UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

|(Mark One)                                   |                                                                                          
|-------------------------------------------- | -----------------------------------------------------------------------------------------
|ý                                            | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
|For the quarterly period ended April 2, 2006
|or                                          
|o                                            | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|For the Transition Period
From  to          

Commission file number 0-26786

APAC Customer Services, Inc.(Exact name of registrant as specified in its charter)

|Illinois                                                       |  | 36-2777140                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)

Six Parkway North, Deerfield, Illinois 60015(Address of Principal Executive Offices, Zip Code)

Registrant's
telephone number, including area code:(847) 374-4980

Indicate
by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý        No  o

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

Large
accelerated filer o        Accelerated
filer ý        Non-accelerated filer o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o        No  ý

There were 49,848,653 common shares, $0.01 par value per share, outstanding as of May 1, 2006.



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INDEX

|                                                                      |  |                       |  |                                                                                                              |  | Page
|--------------------------------------------------------------------- |  | --------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|Forward-Looking Statements and Factors That May Affect Future Results |  | 3                    
|Part I.                                                               |  | Financial Information |  | 4                                                                                                           
|                                                                      |  | Item 1.               |  | Consolidated Condensed Financial Statements (Unaudited):                                                     |  |     
|                                                                      |  |                       |  | Consolidated Condensed Balance Sheets as of April 2, 2006 and January 1, 2006                                |  | 4   
|                                                                      |  |                       |  | Consolidated Condensed Statements of Operations for the Thirteen Weeks Ended April 2, 2006 and April 3, 2005 |  | 5   
|                                                                      |  |                       |  | Consolidated Condensed Statements of Cash Flows for the Thirteen Weeks Ended April 2, 2006 and April 3, 2005 |  | 6   
|                                                                      |  |                       |  | Notes to Consolidated Condensed Financial Statements                                                         |  | 7   
|                                                                      |  | Item 2.               |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 14  
|                                                                      |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 21  
|                                                                      |  | Item 4.               |  | Controls and Procedures                                                                                      |  | 22  
|Part II.                                                              |  | Other Information     |  | 23                                                                                                          
|                                                                      |  | Item 1A.              |  | Risk Factors                                                                                                 |  | 23  
|                                                                      |  | Item 6.               |  | Exhibits                                                                                                     |  | 23  

2

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Forward-Looking Statements and Factors That May Affect Future Results

In passing the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), Congress encouraged public companies to make "forward-looking statements" by creating a
"safe harbor" to protect companies from securities law liability in connection with forward-looking statements. The Company intends to qualify its written and oral forward-looking statements for
protection under the Reform Act and any other similar safe harbor provisions. Unless the context indicates otherwise, the words "Company," "we," "our," and "us" when used in this report on
Form 10-Q refer collectively to APAC Customer Services, Inc. and its wholly-owned subsidiaries.

Generally,
forward-looking statements include expressed expectations, estimates and projections of future events and financial performance and the assumptions on which these expressed expectations,
estimates and projections are based. Statements that are not historical facts, including statements about the beliefs and expectations of the Company and its management are forward-looking statements.
Sometimes these statements will contain words such as "believes," "expects," "anticipates," "intends," "estimates," "goals," "would," "could," "should," "plans," and other similar words. All
forward-looking statements are inherently uncertain as they are based on various expectations and assumptions about future events, and they are subject to known and unknown risks and uncertainties
that can cause actual events and results to differ materially from historical results and those projected.

Due
to such uncertainties, readers are cautioned not to place undue reliance on our written or oral forward-looking statements, which speak only as of the date on which they were made. If no date is
provided, such statements speak only as of the date of this Quarterly Report on Form 10-Q. The Company expressly undertakes no obligation to publicly update or revise any
forward-looking statements as a result of changed assumptions, new information, future events or otherwise.

There
are numerous factors that could prevent us from achieving our goals and cause future results to differ materially from historical results or those expressed or implied by forward-looking
statements including, but not limited to, the following:

See
the Company's filings with the SEC for further discussion of the risks and uncertainties associated with the Company's business, in particular, the discussion in Item 1A of the Company's
Annual Report on Form 10-K for the fiscal year ended January 1, 2006.

3

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PART I. FINANCIAL INFORMATION

Item 1.    Consolidated Condensed Financial Statements

APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES        CONSOLIDATED CONDENSED BALANCE SHEETS        (Dollars in thousands, except share data)        (Unaudited)

|                                     |                                                                                                                                                                                                                                                            | April 2,
2006                              |        | January 1,
2006 |        
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | --------------- | -------
|ASSETS                               |                                                                                                                                                                                                                                                            |                                            |        |                 |        
|Current assets:                      |                                                                                                                                                                                                                                                            |                                            |        |                 |        
|                                     | Cash and cash equivalents                                                                                                                                                                                                                                  |                                            | $      | 1,490           |        
|                                     | Accounts receivable, net                                                                                                                                                                                                                                   |                                            |        | 39,417          |        
|                                     | Other current assets                                                                                                                                                                                                                                       |                                            |        | 8,870           |        
|                                     |                                                                                                                                                                                                                                                            |                                            |        |                 |        
|                                     |                                                                                                                                                                                                                                                            | Total current assets                       |        |                 | 49,777 
|Property and equipment, net          |                                                                                                                                                                                                                                                            |                                            | 21,938 |                 |        
|Goodwill                             |                                                                                                                                                                                                                                                            |                                            | 13,338 |                 |        
|Other intangible assets, net         |                                                                                                                                                                                                                                                            |                                            | 9,755  |                 |        
|Deferred taxes                       |                                                                                                                                                                                                                                                            |                                            | 16,480 |                 |        
|Other assets                         |                                                                                                                                                                                                                                                            |                                            | 1,015  |                 |        
|                                     |                                                                                                                                                                                                                                                            |                                            |        |                 |        
|                                     |                                                                                                                                                                                                                                                            | Total assets                               |        | $               | 112,303
|                                     |                                                                                                                                                                                                                                                            |                                            |        |                 |        
|LIABILITIES AND SHAREHOLDERS' EQUITY |                                                                                                                                                                                                                                                            |                                            |        |                 |        
|Current liabilities:                 |                                                                                                                                                                                                                                                            |                                            |        |                 |        
|                                     | Short-term debt                                                                                                                                                                                                                                            |                                            | $      | 10,932          |        
|                                     | Accounts payable                                                                                                                                                                                                                                           |                                            |        | 2,771           |        
|                                     | Income taxes payable                                                                                                                                                                                                                                       |                                            |        | 17,519          |        
|                                     | Accrued payroll and related items                                                                                                                                                                                                                          |                                            |        | 15,807          |        
|                                     | Accrued liabilities                                                                                                                                                                                                                                        |                                            |        | 10,754          |        
|                                     |                                                                                                                                                                                                                                                            |                                            |        |                 |        
|                                     |                                                                                                                                                                                                                                                            | Total current liabilities                  |        |                 | 57,783 
|Other liabilities                    |                                                                                                                                                                                                                                                            |                                            | 2,988  |                 |        
|Commitments and contingencies        |                                                                                                                                                                                                                                                            |                                            |       |                 |        
|Shareholders' equity:                |                                                                                                                                                                                                                                                            |                                            |        |                 |        
|                                     | Common shares, $0.01 per share; authorized 200,000,000 shares; 50,089,698 and 49,695,699 shares issued at April 2, 2006 and January 1, 2006, respectively; 49,848,653 and 49,454,654 shares outstanding at
April 2, 2006 and January 1, 2006, respectively |                                            |        | 501             |        
|                                     | Additional paid-in capital                                                                                                                                                                                                                                 |                                            |        | 99,955          |        
|                                     | Accumulated deficit                                                                                                                                                                                                                                        |                                            |        | (48,051         | )      
|                                     | Accumulated other comprehensive loss                                                                                                                                                                                                                       |                                            |        | (26             | )      
|                                     | Treasury shares: 241,045 shares, at cost at April 2, 2006, and January 1, 2006                                                                                                                                                                             |                                            |        | (847            | )      
|                                     |                                                                                                                                                                                                                                                            |                                            |        |                 |        
|                                     |                                                                                                                                                                                                                                                            | Total shareholders' equity                 |        |                 | 51,532 
|                                     |                                                                                                                                                                                                                                                            |                                            |        |                 |        
|                                     |                                                                                                                                                                                                                                                            | Total liabilities and shareholders' equity |        | $               | 112,303
|                                     |                                                                                                                                                                                                                                                            |                                            |        |                 |        

See
Notes to Consolidated Condensed Financial Statements.

4

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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES        CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS        (Dollars in thousands, except share data)        (Unaudited)

|                                               |                                              | Thirteen Weeks Ended     |       
|---------------------------------------------- | -------------------------------------------- | ------------------------ | ------
|
|Net revenue                                    |                                              | $                        | 60,723
|                                               | Cost of services                             |                          |       
|                                               |                                              |                          |       
|Gross profit                                   |                                              |                          | 7,651 
|Operating expenses:                            |                                              |                          |       
|                                               | Selling, general and administrative expenses |                          |       
|                                               | Restructuring and other charges (benefits)   |                          |       
|                                               |                                              |                          |       
|                                               |                                              | Total operating expenses |       
|                                               |                                              |                          |       
|Operating loss                                 |                                              |                          | (401  
|Other income                                   |                                              |                          | (28   
|Interest expense, net                          |                                              |                          | 456   
|                                               |                                              |                          |       
|                                               | Loss before income taxes                     |                          |       
|Income tax benefit                             |                                              |                          | (88   
|                                               |                                              |                          |       
|                                               | Net loss                                     |                          | $     
|                                               |                                              |                          |       
|Net loss per share:                            |                                              |                          |       
|                                               | Basic                                        |                          | $     
|                                               |                                              |                          |       
|                                               | Diluted                                      |                          | $     
|                                               |                                              |                          |       
|Weighted average number of shares outstanding: |                                              |                          |       
|                                               | Basic                                        |                          |       
|                                               |                                              |                          |       
|                                               | Diluted                                      |                          |       
|                                               |                                              |                          |       

See
Notes to Consolidated Condensed Financial Statements.

5

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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES        CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS        (Dollars in thousands)        (Unaudited)

|                           |                                                            | Thirteen Weeks Ended                                |  
|-------------------------- | ---------------------------------------------------------- | --------------------------------------------------- | -
|
|Operating activities:      |                                                            |                                                     |  
|                           | Net loss                                                   |                                                     | $
|                           | Depreciation and amortization                              |                                                     |  
|                           | Non-cash restructuring charges (benefits)                  |                                                     |  
|                           | Deferred income taxes                                      |                                                     |  
|                           | Stock compensation expense                                 |                                                     |  
|                           | Change in operating assets and liabilities                 |                                                     |  
|                           |                                                            |                                                     |  
|                           |                                                            | Net cash provided by (used in) operating activities |  
|Investing activities:      |                                                            |                                                     |  
|                           | Purchases of property and equipment, net of disposals      |                                                     |  
|                           |                                                            |                                                     |  
|                           |                                                            | Net cash used in investing activities               |  
|Financing activities:      |                                                            |                                                     |  
|                           | Borrowings (payments) under revolving credit facility, net |                                                     |  
|                           | Payments on long-term debt                                 |                                                     |  
|                           |                                                            |                                                     |  
|                           |                                                            | Net cash provided by (used in) financing activities |  
|                           | Effect of exchange rate changes on cash                    |                                                     |  
|                           |                                                            |                                                     |  
|                           | Net change in cash and cash equivalents                    |                                                     |  
|Cash and cash equivalents: |                                                            |                                                     |  
|                           | Beginning balance                                          |                                                     |  
|                           |                                                            |                                                     |  
|                           | Ending balance                                             |                                                     | $
|                           |                                                            |                                                     |  
|Supplemental disclosures:  |                                                            |                                                     |  
|                           | Cash paid during the period for interest                   |                                                     | $
|                           | Cash paid during the period for income taxes               |                                                     |  
|                           | Leasehold improvements funded by landlord                  |                                                     |  

See
Notes to Consolidated Condensed Financial Statements.

6

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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS        (Unaudited)        (Dollars in thousands, except as otherwise
indicated)

1.    Basis of Presentation

The Company operates on a thirteen week fiscal quarter that ends on the Sunday closest to March 31st. The Company operates on a
52/53 week fiscal year that ends on the Sunday closest to December 31st.

The
accompanying unaudited consolidated condensed financial statements of APAC Customer Services, Inc. and its subsidiaries (collectively, the Company) have been prepared in accordance with
accounting principles generally accepted in the United States (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter ended April 2, 2006, are not necessarily
indicative of the results that may be expected for the fiscal year ending December 31, 2006. The balance sheet at April 2, 2006, has been derived from the unaudited financial statements
at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For additional information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2006. Copies of the Company's filings are available on a web site maintained
by the SEC at http://www.sec.gov.

The
Company sustained significant losses in fiscal year 2005. In an effort to return the Company to profitability, the Company initiated a restructuring plan in July 2005 to exit the outbound
telemarketing business and focus primarily on customer care services and solutions. Operating results have improved for the quarter ended April 2, 2006. Management believes the restructuring
will be successful and the Company will return to profitability.

The
Company expects that its cash balances, cash flows from future operations and available borrowings under the Restated Credit Agreement described in Note 8 will be sufficient to meet normal
operating needs, fund any planned capital expenditures, and repay debt obligations as they come due. A significant change in operating cash flow, a failure to successfully complete the Company's
business turnaround or an adverse outcome in the Company's pending dispute with the Internal Revenue Service described in Note 10 could have a material adverse effect on its liquidity and its
ability to comply with the covenants in the Restated Credit Agreement.

2.    New Accounting Pronouncement

In November 2005, the Financial Accounting Standards Board (FASB) issued Financial Statement Position (FSP) No. 123(R)-3,
"Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards". This pronouncement provides an alternative method of
calculating excess tax benefits available to absorb any tax deficiencies recognized subsequent to the adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R)
"Share-Based Payment." The Company has until November 2006 to make a one-time election to adopt the transition method. The Company is
currently evaluating FSP No. 123(R)-3; however, any one-time election is not expected to affect operating income or net earnings.

7

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3.    Accrued Liabilities

The components of other accrued liabilities included in the consolidated condensed balance sheets are as follows:

April 2,
2006

January 1,
2006Accrued workers' compensation

$
3,029

$
3,010Accrued restructuring charges


2,797


3,503Accrued professional fees


747


659Accrued property tax


522


737Other


3,659


2,598Total

$
10,754

$
10,507


4.    Goodwill and Other Intangible Assets

The Company's policy is to test goodwill for impairment as of the end of the fiscal year. If events occur that would necessitate a more frequent review, the
Company will perform its evaluation for impairment at that time. The Company tested goodwill for impairment as of January 1, 2006, resulting in no impairment being recorded. As of
April 2, 2006 and January 1, 2006, the Company had $13.3 million of goodwill.

The
identifiable intangible assets of the Company represent acquired customer relationships with a gross carrying value of $28.5 million and accumulated amortization of $18.7 million and
$18.2 million as of April 2, 2006 and January 1, 2006, respectively. Under SFAS No. 142, identifiable intangible assets with finite lives are amortized. The customer
relationship intangible assets are amortized on a straight-line basis over the expected period of benefit of 12 years. Total amortization expense related to intangible assets for
the quarters ended April 2, 2006 and April 3, 2005, was $587 for each period. Annual amortization expense is expected to be $2.3 million for fiscal year 2006 through 2009 and
$1.0 million in fiscal year 2010.

5.    Accounting for Stock-Based Compensation

At April 2, 2006 the Company had a share-based incentive compensation plan for employees and non-employee directors, which authorized the
granting of various equity-based incentives, including stock options and restricted stock. The number of common shares reserved for issuance under the plan was 11.8 million at April 2,
2006, of which 2.3 million shares are available for future grants.

Effective
January 2, 2006, the Company adopted FASB Statement No. 123(R). Prior to fiscal 2006, as permitted under SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company accounted for its stock compensation plans according to Accounting Principles Board (APB) Opinion No. 25
"Accounting for Stock Issued to Employees," and related interpretations. The Company adopted the fair value recognition provisions of SFAS
No. 123(R) using the modified prospective transition method, and therefore, it has not restated the prior periods' financial statements.

Under
modified prospective transition method, compensation expense is recognized for new grants beginning this fiscal year and for any unvested grants made prior to the adoption of SFAS
No. 123(R). Stock-based compensation expense for all share-based payment awards is based on the grant-date fair

8

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value
estimated in accordance with the provisions of SFAS No. 123(R). Total stock-based compensation expense for the quarter ended April 2, 2006 was $0.4 million. The recognized
tax benefit was $0.1 million. The Company recognizes these compensation costs net of a forfeiture rate on a straight-line basis over the employee's requisite service period. The
Company estimated the forfeiture rate for awards granted during the quarter ended April 2, 2006 based on its historical experience during the preceding fiscal years. Compensation expense
related to share-based awards is amortized over the requisite service period in selling, general and administrative expenses in the consolidated condensed statements of operations. As of
April 2, 2006, there was $3.3 million of unrecognized compensation cost related to un-vested awards that is expected to be recognized over a weighted-average period of
approximately three years.

Stock
options to purchase common shares are granted with an exercise price equal to the average of the high and low market price of the Company's stock on the date of the grant. Substantially all of
the options become exercisable between one to five years after the grant date and generally expire ten years from the grant date.

During
the quarter ended April 2, 2006, the Company awarded 393,999 restricted common shares at a weighted average value per share of $1.92 to certain employees. The restricted common shares
vest two
years from the grant date provided that performance or market condition thresholds are met by the Company.

In
November 2005, the FASB issued FSP No. 123(R)-3, "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards". This pronouncement provides an alternative method of calculating excess tax benefits available to absorb any tax deficiencies recognized subsequent to the adoption of
SFAS No. 123(R). The Company has until November 2006 to make a one-time election to adopt the transition method. The Company is currently evaluating FSP
No. 123(R)-3; however, any one-time election is not expected to affect operating income or net earnings.

The
following table illustrates the effect on net income and earnings per share if the Company had adopted the fair value recognition provisions of SFAS No. 123(R) in the quarter ended
April 3, 2005:

Thirteen Weeks Ended
April 3, 2005Net loss as reported

$
(2,382
)Less-compensation expense on stock options, net of income tax benefit


(286
)Net loss pro forma

$
(2,668
)Loss per sharebasicAs reported

$
(0.05
)Pro forma

$
(0.05
)Loss per sharedilutedAs reported

$
(0.05
)Pro forma

$
(0.05
)


9

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The
Company estimated the fair value of its employee stock options and restricted common shares using the Black-Scholes option-pricing model with the following assumptions:

Thirteen Weeks EndedApril 2,
2006

April 3,
2005Expected volatility


51.17
%

45.56
%Risk-free interest rate


4.76
%

4.45
%Expected life of options in years


2.24


6.83Annualized forfeiture rate


8.62


Weighted average grant date fair value

$
1.51

$
0.85


A
summary of the Company's stock option and restricted common share activity during the quarter ended April 2, 2006 is presented in the following table:

|                               |  | Number of
Options/Shares |   | Weighted Average
Exercise Price
Per Share |      | Weighted Average
Remaining
Contractual
Term (in years) |      | Aggregate
Intrinsic
Value
|------------------------------ |  | ------------------------ | - | ----------------------------------------- | ---- | ------------------------------------------------------ | ---- | -------------------------
|Outstanding on January 1, 2006 |  | 7,674,299                |   | $                                         | 4.71 |                                                        |      |                          
|Granted                        |  | 567,583                  |   |                                           | 0.57 |                                                        |      |                          
|Exercised/Forfeited/Canceled   |  | (130,306                 | ) |                                           | 5.19 |                                                        |      |                          
|Outstanding on April 2, 2006   |  | 8,111,576                |   |                                           | 2.30 |                                                        | 7.85 |                          
|Exercisable on April 2, 2006   |  | 2,815,700                |   |                                           | 4.05 |                                                        | 5.56 |                          

6.    Comprehensive Loss

Comprehensive loss for the quarters ended April 2, 2006 and April 3, 2005, respectively is as follows:

Thirteen Weeks EndedApril 2,
2006

April 3,
2005Net loss

$
(741
)
$
(2,382
)Foreign currency translation gain


38


41Total comprehensive loss

$
(703
)
$
(2,341
)


Foreign
currency translation gains relate to the impact of a change in exchange rates on net assets located in the Philippines.

10

---



7.    Legal Proceedings

The Company is subject to occasional lawsuits, governmental investigations and claims arising out of the normal conduct of its business. Management does not
believe that the outcome of any such pending claims will have a material adverse impact on the Company's business, results of operations, liquidity, or financial condition, although no assurance to
that effect can be given.

8.    Debt

On October 31, 2005, the Company entered into an Amended and Restated Loan and Security Agreement (Restated Credit Agreement) with LaSalle Bank National
Association (LaSalle), as agent,
and the financial institutions from time to time parties thereto as lenders. The Restated Credit Agreement provides the Company with a $25 million revolving loan facility which expires in
October 2008.

The
Company's ability to borrow under the Restated Credit Agreement depends on the amount of eligible accounts receivable from its' clients and there are limitations on the concentration of these
accounts with a single client. In addition, LaSalle retains certain reserves against otherwise available borrowing capacity, including a reserve related to the Internal Revenue Services' proposed
adjustment to the Company's 2002 tax return described in Note 10. Other restrictive covenants limit the Company's ability to make capital expenditures, incur additional indebtedness, repurchase
outstanding common shares, create liens, acquire, sell or dispose of certain assets, engage in certain mergers and acquisitions, pay dividends and make certain restricted payments.

Borrowings
under the Restated Credit Agreement incur a floating interest rate based on the LIBOR index rate or an alternate base rate defined in the Restated Credit Agreement. Interest rates on the
Company's borrowings ranged from 7.5% to 8.0% during the quarter ended April 2, 2006. The Restated Credit Agreement is secured principally by a grant of a security interest in all personal
property and fixtures of the Company. In addition, the Company pays a commitment fee on the unused portion of the revolving facility as well as fees on outstanding letters of credit.

On
March 3, 2006, the Company and LaSalle entered into an amendment (Amendment No. 1) to the Restated Credit Agreement. Amendment No. 1 was effective February 21, 2006.
Under the terms of Amendment No. 1, LaSalle agreed to relieve the Company of its obligation to comply with the excess availability covenant in the Restated Credit Agreement through
April 30, 2006. Subsequently, the Company successfully met the requirements set forth in the Restated Credit Agreement, and the excess availability requirement no longer applies.

On
April 25, 2006, the Company and LaSalle entered into a second amendment (Amendment No. 2) to the Restated Credit Agreement. Amendment No. 2 was effective April 2, 2006.
Under the terms of Amendment No. 2, LaSalle agreed to amend certain financial covenants related to capital expenditures.

Borrowings
under the Restated Credit Agreement totaled $10.9 million and $12.0 million as of April 2, 2006 and January 1, 2006, respectively. The Company had approximately
$10.8 million of unused borrowing capacity as of April 2, 2006. The Company was in compliance with its financial covenants as of April 2, 2006.

The
Company expects that its cash balances, cash flows from future operations and available borrowings under the Restated Credit Agreement will be sufficient to meet normal operating needs, fund any
planned

11

---



capital
expenditures, and repay debt obligations as they come due. A significant change in operating cash flow, a failure to successfully complete the Company's business turnaround, or an adverse
outcome in the Company's pending dispute with the Internal Revenue Service described in Note 10 could have a material adverse effect on its liquidity and its ability to comply with the
covenants in the Restated Credit Agreement.

9.    Restructuring and Other Charges/Asset Impairment Charges

No restructuring charges were taken during the quarter ended April 2, 2006. The Company recorded $0.2 million of restructuring charges in the
quarter ended April 3, 2005 related to the closure of one customer care center. These charges included severance costs of $0.1 million and $0.1 million for the write down of
property and lease termination and other costs. Payments totaling $0.1 million have been paid through April 2, 2006. The remaining $0.1 million of payments, primarily related to
lease termination and other costs, are payable over the next year. The Company also recorded $0.4 million of other severance charges during the quarter ended April 3, 2005, which were
partially offset by a $0.3 million sales and use tax refund.

Following
is a summary of the fiscal 2006 year-to-date activity in the reserves established in connection with the Company's restructuring initiatives:

|                                         |                                     | January 1,
2006 |       | Charges
(Reversals) |   | Cash
Payments
(Receipts) |     | April 2,
2006
|---------------------------------------- | ----------------------------------- | --------------- | ----- | ------------------- | - | ------------------------ | --- | -------------
|Restructuring initiatives prior to 2005: |                                     | $               | 255   |                     | $ |                         |     | $            
|2005 restructuring initiatives:          |                                     |                 |       |                     |   |                          |     |              
|                                         | Employee severance costs            |                 |       | 458                 |   |                          | (2  | )            
|                                         | Write-off of property and equipment |                 |       | 697                 |   |                          |    |              
|                                         | Lease obligations and other costs   |                 |       | 3,985               |   |                          | (11 | )            
|                                         |                                     |                 |       |                     |   |                          |     |              
|Total                                    |                                     | $               | 5,395 |                     | $ | (13                      | )   | $            
|                                         |                                     |                 |       |                     |   |                          |     |              

10.    Income Taxes

The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation
allowance is recorded when management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized in the future. The Company will need to generate
taxable income of approximately $31 million during the next 20 years to utilize its net operating loss carryforwards before they expire. The Company believes that it is more likely than
not that the deferred tax asset recorded as April 2, 2006 will be realized in future periods. Accordingly, no valuation allowance has been established. The Company records a reserve for tax
contingencies until management believes it is probable that the deductions giving rise to these contingencies will not be successfully challenged. The Company's effective income tax rate is 10.6% and
34.2% for the quarters ended April 2, 2006 and April 3, 2005, respectively.

12

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In
October 2003, the Company received an $11.6 million cash tax refund as a result of carrying back against prior years' taxable income a $48.1 million loss reported on its 2002
tax return. This loss resulted from the Company taking a $59.9 million deduction to write-off, for tax purposes, its remaining investment in ITI Holdings, Inc. (ITI) (for
book purposes the Company recorded appropriate impairment charges related to ITI in previous fiscal years). The total combined liquidity benefit to the Company from this deduction could be as much as
$20.9 million, which includes the $11.6 million cash tax refund already received, $3.3 million of cash tax savings related to the 2002 tax year and the release of
$6.0 million of tax credits generated and utilized in prior years to be used in future periods.

The
Internal Revenue Service has audited the Company's 2002 tax return. On September 29, 2005, a field agent for the Internal Revenue Service issued a report which disallowed the deduction
related to the Company's investment in ITI. The Company believes that it has sufficient support for the deduction and intends to pursue its available administrative remedies. On November 30,
2005, the Company filed a protest contesting the proposed adjustment and requested a hearing with an Internal Revenue Service Appeals Officer. At this point it is unclear as to how this issue will
ultimately be resolved. The Company has not recognized the income tax benefit related to this deduction and has previously recorded a liability for the $11.6 million refund. The Company is
required to accrue interest and has reserved $2.0 million for the amount of interest accrued to date. Should the Company not prevail in this matter, it may be required to repay the previously
received refund of $11.6 million, as well as interest related thereto. The timing of any repayment of the previously received refund could have a material adverse effect on the liquidity of the
Company, require it to seek additional financing to fund the repayment, and result in a default under the Restated Credit Agreement described in Note 8.

11.    Earnings Per Share

For the quarters ended April 2, 2006 and April 3, 2005 approximately 64,000 and 3,000 options to purchase common shares, respectively, were excluded
from the computation of earnings per share because they would have been anti-dilutive.

13

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

Our management's discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated condensed financial statements of
the Company and related notes thereto appearing elsewhere in this report and the audited consolidated financial statements of the Company which appear in Item 8 of our Annual Report on
Form 10-K for the fiscal year ended January 1, 2006. Our management's discussion and analysis contains "forward-looking statements".

Overview

We are a leading provider of customer care services and solutions to Fortune 500 companies and other market leaders in the communication, healthcare, financial services,
business services, travel and entertainment, and publishing industries. In July 2005, we announced a strategic restructuring to exit virtually all of the outbound telemarketing business,
restructure operations, and focus primarily on profitable client relationships in a limited number of key industries. We have targeted primarily high growth business segments, each with critical
customer care needs and businesses with unique opportunities for outsourced customer care. Our services are highly customized customer care services and solutions that involve communicating with
customers and managing situations that are unique to each targeted industry. We provide customized technology applications that are scalable and provide a higher level of customer service. We also
bring the expertise to hire, train and retain skilled customer care talent. Given our Company resources and unique position in the customer care service industry, we believe we are aligned to
capitalize on the growth in this segment.

Our
services are provided through customer care centers staffed with skilled customer service representatives in domestic, international, and client-owned locations. As of April 2, 2006, we
operate 13 customer care centers: 11 domestic, one domestic client-owned facility, and one international center located in the Philippines. The customer care centers house approximately 5,400 domestic
and 1,200 international workstations.

14

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Results of Operations

The following table sets forth selected information about our results of operations for the quarters ended April 2, 2006 and April 3, 2005, respectively. Certain
additional items of net revenue and cost of services have been included as we believe they would enhance an understanding of our results of operations.

|                         |                                            | Thirteen Weeks Ended |      
|------------------------ | ------------------------------------------ | -------------------- | -----
|
|Net Revenue:             |                                            |                      |      
|                         | Domestic                                   |                      | $    
|                         | Off-shore                                  |                      |      
|                         | Restructured outbound business             |                      |      
|                         |                                            |                      |      
|                         | Total net revenue                          |                      |      
|                         |                                            |                      |      
|Cost of Services:        |                                            |                      |      
|                         | Direct labor                               |                      |      
|                         | Other facility expenses                    |                      |      
|                         |                                            |                      |      
|                         | Total cost of services                     |                      |      
|                         |                                            |                      |      
|Percentage of revenue    |                                            |                      | 87.4 
|                         |                                            |                      |      
|Gross profit             |                                            |                      | 7,651
|Gross profit percentage  |                                            |                      | 12.6 
|Operating Expenses:      |                                            |                      |      
|                         | Selling, general & administrative expenses |                      |      
|                         | Restructuring and other charges (benefits) |                      |      
|                         |                                            |                      |      
|                         | Total operating expenses                   |                      |      
|                         |                                            |                      |      
|Operating loss           |                                            |                      | (401 
|Other income             |                                            |                      | (28  
|Interest expense, net    |                                            |                      | 456  
|                         |                                            |                      |      
|Loss before income taxes |                                            |                      | (829 
|Benefit for income taxes |                                            |                      | (88  
|                         |                                            |                      |      
|Net loss                 |                                            | $                    | (741 
|                         |                                            |                      |      

---

15

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Non-GAAP Financial Measures

To supplement our consolidated condensed financial statements presented in accordance with accounting principles generally accepted in the United States (GAAP), we use the
following measures defined as non-GAAP financial measures by the SEC: EBITDA, adjusted EBITDA, adjusted operating income, free cash flow and adjusted free cash flow. The presentation of
these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. The items excluded from
these non-GAAP financial measures are significant components of our financial statements and must be considered so in performing a comprehensive analysis of our overall financial results.

We
expect to use consistent methods for computation of non-GAAP financial measures. Our calculations of non-GAAP financial measures may not be consistent with calculations of
similar measures used by other companies. The accompanying tables have more details on the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the
related reconciliations between these financial measures.

More
information on these non-GAAP financial measures can be found in Item 7 of our Annual Report on Form 10-K for the year ended January 1, 2006.

|                                                |           | Thirteen Weeks Ended |      
|----------------------------------------------- | --------- | -------------------- | -----
|
|
|EBITDA                                          |           | $                    | 2,642
|Adjusted EBITDA                                 |           |                      | 2,629
|Adjusted operating loss                         |           |                      | (414 
|Free cash flow                                  |           |                      | 1,702
|Adjusted free cash flow                         |           |                      | 1,689
|Statistical information:                        |           |                      |      
|Number of customer care centers                 |           |                      |      
|                                                | Domestic  |                      |      
|                                                | Off-shore |                      |      
|                                                |           |                      |      
|Total                                           |           |                      | 13   
|                                                |           |                      |      
|Number of workstations:                         |           |                      |      
|                                                | Domestic  |                      |      
|                                                | Off-shore |                      |      
|                                                |           |                      |      
|Total                                           |           |                      | 6,627
|                                                |           |                      |      
|Annualized net revenue per average workstation: |           |                      |      
|                                                | Domestic  |                      | $    
|                                                | Off-shore |                      |      

---

See
Accompanying Notes to Non-GAAP Financial Measures

16

---



Notes to Non-GAAP Financial Measures



Thirteen Weeks EndedApril 2, 2006

April 3, 2005(Dollars in thousands)Net loss

$
(741
)
$
(2,382
)Interest expense


456


222Benefit for income taxes


(88
)

(1,238
)Depreciation and amortization


3,015


2,871EBITDA

$
2,642

$
(527
)Restructuring and other charges (benefits)


(13
)

277Asset impairment charges





Adjusted EBITDA

$
2,629

$
(250
)




Thirteen Weeks EndedApril 2, 2006

April 3, 2005(Dollars in thousands)Operating loss

$
(401
)
$
(3,438
)Restructuring and other charges (benefits)


(13
)

277Asset impairment charges





Adjusted operating loss

$
(414
)
$
(3,161
)


17

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Notes to Non-GAAP Financial Measures (continued)

Thirteen Weeks EndedApril 2, 2006

April 3, 2005(Dollars in thousands)EBITDA

$
2,642

$
(527
)Capital expenditures


(2,060
)

(2,584
)Tenant improvements funded by landlord


1,120


Free Cash Flow

$
1,702

$
(3,111
)Restructuring and other charges (benefits)


(13
)

277Asset impairment charges





Adjusted Free Cash Flow

$
1,689

$
(2,834
)




Thirteen Weeks EndedApril 2, 2006

April 3, 2005(Dollars in thousands)Net cash provided by (used in) operating activities

$
2,545

$
(2,775
)Purchases of property and equipment


(940
)

(2,584
)Benefit for income taxes


(88
)

(1,238
)Interest expense


456


222Changes in operating assets and liabilities


(178
)

1,444Asset impairment charges





Increase in deferred income taxes


254


1,835Stock compensation expense


(360
)

Non-cash restructuring charges (benefits)


13


(15
)Free Cash Flow

$
1,702

$
(3,111
)Restructuring and other charges (benefits)


(13
)

277Asset impairment charges





Adjusted Free Cash Flow

$
1,689

$
(2,834
)


18

---





Comparison of Results of Operations for the Quarter Ended April 2, 2006 and April 3, 2005.

Net revenue decreased 7.5%, or $5.0 million, to $60.7 million in the quarter ended April 2, 2006 from $65.7 million in the same period of fiscal
year 2005. The revenue decline is primarily attributable to our decision in July 2005 to exit the campaign-driven outbound customer acquisition business and other non-strategic and
unprofitable client relationships, which accounted for $0.9 million and $15.8 million of the first quarter 2006 and 2005 revenue, respectively. The decrease in revenue from the
restructured outbound business was partially offset by an increase in revenue attributable to the Medicare Part D enrollment and customer care business. During the quarter we agreed to
terminate a large customer care client effective at the end of the second quarter 2006. This client accounted for approximately $5 million of revenue in the quarter ended April 2, 2006.

Cost
of services decreased $5.9 million, or 10.0%, in the first quarter of fiscal year 2006, to $53.1 million from $59.0 million in the same period of fiscal year 2005. This
decrease is primarily due to a reduction in direct labor costs of $2.4 million driven by lower volume and lower call center overhead of $3.5 million. These factors resulted in a decrease
in cost of services as a percent of revenue from 89.8% for the quarter ended April 3, 2005 to 87.4% for the quarter ended April 2, 2006.

Gross
profit increased $1.0 million, or 14.2%, to $7.7 million in the quarter ended April 2, 2006 from $6.7 million in the quarter ended April 3, 2005. Gross profit
margin increased to 12.6% for the quarter ended April 2, 2006 compared to 10.2% in the comparable period of fiscal year 2005. This increase is principally due to the benefit of more profitable
client relationships, an increase in labor efficiencies and a reduction of call center overhead.

Operating
expenses for the quarter ended April 2, 2006 were $8.1 million compared to operating expenses of $10.1 million in the comparable prior year period. The decrease is
primarily the result of a $1.8 million, or 18.2%, reduction in selling, general and administrative expenses partially offset by the absence of any restructuring charges during the 2006 period.
Selling, general and administrative expenses declined from the prior year due to reductions in employee related expenses and facilities costs resulting from the headcount reductions and center
closures that were part of our July 2005 restructuring plan, lower information technology and marketing expenses, offset by an increase in compensation expense of $0.4 million related to
our adoption of SFAS No. 123-R and employee bonus and incentive accruals.

No
restructuring charges were recorded in the quarter ended April 2, 2006. We recorded $0.2 million of restructuring charges in the quarter ended April 3, 2005 related to the
closure of one customer care center. These charges included severance costs of $0.1 million and $0.1 million for the write-down of property and lease termination and other
costs. Payments totaling $0.1 million have been paid through April 2, 2006. The remaining $0.1 million of payments, primarily related to severance costs, are payable over the next
year. We also recorded $0.4 million of other severance charges in the quarter ended April 3, 2005, which were partially offset by a $0.3 million sales and use tax refund.

Operating
loss decreased from $3.4 million in the quarter ended April 3, 2005 to $0.4 million in the quarter ended April 2, 2006. The $3.0 million improvement was
due to the benefits of the strategic restructuring on center overhead and selling, general and administrative expenses, plus improvements in client profitability. Adjusted operating loss improved
$2.8 million from $3.2 million in the quarter ended April 3, 2005 to $0.4 million in the quarter ended April 2, 2006 for the same reasons.

Net
interest expense increased $0.3 million in the quarter ended April 2, 2006 as compared to the prior year period primarily as a result of an increase in net borrowings.

EBITDA
increased from a negative $0.5 million in the quarter ended April 3, 2005 to a positive $2.6 million in the quarter ended April 2, 2006. The $3.1 million
increase is due to a higher gross profit and lower operating expenses. Adjusted EBITDA improved from a negative $0.3 million in the quarter ended April 3, 2005 to a positive
$2.6 million in the quarter ended April 2, 2006 for the same reasons.

19

---



Our
effective income tax rate was 10.6% in the quarter ended April 2, 2006 compared to 34.2% in the comparable prior year period. The decrease in the effective income tax rate is due to the
utilization of net operating losses in the quarter ended April 2, 2006.

We
generated a net loss of $0.7 million in the quarter ended April 2, 2006 compared to a $2.4 million net loss for the same period of fiscal year 2005. The $1.7 million, or
70% decrease in net loss is due to an increase in gross profit and reduced operating expenses, partially offset by a lower income tax benefit.

Liquidity and Capital Resources

The following table sets forth our consolidated statements of cash flow data for the quarters ended April 2, 2006 and April 3, 2005, respectively.

|                                                    |  | Thirteen Weeks Ended |       
|--------------------------------------------------- |  | -------------------- | ------
|
|
|Net cash provided by (used in) operating activities |  | $                    | 2,545 
|Net cash used in investing activities               |  |                      | (940  
|Net cash provided by (used in) financing activities |  |                      | (1,039
|Effect of exchange rate changes on cash             |  |                      | (36   
|                                                    |  |                      |       
|Net change in cash and cash equivalents             |  | $                    | 530   
|                                                    |  |                      |       

Net
cash provided by operating activities in the quarter ended April 2, 2006 increased $5.3 million as compared with the quarter ended April 3, 2005, primarily due to improved
operating performance and changes in operating assets, liabilities, and deferred tax assets.

Net
cash used in investing activities was $0.9 million and $2.6 million in the quarters ended April 2, 2006 and April 3, 2005, respectively and consisted primarily of
expenditures related to the buildout and maintenance in our customer care centers along with telecommunications hardware and software costs.

Net
cash provided by (used in) financing activities primarily relates to the net borrowings under our revolving loan agreements for the quarters ended April 2, 2006 and April 3, 2005.

Free
cash flow improved $4.8 million, or 154.7%, from a negative $3.1 million in the quarter ended April 3, 2005 to a positive $1.7 million in the quarter ended
April 2, 2006. The improvement was driven by operating performance and lower net capital expenditures. Adjusted free cash flow improved $4.5 million, or 159.6%, from a negative
$2.8 million in the quarter ended April 3, 2005 to a positive $1.7 million in the quarter ended April 2, 2006 for the same reasons.

On
October 31, 2005, we entered into an Amended and Restated Loan and Security Agreement (the Restated Credit Agreement) with LaSalle Bank National Association (LaSalle), as agent, and the
financial institutions from time to time parties thereto as lenders. The Restated Credit Agreement provides for a $25 million revolving loan facility which expires in October 2008.

Our
ability to borrow under the Restated Credit Agreement depends on the amount of eligible accounts receivable from our clients and there are limitations on the concentration of these accounts with a
single client. In addition, LaSalle retains certain reserves against otherwise available borrowing capacity, including a reserve related to the Internal Revenue Services' proposed adjustment to our
2002 tax return described in Note 10 to the consolidated condensed financial statements. Other restrictive covenants limit our ability to make capital expenditures, incur additional
indebtedness, repurchase outstanding common shares, create liens, acquire, sell or dispose of certain assets, engage in certain mergers and acquisitions, pay dividends, and make certain restricted
payments.

Borrowings
under the Restated Credit Agreement incur a floating interest rate based on the LIBOR index rate or an alternate base rate defined in the Restated Credit Agreement. The Restated Credit
Agreement

20

---



is
secured principally by a grant of a security interest in all of our personal property and fixtures. In addition, we pay a commitment fee on the unused portion of the revolving facility as well as
fees on outstanding letters of credit.

On
March 3, 2006, we entered into an amendment (Amendment No. 1) to the Restated Credit Agreement. Amendment No. 1 was effective February 21, 2006. Under the terms of
Amendment No. 1, LaSalle agreed to relieve us of our obligation to comply with the excess availability covenant in the Restated Credit Agreement through April 30, 2006. Subsequently, we
successfully met the requirements set forth in the Restated Credit Agreement, and the excess availability requirement no longer applies.

On
April 25, 2006, we entered into a second amendment (Amendment No. 2) to the Restated Credit Agreement. Amendment No. 2 was effective April 2, 2006. Under the terms of
Amendment No. 2, LaSalle agreed to amend certain financial covenants related to capital expenditures.

Borrowings
under the Restated Credit Agreement totaled $10.9 million and $12.0 million as of April 2, 2006 and January 1, 2006, respectively. We had approximately
$10.8 million of unused borrowing capacity as of April 2, 2006. We were in compliance with our financial covenants as of April 2, 2006.

We
expect that our cash balances, cash flows from future operations and available borrowings under the Restated Credit Agreement will be sufficient to meet normal operating needs, fund any planned
capital expenditures, and repay debt obligations as they come due. A significant change in operating cash flow, a failure to successfully complete our business turnaround or an adverse outcome in our
pending dispute with the Internal Revenue Service described in Note 10 to the consolidated condensed financial statements could have a material adverse effect on our liquidity and our ability
to comply with the covenants in the Restated Credit Agreement.

In
October 2003, we received an $11.6 million cash tax refund associated with the write-off for tax purposes in 2002 of our remaining investment in ITI Holdings, Inc.
The Internal Revenue Service has audited our 2002 tax return and proposed an adjustment that would disallow this deduction. We believe that we have sufficient support for the deduction and intend to
pursue our available remedies. On November 30, 2005, we filed a protest contesting the proposed adjustment and requested a hearing with an Internal Revenue Service Appeals Officer. At this
point, it is unclear as to how this issue will ultimately be resolved. We have not recognized the income tax benefit related to this deduction and have previously recorded a liability for the
$11.6 million refund. We are required to accrue interest and have reserved $2.0 million for the amount of interest accrued to date. Should we not prevail in this matter, we may be
required to repay the previously received refund of $11.6 million, as well as interest related thereto. The timing of any repayment of the previously received refund could have a material
adverse effect on our liquidity, require us to seek additional financing to fund the repayment, and result in a default under the Restated Credit Agreement.

Our
cash flow is significantly impacted by our ability to collect our clients' accounts receivable on a timely basis. To the extent that our business with a single client or small group of clients
represents a more significant portion of our revenue, a delay in receiving payment could materially adversely affect our ability to fund operations.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Historically, we have been exposed to the impact of U.S. interest rate changes directly related to our normal operating and funding activities. From time to time, we have
entered into derivative
transactions in order to minimize these risks, but not for trading purposes. We do not have any derivative agreements as of April 2, 2006.

We
prepared a sensitivity analysis of its average debt for the quarter ended April 2, 2006, assuming a one-percentage point adverse change in interest rates. Holding all other
variables constant, the hypothetical adverse change would not significantly increase interest expense. The sensitivity analysis assumes no changes in our financial structure.

21

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Item 4.    Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the
effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as
of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and our principal financial officer have concluded that, as of
the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the
reports that we file or submit under the Exchange Act.

Internal Control Over Financial Reporting

There have not been changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the quarter ended April 2, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Controls

Our management, including our principal executive officer and our principal financial officer, does not expect that our disclosure controls and procedures or our internal
controls over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or
that all control issues and instances of fraud, if any, within our Company have been detected.

These
inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by
the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any controls'
effectiveness in future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or
procedures.

22

---





Part II. Other Information

Item 1A.    Risk Factors

For a detailed discussion of the risks and uncertainties associated with our business see Item 1A of our Annual Report on Form 10-K for the fiscal
year ended January 1, 2006.

There
have been no material changes to these risk factors during the quarter ended April 2, 2006.

Item 6.    Exhibits

The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index attached hereto.

23

---





SIGNATURES

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

|                   |  | APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
|------------------ |  | ---------------------------------------------
|Date: May 12, 2006 |  | By:                                          
|Date: May 12, 2006 |  | By:                                          
|Date: May 12, 2006 |  | By:                                          

24

---





Exhibit Index

|Exhibit
Number |  | Description                                                                                                                                                                                                                                           
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Articles of Incorporation of APAC Customer Services, Inc., incorporated by reference to APAC Customer Services, Inc.'s Annual Report on Form 10-K for the fiscal year ended January 1, 2006.                                                          
|3.2            |  | Certificate of Amendment of the Amended and Restated Bylaws of APAC Customer Services, Inc. as amended March 10, 2004, incorporated by reference to APAC Customer Services, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
March 28, 2004.
|10.1           |  | Amendment No. 1 to Amended and Restated Loan and Security Agreement, dated as of February 21, 2006, incorporated by reference to APAC Customer Services, Inc.'s current report on Form 8-K, dated March 3, 2006.                                      
|10.2           |  | Amendment No. 2 to Amended and Restated Loan and Security Agreement, dated as of April 2, 2006, incorporated by reference to APAC Customer Services, Inc.'s current report on Form 8-K, dated April 25, 2006.                                         
|31.1           |  | Certification of Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                       
|31.2           |  | Certification of Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                       
|32.1           |  | Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                    

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