##### Table of Contents



UNITED STATES
    SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
      Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For 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)
   (847) 374-4980
  Common Shares, $0.01 Par Value
  None
    o þ
    o þ
    þ o
  Regulation S-K Form 10-K Form 10-K o
  Rule 12b-2
  o o þ
  Rule 12b-2
  o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.




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##### 



TABLE OF
    CONTENTS
  Forward-Looking
    Statements and Factors that May Affect Future Results


3PART I


4Item 1.


Description of
    Business


4Item 1A.


Risk
    Factors


14Item 1B.


Unresolved Staff
    Comments


18Item 2.


Properties


18Item 3.


Legal
    Proceedings


19Item 4.


Submission of
    Matters to a Vote of Security Holders


19Executive Officers
    of the Registrant


19PART II


21Item 5.


Market for
    Registrants Common Equity, Related Shareholder Matters and
    Issuer Purchases of Equity Securities


21Item 6.


Selected Financial
    Data


23Item 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


25Item 7A.


Quantitative and
    Qualitative Disclosures About Market Risk


40Item 8.


Financial
    Statements and Supplementary Data


41Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


68Item 9A.


Controls and
    Procedures


68Item 9B.


Other
    Information


71PART III


71Item 10.


Directors and
    Executive Officers of the Registrant


71Item 11.


Executive
    Compensation


71Item 12.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


71Equity Compensation
    Plan Information


71Item 13.


Certain
    Relationships and Related Transactions


72Item 14.


Principal
    Accounting Fees and Services


72PART IV


72Item 15.


Exhibits and
    Financial Statement Schedules


72Signatures


73Exhibit IndexForm of Restricted Stock Award Agreement2005 Management Incentive PlanSubsidiariesConsent of Deloitte & Touche LLPConsent of Ernst & Young LLPPower of AttorneyCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of the CEO and CFO Pursuant to Section 906   2




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##### Table of Contents



Forward-Looking
    Statements and Factors that May Affect Future Results  Form 10-K
    Form 10-K.
  Form 10-K,
    
    Our revenue is generated from a limited number of clients and
    the loss of one or more of them, or a reduction in their demand
    for our services, could materially affect our financial results.
    Circumstances outside our control such as typhoons, earthquakes
    and other acts of God, political instability, equipment
    malfunction, telephone or data service interruptions, changes in
    the telecommunications market, war and terrorism could seriously
    harm our domestic or off-shore business.
    Our financial results depend on our ability to effectively
    manage the capacity of our domestic customer care centers and
    the growth of our off-shore customer care centers.
    Our inability to attract and retain a sufficient number of
    qualified employees could negatively impact our business.
    Our success is subject to the terms of our client contracts.
    Our success depends on sustaining a return to profitability.
    Our business operates in a highly competitive market.
    Our financial results may be affected by risks associated with
    international operations and expansion.
    Our business may be affected by our cash flows from operations
    and our ability to comply with our debt covenants.
    Our business and our clients businesses are subject to
    federal and state regulation and industry standards, including
    laws and industry standards regarding consumer privacy and
    information security. 3




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##### Table of Contents




    Our success depends on key personnel.
    Our principal shareholder can exercise significant control
    over the Company.
    Our liquidity and ability to meet the terms of our current
    loan agreements could be materially affected should we not
    prevail in our dispute with the Internal Revenue Service.  Form 10-K.
  Form 10-K Form 10-K Form 10-K.
 PART I  Item 1.
    Description
    of Business.  General
    Overview
        Business
    Turnaround
  Refocusing
    Our Strategy
   4




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Completing
    our Strategic Realignment
    
    Expanded our off-shore capacity in the Philippines by opening a
    second facility and leasing space in a temporary site pending
    completion of construction of a third location, that is a
    2,000 seat facility that is expected to open late in the
    first or early in the second quarter of 2007;
    Improved our labor model and compensation programs to enhance
    our ability to attract and retain quality customer service
    representatives;
    Increased our
    atHOMEtm
    agent program to provide an alternative for those qualified
    employees that have a need or desire for a more flexible
    schedule and to improve our ability to manage
    productivity; and
    Worked with the Customer Operations Performance Center, Inc.
    (COPC), the industry leader in call center
    standards, to audit our operational processes for adherence to
    our standards and provide recommendations for process
    improvements.      
    Excluding revenue from the exited outbound customer acquisition
    business from fiscal year 2006 and 2005 results, full year
    revenue increased $22.3 million or 11.1% to
    $223.4 million in fiscal year 2006;
    Ongoing off-shore revenue grew 157% from $10.9 million in
    fiscal year 2005 to $28.2 million in fiscal year 2006;
    Operating income for the 2006 fourth quarter was
    $1.5 million compared to a $4.5 million operating loss
    in the comparable prior year quarter; and
    Income before taxes was $954,000 for the 2006 fourth quarter
    compared to a $4.9 million loss in the prior year quarter.  Form 10-K Form 10-K
  Long
    Term Growth Strategy
   5




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##### Table of Contents



at tm
  Our
    Approach and Competitive Strategy
    ramp-up
      Our
    Core Industries and Clients
  Core
    Industries
    
    Healthcare
    Communications
    Business Services
    Financial Services
    Publishing
    Travel and Entertainment 6




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##### Table of Contents



Major
    Clients
  Form 10-K
  Seasonality
    Our
    Services
    Healthcare
    Communications
  set-up
  Business
    Services
   7




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##### Table of Contents



Financial
    Services
    Publishing
    Travel
    and Entertainment
    Personnel
    and Training
  pay-for-performance
    tm
    Form 10-K
  Operations
    and Capacity Utilization
  Customer
    Care Centers
   8




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Form 10-K
  Capacity
    and Workforce Management
    tm
  
    Co-locating call receipt patterns that are counter cyclical to
    create efficiencies and improve work load balance and resource
    utilization.
    Building innovative staffing and workforce
    ramp-up
    capabilities and using
    atHOMEtm
    agents for added scheduling flexibility; and
    Increasing overall capacity through a detailed analysis of
    anticipated demand.  Form 10-K
  Operational
    Leadership and Disciplines
      Program
    Implementation
  end-to-end start-up.
  Quality
    tm
 9




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Technology
    and Telecommunications
      Customer
    Care Applications
    tm
  tm
  Operating
    Systems and Telephony
  tm tm
 10




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##### Table of Contents



at tm
      System
    Architecture and Redundancy
    Form 10-K
  Client
    Relationships
      Form 10-K
 11




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Competition
      Form 10-K
      Government
    Regulation and Industry Self-Regulation
    Consumer
    Privacy and Information Security
   12




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Licensing
    Outbound
    Telemarketing Sales
    Compliance
    Activities
    Form 10-K
  Financial
    Information about Industry Segments
  Disclosures About Segments of an Enterprise and Related
    Information
  Available
    Information
  www.sec.gov. 1-800-SEC-0330.
 13




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www.apaccustomerservices.com. Form 10-K. Form 10-K, Form 10-Q, Form 8-K,
  Item 1A.
    Risk
    Factors.  Risk
    Relating to the Company and its Business
    Our
    revenue is generated from a limited number of clients and the
    loss of one or more of them, or a reduction in their demand for
    our services, could materially affect our financial
    results.
    Circumstances
    outside our control such as typhoons, earthquakes and other acts
    of God, political instability, equipment malfunction, telephone
    or data service interruptions, changes in the telecommunications
    market, war and terrorism could seriously harm our domestic or
    off-shore business.
     14




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##### Table of Contents



Our
    financial results depend on our ability to effectively manage
    the capacity of our domestic customer care centers and the
    growth of our off-shore customer care centers.
      Form 10-K
  Our
    inability to attract and retain a sufficient number of qualified
    employees could negatively impact our business.
    Form 10-K
  Our
    success is subject to the terms of our client
    contracts.
  and/or agreed-upon Form 10-K
 15




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Our
    success depends on sustaining a return to
    profitability.
  Form 10-K Form 10-K.
  Our
    business operates in a highly competitive market.
  Form 10-K
  Form 10-K Form 10-K
      Our
    financial results may be affected by risks associated with
    international operations and expansion.
     16




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Our
    business may be affected by our cash flows from operations and
    our ability to comply with our debt covenants.
          Our
    business and our clients businesses are subject to federal
    and state regulation and industry standards, including laws and
    industry standards regarding consumer privacy and information
    security.
     17




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##### Table of Contents



Form 10-K
        Our
    success depends on key personnel.
    Our
    principal shareholder can exercise significant control over the
    Company.
    Item 1B.
    Unresolved
    Staff Comments.    Item 2.
    Properties.  Accounting for Sales
    with Leaseback
   18




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Number ofCustomer Care Center Locations

WorkstationsTucson, Arizona


669Davenport, Iowa


667Cedar Rapids, Iowa


388Utica, New York


379Corpus Christi, Texas


798Newport News, Virginia (client
    owned)


810Green Bay, Wisconsin


669LaCrosse, Wisconsin


350Total US


4,730Alabang, Muntilupa City,
    Philippines


1,306Alabang, Muntilupa City,
    Philippines


410Eastwood City, Quezon City,
    Philippines (temporary facility)


382Total Philippines


2,098Total all Customer Care Center
    Locations


6,828   Item 3.
    Legal
    Proceedings.    Form 10-K
  Item 4.
    Submission
    of Matters to a Vote of Security Holders.   Executive
    Officers of the Registrant    Name

Age

PositionRobert J. Keller


53


President and Chief Executive
    OfficerJoseph R. Doolan


43


Vice President and ControllerGeorge H. Hepburn III


47


Senior Vice President and Chief
    Financial OfficerDavid J. LaBonte


57


Senior Vice President, OperationsJames M. McClenahan


48


Senior Vice President, Sales and
    MarketingMark E. McDermott


46


Senior Vice President and Chief
    Information OfficerPamela R. Schneider


47


Senior Vice President, General
    Counsel and SecretaryKaren R. Tulloch


50


Senior Vice President, Human
    Resources  19




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2002-2003. 1995-2002,
             20




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PART II Item 5.  Market
    for Registrants Common Equity, Related Shareholder Matters
    and Issuer Purchases of Equity Securities.    High


LowFiscal Year 2006:First Quarter

$
2.50


$
1.65Second Quarter

$
2.30


$
1.42Third Quarter

$
2.96


$
1.87Fourth Quarter

$
3.84


$
2.28   High


LowFiscal Year 2005:First Quarter

$
2.00


$
1.13Second Quarter

$
1.31


$
0.65Third Quarter

$
1.27


$
0.69Fourth Quarter

$
1.91


$
0.88   Form 10-K Form 10-K
 21




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Comparison
    of 5 Year Cumulative Total Return
 Among APAC Customer Services, Inc., The S&P 500 Index
 and a Self-Determined Peer Group
  
  12/28/2001


12/27/2002


12/26/2003


12/31/2004


12/30/3005


12/29/2006APAC Customer Services, Inc.



100.00




90.84




103.19




69.32




72.91




149.40S&P 500 Stock Index



100.00




75.40




94.39




104.38




107.52




122.16Self-Determined Peer Group



100.00




44.43




57.93




49.38




56.23




86.58   
 22




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Item 6.
    Selected
    Financial Data.  Form 10-K Form 10-K.
  For the Fiscal Years Ended(1)December 31,


January 1,


January 2,


December 28,


December 29,2006


2006


2005


2003


2002(Dollars in thousands, except share data, statistical data
    and notes)Operating Data:Net revenue

$
224,297


$
239,845


$
273,239


$
322,852


$
371,198Cost of services


197,095



217,124



239,783



263,153



295,874Gross profit


27,202



22,721



33,456



59,699



75,324Selling, general and
    administrative expenses(5)


32,065



34,369



39,712



48,633



50,283Restructuring and other charges(2)


2,384



8,216



1,873



3,238



8,139Asset impairment charges(3)






10,886



2,234



420



1,005Total operating expenses


34,449



53,471



43,819



52,291



59,427Operating (loss) income


(7,247
)


(30,750
)


(10,363
)


7,408



15,897Other income


(101
)


(600
)


(361
)


(100
)


(47
)Interest expense, net


2,013



1,408



620



1,131



6,532Income tax provision (benefit)(4)


21,380



(9,160
)


(4,123
)


2,038



3,218Net (loss) income

$
(30,539
)

$
(22,398
)

$
(6,499
)

$
4,339


$
6,194Net (loss) income per share:Basic

$
(0.62
)

$
(0.45
)

$
(0.13
)

$
0.09


$
0.13Diluted

$
(0.62
)

$
(0.45
)

$
(0.13
)

$
0.09


$
0.13Weighted average shares
    outstanding:Basic


49,458



49,455



49,453



49,436



49,244Diluted


49,458



49,455



49,453



49,461



49,415Balance Sheet Data:Cash and cash equivalents

$
1,305


$
960


$
271


$
11,428


$
14,530Working capital (deficit)


(16,679
)


(7,685
)


8,511



15,681



37,367Capital expenditures


10,713



8,699



11,206



8,348



6,494Total assets


92,054



110,353



119,533



134,593



149,394Short-term debt


14,378



11,971



313



389



656Long-term debt, less current
    maturities


4,400











313



28,872Shareholders equity


23,306



51,874



74,163



80,730



76,427    23




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##### Table of Contents



Notes
    to Selected Financial Data
  (1)
    
    We operate on a
    52/53-week
    fiscal year that ends on the Sunday closest to December 31.
    All fiscal years presented were 52 weeks, except for fiscal
    year 2004 which ended on January 2, 2005. Fiscal year 2004
    was 53 weeks. The effect of the additional week in fiscal
    year 2004 was to increase revenues and gross profit by
    $4.1 million and $87,000, respectively and to increase
    operating loss by $336,000.    Fiscal Year

Fiscal Year End2002


December 29, 20022003


December 28, 20032004


January 2, 20052005


January 1, 20062006


December 31, 2006   (2)
    
    We recorded restructuring charges in each of the fiscal years
    presented in the Selected Financial Data table noted
    above. For fiscal years 2006, 2005 and 2004, see Note 7 of
    the Notes to Consolidated Financial Statements in Item 8 of
    this Annual Report on
    Form 10-K
    for more information. In fiscal year 2003, we recorded
    $3.4 million of restructuring charges, partially offset by
    the reversal of $0.1 million in prior year charges not
    utilized. The 2003 restructuring charges consisted of
    $2.8 million in severance costs related to the elimination
    of administrative and support positions and $0.6 million
    for the write-off of property and lease termination and other
    costs associated with the closure of five customer care centers.
    We recorded $8.4 million of restructuring charges in fiscal
    year 2002, partially offset by the reversal of $0.3 million
    in prior year charges not utilized. The 2002 restructuring
    charges consisted of $5.8 million for the write-off of
    property and lease termination and other costs associated with
    the closure of sixteen customer care centers and the transition
    of one customer care center under a facility management contract
    and $2.6 million in severance costs related to the
    elimination of administrative and support positions.(3)
    
    We recorded $10.9 million of asset impairment charges in
    fiscal year 2005, including a write-down of goodwill of
    $10.5 million. We recorded $2.2 million of asset
    impairment charges during fiscal year 2004 relating to the
    write-off of unutilized software and telecommunications
    equipment. Fiscal year 2003 asset impairment charges of
    $0.4 million related to the write-off of certain software
    licenses and computer hardware. Asset impairment charges in
    fiscal year 2002 of $1.0 million related to the write-off
    of certain non-performing IT hardware and software costs and
    certain telecommunications equipment.(4)
    
    We provided a valuation allowance of $25.2 million against
    deferred tax assets as of December 31, 2006. See
    Note 8 of the Notes to Consolidated Financial Statements in
    Item 8 of this Annual Report on
    Form 10-K
    for more information.(5)
    
    Effective January 2, 2006, we adopted FASB Statement
    No. 123(R) Share-Based Payment
    (SFAS No. 123(R)). See Note 3 of the Notes to
    Consolidated Financial Statements in Item 8 of this Annual
    Report on Form
    10-K for
    more information. Total stock-based compensation expense
    included in selling, general and administrative expenses was
    $1.5 million for the fiscal year ended December 31,
    2006. The recognized tax benefit was $0.6 million for the
    fiscal year ended December 31, 2006. 24




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##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.  Form 10-K. Form 10-K.
  Overview
  Background
      2005
    Strategic Realignment
    Form 10-K
   25




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##### Table of Contents



2006
    Operating Results
      T-Mobile. Form 10-K.
    
    Excluding revenue from the exited outbound customer acquisition
    business from fiscal year 2006 and 2005, revenue increased
    $22.3 million or 11.1% to $223.4 million in fiscal
    year 2006;
    Ongoing off-shore revenue grew 157% from $10.9 million in
    fiscal year 2005 to $28.2 million in fiscal year 2006;
    Operating income for the 2006 fourth quarter was
    $1.5 million compared to a $4.5 million operating loss
    in the comparable prior year quarter; and
    Income before taxes was $954,000 for the 2006 fourth quarter
    compared to a $4.9 million loss in the prior year.  Form 10-K.
  Financial
    Outlook
   26




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##### Table of Contents



Results
    of Operations
    For the Fiscal Year EndedDecember 31,


January 1,


January 2,


2006 vs 2005


2005 vs 20042006


2006


2005(1)


Fav (Unfav)


Fav (Unfav)(Dollars in thousands, except statistical data and notes)Net Revenue:On-goingDomestic

$
195,209


$
190,054


$
195,208



2.7
%


(2.6
)%Off-shore


28,159



10,967



2,199



156.8



*Exited outbound business


929



38,824



75,832



(97.6
)


(48.8
)Total net revenue


224,297



239,845



273,239



(6.5
)


(12.2
)Cost of Services:Direct labor


129,839



137,695



155,871



5.7



11.7Other facility expenses


67,256



79,429



83,912



15.3



5.3Total cost of services


197,095



217,124



239,783



9.2



9.4Percentage of revenue


87.9
%


90.5
%


87.8
%


*



*Gross profit


27,202



22,721



33,456



19.7



(32.1
)Gross profit margin


12.1
%


9.5
%


12.2
%


*



*Operating Expenses:Selling, general &
    administrative expenses


32,065



34,369



39,712



6.7



13.5Restructuring and other charges


2,384



8,216



1,873



71.0



*Asset impairment charges






10,886



2,234



100.0



*Total operating expenses


34,449



53,471



43,819



35.6



(22.0
)Operating loss


(7,247
)


(30,750
)


(10,363
)


76.4



(196.7
)Other income


(101
)


(600
)


(361
)


(83.2
)


66.2Interest expense, net


2,013



1,408



620



(43.0
)


*Loss before income taxes


(9,159
)


(31,558
)


(10,622
)


71.0



(197.1
)Provision (benefit) for income
    taxes


21,380



(9,160
)


(4,123
)


*



122.2Net loss

$
(30,539
)

$
(22,398
)

$
(6,499
)


(36.3
)%


(244.6
)%     (1)
    
    We operate on a
    52/53-week
    fiscal year that ends on the Sunday closest to December 31.
    All fiscal years presented were 52 weeks, except for fiscal
    year 2004 which ended on January 2, 2005. Fiscal year 2004
    was 53 weeks. The effect of the additional week in fiscal
    year 2004 was to increase revenues and gross profit by
    $4.1 million and $87,000, respectively, and increase
    operating loss by $336,000.*
    
    Means that the percentage change is not meaningful.  Non-GAAP Financial
    Measures
   27




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##### Table of Contents



For the Fiscal Year EndedDecember 31,


January 1,


January 2,


2006 vs 2005


2005 vs 20042006


2006


2005(1)


Fav (Unfav)


Fav (Unfav)(Dollars in thousands, except statistical data and notes)EBITDA(2)

$
5,320


$
(18,032
)

$
1,053



129.5
%


*
%Adjusted EBITDA(2)


7,704



1,070



5,160



620.0



(79.3
)Free cash flow(3)


(5,393
)


(26,731
)


(10,153
)


79.8



(163.3
)Statistical Information:Number of customer care centersDomestic


8



12



23



(4
)


(11
)Off-shore


3



1



1



2



Total


11



13



24



(2
)


(11
)Number of workstationsDomestic


4,730



5,313



6,286



(583
)


(973
)Off-shore


2,098



1,240



600



858



640Total


6,828



6,553



6,886



275



(333
)Net weighted average revenue per
    workstationDomestic

$
38,616


$
37,564


$
41,723


$
1,052


$
(4,159
)Off-shore


19,624



15,102



7,089



4,522



8,013Total


34,298



35,172



40,144



(874
)


(4,972
)       *
    
    Means that the percentage change is not meaningful.  Notes
    to Non-GAAP Financial Measures
  (1)
    
    We operate on a
    52/53-week
    fiscal year that ends on the Sunday closest to December 31.
    All fiscal years presented were 52 weeks, except for fiscal
    year 2004 which ended on January 2, 2005. Fiscal year 2004
    was 53 weeks. The effect of the additional week in fiscal
    year 2004 was to increase revenues and gross profit by
    $4.1 million and $87,000 respectively, and increase
    operating loss by $336,000.(2)
    
    We define EBITDA as net income (loss) plus the provision
    (benefit) for income taxes, depreciation and amortization, and
    interest expense. We define adjusted EBITDA as EBITDA adjusted
    for restructuring and other charges and asset impairment
    charges. We use EBITDA and adjusted EBITDA, in addition to
    operating income and cash flows from operating activities, to
    assess our liquidity and performance, including measuring
    management incentive plans. In addition, we use adjusted EBITDA
    to evaluate the performance of our current business model
    against historic performance without the impact of the
    restructuring and other charges and asset 28




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##### Table of Contents



impairment charges resulting from our July 2005 strategic
    alignment. We believe that EBITDA and adjusted EBITDA are of
    interest to our investors and analysts to be able to evaluate
    our financial results using the same measures we use.EBITDA and adjusted EBITDA do not represent funds available for
    our discretionary use and are not intended to represent or to be
    used as a substitute for net income (loss) or cash flow from
    operations data as measured in accordance with GAAP. The items
    excluded from EBITDA and adjusted EBITDA are significant
    components of our statements of operations and must be
    considered in performing a comprehensive assessment of our
    overall financial results.EBITDA and adjusted EBITDA can be reconciled to net income
    (loss), which we believe to be the most directly comparable
    financial measure calculated and presented in accordance with
    GAAP, as follows:  For the Fiscal Year EndedDecember 31,


January 1,


January 2,2006


2006


2005(Dollars in thousands)Net loss

$
(30,539
)

$
(22,398
)

$
(6,499
)Provision (benefit) for income
    taxes


21,380



(9,160
)


(4,123
)Interest expense


2,013



1,408



620Depreciation and amortization


12,466



12,118



11,055EBITDA

$
5,320


$
(18,032
)

$
1,053Restructuring and other charges


2,384



8,216



1,873Asset impairment charges






10,886



2,234Adjusted EBITDA

$
7,704


$
1,070


$
5,160   (3)
    
    We define free cash flow as EBITDA less capital expenditures. We
    use free cash flow, in addition to net cash provided by (used
    in) operating activities, to assess our liquidity and
    performance. We believe that free cash flow is of interest to
    our investors and analysts in relation to our debt covenants as
    capital expenditures are a significant use of our cash and our
    future performance will depend on our ability to continue to
    fund our growth.  For the Fiscal Year EndedDecember 31,


January 1,


January 2,2006


2006


2005(Dollars in thousands)EBITDA

$
5,320


$
(18,032
)

$
1,053Capital expenditures


(13,963
)


(8,699
)


(11,206
)Leasehold improvements funded by
    landlord


3,250







Free cash flow

$
(5,393
)

$
(26,731
)

$
(10,153
)   Free cash flow does not represent funds available for our
    discretionary use and is not intended to represent or to be used
    as a substitute for cash flow from operating activities as
    measured in accordance with GAAP. 29




---



##### Table of Contents



Free cash flow can be reconciled to net cash provided by (used
    in) operating activities, which we believe to be the most
    directly comparable financial measure calculated and presented
    in accordance with GAAP, as follows:  For the Fiscal Year EndedDecember 31,


January 1,


January 2,2006


2006


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

$
2,268


$
(2,405
)

$
490Purchase of property and
    equipment, net


(10,713
)


(8,699
)


(11,206
)Income tax provision (benefit)


21,380



(9,160
)


(4,123
)Interest expense


2,013



1,408



620Changes in operating assets and
    liabilities


2,700



(5,431
)


2,981Asset impairment charges






(10,886
)


(2,234
)Gain on sale of property and
    equipment


18



339



Increase (decrease) in deferred
    income taxes


(21,380
)


9,007



3,394Stock compensation expense


(1,478
)






Non-cash restructuring charges


(201
)


(904
)


(75
)Free cash flow

$
(5,393
)

$
(26,731
)

$
(10,153
)  30




---



##### Table of Contents



Fiscal
    Year 2006 Results of Operations Compared to Fiscal Year 2005
    Results of Operations
  T-Mobile. T-Mobile
        T-Mobile.
  Form 10-K
     31




---



##### Table of Contents



Form 10-K
      Fiscal
    Year 2005 Results of Operations Compared to Fiscal Year 2004
    Results of Operations
             32




---



##### Table of Contents



Form 10-K
      Critical
    Accounting Policies and Estimates
  Share-Based Payment Form 10-K.
 33




---



##### Table of Contents



Revenue
    recognition
  Revenue Recognition in
    Financial Statements Revenue Recognition No. 00-21, Revenue Arrangements with Multiple
    Deliverables
  No. 00-21, Revenue Arrangements with Multiple
    Deliverables.
      Cost of
    services
  Recognition and Measurement in Financial Statements of
    a Business Enterprise
    Accounting
    for long-lived assets
  Accounting for the Impairment or
    Disposal of Long-Lived Assets
   34




---



##### Table of Contents



Goodwill
    and other intangible assets
  Accounting for the Impairment or Disposal of Long-Lived
    Assets
    Restructuring
    charges
  Accounting for Costs Associated with Exit or Disposal
    Activities
  Allowance
    for doubtful accounts
    Accounting
    for employee benefits
    Accounting
    for stock-based compensation
  Share-Based Payment Accounting for
    Stock-Based Compensation Accounting for Stock Issued
    to Employees
  Accounting for Stock-Based Compensation
 35




---



##### Table of Contents



Income
    taxes
    Liquidity
    and Capital Resources
    For the Fiscal Year EndedDecember 31,


January 1,


January 2,2006


2006


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

$
2,268


$
(2,405
)

$
490Net cash used in investing
    activities


(8,737
)


(7,628
)


(11,206
)Net cash provided by (used in)
    financing activities


6,956



10,836



(441
)Effect of exchange rates on cash


(142
)


(114
)


Net change in cash

$
345


$
689


$
(11,157
)   Operating
    Activities
      Investing
    Activities
    tm tm .
 36




---



##### Table of Contents



Financing
    Activities
      Free Cash
    Flow
  Form 10-K
  Bank
    Financing
      Form 10-K.
     37




---



##### Table of Contents



Form 10-K.
        ITI Tax
    Matter
   38




---



##### Table of Contents



Future
    Liquidity
  Form 10-K
  Off
    Balance Sheet Arrangements
    Contractual
    Obligations and Commitments
    Payment Due by PeriodLess than1 Year


2 to 3 Years


4 to 5 Years


Over 5 Years


Total(Dollars in thousands)Contractual
    Obligations:Operating leases

$
8,541


$
10,361


$
5,321


$
8,909


$
33,132Other Commercial
    Commitments:Long-term debt, including interest


1,180



3,190



2,220







6,590Telecommunications commitments


4,527



7,429











11,956Letters of Credit


3,959















3,959Total other commercial commitments

$
9,666


$
10,619


$
2,220


$



$
22,505   New
    Accounting Pronouncements
  Share-Based Payment Accounting for
    Stock-Based Compensation Accounting for Stock Issued
    to Employees
  Accounting for Stock-Based Compensation
 39




---



##### Table of Contents



Transition Election Related to
    Accounting for the Tax Effects of Share-Based Payment
    Awards. Share-Based Payment
  Accounting for
    Uncertainty in Income Taxes: an interpretation of FASB Statement
    No. 109 Accounting for Income Taxes,
  Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk.     40




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data.  Form 10-K:
  PageReport of
    Independent Registered Public Accounting Firm for the Fiscal
    Year Ended December 31, 2006


42Report of
    Independent Registered Public Accounting Firm for the Fiscal
    Years Ended January 1, 2006 and January 2,
    2005


43Consolidated
    Statements of Operations for the Fiscal Years Ended
    December 31, 2006, January 1, 2006, and
    January 2, 2005


44Consolidated
    Balance Sheets as of December 31, 2006 and January 1,
    2006


45Consolidated
    Statements of Shareholders Equity for the Fiscal Years
    Ended December 31, 2006, January 1, 2006, and
    January 2, 2005


46Consolidated
    Statements of Cash Flows for the Fiscal Years Ended
    December 31, 2006, January 1, 2006, and
    January 2, 2005


47Notes to
    Consolidated Financial Statements


48Quarterly Results
    of Operations for the Fiscal Years Ended December 31, 2006,
    and January 1, 2006


67Managements
    Report on Internal Control over Financial Reporting for the
    Fiscal Year Ended December 31, 2006


68Report of
    Independent Registered Public Accounting Firm on Internal
    Control over Financial Reporting for the Fiscal Year Ended
    December 31, 2006


70  41




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm          Share-Based
    Payment
    
    42




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm          
    43




---



##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  CONSOLIDATED STATEMENTS OF OPERATIONS
  (Dollars in thousands, except share data)
  For the Fiscal Year EndedDecember 31,


January 1,


January 2,2006


2006


2005Net revenue

$
224,297


$
239,845


$
273,239Cost of services


197,095



217,124



239,783Gross profit


27,202



22,721



33,456Operating expenses:Selling, general and
    administrative expenses


32,065



34,369



39,712Restructuring and other charges


2,384



8,216



1,873Asset impairment charges






10,886



2,234Total operating expenses


34,449



53,471



43,819Operating loss


(7,247
)


(30,750
)


(10,363
)Other income


(101
)


(600
)


(361
)Interest expense


2,013



1,408



620Loss before income taxes


(9,159
)


(31,558
)


(10,622
)Income tax provision (benefit)


21,380



(9,160
)


(4,123
)Net loss

$
(30,539
)

$
(22,398
)

$
(6,499
)Net loss per share:Basic

$
(0.62
)

$
(0.45
)

$
(0.13
)Diluted

$
(0.62
)

$
(0.45
)

$
(0.13
)Weighted average shares
    outstanding:Basic


49,458



49,455



49,453Diluted


49,458



49,455



49,453    44




---



##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  CONSOLIDATED BALANCE SHEETS
  (Dollars in thousands, except share data)
  December 31,


January 1,2006


2006ASSETSCurrent assets:Cash and cash equivalents

$
1,305


$
960Accounts receivable, less
    allowances of $1,473 and $1,919, respectively


37,858



37,592Other current assets


6,717



9,248Total Current Assets


45,880



47,800Property and equipment, net


23,930



21,536Goodwill


13,338



13,338Other intangible assets, net


8,070



10,341Deferred taxes






16,237Other assets


836



1,101Total Assets

$
92,054


$
110,353LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent liabilities:Short-term debt

$
14,378


$
11,971Accounts payable


2,890



3,558Income taxes payable


17,800



17,377Accrued payroll and related items


14,603



12,769Accrued liabilities


12,888



9,810Total Current Liabilities


62,559



55,485Long-term debt


4,400



Other liabilities


1,789



2,994Commitments and contingencies






Shareholders
    equity:Common Shares, $0.01 per
    share; authorized 200,000,000 shares; 50,066,628 and
    49,695,699 shares issued at December 31, 2006, and
    January 1, 2006, respectively; 49,866,583 and
    49,454,654 shares outstanding at December 31, 2006,
    and January 1, 2006, respectively


501



497Additional paid-in capital


101,077



99,598Accumulated deficit


(77,849
)


(47,310
)Accumulated other comprehensive
    income (loss)


280



(64
)Treasury shares: 200,045 and
    241,045 shares at cost at December 31, 2006 and
    January 1, 2006, respectively


(703
)


(847
)Total Shareholders Equity


23,306



51,874Total Liabilities and
    Shareholders Equity

$
92,054


$
110,353    45




---



##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  CONSOLIDATED STATEMENTS OF SHAREHOLDERS
    EQUITY
  (Dollars in thousands, except share data)
  Common


Common


Additional





Accumulated Other


TotalShares


Share


Paid-In


Accumulated


Comprehensive


Treasury


ShareholdersIssued


Amount


Capital


Deficit


Income (Loss)


Stock


EquityBalance, December 28,
    2003


49,695,699


$
497


$
99,620


$
(18,413
)

$
(82
)

$
(892
)

$
80,730Net loss














(6,499
)










(6,499
)Foreign currency translation
    adjustment


















(91
)






(91
)Total comprehensive loss


























(6,590
)Exercise of employee stock options,
    including related income tax benefits










(22
)










45



23Balance, January 2,
    2005


49,695,699


$
497


$
99,598


$
(24,912
)

$
(173
)

$
(847
)

$
74,163Net loss














(22,398
)










(22,398
)Foreign currency translation
    adjustment


















109







109Total comprehensive loss


























(22,289
)Balance, January 1,
    2006


49,695,699


$
497


$
99,598


$
(47,310
)

$
(64
)

$
(847
)

$
51,874Net loss














(30,539
)










(30,539
)Foreign currency translation
    adjustment


















344







344Total comprehensive loss


























(30,195
)Issuance of non-vested stock


370,929



4



















4Exercise of employee stock options,
    including related excess income tax benefits










1











144



145Stock compensation expense










1,478















1,478Balance, December 31,
    2006


50,066,628


$
501


$
101,077


$
(77,849
)

$
280


$
(703
)

$
23,306    46




---



##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  (Dollars in thousands)
  For the Fiscal Year EndedDecember 31,


January 1,


January 2,2006


2006


2005Operating Activities:Net loss

$
(30,539
)

$
(22,398
)

$
(6,499
)Adjustments to reconcile net loss
    to net cash provided by (used in) operating activitiesDepreciation and amortization


12,466



12,118



11,055Deferred income taxes


21,380



(9,007
)


(3,394
)Non-cash restructuring charges


201



904



75Asset impairment charges






10,886



2,200Stock compensation expense


1,478







Gain on sale of property and
    equipment


(18
)


(339
)


Changes in operating assets and
    liabilities:Accounts receivable


(266
)


3,410



5,894Recoverable income taxes






264



(89
)Other current assets


(2,190
)


599



(1,289
)Accounts payable


(669
)


14



(502
)Accrued payroll and related items


1,834



(2,279
)


(3,319
)Income taxes payable






748



(1,323
)Accrued liabilities


1,229



1,444



(2,629
)Other assets and liabilities


(2,638
)


1,231



310Net cash provided by (used in)
    operating activities


2,268



(2,405
)


490Investing Activities:Purchase of property and equipment,
    net


(10,713
)


(8,699
)


(11,206
)Net proceeds from sale of property
    and equipment


1,976



1,071



Net cash used in investing
    activities


(8,737
)


(7,628
)


(11,206
)Financing Activities:Borrowings under revolving credit
    facility


238,833



172,432



Payments under revolving credit
    facility


(237,026
)


(160,461
)


Borrowings on long term debt


5,000







Payments on long term debt






(313
)


(389
)Financing costs






(822
)


(75
)Stock option transactions including
    related excess income tax benefits


149







23Net cash provided by (used in)
    financing activities


6,956



10,836



(441
)Effect of exchange rates on cash


(142
)


(114
)


Net increase (decrease) in cash and
    cash equivalents


345



689



(11,157
)Cash and Cash
    Equivalents:Beginning of year


960



271



11,428End of year

$
1,305


$
960


$
271Supplemental
    Disclosures:Cash payments for interest

$
1,483


$
671


$
385Cash payments for income taxes


21



5



225Income tax refund received






445



Leasehold improvements funded by
    landlord


3,250







    47




---



##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Dollars in thousands, except share data and as otherwise
    indicated)
  1.
    Description
    of Business      2.
    Basis of
    Presentation and Principles of Consolidation  Consolidation
    Fiscal
    Year
  52/53-week
  3.
    Summary
    of Significant Accounting Policies and Estimates  Revenue
    recognition
  Revenue Recognition in Financial Statements Revenue Recognition No. 00-21, Revenue Arrangements with Multiple
    Deliverables
  No. 00-21, Revenue Arrangements with Multiple
    Deliverables.
 48




---



##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
        Cost
    of services
  Recognition and Measurement in Financial Statements of
    Business Enterprise
    Restructuring
    charges
  Accounting for Costs Associated with Exit or Disposal
    Activities
  Allowance
    for doubtful accounts
    Accounting
    for employee benefits
   49




---



##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
      2006


2005Group Health Insurance

$
1,220


$
2,268Workers Compensation

$
2,705


$
3,010   Income
    taxes
    Cash
    equivalents
    Use of
    estimates
    Accounting
    for long-lived assets
  Accounting for the Impairment or Disposal of Long-Lived
    Assets
  Property
    and Equipment
    50




---



##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
  December 31,


January 1,2006


2006Building and leasehold improvements

$
17,989


$
24,556Telecommunications equipment


46,349



46,659Workstations and office equipment


11,064



13,178Capitalized software


22,989



21,914Construction in progress


2,751



525Accumulated depreciation and
    amortization


(77,212
)


(85,296
)Property and equipment, net

$
23,930


$
21,536   Capitalized
    Software
  No. 98-1 Accounting for Costs of Computer Software Developed or
    Obtained for Internal Use
  Goodwill
  Goodwill and Other
    Intangible Assets
  Intangible
    Asset
  Goodwill and Other Intangible
    Assets
  Accounting for the Impairment or Disposal of Long-Lived
    Assets
 51




---



##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
    Financial
    Information about Industry Segments
  Disclosures About Segments of an Enterprise and Related
    Information
  Accounting
    for Stock-Based Compensation
    Share-Based Payment Accounting for
    Stock-Based Compensation Accounting for Stock
    Issued to Employees
  Accounting for Stock-Based Compensation 10-year
      Transition Election Related to Accounting for the Tax
    Effects of Share-Based Payment Awards
 52




---



##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
        2005


2004Net loss as reported

$
(22,398
)

$
(6,499
)Less  compensation
    expense on stock options, net of income tax benefit


(927
)


(1,381
)Net loss pro forma

$
(23,325
)

$
(7,880
)Loss per share  basicAs reported

$
(0.45
)

$
(0.13
)Pro forma

$
(0.47
)

$
(0.16
)Loss per share  dilutedAs reported

$
(0.45
)

$
(0.13
)Pro forma

$
(0.47
)

$
(0.16
)   New
    Accounting Pronouncements
  Accounting for Uncertainty in Income
    Taxes: An interpretation of FASB Statement
    No. 109 ,
    Accounting for Income Taxes,
  4.
    Comprehensive
    Income/Loss    2006


2005


2004Net loss

$
(30,539
)

$
(22,398
)

$
(6,499
)Foreign currency translation gain
    (loss)(1)


344



109



(91
)Total comprehensive loss

$
(30,195
)

$
(22,289
)

$
(6,590
)     (1)
    
    The foreign currency translation gains in fiscal year 2006 and
    2005 and loss in fiscal year 2004 relate to the impact of a
    change in exchange rates on net assets located outside of the
    United States. 53




---



##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
   5.
    Significant
    Clients    2006


2005


2004WellPoint


19.5
%


6.1
%



%Verizon Wireless


17.4



10.8



5.7United Parcel Services, Inc.


15.5



12.8



10.0Citigroup, Inc.


6.8



10.2



10.6T-Mobile
    USA


3.9



10.6



12.3Total


63.1
%


50.5
%


38.6
%     Percent of NetAccounts Receivable2006


2005WellPoint


26.3
%


27.2
%Verizon Wireless


20.7



13.4United Parcel Services, Inc


7.0



9.1Citigroup, Inc.


7.2



9.5T-Mobile
    USA






5.0Total


61.2
%


64.2
%   6.
    Supplemental
    Balance Sheet Data  December 31,


January 1,Consolidated Balance Sheet

2006


2006Prepaid expenses

$
5,066


$
4,270Non-trade receivables


1,651



258Deferred tax assets






4,720Other current assets

$
6,717


$
9,248Deferred rent

$
3,070


$
Accrued workers compensation


2,705



3,010Restructuring charges


2,032



2,806Accrued professional fees


837



659Accrued property tax


261



737Other accrued liabilities


3,983



2,598Accrued liabilities

$
12,888


$
9,810  54




---



##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
    7.
    Restructuring
    and Other Charges/Asset Impairment Charges  Restructuring
    Charges
       55




---



##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
     LeaseSeverance


Asset


ObligationsCosts


Write-off


and Other


TotalRestructuring Reserve,
    December 28, 2003


1,407



48



1,598



3,053Total expense


1,309



242



322



1,873Total adjustments






(290
)






(290
)Total payments


(2,154
)






(1,839
)


(3,993
)Restructuring Reserve,
    January 2, 2005


562







81



643Total expense


2,300



894



4,544



7,738Total adjustments






(894
)






(894
)Total payments


(2,153
)






(636
)


(2,789
)Restructuring Reserve,
    January 1, 2006


709







3,989



4,698Total expense


225



501



1,658



2,384Total adjustments


(88
)


(486
)


787



213Total payments


(839
)


5



(3,284
)


(4,118
)Restructuring Reserve,
    December 31, 2006


7



20



3,150



3,177   Asset
    Impairment Charges
      8.
    Income
    Taxes    2006


2005


2004Current provision (benefit)

$



$
(153
)

$
(729
)Deferred provision (benefit)


21,380



(9,007
)


(3,394
)Total provision (benefit) for
    income taxes

$
21,380


$
(9,160
)

$
(4,123
)  56




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##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
    2006


2005


2004U.S. Statutory tax expense
    (benefit)  rate (35%)

$
(3,206
)

$
(6,832
)

$
(3,718
)U.S. State taxes, net of
    U.S. Federal benefit and state credits


(359
)


(871
)


(446
)Work opportunity tax credits


(642
)


(1,725
)


Other


381



268



41Valuation allowance recorded


25,206







Actual tax expense (benefit)

$
21,380


$
(9,160
)

$
(4,123
)     December 31,


January 1,2006


2006Deferred tax assets:Net operating loss and credit
    carryforwards

$
15,485


$
13,878Depreciation


3,146



2,577Self insurance related costs


1,395



1,802Deferred rent


1,203



Payroll related items


1,098



924Restructuring charge


1,013



1,703Allowance for doubtful accounts


578



752Stock compensation expense


477



Intangible assets


358



Other


575



644Total deferred tax assets


25,328



22,280Deferred tax liabilities


(122
)


(1,323
)Valuation allowance


(25,206
)


Net deferred tax assets

$



$
20,957      57




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##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
    9.
    Long-Term
    Debt    December 31, 2006Term loan, interest rate of prime
    plus 475 basis points

$
5,000Total long-term debt


5,000Less  current maturities


600Long-term debt, net

$
4,400     2007

$
6002008


1,2002009


1,2002010


1,2002011


800Thereafter


Total payments

$
5,000        58




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##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
                 59




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##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
                 60




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##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
        10.
    Commitments
    and Contingencies  Lease
    Commitments
    Accounting for Sales with Leaseback
    Operating Leases2007

$
8,5412008


6,3742009


3,9872010


3,0862011


2,235Years thereafter


8,909Total payments

$
33,132   Telecommunications
    Commitments
    Total2007

$
4,5272008


3,9292009


3,500Total commitments

$
11,956  61




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##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
  Legal
    Proceedings
        Training
    Bonds
    11.
    Shareholders
    Equity    12.
    Earnings
    Per Share    2006


2005


2004Net loss(1)

$
(30,539
)

$
(22,398
)

$
(6,499
)Weighted average common shares
    outstanding


49,458



49,455



49,453Loss per share  basic

$
(0.62
)

$
(0.45
)

$
(0.13
)Dilutive effect of stock options










Weighted average common and common
    equivalent shares outstanding


49,458



49,455



49,453Loss per share  diluted

$
(0.62
)

$
(0.45
)

$
(0.13
)     (1)
    
    Net loss is the same for purposes of calculating basic and
    diluted EPS.   62




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##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
   13.
    Stock
    Awards      Share-Based Payment
    For the Fiscal Year EndedDecember 31, 2006Non-vestedOptions


Common SharesExpected volatility


51 - 57
%


N/ARisk-free interest rate


4.6 - 5.1
%


N/AExpected life in years


2.1 - 5.0



N/AAnnualized forfeiture rate


15.7
%


15.7
%Weighted average grant date fair
    value

$
0.89


$
1.57  63




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##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
  Stock
    Option Activity
    Grant Price


Weighted Average


AggregateRange


Exercise Price


IntrinsicDescription

Shares


Per Share


Per Share


ValueOutstanding as of
    December 28, 2003


5,720,169


$
1.59 - $38.13


$
4.27Granted


1,207,119



1.55 - 3.03



2.44Exercised


(13,062
)


1.59 - 2.90



1.79Cancelled


(1,655,200
)


1.59 - 7.94



3.94Outstanding as of January 2,
    2005


5,259,026


$
1.55 - $38.13


$
3.96Granted


6,425,090



0.85 - 1.74



1.41Exercised










Cancelled


(4,009,817
)


1.06 - 15.31



2.70Outstanding as of January 1,
    2006


7,674,299


$
0.85 - $38.13


$
2.48Granted


720,112



1.80 - 2.84



2.21Exercised


(41,000
)


1.55 - 3.57



2.10Cancelled


(1,091,446
)


1.35 - 38.13



3.61Outstanding as of
    December 31, 2006


7,261,965


$
0.85 - $16.75


$
2.15


$
12,745Stock options exercisable at
    December 31, 2006


2,611,419


$
0.85-$16.75


$
3.16


$
2,976       Per Share Exercise Price Ranges


Total$0.85-$1.62


$1.63-$3.47


$3.53-$16.75


$0.85-$16.75Outstanding as of
    December 31, 2006


4,264,276



2,423,046



574,643



7,261,965Weighted average remaining term


8.39



6.83



3.24



7.46Weighted average exercise price

$
1.31


$
2.59


$
6.47


$
2.15Exercisable as of
    December 31, 2006


783,753



1,253,023



574,643



2,611,419Weighted average exercise price

$
1.30


$
2.81


$
6.47


$
3.16  64




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##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
  Non-vested
    Common Share Activity
    Description

SharesOutstanding as of January 1,
    2006(1)


Granted


477,529Exercised


Cancelled


(106,600
)Outstanding as of
    December 31, 2006


370,929Exercisable at December 31,
    2006


     (1)
    
    The Company did not issue non-vested common shares in fiscal
    years 2005 and 2004.    14.
    Benefit
    Plans    15.
    Related
    Party Transactions        16.
    Reclassification    17.
    Subsequent
    Events   65




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##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
           66




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##### Table of Contents



APAC
    CUSTOMER SERVICES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (Dollars
    in thousands, except share data and as otherwise
    indicated)
  18.
    Quarterly
    Data (Unaudited)    First


Second


Third


Fourth


FullQuarter


Quarter


Quarter


Quarter


YearFiscal year ended
    December 31, 2006:Net revenue

$
60,723


$
58,236


$
49,282


$
56,056


$
224,297Gross profit


7,651



7,286



3,136



9,129



27,202Operating (loss) income


(401
)


(1,005
)


(7,375
)


1,534



(7,247
)Net loss


(741
)


(793
)


(5,005
)


(24,000
)


(30,539
)Net loss per share

$
(0.01
)

$
(0.02
)

$
(0.10
)

$
(0.49
)

$
(0.62
)Fiscal year ended
    January 1, 2006:Net revenue

$
65,674


$
58,159


$
56,343


$
59,669


$
239,845Gross profit


6,700



2,824



5,377



7,820



22,721Operating loss


(3,438
)


(7,271
)


(15,541
)


(4,500
)


(30,750
)Net loss


(2,382
)


(5,013
)


(13,507
)


(1,496
)


(22,398
)Net loss per share

$
(0.05
)

$
(0.10
)

$
(0.27
)

$
(0.03
)

$
(0.45
)   quarter-to-quarter
 67




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##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure.   Item 9A.  Controls
    and Procedures.  Disclosure
    Controls and Procedures
  Rules 13a-15(e) Form 10-K.
 Managements
    Report on Internal Control over Financial
    Reporting  Rules 13a-15(f) 15d-15(f)). Internal Control 
    Integrated Framework Internal
    Control  Integrated Framework, Form 10-K.
    Robert J. Keller

George H. Hepburn IIIChief Executive Officer

Chief Financial Officer   Inherent
    Limitations on the Effectiveness of Controls
     68




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##### Table of Contents



Internal
    Control Over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
 69




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm on Internal
    Control Over Financial Reporting                    70




---



##### Table of Contents



Item 9B.
    Other
    Information.   PART III  Item 10.
    Directors
    and Executive Officers of the Registrant.  Regulation S-K
  http://www.apaccustomerservices.com Form 8-K
    Item 11.
    Executive
    Compensation.   Item 12.  Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters.     71




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##### Table of Contents



Equity
    Compensation Plan Information    Number of SecuritiesRemaining Available forNumber of Securities





Future Issuance Underto Be Issued Upon


Weighted Average


Equity CompensationExercise of Outstanding


Exercise Price


Plans (ExcludingOptions, Warrants,


of Outstanding Options,


Securities ReflectedPlan Category

and Rights


Warrants, and Rights


in the First Column)Equity compensation plans approved
    by security holders


7,632,894


$
2.04



2,782,108Equity compensation plans not
    approved by security holders










   Item 13.
    Certain
    Relationships and Related Transactions.     Item 14.
    Principal
    Accounting Fees and Services.    PART IV   Item 15.
    Exhibits
    and Financial Statement Schedules.  (a) (1) Financial Statements
  Form 10-K:
                  (2) Financial Statement Schedules
  Form 10-K:
   72




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##### Table of Contents



Regulation S-X
  (3) Exhibits
  Regulation S-K
  (b)  Exhibits
  Form 10-K.
  (c)  Financial Statement Schedules
  Form 10-K.
 73




---



##### Table of Contents



SIGNATURES      By:
    /s/  George
    H. Hepburn III   Senior Vice President and Chief Financial Officer
      Signature

Title

Date/s/  Theodore
    G.
    Schwartz*Theodore
    G. Schwartz

Chairman of the Board of Directors

March 16, 2007/s/  Robert
    J. KellerRobert
    J. Keller

Director and Chief Executive
    Officer (Principal Executive Officer)

March 16, 2007/s/  George
    H.
    Hepburn IIIGeorge
    H. Hepburn III

Senior Vice President and Chief
    Financial Officer (Principal Financial Officer)

March 16, 2007/s/  Joseph
    R. DoolanJoseph
    R. Doolan

Vice President and Controller
    (Principal Accounting Officer)

March 16, 2007/s/  Cindy
    K.
    Andreotti*Cindy
    K. Andreotti

Director

March 16, 2007/s/  Thomas
    M. Collins*Thomas
    M. Collins

Director

March 16, 2007/s/  John
    W.
    Gerdelman*John
    W. Gerdelman

Director

March 16, 2007/s/  John
    C. Kraft*John
    C. Kraft

Director

March 16, 2007/s/  John
    J. Park*John
    J. Park

Director

March 16, 2007     *
    
    George H. Hepburn III, as attorney in fact for each person
    indicated. 74




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##### Table of Contents



SCHEDULE II
  VALUATION AND QUALIFYING ACCOUNTS
 (Dollars in thousands)
  Column A

Column B


Column C


Column D


Column EBalance at


Charged to





Balance atBeginning of


Costs and





End ofDescription

Period


Expenses


Deductions(a)


PeriodAllowance for doubtful accounts:Fiscal Year ended January 2,
    2005

$
2,451


$
(200
)

$
58


$
2,193Fiscal Year ended January 1,
    2006


2,193



50



324



1,919Fiscal Year ended
    December 31, 2006


1,919



854



1,300



1,473     (a)
    
    Represents charges for which the
    allowance account was created. 75




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##### Table of Contents



EXHIBIT INDEX  ExhibitNumber

Description3
.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 fiscal quarter ended March 28, 2004.4
.1

Specimen Common Stock Certificate,
    incorporated by reference to APAC Customer Services, Inc.s
    Annual Report on
    Form 10-K
    for the fiscal year ended December 29, 2002.*10
.1

APAC Customer Services, Inc. 2005
    Incentive Stock Plan incorporated by reference into APAC
    Customer Services, Inc.s Current Report on
    Form 8-K,
    dated February 7, 2006.*10
.2

Form of Stock Option Agreement,
    incorporated by reference to APAC Customer Services, Inc.s
    Current Report on
    Form 8-K,
    dated February 11, 2005.*10
.3

Form of Stock Option Agreement,
    incorporated by reference to APAC Customer Services, Inc.s
    Annual Report on
    Form 10-K
    for the fiscal year ended January 1, 2006.*10
.4

Form of Director Option Agreement,
    incorporated by reference to APAC Customer Services, Inc.s
    Annual Report on
    Form 10-K
    for the fiscal year ended January 1, 2006.*10
.5

Form of Restricted Stock Award
    Agreement, incorporated by reference to APAC Customer Services,
    Inc.s Annual Report on
    Form 10-K
    for the fiscal year ended January 1, 2006.*10
.6

Form of Restricted Stock Award
    Agreement.*10
.7

APAC Customer Services, Inc.
    Retirement Plan for Senior Employees incorporated by reference
    into APAC Customer Services, Inc.s Annual Report on
    Form 10-K
    for the fiscal year ended January 2, 2005.*10
.8

Employment Agreement with Robert
    J. Keller, dated March 10, 2004, incorporated by reference
    to APAC Customer Services, Inc.s Annual Report on
    Form 10-K
    for the fiscal year ended December 28, 2003.*10
.9

Employment Agreement with Pamela
    R. Schneider, dated June 1, 2005 incorporated by reference
    to APAC Customer Services, Inc.s Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended July 3, 2005.*10
.10

Employment Agreement with James M.
    McClenahan, dated May 9, 2004, incorporated by reference to
    APAC Customer Services, Inc.s Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended June 27, 2004.*10
.11

Employment Agreement with Karen R.
    Tulloch, dated May 28, 2005, incorporated by reference to
    APAC Customer Services, Inc.s Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended July 3, 2005.*10
.12

Employment Agreement with George
    H. Hepburn III, dated September 6, 2005, incorporated
    by reference to APAC Customer Services, Inc.s Current
    Report on
    Form 8-K,
    dated September 15, 2005.*10
.13

Employment Agreement with Mark E.
    McDermott, dated April 12, 2004, incorporated by reference
    into APAC Customer Services, Inc.s Annual Report on
    Form 10-K
    for the fiscal year ended January 2, 2005.*10
.14

Employment Agreement with Joseph
    R. Doolan, dated January 11, 2006, incorporated by
    reference to APAC Customer Services, Inc.s Current Report
    on
    Form 8-K,
    dated February 9, 2006.*10
.15

APAC Customer Services, Inc. 2005
    Management Incentive Plan, effective January 3, 2005,
    incorporated by reference into APAC Customer Services,
    Inc.s Current Report on
    Form 8-K,
    dated February 7, 2006.*10
.16

APAC Customer Services, Inc. 2005
    Management Incentive Plan, as amended and restated effective
    March 15, 2007.*10
.17

Form of Employment Security
    Agreement between the Company and its Senior Management Team,
    incorporated by reference to APAC Customer Services, Inc.s
    Annual Report on
    Form 10-K
    for the fiscal year ended January 1, 2006.10
.18

Amended and Restated Credit
    Agreement, dated October 31, 2005, incorporated by
    reference to APAC Customer Services, Inc.s Current Report
    on
    Form 8-K,
    dated November 3, 2005.




---



##### Table of Contents



ExhibitNumber

Description10
.19

Amendment No. 1 to Amended
    and Restated Credit Agreement, effective as of February 21,
    2006, incorporated by reference to APAC Customer Services,
    Inc.s Current Report on
    Form 8-K,
    dated March 9, 2006.10
.20

Amendment No. 2 to Amended
    and Restated Credit Agreement, effective as of April 2,
    2006, incorporated by reference to APAC Customer Services,
    Inc.s Current Report on
    Form 8-K,
    dated April 27, 2006.10
.21

Amendment No. 3 to Amended
    and Restated Credit Agreement, effective as of June 2,
    2006, incorporated by reference to APAC Customer Services,
    Inc.s Current Report on
    Form 8-K,
    dated June 9, 2006.10
.22

Amendment No. 4 to Amended
    and Restated Credit Agreement, effective as of October 1,
    2006, incorporated by reference to APAC Customer Services,
    Inc.s Current Report on
    Form 8-K,
    dated October 30, 2006.10
.23

Amendment No. 5 to Amended
    and Restated Credit Agreement, dated as of November 10,
    2006, incorporated by reference to APAC Customer Services,
    Inc.s Quarterly Report on
    Form 10-Q,
    for fiscal quarter ended October 1, 2006.10
.24

Amendment No. 6 to Amended
    and Restated Credit Agreement, dated as of December 5,
    2006, incorporated by reference to APAC Customer Services,
    Inc.s Current Report on
    Form 8-K,
    dated December 8, 2006.10
.25

Second Amended and Restated Loan
    and Security Agreement, dated January 31, 2007,
    incorporated by reference to APAC Customer Services, Inc.s
    Current Report on
    Form 8-K,
    dated February 5, 2007.10
.26

Second Lien Loan and Security
    Agreement, dated January 31, 2007, incorporated by
    reference to APAC Customer Services, Inc.s Current Report
    on
    Form 8-K,
    dated February 5, 2007.10
.27

Registration Rights Agreement
    incorporated by reference to APAC TeleServices, Inc.s
    Registration Statement on
    Form S-1,
    as amended, Registration
    No. 33-95638.10
.28

Tax Agreement incorporated by
    reference to APAC TeleServices, Inc.s Registration
    Statement on
    Form S-1,
    as amended, Registration
    No. 33-95638.21
.1

Subsidiaries of APAC Customer
    Services, Inc.23
.1

Consent of Deloitte &
    Touche LLP.23
.2

Consent of Ernst & Young
    LLP.24
.1

Power of attorney executed by
    Theodore G. Schwartz, Cindy K. Andreotti, Thomas M. Collins,
    John W. Gerdelman, John C. Kraft, Robert J. Keller, and John J.
    Park.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.     *
    
    Indicates management employment contracts or compensatory plans
    or arrangements.