |       | —                 |       | —          |       | —       |       | 1                      |       |
| Comprehensive  income (loss):                                                                          |       |       |       |           |       |                   |       |            |       |         |       |                   |       |
| Net loss*(As Restated)*                                                                                |       | —     |       | —         |       | —                 |       | (28,440         | )          | —       |       | (28,440                | )          |
| Currency  translation adjustment*(As restated)*                                                        |       | —     |       | —         |       | 7,569                  |       | —          |       | —       |       | 7,569                  |       |
| Other                                                                                                  |       | —     |       | —         |       | (103                   | )          | —          |       | —       |       | (103                   | )          |
| Total  comprehensive income (loss)*(As restated)*                                                      |       | —     |       | —         |       | —                 |       | —          |       | —       |       | (20,974                | )          |
| **Balance,  December 31, 2004***(As  restated)*                                                        |       | $          | 74         |           | $          | 168,871                |       | $               | 7,721      |         | $          | (50,419                | )          | $ | (1,017 | ) | $ | 125,230 |   |
|                                                                                                   |       |       |       |           |       |                   |       |            |       |         |       |                   |       |
| Issuance of  324,100 shares of common stock for options exercised and 56,625 shares of treasury  stock |       | 1          |       | 791            |       | —                 |       | —          |       | 134          |       | 926                    |       |
| Comprehensive  income (loss):                                                                          |       |       |       |           |       |                   |       |            |       |         |       |                   |       |
| Net income                                                                                             |       | —     |       | —         |       | —                 |       | 2,774           |       | —       |       | 2,774                  |       |
| Currency  translation adjustment                                                                       |       | —     |       | —         |       | (10,490                | )          | —          |       | —       |       | (10,490                | )          |
| Other                                                                                                  |       | —     |       | —         |       | (54                    | )          | —          |       | —       |       | (54                    | )          |
| Total  comprehensive loss                                                                              |       | —     |       | —         |       | —                 |       | —          |       | —       |       | (7,770                 | )          |
| **Balance, December 31, 2005**                                                                         |       | $          | 75         |           | $          | 169,662                |       | $               | (2,823     | )            | $          | (47,645                | )          | $ | (883 | ) | $ | 118,386 |   |

 

*See Notes to Consolidated Financial Statements.*

F-5

----

**SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(in thousands)
| **Years Ended December 31,**                                              | ** ** | **2005**   | ** ** | **2004**               | ** ** | **2003**               | ** ** |
|------------------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                               | ** ** | ** ** | ** ** | **(As restated)** | ** ** | **(As restated)** | ** ** |
| **Cash  flows from operating activities:**                                               | ** ** | ** ** | ** ** | ** **             | ** ** | ** **             | ** ** |
| Net income  (loss)                                                                       |       | $          | 2,774      |                   | $          | (28,440                | )          | $ | (7,766 | ) |
| Adjustments to  reconcile net income (loss) to net cash flows from operating activities: |       |       |       |                   |       |                   |       |
| Asset impairment  and restructuring provision                                            |       | 6,614      |       | 16,993                 |       | 3,004                  |       |
| Depreciation and  amortization                                                           |       | 37,408     |       | 36,531                 |       | 36,066                 |       |
| (Gain)/loss on  disposal of assets                                                       |       | 212        |       | 286                    |       | (58                    | )          |
| Provision for  deferred income taxes                                                     |       | (6,541     | )          | 9,142                  |       | 427                    |       |
| Provision for  losses on accounts receivable                                             |       | 1,593      |       | 400                    |       | 1,488                  |       |
| Equity in  earnings of affiliates                                                        |       | (722       | )          | (681                   | )          | (1,417                 | )          |
| Minority  interest in net income of consolidated subsidiaries                            |       | 2,240      |       | 724                    |       | 658                    |       |
| Impairment  losses on equity investments                                                 |       | —     |       | —                 |       | 1,480                  |       |
| Changes in  operating assets and liabilities:                                            |       |       |       |                   |       |                   |       |
| Trade accounts  receivable                                                               |       | (43,379    | )          | (10,237                | )          | (32,166                | )          |
| Other assets                                                                             |       | 2,155      |       | 1,970                  |       | 414                    |       |
| Trade accounts  payable                                                                  |       | 1,141      |       | 5,059                  |       | (1,155                 | )          |
| Other  liabilities                                                                       |       | 13,478     |       | 7,731                  |       | 8,453                  |       |
| Net cash flows  from operating activities                                                |       | 16,973     |       | 39,478                 |       | 9,428                  |       |
|                                                                                     |       |       |       |                   |       |                   |       |
| **Cash  flows from investing activities:**                                               | ** ** | ** ** | ** ** | ** **             | ** ** | ** **             | ** ** |
| Purchases of  property and equipment                                                     |       | (29,208    | )          | (25,178                | )          | (24,945                | )          |
| Dividends  received (paid) from (to) affiliates                                          |       | (450       | )          | 1,747                  |       | 1,815                  |       |
| Proceeds from  cash surrender value of life insurance                                    |       | 3,274      |       | —                 |       | —                 |       |
| Proceeds from  sales of property and equipment                                           |       | 100        |       | 10                     |       | 211                    |       |
| Other                                                                                    |       | —     |       | (357                   | )          | (1,333                 | )          |
| Net cash flows  from investing activities                                                |       | (26,284    | )          | (23,778                | )          | (24,252                | )          |
|                                                                                     |       |       |       |                   |       |                   |       |
| **Cash  flows from financing activities:**                                               | ** ** | ** ** | ** ** | ** **             | ** ** | ** **             | ** ** |
| Borrowings on  debt                                                                      |       | 348,288    |       | 21,182                 |       | 21,276                 |       |
| Repayments of  debt                                                                      |       | (335,597   | )          | (37,230                | )          | (5,690                 | )          |
| Repayments of  capital lease obligations                                                 |       | (3,405     | )          | (3,187                 | )          | (2,471                 | )          |
| Treasury stock  reissuances (repurchases), net                                           |       | 116        |       | 85                     |       | (1,009                 | )          |
| Debt issuance  costs                                                                     |       | (5,503     | )          | —                 |       | —                 |       |
| Other                                                                                    |       | 859        |       | 146                    |       | —                 |       |
| Net cash flows  from financing activities                                                |       | 4,758      |       | (19,004                | )          | 12,106                 |       |
| Effect of  exchange rates on cash                                                        |       | 1,240      |       | 2,303                  |       | (1,288                 | )          |
| **Net  decrease in cash**                                                                |       | (3,313     | )          | (1,001                 | )          | (4,006                 | )          |
| **Cash  and cash equivalents, beginning of period**                                      |       | 29,130     |       | 30,131                 |       | 34,137                 |       |
| **Cash  and cash equivalents, end of period**                                            |       | $          | 25,817     |                   | $          | 29,130                 |       | $ | 30,131 |   |
| ** **                                                                               | ** ** | ** ** | ** ** | ** **             | ** ** | ** **             | ** ** |
| **Other  cash flows information:**                                                       | ** ** | ** ** | ** ** | ** **             | ** ** | ** **             | ** ** |
| Interest paid                                                                            |       | $          | 14,198     |                   | $          | 12,022                 |       | $ | 11,263 |   |
| Income taxes  paid                                                                       |       | $          | 7,273      |                   | $          | 3,968                  |       | $ | 5,673 |   |
|                                                                                     |       |       |       |                   |       |                   |       |
| **Non-cash  investing and financing activities:**                                        | ** ** | ** ** | ** ** | ** **             | ** ** | ** **             | ** ** |
| Capital leases incurred                                                                  |       | $          | 2,205      |                   | $          | 1,940                  |       | $ | 3,325 |   |

 

*See Notes to Consolidated Financial Statements.*

F-6

----

**SITEL CORPORATION AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

(columnar amounts in thousands,except per share amounts and as otherwise indicated)

**Note 1. Description of Our Business and SignificantAccounting Policies and Practices**

***Description of Our Business***

References in the Notes to Consolidated Financial Statements to “we”,“our”, “SITEL”, and the “Company” are to SITEL Corporation and itssubsidiaries, collectively.

We are a leading global provider of outsourced customer support services.We specialize in the design, implementation, and operation of multi-channelcontact centers. We support the customer management strategies of large andmedium size corporations in North America, Europe, Asia Pacific, and LatinAmerica. We provide customer acquisition, customer care, technical support andrisk management services on an outsourced basis, as well as operational andinformation technology professional services for both outsourced and internalcontact centers. We serve clients primarily in the automotive, consumer, financial services,insurance, technology, telecommunications and ISP, and utilities sectors.

***Principles of Consolidation***

OurConsolidated Financial Statements include the financial statements of SITELCorporation and its subsidiaries. Weuse the consolidation method when we can exercise control over the operationsand policies of a company.  We use theequity method to report investments where we can exercise significantinfluence, but cannot exercise control, over the investee’s operations andpolicies, which is generally in situations where we hold a 20% to 50% votinginterest. We use the cost method if we hold less than a 20% voting interest inan investment and cannot exercise significant influence over the investee’soperations and policies. All intercompany transactions and accounts have beeneliminated and netearnings are reduced by the portion of the net earnings of subsidiariesapplicable to minority interests.

***Capital Stock***

Our outstanding capitalstock consists of a single class of Common Stock.  Each share of Common Stock is entitled to onevote upon each matter subject to a stockholders vote and to dividends if andwhen declared by the Board of Directors. Payment of dividends is currently restricted under the covenants of ourCredit Facility (see Note 5).

***Translation of Foreign Currencies***

Ournon-U.S. subsidiaries use as their functional currency the local currency ofthe countries in which they operate. They translate their assets andliabilities into U.S. dollars at the exchange rates in effect at the balancesheet date. They translate their revenue and expenses at the average exchangerates during the period. We include translation gains and losses in accumulatedother comprehensive income (loss), a component of stockholders’ equity. Gainsand losses related to transactions denominated in a currency other than thefunctional currency of the countries in which we operate and short-termintercompany accounts are included in other income (expense) in theconsolidated statements of operations.

***Revenue Recognition***

Werecognize revenue in accordance with applicable accounting standards, includingSecurities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104,*Revenue Recognition*.  We recognize revenue at the time services areperformed based on the rate detailed in the client contract, such as hourly,monthly, per call or per employee.  Aportion of our revenue is often subject to performance standards, such as salesper hour, average handle time, occupancy rate and abandonment rate.  Ourperformance against such standards may result in incentives or penalties, whichare recognized as earned or incurred. In certain circumstances, we receivepayment in advance of providing service. Amounts billed but not earned under thesecontracts are excluded from revenue and included in deferred revenue and otherin the consolidated balance sheet. Revenue for services performed under certaincollection service agreements are recognized as the related consumer debts arecollected and are calculated based upon a percentage of cash collected or otheragreed upon contractual parameters.

***C**ash Equivalents***

Forpurposes of reporting our cash flows, we define cash equivalents as highlyliquid investments that mature in three months or less.

F-7

----

***Trade Accounts Receivable***

Tradeaccounts receivable includes unbilled revenue for services performed that weexpect to bill, generally within thirty days, and collect in the normal courseof business.

We report our trade accounts receivable net of an allowance for doubtfulaccounts, which represents management’s estimates of the amount of ourreceivables that may not be collectible, net of recoveries of amountspreviously written off. These estimates are based on a detailed aging analysisof accounts receivable, historical bad debts, client credit-worthiness, andchanges in our client payment terms.  Thefollowing table summarizes our allowance for doubtful accounts:
|                                                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                  |       |     |       |     |       |     |       |
| Balance,  beginning of year                           |       | $        | 2,391      |     | $          | 3,088    |       | $ | 4,011 |   |
| Provision for  bad debts                              |       | 1,579    |       | 400      |       | 1,488    |       |
| Deductions for  uncollectible receivables written-off |       | (1,985   | )          | (1,278   | )          | (2,427   | )          |
| Other                                                 |       | (275     | )          | 181      |       | 16       |       |
| Balance, end of year                                  |       | $        | 1,710      |     | $          | 2,391    |       | $ | 3,088 |   |

 

Other consists of foreign currency translation.

***Property and Equipment, net***

We record property and equipment at cost, and we calculate depreciationusing the straight-line method over the estimated useful lives of the assets,which generally range from 2 to 25 years.

We record equipment under capital leases at the present value of theminimum lease payments. We amortize leasehold improvements and assets undercapital leases on a straight-line basis over the shorter of the lease term orthe estimated useful life of the asset.

We review long-livedassets for impairment whenever events or changes in business circumstancesindicate that the carrying amount of the assets may not be fully recoverable.Recoverability of an asset “held-for-use” is determined by comparing thecarrying amount of the asset to the undiscounted net cash flows expected to begenerated from the use of the asset. If the carrying amount is greater than theundiscounted net cash flows expected to be generated by the asset, the asset’scarrying amount is reduced to its fair market value. An asset “held-for-sale”is reported at the lower of the carrying amount or fair market value, less costto sell.

***Investment in Affiliates***

We have mademinority interest investments for business and strategic purposes through thepurchase of voting common and preferred stock of companies. These investmentsare included in investments in affiliates in the consolidated balance sheets.We periodically evaluate whether declines in fair value, if any, of ourinvestments are other-than-temporary. This evaluation consists of a review ofqualitative and quantitative factors. We also consider other factors todetermine whether declines in fair value are other-than-temporary, such as theinvestee’s financial condition, results of operations and operating trends. Wealso consider the implied value from any recent rounds of financing completedby the investee. Based upon an evaluation of the facts and circumstances, wedetermined that an other-than-temporary impairment existed for two of ourinvestments during the year ended December 31, 2003. An impairment charge of$1.5 million was recorded in other income (expense), net in theconsolidated statement of operations for the year ended December 31, 2003, toreduce our basis in investments to fair value.

We have a 50% ownership interest in a joint venturelocated in India.  As of December 31,2005 and 2004, the investment in our India joint venture was approximately $3.4million and $4.1 million, respectively.  Subcontracted services provided by our India jointventure for the years ended December 31, 2005, 2004 and 2003 were $16.1million, $15.0 million, and $11.4 million, respectively and are included insubcontracted and other services expenses in the accompanying consolidatedstatements of operations. The Company had payables to our India joint ventureof $4.8 million and $3.0 million at December 31, 2005 and 2004, respectively,which are included in trade accounts payable in the accompanying consolidatedbalance sheets. We received $1.8 million of dividend distributions from ourIndia joint venture during the year ended December 31, 2003.

F-8

----

We also have a 49%ownership interest in a joint venture located in Mexico and a 46% interest in ajoint venture located in Colombia (collectively, Latin Americaaffiliates).  As of December 31, 2005 and2004, the investment in certain Latin America affiliates was approximately$13.7 million and $12.4 million, respectively. Of the $13.7 million investment in certain Latin America affiliates,approximately $7.7 million is equity method goodwill. This equity methodgoodwill is not amortized.  We wouldrecognize a loss when there is other than a temporary decline in value of ourequity method investments. Subcontracted services provided by our Latin Americajoint ventures for the years ended December 31, 2005, 2004, and 2003 were notmaterial.  We received $1.7 million ofdividend distributions from our Latin America affiliates during the year endedDecember 31, 2004.

Our significantequity investments include our Latin America and India joint ventures.  The following is summarized financialinformation for our joint ventures as of and for the years ended December 31:
|                                     | ** ** | **2005**               | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **(in millions)** | ** ** |
| **Statements  of Operations Data:** | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                             |       | $                      | 60.3       |       | $          | 52.7       |       | $ | 43.8 |   |
| Net income                          |       | 1.3                    |       | 1.4        |       | 2.8        |       |
| **Balance  Sheet Data:**            | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets                      |       | 21.8                   |       | 18.1       |       |       |       |
| Non-current assets                  |       | 6.1                    |       | 7.0        |       |       |       |
| Current liabilities                 |       | 8.7                    |       | 7.2        |       |       |       |
| Shareholders’  equity          |       | 19.2                   |       | 17.8       |       |       |       |
|                                     |            |                        |            |            |            |            |            |  |  |  |

 

***Deferred Income Taxes***

The Company recognizes deferred tax assets and liabilities in ourconsolidated balance sheets based on the difference between the financialstatement and tax basis of assets and liabilities using estimated tax rates ineffect for the year in which the differences are expected to reverse.  We recognize the effect of a change in taxrates on deferred tax assets and liabilities in income in the period that therate change is effective. 

We establish valuation allowances when necessary to reduce deferred taxassets to the amount that is more likely than not to be realized. Wealso accrue for any income tax contingencies in accordance with Statement ofFinancial Accounting Standards No. 5 (SFAS 5), *Accounting for Contingencies*.  We did notaccrue for income taxes for the unremitted earnings of foreign subsidiaries ofapproximately $43.4 million and $42.3 million at December 31, 2005 and 2004,respectively, that have been or are intended to be reinvested indefinitely.

***Goodwill***

We recorded goodwill for purchase businesscombinations to the extent the purchase price of each acquisition exceeded theidentifiable assets, net of liabilities, of the acquired company.   

Goodwill is testedat least on an annual basis for impairment of value. Impairment occurs when thefair value of the asset is less than its carrying amount. If impaired, theasset’s carrying amount is reduced to its fair market value. The company’sannual impairment testing is performed during the fourth quarter.  See Note 12 for discussion of the impairmentrecorded for the year ended December 31, 2004. No impairment charges resulted from the annual impairment tests for theyears ended December 31, 2005 and 2003.

***AssetRetirement Obligations***

We have contractual obligations with respect to the retirement ofcertain leasehold improvements at maturity of facility leases and therestoration of facilities back to their original state at the end of the leaseterm. Accruals are made based on management’s estimates of current marketrestoration costs, inflation rates and discount rates. At the inception of alease, the present value of the expected cash payment is recognized as an assetretirement obligation with a corresponding amount recognized in propertyassets. The property asset amount is amortized, and the liability is accreted, overthe period from lease inception to the time we expect to vacate the premisesresulting in both depreciation and interest charges in the consolidatedstatement of operations. Discount rates used are based on credit-adjustedrisk-free interest rates. Based on our current lease commitments, obligationsare required to be settled commencing during the year ended December 31, 2006and ending during the year ended December 31, 2024.

F-9

----

Revisions to these obligations may be required if our estimates ofrestoration costs change.  At December31, 2005 and 2004, we had obligations of $1.9 million and $2.0 million,respectively, recorded in other liabilities in the accompanying consolidatedbalance sheets.

***GovernmentGrants***

In certain stateand foreign jurisdictions, we benefit from incentives offered by localgovernments for creation of jobs.  Thesegrants are intended to promote employment in certain locations and areconditioned on the recipient maintaining certain prescribed employment levels.The terms of such government grants generally require that such jobs bemaintained for a period of up to five years from the receipt of the grant.

Government grantsare recognized when there is reasonable assurance that we will comply with theconditions attaching to it, and that the grant will be received. Governmentgrants relating to categories of operating expenditures are recorded as areduction of the related expense in the period in which the expenditure towhich they relate is recorded. Government grants received relating to capitalexpenditures are recorded as a reduction of the cost of the related propertyand equipment.

If we were no longer able to maintain the required level of employmentin the future, we could be required to return some grant funds that were previouslyrecorded. The effect of the return of these funds would be to reduce our incomein future years.  See Note 12 fordiscussion of the grant reimbursement recorded as a liability during the yearended December 31, 2005.  

***Income (Loss) Per Common Share***

We calculate income (loss) per common share by dividingour reported net income (loss) by the weighted average number of common sharesand common equivalent shares outstanding during each period. Our reported netincome (loss) is used in the computation of both basic and diluted income(loss) per share.

The difference between the number of shares used tocalculate basic and diluted earnings per share represents the number of sharesassumed to be issued from the exercise of dilutive stock options under our stockoption plans, less shares assumed to be purchased with proceeds from theexercise of the stock options and the related tax benefits. At December31, 2005, 3.0 million options were excluded from the diluted net income pershare computation because their exercise price exceeds the fair marketvalue.  At December 31, 2004 and 2003,all 6.8 million and 7.8 million options, respectively, were excluded from thediluted net income (loss) per share computation due to the net loss for thoseyears. 

***Use of Accounting Estimates***

The preparation ofthe consolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amount of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenue andexpenses during the reporting period. Actual results could differ from those estimates.

***Stock-Based Compensation***

We apply the intrinsic-value-based method ofaccounting prescribed by Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (APB No. 25)*,* and related interpretations to account for ourfixed-plan stock options. Under this method, compensation expense is recordedon the date of grant only if the current market price of the underlying stockexceeded the exercise price. Statement of Financial AccountingStandard No. 123, *Accounting for Stock-BasedCompensation* (SFAS No. 123)*,* established accounting anddisclosure requirements using a fair-value-based method of accounting for stock-basedemployee compensation plans. 

F-10

----

The followingtable illustrates the effect on our net income (loss) if the fair-value-basedmethod had been applied to all outstanding and unvested awards for the yearsended December 31:
|                                                                                                                          | ** ** | **2005**   | ** ** | **2004**               | ** ** | **2003**               | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                               | ** ** | ** ** | ** ** | **(As restated)** | ** ** | **(As restated)** | ** ** |
| Net income  (loss):                                                                                                      |       |       |       |                   |       |                   |       |
| As reported                                                                                                              |       | $          | 2,774      |                   | $          | (28,440                | )          | $ | (7,766 | ) |
| Less: total stock based employee compensation  expense determined under the fair value method for all awards, net of tax |       | (526       | )          | (984                   | )          | (1,224                 | )          |
| Pro forma net income (loss)                                                                                              |       | $          | 2,248      |                   | $          | (29,424                | )          | $ | (8,990 | ) |
|                                                                                                                     |       |       |       |                   |       |                   |       |
| Income (loss)  per common share:                                                                                         |       |       |       |                   |       |                   |       |
| As reported:                                                                                                             |       |       |       |                   |       |                   |       |
| Basic                                                                                                                    |       | $          | 0.04       |                   | $          | (0.39                  | )          | $ | (0.11 | ) |
| Diluted                                                                                                                  |       | 0.04       |       | (0.39                  | )          | (0.11                  | )          |
| Pro forma:                                                                                                               |       |       |       |                   |       |                   |       |
| Basic                                                                                                                    |       | $          | 0.03       |                   | $          | (0.40                  | )          | $ | (0.12 | ) |
| Diluted                                                                                                                  |       | 0.03       |       | (0.40                  | )          | (0.12                  | )          |

 

The fair value ofoptions was estimated at the date of the grant using the Black-Scholesoption-pricing model with the following weighted average assumptions:  
|                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Volatility  factor       |       | 50.3     | %          | 50.3     | %          | 59.6     | %          |
| Risk-free  interest rate |       | 4.02     | %          | 3.60     | %          | 2.99     | %          |
| Dividend yield           |       | 0        | %          | 0        | %          | 0        | %          |
| Expected life (in years) |       | 5        |       | 5        |       | 5        |       |

 

The weightedaverage fair value of options granted in the years ended December 31, 2005,2004 and 2003 were $0.96, $1.52 and $0.78, respectively.

***Fair Value of Financial Instruments***

Weconsider the amounts presented for financial instruments in the consolidatedbalance sheets, except for the Senior Subordinated Notes (the Notes) balance atDecember 31, 2004, to be reasonable estimates of fair value based on maturitydates or other characteristics. The estimated fair value of the Notes wasapproximately $90.7 million at December 31, 2004. The Company determinedthe estimated fair value of the Notes using available market information.  The Notes were redeemed in September of 2005as discussed in Note 5.  

***Comprehensive Income (Loss)***

Comprehensive income (loss) is presented in our consolidated statementsof stockholders’ equity. The difference between our reported net income (loss)and comprehensive income (loss) for each period presented is primarily thechange in the foreign currency translation adjustment. Accumulated othercomprehensive income (loss) included in our consolidated balance sheets atDecember 31, 2005 and 2004 primarily represents the accumulated foreigncurrency translation adjustment. We deem our unremitted earnings fromforeign subsidiaries to be permanent in nature and do not provide for taxes oncurrency translation adjustments arising from converting the investment in aforeign currency to U.S. dollars.

# ***Recently IssuedAccounting Standards***

In December 2004,the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (R), *Share-Based Payment*, (SFAS 123R). Thisstandard will require the cost of employee compensation paid with equityinstruments to be measured based on grant-date fair values with the costrecorded as compensation expense over the period during which the employee isrequired to perform service in exchange for the award (generally over thevesting period of the award). The proforma disclosures previously permittedunder SFAS 123 no longer will be an alternative to financial statementrecognition. See “Stock-Based Compensation” in Note 1 to the consolidatedfinancial statements for the pro forma net income (loss) and net income (loss)per share amounts, for the years ended December 31, 2005, 2004 and 2003, as ifwe had used a fair-value-based method similar to the methods required underSFAS 123R to measure compensation expense for employee stock incentiveawards.  In March 2005, the Securitiesand Exchange

F-11

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Commission (SEC)issued Staff Accounting Bulletin (SAB) No. 107, which expressed theviews of the SEC regarding the interaction between SFAS 123R and certainSEC rules and regulations. SAB No. 107 provides guidance related tothe valuation of share-based payment arrangements for public companies,including assumptions such as expected volatility and expected term.  In April 2005, the SEC approved a rulethat delayed the effective date of SFAS 123R for public companies. As aresult, SFAS 123R will be effective for the Company in the first quarterof 2006 and will apply to all of our outstanding unvested share-based paymentawards as of January 1, 2006 and all prospective awards.

In May 2005, theFASB issued SFAS Statement No. 154, *AccountingChanges and Error Corrections,* (SFAS 154).  SFAS 154 is a replacement of AccountingPrinciples Board Opinion No. 20 (APB 20) and FASB Statement No. 3.  SFAS 154 provides guidance on the accountingfor and reporting of accounting changes and error corrections.  It establishes retrospective application, orthe latest practicable date, as the required method for reporting a change inaccounting principle and the reporting of a correction of an error.  SFAS 154 is effective for accounting changesand corrections of error made in fiscal years beginning after December 15, 2005and we will adopt this standard on January 1, 2006.  We do not expect that the adoption of SFAS154 will have a material impact on our consolidated results of operations,financial condition and cash flows.

In July 2006, theFASB issued FASB Interpretation (FIN) No. 48, *Accountingfor Uncertainty in Income Taxes,* (FIN 48). FIN 48 applies to all taxpositions accounted for under SFAS No. 109, *Accounting for IncomeTaxes,* and defines the confidence level that a tax position mustmeet in order to be recognized in the financial statements. The interpretationrequires that the tax effects of a position be recognized only if it is “more-likely-than-not”to be sustained by the taxing authority as of the reporting date. If a taxposition is not considered “more-likely-than-not” to be sustained then nobenefits of the position are to be recognized. FIN 48 requires additionalannual disclosures and is effective as of the beginning of the first fiscalyear beginning after December 15, 2006. We are currently evaluating the effectthat the adoption of FIN 48 will have on our consolidated results of operationsand financial condition.

**Note 2. Restatement**

As a result of accounting irregularities identified at ourBrazilian subsidiary, we have restatedour previously filed consolidated financial statements as of December 31, 2004and for the fiscal years ended December 31, 2004 and 2003. We havedetermined that the subsidiary’s former controller, in violation of Companypolicies, engaged in improper accounting practices and the avoidance of localtax obligations and caused misleading records to be created to prevent theCompany’s senior management from detecting this misconduct. 

Additionally, aspart of the restatement process, we also recorded other adjustments that werepreviously deemed immaterial.

As a result of therestatement, we have determined that it is more likely than not that we willnot realize the full tax benefit of our net operating losses in Brazil.Consequently, the restatement amounts are presented on a pre-tax basis as we donot expect to realize any significant tax benefit from the additional expenses.

F-12

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Summary ofrestatement items for the years ended December 31: 
|                                                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
| Net loss as  originally reported                       |       | $        | (26,567    | )        | $          | (4,812 | ) |
|                                                   |       |     |       |     |       |
| Tax obligations,  including interest and penalties (A) |       | (1,123   | )          | (827     | )          |
| Deferred expense  recognition (B)                      |       | (565     | )          | (637     | )          |
| Errors in  revenue recording (C)                       |       | (144     | )          | (267     | )          |
| Intentional  falsification of records (D)              |       | (310     | )          | (497     | )          |
| Other (E)                                              |       | 269      |       | (726     | )          |
| Total impact of  restatement adjustments               |       | (1,873   | )          | (2,954   | )          |
|                                                   |       |     |       |     |       |
| Net loss as restated                                   |       | $        | (28,440    | )        | $          | (7,766 | ) |

 

----

Errors inpreviously issued financial statements were identified in the following areas:

(A) Taxobligations, including interest and penalties

During the years2001 through 2005, certain Brazilian Municipal and Federal taxes totalingapproximately $8.3 million were collected and accrued but not paid. As aresult, we incurred accumulated interest of approximately $2.6 million, plusapproximately $1.4 million in penalties as of December 31, 2005. Ourrestated consolidated statements of operations reflect the recognition ofinterest and penalties in the prior period incurred based on laws andregulations in effect at the time.

On April 7, 2006, newlegislation was enacted in Brazil that will result in a reduction in the amountof penalties and interest we were required to pay for unpaid municipal taxes.We will record a gain of $1.8 million in 2006 resulting from a reduction in thetax obligation recorded as of December 31, 2005 for a portion of the cumulativeinterest and penalties on unpaid municipal taxes for the four years endedDecember 31, 2004. 

(B) Deferredexpense recognition

The subsidiaryimproperly deferred expense recognition of certain payments. These paymentsshould have been recorded as expense when incurred rather than deferred.

(C) Errors inrevenue recording

The subsidiaryimproperly recorded revenue related to certain customer invoices including:recording higher revenue than the invoice amount, recording revenue andsubsequently canceling the invoice and recording revenue for invoices that havenot been located nor was cash received.

(D) Intentionalfalsification of financial results

The subsidiary’sformer controller intentionally falsified financial reporting records providedto Corporate management.  The actualresults reported to Corporate management was manipulated to present differentreported earnings than actually recorded in the subsidiary’s local financialrecords.

(E) Other

Representsadjustments recorded to correct other miscellaneous items identified in therestatement and other adjustments that were previously deemed immaterial, noneof which are individually significant.  

In addition, thesubsidiary’s former controller intentionally misclassified amounts in thebalance sheet. The misclassifications impacted substantially all of the lineitems in the consolidated balance sheets.

The functionalcurrency of our Brazilian subsidiary is the Brazilian Real. The restatementadjustments presented in our prior period financial statements were recordedusing the foreign currency exchange rates in effect in the applicable

F-13

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period. The assetsand liabilities are subsequently adjusted for fluctuations in foreign currencyexchange rates from the date of the original transaction to the balance sheetdate. Translation gains and losses resulting from the revaluation of the assetsand liabilities of the foreign subsidiary to US dollars is included in othercomprehensive income, a component of stockholders’ equity. The cumulativeeffect of foreign currency exchange rate fluctuations from the restatementadjustments was a decrease in stockholders’ equity of $0.6 million as ofDecember 31, 2004.

The followingitems in the Consolidated Statements of Operations, Consolidated Balance Sheetsand Consolidated Statements of Cash Flows have been restated as follows basedon the items noted above.

F-14

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| ** **                                               | ** ** | **Year Ended December 31, 2004** | ** ** | **Year Ended December 31, 2003** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                               | ** ** | **As previously**                               | ** ** | **As**                                               | ** ** | **As previously** | ** ** | **As** | ** ** |
| ** **                                               | ** ** | **reported**                                         | ** ** | **restated**                                         | ** ** | **reported** | ** ** | **restated** | ** ** |
| *Consolidated  Statements of Operations:*                | * *   | * *                                             | * *   | * *                                             | * *   | * * | * * | * * | * * |
| Revenue                                                  |       | $                                                    | 956,443    |                                                 | $          | 956,135 |   | $ | 846,513 |   | $ | 846,087 |   |
| Direct labor and  telecommunications expense             |       | 574,910                                              |       | 574,712                                              |       | 497,275 |   | 497,533 |   |
| Subcontracted  and other services expenses               |       | 50,726                                               |       | 50,726                                               |       | 54,121 |   | 54,121 |   |
| Operating,  selling and administrative expenses          |       | 312,851                                              |       | 313,567                                              |       | 280,859 |   | 282,211 |   |
| Total operating  expenses                                |       | 955,480                                              |       | 955,998                                              |       | 835,259 |   | 836,869 |   |
| Operating income  (loss)                                 |       | 963                                                  |       | 137                                                  |       | 11,254 |   | 9,218 |   |
| Interest expense                                         |       | (12,735                                              | )          | (13,693                                              | )          | (12,253 | ) | (12,939 | ) |
| Interest income                                          |       | 591                                                  |       | 589                                                  |       | 427 |   | 423 |   |
| Other income  (expense), net                             |       | (654                                                 | )          | (698                                                 | )          | (193 | ) | (438 | ) |
| Total other  expense, net                                |       | (12,117                                              | )          | (13,121                                              | )          | (10,602 | ) | (11,537 | ) |
| Income (loss)  before income taxes and minority interest |       | (11,154                                              | )          | (12,984                                              | )          | 652 |   | (2,319 | ) |
| Income tax  expense (benefit)                            |       | 14,679                                               |       | 14,732                                               |       | 4,798 |   | 4,789 |   |
| Minority  interest                                       |       | 734                                                  |       | 724                                                  |       | 666 |   | 658 |   |
| Net income  (loss)                                       |       | $                                                    | (26,567    | )                                                    | $          | (28,440 | ) | $ | (4,812 | ) | $ | (7,766 | ) |
| Income (loss)  per share:                                |       |                                                 |       |                                                 |       |   |   |   |   |
| Basic and  Diluted                                       |       | $                                                    | (0.36      | )                                                    | $          | (0.39 | ) | $ | (0.07 | ) | $ | (0.11 | ) |

 
|                                                       | ** ** | **As of December 31, 2004** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                            | ** ** | **As previously**                          | ** ** | **As** | ** ** |
| ** **                                            | ** ** | **reported**                                    | ** ** | **restated** | ** ** |
| *Consolidated  Balance Sheets:*                       | * *   | * *                                        | * *   | * * | * * |
| Cash and cash  equivalents                            |       | $                                               | 28,906     |   | $ | 29,130 |   |
| Trade accounts receivable                             |       | 191,391                                         |       | 192,204 |   |
| Prepaid expenses  and other assets                    |       | 15,859                                          |       | 16,416 |   |
| Deferred income  taxes                                |       | 1,313                                           |       | 1,251 |   |
| Total current  assets                                 |       | 237,469                                         |       | 239,001 |   |
| Property and  equipment, net                          |       | 86,057                                          |       | 85,934 |   |
| Other assets                                          |       | 8,420                                           |       | 8,386 |   |
| Deferred income  taxes                                |       | 843                                             |       | 1,360 |   |
| Total assets                                          |       | 397,531                                         |       | 399,423 |   |
| Revolving credit  facility and other current debt     |       | 18,802                                          |       | 19,712 |   |
| Current portion  of capital lease obligations         |       | 3,202                                           |       | 3,435 |   |
| Trade accounts  payable                               |       | 32,595                                          |       | 29,318 |   |
| Accrued wages,  salaries and bonuses                  |       | 43,641                                          |       | 50,273 |   |
| Accrued  operating expenses                           |       | 46,533                                          |       | 48,644 |   |
| Deferred revenue  and other                           |       | 8,816                                           |       | 8,892 |   |
| Total current  liabilities                            |       | 154,696                                         |       | 161,381 |   |
| Long-term debt,  excluding current portion            |       | 90,000                                          |       | 91,020 |   |
| Capital lease  obligations, excluding current portion |       | 8,393                                           |       | 8,510 |   |
| Other  liabilities                                    |       | 8,949                                           |       | 9,788 |   |
| Deferred income  taxes                                |       | 205                                             |       | 883 |   |
| Total  liabilities                                    |       | 262,243                                         |       | 271,582 |   |
| Minority  interest                                    |       | 2,629                                           |       | 2,611 |   |
| Accumulated  other comprehensive income (loss)        |       | 8,342                                           |       | 7,721 |   |
| Accumulated  deficit                                  |       | (43,611                                         | )          | (50,419 | ) |
| Total  stockholders’ equity                      |       | 132,659                                         |       | 125,230 |   |
| Total liabilities and  stockholders’ equity      |       | 397,531                                         |       | 399,423 |   |
|                                                       |            |                                                 |            |  |  |  |  |

 

F-15

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| ** **                                | ** ** | **Year Ended December 31, 2004** | ** ** | **Year Ended December 31, 2003** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **As previously**                               | ** ** | **As**                                               | ** ** | **As previously** | ** ** | **As** | ** ** |
| ** **                                | ** ** | **reported**                                         | ** ** | **restated**                                         | ** ** | **reported** | ** ** | **restated** | ** ** |
| *Consolidated  Statements of Cash Flows:* | * *   | * *                                             | * *   | * *                                             | * *   | * * | * * | * * | * * |
| Operating  activities                     |       | $                                                    | 39,484     |                                                 | $          | 39,478 |   | $ | 9,106 |   | $ | 9,428 |   |
| Investing  activities                     |       | (23,603                                              | )          | (23,778                                              | )          | (24,115 | ) | (24,252 | ) |
| Financing activities                      |       | (18,591                                              | )          | (19,004                                              | )          | 11,949 |   | 12,106 |   |
|                                           |            |                                                      |            |                                                      |            |  |  |  |  |  |  |  |  |

 

**Note 3. Property and Equipment**

Property and equipment consists of the following at December 31:
|                                  | ** ** | **2005**   | ** ** | **2004**               | ** ** |
|----------------------------------|------------|------------|------------|------------------------|------------|
| ** **                       | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
|                             |       |       |       |                   |       |
| Computer  equipment and software |       | $          | 100,721    |                   | $          | 119,649 |   |
| Furniture,  equipment and other  |       | 75,139     |       | 71,584                 |       |
| Leasehold  improvements          |       | 49,198     |       | 47,146                 |       |
| Buildings                        |       | 14,067     |       | 15,530                 |       |
| Other                            |       | 1,874      |       | 2,955                  |       |
|                             |       | 240,999    |       | 256,864                |       |
| Accumulated  depreciation        |       | (166,588   | )          | (170,930               | )          |
| Property and equipment,  net     |       | $          | 74,411     |                   | $          | 85,934 |   |

 

**Included in the property and equipment balance isthe following property and equipment obtained through capitalized leases as ofDecember 31:**
|                                  | ** ** | **2005**   | ** ** | **2004**               | ** ** |
|----------------------------------|------------|------------|------------|------------------------|------------|
| ** **                       | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
|                             |       |       |       |                   |       |
| Computer  equipment and software |       | $          | 8,901      |                   | $          | 5,054 |   |
| Furniture,  equipment and other  |       | 1,070      |       | 8,266                  |       |
| Buildings                        |       | 9,040      |       | 10,335                 |       |
| Other                            |       | —     |       | 391                    |       |
|                             |       | 19,011     |       | 24,046                 |       |
| Accumulated  depreciation        |       | (11,050    | )          | (13,072                | )          |
|                             |       | $          | 7,961      |                   | $          | 10,974 |   |

 

**Note 4. Goodwill**

The following represents a summary of changes in ourgoodwill for the years ended December 31:
|                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------|------------|----------|------------|----------|------------|----------|------------|
|               |       |     |       |     |       |     |       |
| Beginning of  Year |       | $        | 48,276     |     | $          | 53,553   |       | $ | 49,724 |   |
| Additions          |       | —   |       | 732      |       | —   |       |
| Impairment charge  |       | —   |       | (7,668   | )          | —   |       |
| Other              |       | (2,088   | )          | 1,659    |       | 3,829    |       |
| End of Year        |       | $        | 46,188     |     | $          | 48,276   |       | $ | 53,553 |   |

 

During the secondquarter of 2004, we acquired certain net assets of an existing call centeroperation in Morocco. As a result of this acquisition, we recorded goodwill ofapproximately $0.7 million. The impact of the acquisition was not material toour consolidated results of operations.

F-16

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See Note 12 fordiscussion of the impairment recorded for the year ended December 31, 2004.

Other consists offoreign currency translation.

**Note 5. Long-Term Debt**

***Credit Facility***

On August 19, 2005, theCompany entered into a five year $145 million credit facility (the CreditFacility) with certain lenders. The Credit Facility is comprised of two creditagreements (the Credit Agreements). A Credit Agreement with Wells FargoFoothill, Inc., entered into by US and foreign borrowers, consists of a seniorrevolving credit facility (Revolver) of $90 million and an amortizing term loan(Term Loan A) of $20 million, secured by a first lien on the Company’s assetsin the United States and a first lien on the Company’s accounts receivable andrelated assets and deposit accounts in Canada, the United Kingdom, Ireland andGermany.  A second Credit Agreement withAbleco Finance LLC, entered into by US borrowers, provides for abullet-repayment term loan (Term Loan B) of $35 million secured by a secondlien on the Company’s assets in the United States.  Certain other non-U.S. subsidiaries haveguaranteed the obligations of the foreign borrowers.  

Borrowings under eachCredit Agreement bear interest, at the Company’s option, at either the PrimeRate plus the Applicable Margins or the LIBOR Rate plus the Applicable Margins(each term as defined in the Credit Agreements). The Term Loan A requiresmonthly principal payments of $0.3 million each, with the balance payable atmaturity.  On December 31, 2005, the weightedaverage interest rates applicable to the Revolver and Term Loan A were each6.90% and the interest rate applicable to the Term Loan B was 10.68%.

The Credit Agreementsrequire prepayment from excess cash flow and proceeds of certain asset sales,debt issuances, and extraordinary receipts. The Company may prepay the termloans without prepayment premium under certain circumstances.  If the Credit Facility is terminated duringthe first four years, the applicable prepayment premium is 4% in year one onthe maximum Revolver and any remaining principal of Term Loan A, declining byone percent each year thereafter, and 2% on any remaining principal of TermLoan B, declining by one-half percent each year thereafter. 

The CreditAgreements contain covenants that among other things limit the ability of theCompany and certain other subsidiaries to incur indebtedness; incur liens;liquidate, merge or consolidate with others; sell assets; change the nature ofits business; prepay or amend the terms of other indebtedness; have a change incontrol; pay dividends or make certain other restricted payments; makeinvestments; enter into certain transactions with affiliates; or permit liensor indebtedness above certain limits in other subsidiaries.  The Company must also comply with certainfinancial covenants.

The CreditAgreements contain events of default including failure to make requiredpayments; failure to comply with covenants or other agreements in the CreditAgreements; failure to pay, or the right of acceleration of, certain otherindebtedness; certain events of bankruptcy, insolvency, and injunction;material breach of representations and warranties; and certain judgments.  Upon the occurrence and continuance of anevent of default, amounts due under the Credit Agreements may be accelerated.

On August 19,2005, we used proceeds of the Revolver under the Credit Facility to repayamounts outstanding under our existing revolving credit facility with FleetCapital Corporation that was to expire on December 27, 2005.  

On September 21,2005, we used the proceeds of Term Loan A, Term Loan B, and an additionaldrawing under the Revolver to redeem the outstanding 9.25% Senior SubordinatedNotes (the Notes) that were due March 2006. 

At December 31,2005, we had $110.6 million outstanding under the Credit Agreements, of which$3.6 million is included in revolving credit facility and other current debt inthe accompanying consolidated balance sheet. The remainder is included in long-term debt in the accompanying consolidatedbalance sheet.  

F-17

----

Annual repaymentsof the Credit Facility for the years ending December 31, are as follows (inthousands):
|        | ** ** | **Amount** | ** ** |
|--------|------------|------------|------------|
|   |       |       |       |
| 2006   |       | 3,600      |       |
| 2007   |       | 3,600      |       |
| 2008   |       | 3,600      |       |
| 2009   |       | 3,600      |       |
| 2010   |       | 96,160     |       |
| Total  |       | $          | 110,560    |   |
|        |            |            |            |  |

 

As a result of therepayment of the Fleet revolving credit facility and redemption of the Notes,the Company recorded a non-cash pre-tax charge of approximately $0.4 millionduring the year ended December 31, 2005 to write-off previously capitalized debtissuance costs, which is included in interest expense in the accompanyingconsolidated statements of operations.

Primarily as a result of matters arising out of and related to ourinvestigation of irregularities at our Brazilian subsidiary, we were not incompliance with certain covenants of our credit agreements with WellsFargo Foothill, Inc. and Ableco Finance LLC as Agents as of September 30, 2005 and December 31, 2005.  We subsequently obtained waivers of thenon-compliance.

The waiversaddressed defaults, including among other things, (1) the making ofintercompany loans to our Brazilian subsidiary to pay certain taxes, (2) thedelayed submission of our audited financial statements for the year endedDecember 31, 2005 and certain quarterly and monthly unaudited financialstatements, compliance certificates, borrowing base certificates andprojections; (3) our exceeding the maximum leverage ratio of 2.75 to 1.0 forthe four fiscal quarters ended September 30, 2005 based on the restatement ofprior financial statements; and (4) inaccuracies in prior financial statementsand related compliance certificates due to the restatement of such financialstatements.  The waivers also enable usto avoid default related to any delinquent payment of certain U.S. income taxesthat would result if we do not receive the expected favorable IRS rulingsconcerning technical errors in the filings of the Company’s US federal taxreturns for fiscal years 2001-2003.

We also securedthe lenders’ consent to certain items, including, among other things, (1)additional intercompany loans totalling up to $750,000 to the Braziliansubsidiary for working capital; (2) a UK subsidiary using proceeds of anadvance under the WFF Credit Agreement to repay $3.95 million of intercompanydebt to the Company; (3) the Brazilian subsidiary incurring additional securedindebtedness of up to 2 million Brazilian Reais; and (4) excluding theBrazilian subsidiary’s intercompany loans and previously incurred securedindebtedness from the Investment, Indebtedness and Lien basket limitations.

We obtainedamendments to the credit agreements to, among other things, (1) increase theMinimum EBITDA requirement to $55 million (from $45 million) for the twelvemonth period ending September 30, 2006 and thereafter; and (2) postpone by onequarter the tightening of the Leverage Ratio (debt divided by EBITDA, asdefined), now requiring the ratio not to exceed 2.50 to 1 for the four fiscalquarters ending June 30, 2006, 2.25 to 1 for the four fiscal quarters endingSeptember 30, 2006, and 2.00 to 1 for the four fiscal quarters endingthereafter.

***Other Long-term Debt (As restated)***

Also included inlong-term debt is the outstanding principal balance for two installment loanswith a Brazilian federal tax agency. The amounts outstanding as of December 31,2005 and 2004 were $1.4 million and $1.7 million, respectively. The currentportion of the installment loans as of December 31, 2005 and 2004 were $0.7million and $0.7 million, respectively, and is included in revolving creditfacility and other current debt in the accompanying consolidated balance sheet.

***9.25% Senior Subordinated Notes***

In March 1998, wecompleted the private placement of $100 million of 9.25% Senior SubordinatedNotes due March 2006 (the Notes). The proceeds from the offering were used torepay other debt outstanding at that time.

F-18

----

The Notes, whichincluded interest payable semiannually, were our general unsecured obligationsand were subordinated in right of payment to all our existing and future seniordebt. The Notes were guaranteed by substantially all of our wholly owned domesticsubsidiaries and contained covenants that limited our ability and the abilityof these subsidiaries to, among other things: incuradditional indebtedness, paydividends or make certain other restricted payments, consummate certain asset sales, enter into certaintransactions with affiliates, incur liens, merge or consolidate with anothercompany, and sell or otherwise disposeof all or substantially all of our assets.

The Notes wereredeemable at a redemption price of 101.542% plus accrued and unpaid interest,if any, to the date of redemption through March 15, 2005. After March 15, 2005,the Notes were redeemable at a redemption price of 100%, plus accrued interestthrough the date of repurchase.

In December 2004,we redeemed $10 million of our 9.25% Senior Subordinated Notes. The Notes wereredeemed at the mandatory redemption price of 101.542% plus accrued and unpaidinterest through the date of redemption. As a result of the redemption, werecorded a charge of $0.2 million for the call premium and write-off of previously capitalized debt issuance costswhich is included in interest expense in the consolidated statements ofoperations. On July 27, 2005, weacquired $6.2 million of the Notes through open market purchases. The remainingbalance was redeemed on September 21, 2005 using proceeds from the CreditFacility, as discussed above.

As of December 31,2004, the Company had $90 million of the Notes outstanding, which was includedin long-term debt in the consolidated balance sheet.

***Revolving Credit Facility***

Effective December27, 2002, we closed a three-year $50 million revolving credit facility. Thecredit facility was secured by accounts receivable in the United States, Canadaand the United Kingdom. We utilized the facility, as needed, for ongoing workingcapital requirements and general corporate purposes.

At December 31,2004, we had $40.8 million of available borrowings under the credit facility.The weighted-average interest rate for this facility was 7.0% at December 31,2004.

***Other CurrentDebt***

Certain of ourforeign subsidiaries entered into agreements with various financialinstitutions, under which we collateralized certain receivables for borrowings.The agreements provide for borrowings of up to $11.2 million, depending uponthe level of eligible receivables. As of December 31, 2005 and 2004, $6.1million and $5.3 million, respectively was outstanding and included in revolverand other current debt in the consolidated balance sheets. The weighted averageinterest rate as of December 31, 2005 and 2004 was approximately 3.6% and 3.3%,respectively.

The remainder ofother current debt consists primarily of overdraft coverage and revolvingcredit lines by certain of our foreign subsidiaries that are payable in thesubsidiaries’ local currency. These lines primarily support short-termborrowing needs of our foreign subsidiaries. Interest rates and other terms ofborrowing under these lines of credit vary from country to country, dependingon local market conditions. The Company’s foreign subsidiaries haveapproximately $4.2 million and $6.9 million of available unused overdraftcoverage and revolving credit lines to provide additional liquidity as ofDecember 31, 2005 and 2004, respectively.

**Note 6.Income Taxes**

***Components of Pretax Income (Loss)***

For financialreporting purposes, income (loss) before income taxes and minority interestincludes the following components for the years ended December 31:
|               | ** ** | **2005**   | ** ** | **2004**               | ** ** | **2003**               | ** ** |
|---------------|------------|------------|------------|------------------------|------------|------------------------|------------|
| ** **    | ** ** | ** ** | ** ** | **(As restated)** | ** ** | **(As restated)** | ** ** |
| United States |       | $          | 16,587     |                   | $          | 9,920                  |       | $ | (7,884 | ) |
| Foreign       |       | (10,919    | )          | (22,904                | )          | 5,565                  |       |
| Total         |       | $          | 5,668      |                   | $          | (12,984                | )          | $ | (2,319 | ) |

*** ***

F-19

----

***Provision for Income Tax Expense***

Thecomponents of the provision for income tax expense were comprised of thefollowing for the years ended December 31:
|                                   | ** ** | **2005**   | ** ** | **2004**               | ** ** | **2003**               | ** ** |
|-----------------------------------|------------|------------|------------|------------------------|------------|------------------------|------------|
| ** **                        | ** ** | ** ** | ** ** | **(As restated)** | ** ** | **(As restated)** | ** ** |
| Current:                          |       |       |       |                   |       |                   |       |
| Federal                           |       | $          | —     |                   | $          | —                 |       | $ | — |   |
| Foreign                           |       | 7,181      |       | 5,383                  |       | 3,932                  |       |
| State                             |       | 2          |       | 207                    |       | 430                    |       |
|                              |       | 7,183      |       | 5,590                  |       | 4,362                  |       |
|                              |       |       |       |                   |       |                   |       |
| Deferred:                         |       |       |       |                   |       |                   |       |
| Federal                           |       | —     |       | 10,929                 |       | —                 |       |
| Foreign                           |       | (6,541     | )          | (1,787                 | )          | 427                    |       |
| State                             |       | —     |       | —                 |       | —                 |       |
|                              |       | (6,541     | )          | 9,142                  |       | 427                    |       |
|                              |       |       |       |                   |       |                   |       |
| Provision for income tax  expense |       | $          | 642        |                   | $          | 14,732                 |       | $ | 4,789 |   |

 

Whenapplicable, certain of the income tax benefits related to the exercise of stockoptions reduce taxes currently payable and are credited to additional paid-incapital, as presented in our consolidated statements of stockholders’ equity.

***Deferred Tax Assets and Liabilities***

Thefollowing table sets forth the tax effects of temporary differences that giverise to significant portions of the deferred tax assets and deferred taxliabilities that are reported in our consolidated balance sheets at December31:
|                                                                       | ** ** | **2005**   | ** ** | **2004**               | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|------------------------|------------|
| ** **                                                            | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| **Deferred  tax assets:**                                             | ** ** | ** ** | ** ** | ** **             | ** ** |
| Accrued compensation and other liabilities                            |       | $          | 4,717      |                   | $          | 7,652 |   |
| Goodwill                                                              |       | 44,082     |       | 54,221                 |       |
| Net operating loss and other credit carryforwards                     |       | 41,032     |       | 33,694                 |       |
| Net operating loss carryforwards related to international  operations |       | 28,396     |       | 27,076                 |       |
| Depreciation timing differences                                       |       | 15,867     |       | 12,534                 |       |
| Total deferred tax assets                                             |       | 134,094    |       | 135,177                |       |
| Valuation allowance                                                   |       | (126,219   | )          | (132,566               | )          |
| Net deferred tax assets                                               |       | 7,875      |       | 2,611                  |       |
| ** **                                                            | ** ** | ** ** | ** ** | ** **             | ** ** |
| **Deferred  tax liabilities:**                                        | ** ** | ** ** | ** ** | ** **             | ** ** |
| Leased assets and depreciation                                        |       | —     |       | 205                    |       |
| Other                                                                 |       | —     |       | 678                    |       |
| Total deferred tax liabilities                                        |       | —     |       | 883                    |       |
|                                                                  |       |       |       |                   |       |
| **Net deferred tax assets**                                           |       | $          | 7,875      |                   | $          | 1,728 |   |

 

Basedupon our current and historical earnings, management believes that it is morelikely than not that we will generate sufficient taxable income to fullyrealize the benefits of our recorded net deferred tax assets as of December 31,2005.

In assessing thevalue of the deferred tax assets, management considers whether it is morelikely than not that all of the deferred tax assets will be realized. Thevaluation allowance was calculated in accordance with the provisions of SFAS

F-20

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No. 109, *Accounting for Income Taxes* (SFAS 109),which requires an assessment of both negative and positive evidence whenmeasuring the need for a valuation allowance. In accordance with SFAS 109,evidence such as operating results during recent periods is given more weightthan our expectations of future profitability, which are inherently uncertain.

During the thirdquarter of 2005, we determined that it is more likely than not that we willrealize the full benefit of deferred tax assets in certain jurisdictions.Consequently, we recorded a decrease to the existing valuation allowanceresulting in non-cash tax benefit of approximately $5.8 million.

During the fourthquarter of 2004, we determined that it is more likely than not that we will notrealize the full benefit of deferred tax assets in certain other jurisdictions.Consequently, we recorded an increase to the existing valuation allowanceresulting in non-cash tax expense of approximately $10.9 million. This increasewas partially offset by the reversal of $0.8 million of valuation allowanceassociated with deferred tax assets in certain of our foreign jurisdictionsreflecting foreign net operating losses and other credit carryforwards that areexpected to be utilized.

In the future, we will continue to periodically assess therecoverability of the remaining deferred income tax assets, which isprincipally dependent upon our ability to achieve taxable income in certainforeign jurisdictions. In addition, the deferred tax asset, and itspotential realizability, will also be evaluated to determine if a portion ofthe valuation allowance should be reversed. Any reversal of this valuationallowance in the future will result in a reduction of our effective tax rate.

***Net Operating Loss and AlternativeMinimum Tax Credit Carryforwards***

AtDecember 31, 2005, we had approximately:

·            $135.8 million in U.S.Federal net operating loss carryforwards, which expire between 2020 and 2025,

·            $94.5 million inforeign net operating loss carryforwards, of which $21.6 million expire between2006 and 2016 and $72.9 million can be carried forward indefinitely,

·            $0.5 million of U.S.Federal general business credit carryforwards, which expire between 2008 and2012, and

·            $2.2million of U.S. Federal alternativeminimum tax credit carryforwards, which can be carried forward indefinitely.

***Reconciliation of Reported Income TaxExpense (Benefit) to Expected Income Tax Expense (Benefit)***

The following table shows the reconciliation between income tax expensereported in our consolidated statements of operations and the income taxexpense (benefit) that would have resulted from applying the U.S. Federalincome tax rate of 35% to pretax income (loss) for the years ended December 31:
|                                                | ** ** | **2005**   | ** ** | **2004**               | ** ** | **2003**               | ** ** |
|------------------------------------------------|------------|------------|------------|------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | **(As restated)** | ** ** | **(As restated)** | ** ** |
| Expected Federal  income tax expense (benefit) |       | $          | 1,984      |                   | $          | (4,544                 | )          | $ | (381 | ) |
| State taxes, net  of Federal effect            |       | 10         |       | 213                    |       | 39                     |       |
| Impact of  foreign operations                  |       | 4,390      |       | 1,341                  |       | 263                    |       |
| Impact of goodwill  impairment                 |       | —     |       | 2,684                  |       | —                 |       |
| Valuation  allowance                           |       | (5,722     | )          | 14,552                 |       | 4,903                  |       |
| Other                                          |       | (20        | )          | 486                    |       | (35                    | )          |
| Total                                          |       | $          | 642        |                   | $          | 14,732                 |       | $ | 4,789 |   |

 

***Other Tax Matters***

As aresult of our restatement of our prior year financial statements, we have identifiedtechnical errors in the filings of our US federal tax returns for fiscal years2001 through 2003 and a related accounting error. We have requested privateletter rulings from the Internal Revenue Service, which would permit us tocorrect the technical errors. We expect to receive favorable rulings from theIRS. Therefore, no tax provision has been recorded related to this matter.However, there can be no assurance that the IRS will grant any such rulings or,if such rulings are granted, when they will be received. We have determinedthat certain tax deductions previously taken on the 2001 US federal tax returnwould not be allowed after the technical errors are corrected. Accordingly, wehave reduced our US NOL carryforward by $2.4 million and related deferred taxassets and valuation allowance by $1 million for all periods presented.

F-21

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In August 2006,our subsidiary in Brazil received an assessment from the Brazilian FederalRevenue Service for the tax years 2001 through 2003. We believe certain technicalaspects of the assessment are without merit and have received an opinion fromour external Brazilian counsel that it is probable that we will be successfulin appealing the assessment. Therefore, no tax provision has been recordedrelated to this assessment. However, there can be no assurance that we will nothave to pay the assessment and further penalties and interest or some portionthereof in the future.

**Note 7. LeaseObligations**

***Capital Leases***

We are obligated under various capital leases for property and certainequipment that expire at various dates through 2015. At December 31, 2005, ourfuture minimum payments under capital leases were as follows:
|                               | ** ** | **Minimum**             | ** ** |
|-------------------------------|------------|-------------------------|------------|
| **Year**                      | ** ** | **Lease Payments** | ** ** |
| 2006                          |       | $                       | 2,919      |   |
| 2007                          |       | 2,175                   |       |
| 2008                          |       | 1,299                   |       |
| 2009                          |       | 771                     |       |
| 2010                          |       | 744                     |       |
| Thereafter                    |       | 3,220                   |       |
|                          |       | 11,128                  |       |
| Amount  representing interest |       | (1,836                  | )          |
| Net                           |       | $                       | 9,292      |   |

 

***Operating Leases***

We also lease property and certain equipment under non-cancelableoperating lease arrangements, which expire at various dates through 2018. Certainleases of real property provide options to extend the lease terms. We recognizerent holidays and rent escalations on a straight-line basis over the leaseterm; and landlord/tenant incentives are recorded as deferred rent andamortized over the life of the related lease. Rent expense was approximately$39.6 million, $34.0 million, and $29.0 million for the years ended December 31,2005, 2004 and 2003, respectively.

At December 31, 2005, our future minimum payments under operatingleases, net of sublease proceeds, were as follows:
|            | ** ** | **Minimum**             | ** ** | **Sublease** | ** ** | **Net Lease** | ** ** |
|------------|------------|-------------------------|------------|--------------|------------|--------------------|------------|
| **Year**   | ** ** | **Lease Payments** | ** ** | **Proceeds** | ** ** | **Commitments**    | ** ** |
| 2006       |       | $                       | 36,311     |         | $          | (527               | )          | $ | 35,784 |   |
| 2007       |       | 23,704                  |       | (412         | )          | 23,292             |       |
| 2008       |       | 16,221                  |       | (175         | )          | 16,046             |       |
| 2009       |       | 10,911                  |       | —       |       | 10,911             |       |
| 2010       |       | 4,585                   |       | —       |       | 4,585              |       |
| Thereafter |       | 17,445                  |       | —       |       | 17,445             |       |
| Total      |       | $                       | 109,177    |         | $          | (1,114             | )          | $ | 108,063 |   |

 

**Note 8. Stock-Based Compensation**

***Stock Options***

The 1999 StockIncentive Plan (1999 Plan) provides for the granting of various types ofincentive awards (including incentive stock options, nonqualified options,stock appreciation rights, restricted shares, and performance shares or units)for the issuance of up to an aggregate of 10,500,000 shares of common stock toour employees, consultants and non-employee directors.

Vesting terms varywith each grant, generally straight-line in average of one to five years, andoption terms may not exceed ten years. Option prices, set by the CompensationCommittee of the Board of Directors, may not be less than the fair market valueat date of grant for incentive stock options or less than par value fornonqualified stock options.

F-22

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At December 31,2005, there were approximately 6.0 million shares available for issuancepursuant to future grants under the 1999 Plan.

Prior to theadoption of the 1999 Plan, we granted options under several different plans. Asof December 31, 2005, options granted under these plans aggregating 2.1 millionremained outstanding. The last of these options will expire on February 1,2009. We granted these options at prices ranging from $2.41 to $19.50. We willnot grant additional options under these plans.

The followingtable sets forth shares subject to options:
|                             | ** ** | ** **          | ** ** | **Weighted-Average**          | ** ** |
|-----------------------------|------------|---------------------|------------|-------------------------------|------------|
| ** **                  | ** ** | **Number**          | ** ** | **Exercise**                  | ** ** |
| ** **                  | ** ** | **of Options** | ** ** | **Price per Share** | ** ** |
|                        |       |                |       |                          |       |
| Balance, January  1, 2003   |       | 8,805,281           |       | $                             | 3.83       |   |
| Granted                     |       | 809,563             |       | 1.48                          |       |
| Exercised                   |       | (4,704              | )          | 2.41                          |       |
| Canceled                    |       | (1,859,750          | )          | 3.54                          |       |
| Balance,  December 31, 2003 |       | 7,750,390           |       | 3.67                          |       |
| Granted                     |       | 332,924             |       | 3.21                          |       |
| Exercised                   |       | (65,494             | )          | 2.22                          |       |
| Canceled                    |       | (1,209,084          | )          | 3.52                          |       |
| Balance,  December 31, 2004 |       | 6,808,736           |       | 3.68                          |       |
| Granted                     |       | 80,000              |       | 2.04                          |       |
| Exercised                   |       | (324,100            | )          | 2.65                          |       |
| Canceled                    |       | (770,338            | )          | 3.49                          |       |
| Balance, December 31,  2005 |       | 5,794,298           |       | $                             | 3.63       |   |

 

The options exercisable at theend of each period were:
|                    | ** ** | ** **          | ** ** | **Weighted-Average**          | ** ** |
|--------------------|------------|---------------------|------------|-------------------------------|------------|
| ** **         | ** ** | **Number**          | ** ** | **Exercise**                  | ** ** |
| ** **         | ** ** | **of Options** | ** ** | **Price per Share** | ** ** |
|               |       |                |       |                          |       |
| December 31,  2003 |       | 3,175,457           |       | $                             | 4.61       |   |
| December 31,  2004 |       | 3,716,345           |       | $                             | 4.28       |   |
| December 31, 2005  |       | 3,440,369           |       | $                             | 4.13       |   |

 

Thefollowing table summarizes stock options outstanding at December 31, 2005:
|                          | ** ** | ** **      | ** ** | **Weighted-Average** | ** ** | **Weighted-Average** | ** ** |
|--------------------------|------------|-----------------|------------|----------------------|------------|----------------------|------------|
| **Range of**        | ** ** | **Number**      | ** ** | **Remaining**        | ** ** | **Exercise**         | ** ** |
| **Exercise Prices** | ** ** | **Outstanding** | ** ** | **Life**             | ** ** | **Price**            | ** ** |
| ** **               | ** ** | ** **      | ** ** | ** **           | ** ** | ** **           | ** ** |
| $1.24 to $1.75           |       | 728,465         |       | 7.1956               |       | $                    | 1.58       |   |
| $1.76 to $4.00           |       | 3,842,774       |       | 4.319                |       | $                    | 3.10       |   |
| $4.01 to $6.33           |       | 649,742         |       | 3.2728               |       | $                    | 4.85       |   |
| $6.34 to $7.22           |       | 392,917         |       | 3.8153               |       | $                    | 6.70       |   |
| $7.23 to $12.66          |       | 120,400         |       | 2.1286               |       | $                    | 9.76       |   |
| $12.67 to $20.00         |       | 60,000          |       | 1.2468               |       | $                    | 17.35      |   |

 

F-23

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The following table summarizes stock options exercisable at December 31,2005:
|                          | ** ** | ** **      | ** ** | **Weighted-Average** | ** ** |
|--------------------------|------------|-----------------|------------|----------------------|------------|
| **Range of**        | ** ** | **Number**      | ** ** | **Exercise**         | ** ** |
| **Exercise Prices** | ** ** | **Exercisable** | ** ** | **Price**            | ** ** |
| ** **               | ** ** | ** **      | ** ** | ** **           | ** ** |
| $1.24 to $1.75           |       | 433,422         |       | $                    | 1.59       |   |
| $1.76 to $4.00           |       | 1,784,288       |       | $                    | 3.09       |   |
| $4.01 to $6.33           |       | 649,742         |       | $                    | 4.85       |   |
| $6.34 to $7.22           |       | 392,917         |       | $                    | 6.70       |   |
| $7.23 to $12.66          |       | 120,000         |       | $                    | 9.75       |   |
| $12.67 to $20.00         |       | 60,000          |       | $                    | 17.35      |   |

 

***Employee Stock Purchase Plan (ESPP)***

During 1998, we implemented an ESPP that enables eligible employees topurchase our stock at 85% of the current market value on a quarterly basis. Wehave not recognized any compensation expense in connection with this plan.Total purchases and shares purchased under the ESPP were $0.1 million and38,322 shares for 2005, $0.1 million and 44,354 shares for 2004, and $0.1million and 93,858 shares for 2003.

**Note 9. Benefit Plans**

We sponsor a 401(k) plan, which covers substantially all domesticemployees who are 18 years of age with 6 months or more of service.Participants may elect to contribute 1% to 20% of compensation. We may elect tomake a year-end contribution to the 401(k) plan. We did not contribute to theplan in 2005, 2004, or 2003.

We also make contributions to certain executive and other employeepersonal retirement programs, primarily in Europe. We contributed $1.0 million,$1.4 million, and $1.7 million for the years ended December 31, 2005, 2004 and2003, respectively.

Wealso sponsored a deferred compensation plan for certain executive employees whoelected to contribute to the plan. On December 10, 2004, we amended thedeferred compensation plan in order to address certain requirements under newU.S. legislation concerning deferred compensation arrangements. The ExecutiveWealth Accumulation Plan, which permits certain U.S. executive employees todefer part of their salary and part or all of their incentive compensation, wasfrozen and no further contributions to the plan were permitted after December31, 2004. We subsequently terminated the plan effective January 1, 2005,primarily because of the new U.S. legislation affecting the plan and currentlimited participation in the plan. Participants’ deferred compensation accountbalances were paid out March 4, 2005. We didnot contribute to the plan in 2005, 2004, or 2003.

**Note 10. Segment Data**

***Business Segments***

Our operations are conducted in one reportable segment that includesoperating segments that all provide customer management services via electronicmedia including telephone, fax, and the Internet, and, to a lesser extent,traditional mail.

Our services are provided through a number of operating subsidiaries ina variety of locations around the world. However, the nature of services, the natureof the processes involved in providing those services, the types of clients,and the expected long-term operating income from these subsidiaries aresimilar.

F-24

----

Revenue is primarily attributed to countries based upon the locationwhere the services are performed. The following table summarizes our revenue bygeographic area for the years ended December 31:
|                         | ** ** | **2005**   | ** ** | **2004**               | ** ** | **2003**               | ** ** |
|-------------------------|------------|------------|------------|------------------------|------------|------------------------|------------|
| ** **              | ** ** | ** ** | ** ** | **(As restated)** | ** ** | **(As restated)** | ** ** |
| Revenue:                |       |       |       |                   |       |                   |       |
| United States           |       | $          | 507,566    |                   | $          | 437,342                |       | $ | 407,785 |   |
| Spain                   |       | 137,566    |       | 114,511                |       | 84,409                 |       |
| Other foreign countries |       | 392,047    |       | 404,282                |       | 353,893                |       |
| Total revenue           |       | $          | 1,037,179  |                   | $          | 956,135                |       | $ | 846,087 |   |

 

The following table summarizes our long-lived assets by geographic areaas of December 31:
|                         | ** ** | **2005**   | ** ** | **2004**               | ** ** |
|-------------------------|------------|------------|------------|------------------------|------------|
| ** **              | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| Long-lived  assets:*    |       |       |       |                   |       |
| United States           |       | $          | 62,035     |                   | $          | 57,759 |   |
| Spain                   |       | 16,353     |       | 18,186                 |       |
| Other foreign countries |       | 69,746     |       | 83,117                 |       |
| Total long-lived assets |       | $          | 148,134    |                   | $          | 159,062 |   |

 

----

*Amounts exclude long-term deferred tax assets

***Major Clients***

The combined total revenue of multiple independently managed businessunits of General Motors Corporation with operations primarily in the UnitedStates was 11.3%, 14.9% and 21.2 % of our revenue for the years ended December31, 2005, 2004 and 2003, respectively. Our primary contract with GeneralMotors expired in December 2005. Hewlett-PackardCompany business units were responsible for 11.6% and 11.3% of our revenue forthe year ended December 31, 2005 and 2004. We did not have any other clientsunder common control that generated more than 10% of our revenue for the yearspresented.

**Note 11. Contingencies**

From time to time, during the normal course ofbusiness, we may make certain indemnities, commitments and guarantees underwhich we may be required to make payments in relation to certain transactions.These include for example: (i) indemnities to clients pertaining to claimsbased on our negligence or willful misconduct and (ii) indemnities involvingthe accuracy of representations and warranties in certain contracts.

From time to time, we are involved in litigationincidental to our business. We cannot predict the ultimate outcome of suchlitigation with certainty, but management believes, after consultation withcounsel, except for the items discussed below for the reasons mentionedtherein, that the resolution of such matters will not have a material adverseeffect on our consolidated financial position or results of operations.

On March 1, 2006,we contacted the U.S. Securities and Exchange Commission Enforcement Divisionand reported that we had identified accounting and other irregularities in ourBrazil subsidiary that raised the possibility of violations of the U.S. ForeignCorrupt Practices Act. We completed an internal investigation into theseirregularities, with the assistance of independent outside counsel in Brazil. Theinvestigation did not reveal any prior involvement or knowledge regarding theirregularities by any officer or director of the Company. We have taken and aretaking remedial actions. We restated our financial statements for the yearsended December 31, 2001 through 2004 and for the quarters ended March 31, June30, and September 30, 2005 as a result of errors in the prior financialstatements identified as a result of the investigation. We reported to the SECon the results of the internal investigation and is responding to the SEC’srequests for further information. We cannot predict the ultimate outcome of theongoing discussions with the SEC. The outcome could include the institution ofadministrative or civil injunctive proceedings

F-25

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involving theCompany and/or current or former Company employees, officers and/or directors,the imposition of fines and other penalties, remedies and/or sanctions and/or areferral to other governmental agencies.

Two of our clientshave received letters from time to time containing an offer to license andsuggesting that the clients might be infringing certain patents related tocomputerized telephonic voice response systems without the license. The clientshave indicated that if any infringement occurred the clients would seekcontractual indemnity from us. In such an event, we would expect to seekcontractual indemnity from certain of our vendors. Any such contractualindemnity we might obtain may not be sufficient to cover all of the costs ofinvestigating and resolving such matter. We might also seek a license under thepatents. Any such license may not be available under commercially reasonableterms. Any license costs would increase the cost of doing business in thefuture and may or may not be fully reflected in our pricing. To our knowledge,no litigation has been initiated against our clients or us concerning thismatter. At this stage, due to the inherent uncertainties, we are unable topredict whether this matter may have a material adverse effect on our businessor on our financial condition or results of operation.

During the yearended December 31, 2004, we recorded a benefit from the refund of payroll taxoverpayments paid in a prior year. We recorded the payroll tax refund in theaccompanying consolidated statement of operations as a $1.3 million reductionof direct labor and telecommunications expenses and a $0.4 million reduction ofoperating, selling and administrative expenses during the year ended December31, 2004.

**Note 12. Asset Impairment and Restructuring Expenses**

We summarize the components of therestructuring charges that we recorded as asset impairment and restructuringexpenses in the following table:
| ** **         | ** ** | ** **    | ** ** | **Facility**        | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------|------------|---------------|------------|---------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **         | ** ** | ** **    | ** ** | **Closure or** | ** ** | **Grant**         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **         | ** ** | **Severance** | ** ** | **Reduction**       | ** ** | **Reimbursement** | ** ** | **Other**  | ** ** | **Total**  | ** ** |
|               |       |          |       |                |       |              |       |       |       |       |       |
| January 1, 2003    |       | $             | 0.3        |                | $          | 6.4               |       | $          | —     |       | $          | 0.3 |   | $ | 7.0 |   |
| Expensed           |       | —        |       | 2.6                 |       | —            |       | —     |       | 2.6        |       |
| Paid               |       | —        |       | (3.0                | )          | —            |       | (0.3       | )          | (3.3       | )          |
| Other              |       | (0.2          | )          | 0.5                 |       | —            |       | —     |       | 0.3        |       |
| December 31,  2003 |       | 0.1           |       | 6.5                 |       | —            |       | —     |       | 6.6        |       |
| Expensed           |       | 5.3           |       | 2.6                 |       | —            |       | —     |       | 7.9        |       |
| Paid               |       | (1.2          | )          | (3.5                | )          | —            |       | —     |       | (4.7       | )          |
| Other              |       | —        |       | 0.3                 |       | —            |       | —     |       | 0.3        |       |
| December 31,  2004 |       | 4.2           |       | 5.9                 |       | —            |       | —     |       | 10.1       |       |
| Expensed           |       | 4.5           |       | 1.9                 |       | 3.5               |       | —     |       | 9.9        |       |
| Reversed           |       | —        |       | (3.3                | )          | —            |       | —     |       | (3.3       | )          |
| Paid               |       | (7.1          | )          | (1.9                | )          | —            |       | —     |       | (9.0       | )          |
| Other              |       | (0.1          | )          | (0.4                | )          | —            |       | —     |       | (0.5       | )          |
| December 31, 2005  |       | $             | 1.5        |                | $          | 2.2               |       | $          | 3.5        |       | $          | — |   | $ | 7.2 |   |

 

Otherincludes the impact of foreign currency translation. Items charged to the accrual during 2005, 2004and 2003 were cash items.

At December 31, 2005,of the $7.2 million of unpaid liabilities, $0.1 million is classified aslong-term in other liabilities and $7.1 million is classified as short-term inaccrued operating expense in the accompanying consolidated balance sheet. Ofthe $10.1 million of unpaid liabilities at December 31, 2004, $3.3 million isclassified as long-term in other liabilities and $6.8 million is classified asshort-term in accrued operating expenses in the accompanying consolidatedbalance sheets.

F-26

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***2005***

On July 7, 2005,in continuation of the previously announced profit improvement plan, wecommitted to additional actions to reduce ongoing operating expenses,consolidate facilities, and reduce our workforce. The additional actionsincluded closing and consolidating certain facilities in Northern Europe andreducing net headcount by a total of approximately 40 employees throughseverance, in addition to 20 expected through attrition. We recordedrestructuring expenses of $2.5 million for severance and $1.8 million forfacility closures during the year ended December 31, 2005 as a result of theseactions, in addition to $0.1 million for asset impairments.

As a result of thefacility closures discussed above, we will no longer be able to maintaincertain minimum employment levels required to retain government grants receivedand recorded as a reduction of operating expenses in previous periods.Consequently, we recorded restructuring expense of $3.5 million during the yearended December 31, 2005, to establish a liability for the obligation to repaysuch amounts.

On December 28,2005, we announced additional headcount reductions across the company to reduceour workforce. We recorded additional severance of approximately $1.3 million. Inaddition, during the year we recorded $0.7 million of severance expense as aresult of previously announced actions.

During the yearended December 31, 2005, we decided to open previously closed leased facilitiesin North America to temporarily accommodate new business. In a prior year, wehad recorded a restructuring liability for the future scheduled lease paymentsfor the closed facilities. As a result of the decision to reopen thefacilities, we reversed the remaining $3.3 million restructuring liability.

The followingtable summarizes these charges:
| Description            | ** ** | **2005**               | ** ** |
|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **(in millions)** | ** ** |
| **Cash  charges:**     | ** ** | ** **             | ** ** |
| Employee severance     |       | $                      | 4.5        |   |
| Grant Reimbursement    |       | 3.5                    |       |
| Facilities leases      |       | (1.5                   | )          |
| Total cash charges     |       | 6.5                    |       |
| **Non-cash  charges:** | ** ** | ** **             | ** ** |
| Goodwill impairment    |       | —                 |       |
| Fixed asset disposals  |       | 0.1                    |       |
| Total non-cash charges |       | 0.1                    |       |
| **Total**              |       | $                      | 6.6        |   |

 

***2004***

On December 3, 2004, we committed to a restructuring plan to reduce ongoing operating expenses, consolidate facilities, and reduce our workforce as a part of an announced profit improvement plan. The plan included closing certain facilities in North America and Europe and reducing headcount by a total of approximately 170 employees throughout the Company. The plan also included disposing of certain capital equipment.

During the fourthquarter of 2004, we recorded $17.0 million of asset impairment andrestructuring expenses. In connection with the cost reduction portion of ourprofit improvement plan, we recorded asset impairment and restructuringexpenses of $7.8 million. This amount is comprised of $5.3 million of severancecosts, $1.4 of asset impairment costs, including asset impairment obligations,and $1.1 million of scheduled payments of operating leases for which we willreceive no future economic benefit. In addition, we recorded asset impairmentand restructuring expenses of $1.5 million as a result of a revision to ourestimate for non-cancelable lease payments associated with previously announcedfacility closures.

We performed ourannual goodwill impairment review during the fourth quarter of 2004 anddetermined that a goodwill impairment charge of $7.7 million was required forone of our reporting units. The impairment charge is included in assetimpairment and restructuring expense in the accompanying consolidated statementof operations for the year ended December 31, 2004. In calculating the goodwillimpairment charge, the fair value of the reporting unit

F-27

----

was determinedwith the assistance of an independent third-party valuation specialist using adiscounted cash flow valuation approach.

The followingtable summarizes these charges:
|                        | ** ** | **2004**               | ** ** |
|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **(in millions)** | ** ** |
| **Cash  charges:**     | ** ** | ** **             | ** ** |
| Employee severance     |       | $                      | 5.3        |   |
| Facilities leases      |       | 2.6                    |       |
| Total cash charges     |       | 7.9                    |       |
| **Non-cash  charges:** | ** ** | ** **             | ** ** |
| Goodwill impairment    |       | 7.7                    |       |
| Fixed asset disposals  |       | 1.4                    |       |
| Total non-cash charges |       | 9.1                    |       |
| **Total**              |       | $                      | 17.0       |   |

 

***2003***

During 2003, inconnection with the closure of our former headquarters facility and the closureof a contact center, we recorded asset impairment and restructuring expenses of$1.6 million, which consisted of the write-off of abandoned leaseholdimprovements of $0.4 million and for $1.2 million of scheduled payments ofoperating leases for which we will receive no future economic benefit. Inaddition, we recorded asset impairment and restructuring expenses of $1.4million as a result of a revision to our estimate for non-cancelable leasepayments associated with a previously announced facility closure.

**Note 13. Shareholder Rights Plan**

We have aShareholder Rights Plan that provides for the issuance of preferred sharepurchase rights that expire in August 2008. The rights generally will beexercisable and transferable apart from the common stock in the followingcases:

·            only after the tenth day following publicdisclosure that a person or group of affiliated or associated persons hasacquired 20% or more of the outstanding shares of common stock (therebybecoming an “Acquiring Person”), and

·            on such date as the Board of Directors determinesafter the commencement or announcement of a tender or exchange offer by aperson or group for 20% or more of the outstanding shares of common stock.

If any person or group of affiliated or associated persons acquires 20%or more of the outstanding shares of common stock and our redemption right hasexpired, each holder of a right (except those held by the Acquiring Person)will have the right to purchase shares of our common stock (or in certaincircumstances, our shares of preferred stock or similar securities) having avalue equal to two times the exercise price of the right.

Alternatively, if, in a transaction not approved by the Board ofDirectors, we are acquired in a merger or other business combination or 50% ormore of our assets or earnings power are sold, and our redemption right hasexpired, each holder of a right will have the right to purchase that number ofshares of common stock of the acquiring company having the market value of twotimes the exercise price of the right.

The rights may not be exercisable while they are redeemable. We can redeemthe rights, which have a $30 exercise price, at a price of $.001 per right atany time up to and including the tenth day after the time that a person orgroup has become an Acquiring Person.

F-28

----

**Note 14.Quarterly Financial Data (Unaudited)**

Ourquarterly financial information has not been audited but, in management’sopinion, includes all adjustments necessary for a fair presentation. Weexperience periodic fluctuations in our results of operations related to boththe start-up costs associated with expansion and the implementation of clients’customer management activities. In addition, our business generally tends to beslower in the third quarter due to summer holidays in Europe. Accordingly,comparisons among quarters of a year may not represent overall trends andchanges in operations.

***2005 Quarterly Data***
| ** **                | ** ** | **First**                                                             | ** ** | **Second**             | ** ** | **Third**              | ** ** | **Fourth**  | ** ** |
|---------------------------|------------|-----------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|-------------|------------|
| ** **                | ** ** | **Quarter**                                                           | ** ** | **Quarter**            | ** ** | **Quarter**            | ** ** | **Quarter** | ** ** |
| ** **                | ** ** | **(As restated)**                                                | ** ** | **(As restated)** | ** ** | **(As restated)** | ** ** | ** **  | ** ** |
| ** **                | ** ** | **(in thousands, except per share amounts)** | ** ** |
|                      |       |                                                                  |       |                   |       |                   |       |        |       |
| Revenue                   |       | $                                                                     | 250,892    |                   | $          | 251,810                |       | $           | 244,042    |   | $ | 290,435 |   |
| Operating income  (loss)  |       | 5,323                                                                 |       | 7,001                  |       | (899                   | )          | 7,060       |       |
| Net income  (loss)        |       | 548                                                                   |       | 2,572                  |       | (1,923                 | )          | 1,577       |       |
|                      |       |                                                                  |       |                   |       |                   |       |        |       |
| Income per  common share: |       |                                                                  |       |                   |       |                   |       |        |       |
| Basic                     |       | $                                                                     | 0.01       |                   | $          | 0.03                   |       | $           | (0.03      | ) | $ | 0.02 |   |
| Diluted                   |       | $                                                                     | 0.01       |                   | $          | 0.03                   |       | $           | (0.03      | ) | $ | 0.02 |   |

 

The second quarter results include a net benefit of $2.6 millionprimarily from the reversal of a restrucuturing liability for a previouslyclosed leased facility. Third quarter results include $4.6 million of assetimpairment and restructuring charges as discussed in Note 12, and $5.8 millionof benefit from the release of a valuation allowance associated with deferredtax assets as discussed in Note 6. Fourth quarter results include an additional$4.6 million of of asset impairment and restructuring charges as discussed inNote 12.

***2004 Quarterly Data***
| ** **                | ** ** | **First**                                                             | ** ** | **Second**             | ** ** | **Third**              | ** ** | **Fourth**             | ** ** |
|---------------------------|------------|-----------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                | ** ** | **Quarter**                                                           | ** ** | **Quarter**            | ** ** | **Quarter**            | ** ** | **Quarter**            | ** ** |
| ** **                | ** ** | **(As restated)**                                                | ** ** | **(As restated)** | ** ** | **(As restated)** | ** ** | **(As restated)** | ** ** |
| ** **                | ** ** | **(in thousands, except per share amounts)** | ** ** |
|                      |       |                                                                  |       |                   |       |                   |       |                   |       |
| Revenue                   |       | $                                                                     | 244,027    |                   | $          | 239,897                |       | $                      | 229,393    |   | $ | 242,818 |   |
| Operating income  (loss)  |       | 9,610                                                                 |       | 7,050                  |       | 835                    |       | (17,358                | )          |
| Net income  (loss)        |       | 4,084                                                                 |       | 2,230                  |       | (2,295                 | )          | (32,459                | )          |
|                      |       |                                                                  |       |                   |       |                   |       |                   |       |
| Income per  common share: |       |                                                                  |       |                   |       |                   |       |                   |       |
| Basic                     |       | $                                                                     | 0.06       |                   | $          | 0.03                   |       | $                      | (0.03      | ) | $ | (0.44 | ) |
| Diluted                   |       | $                                                                     | 0.06       |                   | $          | 0.03                   |       | $                      | (0.03      | ) | $ | (0.44 | ) |

 

Fourth quarter results include $17.0 million of asset impairment andrestructuring charges, including $7.7 million of goodwill impairment, asdiscussed in Note 12, and $10.9 million of charges related to the increase inthe deferred tax valuation allowance, as discussed in Note 6.

*The sum of the quarterly amounts may not equal thetotals for the year due to the effects of rounding.*

**Note 15. Subsequent Events**

On April 12, 2006, weentered into a settlement agreement with a business partner over the handlingof certain business transactions. For the settlement, SITEL received a paymentof $5.0 million in April of 2006 and will receive an additional $1 million ininstallments during the second half of 2006. As a result of the settlement, wewill record a $6.0 million gain in 2006.

F-29

----

 

**REPORT OF INDEPENDENT AUDITORS**

Mexico City,August 21, 2006

To thestockholders ofGrupo Sitel de México, S. A. de C. V.

We have auditedthe accompanying consolidated balance sheets of Grupo Sitel de México, S. A. deC. V. and subsidiary (the “Company”) as of December 31, 2005 and 2004, and therelated consolidated statements of income (loss), of changes in stockholders’equity and of changes in financial position for each of the three years in theperiod ended December 31, 2005, all expressed in Mexican pesos of purchasingpower of December 31, 2005.  Theseconsolidated financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

We conducted ouraudits of these consolidated statements in accordance with generally acceptedauditing standards in Mexico and with generally accepted auditing standards inUnited States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement and that they were prepared in accordance with accountingprinciples generally accepted in Mexico. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosure in the consolidatedfinancial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall consolidated financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

In our opinion,the accompanying consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of GrupoSitel de México, S. A. de C. V. and subsidiary as of December 31, 2005 and2004, and the results of their operations, the change in their stockholders’equity and the changes in their financial position for each of the three yearsin the period ended December 31, 2005, in conformity with accounting principlesgenerally accepted in Mexico.

Accountingprinciples generally accepted in Mexico vary in certain significant respectsfrom accounting principles generally accepted in the United States of America(U.S. GAAP). The application of the latter would have affected thedetermination of consolidated net income for each of the two years in theperiod ended December 31, 2005 and the determination of consolidatedstockholders’ equity at December 31, 2005 and 2004 to the extent summarized inNote 14 to the consolidated financial statements.
| PricewaterhouseCoopers                      |
|---------------------------------------------|
|                                        |
| /s/ José Carlos del Castillo Díaz |   |
|                                        |
| Audit Partner                               |

 

F-30

----

**GRUPO SITEL DE MÉXICO, S. A. DEC. V. AND SUBSIDIARY**

**CONSOLIDATED BALANCE SHEETS**

## Mexican pesos(Ps) of December 31, 2005 purchasing power

| ** **                                                                   | ** ** | **December 31,**                                                                                                                                                                                                                                                                                                                                                                                         | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | **2004** | ** ** |
| Assets                                                                       |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| CURRENT ASSETS:                                                              |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| Cash and cash  equivalents                                                   |       | Ps                                                                 30,732,993 |       | Ps                                                                 26,427,212 |   |
| Accounts  receivable - Net (Note 4)                                          |       | 90,321,805                                                                                                                                                                                                                                                                                                                                                                                                    |       | 84,515,892 |   |
| Refundable taxes  (Note 4)                                                   |       | 13,362,969                                                                                                                                                                                                                                                                                                                                                                                                    |       | 2,915,192 |   |
| Related parties  (Note 5)                                                    |       | 21,362,134                                                                                                                                                                                                                                                                                                                                                                                                    |       | 23,544,854 |   |
| Other assets                                                                 |       | 1,397,747                                                                                                                                                                                                                                                                                                                                                                                                     |       | 1,324,354 |   |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| Total current  assets                                                        |       | 157,177,648                                                                                                                                                                                                                                                                                                                                                                                                   |       | 138,727,504 |   |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| FURNITURE AND  EQUIPMENT, LEASEHOLD IMPROVEMENTS AND LICENCES - Net (Note 6) |       | 69,783,611                                                                                                                                                                                                                                                                                                                                                                                                    |       | 60,994,779 |   |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| Total assets                                                                 |       | Ps                                                           226,961,259                                    |       | Ps                                                           199,722,283 |   |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| Liabilities and  stockholders’ equity                                   |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| CURRENT  LIABILITIES:                                                        |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| Related parties  (Note 5)                                                    |       | Ps                                                                 12,751,483 |       | Ps                                                                 19,636,190 |   |
| Suppliers                                                                    |       | 6,377,257                                                                                                                                                                                                                                                                                                                                                                                                     |       | 9,268,427 |   |
| Accrued expenses  (Note 7)                                                   |       | 30,013,496                                                                                                                                                                                                                                                                                                                                                                                                    |       | 21,689,532 |   |
| Short-term  leases liability (Note 8)                                        |       | 5,974,951                                                                                                                                                                                                                                                                                                                                                                                                     |       |   |   |
| Taxes payable                                                                |       | 10,567,493                                                                                                                                                                                                                                                                                                                                                                                                    |       | 9,992,467 |   |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| Total current  liabilities                                                   |       | 65,684,680                                                                                                                                                                                                                                                                                                                                                                                                    |       | 60,586,616 |   |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| LONG-TERM  LIABILITIES:                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| Leases liability  (Note 8)                                                   |       | 9,074,964                                                                                                                                                                                                                                                                                                                                                                                                     |       |   |   |
| Deferred income  tax (Note 10)                                               |       | 10,278,410                                                                                                                                                                                                                                                                                                                                                                                                    |       | 7,238,120 |   |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| Total long-term  liabilities                                                 |       | 19,353,374                                                                                                                                                                                                                                                                                                                                                                                                    |       | 7,238,120 |   |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| Total  liabilities                                                           |       | 85,038,054                                                                                                                                                                                                                                                                                                                                                                                                    |       | 67,824,736 |   |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| STOCKHOLDERS’  EQUITY (Note 9):                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| Capital stock                                                                |       | 8,447,918                                                                                                                                                                                                                                                                                                                                                                                                     |       | 8,447,918 |   |
| Share premium                                                                |       | 44,247,697                                                                                                                                                                                                                                                                                                                                                                                                    |       | 44,247,697 |   |
| Contribution for  future capital stock increase                              |       | 57,262,423                                                                                                                                                                                                                                                                                                                                                                                                    |       | 57,262,423 |   |
| Retained  earnings                                                           |       | 43,615,567                                                                                                                                                                                                                                                                                                                                                                                                    |       | 24,716,209 |   |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| Other  comprehensive income                                                  |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| Cumulative  deferred income tax                                              |       | 2,494,432                                                                                                                                                                                                                                                                                                                                                                                                     |       | 2,494,432 |   |
| Cumulative  translation adjustment                                           |       | (3,486,667                                                                                                                                                                                                                                                                                                                                                                                                    | )          | 5,187,942 |   |
| Deficit in the  restatement of capital                                       |       | (12,271,764                                                                                                                                                                                                                                                                                                                                                                                                   | )          | (12,271,764 | ) |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| Total majority  interest                                                     |       | 140,309,606                                                                                                                                                                                                                                                                                                                                                                                                   |       | 130,084,857 |   |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| Minority interest                                                            |       | 1,613,599                                                                                                                                                                                                                                                                                                                                                                                                     |       | 1,812,690 |   |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| Total  stockholders’ equity                                             |       | 141,923,205                                                                                                                                                                                                                                                                                                                                                                                                   |       | 131,897,547 |   |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| CONTINGENCIES  (Note 11)                                                     |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
|                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |   |
| Total liabilities and  stockholders’ equity                             |       | Ps                                                           226,961,259                                    |       | Ps                                                           199,722,283 |   |

 

The accompanyingfourteen Notes are an integral part of these financial statements.

F-31

----

**GRUPO SITEL DE MÉXICO, S. A. DEC. V. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF INCOME(LOSS)**

Mexican pesos (Ps) of December 31, 2005 purchasingpower
| ** **                                                                          | ** ** | **Years ended December 31,**                                                                                                                                                                                                                                                                                     | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                                                                                                                                                                                                                                                                                                                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Income from  services                                                               |       | Ps                                              491,125,893                                    |       | Ps                                              444,268,220 |   | Ps                                              462,694,411 |   |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Direct labor  costs and subcontracted service labor cost                            |       | (266,515,928                                                                                                                                                                                                                                                                                                                    | )          | (236,524,019 | ) | (181,284,987 | ) |
| Direct  telecommunications costs                                                    |       | (39,662,359                                                                                                                                                                                                                                                                                                                     | )          | (42,756,978 | ) | (29,459,149 | ) |
| Third-party  subcontracted services and other direct expenses                       |       | (36,762,301                                                                                                                                                                                                                                                                                                                     | )          | (15,727,746 | ) | (28,764,317 | ) |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Gross profit                                                                        |       | 148,185,305                                                                                                                                                                                                                                                                                                                     |       | 149,259,477 |   | 223,185,958 |   |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Operating,  selling and administrative expenses                                     |       | (115,162,965                                                                                                                                                                                                                                                                                                                    | )          | (112,675,254 | ) | (205,263,676 | ) |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Operating income                                                                    |       | 33,022,340                                                                                                                                                                                                                                                                                                                      |       | 36,584,223 |   | 17,922,282 |   |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Other expenses -  Net                                                               |       | (1,258,113                                                                                                                                                                                                                                                                                                                      | )          | (763,526 | ) | (2,309,193 | ) |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
|                                                                                |       | 31,764,227                                                                                                                                                                                                                                                                                                                      |       | 35,820,697 |   | 15,613,089 |   |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Comprehensive  financing cost:                                                      |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Interest earned  - Net                                                              |       | 2,004,038                                                                                                                                                                                                                                                                                                                       |       | 2,455,643 |   | 3,130,733 |   |
| Exchange loss -  Net                                                                |       | (27,186                                                                                                                                                                                                                                                                                                                         | )          | (80,849 | ) |   |   |
| Loss on net  monetary position                                                      |       | (3,907,540                                                                                                                                                                                                                                                                                                                      | )          | (2,877,253 | ) | (6,139,960 | ) |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Comprehensive  financing cost - Net                                                 |       | (1,930,688                                                                                                                                                                                                                                                                                                                      | )          | (502,459 | ) | (3,009,227 | ) |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Income before  taxes                                                                |       | 29,833,539                                                                                                                                                                                                                                                                                                                      |       | 35,318,238 |   | 12,603,862 |   |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Income tax (Note  10):                                                              |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Current                                                                             |       | (7,496,593                                                                                                                                                                                                                                                                                                                      | )          | (11,463,997 | ) | (8,251,318 | ) |
| Deferred                                                                            |       | (3,040,290                                                                                                                                                                                                                                                                                                                      | )          | (48,192 | ) | (1,612,628 | ) |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
|                                                                                |       | (10,536,883                                                                                                                                                                                                                                                                                                                     | )          | (11,512,189 | ) | (9,863,946 | ) |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Income before  equity in net income of subsidiary                                   |       | 19,296,656                                                                                                                                                                                                                                                                                                                      |       | 23,806,049 |   | 2,739,916 |   |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Equity in net  income of subsidiary and net effect on diluted capital of subsidiary |       |                                                                                                                                                                                                                                                                                                                            |       |   |   | (2,772,882 | ) |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Net consolidated  income (loss) for the year                                        |       | Ps                                                    19,296,656 |       | Ps                                                    23,806,049 |   | Ps                                                                     (32,966 | ) |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Distribution of  net consolidated income (loss) for the year:                       |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Majority  participation                                                             |       | Ps                                                    18,899,358 |       | Ps                                                    23,894,303 |   | Ps                                                                         33,572 |   |
| Minority  interest                                                                  |       | 397,298                                                                                                                                                                                                                                                                                                                         |       | (88,254 | ) | (66,538 | ) |
|                                                                                |       |                                                                                                                                                                                                                                                                                                                            |       |   |   |   |   |
| Net consolidated income  (loss) for the year                                        |       | Ps                                                    19,296,656 |       | Ps                                                    23,806,049 |   | Ps                                                                     (32,966 | ) |

 

The accompanying fourteen Notes are an integral partof these financial statements.

F-32

----

**GRUPO SITEL DE MÉXICO, S. A. DEC. V. AND SUBSIDIARY**

**STATEMENT OF CHANGES INSTOCKHOLDERS’ EQUITY**

**FOR THE YEAR ENDED DECEMBER 31,2005**

(Note 9)

Mexican pesos (Ps) ofDecember 31, 2005 purchasing power
| ** **                                                                             | ** ** | ** **                                 | ** ** | ** **                      | ** ** | **Contributions**               | ** ** | ** **                      | ** ** | **Other comprehensive income**   | ** ** | ** **                                      | ** ** | ** **                   | ** ** | ** **           | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------|------------|------------------------------|------------|----------------------|------------|
| ** **                                                                             | ** ** | ** **                                 | ** ** | ** **                      | ** ** | **for future**             | ** ** | ** **                      | ** ** | **Cumulative**                             | ** ** | **Cumulative**                                  | ** ** | **Deficit in the** | ** ** | **Total**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | **Capital**                                | ** ** | **Share**                       | ** ** | **capital stock**          | ** ** | **Retained**                    | ** ** | **deferred**                               | ** ** | **translation**                                 | ** ** | **restatement**              | ** ** | **majority**         | ** ** | **Minority** | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | **stock**                                  | ** ** | **premium**                     | ** ** | **increase**                    | ** ** | **earnings**                    | ** ** | **income tax**                        | ** ** | **adjustment**                                  | ** ** | **of capital**          | ** ** | **interest**         | ** ** | **interest** | ** ** | **Total** | ** ** |
| Balances at  January 1, 2003                                                           |       | Ps    12,213,817            |       | Ps    42,560,088 |       | Ps    82,672,074 |       | Ps    23,882,701 |       | Ps      2,494,432 |       | Ps       (827,874 | )          | Ps  (19,266,656         | )          | Ps  143,728,582 |       | Ps      1,515,027 |   | Ps  145,243,609 |   |
| Net movement in  the minority interest                                                 |       |                                       |       |                            |       |                            |       |                            |       |                                       |       |                                            |       |                         |       |                 |       | 328,210 |   | 328,210 |   |
| Comprehensive  income for the year                                                     |       |                                       |       |                            |       |                            |       | 33,572                          |       |                                       |       | 5,071,148                                       |       |                         |       | 5,104,720            |       | (66,538 | ) | 5,038,182 |   |
|                                                                                   |       |                                       |       |                            |       |                            |       |                            |       |                                       |       |                                            |       |                         |       |                 |       |   |   |   |   |
| Balances at  December 31, 2003                                                         |       | 12,213,817                                 |       | 42,560,088                      |       | 82,672,074                      |       | 23,916,273                      |       | 2,494,432                                  |       | 4,243,274                                       |       | (19,266,656                  | )          | 148,833,302          |       | 1,776,699 |   | 150,610,001 |   |
|                                                                                   |       |                                       |       |                            |       |                            |       |                            |       |                                       |       |                                            |       |                         |       |                 |       |   |   |   |   |
| Reclassification  to liabilities from contributions for future capital stock increases |       |                                       |       |                            |       | (82,672,074                     | )          |                            |       |                                       |       |                                            |       |                         |       | (82,672,074          | )          |   |   | (82,672,074 | ) |
| Dividends paid                                                                         |       |                                       |       |                            |       |                            |       | (19,533,401                     | )          |                                       |       |                                            |       |                         |       | (19,533,401          | )          |   |   | (19,533,401 | ) |
| Decrease in  capital stock                                                             |       | (6,219,000                                 | )          | (21,670,638                     | )          |                            |       | (3,560,966                      | )          |                                       |       |                                            |       | 4,850,804                    |       | (26,599,800          | )          |   |   | (26,599,800 | ) |
| Increase in  capital stock                                                             |       | 2,453,101                                  |       | 23,358,247                      |       |                            |       |                            |       |                                       |       |                                            |       |                         |       | 25,811,348           |       |   |   | 25,811,348 |   |
| Increase in  contributions for future capital stock increases                          |       |                                       |       |                            |       | 57,262,423                      |       |                            |       |                                       |       |                                            |       |                         |       | 57,262,423           |       |   |   | 57,262,423 |   |
| Net movement in  the minority interest                                                 |       |                                       |       |                            |       |                            |       |                            |       |                                       |       |                                            |       |                         |       |                 |       | 124,245 |   | 124,245 |   |
| Comprehensive  income for the year                                                     |       |                                       |       |                            |       |                            |       | 23,894,303                      |       |                                       |       | 944,668                                         |       | 2,144,088                    |       | 26,983,059           |       | (88,254 | ) | 26,894,805 |   |
|                                                                                   |       |                                       |       |                            |       |                            |       |                            |       |                                       |       |                                            |       |                         |       |                 |       |   |   |   |   |
| Balances at  December 31, 2004                                                         |       | 8,447,918                                  |       | 44,247,697                      |       | 57,262,423                      |       | 24,716,209                      |       | 2,494,432                                  |       | 5,187,942                                       |       | (12,271,764                  | )          | 130,084,857          |       | 1,812,690 |   | 131,897,547 |   |
|                                                                                   |       |                                       |       |                            |       |                            |       |                            |       |                                       |       |                                            |       |                         |       |                 |       |   |   |   |   |
| Net movement in  the minority interest                                                 |       |                                       |       |                            |       |                            |       |                            |       |                                       |       |                                            |       |                         |       |                 |       | (596,389 | ) | (596,389 | ) |
| Comprehensive  income for the year                                                     |       |                                       |       |                            |       |                            |       | 18,899,358                      |       |                                       |       | (8,674,609                                      | )          |                         |       | 10,224,749           |       | 397,298 |   | 10,622,047 |   |
|                                                                                   |       |                                       |       |                            |       |                            |       |                            |       |                                       |       |                                            |       |                         |       |                 |       |   |   |   |   |
| Balances at December 31,  2005                                                         |       | Ps      8,447,918 |       | Ps    44,247,697 |       | Ps    57,262,423 |       | Ps    43,615,567 |       | Ps      2,494,432 |       | Ps    (3,486,667                 | )          | Ps  (12,271,764         | )          | Ps  140,309,606 |       | Ps      1,613,599 |   | Ps  141,923,205 |   |

 

The accompanying fourteen Notes are an integral partof these financial statements.

F-33

----

**GRUPO SITEL DE MÉXICO, S. A. DE C. V. ANDSUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIALPOSITION**

Mexicanpesos (Ps) of December 31, 2005 purchasing power
| ** **                                                                          | ** ** | **Years ended December 31,**                                                                                                                   | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Operation:**                                                                      | ** ** | **2005**                                                                                                                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                |       |                                                                                                                                                          |       |   |   |   |   |
| Net consolidated  income (loss) for the year                                        |       | Ps                         19,296,656 |       | Ps                         23,806,049 |   | Ps                                          (32,966 | ) |
| Charges  (credits) to income (loss) not affecting resources:                        |       |                                                                                                                                                          |       |   |   |   |   |
| Depreciation and  amortization                                                      |       | 10,556,654                                                                                                                                                    |       | 8,876,211 |   | 8,573,571 |   |
| Deferred income  tax                                                                |       | 3,040,290                                                                                                                                                     |       | 48,192 |   | 1,612,628 |   |
| Equity in net  income of subsidiary and net effect on diluted capital of subsidiary |       |                                                                                                                                                          |       |   |   | 2,772,882 |   |
| Net variation in  working capital except cash and cash equivalents                  |       | (12,206,076                                                                                                                                                   | )          | (18,520,331 | ) | 25,302,193 |   |
|                                                                                |       |                                                                                                                                                          |       |   |   |   |   |
| Resources  provided by operating activities                                         |       | 20,687,524                                                                                                                                                    |       | 14,210,121 |   | 38,228,308 |   |
|                                                                                |       |                                                                                                                                                          |       |   |   |   |   |
| Financing:                                                                          |       |                                                                                                                                                          |       |   |   |   |   |
|                                                                                |       |                                                                                                                                                          |       |   |   |   |   |
| Dividends  declared                                                                 |       |                                                                                                                                                          |       | (19,533,401 | ) |   |   |
| Net increase and  decrease in capital stock                                         |       |                                                                                                                                                          |       | (22,985,102 | ) |   |   |
|                                                                                |       |                                                                                                                                                          |       |   |   |   |   |
| Resources used  in financing activities                                             |       |                                                                                                                                                          |       | (42,518,503 | ) |   |   |
|                                                                                |       |                                                                                                                                                          |       |   |   |   |   |
| Investment:                                                                         |       |                                                                                                                                                          |       |   |   |   |   |
|                                                                                |       |                                                                                                                                                          |       |   |   |   |   |
| Resources used  in investment activities for acquisition of fixed assets - Net      |       | (16,381,743                                                                                                                                                   | )          | (11,090,912 | ) | (10,364,028 | ) |
|                                                                                |       |                                                                                                                                                          |       |   |   |   |   |
| Increase  (decrease) in cash and cash equivalents                                   |       | 4,305,781                                                                                                                                                     |       | (39,399,294 | ) | 27,864,280 |   |
|                                                                                |       |                                                                                                                                                          |       |   |   |   |   |
| Cash and cash  equivalents at the beginning of the year                             |       | 26,427,212                                                                                                                                                    |       | 65,826,506 |   | 37,962,226 |   |
|                                                                                |       |                                                                                                                                                          |       |   |   |   |   |
| Cash and cash  equivalents at the end of the year                                   |       | Ps                         30,732,993 |       | Ps                         26,427,212 |   | Ps                         65,826,506 |   |

 

The accompanyingfourteen Notes are an integral part of these financial statements.

F-34

----

**GRUPO SITEL DE MÉXICO, S. A. DE C. V. ANDSUBSIDIARY**

**(subsidiary of Comercializadora Tlmarketing, S. A.de C. V.)**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005, 2004 AND 2003**

(Mexicanpesos (Ps) of December 31, 2005 purchasing power, except exchange rates)

**Note 1.Activity of the Company**

Grupo Sitel deMéxico, S. A. de C. V. (the Company) was incorporated on August 17, 1995, themain activity of the Company is to render telemarketing services.

The Company is asubsidiary of Comercializadora Tlmarketing, S. A. de C. V., who holds 51% ofthe capital stock. The ultimate parent company is Corporación Interamericana deEntretenimiento, S. A. de C. V. (CIE).

The Company has noemployees, and all operative and administrative services are provided byrelated parties.

As a result of acorporate reorganization, on October 1, 2003 the investment in shares of thesubsidiary in Panamá was diluted to 1%, through the increase of capital byanother stockholder. The Company refused its subscription preferred rights.Additionally, on October 31, 2003, the Company sold its remaining interest inPanamá for Ps56,553. The Company recognized net losses for Ps2,772,882 in thestatement of income of 2003. Until September 30, 2003, the Company recordedunder the equity method, the investment in shares of this subsidiary.

**Note2. Significant Accounting Policies**

The accompanyingfinancial statements have been prepared in accordance with accountingprinciples generally accepted in Mexico (“Mexican GAAP”) and are stated inMexican pesos of December 31, 2005 purchasing power. A reconciliation fromMexican GAAP to United States generally accepted accounting principles (“U.S.GAAP”) is included in Note 14.

***Principlesof consolidation***

ConsolidatedFinancial Statements include the financial statements of the Company and itssubsidiary. The Company uses the consolidation method when the Company canexercise control over the operations and policies of a company.  The Company uses the equity method to reportinvestments where the Company can exercise significant influence, but cannotexercise control, over the invitee’s operations and policies, which isgenerally in situations where the Company holds a 20% to 50% voting interest.The Company uses the cost method if it holds less than a 20% voting interest inan investment and cannot exercise significant influence over the invitee’soperations and policies. All intercompany transactions and accounts have beeneliminated and net earnings were reduced by the portion of the net earnings ofsubsidiaries applicable to minority interests.

The Company holds94% of the capital stock of Sitel de Colombia, S. A.  The main activity of the subsidiary is torender telemarketing services.

***Useof estimates***

The preparation ofthe financial statements in conformity Mexican with generally acceptedaccounting principles requires management to make certain estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the dates of the financialstatements, and reported amounts of revenues, costs and expenses for thereporting years.  Actual results coulddiffer from those estimates

***Foreigncurrency translation***

Financialstatements of foreign subsidiary have been restated to recognize the effects ofinflation and translated to Mexican pesos of constant purchasing power as ofDecember 31, 2005, as follows:

F-35

----

 

·                  Financialstatements are restated to year-end constant local currencies following theprovisions of Bulletin B-15, applying the National Consumer Price Index (“NCPI”)of the foreign country, which reflects the change in purchasing power of thelocal currency in which the subsidiary operates and are subsequently adjustedto Mexican GAAP and converted to Mexican pesos at the rate of exchange ineffect at the close of the year end.

·                  Assets,liabilities, income and expenses are translated to Mexican pesos applying theexchange rate in effect at each period end. Stockholders’ equity balances were translated by applying the exchange ratesin effect at the dates in which the contributions were made and the income wasgenerated.  The effects of translationwere recognized as a component of equity entitled “Cumulative TranslationAdjustments”.

***Recognition of the effects of inflation***

The result on netmonetary position represents losses due to inflation changes, measured by NCPIfactors, on the years’ net monthly monetary assets and liabilities, stated inMexican pesos of purchasing power as of the most recent balance sheet date.Inflation rates were 3.33% in 2005 and 5.19% in 2004.

***Revenue recognition***

The Company recognizesrevenue in accordance with applicable accounting standards in Mexico.  The Company recognizes revenue at the timeservices are performed based on the rate detailed in the client contract, suchas hourly, monthly, per call or per employee. A portion of our revenue is often subject to performance standards, suchas sales per hour, average handle time, occupancy rate and abandonment rate.  The Company performance against suchstandards may result in incentives or penalties, which are recognized as earnedor incurred. Revenue for services performed under certain collection serviceagreements are recognized as the related consumer debts are collected and arecalculated based upon a percentage of cash collected or other agreed uponcontractual parameters.

***Cash equivalents***

The Company has definedcash equivalents as short-term, highly liquid investments that are readilyconvertible to amounts of cash with original maturities of three months orless.

***Furniture and equipment, leasehold improvements and licenses***

Furniture andequipment, leasehold improvements and licenses are expressed at their restatedvalue, by applying factors derived from the NCPI to their acquisition cost.Other intangible assets (software licenses) are recognized in the balance sheetprovided they are identifiable, provide expected economic benefits and theCompany has control over such benefits.

Maintenance andrepairs are expensed as incurred.  Costsof major replacements and improvements are capitalized.  When assets are retired, sold or otherwisedisposed of, the restated value and accumulated depreciation are removed fromthe appropriate accounts and any resulting gain or loss is included in “Otherexpenses, net”.

Depreciation iscalculated by the straight-line method on both the acquisition cost andrestatement increments. Annual depreciation rates of the assets are as follows:
|                           | ** ** | **Annual depreciation** | ** ** |
|---------------------------|------------|------------------------------|------------|
| ** **                | ** ** | **rate (%)**            | ** ** |
| Computer  equipment       |       | 30                           |       |
| Telephony  equipment      |       | 10                           |       |
| Furniture and  equipment  |       | 10                           |       |
| Leasehold  improvements   |       | 5                            |       |
| Licenses                  |       | 15                           |       |
| Peripheral  equipment     |       | 30                           |       |
| Transportation  equipment |       | 20                           |       |
| Radio equipment           |       | 10                           |       |

 

F-36

----

***Impairmentof long lived assets***

Effective January1, 2004, the Company adopted the provisions of Bulletin C-15 “Impairment in theValue of Long-lived Assets and their Disposition” of Mexican GAAP.  Bulletin C-15 establishes the criteria forthe identification of certain evidence of a potential impairment of long-livedassets, tangible and intangible. Additionally, Bulletin C-15 provides guidelines for the computation andrecognition of impairment losses and their reversal, as well as therequirements for their disclosure and presentation.

As a result of theapplication of Bulletin C-15, the Company performs impairment tests for itsfurniture and equipment and no impairment effect was determined as of December31, 2005 and 2004.

Fair value ofassets held for use is determined using the higher between the discounted netcash flows expected from the assets and the market price; an impairment loss isrecorded to the extent that the net book value exceeds the fair value of theassets.  Market price is determined usingmarket values or transactions with similar assets less costs to sell.

Fair value ofassets to be disposed of is determined using the lower between book value andmarket price; an impairment loss is recognized for the excess of book valueover market price.  These assets aresubsequently restated using NCPI factors and are no longer depreciated oramortized.

***Provisions***

Liabilities and provisions for liabilities representpresent obligations of the Company with a probable requirement to pay thoseobligations in cash.  The provisions havebeen recorded based on the best reasonable estimation by management of thepresent payment obligation; however, actual results could differ from recordedprovisions.

***Deferredincome taxes***

TheCompany recognizes in income the expense or earning from deferred income taxfor all temporary differences arising between the carrying values for financialreporting and tax values of assets and liabilities that are expected to reversein the future.  Valuation allowances areprovided if based upon the weight of available evidence it is more likely thannot that some or all the deferred tax assets will not be realizable.

***Stockholders’equity***

The differentcomponents of the stockholders’ equity represents the value of those items interms of purchasing power of the Mexican peso as of the most recent balancesheet date, and are determined by applying factors derived from the NCPI to thehistorical values.

Share premiumrepresents the excess of payments for shares subscribed over their par value,and is restated by applying NCPI factors.

Deficit in the restatementof capital represents the initial accrued result on monetary position and theresult of holding non-monetary assets (fixed assets) stated in Mexican pesos ofpurchasing power as of the most recent balance sheet date.

***Foreigncurrency transactions***

Transactionsin foreign currencies are recorded at the rates of exchange prevailing on thedates they are entered into and/or settled. Assets and liabilities denominated in these currencies are stated in theMexican peso equivalents resulting from applying the exchange rates prevailingon the balance sheet dates.  Thedifferences arising from fluctuations in the exchange rates between the dateson which transaction are entered into and those on which they are settled, orthe balance sheet date, are charged or credited to income.

***Comprehensiveincome (loss)***

Comprehensive income(loss) consists of net income (loss) for the year, plus the translationadjustment arising in connection with foreign subsidiary, and items required byMexican GAAP to be reflected in stockholders’ equity but which do notconstitute capital contributions, reductions or distribution. It is restated onthe basis of NCPI factors.

***Reclassifications***

The Company hasreclassified certain prior-period amounts for comparative purposes. These reclassificationsdid not affect consolidated net loss for the periods presented.

F-37

----

**Note 3. Foreign Currency Position**

 

As ofDecember 31, 2005 and 2004, the Company holds certain assets andliabilities in foreign currency, mainly Colombian Pesos, converted at theexchange rate issued by Banco de México of Ps10.6344 and Ps11.1495 per $1dollar (Dls), respectively, as follows:
|              | ** ** | **December 31,**           | ** ** |
|--------------|------------|---------------------------------|------------|
| ** **   | ** ** | **2005**                        | ** ** | **2004** | ** ** |
|         |       |                            |       |   |   |
| Assets       |       | Dls.   5,737,663 |       | Dls.   3,737,701 |   |
| Liabilities  |       | (2,015,078                      | )          | (1,146,343 | ) |
|         |       |                            |       |   |   |
| Net position |       | Dls.   3,722,585      |       | Dls.   2,591,358 |   |

 

**Note 4. Accounts Receivable andRefundable Taxes**

Accounts receivable - netare comprised of the following:
|                                  | ** ** | **December 31,**          | ** ** |
|----------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **2005**                       | ** ** | **2004** | ** ** |
|                             |       |                           |       |   |   |
| Customers                        |       | Ps   91,013,413 |       | Ps   82,265,211 |   |
| Other accounts  receivable       |       | 607,226                        |       | 3,605,641 |   |
|                             |       |                           |       |   |   |
|                             |       | 91,620,639                     |       | 85,870,852 |   |
| Allowance for  doubtful accounts |       | (1,298,834                     | )          | (1,354,960 | ) |
|                             |       |                           |       |   |   |
|                             |       | Ps   90,321,805 |       | Ps   84,515,892 |   |

 

Refundable taxesare comprised of the following:
|                            | ** ** | **December 31,**          | ** ** |
|----------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **2005**                       | ** ** | **2004** | ** ** |
|                       |       |                           |       |   |   |
| Value-added tax            |       |                           |       | Ps     2,915,192 |   |
| Income tax paid  in excess |       | Ps   13,362,969 |       |   |   |
|                       |       |                           |       |   |   |
|                       |       | Ps   13,362,969 |       | Ps     2,915,192 |   |

 

The Company madeseveral income taxes advance payments during 2005 based on prior year taxableincome, which at year end were higher than payable annual income tax. As aresult the Company had a receivable balance with tax authorities at December31, 2005.

F-38

----

**Note 5.Analysis of Transactions and Balances with Related Parties**

a.        Transactions with relatedparties, for the three years ended December 31, carried out in the ordinarycourse of business, were as shown below:
|                         | ** ** | **Year ended December 31,**                | ** ** |
|-------------------------|------------|-----------------------------------------------------------|------------|
| **Income:**             | ** ** | **2005**                                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
|                    |       |                                                      |       |   |   |   |   |
| Telemarketing  services |       | Ps        314,988 |       | Ps        628,494 |   | Ps     1,369,901 |   |
| Other income            |       | 571,522                                                   |       | 290,855 |   | 382,605 |   |
| Interest earned         |       | 1,308,630                                                 |       | 1,514,151 |   | 198,056 |   |

 
|                              | ** ** | **Year ended December 31,** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|
| **Expenses:**                | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                         |       |                                       |       |   |   |   |   |
| Administrative  services (1) |       | Ps 213,970,317                        |       | Ps 202,184,641 |   | Ps 167,072,989 |   |
| Building leases              |       | 5,498,983                                  |       | 4,918,533 |   | 3,334,688 |   |
| Sponsors                     |       | 7,231,216                                  |       | 10,660,525 |   | 8,121,812 |   |
| Other expenses               |       | 183,900                                    |       |   |   | 5,264,303 |   |

 

b.  Accounts receivable and payable from related parties as of December31, were as follows:
|                                                                         | ** **                                                                                 | **December 31,**                                    | ** ** |
|-------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|----------------------------------------------------------|------------|
| ** **                                                              | ** **                                                                                 | **2005**                                                 | ** ** | **2004** | ** ** |
|                                                                    |                                                                                       |                                                     |       |   |   |
| Accounts  receivable:                                                   |                                                                                       |                                                     |       |   |   |
|                                                                    |                                                                                       |                                                     |       |   |   |
| SITEL Panamá, S.  A. (2)                                           |                                                                                       | Ps        62,595 |       | Ps   3,747,109 |   |
| Servicios  Compartidos en Factor Humano, S. A. de C. V. (1)             |                                                                                       | 19,053,691                                               |       | 19,186,250 |   |
| Servicios  Administrativos, División Comercial, S. A. de C. V. (1) |                                                                                       | 1,858,358                                                |       |   |   |
| SITEL Brasil, S.  A. (3)                                                |                                                                                       | 328,677                                                  |       | 356,072 |   |
| Venta de Boletos  por Computadora, S. A. de C. V. (4)                   |                                                                                       |                                                     |       | 141,864 |   |
| Other                                                                   |                                                                                       | 58,813                                                   |       | 113,559 |   |
|                                                                    |                                                                                       | Ps 21,362,134                                       |       | Ps 23,544,854 |   |
|                                                                    |                                                                                       |                                                     |       |   |   |
| Accounts payable:                                                       |                                                                                       |                                                     |       |   |   |
|                                                                    |                                                                                       |                                                     |       |   |   |
| Make Pro, S. A.  de C. V. (5)                                           |                                                                                       | Ps   2,831,545                            |       | Ps   6,255,193 |   |
| Servicios  Corporativos CIE, S. A. de C. V. (1)                         |                                                                                       | 3,365,276                                                |       | 4,934,706 |   |
| Serinem México,  S. A. de C. V. (1)                                |                                                                                       | 1,380,574                                                |       | 1,454,628 |   |
| Corporación  Interamericana de Entretenimiento, S. A. de C. V. (6) |                                                                                       | 1,246,352                                                |       | 1,532,366 |   |
| Operadora de  Centros de Espectáculos, S. A. de C. V. (7)          |                                                                                       | 392,683                                                  |       | 1,867,349 |   |
| Servicios  Administrativos, División Comercial, S. A. de C. V. (1) |                                                                                       |                                                     |       | 1,692,392 |   |
| SITEL  Corporation (8)                                                  |                                                                                       | 851,989                                                  |       | 2,165,006 |   |
| SITEL Europe (8)                                                        |                                                                                       |                                                     |       | 330,727 |   |
| OCESA  Anfiteatro, S. A. de C. V. (9)                                   |                                                                                       |                                                     |       | 298,430 |   |
| Coordinación de  Recursos Humanos, S. A. de C. V. (1)              |                                                                                       |                                                     |       | 8,321 |   |
|                                                                    |                                                                                       | 10,068,419                                               |       | 20,539,118 |   |
| Labor  liabilities (assets) with related parties - Net (1)              |                                                                                       | 2,683,064                                                |       | (902,928 | ) |
|                                                                    |                                                                                       |                                                     |       |   |   |
|                                                                    |                 | Ps 12,751,483                                       |       | Ps 19,636,190 |   |

 

F-39

----

----

(1)   Services companies that provideadministrative and operative services to the companies of CIE. RetirementObligations are comprised of the following as of December 31:
|                          | ** ** | **December 31,**         | ** ** |
|--------------------------|------------|-------------------------------|------------|
| ** **               | ** ** | **2005**                      | ** ** | **2004** | ** ** |
|                     |       |                          |       |   |   |
| Pensions                 |       | Ps   3,257,448 |       | Ps   2,349,062 |   |
| Post-retirement benefits |       | 7,573,217                     |       | 4,364,111 |   |
| Post-employment benefits |       | 2,256,415                     |       | 1,701,557 |   |
| Contributions made       |       | (10,404,016                   | )          | (9,317,658 | ) |
|                     |       |                          |       |   |   |
|                     |       | Ps   2,683,064 |       | Ps    (902,928 | ) |

 

The Company has no employees as all operative andadministrative personnel services are provided by related parties. Percontractual clauses the Company needs to assume any expense generated by thepersonnel. Under Mexican GAAP the Company registers generic provisions relatedto the personnel in order to reflect these liabilities on a stand alone basis.

Administrative services are basically comprised of thesalaries paid to personnel contracted through related parties.

(2)           SITEL Panamá renders telemarketing services in Panamá.

(3)           SITEL Brasil renders telemarketing services in Brazil.

(4)           Venta deBoletos por Computadora, S. A. de C. V., engaged of automated ticket sales inMéxico.

(5)           Make Pro,S.A. de C.V., engaged of sales of advertising and sponsorship rights.

(6)    CorporaciónInteramericana de Entretenimiento, S. A. de C. V., parent company of CIE Group.

(7)           Operadorade Centros de Espectáculos, S. A. de C. V., engaged of the administration ofentertainment venues and leases the facilities to the Company.

(8)           SITELCorporation, Inc. and Sitel Europe render certain kind of administrativeservices.

(9)           OCESAAnfiteatro, S. A. de C. V., engaged of lease a portion of the facilities to theCompany.

F-40

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**Note 6. Furniture and Equipment, LeaseholdImprovements and Licenses**
|                           | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                      |       |                  |       |   |   |
| Computer equipment (1)    |       | Ps 70,390,417    |       | Ps 55,438,057 |   |
| Telephony equipment       |       | 19,197,504            |       | 19,486,272 |   |
| Furniture and equipment   |       | 22,821,297            |       | 21,129,520 |   |
| Leasehold improvements    |       | 18,877,444            |       | 15,195,414 |   |
| Licenses                  |       | 14,539,098            |       | 12,590,807 |   |
| Peripheral equipment      |       | 6,510,665             |       | 6,244,859 |   |
| Transportation  equipment |       | 401,294               |       | 431,616 |   |
| Radio equipment           |       | 7,364                 |       | 7,366 |   |
|                      |       |                  |       |   |   |
|                      |       | 152,745,083           |       | 130,523,911 |   |
|                      |       |                  |       |   |   |
| Accumulated  depreciation |       | (82,961,472           | )          | (69,529,132 | ) |
|                      |       |                  |       |   |   |
|                      |       | Ps 69,783,611    |       | Ps 60,994,779 |   |

 

----

(1) IncludesPs15,049,915 of leases capitalization of computer equipment in 2005.

For the yearsended December 31, 2005, 2004 and 2003, depreciation expense amounted toPs.10,556,654, Ps.8,876,211 and 8,573,571, respectively.  Additionally, as of December 31, 2005 thefinancial group had no assets which are available for sale.

At December 31,2005 and 2004 the Company had no furniture and equipment, leaseholdimprovements and licenses subject to mortgage indebtedness.

**Note 7.Accrued Expenses**

Accrued expensesconsisted of the following:
| ** **                 | ** ** | **December 31,**         | ** ** |
|----------------------------|------------|-------------------------------|------------|
| ** **                 | ** ** | **2005**                      | ** ** | **2004** | ** ** |
|                       |       |                          |       |   |   |
| Accrued wages              |       | Ps   1,460,934 |       | Ps   7,725,527 |   |
| Accrued expenses           |       | 8,925,234                     |       | 9,231,282 |   |
| Other current  liabilities |       | 19,627,328                    |       | 4,732,723 |   |
|                       |       |                          |       |   |   |
|                       |       | Ps 30,013,496            |       | Ps 21,689,532 |   |

 

F-41

----

**Note 8. Commitments**

During 2005 theCompany entered into several capital leases for certain computer equipment thatexpire at various dates through 2009.  AtDecember 31, 2005, the future minimum payments under capital leases contractswere as follows:

|                        | ** ** | **Minimum**                   | ** ** |
|------------------------|------------|-------------------------------|------------|
| **Year**               | ** ** | **lease payments**       | ** ** |
|                   |       |                          |       |
| 2006                   |       | Ps   6,513,738 |       |
| 2007                   |       | 6,513,738                     |       |
| 2008                   |       | 4,649,505                     |       |
| 2009                   |       | 92,057                        |       |
|                   |       |                          |       |
|                   |       | 17,769,038                    |       |
|                   |       |                          |       |
| Interest to be accrued |       | (2,719,123                    | )          |
|                   |       |                          |       |
|                   |       | Ps 15,049,915            |       |

 

**Note 9.Stockholders Equity**

***Capitalstock***

At December 31,2005, the capital stock was represented by common nominative Shares with no parvalue, at a subscription price per share of Ps1.00, analyzed as follows:
| **Number of** | ** ** | ** **                                                                                         | ** ** | ** **                                               | ** ** |
|--------------------|------------|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **shares**         | ** ** | **Description**                                                                                    | ** ** | **Amount**                                               | ** ** |
|               |       |                                                                                               |       |                                                     |       |
| 24,500             |       | Series “E”,  Class I shares, representing the fixed minimum portion of the capital stock |       | Ps        24,500 |       |
|               |       |                                                                                               |       |                                                     |       |
| 25,500             |       | Series “D”,  Class I shares, representing the fixed minimum portion of the capital stock |       | 25,500                                                   |       |
|               |       |                                                                                               |       |                                                     |       |
| 2,174,831          |       | Series “E”,  Class II shares, representing the variable portion of the capital stock     |       | 2,174,831                                                |       |
|               |       |                                                                                               |       |                                                     |       |
| 2,263,599          |       | Series “D”,  Class II shares, representing the variable portion of the capital stock     |       | 2,263,599                                                |       |
|               |       |                                                                                               |       |                                                     |       |
| 4,488,430          |       | Capital stock in  historical Mexican pesos                                                         |       | 4,488,430                                                |       |
|               |       |                                                                                               |       |                                                     |       |
|               |       | Restatement  increase                                                                              |       | 3,959,488                                                |       |
|               |       |                                                                                               |       |                                                     |       |
|               |       | Capital stock in pesos  of December 31, 2005 purchasing power                                      |       | Ps   8,447,918                            |       |

 

F-42

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***Dividends***

Dividends paid arenot subject to income tax if paid from the net tax profit account.  Any dividends paid in excess of this accountare subject to income tax equivalent to 40.84% and 38.91% depending on whetherpaid in 2006 or 2007, respectively.  Theincome tax is payable by the Company and may be credited against its income taxin the same year or the following two years. Dividends paid from previously taxed profits are not subject to taxwithholding or additional tax payment.

At the February16, 2004 general stockholders’ meeting, the stockholders decreed dividends inthe amount of Ps19,533,401 (Ps18,082,936 in historical pesos), to be paid incash by July 10, 2004, at the latest.

In the event of acapital reduction, any excess of stockholders’ equity over capital contributions,the latter restated in accordance with the provisions of the Income Tax Law,receives the same tax treatment as dividends.

***Otherequity transactions***

On January 15,2004, the Company agreed to reimburse contributions for future capital stock increasesin the amount of Ps25,409,651 (Ps22,733,390 in historical pesos).

At the February23, 2004 general stockholders’ meeting, the stockholders agreed to:

1.                                       Reducethe Company’s variable capital stock through cancellation of 2,263,599 ordinarynominative Class II, series “D” Shares, with a par value of Ps1.00 each.  This reimbursement was made through paymentof Ps26,599,800 (Ps23,708,889 in historical pesos), at Ps10.47397932reimbursement value per share, to be paid by October 16, 2004 at the latest.

The corresponding payment was made, irrespective ofthe par value of the cancelled shares, on the basis of the financial statementsat January 31, 2004, which had been adjusted and restated in light of thedividends decreed at the February 16, 2004 stockholders’ meeting.

2.                                       Increasethe Company’s variable capital stock by Ps2,453,101 (Ps2,289,099 in historicalpesos) through issuance of 2,289,099 ordinary nominative Class II, Series “D”Shares, with a par value of Ps1.00, plus a premium on the subscription ofshares required by the Company in the amount of Ps23,358,247 (Ps21,686,876 inhistorical pesos).

3.                                       Convert25,500 ordinary nominative Class I, Series “D” Shares, with a par value ofPs1.00 each, representing the Company’s fixed capital stock, to 25,500 ordinarynominative Class II, Series “D” Shares, with a par value of Ps1.00 each,representing the Company’s variable capital stock.  It was also agreed to simultaneously convert25,500 ordinary nominative Class I, Series “D” Shares, with a par value of Ps1.00each, representing the Company’s variable capital stock, to 25,500 ordinarynominative Class I, Series “D” Shares with a par value of Ps1.00 each,representing the Company’s fixed capital stock.

In light of the fact that the approved Shareconversions were conducted simultaneously, and involved the same number ofShares and the same amount of capital, the minimum fixed and variable portionswere not changed in the Company’s by-laws.

4.                                       Reducethe Company’s variable capital stock through cancellation of 25,500 ordinarynominative Class II, Series “D” Shares, with a par value of Ps1.00 each.  This reimbursement was made through paymentof Ps10.47397932 (Ps267,086 per share).

It was agreed, irrespective of the par value of thecancelled Shares, to make the corresponding payment on the basis of thefinancial statements at January 31, 2004, which had been adjusted and restatedin light of the dividends decreed at the February 16, 2004 stockholders’meeting.

F-43

----

**Note 10.Income Tax and Assets Tax**

***Income tax and Asset tax***

In 2005, 2004 and2003 the Company and its subsidiary determined a tax profit of Ps23,288,406,Ps35,152,292 and Ps19,510,066 (in historical pesos), respectively.

In accordance withthe applicable tax law, Mexican corporations must pay the higher of eitherincome tax or asset tax (1.8%). Asset tax is determined on the average value ofsubstantially all of the Company assets less certain liabilities. Payments ofasset tax are recoverable against the excess of income tax over asset tax ofthe three prior years and the ten subsequent years.

At December 31,2005 and 2004, the Company determined asset tax of Ps504,544 and Ps1,674,702,respectively, in historical pesos.  Assettax determined in 2005 and 2004 was lower than income tax incurred; therefore, assettax was credited against income tax.

***Compose of provision for income tax expense***

As a result of thechange to the Mexican income tax law approved on November 13, 2004, the incometax rate will be of 29% and 28%, in 2006 and 2007, respectively.

The components ofthe provision for income tax expense were comprised of the following for theyears ended December 31:
|                                   | ** ** | **December 31,**          | ** ** |
|-----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **2005**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|                              |       |                           |       |   |   |   |   |
| Current:                          |       |                           |       |   |   |   |   |
| Mexico                            |       | (5,292,152                     | )          | (10,831,671 | ) | (6,750,472 | ) |
| Foreign                           |       | (2,204,441                     | )          | (632,326 | ) | (1,500,846 | ) |
|                              |       |                           |       |   |   |   |   |
|                              |       | Ps   (7,496,593 | )          | Ps (11,463,997 | ) | Ps   (8,251,318 | ) |
|                              |       |                           |       |   |   |   |   |
| Deferred:                         |       |                           |       |   |   |   |   |
| Mexico                            |       | (3,040,290                     | )          | (48,192 | ) | (1,612,628 | ) |
| Foreign                           |       | —                         |       | — |   | — |   |
|                              |       |                           |       |   |   |   |   |
|                              |       | Ps   (3,040,290 | )          | Ps       (48,192 | ) | Ps   (1,612,628 | ) |
|                              |       |                           |       |   |   |   |   |
| Provision for income  tax expense |       | Ps (10,536,883            | )          | Ps (11,512,189 | ) | Ps   (9,863,946 | ) |

 

F-44

----

***Reconciliation of statutory andeffective tax rate***

Following is the reconciliation between thestatutory and effective tax rates:
|                                                                                                                              | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                   | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                         |       |                  |       |   |   |   |   |
| Statutory income tax rate                                                                                                    |       | 30                    | %          | 33 | % | 34 | % |
| Plus (less) effect of the following permanent differences:                                                                   |       |                  |       |   |   |   |   |
| Non-deductible expenses                                                                                                      |       | 2                     | %          | 3 | % | 8 | % |
| Net difference between the gain or loss on net monetary position and  the inflationary component determined for tax purposes |       | 1                     | %          | 1 | % | — |   |
| Foreign tax credit and payments                                                                                              |       | 2                     | %          | (4 | )% | 36 | % |
|                                                                                                                         |       |                  |       |   |   |   |   |
| Effective income tax rate                                                                                                    |       | 35                    | %          | 33 | % | 78 | % |

 

***Composeof deferred income tax liability***

The following table setsforth the tax effects of temporary differences that gave rise to significantportions of the deferred tax assets and deferred tax liabilities that werereported in our consolidated balance sheets:
| ** **                                 | ** ** | **December 31,**                                             | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                                          | ** ** | **2004** | ** ** |
|                                       |       |                                                              |       |   |   |
| Allowance for doubtful  accounts           |       | Ps         1,298,834 |       | Ps         1,354,960 |   |
| Provisions - Net                           |       | 8,331,018                                                         |       | 7,554,323 |   |
| Advance payments  received from clients    |       |                                                              |       | 1,856,640 |   |
| Fixed assets - Net                         |       | (15,736,722                                                       | )          | (13,603,832 | ) |
| Prepaid expenses                           |       | (21,224,759                                                       | )          | (18,445,454 | ) |
| Accounts receivable  pending to be taxable |       | (8,111,165                                                        | )          | (2,843,704 | ) |
|                                       |       |                                                              |       |   |   |
|                                       |       | (35,442,794                                                       | )          | (24,127,067 | ) |
|                                       |       |                                                              |       |   |   |
| Income tax rate                            |       | 29                                                                | %          | 30 | % |
|                                       |       |                                                              |       |   |   |
| Deferred income tax liabilities            |       | Ps     (10,278,410                       | )          | Ps       (7,238,120 | ) |

 

**Note 11. Contingencies**

Under the provisions ofthe Income Tax Law, parties carrying out operations with related partiesresident in Mexico or abroad are subject to tax limitations and obligations asconcern the determination of transfer prices, which must be similar to thosenegotiated with non-related parties in comparable operations.

If in the event of anofficial review of the prices involved, the tax authorities consider theamounts determined as a departure from the applicable legal provisions, asidefrom payment of the tax in question and the corresponding

F-45

----

restatement andsurcharges, the authorities could impose fines on omitted taxes, of up to 100%of the amount in question.

**Note 12. New Accounting Standards**

Beginning January 1,2006, several Financial Reporting Standards (NIFS), issued by a neworganization, the Mexican Financial Reporting Standards Board (CINIF, for itsinitials in Spanish) came into effect. It is expected that these standards will not  have a significant effect on activities, orthe financial situation of the Company.

**Note 13. Concentration of Risk**

Teléfonos de México, S.A. de C. V. and Banco Santander Serfin, S. A., business units were responsiblefor 42% and 13% in 2005 and 40% and 11% in 2004.  The Company did not have any other clientsthat had generated more than 10% of our income from services for the yearspresented.

**Note 14.Differences between Mexican GAAP and U.S. GAAP**

The Company’sconsolidated financial statements are prepared in accordance with Mexican GAAP,which differ in certain significant respects from U.S. GAAP.  The Mexican GAAP consolidated financialstatements include the effects of inflation as provided for under BulletinB-10, including the Fifth Amendment to Bulletin B-10 and Bulletin B-15, whereasfinancial statements prepared under U.S. GAAP are presented on a historicalcost basis.  These provisions ofinflation accounting under Mexican GAAP do not meet the consistent reportingcurrency requirements of Regulation S-X. The reconciliation does not include the reversal of other Mexican GAAPinflation accounting adjustments as they represent a comprehensive measure ofthe effects of price-level changes in the inflationary Mexican economy and, assuch, are considered a more meaningful presentation than historical cost-basedfinancial reporting for both Mexican and U.S. accounting purposes.

The principaldifferences, other than inflation accounting, between Mexican GAAP and U.S.GAAP and the effect on consolidated net income (loss) and consolidatedstockholders’ equity are presented below, with an explanation of theadjustments.

Monetary figures in thisNote are expressed in Mexican pesos (Ps) of December 31, 2005 purchasing power.

*Reconciliationof stockholders’ equity:*
|                                                             | ** ** | **As of December 31,**            | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                  | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
|                                                        |       |                                             |       |   |   |
| Stockholders’  equity under Mexican GAAP               |       | Ps    141,923,205            |       | Ps    131,897,547 |   |
| U.S. GAAP  adjustments:                                     |       |                                             |       |   |   |
| Reclassification  of future capital stock increases (see B) |       | (57,262,423                                      | )          | (57,262,423 | ) |
| Minority  interest under Mexican GAAP (see C)               |       | (1,613,599                                       | )          | (1,812,690 | ) |
|                                                        |       |                                             |       |   |   |
| Stockholders’ equity  under U.S. GAAP                  |       | Ps      83,047,183 |       | Ps      72,822,434 |   |

 

Adjustments in the Stockholders’equity section between U.S. GAAP and Mexican GAAP represent reclassificationswith no impact to net income. Therefore, no net income reconciliation betweenboth GAAPs is included.

F-46

----

A rollforward of theCompany’s U.S. GAAP stockholders’ equity balance is shown as follows.
|                                                               | ** ** | **As of December 31,**      | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Balance at the  beginning of the year                         |       | Ps     72,822,434 |       | Ps     66,161,228 |   |
|                                                          |       |                                       |       |   |   |
| Net consolidated  majority income under Mexican and U.S. GAAP |       | 18,899,358                                 |       | 23,894,303 |   |
| Increase in  capital                                          |       |                                       |       | 25,811,348 |   |
| Decrease in  capital                                          |       |                                       |       | (26,599,800 | ) |
| Dividends paid                                                |       |                                       |       | (19,533,401 | ) |
| Deficit in the  restatement of capital                        |       |                                       |       | 2,144,088 |   |
| Other  comprehensive loss                                     |       | (8,674,609                                 | )          | 944,668 |   |
|                                                          |       |                                       |       |   |   |
| Balance at the end of  the year                               |       | Ps     83,047,183 |       | Ps     72,822,434 |   |

 

***I.Explanation of reconciling items:***

***A. Effects of Bulletin B-15 Restatement:***

As disclosed in Note 2,the Company adopted the provisions of Bulletin B-15, which allows therestatement of information for prior periods for comparison purposes toinformation of the most current period presented, based on a weighted averagerestatement factor that reflects the relative inflation and currency exchangemovements of the countries in which the Company operates.  The restatement provisions of Bulletin B-15do not meet the Regulation S-X requirement that the financial statements bestated in the same currency for all periods, because changes in foreigncurrency exchange rates are included in the restatement factor.  The U.S. GAAP adjustments to net income andstockholders’ equity reflecting the difference between restating these priorperiods, including the U.S. GAAP adjustments, to December 31, 2005 constantpesos utilizing the Mexican NCPI and the weighted average restatement factor,are not deemed significant.

***B. Reclassification of future stock increases:***

Based on guidelinesprovided by Mexican GAAP standards, the Company registered within the equitysection, contributions made by shareholders for future stock increases to beagreed by the Board of Directors.  Thesecontributions were received during 2004.

Under U.S. GAAP and inaccordance to FAS 150 ‘Accounting for Certain Instruments with Characteristicsof Both Liabilities’, it is stated that to be classified as equity, anobligation must expose the holder of the instrument to certain risk andbenefits that are similar to those to which an owner (that is, a holder of anoutstanding share of the entity’s equity) is exposed. Cash contributed byshareholders represents a financial instrument embodying an obligation of afuture stock issuance. Therefore, this balance is reclassified to liabilitiesfor alignment purposes with U.S. GAAP.

***C. Minority interest:***

Under Mexican GAAP, theminority interest in consolidated subsidiary is presented as a separatecomponent within stockholders’ equity in the consolidated balance sheet. ForU.S. GAAP purposes, the minority interest is not included in stockholders’equity.

F-47

----

***II.Additional disclosures:***

***A.Deferred tax classification:***
|                                            | ** ** | **2005**                                                              | ** ** | **2004**                                                              | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
|                                       |       |                                                                  |       |                                                                  |       |
| Allowance for  doubtful accounts           |       | Ps          376,672 |       | Ps          406,488 |       |
| Provisions - Net                           |       | 2,415,995                                                             |       | 2,266,297                                                             |       |
| Advance payments  of clients               |       |                                                                  |       | 556,992                                                               |       |
| Fixed assets -  Net                        |       | (4,563,659                                                            | )          | (4,081,150                                                            | )          |
| Prepaid expenses                           |       | (6,155,180                                                            | )          | (5,533,636                                                            | )          |
| Accounts  receivable pending to be taxable |       | (2,352,238                                                            | )          | (853,111                                                              | )          |
|                                       |       |                                                                  |       |                                                                  |       |
|                                       |       | Ps    (10,278,410                                 | )          | Ps     (7,238,120)                           |       |
|                                       |       |                                                                  |       |                                                                  |       |
| Short term                                 |       | Ps      (5,714,761                      | )          | Ps     (3,156,971)                           |       |
| Long term                                  |       | (4,563,649                                                            | )          | (4,081,150                                                            | )          |
|                                       |       |                                                                  |       |                                                                  |       |
|                                       |       | Ps    (10,278,410                                 | )          | Ps      (7,238,120                      | )          |

 

***B.Cash flow information:***

Under U.S. GAAP, pursuantto SFAS No. 95, “Statement of Cash Flows”, a statement of cash flow is arequired component of a complete set of financial statements in lieu of astatement of changes in financial position. SFAS No. 95 establishes specificpresentation requirements and additional disclosures but does not provideguidance with respect to inflation adjusted financial statements. Based onrequirements of the Securities and Exchange Commission (the “SEC”), the effectof inflation restatements and foreign exchange gains and losses on cash flowhas been included in a separate line after cash flows from financingactivities.

The U.S. GAAP statementsof cash flows for the years ended December 31, 2005 and 2004 are shown inthe next page.

F-48

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**
| ** **                                                                        | ** ** | **Years ended December 31,**                                 | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                                                                    | ** ** | **2004** | ** ** |
|                                                                              |       |                                                                        |       |   |   |
| Cash flows from  operating activities:                                            |       |                                                                        |       |   |   |
|                                                                              |       |                                                                        |       |   |   |
| Net consolidated  majority income under U.S. GAAP                                 |       | Ps      18,899,358                            |       | Ps      23,894,303 |   |
| Adjustments to  reconcile net income to net cash flows from operating activities: |       |                                                                        |       |   |   |
| Depreciation and  amortization                                                    |       | 10,556,654                                                                  |       | 8,876,211 |   |
| Gain (loss) on disposal  of assets                                                |       | 75,972                                                                      |       | (175,203 | ) |
| Provision for deferred  income tax                                                |       | 3,040,290                                                                   |       | 48,192 |   |
| Increase in allowance  for doubtful accounts                                      |       | (56,126                                                                     | )          | 208,355 |   |
| Loss on net monetary  position                                                    |       | 3,907,540                                                                   |       | 2,877,253 |   |
| Changes in operating  assets and liabilities:                                     |       |                                                                        |       |   |   |
| Related parties - Net                                                             |       | (5,699,430                                                                  | )          | (11,003,294 | ) |
| Accounts receivable                                                               |       | (14,964,353                                                                 | )          | (31,787,861 | ) |
| Other assets                                                                      |       | (2,301,639                                                                  | )          | (3,228,021 | ) |
| Accounts payable                                                                  |       | 592,831                                                                     |       | 9,781,471 |   |
| Other liabilities                                                                 |       | (115,878                                                                    | )          | 12,645,523 |   |
|                                                                              |       |                                                                        |       |   |   |
| Net cash flows from  operating activities                                         |       | 13,935,219                                                                  |       | 12,136,929 |   |
|                                                                              |       |                                                                        |       |   |   |
| Cash flows from  investing activities:                                            |       |                                                                        |       |   |   |
|                                                                              |       |                                                                        |       |   |   |
| Purchases of furniture  and equipment                                             |       | (10,365,800                                                                 | )          | (6,529,334 | ) |
|                                                                              |       |                                                                        |       |   |   |
| Cash flows from  financing activities:                                            |       |                                                                        |       |   |   |
|                                                                              |       |                                                                        |       |   |   |
| Dividends paid                                                                    |       |                                                                        |       | (18,082,936 | ) |
| Net increase and  decrease in capital stock                                       |       |                                                                        |       | (20,941,955 | ) |
|                                                                              |       |                                                                        |       |   |   |
| Net cash flows from  financing activities                                         |       |                                                                        |       | (39,024,891 | ) |
|                                                                              |       |                                                                        |       |   |   |
| Effect of foreign  exchange rates and inflation on cash and cash equivalents      |       | 736,362                                                                     |       | (3,583,873 | ) |
|                                                                              |       |                                                                        |       |   |   |
| Increase (decrease) in  cash and cash equivalents                                 |       | 4,305,781                                                                   |       | (37,001,169 | ) |
|                                                                              |       |                                                                        |       |   |   |
| Cash and cash  equivalents at the beginning of the year                           |       | 26,427,212                                                                  |       | 63,428,381 |   |
|                                                                              |       |                                                                        |       |   |   |
| Cash and cash  equivalents at the end of the year                                 |       | Ps      30,732,993                            |       | Ps      26,427,212 |   |
|                                                                              |       |                                                                        |       |   |   |
| Other cash information:                                                           |       |                                                                        |       |   |   |
| Interest paid                                                                     |       | Ps           165,821 |       | Ps           187,313 |   |
| Income taxes paid                                                                 |       | 13,577,287                                                                  |       | 3,452,498 |   |
|                                                                              |       |                                                                        |       |   |   |
| Non-cash investing in  financing activities:                                      |       |                                                                        |       |   |   |
| Capital leases incurred                                                           |       | Ps      15,049,915                            |       | Ps                    — |   |

*** ***

F-49

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***III.New Accounting pronouncements***

In May 2005, the FASBissued SFAS Statement No. 154, “Accounting Changes and Error Corrections” (“SFAS154”). SFAS 154 is a replacement of Accounting Principles Board OpinionNo. 20 (“APB 20”) and FASB Statement No. 3.  SFAS 154 provides guidance on the accountingfor and reporting of accounting changes and error corrections. It establishesretrospective application, or the latest practicable date, as the requiredmethod for reporting a change in accounting principle and the reporting of acorrection of an error. SFAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15, 2005and the Company will adopt this standard on January 1, 2006. The Company doesnot expect that the adoption of SFAS 154 will have a material impact on ourconsolidated results of operations, financial condition and cash flows.

EITF Issue No.05-6, “Determiningthe Amortization Period for Leasehold Improvements Purchased after LeaseInception or Acquired in a Business Combination”, was issued in June 2005.  This guidance determines that leaseholdimprovements acquired in a business combination should be amortized over theshorter of the useful life of the assets or a term that includes required leaseperiod and renewals that are deemed to be reasonably assured at the date ofacquisition.  The Task Force also agreedthat leasehold improvements that are placed in service significantly after andnot contemplated at or near beginning of the lease term should be amortizedover the shorter of the useful life of the assets or a term that includesrequired lease periods and renewals that are deemed to be reasonably assured atthe date the leasehold improvement are purchased.  This consensus should be applied to leaseholdimprovements that are purchased or acquired in reporting periods beginningafter June 29, 2005.  The Company’smanagement does not anticipate that the adoption of this EITF will have amaterial effect on its consolidated financial position or results of operation.

SFAS No.155 “Accountingfor certain hybrid financial instruments-and amendment of FASB StatementsNo.133 and 140” was issued on February 2006. This Statement amends FASB Statements No.133, “Accounting for DerivativeInstruments and Hedging Activities, and No. 140, Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities.” ThisStatement resolves issues addressed in Statement 133 Implementation Issue No.D1, “Application of Statement 133 to Beneficial Interests in SecuritizedFinancial Assets.” This Statement permits fair value remeasurement for anyhybrid financial instrument that contains an embedded derivative that otherwisewould require bifurcation, clarifies which interest-only strips andprincipal-only strips are not subject to the requirements of Statement 133,establishes a requirement to evaluate interests in securitized financial assetsto identify interests that are freestanding derivatives or that are hybridfinancial instruments that contain an embedded derivative requiring bifurcation,clarifies that concentrations of credit risk in the form of subordination arenot embedded derivatives and amends Statement 140 to eliminate the prohibitionon a qualifying special-purpose entity from holding a derivative financialinstrument that pertains to a beneficial interest other than another derivativefinancial instrument. This Statement is effective for all financial instrumentsacquired or issued after the beginning of an entity’s first fiscal year thatbegins after September 15, 2006.

SFAS No.156 “Accountingfor servicing of financial assets-an amendment of FASB Statement No.140” wasissued on March 2006.  This Statementamends FASB Statement No.140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities,” with respect to theaccounting for separately recognized servicing assets and servicingliabilities.  This Statement requiresthat all separately recognized servicing assets and servicing liabilities beinitially measured at fair value, if practicable.  This Statement permits, but does not require,the subsequent measurement of servicing assets and servicing liabilities atfair value.  This Statement permits anentity to reclassify certain available-for-sale securities to tradingsecurities, regardless of the restriction in paragraph 15 of Statement 115,provided that those available-for-sale securities are identified in some manneras offsetting the entity’s exposure to changes in fair value of servicingassets or servicing liabilities that a services elects to subsequently measureat fair value.  This option is availableonly once, as of the beginning of the fiscal year in which the entity adoptsthis Statement.  An entity should adoptthis Statement as of the beginning of its first fiscal year that begins afterSeptember 15, 2006.  Earlier adoption ispermitted as of the beginning of an entity’s fiscal year, provided the entityhas not yet issued financial statements, including interim financialstatements, for any period of that fiscal year. The effective date of this Statement is the date an entity adopts therequirements of this Statement.  Anentity should apply the requirements for recognition and initial measurement ofservicing assets and servicing liabilities prospectively to all transactions afterthe effective date of this Statement.

On July 13, 2006, theFASB released FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes, an interpretation of FASB Statement No. 109” (FIN 48).  FIN 48 clarifies the accounting and reportingfor income taxes where interpretation of the tax law may be uncertain. FIN 48prescribes a comprehensive model for the financial

F-50

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statement recognition,measurement, presentation and disclosure of income tax uncertainties withrespect to positions taken or expected to be taken in income tax returns.  The Corporation will adopt FIN 48 on January1, 2007.  The cumulative effect, if any,of applying FIN 48 will be recorded as an adjustment to the beginning balanceof Retained Earnings. Management is currently evaluating the effect of FIN 48on the Corporation.

F-51

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