<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
(Mark One)
  [X]            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
 
                   For the fiscal year ended January 3, 1999
 
                                      OR
 
  [_]      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 TeleServices, Inc.
            (Exact name of registrant as specified in its charter)
 
               Illinois                              36-2777140
    (State or other jurisdiction of               (I.R.S. Employer
    incorporation or organization)               Identification No.)
 
        One Parkway North Center, Suite 510, Deerfield, Illinois 60015
                   (Address of principal executive offices)
 
Registrant's telephone number, including area code: (847) 374-4980
 
Securities registered pursuant to Section 12(b) of the Act:
 
                                               Names of each exchange
                                                 on which registered
          Title of Each Class                           None
                 None
Securities registered pursuant to Section 12(g) of the Act:
 
                        Common Shares, $0.01 Par Value
                               (Title of class)
 
   Indicate by check mark whether the Registrant (l) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
                                  Yes X  No
 
   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
 
   As of March 22, 1999, 47,485,085 Common Shares were outstanding.
 
   The aggregate market value of the Registrant's Common Shares held by
nonaffiliates on March 22, 1999 was approximately $84,014,245.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
    Certain portions of the Registrant's Proxy Statement for Annual Meeting
  of Share Owners to be held on May 18, 1999 are incorporated by reference in
                                   Part III
 
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<PAGE>
 
                                    PART I
 
Item 1. Business.
 
General
 
   APAC TeleServices, Inc. and its Subsidiaries ("APAC" or the "Company")
provides high volume telephone-based sales, marketing and customer management
solutions for corporate clients operating in the business and consumer
products, parcel delivery, financial services, insurance, retail, and
telecommunications industries throughout the United States. The Company's
client base is comprised of large companies with the need for cost-effective
means of contacting and servicing current and prospective customers. On May
20, 1998, the Company increased its market presence by acquiring ITI Holdings,
Inc., the sole shareholder of ITI Marketing Services, Inc. ("ITI"). Like the
Company, ITI provides telephone-based sales, marketing and customer management
services on an outsourced basis to corporate clients that have high volumes of
incoming and/or outgoing calls. The Company operates and manages 12,720
workstations in 77 Customer Contact Centers. The Customer Contact Centers are
managed centrally through the application of extensive telecommunications and
computer technology to promote the consistent delivery of quality service. The
Company has three primary service offerings: Outbound Sales and Marketing
Solutions ("Sales Solutions"), Inbound Customer Service Solutions ("Service
Solutions"), and Paragren software and services. In December 1998, the
Company's management, having determined that the value of Paragren will be
enhanced through a combination with a more appropriate owner, approved a plan
to sell Paragren's software development business. Accordingly, the Paragren
business has been accounted for as a discontinued operation as of January 3,
1999.
 
   The Company's net revenue for fiscal 1998 was $425.0 million, an increase
of $74.5 million or 21.3% compared to fiscal 1997. Largely as a result of the
financial performance of ITI's Sales Solutions business and the decision to
discontinue the Paragren business, the Company's operating results
deteriorated significantly during the fourth quarter of fiscal 1998. The
Company had a net loss for fiscal 1998 of $79.3 million or $1.63 per share,
compared to a net loss of $1.2 million or $0.03 per share for fiscal 1997.
Included in the losses for the quarter and fiscal year was $79.3 million of
nonrecurring charges principally related to a long-lived asset impairment
associated with the ITI business. The Company also recorded a pretax loss of
$9.5 million on the discontinuance of its Paragren software development
business in the fourth quarter and fiscal year.
 
Sales Solutions
 
   Services. Sales Solutions provides outbound sales support to consumers and
businesses, market research, targeted marketing plan development and customer
lead generation, acquisition and retention. Sales Solutions generated $199.5
million of net revenue, or 46.9% of the Company's total net revenue, in fiscal
1998, an increase of $16.6 million or 9.1% compared to fiscal 1997.
 
   Sales Solutions activities typically begin when APAC calls a consumer or
business prospect targeted by one of its clients to offer the client's
products or services. Prospect information, which APAC typically receives
electronically from its clients, is selected to match the demographic profile
of the targeted customer for the product or service being offered. APAC's data
management system sorts the prospect information and delivers it to one of the
Sales Solutions Customer Contact Centers. Computerized call-management systems
utilizing predictive dialers automatically dial the telephone numbers,
determine if a live connection is made, and present connected calls to a sales
representative who has been specifically trained for the client's program.
When a call is presented, the prospect's name, other information about the
prospect, and the program script simultaneously appear on the sales
representative's computer screen. The sales representative then uses the
script to solicit an order for the client's product or service or to request
information which will be added to the client's database. APAC's advanced
systems permit on-line monitoring of marketing campaigns allowing its clients
to refine programs while in progress.
 
   Clients. APAC targets those companies with large customer bases and the
greatest potential to generate recurring revenue driven by their ongoing
telephone-based direct sales and marketing needs. Sales Solutions currently
specializes in three industries:
 
  Telecommunications--APAC provides Sales Solutions services to the
  telecommunications industry, primarily servicing long distance, regional
  and wireless telecommunications companies. The Company's services include
  new account acquisition, direct sales of custom calling features,
  personalized "800" and
<PAGE>
 
  long distance services and other customer retention services in both the
  business and consumer market segments. The Company's most significant
  relationship in this industry is with AT&T Corporation ("AT&T"), which
  accounted for 20.0% of the Company's Sales Solutions net revenue in fiscal
  1998. Sales Solutions' net revenue from telecommunications industry clients
  represented 31.8%, 33.7% and 39.0% of the Company's total Sales Solutions
  net revenue, and 14.9%, 17.6% and 20.0% of the Company's total net revenue,
  in fiscal years 1998, 1997 and 1996, respectively.
 
  Insurance--APAC is a major marketer of insurance products across the United
  States. The Company works with large consumer insurance companies and their
  agents, marketing products such as life, accident, health, and property and
  casualty insurance. The Company employs approximately 515 insurance agents
  licensed to sell insurance to consumers in a total of 49 states and the
  District of Columbia. Significant relationships in this industry include
  Mass Marketing Insurance Group and J.C. Penney Life Insurance Company,
  which clients accounted for 10.3% and 9.6%, respectively, of the Company's
  Sales Solutions net revenue in fiscal 1998. Sales Solutions net revenue
  from insurance industry clients represented 28.4%, 33.2% and 32.9% of the
  Company's total Sales Solutions net revenue, and 13.3%, 17.3% and 16.9% of
  the Company's total net revenue, in fiscal years 1998, 1997 and 1996,
  respectively.
 
  Financial Services--APAC provides sales and marketing services to many of
  the largest U.S. credit card issuers. The Company's services include
  customer account acquisition, credit line expansion, balance consolidation,
  cardholder retention and sales of other banking products and services.
  Sales Solutions net revenue from financial service industry clients
  represented 23.5%, 31.6% and 24.2% of the Company's total Sales Solutions
  net revenue, and 11.0%, 16.5% and 12.4% of the Company's total net revenue,
  in fiscal years 1998, 1997 and 1996, respectively.
 
   Sales Solutions provided services to 56 clients in fiscal 1998. Sales
Solutions operates generally under contracts that may be terminated or
modified on short notice. However, the Company tends to establish long-term
relationships with its clients. The Company generally is paid a fixed fee for
each hour that it provides a sales representative under its Sales Solutions
contracts. Except for AT&T no Sales Solutions' client accounted for more than
ten percent of the Company's total net revenue in fiscal years 1998, 1997 or
1996.
 
Service Solutions
 
   Services. Service Solutions provides inbound customer service, customer
acquisition, customer retention, direct mail response, "help" line support,
and customer order processing. Certain Service Solutions clients rely upon the
Company to provide specialized customer service representatives such as
insurance agents and computer technicians, capable of responding to more
technical inquiries from customers and prospects. Service Solutions generated
$225.5 million of net revenue, or 53.1% of the Company's total net revenue, in
fiscal 1998, an increase of $57.9 million or 34.5% when compared to fiscal
1997. APAC believes significant opportunities to generate new business in
Service Solutions exist as more companies move to outsource all or a portion
of their telephone-based marketing and customer service functions.
 
   Service Solutions involves the receipt of a call from a client's customer
or prospect, and the identification and routing of the call to the appropriate
APAC customer service representative. The caller typically uses a toll-free
"800" number to request product or service information, place an order for a
product or service or obtain assistance regarding a client's products or
services. APAC utilizes automated call distributors and digital switches to
identify each inbound call by "800" number and route the call to an APAC
customer service representative trained for the client's program.
Simultaneously with receipt of the call, the customer service representative's
computer screen displays customer, product and service information relevant to
the call. The Company reports information and results captured during the call
to its client for order processing, customer service and database management.
 
   Clients. Service Solutions directs its business development efforts toward
large companies with substantial inbound customer service call volume. Within
this market segment, APAC often targets those companies that operate in high-
cost metropolitan areas or that are currently utilizing inefficient or
expensive technology in their
 
                                       2
<PAGE>
 
customer service operations. Service Solutions provided services to 32 clients
in fiscal 1998. The Company's significant relationships include a large parcel
delivery client, a major telecommunications client and AT&T, which accounted
for 30.4%, 13.8% and 7.8%, respectively, of the Company's Service Solutions
net revenue in fiscal 1998.
 
   Service Solutions operates under contracts with terms up to five years. The
Company is generally paid a fixed fee for each hour that it provides a
customer service representative under its Service Solutions contracts,
regardless of the number of calls handled. The client works with the Company
to determine the number of customer service representatives which are
necessary to efficiently handle the expected volume of inbound calls. Except
for the parcel delivery client, no Service Solutions client of the Company
accounted for more than ten percent of the Company's total net revenue in
fiscal years 1998, 1997 or 1996. The Company's contract with the parcel
delivery client expires January 15, 2000. To date, no discussion to extend
this contract has taken place between the Company and the parcel delivery
client and the Company is uncertain as to whether it or the parcel delivery
client intends to effect such an extension. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Information Regarding Forward-Looking Statements--
Reliance on Major Clients."
 
Paragren
 
   In August 1997, the Company acquired Paragren Technologies, Inc.
("Paragren"). Paragren is a specialist in software-based marketing products
that help its clients maximize their customer relationships. Paragren's
software helps clients analyze market, customer and sales data on a real-time
basis so that they can respond more effectively to rapidly changing
opportunities and competitive challenges. Paragren's One-By-One(TM) suite of
customer intelligence software applications allows marketers to develop
strategic insights into their marketing plans and make real-time tactical
decisions. It enables users to retrieve and analyze information through
multiple channels including the internet for customer profiling and potential;
marketing segmentation and targeting; and full campaign execution and
evaluation. In addition to its software solutions, systems integration and
consulting services, Paragren designs, develops and manages consumer-panel
research. This research helps businesses learn more about their competition,
customer preferences and marketplace environment through actual purchase and
behavioral data collected over time. Panels are dedicated to specific
industries, such as telecommunications, to ensure relevance to each client's
opportunities and issues. In December 1998, the Company's management, having
determined that the value of Paragren will be enhanced through a combination
with a more appropriate owner, approved a plan to sell Paragren's software
development business. Accordingly, the Paragren business has been accounted
for as a discontinued operation as of January 3, 1999.
 
Technology Resources
 
   APAC has successfully integrated call management and database marketing and
management information systems within its Customer Contact Centers. This
proprietary Advanced Technology Platform ("ATP") provides sales and service
representatives with real-time access to customer and product information and
allows the Company to design and implement application software for each
client's program. ATP incorporates PC-based workstations, object-oriented
software modules, relational database management systems, call tracking and
workforce management systems, computer telephony integration and interactive
voice response. This technology enables sales and service representatives to
focus on assisting the customer, rather than on the technology, by providing
all necessary customer information at call arrival. In addition, ATP also
helps to decrease training time and increase call handling efficiencies.
 
   Supporting the integration of the call handling technologies and call
management systems is First Alert, a proprietary agent productivity system,
which provides real-time information on each customer contact. First Alert
captures all call information and reports on each sales and service
representative's activities so that the Company and its clients can make real-
time decisions with respect to quality and performance.
 
   The UNIX-based computer system that the Company has developed utilizes a
"hub and spoke" configuration to electronically link each Customer Contact
Center's systems to the Company's operational headquarters. This open
architecture system provides APAC with the flexibility to integrate its client
server and
 
                                       3
<PAGE>
 
mid-range systems with the variety of systems maintained by its clients. By
integrating with its clients' systems, APAC is able to receive calls and data
directly from its clients' in-house systems, forward calls to its clients' in-
house telephone representatives when appropriate, and report, on a real-time
basis, the status and results of the Company's services. APAC's custom
software is built on relational database technology that enables the Company
to quickly design tailored software applications that enhance the efficiency
of its call services, while providing flexible scripting and readily
accessible screen navigation.
 
   The Company recognizes the need to ensure its operations will not be
adversely impacted by year 2000 software failures. Specifically, computational
errors are a known risk with respect to dates after December 31, 1999. The
Company is in the process of addressing its computer and telecommunications
equipment and internal computer applications to prepare for the year 2000 and
currently believes it will be able to upgrade and maintain its computer
systems to recognize years beginning with 2000, and that the costs to do so
will not have a material impact on its results of operations and financial
position. Although the Company is committed to making its systems year 2000
compliant as soon as practical, it is uncertain as to the extent its clients
and vendors may be affected by year 2000 issues that require commitment of
significant resources and may cause disruptions in the clients' and vendors'
businesses. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Year 2000 Issue."
 
Sales and Marketing
 
   The Company seeks to differentiate itself from other providers of
telephone-based services by offering customized solutions that address the
specialized needs of its clients. It focuses on certain targeted industries
with the highest potential for outsourcing. The Company has developed a
targeted approach to identifying new clients and additional needs of existing
clients. Often, APAC initially develops a pilot program for a new client to
demonstrate the Company's abilities and effectiveness in telephone-based
marketing and customer service. The Company's sales personnel also assist
clients in identifying high potential customers and developing programs to
reach those customers, communicate results of the program and assist clients
in modifying programs for future use. The Company markets its services by
expanding relationships with existing clients, responding to requests for
proposals, pursuing client referrals, participating in trade shows and
advertising in business publications. The Company believes its increasingly
consultative approach will enhance its ability to successfully identify
additional business opportunities and secure new business.
 
People and Learning
 
   The Company believes a key component of APAC's success is the quality of
its employees. Therefore, the Company is continually refining its systematic
approach to hiring, training and managing qualified personnel. APAC locates
Customer Contact Centers primarily in small to mid-sized communities in an
effort to lower its operating costs and attract a high quality, dedicated work
force. The Company believes that by employing a significant number of full-
time employees it is able to maintain a more stable work force and reduce the
Company's recruiting and training expenditures. At each Customer Contact
Center, the Company utilizes a management structure designed to ensure that
its sales and service representatives are properly supervised, managed and
developed.
 
   The Company offers extensive classroom and on-the-job training programs for
its people including instruction about the client's company and its product
and service offerings as well as proper telephone-based sales or customer
service techniques. Once hired, each new sales and service representative
receives on-site training lasting from three to over twenty days. The amount
of initial training each employee receives varies depending upon whether the
employee will be performing Sales or Service Solutions and the nature of the
services being offered. In addition, the Company offers one and two week
courses to its sales and service representatives who are preparing for the
insurance agent license exam. The Company believes in developing and
challenging all employees to grow personally and professionally.
 
                                       4
<PAGE>
 
   For employee recruitment and job tracking, the addition of the SMART System
(SiMple Accurate Record Tracking) assists the Company in selecting people who
can meet and exceed expectations. SMART System is a comprehensive electronic
process for applicant tracking and performance evaluation. The process begins
with an applicant's search of a database to find available positions, review
job information, and learn more about the Company. After a candidate completes
a series of online templates and tests, a recruiter reviews qualifications and
skills, sets appointments and tracks progress of the application.
 
   The Company had approximately 13,300 full and 5,600 part-time employees for
a total of 18,900 employees on March 30, 1999. None of APAC's employees is
subject to a collective bargaining agreement. The Company considers its
relations with its employees to be good.
 
Quality Assurance
 
   Because APAC's services involve direct contact with its clients' customers,
the Company's reputation for quality service is critical to acquiring and
retaining clients. Therefore, the Company and its clients monitor the
Company's sales and service representatives for strict compliance with the
client's script and to maintain quality and efficiency. The Company also
regularly measures the quality of its services by benchmarking such factors as
customer service levels, average handle times, first call resolutions, sales
per hour and average speed of answer. The Company's information systems enable
APAC to provide clients with reports on a real-time basis as to the status of
ongoing services and can transmit summary data and captured information
electronically to clients. This data enables APAC and its clients to modify or
enhance ongoing services to improve effectiveness. In addition to daily
contact with its clients, APAC asks each client to rate the Company's
performance quarterly using specific quality measures.
 
Competition
 
   The industry in which the Company operates is very competitive and highly
fragmented. APAC's competitors range in size from very small firms offering
specialized applications or short term projects, to large independent firms
and the in-house operations of many clients and potential clients. A number of
competitors have capabilities and resources equal to, or greater than, the
Company's. The market includes non-captive telemarketing and customer service
operations such as Convergys Corporation, SITEL Corporation, West Teleservices
Corporation, Precision Response Corporation, Electronic Data Systems
Corporation, TeleTech Holdings, Inc., and TeleSpectrum Worldwide, Inc., as
well as in-house telemarketing and customer service organizations throughout
the United States. In-house telemarketing and customer service organizations
comprise by far the largest segment of the industry. In addition, some of the
Company's services also compete with other forms of direct marketing such as
mail, television and radio. The Company believes the principal competitive
distinctions in the telephone-based marketing and customer service industry
are reputation for quality, sales and marketing results, price, technological
expertise, and the ability to promptly provide clients with customized
solutions to their sales, marketing and customer service needs.
 
Government Regulation
 
   Telephone sales practices are regulated at both the Federal and state
level. The Federal Communications Commission's (the "FCC") rules under the
Federal Telephone Consumer Protection Act of 1991 (the "TCPA") prohibit the
initiation of telephone solicitations to residential telephone subscribers
before 8:00 a.m. or after 9:00 p.m., local time, and prohibit the use of
automated telephone-dialing equipment to call certain telephone numbers. In
addition, the FCC rules require the maintenance of a list of residential
consumers who have stated that they do not want to receive telephone
solicitations and avoidance of making calls to such consumers' telephone
numbers.
 
   The Federal Telemarketing and Consumer Fraud and Abuse Protection Act of
1994 (the "TCFAPA") broadly authorizes the Federal Trade Commission (the
"FTC") to issue regulations prohibiting misrepresentation in telephone sales.
In August, 1995, the FTC issued rules under the TCFAPA. These rules generally
prohibit abusive telephone solicitation practices and impose disclosure and
record keeping requirements.
 
                                       5
<PAGE>
 
   A number of states have enacted or are considering legislation to regulate
telephone solicitations. For example, telephone sales in certain states cannot
be final unless a written contract is delivered to and signed by the buyer and
may be cancelled within three business days. At least one state also prohibits
telemarketers from requiring credit card payment and several other states
require that certain telemarketers obtain licenses and post bonds. From time
to time, bills are introduced in Congress which, if enacted, would regulate
the use of credit information. The Company cannot predict whether this
legislation will be enacted and what effect, if any, it would have on the
Company or its industry.
 
   The Company believes that it is in compliance with the TCPA and the FCC
rules thereunder and with the FTC's rules under the TCFAPA. The Company trains
its telephone sales representatives to comply with the FTC and FCC rules and
state laws and programs its call management system to avoid telephone calls
during restricted hours or to individuals maintained on APAC's "do-not-call"
list. Subject to certain limitations, APAC generally undertakes to indemnify
its clients against claims and expenses resulting from any failure by APAC to
comply with federal and state laws regulating telephone solicitation
practices.
 
   The industries served by the Company are also subject to varying degrees of
government regulation. Generally, the Company relies on its clients and their
advisors to develop the scripts to be used by APAC in making consumer
solicitations. The Company generally requires its clients to indemnify APAC
against claims and expenses arising in connection with a client's failure to
provide purchased products or services to customers, any defect or deficiency
in such products or services or any written or oral presentation furnished by
the client to APAC. The Company has never been held responsible for regulatory
noncompliance by a client. APAC employees who complete the sale of insurance
products are required to be licensed by various state insurance commissions
and participate in regular continuing education programs, which are currently
provided in-house by the Company.
 
Item 2. Properties
 
   The Company's corporate headquarters is located in Deerfield, Illinois in
leased facilities consisting of approximately 16,500 square feet of office
space. The term of this lease expires in March 2001. The Company's operational
headquarters is located in approximately 89,000 square feet of office space in
Cedar Rapids, Iowa. This office space is located on all or part of seven
floors which are owned and/or leased by the Company and is part of an office
condominium. The Company also leases approximately 87,000 square feet of
office space in Omaha, Nebraska and 6,000 square feet of office space in
Atlanta, Georgia. The Omaha space was acquired with the purchase of ITI. The
Company plans to transfer certain of its Omaha operations to Cedar Rapids in
fiscal 1999 and sublease a portion of the office space. The lease for the
Omaha office space expires in August 2007.
 
 
 
                                       6
<PAGE>
 
   The Company also leases the facilities listed below, except for the Newport
News, Fort Worth, High Point and Boynton Beach facilities which are not leased
by the Company, but are managed, staffed and operated by the Company on behalf
of a major parcel deliver client. As of January 3, 1999, the Company operated
the following Customer Contact Centers and workstations:
 
                   Sales Solutions Customer Contact Centers
 
<TABLE>
<CAPTION>
                                                Date Opened     Number of
Location                                        or Acquired     Workstations (1)
--------                                        --------------- ----------------
<S>                                             <C>             <C>
Dubuque, Iowa.................................. September, 1990        80
Clinton, Iowa.................................. October, 1990          80
Burlington, Iowa............................... October, 1991          80
Oskaloosa, Iowa................................ September, 1992        96
Waterloo, Iowa................................. February, 1993         96
Cedar Falls, Iowa.............................. February, 1993         64
Iowa City, Iowa................................ March, 1993            64
Mt. Pleasant, Iowa............................. September, 1993        64
Ottumwa, Iowa.................................. November, 1993        144
Decorah, Iowa.................................. January, 1994          80
Marshalltown, Iowa............................. February, 1994         80
Fort Madison, Iowa............................. March, 1994            96
Keokuk, Iowa................................... May, 1994              80
Mason City, Iowa............................... December, 1994         80
Newton, Iowa................................... March, 1995            64
Knoxville, Iowa................................ March, 1995            80
Fort Dodge, Iowa............................... March, 1995            64
Muscatine, Iowa................................ April, 1995            96
Estherville, Iowa.............................. April, 1995            64
Spencer, Iowa.................................. May, 1995              64
Indianola, Iowa................................ July, 1995             80
Algona, Iowa................................... September, 1995        64
Davenport, Iowa (2)............................ February, 1996         96
Maquoketa, Iowa................................ February, 1996         80
Kewanee, Illinois.............................. February, 1996         96
Quincy, Illinois............................... February, 1996        176
Kalamazoo, Michigan............................ February, 1996        192
Danville, Illinois............................. February, 1996         80
Freeport, Illinois............................. March, 1996            96
Normal, Illinois............................... March, 1996            64
Rock Falls, Illinois........................... March, 1996            96
Waverly, Iowa.................................. March, 1996            64
Decatur, Illinois.............................. April, 1996            80
Jacksonville, Illinois......................... April, 1996            96
Canton, Illinois............................... May, 1996              96
Lincoln, Illinois.............................. May, 1996              80
Pekin, Illinois................................ May, 1996              96
Peoria, Illinois............................... May, 1996             160
Galesburg, Illinois............................ June, 1996             96
Mt. Vernon, Illinois........................... June, 1996             96
Vincennes, Indiana............................. June 1996              96
Alton, Illinois................................ December, 1996        192
Marion, Illinois............................... December, 1996        192
</TABLE>
 
                                       7
<PAGE>
 
<TABLE>
<CAPTION>
                                                 Date Opened    Number of
Location                                         or Acquired    Workstations (1)
--------                                         -------------- ----------------
<S>                                              <C>            <C>
Belleville, Illinois............................ December, 1996         96
Granite City, Illinois.......................... December, 1996         96
Freemont, Ohio.................................. March, 1997            96
Aberdeen, South Dakota.......................... May, 1998              88
Bellevue, Nebraska.............................. May, 1998             120
Emporia, Kansas................................. May, 1998              96
Grand Island, Nebraska.......................... May, 1998              88
Hutchinson, Kansas.............................. May, 1998             104
Kearney, Nebraska............................... May, 1998              88
Lincoln, Nebraska............................... May, 1998              84
Lawton, Oklahoma................................ May, 1998             120
Manhattan, Kansas............................... May, 1998              88
Miami Lakes, Florida............................ May, 1998              96
Newton, Kansas.................................. May, 1998              52
Pawnee, Oklahoma................................ May, 1998              96
Peru, Nebraska.................................. May, 1998              40
Salina, Kansas.................................. May, 1998              96
St. Joseph, Missouri............................ May, 1998              96
Westminster, Oklahoma........................... May, 1998             120
Utica, New York (2)............................. December, 1998        151
                                                                     -----
    Total Sales Solutions.......................                     5,991
                                                                     =====
</TABLE>
 
                  Service Solutions Customer Contact Centers
 
<TABLE>
<CAPTION>
                                                Date Opened or  Number of
Location                                        Acquired        Workstations (1)
--------                                        --------------- ----------------
<S>                                             <C>             <C>
Cedar Rapids, Iowa--3rd Avenue................. August, 1994           203
Cedar Rapids, Iowa--Park Place I............... January, 1995          126
Cedar Rapids, Iowa--Park Place II.............. November, 1995         162
Newport News, Virginia......................... August, 1995           716
Fort Worth, Texas.............................. October, 1995          683
High Point, North Carolina..................... November, 1995         620
Boynton Beach, Florida......................... February, 1996         610
Waterloo, Iowa................................. October 1996           300
Corpus Christi, Texas.......................... October, 1996          726
Columbia, South Carolina....................... December, 1996         544
LaCrosse, Wisconsin............................ May, 1997              350
Oklahoma City, Oklahoma........................ May, 1998              323
Green Bay, Wisconsin........................... May, 1998              427
Omaha, Nebraska................................ May, 1998              320
Davenport, Iowa (2)............................ September, 1998        368
Utica, New York (2)............................ December 1998          251
                                                                     -----
    Total Service Solutions....................                      6,729
                                                                     =====
</TABLE>
--------
(1) During the last half of fiscal 1998, the Company closed 15 Sales Solutions
    Customer Contact Centers containing 1,252 workstations. The centers were
    closed due to underutilized capacity acquired with the purchase of ITI.
    Six of ITI's largest Sales Solutions clients, who provided 65% of ITI's
    Sales Solutions net revenue in the eight months prior to the acquisition
    either ceased doing business or substantially reduced the level of
    business they did with the Company in the seven months subsequent to the
    acquisition. The Company also closed one Service Solutions Customer
    Contact Center with 145 workstations in order to convert the facility into
    a quality assurance center. Service Solutions workstations in the
    converted facility have been redeployed to other Service Solutions
    centers.
 
                                       8
<PAGE>
 
(2) The Davenport and Utica centers are blended centers with both Sales and
    Service Solutions capabilities. Utica was constructed as a blended center
    while Davenport was converted to blended use in September 1998.
 
(3) The leases of these Customer Contact Centers have terms ranging from two
    to twelve years and typically contain renewal options and early
    termination buyouts. Sales Solutions centers are generally leased for
    periods of two to three years while Service Solutions centers are
    generally leased for periods of five to twelve years. The Company believes
    that its existing facilities are suitable and adequate for its current
    operations.
 
   The Company's profitability is influenced significantly by its Customer
Contact Center capacity utilization. The Company's Sales Solutions operations
tend to be utilized primarily in the early evening hours on weekdays and to a
limited extent on weekends. The Company's Service Solutions operations tend to
be utilized primarily during normal business hours on weekdays and to a
limited extent on weekends. In an attempt to improve profitability, the
Company is in the process of developing a plan to better manage Customer
Contact Center capacity utilization in all its operations in order to achieve
higher levels of fixed cost absorption. The plan may include the closure of
certain Customer Contact Centers that have become technologically obsolete or
are located in difficult labor markets. The plan will also include utilization
of certain Customer Contact Centers to perform work for both Sales and Service
Solutions clients. The Company carefully plans the development and opening of
new Customer Contact Centers to minimize the financial impact resulting from
excess capacity. To enable the Company to respond rapidly to changing market
demands, implement new programs and expand existing programs, additional
Customer Contact Center capacity may be required in the future.
 
Item 3. Legal Proceedings
 
   The Company, certain of its officers and directors and the lead
underwriters of certain public offerings of the Company's securities have been
named as defendants in three purported class action lawsuits. The suits were
filed in federal district court for the Southern District of New York on
December 11, 1997, December 19, 1997 and January 5, 1998, respectively. The
lawsuits were consolidated in April 1998 into one lawsuit. The lawsuit alleges
violations of the federal securities laws in connection with the Company's
November 1996 Prospectus and other public statements which are alleged to have
omitted certain disclosures with respect to the Company's agreement with a
large parcel delivery client. The complaint as amended seeks, among other
things, unspecified damages and an award of attorney's fees, costs and
expenses. The Company filed a motion to dismiss the lawsuit on September 10,
1998, which is pending. The Company denies all allegations of wrongdoing and
continues to believe that it has meritorious defenses.
 
   Additionally, the Company is subject to occasional lawsuits, investigations
and claims arising out of the normal conduct of its business. Management does
not believe the outcome of any pending claims will have a materially adverse
impact on the Company's consolidated financial position.
 
Item 4. Submission of Matters to a Vote of Security Holders
 
   Inapplicable
 
Executive Officers of the Registrant
 
   The executive officers of the Company are as follows:
 
<TABLE>
<CAPTION>
      Name                   Age                    Position
      ----                   ---                    --------
      <S>                    <C> <C>
      Theodore G. Schwartz..  45 Chairman, Chief Executive Officer and Director
      Marc S. Simon.........  50 President and Director
      Mark O. Remissong.....  46 Chief Financial Officer
      Donald B. Berryman....  41 Senior Vice President-Sales
      L. Clark Sisson.......  37 Senior Vice President-Operations
      Philip B. Wade........  51 Vice President and Controller
</TABLE>
 
 
                                       9
<PAGE>
 
   Theodore G. Schwartz has served as the Company's Chairman and Chief
Executive Officer since its formation in May 1973.
 
   Marc S. Simon became President of the Company in March 1998. Mr. Simon
joined the Company as Chief Financial Officer in June 1995 and was elected as
a Director of the Company in August 1995. Prior to joining the Company, Mr.
Simon was a partner practicing corporate and business law at the law firm of
Neal, Gerber & Eisenberg in Chicago, Illinois for more than 7 years. Mr. Simon
is a certified public accountant.
 
   Mark O. Remissong joined the Company as Chief Financial Officer in October
1998. Prior to joining the Company, Mr. Remissong was Chief Financial Officer
of U.S. Robotics, Inc. in Skokie, Illinois from February 1995 to July 1997.
From 1993 to 1995, Mr. Remissong was Chief Financial Officer of Collins &
Aikman, Inc. in Charlotte, North Carolina.
 
   Donald B. Berryman joined the Company as Vice President and General
Manager-Service Solutions in March 1993 and became Senior Vice President-Sales
in October 1995.
 
   L. Clark Sisson joined the Company as Senior Vice President-Operations in
October 1998. Prior to joining the Company, Mr. Sisson served as the Vice
President--Inbound of ITI Marketing Services, Inc. from November 1993 to
September 1998.
 
   Philip B. Wade joined the Company as Controller in May 1995 and became a
Vice President in February 1997. From 1986 to 1994, Mr. Wade was with Penford
Products Co., in Cedar Rapids, Iowa where he served as Vice President,
Finance.
 
                                    Part II
 
Item 5. Market for Registrant's Common Equity and Related Share owner Matters
 
   The Company's Common Shares are quoted on the Nasdaq National Market under
the symbol "APAC." The following table sets forth for the periods indicated
the high and low sale prices of the Common Shares as reported on the Nasdaq
National Market during such period.
 
<TABLE>
<CAPTION>
                                                                    High   Low
                                                                   ------ ------
      <S>                                                          <C>    <C>
      Fiscal 1997:
        First Quarter............................................. $41.00 $23.75
        Second Quarter............................................ $30.50 $ 8.75
        Third Quarter............................................. $19.63 $10.75
        Fourth Quarter............................................ $15.56 $11.25
      Fiscal 1998:
        First Quarter............................................. $16.00 $11.94
        Second Quarter............................................ $13.06 $ 5.88
        Third Quarter............................................. $ 6.19 $ 3.13
        Fourth Quarter............................................ $ 8.31 $ 3.03
</TABLE>
 
   The Company has received a routine notice from the Nasdaq National Market
that due to the Company's Common Share price being below $5.00 per share for
more than thirty days, Nasdaq National Market will review continued listing of
the Company's Common Shares pursuant to Nasdaq National Market rules, unless
the closing bid price exceeds $5.00 per share for ten consecutive days prior
to May 7, 1999. Should the Common Shares cease to be listed on the Nasdaq
National Market, the Company believes it qualifies for listing on the Nasdaq
SmallCap Market or the American Stock Exchange and will seek listing in one of
these markets.
 
   As of April 1, 1999, there were 313 holders of record of the Common Shares.
The Company did not pay any dividends on its Common Shares in fiscal years
1997 or 1998. The Company currently intends to retain future earnings to
finance its growth and development and therefore does not anticipate paying
any cash dividends in the foreseeable future. In addition, the Company's
Credit Facility restricts the payment of cash dividends by the Company.
Payment of any future dividends will depend upon the future earnings and
capital requirements of the Company and other factors which the Board of
Directors considers appropriate.
 
                                      10
<PAGE>
 
Item 6. Selected Financial Data
 
                    APAC TELESERVICES, INC. AND SUBSIDIARIES
 
                            SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                        For the Fiscal Years Ended (1)
                         ------------------------------------------------------------
                         January 3, December 28, December 29, December 31, January 1,
                            1999      1997 (2)       1996         1995        1995
                         ---------- ------------ ------------ ------------ ----------
                           (In thousands, except per share and selected statistical
                                                    data)
<S>                      <C>        <C>          <C>          <C>          <C>
Operating Data:
  Sales Solutions
   division.............  $199,523    $182,874     $141,860     $72,692     $40,231
  Service Solutions
   division.............   225,505     167,659      134,583      28,975       6,387
                          --------    --------     --------     -------     -------
    Total net revenue...   425,028     350,533      276,443     101,667      46,618
  Cost of services......   353,979     268,177      193,967      71,982      30,666
  Selling, general and
   administrative
   expenses.............    56,230      45,810       33,397      16,398       9,322
  Special charges (3)...    80,172       3,238          --          --          --
                          --------    --------     --------     -------     -------
    Operating income
     (loss).............   (65,353)     33,308       49,079      13,287       6,630
  Interest expense, net.     8,139       1,499           29         804         664
  Income taxes
   (benefit)............    (5,200)     12,100       18,500       4,330         --
                          --------    --------     --------     -------     -------
  Income (loss) from
   continuing
   operations...........   (68,292)     19,709       30,550       8,153       5,966
  Loss from discontinued
   operations (4).......   (11,028)    (18,726)         --          --          --
  Cumulative effect of
   accounting change
   (5)..................       --       (2,200)         --          --          --
                          --------    --------     --------     -------     -------
  Net income (loss).....  $(79,320)   $ (1,217)    $ 30,550     $ 8,153     $ 5,966
                          ========    ========     ========     =======     =======
  Pro forma income
   (unaudited):
    Net income as
     reported...........                                        $ 8,153     $ 5,966
    Pro forma adjustment
     for income
     taxes (6)..........                                            670       2,070
                                                                -------     -------
    Pro forma net
     income.............                                        $ 7,483     $ 3,896
                                                                =======     =======
  Net income (loss) per
   share (pro forma for
   fiscal 1995 and
   1994):
    Basic:
      Continuing
       operations.......  $  (1.40)   $   0.36     $   0.66     $  0.19     $  0.10
      Discontinued
       operations.......     (0.23)      (0.39)         --          --          --
                          --------    --------     --------     -------     -------
      Net income (loss).  $  (1.63)   $  (0.03)    $   0.66     $  0.19     $  0.10
                          ========    ========     ========     =======     =======
    Diluted:
      Continuing
       operations.......  $  (1.40)   $   0.36     $   0.64     $  0.18     $  0.10
      Discontinued
       operations.......     (0.23)      (0.39)         --          --          --
                          --------    --------     --------     -------     -------
      Net income (loss).  $  (1.63)   $  (0.03)    $   0.64     $  0.18     $  0.10
                          ========    ========     ========     =======     =======
  Weighted average
   shares outstanding:
    Basic...............    48,609      47,453       46,350      40,425      40,086
    Diluted.............    48,609      48,505       47,935      41,624      40,086
 
Statistical Data:
  Number of Customer
   Contact Centers (7):
    Sales Solutions
     division...........        62          56           48          26          15
    Service Solutions
     division...........        15          12           14           7           2
  Number of workstations
   (7):
    Sales Solutions
     division...........     5,991       5,584        4,592       2,128       1,184
    Service Solutions
     division...........     6,729       5,186        3,858       2,082         446
  Net revenue per
   workstation (8):
    Sales Solutions
     division...........  $ 36,178    $ 33,666     $ 36,005     $39,442     $37,918
    Service Solutions
     division...........  $ 39,035    $ 33,075     $ 38,158     $29,871     $26,836
 
Balance Sheet Data:
  Cash and short-term
   investments..........  $  3,543    $     17     $    141     $30,186     $     1
  Net assets of
   discontinued
   operations (4).......     7,096      15,318          --          --          --
  Working capital.......    17,748      34,090       13,354      33,045       2,877
  Capital expenditures..    17,076      43,742       64,417      16,626       6,526
  Total assets..........   267,502     185,831      141,381      74,332      21,181
  Long-term debt, less
   current maturities...   132,427       1,863        1,325       1,474       8,218
  Share owners' equity..    41,824     124,783       88,206      52,707       5,722
</TABLE>
 
                                       11
<PAGE>
 
NOTES (000's):
(1) The Company operates on a 52-/53-week fiscal year that ends on the Sunday
    closest to December 31. Fiscal 1998 is the only period presented that
    consists of 53 weeks.
(2) Certain financial information for fiscal 1997 has been reclassified to
    conform to fiscal 1998 classifications. See Note 4 below.
(3) Special charges recorded in fiscal 1998 consisted of impairment losses of
    $71,172 and a restructuring charge of $9,000. The Company recognized
    impairment losses of $69,700 on long-lived assets acquired with the
    purchase of ITI Holdings, Inc. ("ITI") in May 1998, and $1,472 on
    capitalized software abandoned by the Company during the year. In June
    1998, the Company recorded a restructuring charge to close Customer
    Contact Centers, reconfigure certain administrative support facilities and
    reduce the salaried workforce. The special charge in fiscal 1997 reflects
    a provision for software impairment of $3,238 recorded as a result of
    plans to replace software platforms used by the Company with superior
    technologies being developed by Paragren Technologies, Inc. ("Paragren").
(4) In December 1998, the Company's management approved a plan to sell
    Paragren. The Company expects to sell Paragren in fiscal 1999.
    Accordingly, Paragren is reported as a discontinued operation, and the
    consolidated financial statements have been reclassified to segregate the
    net assets and operating results of the business. Loss from discontinued
    operations in fiscal 1998 includes an estimated loss on disposal of
    $8,400, net of income tax benefit of $1,100. Loss from discontinued
    operations in fiscal 1997 includes a special charge of $19,800 to write-
    off acquired in-process research and development acquired in connection
    with the purchase of Paragren in August 1997.
(5) Cumulative effect of accounting change refects the adoption of EITF
    Bulletin No. 97-13 which requires that business process reengineering
    costs be expensed as incurred. All previously capitalized and unamortized
    reengineering costs at November 20, 1997, have been expensed as the
    cumulative effect of the accounting change, net of income tax benefit of
    $1,349.
(6) Prior to the initial public offering, the Company was an S Corporation and
    not subject to Federal and certain state corporate income taxes. On
    October 16, 1995, the Company changed its tax status from an S Corporation
    to a C Corporation. The operating data reflects a pro forma adjustment for
    income taxes as if the Company were subject to Federal and state corporate
    income taxes for fiscal years 1995 and 1994. The pro forma provisions for
    income taxes represent a combined Federal and state income tax rate of
    43%, less applicable Federal and state job creation tax credits, which
    resulted in effective income tax rates of 40% and 35%, respectively.
(7) The number of Customer Contact Centers and workstations represent centers
    and workstations in service as of the end of each fiscal year.
(8) Net revenue per workstation was based on the weighted average number of
    workstations in service for each of the fiscal years presented. The
    Service Solutions division's net revenue per workstation, exclusive of
    revenue earned from client-owned workstations managed for the Company's
    large parcel delivery client, was as follows: $50,458, 1998; $32,261,
    1997; $35,215, 1996; and $35,220, 1995. The Company's net revenue from the
    management of client-owned workstations is less than net revenue from the
    management of Company-owned workstations because the Company does not have
    an investment in facilities and technology required to provide the
    teleservices.
 
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
 
   The following discussion of the Company's results of operations and
liquidity and capital resources should be read in conjunction with the
Selected Financial Data and the Consolidated Financial Statements of the
Company and related notes thereto appearing elsewhere in this Report.
 
Description of Business
 
   APAC TeleServices, Inc. and Subsidiaries (the "Company") provides high
volume telephone-based sales, marketing and customer management solutions for
corporate clients operating in the business and consumer products, parcel
delivery, financial services, insurance, retail, and telecommunications
industries throughout the
 
                                      12
<PAGE>
 
United States. The Company has three service offerings. The Sales Solutions
division provides outbound sales support to consumers and businesses, market
research, targeted marketing plan development and customer lead generation,
acquisition and retention. The Service Solutions division provides inbound
customer service, direct mail response, "help" line support and customer order
processing. In August 1997, the Company expanded its service offerings through
the acquisition of Paragren Technologies, Inc. ("Paragren") which specializes
in software-based consumer marketing products that help its clients analyze
market, customer and sales data on a real-time basis. In December 1998, the
Company's management approved a plan to sell Paragren's software development
business. The Company does not believe that additional investment in the
software development business is consistent with its long-term strategic goals
and objectives. Accordingly, Paragren is reported as a discontinued operation,
and the consolidated financial statements for fiscal years 1998 and 1997 have
been reclassified to segregate the operating results and net assets of the
business. In May 1998, the Company increased its market presence with the
acquisition of ITI Holdings, Inc., the sole shareholder of ITI Marketing
Services, Inc. ("ITI"). ITI, like the Company, provides telephone-based sales,
marketing and customer management services to corporate clients. As of January
3, 1999, the Company operated and managed 12,720 workstations in 77 customer
contact centers.
 
Significant Clients
 
   The nature of the industry is such that the Company is dependent on several
large clients for a significant portion of its annual net revenue. The Company
had two clients, a large parcel delivery client and AT&T Corporation ("AT&T"),
which individually accounted for more than 10% of the Company's net revenue
for fiscal 1998. For the year, these two clients accounted for 16.1% and 13.5%
of the Company's net revenue, respectively. The Company provides both Sales
Solutions and Service Solutions services for AT&T. AT&T is the largest Sales
Solutions client and accounted for 20.0% of the Company's Sales Solutions net
revenue in fiscal 1998.
 
   The parcel delivery client is the largest Service Solutions client and
accounted for 30.4% of the Company's Service Solutions net revenue in fiscal
1998. The Company's contract with its parcel delivery client expires January,
15, 2000. No discussion to extend this contract has taken place. The Company
is uncertain as to whether the client intends to extend this contract. Also,
the Company is undecided as to whether it is willing to extend the contract
should the client intend to do so.

   The Company's contract with its large parcel delivery customer is a
facilities management contract. The cost characteristics and capital
requirements of the Company's fully outsourced programs differ significantly
from the cost characteristics and capital requirements of its facilities
management program with its large parcel delivery customer. Under this
facilities management program, the Customer Contact Centers where the work is
performed are owned by the client, but are staffed and managed by the Company.
Accordingly, this facilities management program has higher costs of services
as a percentage of net revenue and lower selling, general and administrative
expenses as a percentage of net revenue than fully outsourced programs.
Regardless of whether or not this contract is extended, there is no impact on
the utilization of the Company-owned Customer Contact Centers.
 
   As a result of the facilities management contract, the Company expects that
its overall gross margin will continue to fluctuate as net revenue
attributable to fully outsourced programs vary in proportion to net revenue
attributable to the facilities management contract. Based on the foregoing,
management believes that the Company's operating margin, which is income from
operations, excluding unusual charges, expressed as a percentage of net
revenue is a better measure of "profitability" on a period-to-period basis
than gross margin. Operating margin may be less subject to fluctuation as the
proportion of the Company's business portfolio attributable to fully
outsourced programs versus facilities management program changes.
 
   There can be no assurance that the Company will be able to retain any of
its largest clients or that the volumes of its most profitable or largest
programs will not be reduced, or that the Company would be able to replace
such clients or programs with clients or programs that generate a comparable
amount of revenue or profits. Consequently, the loss of one or more of its
significant clients could have a materially adverse effect on the Company's
business, results of operations and financial condition.
 
                                      13
<PAGE>
 
Recent Developments
 
   Largely as a result of nonrecurring charges associated with ITI's Sales
Solutions business and the decision to discontinue the Paragren business, the
Company's operating results deteriorated significantly during the fourth
quarter of fiscal 1998. The Company incurred net losses for the quarter and
fiscal year ended January 3, 1999, of $84.1 million and $79.3 million,
respectively. Included in the losses for the quarter and fiscal year was $79.3
million of nonrecurring charges related to the ITI business. Six of ITI's
largest Sales Solutions clients, who provided 65% of ITI's Sales Solutions net
revenue in the eight months prior to the acquisition either ceased doing
business or substantially reduced the level of business they did with the
Company in the seven months subsequent to the acquisition. These clients
generated approximately $46.0 million in net revenue in the eight months prior
to the acquisition and approximately $19.0 million in net revenue in the seven
months subsequent to the acquisition. As a result of fourth quarter reductions
in ITI's client base, the Company adjusted the carrying value of ITI's Sales
Solutions long-lived assets to their fair value resulting in a non-cash
impairment loss of $69.7 million. In addition, the Company recorded two
additional nonrecurring charges associated with changes in ITI's client base.
The Company provided allowances for doubtful accounts of $2.5 million to fully
reserve trade receivables due from two ITI clients which filed for protection
under Federal bankruptcy law, and accrued $7.1 million in future
telecommunications costs guaranteed under two minimum usage contracts. As a
result of the downturn in ITI's business, the Company will not achieve the
minimum volumes under these contracts and cannot recover the guaranteed costs
from future results of operations.
 
   The Company also recorded a loss on the discontinuance of its Paragren
software development business in the fourth quarter. In December 1998, the
Company's management approved a plan to sell Paragren. The company expects to
sell Paragren at a loss during fiscal year 1999. The pretax loss of $9.5
million recorded during fiscal 1998 includes a reduction in asset value of $6.5
million for expected loss on disposal and a provision for anticipated operating
losses until disposal of $3.0 million.
 
   Not withstanding the foregoing charges, the Company's income from operations
decreased significantly in fiscal 1998 when compared to fiscal 1997. The
Company attributes the deterioration in financial performance to underutilized
Sales Solutions call center capacity acquired with the acquisition of ITI. The
Company also attributes its deteriorating performance to decreased Sales
Solutions' selling prices resulting from industry pricing pressures and the
acceptance of lower margin business in an effort to productively utilize a
portion of its underutilized capacity. The Company believes that there has been
a significant and permanent decline in the outsourcing of outbound teleservices
programs, particularly client acquisition programs in the financial services
and telecommunications industries. This decline has resulted in over capacity
in the industry and greater price competition. The ability of the Company to
return to historical levels of profitability in its Sales Solutions business
will be dependent on its ability to match its Customer Contact Center capacity
with existing and future client demand.
 
   As a result of the nonrecurring charges and weak operating performance in
the fourth quarter of fiscal 1998, the Company failed to comply with certain of
the financial covenants under its Senior Credit Facility ("Credit Facility") at
January 3, 1999. On April 1, 1999, the Credit Facility was amended and waivers
of the defaults were granted by the lending banks. The financial covenants of
the agreement have been adjusted, the interest rates on outstanding borrowings
and commitment fees have been increased, and a security interest in certain
additional assets of the Company was granted to the lending banks as part of
the Amendment. The Company's ability to make certain restricted payments, as
defined in the Credit Facility, and the availability of $35.0 million of the
$75.0 million Revolving Credit Facility are subject to the attainment of
certain operating performance requirements. The Company is also limited to
$15.0 million in annual capital expenditures. None of these changes is expected
to materially impair the Company's ability to operate its businesses.
 
                                       14
<PAGE>
 
Results of Operations
 
   The following tables set forth statement of operations data as a percent of
net revenue from services performed by the Company for the fiscal years ended
January 3, 1999, December 28, 1997, and December 29, 1996.
 
<TABLE>
<CAPTION>
                                                         1998    1997    1996
                                                         -----   -----   -----
<S>                                                      <C>     <C>     <C>
Net revenue:
  Sales Solutions division..............................  46.9%   52.2%   51.3%
  Service Solutions division............................  53.1    47.8    48.7
                                                         -----   -----   -----
    Total net revenue................................... 100.0   100.0   100.0
Operating expenses:
  Cost of services......................................  83.3    76.5    70.1
  Selling, general and administrative expenses..........  13.2    13.1    12.1
  Asset impairment charges..............................  16.8     0.9     --
  Restructuring charge..................................   2.1     --      --
                                                         -----   -----   -----
    Total operating expenses............................ 115.4    90.5    82.2
                                                         -----   -----   -----
Operating income (loss)................................. (15.4)    9.5    17.8
Interest expense, net...................................   1.9     0.4     --
                                                         -----   -----   -----
Income (loss) from continuing operations before income
 taxes and cumulative effect of accounting change....... (17.3)    9.1    17.8
Provision (benefit) for income taxes....................  (1.2)    3.5     6.7
                                                         -----   -----   -----
Income (loss) from continuing operations before
 cumulative effect of accounting change................. (16.1)    5.6    11.1
Discontinued operations, less income tax benefit........  (2.6)   (5.3)    --
Cumulative effect of accounting change, less income tax
 benefit................................................   --     (0.6)    --
                                                         -----   -----   -----
Net income (loss)....................................... (18.7%)  (0.3%)  11.1%
                                                         =====   =====   =====
</TABLE>
 
Fiscal 1998 Compared to Fiscal 1997
 
   Net revenue increased 21.3% in fiscal 1998 to $425.0 million, up $74.5
million from fiscal 1997. The increase was due to the inclusion of the results
of ITI since the date of acquisition of May 20, 1998. The Company's Sales
Solutions net revenue increased by $16.6 or 9.1% during fiscal 1998 as a
result of the inclusion of revenue from ITI. Exclusive of ITI revenue, the
Company's Sales Solutions net revenue declined $23.4 million or 12.8% due to
consolidation in the financial services industry and reductions in the use of
telemarketing services for customer acquisition and retention by the
telecommunications industry. The Company's Service Solutions net revenue
increased by $57.9 million or 34.5% during fiscal 1998 due in part to the
inclusion of ITI revenue and service initiated for a new telecommunications
client. The growth in the Company's Service Solutions net revenue during
fiscal 1998 was partially offset by a 25% reduction in revenue from the
Company's large parcel delivery client largely as a result of improved
operating efficiencies in the management of client-owned call centers.
 
   Cost of services as a percent of net revenue increased to 83.3% in fiscal
1998 from 76.5% in fiscal 1997. This increase reflects the reduction in profit
margins due to lower selling prices and underutilized capacity resulting from
reductions in expected call volumes in the Sales Solutions division, and
higher direct wages and benefits in both divisions. Sales Solutions average
selling prices in 1998 declined as compared to 1997 due to client mix and
industry pricing pressures. The increase in cost of services as a percent of
net revenue also reflects the recognition of $7.1 million in future
telecommunications costs guaranteed under two minimum usage contracts. As a
result of the downturn in ITI's Sales Solutions business, the Company will not
achieve the minimum volumes under these contracts and cannot recover the
guaranteed costs from future operations.
 
 
                                      15
<PAGE>
 
   Selling, general and administrative expenses for fiscal 1998 increased by
$10.4 million or 22.7% compared to fiscal 1997 due to the inclusion of
selling, general and administrative expenses from ITI and amortization on
goodwill and other intangible assets acquired in connection with the purchase
of ITI. The selling, general and administrative expenses of ITI include
allowances for doubtful accounts of $2.5 million to fully reserve trade
receivables due from two clients which filed for protection under Federal
bankruptcy law. Despite cost savings achieved through workforce reduction as
part of a restructuring plan initiated in June 1998, selling, general and
administrative expenses as a percent of net revenue increased slightly from
13.1% in fiscal 1997 to 13.2% in fiscal 1998 due to the amortization on
goodwill and other intangible assets. Amortization for fiscal 1998 amounted to
$4.0 million.
 
   In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", the Company reviews long-lived assets to be held and used to
access recoverability from operations using undiscounted cash flows whenever
events or changes in facts and circumstances indicate that the carrying value
of the assets may not be recoverable. An impairment loss is recognized in
operating results when future undiscounted cash flows are less than the
assets' carrying value. As a result of ITI clients who provided 65% of ITI's
Sales Solutions net revenue either ceasing to do business or substantially
reducing the level of business they did with the Company, principally in the
fourth quarter of 1998, estimated future undiscounted cash flows from ITI's
Sales Solutions business were less than the carrying value of its long-lived
assets. Accordingly, the Company has adjusted the carrying value of the Sales
Solutions divisions' long-lived assets to their fair value resulting in a non-
cash impairment loss of $69.7 million ($65.9 million, or $1.36 per share, net
of income tax benefit). The Company also recorded a non-cash impairment loss
of $1.5 million on certain capitalized software abandoned during the year.
 
   In June 1998, the Company adopted a restructuring plan and recorded a $9.0
million charge. The impact of the restructuring charge in the second quarter
amounted to $5.6 million or $0.11 per share, net of income tax benefit. The
restructuring charge provided for the estimated costs to close Customer
Contact Centers, reconfigure certain administrative support facilities and
reduce the workforce by approximately 80 salaried employees. As of January 3,
1999, the amount remaining in the restructuring reserve was $3.7 million, and
is expected to be fully utilized by June 1999.
 
   The Company incurred an operating loss of $65.4 million in fiscal 1998
compared to operating income of $33.3 million in fiscal 1997. Prior to the
nonrecurring charges associated with the ITI business and the Company's
restructuring charge discussed above, operating income was $24.4 million or
5.7% of net revenue in 1998 compared to $36.5 million or 10.4 % of net revenue
in 1997. For the Sales Solutions division, operating income prior to these
nonrecurring charges was $8.6 million or 4.3% of net revenue in fiscal 1998
compared to $25.7 million or 14.1% of net revenue in fiscal 1997. The
deterioration in operating performance was primarily due to lower selling
prices, higher wages and benefits, and the cost of underutilized capacity
resulting from reductions in expected call volumes. The Service Solutions
division's operating income prior to nonrecurring charges was $15.8 million or
7.0% of net revenue in fiscal 1998 compared to $10.8 million or 6.4% of net
revenue in fiscal 1997. The change in operating performance was due to
increased revenue offset by higher wages and benefits and amortization of
goodwill and other intangibles acquired in connection with the purchase of
ITI.
 
   Net interest expense for fiscal 1998 increased by $6.6 million compared to
fiscal 1997. This increase reflects interest and amortization of debt issuance
costs on the $150.0 million Term Loan used to finance the purchase of ITI on
May 20, 1998, as well as increased average borrowing levels on the Company's
Revolving Credit Facility.
 
   The Company provides income tax expense on book earnings before income
taxes. The difference between the Company's effective income tax rate for
fiscal 1998 and the Federal statutory rate was due to the amortization and
write-off of $61.3 million of goodwill related to the ITI purchase, which
amount is not deductible for tax purposes.
 
   As previously discussed, the Company's management approved a plan to sell
the Paragren software development business. The Company does not believe that
additional investment in the software development business is consistent with
its long-term strategic goals and objectives. The Company believes the value
of the
 
                                      16
<PAGE>
 
Paragren business can be better realized with a different ownership structure.
The Company expects to sell Paragren at a loss during fiscal year 1999. Loss
from discontinued operations for fiscal 1998 was $11.0 million and includes an
estimated loss on sale of Paragren of $9.5 million ($8.4 million, or $0.17 per
share, net of income tax benefit). The pretax loss includes a reduction in
asset value of $6.5 million for expected loss on disposal and a provision for
anticipated operating losses until disposal of $3.0 million.
 
Fiscal 1997 Compared to Fiscal 1996
 
   Net revenue increased to $350.5 million in fiscal 1997 from $276.4 million
in fiscal 1996, an increase of $74.1 million or 26.8%. The Company was
successful in decreasing its concentration of business with its two largest
clients during fiscal 1997 by increasing net revenue from other clients by
approximately 70% in the year. Sales Solutions net revenue increased by $41.0
million during fiscal 1997. Of this increase, approximately 45% was
attributable to services initiated for new clients, while the balance was due
to higher call volumes from existing clients. The $33.1 million increase in
Service Solutions net revenue during fiscal 1997 was due to services initiated
for a new telecommunications client. Revenue from existing Service Solutions
clients was unchanged for the year as increased revenue from higher inbound
call volume with AT&T was offset by a 15% revenue reduction from the Company's
large parcel delivery client. The revenue reduction from the large parcel
delivery client was due to improved operating efficiencies in the management
of client-owned call centers and the effects of a three-week labor strike
against the client.
 
   Cost of services as a percent of net revenue increased to 76.5% in fiscal
1997 from 70.1% in fiscal 1996. This increase was due to four factors. First,
the Company experienced lower margins as a result of client mix and industry
pricing pressures. Second, the Company's large parcel delivery client reduced
the number of billable positions in its client-owned call centers by
approximately 20%, resulting in the Company absorbing payroll costs during a
three-month adjustment period that otherwise would have been billed to the
client. Third, the Company absorbed fixed cost relating to underutilized
capacity and infrastructure, such fixed costs increasing as a percent of net
revenue, due to Sales Solutions marketing-related volume deductions by AT&T
and the effects of a labor strike against the large parcel delivery client.
Finally, a more expensive group health insurance plan was implemented during
fiscal 1997 to improve employee retention.
 
   Selling, general and administrative expenses increased to $45.8 million in
fiscal 1997 from $33.4 million in fiscal 1996, an increase of $12.4 million or
37.2%. As a percent of net revenue, selling, general and administrative
expenses increased to 13.1% in fiscal 1997 from 12.1% in fiscal 1996. The
increase in selling, general and administrative expenses during fiscal 1997
was due to expansion of sales and marketing efforts and investments in human
resources and administrative functions to support the Company's larger revenue
base.
 
   The asset impairment charge of $3.238 in fiscal 1997 reflects a provision
for software impairment as a result of plans to replace software platforms
used by the Company with superior technologies being developed by Paragren.
 
   Operating income in fiscal 1997 was $33.3 million. Absent the provision for
software impairment, operating income for fiscal 1997 was $36.5 million
compared to $49.1 million in fiscal 1996. For the Sales Solutions division,
operating income before software impairment was $25.7 million or 14.1% of net
revenue compared to $27.5 million or 19.4% of net revenue in fiscal 1996. The
decrease in operating performance was due primarily to lower selling prices
and the cost of underutilized capacity. The Service Solutions division
operating income before software impairment was $10.8 million or 6.4% of net
revenue in fiscal 1997 compared to $21.6 million or 16.1% of net revenue in
fiscal 1996. The reduction in operating income was due to lower margins as a
result of client mix and higher payroll costs related to services provided to
a large parcel delivery client.
 
   Net loss from discontinued operations for fiscal 1997 was $18.7 million and
includes the write-off of acquired in-process research and development of
$19.8 million in connection with the Paragren purchase. Acquired in-process
research and development, which was determined by an independent appraisal,
includes the value of software in the development stage and not considered to
have reached technological feasibility. Generally accepted accounting
principles require that research and development costs be expensed as
incurred.
 
                                      17
<PAGE>
 
   Net interest expense increased by $1.5 million in fiscal 1997 from fiscal
1996. This increase reflects interest income earned on temporary investments
in fiscal 1996 with cash raised in the initial public offering of the
Company's Common Shares compared to interest expense incurred on outstanding
borrowings in fiscal 1997 as the result of investment in call center
operations during the fourth quarter of fiscal 1996 and fiscal 1997.
 
   The cumulative effect of accounting change of $2.2 million, net of
applicable income taxes, reflects the adoption during fiscal 1997 of Emerging
Issues Task Force Bulletin No. 97-13 ("EITF No. 97-13"), "Accounting for the
Costs Incurred in Connection with a Consulting Contract or an Internal Project
That Combines Business Process Reengineering and Information Technology
Transformation". EITF No. 97-13 requires that business process reengineering
costs be expensed as incurred and that any unamortized reengineering costs at
November 20, 1997, also be expensed and reported as a cumulative effect of
accounting change. The Company had been capitalizing reengineering costs
related to the installation of computer software purchased to provide
enterprise-wide business management systems.
 
New Accounting Pronouncements
 
   As described in Note 3 to the Consolidated Financial Statements, the
Company adopted SFAS No. 130, SFAS No. 131 and SOP 98-1 during fiscal 1998 and
will adopt SFAS Nos. 133 and SOP 98-5 in fiscal 1999. As of January 3, 1999,
the impact of adopting SFAS No. 133 had not been determined and the impact of
adopting SOP 98-5 is not anticipated to have a material effect on the
Company's consolidated financial statements.
 
Liquidity and Capital Resources
 
   The following table sets forth consolidated statements of cash flows data
for the Company for years ended January 3, 1999, December 28, 1997, and
December 29, 1996.
 
<TABLE>
<CAPTION>
                                                         1998     1997    1996
                                                        -------  ------  ------
                                                            (In millions)
<S>                                                     <C>      <C>     <C>
Net cash provided by operating activities.............. $  45.9  $ 30.6  $ 12.1
Net cash used by investing activities..................  (166.3)  (43.7)  (38.4)
Net cash provided by financing activities..............   123.9    13.0    22.3
                                                        =======  ======  ======
</TABLE>
 
   Cash provided by operating activities during fiscal 1998 totaled $45.9
million, up $15.3 million from fiscal 1997 and $33.8 million from fiscal 1996.
The increases are primarily attributable to increased net revenue and changes
in the various components of working capital.
 
   In May 1998, the Company used $149.2 million in cash to fund the
acquisition of ITI. The Company financed the acquisition using the proceeds
from the $150.0 million Term Loan portion of the new $225.0 million Credit
Facility put in place with a group of lenders at the time of the acquisition.
Upon entering into the new Credit Facility, proceeds from borrowings under the
$75.0 million Revolving Credit Facility portion of the new credit facility
were used to repay outstanding borrowings of $7.5 million under the Company's
previous $80.0 million Revolving Credit Facility. The previous Revolving
Credit Facility was terminated at that time. At January 3, 1999 there were no
borrowings under the Revolving Credit Facility. The Company made $6.0 million
of scheduled repayments on the Term Loan during fiscal 1998 resulting in a
balance outstanding at January 3, 1999, of $144.0 million. The Term Loan
requires quarterly repayments during fiscal 1999 aggregating $14.0 million.
 
   During fiscal 1998 the Company used cash provided by operating activities
and borrowings under the Revolving Credit Facilities to fund working capital
needs and $17.1 million of net property and equipment purchases. The
expenditures were principally related to the construction of additional call
center capacity for Service Solutions clients and to upgrading equipment in
existing sites. Capital expenditures were significantly less in 1998 than the
$43.7 million made in 1997. This is primarily as a result of the acquisition
of significant amounts of underutilized call center capacity acquired in the
ITI acquisition. Capital expenditure requirements in 1999 are not expected to
be in excess of the $15.0 million limitation on such expenditures included in
the Credit Facility.
 
                                      18
<PAGE>
 
   On April 1, 1999, the Company and the lending banks amended the Credit
Facility. The financial covenants of the agreement were adjusted, the interest
rates on outstanding borrowings and commitment fees were increased, and a
security interest in certain additional assets, including accounts receivable,
intangibles and certain limited personal property was granted to the lending
banks as part of the amendment. The Company's ability to make certain
restricted payments, as defined in the Credit Facility, and the availability
of $35.0 million of the $75.0 million Revolving Credit Facility were made
subject to the attainment of certain operating performance requirements.
 
   On June 1998, the Company adopted a restructuring plan and recorded a $9.0
million charge to income. The restructuring charge included $4.5 million for
the write-down of leasehold improvements and equipment, $3.3 million for
severance costs and $1.2 million for lease-termination costs. During fiscal
1998, the Company made payments of $2.5 million for employee severance and
lease termination costs.
 
   During 1998, the Company used $5.7 million to repurchase 1.6 million of its
outstanding Common Shares. In the third quarter of 1998, the Company received
$14.1 million in customer deposits on services to be provided in future
periods. These amounts will be offset against future billings. The majority of
the deposit is expected to be offset against billings during 1999.
 
   In December 1998, the Company's management approved a plan to sell
Paragren. The Company expects to sell Paragren during fiscal 1999 and realize
approximately $7.1 million of cash from the sale, net of cash required to fund
operations during the disposal period.
 
   The Company intends to use funds generated by future operations and
available credit under its $75.0 million Revolving Credit Facility to meet
normal operating needs as well as fund planned capital expenditures during
fiscal 1999. The Company believes these sources of liquidity will be adequate
to fund the cash needs of the business during fiscal 1999.
 
Quarterly Results
 
   The Company's operating results in any single period should not be viewed
as indicative of future operating results as the services offered by the
Company are subject to variations in profitability. The Company could
experience variations in net revenue and income as a result of many factors,
including the timing of clients' marketing campaigns and customer service
programs, the timing of additional selling, general and administrative
expenses to acquire and support such new business and changes in the Company's
revenue mix among its various service offerings. In connection with certain
contracts, the Company could incur costs in periods prior to recognizing
revenue under those contracts. In addition, the Company must plan its
operating expenditures based on revenue forecasts, and a revenue shortfall
below such forecast in any quarter would likely adversely affect the Company's
operating results for that quarter. While the effects of seasonality on the
Company's business have historically been obscured by its growing net revenue,
the Company's business tends to be slower in the first and third quarters of
its fiscal year due to client marketing programs which are typically slower in
the postholiday and summer months.
 
Year 2000 Compliance
 
   The Year 2000 issue, common to most companies, concerns the inability of
information and non-information systems to recognize and process date-
sensitive information after 1999 due to the use of only the last two digits to
refer to a year. Time sensitive computer equipment and software with embedded
technology may recognize a date using "00" as the year 1900 rather than the
year 2000. The problem could affect both computer equipment and software and
other equipment that relies on microprocessors.
 
   On October 31, 1998, Senior Information Technology Management under the
direction of the Audit Committee of the Board of Directors completed a
company-wide evaluation of the impact of a potential Year 2000 problem on its
computer systems, applications and other date-sensitive equipment. Equipment
and systems
 
                                      19
<PAGE>
 
that are not Year 2000 compliant have been identified and will be corrected
through equipment replacement, remediation of code in software programs, or
migration to a Year 2000 compliant platform. The Company estimates that
approximately 60% of the remediation of code in software programs was
completed as of March 31, 1999. All Year 2000 compliance issues are expected
to be corrected by July 1, 1999. Through March 31, 1999, the Company had spent
approximately $1.1 million to address Year 2000 issues. In addition at March
31, 1999, the Company had open purchase commitments in the amount of $1.5
million to purchase Year 2000 equipment upgrades. Total costs required to
correct Year 2000 issues are currently estimated to be approximately $3.0
million and principally consist of equipment upgrades and software code
remediation.
 
   While the Company believes that its efforts will adequately address its
internal Year 2000 concerns, it is possible that the Company will be adversely
affected by problems encountered by key customers and suppliers. The Company
has initiated discussions with significant customers and suppliers in an
effort to determine and assess those parties' Year 2000 compliance status. The
Company is dependent on computer and telecommunications companies for computer
equipment and software and telephone systems and service. The Company
completed its evaluation of customers and suppliers on February 28, 1999.
Based upon the results of its assessments of customers and suppliers
compliance status, the Company is developing contingency plans where
appropriate. The Company expects contingency plans will be in place by May 1,
1999. The Company would be unable to perform its work without access to
outbound and/or inbound telephony capabilities, resulting in the loss of
revenue, the extent and materiality of which would depend on the length of the
time required to restore access.
 
               INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
 
   Certain statements in the foregoing "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in this
Report, including those regarding APAC's expected growth, prospective business
opportunities and future expansion plans, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
including, but not limited to, general economic and business conditions,
competition, changing trends in customer profiles and changes in governmental
regulations. Although the Company believes that its expectations with respect
to the forward-looking statements are based upon reasonable assumptions within
the bounds of its knowledge of its business and operations, there can be no
assurance that actual results, performance or achievements of the Company will
not differ materially from any future results, performance or achievements
expressed or implied by such forward looking statements.
 
 
   In addition to the risks and uncertainties of ordinary business operations,
the forward-looking statements of the Company contained in this Annual Report
on Form 10-K are also subject to the following risks and uncertainties:
 
Reliance on Major Clients
 
   Because a substantial portion of the Company's revenue is generated from
relatively few clients, the loss of a significant client or clients could have
a materially adverse effect on the Company. The Company had clients which
individually accounted for more than 10% of the Company's net revenue for
fiscal years 1998, 1997 and 1996. The Company's ten and four largest clients
collectively accounted for 64.8% and 44.0%, respectively, of the Company's net
revenue in fiscal 1998. The Company's largest clients in fiscal 1998 were a
large parcel delivery client and AT&T, which accounted for 16.1% and 13.5%,
respectively, of the Company's net revenue in fiscal 1998. The Company's third
largest client in fiscal 1998 was a major telecommunications client, which
accounted for 7.6% of the Company's net revenue during that period. The
Company's fourth largest client in fiscal 1998 was J.C. Penney Life Insurance
Company which accounted for 6.8% of the Company's net revenue during the
period. The insurance products sold by Mass Marketing Insurance Group are
currently underwritten by J.C. Penney Life Insurance Company. During fiscal
1998, Mass Marketing Insurance Group accounted for 4.8% of the Company's net
revenue. In fiscal 1997, two clients accounted for 25.7% and 17.1% of the
Company's net revenue and in fiscal 1996, two clients accounted for 38.6% and
18.4% of the Company's net revenue, respectively. Many of the Company's
clients are concentrated in the business and consumer products,
 
                                      20
<PAGE>
 
parcel delivery, financial services, insurance, retail and telecommunications
industries. A significant downturn in any of these industries or a trend in
any of these industries not to use, or to reduce their use of, telephone-based
sales, marketing or customer management solutions could have a materially
adverse effect on the Company's business. The Company generally operates under
contracts which may be terminated on short notice, most of which do not have
minimum volume requirements.
 
   The Company's contract with its parcel delivery client expires January 15,
2000. No discussion to extend this contract has taken place. The Company is
uncertain as to whether the client intends to extend this contract. Also, the
Company is undecided as to whether it is willing to extend the contract should
the client intend to do so. The Company's contract with its parcel delivery
client is a facilities management contract. Under this facilities management
program, the Customer Contract Centers where the work is performed are owned
by the client, but are staffed and managed by the Company. Regardless of
whether or not this contract is extended, there is no impact on the
utilization of the Company-owned Customer Contract Centers.
 
   There can be no assurance that the Company will be able to retain any of
its largest clients or that the volumes of its most profitable or largest
programs will not be reduced, or that the Company would be able to replace
such clients or programs with clients or programs that generate a comparable
amount of revenue or profits. Consequently, the loss of one or more of its
significant clients could have a materially adverse effect on the Company's
business, results of operations and financial condition.
 
Factors Affecting Ability to Manage and Sustain Growth
 
   The Company has experienced rapid growth over the past several years.
Future growth will depend on a number of factors, including the effective and
timely initiation and development of client relationships, opening of new
Customer Contact Centers, and recruitment, motivation and retention of
qualified personnel. Sustaining growth will also require the implementation of
enhanced operational and financial systems and will require additional
management, operational and financial resources. There can be no assurance
that the Company will be able to manage its expanding operations effectively
or that it will be able to maintain or accelerate its growth.
 
Competitive and Fragmented Industry; Potential Future Competing Technologies
and Trends
 
   The industry in which the Company competes is extremely competitive and
highly fragmented. The Company's competitors range in size from very small
firms offering special applications or short term projects to large
independent firms and the in-house operations of many clients and potential
clients. A number of competitors have capabilities and resources equal to, or
greater than, the Company's. Some of the Company's services also compete with
direct mail, television, radio and other advertising media. There can be no
assurance that, as the Company's industry continues to evolve, additional
competitors with greater resources than the Company will not enter the
industry (or particular segments of the industry) or that the Company's
clients will not choose to conduct more of their telephone-based sales,
marketing or customer service activities internally.
 
   Because the Company's primary competitors are the in-house operations of
existing or potential clients, the Company's performance and growth could be
adversely affected if its existing or potential clients decide to provide in-
house customer care services that are currently outsourced or to retain or
increase their in-house customer service and product support capabilities.
 
   The development of new forms of direct sales and marketing techniques, such
as interactive home shopping through television, computer networks and other
media, could have an adverse effect on the demand for the Company's Sales
Solutions services. In addition, the increased use of new telephone-based
technologies, such as interactive voice response systems and increased use of
the Internet, could reduce the demand for certain of the Company's Service
Solutions offerings. Moreover, the effectiveness of marketing by telephone
could also decrease as a result of consumer saturation and increased consumer
resistance to this direct marketing tool. Although the Company attempts to
monitor industry trends and respond accordingly, there can be no assurance
that the Company will be able to anticipate and successfully respond to all
such trends in a timely manner.
 
                                      21
<PAGE>
 
Reliance on Technology
 
   The Company has invested significantly in sophisticated and specialized
telecommunications and computer technology, and has focused on the application
of this technology to provide customized solutions to meet its clients needs.
The Company anticipates that it will be necessary to continue to select,
invest in and develop new and enhanced technology on a timely basis in the
future in order to maintain its competitiveness. The Company's future success
will depend in part on its ability to continue to develop information
technology solutions which keep pace with evolving industry standards and
changing client demands. In addition, the Company's business is highly
dependent on its computer and telephone equipment and software systems, and
the temporary or permanent loss of such equipment or systems, through casualty
or operating malfunction, could have a materially adverse effect on the
Company's business.
 
Dependence on Key Personnel
 
   The success of the Company depends in large part upon the abilities and
continued service of its executive officers and other key employees. There can
be no assurance that the Company will be able to retain the services of such
officers and employees. The loss of key personnel could have a materially
adverse effect on the Company. The Company has non-competition agreements with
certain of its existing key personnel. However, courts are at times reluctant
to enforce such agreements. In order to support growth, the Company will be
required to effectively recruit, develop and retain additional qualified
management personnel.
 
Dependence on Labor Force
 
   The Company's industry is very labor intensive and has experienced high
personnel turnover. Many of the Company's employees receive modest hourly
wages and a significant number are employed on a part-time basis. A higher
turnover rate among the Company's employees would increase the Company's
recruiting and training costs and decrease operating efficiencies and
productivity. Some of the Company's operations, particularly insurance product
sales and technology-based inbound customer service, require specially trained
employees. Growth in the Company's business will require it to recruit and
train qualified personnel at an accelerated rate from time to time. There can
be no assurance that the Company will be able to continue to hire, train and
retain a sufficient labor force of qualified employees. A significant portion
of the Company's costs consists of wages to hourly workers. An increase in
hourly wages, costs of employee benefits or employment taxes could materially
adversely effect the Company.
 
Dependence on Telephone Service
 
   The Company's business is materially dependent on service provided by
various local and long distance telephone companies. A significant increase in
the cost of telephone services that is not recoverable through an increase in
the price of the Company's services, or any significant interruption in
telephone services, could have a materially adverse impact on the Company.
 
Government Regulation
 
   The Company's business is subject to various Federal and state laws and
regulations. The Company's industry has become subject to an increasing amount
of Federal and state regulation in the past five years. The FCC rules under
the TCPA limit the hours during which telemarketers may call consumers and
prohibit the use of automated telephone dialing equipment to call certain
telephone numbers. The TCFAPA broadly authorizes the FTC to issue regulations
prohibiting misrepresentation in telemarketing sales. In August 1995, the FTC
issued regulations under the TCFAPA which, among other things, require
telemarketers to make certain disclosures when soliciting sales. The Company's
operating procedures comply with the telephone solicitation rules of the FCC
and FTC. However, there can be no assurance that additional Federal or state
legislation, or changes in regulatory implementation, would not limit the
activities of the Company or its clients in the future or significantly
increase the cost of regulatory compliance.
 
                                      22
<PAGE>
 
   Several of the industries in which the Company's clients operate are
subject to varying degrees of government regulation, particularly the
telecommunications, insurance and financial services industries. Generally,
compliance with these regulations is the responsibility of the Company's
clients. However, the Company could be subject to a variety of enforcement or
private actions for its failure or the failure of its clients to comply with
such regulations. The Company's telephone representatives who sell insurance
products are required to be licensed by various state insurance commissions
and participate in regular continuing education programs, thus requiring the
Company to comply with the extensive regulations of these state commissions.
As a result, changes in these regulations or their implementation could
materially increase the Company's operating costs.
 
Potential Fluctuations in Quarterly Operating Results
 
   The Company could experience quarterly variations in revenues and operating
income as a result of many factors, including the timing of clients' marketing
campaigns and customer service programs, the timing of additional selling,
general and administrative expenses to acquire and support such new business
and changes in the Company's revenue mix among its various service offerings.
In connection with certain contracts, the Company could incur costs in periods
prior to recognizing revenue under those contracts. In addition, the Company
must plan its operating expenditures based on revenue forecasts, and a revenue
shortfall below such forecast in any quarter would likely adversely affect the
Company's operating results for that quarter. The effects of seasonality on
the Company's business have historically been obscured by its growing net
revenue. However, the Company's business tends to be slower in the first and
third quarters due to client marketing programs which are typically slower in
the post-holiday and summer months.
 
Control by Principal Share Owner
 
   Mr. Schwartz, the Company's Chairman and Chief Executive Officer,
beneficially owns approximately 41.6% of the outstanding Common Shares. As a
result, Mr. Schwartz is able to exercise significant control over the outcome
of substantially all matters requiring action by the Company's share owners.
Such voting concentration may have the effect of discouraging, delaying or
preventing a change in control of the Company. In addition, two trusts each
beneficially own approximately 5.5% of the outstanding Common Shares.
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
 
   Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial and commodity market prices and rates. The Company is
exposed to market risk in the area of changes in U.S. interest rates. This
exposure is directly related to its normal operating and funding activities.
 
   Because the Company's obligations under its bank credit agreement bear
interest at floating rates, the Company is sensitive to changes in prevailing
interest rates. The Company uses derivative instruments to manage its long-
term debt interest rate exposure, rather than for trading purposes. A 10%
increase or decrease in market interest rates that effect the Company's
financial instruments would not have a material impact on earnings during the
next fiscal year, and would not materially affect the fair value of the
Company's financial instruments.
 
Item 8. Financial Statements and Supplementary Data
 
   The following financial information is included in this Report:
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Public Accountants..................................   24
Consolidated Balance Sheets as of January 3, 1999 and December 28, 1997...   25
Consolidated Statements of Operations for the Fiscal Years Ended January
 3, 1999, December 28, 1997 and December 29, 1996.........................   26
Consolidated Statements of Share Owners' Equity for the Fiscal Years Ended
 January 3, 1999, December 28, 1997 and December 29, 1996.................   27
Consolidated Statements of Cash Flows for the Fiscal Years Ended January
 3, 1999, December 28, 1997 and December 29, 1996.........................   28
Notes to Consolidated Financial Statements................................   29
</TABLE>
 
                                      23
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Share Owners of
APAC TeleServices, Inc.:
 
   We have audited the accompanying consolidated balance sheets of APAC
TELESERVICES, INC. (an Illinois corporation) AND SUBSIDIARIES as of January 3,
1999 and December 28, 1997, and the related consolidated statements of
operations, share owners' equity and cash flows for the three years ended
January 3, 1999, December 28, 1997, and December 29, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of APAC TeleServices, Inc.
and Subsidiaries as of January 3, 1999, and December 28, 1997, and the results
of their operations and their cash flows for the three years ended January 3,
1999, December 28, 1997, and December 29, 1996, in conformity with generally
accepted accounting principles.
 
                                          Arthur Andersen LLP
Chicago, Illinois
March 22, 1999 (except with respect
to the matter discussed in Note 9
as to which the date is April 1, 1999)
 
                                      24
<PAGE>
 
                    APAC TELESERVICES, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                        January 3, December 28,
                        ASSETS                             1999       1997*
                        ------                          ---------- ------------
                                                         (In thousands, except
                                                              share data)
<S>                                                     <C>        <C>
Current Assets:
  Cash and cash equivalents............................  $  3,543    $     17
  Receivables:
    Trade, less allowance for doubtful accounts of
     $4,250 in 1998 and $447 in 1997...................    75,377      66,558
    Refundable Federal income taxes....................     5,825       1,947
    Other..............................................     1,241       2,060
  Deferred tax assets..................................     8,790         200
  Prepaid expenses.....................................     3,058       2,165
  Net assets of discontinued operations................     7,096      15,318
                                                         --------    --------
      Total current assets.............................   104,930      88,265
                                                         --------    --------
Property and Equipment:
  Building and leasehold improvements..................    27,552      28,015
  Telecommunications equipment.........................    88,958      78,763
  Workstations and office equipment....................    16,918      14,039
  Capitalized software.................................    11,852       7,439
  Construction in progress.............................     6,915       6,463
                                                         --------    --------
      Total property and equipment.....................   152,195     134,719
  Less--accumulated depreciation and amortization......    57,602      38,424
                                                         --------    --------
      Property and equipment, net......................    94,593      96,295
                                                         --------    --------
Intangible Assets:
  Assembled workforce..................................     3,600         --
  Customer relationships...............................    28,493         --
  Goodwill.............................................    36,757         --
                                                         --------    --------
      Total intangible assets..........................    68,850         --
  Less--accumulated amortization.......................     3,975         --
                                                         --------    --------
      Intangible assets, net...........................    64,875         --
                                                         --------    --------
Other Assets...........................................     3,104       1,271
                                                         --------    --------
      Total assets.....................................  $267,502    $185,831
                                                         ========    ========
</TABLE>
--------
*Reclassified to conform to current year's classifications.
 
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       25
<PAGE>
 
                    APAC TELESERVICES, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                             January 3, December 28,
            LIABILITIES AND SHARE OWNERS' EQUITY                1999       1997*
            ------------------------------------             ---------- ------------
                                                              (In thousands, except
                                                                   share data)
<S>                                                          <C>        <C>
Current Liabilities:
  Current maturities of long-term debt......................  $ 16,122    $    202
  Revolving credit facility.................................       --       23,600
  Book overdraft............................................       --        4,679
  Accounts payable..........................................     5,705       6,155
  Customer deposits.........................................    11,123         --
  Accrued liabilities:
    Payroll and related items...............................    19,494      14,199
    Acquisition-related costs...............................    14,377         --
    Telecommunications expenses.............................     9,529       1,643
    Other...................................................    10,832       3,697
                                                              --------    --------
      Total current liabilities.............................    87,182      54,175
                                                              --------    --------
Long-Term Debt, less current maturities.....................   132,427       1,863
Deferred Income Taxes.......................................     1,670       5,010
Other Liabilities...........................................     4,399         --
Commitments and Contingencies...............................
Share Owners' Equity:
  Preferred Shares, $0.01 par value; 50,000,000 shares
   authorized; none issued..................................       --          --
  Common Shares, $0.01 par value; 200,000,000 shares
   authorized; issued 48,893,873 shares in 1998 and
   48,794,367 shares in 1997................................       489         488
  Additional paid-in capital................................    93,799      91,788
  Retained earnings (deficit)...............................   (46,813)     32,507
                                                              --------    --------
                                                                47,475     124,783
  Less--treasury shares; 1,609,000 shares at cost...........     5,651         --
                                                              --------    --------
      Total share owners' equity............................    41,824     124,783
                                                              --------    --------
      Total liabilities and share owners' equity............  $267,502    $185,831
                                                              ========    ========
</TABLE>
--------
*Reclassified to conform to current year's classifications.
 
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       26
<PAGE>
 
                    APAC TELESERVICES, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                For the Fiscal Years Ended
                                           ------------------------------------
                                           January 3, December 28, December 29,
                                              1999       1997*         1996
                                           ---------- ------------ ------------
                                             (In thousands, except per share
                                                          data)
<S>                                        <C>        <C>          <C>
Net Revenue...............................  $425,028    $350,533     $276,443
Operating Expenses:
  Cost of services........................   353,979     268,177      193,967
  Selling, general and administrative
   expenses...............................    56,230      45,810       33,397
  Asset impairment charges................    71,172       3,238          --
  Restructuring charge....................     9,000         --           --
                                            --------    --------     --------
      Total operating expenses............   490,381     317,225      227,364
                                            --------    --------     --------
  Operating income (loss).................   (65,353)     33,308       49,079
Investment Income.........................       --          --           280
Interest Expense..........................     8,139       1,499          309
                                            --------    --------     --------
  Income (loss) from continuing operations
   before income taxes and cumulative
   effect of accounting change............   (73,492)     31,809       49,050
Provision (Benefit) for Income Taxes......    (5,200)     12,100       18,500
                                            --------    --------     --------
  Income (loss) from continuing operations
   before cumulative effect of accounting
   change.................................   (68,292)     19,709       30,550
Discontinued Operations:
  Loss from operations of Paragren
   Technologies, Inc., less income taxes
   (benefit) of ($1,100) in 1998, and $670
   in 1997................................    (2,628)    (18,726)         --
  Loss on disposal of Paragren
   Technologies, Inc., including provision
   of $3,000 for operating losses during
   disposal period, less income tax
   benefit of $1,100......................    (8,400)        --           --
                                            --------    --------     --------
      Total discontinued operations.......   (11,028)    (18,726)         --
                                            --------    --------     --------
Cumulative Effect of Accounting Change,
 less income tax benefit of $1,349........       --       (2,200)         --
                                            --------    --------     --------
Net Income (Loss).........................  $(79,320)   $ (1,217)    $ 30,550
                                            ========    ========     ========
Net Income (Loss) Per Share:
  Basic:
   Income (loss) from continuing
    operations before cumulative effect of
    accounting change.....................  $  (1.40)   $   0.41     $   0.66
   Loss from discontinued operations......     (0.23)      (0.39)         --
   Cumulative effect of accounting change.       --        (0.05)         --
                                            --------    --------     --------
      Net income (loss)...................  $  (1.63)   $  (0.03)    $   0.66
                                            ========    ========     ========
  Diluted:
   Income (loss) from continuing
    operations before cumulative effect of
    accounting change.....................  $  (1.40)   $   0.41     $   0.64
   Loss from discontinued operations......     (0.23)      (0.39)         --
   Cumulative effect of accounting change.       --        (0.05)         --
                                            --------    --------     --------
      Net income (loss)...................  $  (1.63)   $  (0.03)    $   0.64
                                            ========    ========     ========
Weighted Average Shares Outstanding:
  Basic...................................    48,609      47,453       46,350
  Diluted.................................    48,609      48,505       47,935
                                            ========    ========     ========
</TABLE>
--------
*Reclassified to conform to current year's classifications.
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       27
<PAGE>
 
                    APAC TELESERVICES, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHARE OWNERS' EQUITY
 
<TABLE>
<CAPTION>
                                           Additional                         Total
                           Shares           Paid-In   Retained  Treasury  Share Owners'
                           Issued   Amount  Capital   Earnings   Shares      Equity
                         ---------- ------ ---------- --------  --------  -------------
                                      (In thousands, except share data)
<S>                      <C>        <C>    <C>        <C>       <C>       <C>
Balance, December 31,
 1995................... 46,200,000  $462   $49,072   $  3,174  $   --      $ 52,708
  Net income............        --    --        --      30,550      --        30,550
  Exercise of employee
   stock options,
   including related tax
   benefits.............    273,558     2     4,607        --       --         4,609
  Issuance of Common
   Shares through
   employee stock
   purchase plan........     12,059   --        339        --       --           339
  Issuance of Common
   Shares in connection
   with the acquisistion
   of The Shechtman
   Group................     54,440     1        (1)       --       --           --
                         ----------  ----   -------   --------  -------     --------
Balance, December 29,
 1996................... 46,540,057   465    54,017     33,724      --        88,206
  Net loss..............        --    --        --      (1,217)     --        (1,217)
  Exercise of employee
   stock options,
   including related tax
   benefits.............    228,232     2     5,246        --       --         5,248
  Issuance of Common
   Shares through
   employee stock
   purchase plan........     34,693     1       654        --       --           655
  Issuance of Common
   Shares in connection
   with the acquisition
   of Paragren
   Technologies, Inc....  1,991,385    20    31,871        --       --        31,891
                         ----------  ----   -------   --------  -------     --------
Balance, December 28,
 1997................... 48,794,367   488    91,788     32,507      --       124,783
  Net loss..............        --    --        --     (79,320)     --       (79,320)
  Exercise of employee
   stock options,
   including related tax
   benefits.............     41,837   --        948        --       --           948
  Issuance of Common
   Shares through
   employee stock
   purchase plan........     57,669     1       353        --       --           354
  Stock option and
   warrant transactions.        --    --        710        --       --           710
  Purchase of treasury
   shares (1,609,000
   shares)..............        --    --        --         --    (5,651)      (5,651)
                         ----------  ----   -------   --------  -------     --------
Balance, January 3,
 1999................... 48,893,873  $489   $93,799   $(46,813) $(5,651)    $ 41,824
                         ==========  ====   =======   ========  =======     ========
</TABLE>
 
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       28
<PAGE>
 
                    APAC TELESERVICES, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                For the Fiscal Years Ended
                                           -------------------------------------
                                           January 3,  December 28, December 29,
                                              1999        1997*         1996
                                           ----------  ------------ ------------
                                                      (In thousands)
<S>                                        <C>         <C>          <C>
Operating Activities:
  Net income (loss)....................... $ (79,320)    $ (1,217)    $ 30,550
  Depreciation and amortization...........    35,470       21,290       10,784
  Deferred income taxes...................    (8,130)       1,110          640
  Asset impairment charges................    71,172        3,238          --
  Loss from discontinued operations.......    11,028       18,726          --
  Cumulative effect of accounting change,
   net of income tax benefit..............       --         2,200          --
  Changes in operating assets and liabili-
   ties, net of effects of
   acquisition:
    Receivables...........................    15,458       (9,743)     (40,738)
    Prepaid expenses......................       122         (140)      (2,070)
    Other assets..........................      (306)        (619)        (653)
    Accounts payable......................    (4,206)      (5,812)       9,745
    Accrued expenses......................     7,416        3,835        3,809
    Discontinued operations...............    (2,806)      (2,270)         --
                                           ---------     --------     --------
      Net cash provided by operating
       activities.........................    45,898       30,598       12,067
Investing Activities:
  Purchase of property and equipment, net
   of disposals...........................   (17,076)     (43,742)     (64,417)
  Sale of short-term investments..........       --           --        26,000
  ITI Holdings, Inc. acquisition costs,
   net of cash acquired...................  (149,229)         --           --
                                           ---------     --------     --------
      Net cash used by investing
       activities.........................  (166,305)     (43,742)     (38,417)
Financing Activities:
  Proceeds from issuance of long-term
   debt...................................   150,000          --           --
  Repayment of revolving credit facility
   with proceeds from refinancing.........    (7,500)         --           --
  Net borrowings (payments) on revolving
   credit facilities......................   (16,100)       7,700       15,900
  Payments on long-term debt..............    (7,102)        (149)        (847)
  Payment of debt issuance costs..........    (2,031)         --           --
  Increase (decrease) in book overdraft...    (4,679)        (434)       5,113
  Increase in customer deposits and other
   liabilities............................    14,985          --           --
  Stock option and warrant transactions,
   including related tax benefits.........     2,011        5,903        4,948
  Purchase of treasury shares.............    (5,651)         --           --
  S Corporation distributions paid........       --           --        (2,809)
                                           ---------     --------     --------
      Net cash provided by financing
       activities.........................   123,933       13,020       22,305
                                           ---------     --------     --------
Net Increase (Decrease) in Cash and Cash
 Equivalents..............................     3,526         (124)      (4,045)
Cash and Cash Equivalents:
  Beginning of year.......................        17          141        4,186
                                           ---------     --------     --------
  End of year............................. $   3,543     $     17     $    141
                                           =========     ========     ========
Supplemental Disclosures:
  Cash flow information:
    Cash payments for interest (net of
     amounts capitalized)................. $   7,008     $  1,381     $    408
    Cash payments for income taxes........     5,927        8,955       17,013
  Non-cash investing and financing
   activities:
    Capital lease obligations used to
     purchase equipment...................       --           742          --
    Fair market value of Common Shares and
     employee stock options issued in
     connection with the acquisition of
     Paragren Technologies, Inc...........       --        31,891          --
  Fair market value of Common Shares is-
   sued in connection with the acquisition
   of The Shechtman Group.................       --           --         2,613
                                           =========     ========     ========
</TABLE>
--------
*Reclassified to conform to current year's classifications.
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       29
<PAGE>
 
                   APAC TELESERVICES, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             January 3, 1999, December 28, 1997, December 29, 1996
            (In thousands, except for share and per share amounts)
 
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
 
 Industry Information
 
   APAC Teleservices, Inc. and Subsidiaries (the "Company") provides high
volume telephone-based sales, marketing and customer management solutions for
corporate clients operating in the business and consumer products, parcel
delivery, financial services, insurance, retail, and telecommunications
industries throughout the United States.
 
 Principles of Consolidation
 
   The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation. Results of operations of
business combinations accounted for as a purchase have been included in the
consolidated financial statements for all periods subsequent to the dates of
acquisition.
 
 Management's Estimates
 
   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial
statements and reported amounts of net revenue and expenses during the
reporting period. Actual results could differ from these estimates.
 
 Fiscal Year
 
   The Company operates on a fiscal year that ends on the Sunday closest to
December 31. Fiscal years for the consolidated financial statements included
herein ended on January 3, 1999 (53 weeks), December 28, 1997 (52 weeks), and
December 29, 1996 (52 weeks).
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Cash and Cash Equivalents
 
   Cash and cash equivalents consist of cash in banks and overnight
securities.
 
Trade Receivables
 
   Concentration of credit risk is limited to trade receivables and is subject
to the financial conditions of certain major clients. The Company does not
require collateral or other security to support clients' receivables. The
Company conducts periodic reviews of its clients' financial conditions and
vendor payment practices to minimize collection risks on trade receivables.
 
Long-Lived Assets
 
   Long-lived assets are comprised of property and equipment, capitalized
software and intangible assets. In accordance with Statement of Financial
Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", the Company
reviews long-lived assets to be held and used to assess recoverability from
operations using undiscounted cash flows whenever events or changes in facts
and circumstances indicate that the carrying value of the assets may not be
recoverable. An impairment loss is recognized in operating results when future
undiscounted cash flows are less than the assets' carrying value. See Note 5,
Acquisition of ITI Holdings, Inc., for a discussion of the asset impairment
loss included in results of operations for the fiscal year 1998. The Company
reports an asset to be disposed of at the lower of its carrying value or its
net realizable value.
 
                                      30
<PAGE>
 
   Property and Equipment. Property and equipment are stated at cost less
accumulated depreciation. Major improvements are capitalized and charged to
expense through depreciation. Repairs and maintenance are charged to expense
as incurred. Upon sale or retirement, the related cost and accumulated
depreciation are removed from the accounts, and any gain or loss is recorded
in the statement of operations. Interest is capitalized on major build-outs of
new facilities during the construction period. No interest was capitalized in
fiscal year 1998. During fiscal years 1997 and 1996, the Company capitalized
$483 and $196 of interest, respectively.
 
   Depreciation is determined using the straight-line method for financial
reporting purposes. Leasehold improvements are depreciated on a straight-line
basis over the shorter of the estimated useful life of the asset or the lease
term. Lives used for calculating depreciation are 2 to 15 years for building
and leasehold improvements; 3 to 7 years for telecommunications equipment; and
5 to 7 years for workstations and office equipment. Total depreciation on
property and equipment for fiscal years 1998, 1997 and 1996 was $28,862,
$19,642, and $9,035, respectively.
 
   Capitalized Software. The Company capitalizes the cost of third-party
computer software and costs related to the installation of such software in
accordance with the American Institute of Certified Public Accountants
("AICPA") Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Costs incurred in
the preliminary project stage are expensed as incurred while costs incurred
during the development and implementation stages are capitalized. Third-party
computer software costs are amortized over their estimated useful life of 3 to
5 years.
 
   The Company also capitalizes certain software costs related to software
products sold to third parties and costs incurred while providing services to
its customers in accordance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." Costs associated with the planning and design phase of
the software development, including coding and testing activities necessary to
establish technological feasibility, are expensed as incurred. Once
technological feasibility has been determined, additional costs incurred in
development, including coding, testing and product quality assurance, are
capitalized when material. During fiscal years 1998, 1997 and 1996, the
Company capitalized $1,550, $2,278 and $1,937, respectively, of such costs
which are amortized over the lesser of 3 years or the period in which revenue
directly attributable to such costs is expected to be generated. Amortization
on all capitalized software costs for fiscal years 1998, 1997 and 1996 was
$2,837, $1,180 and $702, respectively.
 
   The carrying value of capitalized software costs is regularly reviewed by
the Company, and a loss is recognized if net realizable value falls below
unamortized costs. During the fiscal years 1998 and 1997, the Company recorded
provisions for software impairment of $1,472 and $3,238, respectively, as a
result of obsolescence in 1998 and plans to replace software platforms used by
the Company with technologies acquired through the Paragren Technologies, Inc.
purchase in 1997.
 
   Intangible Assets. Goodwill represents the excess of acquisition costs over
the fair value of net assets of acquired businesses and is amortized on a
straight-line basis over the expected period of benefit ranging from 15 to 21
years. Other purchased intangibles include non-compete agreements, assembled
workforce and customer relationships which are recorded at fair value at the
date of acquisition and amortized on a straight-line basis over their
estimated useful lives ranging from 4 to 12 years. Total amortization on
goodwill and other intangible assets for fiscal years 1998 and 1997 was $5,130
and $1,394, respectively.
 
Revenue Recognition
 
   The Company recognizes teleservices revenue on programs as services are
performed for its clients, generally based upon hours incurred. Software
revenue is recognized upon shipment, or if under contract, when customer
acceptance is obtained and other contract-specific requirements have been
completed.
 
 
                                      31
<PAGE>
 
Training Costs
 
   The Company maintains ongoing training programs for its employees. The cost
of this training is expensed as incurred. In addition, certain contracts
require clients to reimburse the Company for specific training. These costs
are billed to clients as incurred.
 
Income Taxes
 
   The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes".
SFAS No. 109 requires an asset and liability approach to accounting for income
taxes. The Company provides deferred income taxes for temporary differences
that will result in taxable or deductible amounts in future years based on the
reporting of certain revenue and costs in different periods for financial
statement and income tax purposes. A valuation allowance is recognized if it
is anticipated that some or all of a deferred tax asset may not be realized.
 
Accounting for Stock-Based Compensation
 
   The Company utilizes Accounting Principles Board Opinion No. 25 ("APB No.
25") in its accounting for stock options issued to employees. No compensation
expense is recognized for stock options issued to employees under the
Company's Stock Option Plan as the option price equals or exceeds the fair
market value of the Company's Common Shares at the date of grant. In October
1995, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." The accounting method as provided in the
pronouncement is not required to be adopted; however, it is encouraged. The
Company has adopted the disclosure-only provisions of SFAS No. 123 with
respect to options issued to employees. Compensation expense associated with
stock options and warrants issued to non-employees and non-directors is
recognized in accordance with SFAS No. 123.
 
Interest Rate Agreements
 
   The Company uses interest rate agreements to convert floating-rate debt to
fixed-rate debt. Under interest rate swap agreements, the Company agrees with
other parties to exchange at specified intervals the difference between fixed-
rate and floating-rate interest amounts calculated by reference to an agreed
upon notional principal amount. The Company utilizes interest rate cap
agreements to limit the impact of increases in interest rates on its floating-
rate debt. The interest rate cap agreements require premium payments to
counterparties based upon a notional principal amount. Interest rate cap
agreements entitle the Company to receive from counterparties the amounts, if
any, by which the selected market interest rates exceed the strike rates
stated in the agreements. Amounts due to or from interest rate swap
counterparties are recorded in interest expense in the period in which they
accrue. The premiums paid to purchase interest rate caps, as well as any gains
and losses on terminated interest rate swap and cap agreements, are amortized
to interest expense over the life of the debt to which they are matched.
 
Earnings Per Share
 
   During the fourth quarter of fiscal year 1997, the Company adopted
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings Per Share." Under SFAS 128, "basic earnings per share" is calculated
based upon the weighted average number of Common Shares actually outstanding,
and "diluted earnings per share" is calculated based upon the weighted average
number of Common Shares outstanding, and Common Shares that would have been
outstanding if the potentially dilutive Common Shares such as stock options
and stock purchase warrants had been issued. At January 3, 1999, December 28,
1997, and December 29, 1996, options and warrants to purchase 4,898,467,
2,949,797 and 2,026,270 shares, respectively, of the Company's Common Shares
were outstanding. At January 3, 1999, all outstanding options and warrants
were excluded from the computation of net income per share because either the
options' and warrants' exercise prices were greater than the average market
price of the Common Shares or their inclusion would have had an anti-
 
                                      32
<PAGE>
 
dilutive effect on net income per share. At December 28, 1997, and December
29, 1996, 1,815,837 and 12,500 outstanding options, respectively, were
excluded from the computation of net income per share because the options'
exercise prices were greater than the average market price of the Common
Shares.
 
3. NEW ACCOUNTING PRONOUNCEMENTS
 
Comprehensive Income
 
   In June 1997, FASB issued Statement of Financial Accounting Standards No.
130 ("SFAS No. 130"), "Reporting Comprehensive Income," which established
standards for reporting of comprehensive income. This pronouncement requires
that all items recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Comprehensive income
includes all changes in equity during a period except those resulting from
investments by and distributions to share owners. The financial statement
presentation under SFAS No. 130 is effective for all fiscal years beginning
after December 15, 1997, and is required in all interim period financial
statements. The Company adopted the provisions of SFAS No. 130 in January
1998. As of January 3, 1999, the Company had no transactions separately
identified as components of "other comprehensive income" under SFAS No. 130.
 
Segment Reporting
 
   In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS No. 131"), "Disclosure about Segments of an Enterprise and
Related Information", which amends the requirements for a public enterprise to
report financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company in deciding how to allocate resources and in assessing performance.
The financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The disclosures required by SFAS No. 131 are effective
for all fiscal years beginning after December 15, 1997. The Company adopted
the provisions of SFAS No. 131 in December 1998. Segment information is
reported in Note 14 to the consolidated financial statements.
 
Derivative Instruments and Hedging Activities
 
   In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS No. 133") "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. This pronouncement
requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the statement of operations, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. The Company has not
yet quantified the impacts of adopting SFAS No. 133 on its consolidated
financial statements and has not determined the timing of or method of
adoption of SFAS No. 133.
 
Start-Up Costs
 
   In April 1998, the AICPA issued Statement of Position 98-5, ("SOP 98-5")
"Reporting on the Costs of Start-Up Activities." SOP 98-5 provides guidance on
the financial reporting of start-up and organization costs and is effective
for all fiscal years beginning after December 15, 1998. It requires that all
nongovernmental entities expense the costs of start-up activities as those
costs are incurred. The Company will adopt SOP 98-5 in 1999. The Company does
not anticipate that the adoption of SOP 98-5 will have a material impact on
its consolidated financial statements.
 
 
                                      33
<PAGE>
 
4. ACCOUNTING CHANGE
 
   On November 20, 1997, The Emerging Issues Task Force, a subcommittee of the
Financial Accounting Standards Board, issued Bulletin No. 97-13 ("EITF No. 97-
13"), "Accounting for the Costs Incurred in Connection with a Consulting
Contract or an Internal Project That Combines Business Process Reengineering
and Information Technology Transformation." EITF No. 97-13 provides specific
guidelines on defining business process reengineering costs and requires such
costs to be expensed as incurred. Unamortized reengineering costs at November
20, 1997, were also required to be expensed and reported as a cumulative
effect of accounting change. The Company had been capitalizing such costs
related to the installation of internal computer systems. As prescribed by the
literature, the Company adopted the provisions of EITF No. 97-13 in the fourth
quarter of fiscal year 1997 and recorded a charge of $2,200 as the cumulative
effect of accounting change, which is net of applicable income tax benefit of
$1,349.
 
5. ACQUISITION OF ITI HOLDINGS, INC.
 
Acquisition
 
   On May 20, 1998, the Company acquired through merger all of the common
stock of ITI Holdings, Inc., the sole shareholder of ITI Marketing Services,
Inc. ("ITI"), a leading teleservices provider based in Omaha, Nebraska. In
exchange for all of the common stock of ITI, the Company paid $149,229, net of
cash acquired. The initial purchase price was funded with proceeds from a
$150,000 Term Loan. ITI provides telephone-based sales, marketing and customer
management services to corporate clients that have high volumes of outgoing
and/or incoming calls through a network of customer contact centers. The
acquisition has been accounted for as a purchase and, accordingly, the assets
and liabilities and results of operations of ITI have been included in the
Company's consolidated financial statements since the date of acquisition.
 
   The excess of purchase price over the fair value of assets acquired,
liabilities assumed and additional liabilities recorded of $136,650 has been
allocated to intangible assets based upon their estimated fair values as
determined by independent appraisal. Purchased intangibles consisted of
assembled workforce of $3,600, customer relationships of $36,800 and goodwill
of $96,250. The intangible assets are being amortized over their estimated
useful lives which range from 7 to 21 years. In addition, ITI had accumulated
net operating loss carryforwards of $12,773 as of the date of acquisition
which are fully reserved for through a valuation allowance. In connection with
the acquisition, the Company provided estimated costs to close facilities,
terminate unfavorable contracts, write-off uncollectible trade receivables and
reduce the workforce by 135 employees. The amounts provided included $6,500
for facilities, $9,700 for contracts, $2,400 for trade receivables and $2,600
for employee severance. To the extent that unused facilities covered by long-
term leases are subleased and unfavorable contracts are renegotiated, a
reduction in the acquisition-related reserves and goodwill recorded as of
January 3, 1999, would be required.
 
Asset Impairment
 
   Fourth quarter reductions in clients' use of outbound telemarketing
programs as a method of customer acquisition have reduced ITI's Sales
Solutions division net revenue and profitability from levels that existed at
the date of acquisition. Six clients which comprised approximately 65% of
ITI's Sales Solutions net revenue have either ceased or substantially reduced
their telemarketing activities due to apparent financial impairment or
consolidation in the consumer and financial services industries. In addition,
lower than expected outbound telemarketing volume has prevented the Company
from realizing synergies anticipated with and valued in the ITI acquisition.
 
   Pursuant to SFAS No. 121, these events constitute a triggering event in the
fourth quarter of fiscal year 1998 which required the Company to evaluate the
recoverability of the long-lived assets of the Sales Solutions division of
ITI. As a result of the loss of ITI's client base, estimated future
undiscounted cash flows from ITI's Sales Solutions business are now less than
the carrying value of its long-lived assets. Accordingly, the Company
 
                                      34
<PAGE>
 
has adjusted the carrying value of the Sales Solutions division's long-lived
assets to their fair value of $13,620 resulting in a non-cash impairment loss
of $69,700 ($65,900, or $1.36 per share, net of income tax benefit). The
impairment loss was comprised of a write-off of property and equipment of
$1,900, customer relationships of $8,300 and goodwill of $59,500. Fair market
value was determined based upon the appraised value of the remaining customer
base of the Sales Solutions division which was derived from future discounted
cash flow analyses. The remainder of ITI's business has not been impaired.
 
Other Nonrecurring Charges
 
   In addition to the asset impairment loss discussed above, the Company
recorded two additional nonrecurring charges in connection with the ITI
purchase. The Company provided allowances for doubtful accounts of $2,500 to
fully reserve trade accounts receivable balances due from two ITI clients
which filed for protection under Federal bankruptcy law. The Company also
accrued $7,100 in future telecommunications costs guaranteed under two minimum
usage contracts which expire in the year 2000. As a result of the downturn in
ITI's business, the Company will not achieve the minimum volumes under these
contracts and cannot recover the guaranteed costs from future results of
operations.
 
Pro Forma Information
 
   The pro forma results of operations for fiscal years 1998 and 1997
summarized below give effect to actual results as if the acquisition had
occurred on December 29, 1997, and December 30, 1996, respectively, and
include adjustments for unfavorable telephone contracts, goodwill and
intangible asset amortization, interest expense and income taxes.
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                             --------  --------
                                                              (In thousands,
                                                             except per share
                                                                   data)
                                                                (Unaudited)
      <S>                                                    <C>       <C>
      Net revenue........................................... $487,527  $496,107
      Income (loss) from continuing operations before
       cumulative effect of accounting change...............  (68,162)   10,402
      Net income (loss).....................................  (79,190)    8,202
                                                             --------  --------
      Per share data:
        Basic:
          Income (loss) from continuing operations before
           cumulative effect of accounting change........... $  (1.40) $   0.22
          Net income (loss)................................. $  (1.63) $   0.17
                                                             --------  --------
        Diluted:
          Income (loss) from continuing operations before
           cumulative effect of accounting change........... $  (1.40) $   0.21
          Net income (loss)................................. $  (1.63) $   0.17
                                                             --------  --------
</TABLE>
 
   The pro forma results of operations do not necessarily represent operating
results which would have occurred if the acquisition had taken place on the
basis assumed above, nor are they indicative of future operating results of
the combined companies.
 
6. DISCONTINUED OPERATIONS
 
   On August 19, 1997, the Company acquired all of the common and preferred
stock of Paragren Technologies, Inc. ("Paragren"), a specialist in software-
based marketing products that help its clients analyze market, customer and
sales data on a real-time basis. In addition to its software solutions,
systems integration and consulting services, Paragren designs, develops and
manages consumer-panel research.
 
 
                                      35
<PAGE>
 
   In consideration for the common and preferred stock of Paragren, the
Company issued to Paragren share owners 1,991,385 shares of its Common Shares
and converted existing Paragren stock options into stock options for an
additional 189,199 shares of the Company's Common Shares. The acquisition was
accounted as a purchase. The purchase price of approximately $32,900 was
allocated to the assets acquired and the liabilities assumed based upon their
estimated fair values as determined by an independent appraisal resulting in
the assignment of $1,500 to assembled workforce and non-compete covenants,
$19,800 to in-process research and development, and $12,000 to goodwill.
 
   In December 1998, the Company's management approved a plan to sell
Paragren. The Company does not believe that additional investment in the
software development business is consistent with its long-term strategic goals
and objectives. While the Company has had discussions with a potential buyer,
no formal sales agreement was reached. The Company expects to sell Paragren
during fiscal year 1999. Accordingly, Paragren is reported as a discontinued
operation, and the consolidated financial statements have been reclassified to
segregate the operating results and net assets of the business. The estimated
loss recorded during fiscal year 1998 related to Paragren was $9,500 ($8,400,
or $0.17 per share, net of income tax benefit). The estimated loss includes a
reduction in asset value of $6,500 for expected loss on disposal and a
provision for anticipated operating losses until disposal of $3,000. The loss
on disposal of Paragren has been based upon estimated sales proceeds from a
preliminary offer for the business which the Company had received. The amount
the Company will ultimately realize could differ from the amount assumed in
arriving at the estimated loss on disposal. Summary operating results for
Paragren for fiscal years 1998 and 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                              1998      1997
                                                             -------  --------
                                                              (In thousands)
      <S>                                                    <C>      <C>
      Net revenue........................................... $10,711  $  5,857
      Operating expenses:
        Cost of services....................................   5,496     1,149
        Selling, general and administrative expenses........   8,978     2,974
        Acquired in-process research and development........     --     19,800
                                                             -------  --------
          Total operating expenses..........................  14,474    23,923
                                                             -------  --------
        Loss from operations................................  (3,763)  (18,066)
      Interest income, net..................................      35        10
                                                             -------  --------
        Loss before income taxes............................  (3,728)  (18,056)
      Provision (benefit) for income taxes..................  (1,100)      670
                                                             -------  --------
      Net loss.............................................. $(2,628) $(18,726)
                                                             =======  ========
</TABLE>
 
   Net assets of discontinued operation held for sale at January 3, 1999, and
December 28, 1997, are as follows:
 
<TABLE>
<CAPTION>
                                                                 1998    1997
                                                                ------- -------
                                                                (In thousands)
      <S>                                                       <C>     <C>
      Current assets........................................... $ 4,449 $ 3,207
      Property and equipment...................................   1,767   1,171
      Goodwill and other intangibles...........................   3,892  12,629
      Capitalized software.....................................   1,561     225
                                                                ------- -------
          Total assets.........................................  11,669  17,232
                                                                ------- -------
      Current liabilities......................................   2,351   1,464
      Deferred income taxes....................................     322     450
      Provision for loss until disposal, less tax benefit of
       $1,100..................................................   1,900     --
                                                                ------- -------
          Total liabilities....................................   4,573   1,914
                                                                ------- -------
      Net assets of discontinued operations.................... $ 7,096 $15,318
                                                                ======= =======
</TABLE>
 
                                      36
<PAGE>
 
7. RESTRUCTURING CHARGE
 
   In the second quarter of fiscal year 1998, the Company recorded a
restructuring charge of $9,000 ($5,600 or $0.11 per share, net of income tax
benefits). The restructuring initiatives involved closing Customer Contact
Centers, reconfiguring certain administrative support facilities and reducing
the workforce by approximately 80 salaried employees. The $9,000 restructuring
charge included $4,500 for write-off of leasehold improvements and equipment,
$3,300 for employee severance costs and $1,200 for lease termination costs. As
of January 3, 1999, the amount remaining in the restructuring reserve was
$3,736, and is expected to be fully utilized by June 1999.
 
8. INCOME TAXES
 
   The provision (benefit) for income taxes for continuing operations for
fiscal years 1998, 1997 and 1996 consisted of the following:
 
<TABLE>
<CAPTION>
                                                        1998     1997    1996
                                                       -------  ------- -------
                                                           (In thousands)
      <S>                                              <C>      <C>     <C>
      Current:
        Federal....................................... $ 2,820  $ 9,840 $15,772
        State.........................................     640    1,150   2,088
                                                       -------  ------- -------
          Total current provision.....................   3,460   10,990  17,860
                                                       -------  ------- -------
      Deferred:
        Federal.......................................  (7,860)     980     571
        State.........................................    (800)     130      69
                                                       -------  ------- -------
          Total deferred provision....................  (8,660)   1,110     640
                                                       -------  ------- -------
      Total provision for income taxes................ $(5,200) $12,100 $18,500
                                                       =======  ======= =======
</TABLE>
 
   A reconciliation of the statutory Federal income tax rate to the actual
effective income tax rate for continuing operations for fiscal years 1998,
1997 and 1996 is as follows:
 
<TABLE>
<CAPTION>
                                                            1998    1997  1996
                                                            -----   ----  ----
      <S>                                                   <C>     <C>   <C>
      Statutory rate....................................... (35.0)% 35.0% 35.0%
      State taxes, net of Federal benefit and state
       credits.............................................  (0.2)   3.0   3.0
      Tax-exempt investment income.........................   --     --   (0.4)
      Non-deductible goodwill..............................  29.3    --    --
      Partnership losses in excess of book losses..........  (1.2)   --    --
      Work Opportunity Tax credit..........................  (0.5)  (1.1)  --
      Other................................................   0.5    1.1   0.1
                                                            -----   ----  ----
      Effective rate.......................................  (7.1)% 38.0% 37.7%
                                                            =====   ====  ====
</TABLE>
 
 
                                      37
<PAGE>
 
   The significant components of deferred income tax assets and liabilities
for continuing operations at January 3, 1999, and December 28, 1997, are as
follows:
 
<TABLE>
<CAPTION>
                                                               1998     1997
                                                              -------  -------
                                                              (In thousands)
<S>                                                           <C>      <C>
Deferred tax assets:
  Vacation accrual........................................... $   906  $   839
  Acquisition-related costs..................................   4,703      --
  Restructuring charge.......................................   1,699      --
  Revenue recognition........................................   1,140      --
  Allowance for doubtful accounts............................     824      181
  Purchased intangibles......................................   2,665      --
  Tax loss carryforwards.....................................   8,560      --
  Other......................................................   1,303      780
                                                              -------  -------
    Total deferred tax assets................................  21,800    1,800
                                                              -------  -------
Deferred tax liabilities:
  Excess depreciation........................................   5,130    4,662
  Change in accounting methods...............................     461    1,203
  Other......................................................     529      745
                                                              -------  -------
    Total deferred tax liabilities...........................   6,120    6,610
                                                              -------  -------
  Gross deferred tax assets (liabilities)....................  15,680   (4,810)
Valuation allowance..........................................  (8,560)     --
                                                              -------  -------
  Net deferred tax assets (liabilities)...................... $ 7,120  $(4,810)
                                                              =======  =======
</TABLE>
 
   At January 3, 1999, the Company had net operating loss carryforwards for
tax purposes of $24,460 acquired in connection with the purchase of ITI which
expire in fiscal years 2010 through 2013. For financial reporting purposes, a
valuation allowance in the amount of $8,560 has been recorded as an offset to
these deferred tax assets which can only be realized to the extent that ITI
generates sufficient future book and taxable income. There is no assurance
that ITI will generate any specific level of future book and taxable income.
Management believes that sufficient book and taxable income will be available
to realize the benefit of the remaining deferred tax assets.
 
   In connection with the initial public offering of the Company's Common
Shares on October 16, 1995, the Company and certain of its share owners
entered into a tax agreement. The agreement provides that the Company will
indemnify such share owners against additional income taxes resulting from
adjustments made to the taxable income reported by the Company as an S
corporation for the periods prior to the initial public offering, but only to
the extent those adjustments result in a decrease in income taxes otherwise
payable by the Company.
 
9. DEBT
 
   On May 20, 1998, the Company entered into a $250,000 Senior Credit Facility
("Credit Facility") with a group of lending institutions and at the same time
repaid all amounts outstanding on its prior $80,000 credit facility. On
September 8, 1998, the Credit Facility was amended, reducing the available
borrowings to $225,000. The Credit Facility consists of a $150,000 Term Loan
and a $75,000 Revolving Facility.
 
   The Company is required to make quarterly principal payments on the Term
Loan, ranging from $3,000 to $7,000 per quarter, with a final payment of
$61,000 due June 1, 2003. Proceeds from the Term Loan were used to acquire the
outstanding common stock of ITI Holdings, Inc. Borrowings under the Revolving
Facility will be used to provide working capital and fund capital
expenditures. Borrowings under the Credit Facility bear interest at a rate
based on the Company's choice of either the LIBOR index rate or the base rate
as defined in the Credit
 
                                      38
<PAGE>
 
Facility. The rate for LIBOR based borrowings is equal to the sum of the LIBOR
index rate for periods of 30, 60, 90 or 180 days plus an applicable margin of
3.0% for Term Loans. The rate for LIBOR based borrowings is equal to the sum
of the LIBOR index rate for periods of 30, 60, 90 or 180 days plus an
applicable margin of 2.5% for Revolving Loans through the end of the third
quarter of fiscal year 1999. The base rate is the greater of the prime
commercial lending rate of the agent bank or the Federal funds rate plus 1.5%
for Term Loans and through the end of the third quarter of fiscal year 1999,
1.0% for Revolving Loans. Beginning with the fourth quarter of fiscal year
1999, depending on the Company's total debt ratio, as defined in the Credit
Facility, the applicable margin for LIBOR based Revolving Loans will range
between 1.5% and 2.25% and the applicable margin for base rate Revolving Loans
will range between 0.0% and 0.75%. At January 3, 1999, the Company had no
outstanding borrowings under the Revolving Facility and $144,000 outstanding
under the Term Loan.
 
   Under the terms of the Credit Facility the Company is required to maintain
certain financial covenants. At January 3, 1999, the Company was not in
compliance with the financial covenants of the Credit Facility. On April 1,
1999, the Credit Facility was amended and waivers of default granted, and the
Company agreed to grant to the lending banks a security interest in certain
additional assets of the Company including accounts receivable, certain
intangibles and certain limited personal property. The interest rate on the
loans and commitment fees were increased, as described below, and the
Company's ability to make certain restricted payments, as defined in the
agreement, was reduced. The amendment to the Credit Facility limits the
Company to $15,000 in annual capital expenditures. Availability of up to
$35,000 of the $75,000 Revolving Facility is restricted subject to the
attainment of trailing four quarter EBITDA, as defined in the Credit Facility,
of at least $62,500. The Company is not allowed to pay dividends on its Common
Shares.
 
   The Company has entered into various interest rate agreements with one of
the parties to the Credit Facility. On May 20, 1998, the Company entered into
an interest rate swap agreement ("Swap") and an interest rate cap agreement
("Cap") to hedge a portion of the interest rate risk associated with its
floating rate debt. Under the terms of the Swap, through June 1, 2003, the
Company pays a fixed interest rate of 6.0% and receives a floating rate
payment based on the 30-day LIBOR rate. The Swap had an initial notional
amount of $100,000 and amortizes, pro rata, with principal payments on the
Term Loan. Under the terms of the Cap, through June 1, 2003, the Company will
receive payments any time the 30-day LIBOR rate exceeds 6.0%. The Cap had an
initial notional amount of $50,000 and amortizes, pro rata, with principal
payments on the Term Loan.
 
   In connection with securing the Credit Facility, the Company paid fees and
expenses of $2,031. The debt issuance costs are recorded as deferred charges
and are being amortized over the term of the Credit Facility of five years.
The amortization of deferred debt costs for fiscal year 1998 was $237.
 
   As of January 3, 1999, the carrying value of debt obligations reasonably
approximates their fair value as the stated interest rate approximates current
market rates of debt with similar terms.
 
 
                                      39
<PAGE>
 
   Long-term debt at January 3, 1999, and December 28, 1997, consisted of the
following:
 
<TABLE>
<CAPTION>
                                                                  1998    1997
                                                                -------- ------
                                                                (In thousands)
<S>                                                             <C>      <C>
Term Loan, collateralized by the common stock of ITI Holdings,
 Inc., and certain other assets, payable in quarterly
 installments ranging from $3,000 in first year to $7,000 in
 fifth year with a final payment of $61,000 due June 1, 2003,
 with an effective fixed interest rate of 6.97%...............  $144,000 $  --
Industrial Revenue Bonds, collateralized by a building,
 payable in varying monthly installments through June, 2008,
 bearing interest at 7.0%, adjustable semiannually thereafter
 to 71% of the average yield rate of U.S. Treasury Bonds with
 a floor of 7.0% (7.0% in 1998 and 1997)......................     1,239  1,323
County Development Note, payable in monthly installments
 (including interest) of $14 through January 16, 2004, bearing
 interest at 4.0%.............................................       748    --
Promissory notes, payable in varying monthly installments
 through 2002 with a weighted average interest rate of 9.0%...       342    --
Capital lease obligations, secured by related equipment,
 payable in varying monthly installments through 2002 with a
 weighted average interest rate of 8.9%.......................     2,220    742
                                                                -------- ------
    Total long-term debt......................................   148,549  2,065
Less--current maturities......................................    16,122    202
                                                                -------- ------
    Long-term debt, net.......................................  $132,427 $1,863
                                                                ======== ======
</TABLE>
 
   The principal payments of long-term debt are due as follows (in thousands):
 
<TABLE>
      <S>                                                               <C>
      2000............................................................. $ 18,461
      2001.............................................................   22,443
      2002.............................................................   26,503
      2003.............................................................   64,278
      Thereafter.......................................................      742
                                                                        --------
          Total payments............................................... $132,427
                                                                        ========
</TABLE>
 
10. COMMITMENTS AND CONTINGENCIES
 
Lease Commitments
 
   The Company leases its Customer Contact Centers and administrative offices.
Rent expense for the fiscal years 1998, 1997 and 1996 was $8,885, $5,631, and
$3,187, respectively.
 
   Minimum future rental payments at January 3, 1999, are as follows:
 
<TABLE>
<CAPTION>
                                                              Operating Capital
                                                               Leases   Leases
                                                              --------- -------
                                                               (In thousands)
      <S>                                                     <C>       <C>
      1999...................................................  $ 7,758  $1,869
      2000...................................................    4,858     178
      2001...................................................    3,477     178
      2002...................................................    2,479     178
      2003...................................................    1,718
      Thereafter.............................................    3,517
                                                               -------  ------
          Total payments.....................................  $23,807   2,403
                                                               =======
      Less--amount representing interest at an average
       effective rate of 8.9%................................              183
                                                                        ------
      Present value of net minimum rent payments.............            2,220
      Less--amounts due within one year......................            1,742
                                                                        ------
      Amounts due after one year.............................           $  478
                                                                        ======
</TABLE>
 
 
                                      40
<PAGE>
 
   At January 3, 1999, and December 28, 1997, the gross cost of equipment
capitalized under capital lease obligations was $4,622 and $742, respectively.
 
Legal Proceedings
 
   The Company, certain of its officers and directors and the lead
underwriters of certain public offerings of the Company's securities have been
named as defendants in three purported class action lawsuits filed in federal
district court for the Southern District of New York in December 1997 and
January 1998. The lawsuits were consolidated in April 1998 into one lawsuit.
The lawsuit alleges violations of the federal securities laws in connection
with the Company's November 1996 Prospectus and other public statements which
are alleged to have omitted certain disclosures with respect to the Company's
agreement with a large parcel delivery client. The complaint as amended seeks,
among other things, unspecified damages and an award of attorney's fees, costs
and expenses. The Company filed a motion to dismiss the lawsuit on September
10, 1998, which is pending. The Company denies all allegations of wrongdoing
and continues to believe that it has meritorious defenses.
 
   Additionally, the Company is subject to occasional lawsuits, investigations
and claims arising out of the normal conduct of its business. Management does
not believe the outcome of any pending claims will have a material adverse
impact on the Company's consolidated financial position.
 
Training Bonds
 
   At January 3, 1999, and December 28, 1997, the Company had guaranteed the
repayment of approximately $1,435 and $1,807, respectively, of the remaining
outstanding community college bond obligations, which were issued in
connection with various job-training agreements. At January 3, 1999, the
Company estimates that the deposits made into escrow will be adequate to cover
the cost of the maturing bonds.
 
11. SHARE OWNERS' EQUITY
 
   At December 31, 1995, the Company had accrued distributions of $2,809,
based upon the undistributed taxable income attributable to the Company's tax
status as an S Corporation prior to the initial public offering on October 16,
1995. These distributions were paid in fiscal year 1996 to the Company's S
Corporation share owners of record prior to its initial public offering when
the Company finalized its corporate income tax returns.
 
   On May 15, 1996, the Company completed a 2-for-1 stock split in the form of
a stock dividend. All per share information included in these financial
statements has been adjusted to reflect this split retroactively.
 
   On August 31, 1998, the Board of Directors authorized the Company to
repurchase, from time to time at management's discretion, up to 2,500,000
shares of its outstanding Common Shares at market prices. At January 3, 1999,
the Company had repurchased 1,609,000 shares at an average price of $3.50 per
share.
 
12. EQUITY INSTRUMENTS
 
Stock Options
 
   The Company has granted options to purchase Common Shares under several
plans. In 1995, the Company adopted an Incentive Stock Plan and a Nonemployee
Director Stock Option Plan. Officers, key employees and nonemployee
consultants may be granted nonqualified stock options, incentive stock
options, stock appreciation rights, performance shares and stock awards under
the Incentive Stock Plan. A committee of the Board of Directors administers
the Incentive Stock Plan. The Committee is authorized to determine the key
employees to whom, and the times at which, the options and other benefits are
to be granted; the number of shares subject to each option; the applicable
vesting schedule and the exercise price, provided that the exercise price may
not be less than 100% and 85% of the fair market value of the Common Shares at
the date of grant for incentive stock options and non-qualified stock options,
respectively. The Nonemployee Director Stock Option Plan provides for annual
grants of non-qualified stock options to each non-affiliated director of the
Company. The options will allow such directors to purchase 5,000 Common Shares
at an amount equal to the fair market value of the Common Shares on the date
of grant. These options vest equally over a three-year period. Options under
both
 
                                      41
<PAGE>
 
plans expire at periods between 5 and 15 years after date of grant. As of
January 3, 1999, December 28, 1997, and December 29, 1996 the Company had
5,915,034 Common Shares available for grant or purchase in connection with the
exercise of stock options or purchases under the Company's employee stock
purchase plan.
 
   On May 26, 1995, the Company granted an officer an option to purchase
565,034 Common Shares at an aggregate price of $1,765 with an average exercise
price of $3.12 per share. The option vests 20% on May 31 of each year through
2000 and has a term of 10 years. The weighted average fair value of this
option at the date of grant was $1.83 per share, based upon the assumptions
described below using the Black-Scholes option pricing model. At January 3,
1999, 339,020 of these options were vested.
 
   Stock option activity under the Company's Incentive and Nonemployee
Director stock option plans for fiscal years 1998, 1997 and 1996 is as
follows:
 
<TABLE>
<CAPTION>
                                                                       Weighted
                                                                       Average
                                                                       Exercise
Description                                    Shares     Price Range   Price
-----------                                  ----------  ------------- --------
<S>                                          <C>         <C>           <C>
Outstanding as of December 31, 1995.........  1,342,784  $6.31-$ 15.44  $ 6.46
  Granted...................................  1,185,711  $22.43-$51.75  $28.70
  Exercised.................................   (273,558) $6.31-$ 28.63  $ 6.79
  Canceled..................................   (228,667) $6.31-$ 42.88  $12.86
                                             ----------
Outstanding as of December 29, 1996.........  2,026,270  $6.31-$ 51.75  $18.79
 
  Granted...................................  1,872,474  $0.97-$ 19.31  $14.69
  Exercised.................................   (228,232) $0.97-$ 38.13  $13.69
  Canceled..................................   (720,715) $6.31-$ 51.75  $18.68
                                             ----------
Outstanding as of December 28, 1997.........  2,949,797  $0.97-$ 38.13  $13.05
 
  Granted...................................  3,687,759  $3.44-$ 14.06  $ 9.06
  Exercised.................................    (57,679) $0.97-$ 13.19  $ 5.62
  Canceled.................................. (1,756,410) $0.97-$ 32.25  $13.51
                                             ----------
Outstanding as of January 3, 1999...........  4,823,467  $0.97-$ 38.13  $ 7.12
                                             ==========  =============  ======
Stock options exercisable at January 3,
 1999.......................................    868,549                 $ 7.46
                                             ==========                 ======
</TABLE>
 
   The average remaining life of the options outstanding at January 3, 1999,
was 8.9 years. The fair value of each option is estimated on the date of grant
based on the Black-Scholes option pricing model assuming, among other things,
no dividend yield, a risk-free interest rate of 6.5%, expected volatility of
70% and an expected life of 7.5 years to 10 years.
 
   The Company applies APB No. 25 in accounting for the stock option program
above. No compensation expense has been recognized for stock options as the
option price equals or exceeds the fair market value at date of grant.
 
   During fiscal years 1997 and 1998, the Company's Board of Directors, on the
recommendation of the Compensation Committee, in order to preserve an economic
incentive for continued commitment of the Company's success, on three
occasions authorized repricing of certain of its outstanding stock options
having an exercise price in excess of the then current market value. On
January 15, 1997, all options then held by employees with an exercise price in
excess of the then current market value were repriced to have an exercise
price of $32.25 per share. On May 20, 1997, all options held by employees,
other than the Company's President, with an exercise price in excess of the
then current market value were repriced. Those options granted pursuant to the
Company's Compensation, Performance, Responsibility Incentive Plan were
repriced to have an exercise price of $16.75 per share, and the vesting period
was extended from two years to three years. Those options that were awarded to
senior officers of the Company other than pursuant to the Compensation,
Performance, Responsibility Incentive Plan were canceled and replaced with new
options having an exercise price of $16.75
 
                                      42
<PAGE>
 
per share, vesting of these options was changed from 20% per year over five
years to one third at the end of each of years three, four and five of a five
year vesting period. All other options held by employees other than the senior
officers were repriced to have an exercise price of $16.75 per share. On
August 5, 1998, all options held by employees with an exercise price in excess
of the then current market value were repriced, other than those held by the
Company's Chief Executive Officer, President and certain other members of
senior management. Employees at the senior vice president level had their
options repriced to have an exercise price of $8.50 per share. All other
employees had their options repriced to have an exercise price of $6.50 per
share. After repricing, 4,264,843 options are priced between $0.97 and $8.50
per share. Options for 558,624 shares which were not repriced range in price
from $9.50 and $38.13 per share.
 
   Pro forma results of operations for fiscal years 1998, 1997 and 1996 which
reflect the adjustment to compensation expense to account for stock options in
accordance with SFAS No. 123 is as follows:
 
<TABLE>
<CAPTION>
                                                       1998     1997     1996
                                                     --------  -------  -------
                                                      (In thousands, except
                                                         per share data)
<S>                                                  <C>       <C>      <C>
Net income (loss) as reported....................... $(79,320) $(1,217) $30,550
Less--compensation expense on stock options, net of
 income tax benefit.................................   12,320    5,500      450
                                                     --------  -------  -------
Pro forma net income (loss)......................... $(91,640) $(6,717) $30,100
                                                     ========  =======  =======
Basic income (loss) per share:
  Pro forma continuing operations................... $  (1.66) $  0.25  $  0.65
  Discontinued operations...........................    (0.23)   (0.39)     --
                                                     --------  -------  -------
  Pro forma net income (loss)....................... $  (1.89) $ (0.14) $  0.65
                                                     ========  =======  =======
Diluted income (loss) per share:
  Pro forma continuing operations................... $  (1.66) $  0.25  $  0.63
  Discontinued operations...........................    (0.23)   (0.39)     --
                                                     --------  -------  -------
  Pro forma net income (loss)....................... $  (1.89) $ (0.14) $  0.63
                                                     ========  =======  =======
</TABLE>
 
   The pro forma disclosure is not likely to be indicative of pro forma
results of operations which may be expected in future years because of the
fact that options vest over several years, compensation expense is recognized
as the options vest and additional awards may also be granted.
 
Stock Purchase Warrants
 
   On March 10, 1998, the Company entered into a Sales Agreement with a client
and issued 75,000 stock purchase warrants at an exercise price of $14.25 per
share in exchange for services to be performed. Each warrant represents the
right to purchase one share of the Company's Common Shares at the exercise
price. Warrants representing 35,000 shares vested in fiscal year 1998 with the
balance vesting 10,000 shares per year in each of the next four years,
provided the client achieves certain revenue goals. The warrants became
exercisable on March 10, 1998, and expire on March 9, 2007. The estimated fair
value of the warrants on the date issued was $7.14 per share using the Black-
Scholes option pricing model, and assumptions similar to those used for
valuing the Company's stock options described above. The Company recorded $250
in selling expense in fiscal year 1998 for warrants which vested during the
year.
 
13. BENEFIT PLANS
 
   In October 1995, the Company adopted a 401(k) savings plan. Employees,
meeting certain eligibility requirements, as defined, may contribute up to 15%
of pretax gross wages, subject to certain restrictions. The Company makes
matching contributions of 25% of the first 6% of employee wages contributed to
the plan. Company matching contributions vest 20% per year over a five-year
period. For fiscal years 1998, 1997 and 1996, the Company made matching
contributions to the plan of $270, $250, and $102, respectively.
 
                                      43
<PAGE>
 
   In fiscal year 1996, share owners of the Company adopted an employee stock
purchase plan. The plan is administered by the compensation committee and
permits eligible employees to purchase an aggregate of 600,000 Common Shares
at 85% of the lesser of the current market closing price of the Company's
Common Shares at the beginning or end of a quarter. Employees may annually
purchase Common Shares up to the lesser of 15% of their gross wages or $25.
During the fiscal years 1998, 1997 and 1996, 57,670, 34,693 and 12,059 Common
Shares, respectively, were issued to employees under this plan.
 
14. SEGMENT INFORMATION
 
   The Company has three reportable segments organized around operating
divisions providing separate and distinct services to clients. The operating
divisions are managed separately because the service offerings require
different technology and marketing strategies and have different operating
models and performance metrics. The Sales Solutions division provides outbound
sales support to customers and businesses, market research, targeted marketing
plan development and customer lead generation, acquisition and retention. The
Service Solutions division provides inbound customer service, direct mail
response, "help" line support and customer order processing. The Software
Development division is managed by the Company's wholly-owned subsidiary,
Paragren Technologies, Inc. ("Paragren"), which specializes in software-based
consumer marketing products that help its clients analyze market, customer and
sales data on a real-time basis. In December 1998 the Company adopted a plan
to sell Paragren. Accordingly, the operating results of Paragren have been
segregated from continuing operations and are reported separately as
discontinued operations. Information about discontinued operations is reported
in Note 5 to these consolidated financial statements.
 
   All operating net revenue and expenses are included in the results of the
business segments. Shared Services expenses which include information
technology costs and corporate selling, general and administrative expenses
are allocated to the business segments primarily based upon telephone hours,
consistent with management's financial expectations for the business segments.
Other income and expense, principally interest expense and gain and loss on
the disposal of assets, are excluded from the determination of business
segment results. Shared Services assets which include investments in
information technology and corporate assets are not allocated to the business
segments. Corporate assets include cash and cash equivalents, tax assets,
property and equipment associated with information technology and selling,
general and administrative functions, and certain prepaid expenses and
deferred charges related to risk management and corporate financing
activities. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies. There are
no intersegment sales or transfers. The Company evaluates performance based on
operating earnings of the respective operating divisions.
 
   The nature of the industry is such that the Company is dependent on several
large clients for a significant portion of its annual net revenue. The Company
had two clients, a parcel delivery client and AT&T Corporation ("AT&T"), which
individually accounted for more than 10% of the Company's net revenue for
fiscal years 1998, 1997 and 1996, respectively. For fiscal year 1998, such
clients accounted for 16% and 13% of the Company's net revenue; 1997, such
clients accounted for 26% and 17% of the Company's net revenue; and 1996, such
clients accounted for 39% and 18% of the Company's net revenue, respectively.
The Company provides both Sales Solutions and Service Solutions services for
AT&T. The parcel delivery client is the largest Service Solutions client and
accounted for 30%, 53% and 75%, of the Company's Service Solutions net revenue
in fiscal years 1998, 1997 and 1996, respectively. AT&T is the largest Sales
Solutions client and accounted for 20%, 26% and 34% of the Company's Sales
Solutions net revenue in fiscal years 1998, 1997 and 1996, respectively.
 
 
                                      44
<PAGE>
 
   Segment information for fiscal years 1998, 1997, and 1996 is as follows:
 
<TABLE>
<CAPTION>
                               Sales     Service   Software    Shared
Fiscal Years Ended           Solutions  Solutions Development Services Combined
------------------           ---------  --------- ----------- -------- --------
                                              (In thousands)
<S>                          <C>        <C>       <C>         <C>      <C>
January 3, 1999:
  Net revenue............... $199,523   $225,505    $  --      $  --   $425,028
  Operating income (loss)...  (77,315)    11,962       --         --    (65,353)
  Asset impairment charges
   (a)......................   69,700      1,472       --         --     71,172
  Restructuring charge (b)..    6,600      2,400       --         --      9,000
  Capital expenditures......    2,457     10,977       --       3,642    17,076
  Depreciation and
   amortization.............   17,450     18,020       --         --     35,470
  Identifiable assets (c)...   72,360    140,696     7,096     47,350   267,502
                             --------   --------    ------     ------  --------
December 28, 1997:
  Net revenue............... $182,874   $167,659    $  --      $  --   $350,533
  Operating income..........   23,610      9,698       --         --     33,308
  Asset impairment charge
   (d)......................    2,138      1,100       --         --      3,238
  Capital expenditures......   14,795     12,430       --      16,517    43,742
  Depreciation and
   amortization.............   13,840      7,450       --         --     21,290
  Identifiable assets (c)...   75,165     68,233    15,318     27,115   185,831
                             --------   --------    ------     ------  --------
December 29, 1996:
  Net revenue............... $141,860   $134,583    $  --      $  --   $276,443
  Operating income..........   27,466     21,613       --         --     49,079
  Capital expenditures......   25,976     27,711       --      10,730    64,417
  Depreciation and
   amortization.............    7,640      3,144       --                10,784
  Identifiable assets.......   65,154     51,358       --      24,869   141,381
                             --------   --------    ------     ------  --------
</TABLE>
--------
Notes:
a. During fiscal year 1998, the Company's Sales Solutions division recognized
   an impairment loss of $69,700 on long-lived assets acquired with the
   purchase of ITI in May 1998. In addition, the Company's Service Solutions
   division recognized an impairment loss of $1,472 on capitalized software
   abandoned by the division during the year.
b. In June 1998, the Company recorded a restructuring charge to close Customer
   Contact Centers, reconfigure certain administrative support facilities and
   reduce the salaried workforce.
c. In December 1998, the Company's management approved a plan to sell
   Paragren. The identifiable assets for Software Development represent the
   net assets of discontinued operations which are being held for sale.
d. During fiscal year 1997, the Sales and Service Solutions divisions recorded
   a provision for software impairment as a result of plans to replace
   software platforms used by the divisions with superior technologies
   acquired with the purchase of Paragren.
 
                                      45
<PAGE>
 
15. QUARTERLY DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                           First     Second     Third      Fourth      Full
   Fiscal Years Ended     Quarter   Quarter    Quarter    Quarter      Year
   ------------------     -------   --------   --------   --------   --------
                             (In thousands, except per share data)
<S>                       <C>       <C>        <C>        <C>        <C>
January 3, 1999:
  Net revenue............ $89,153   $104,885   $115,961   $115,029   $425,028
  Gross profit...........  19,365     20,079     23,360      8,245     71,049
  Income (loss) from
   continuing
   operations (a) (b)....   5,353     (2,958)     3,613    (74,300)   (68,292)
  Loss from discontinued
   operations (d)........    (436)      (630)      (190)    (9,772)   (11,028)
  Net income (loss)......   4,917     (3,588)     3,423    (84,072)   (79,320)
 
  Basic income (loss) per
   share:
    Continuing
     operations.......... $  0.11   $  (0.06)  $   0.07   $  (1.57)  $  (1.40)
    Discontinued
     operations..........   (0.01)     (0.01)       --       (0.21)     (0.23)
                          -------   --------   --------   --------   --------
    Net income (loss).... $  0.10   $  (0.07)  $   0.07   $  (1.78)  $  (1.63)
                          =======   ========   ========   ========   ========
  Diluted income (loss)
   per share:
    Continuing
     operations.......... $  0.11   $  (0.06)  $   0.07   $  (1.57)  $  (1.40)
    Discontinued
     operations..........   (0.01)     (0.01)       --       (0.21)     (0.23)
                          -------   --------   --------   --------   --------
    Net income (loss).... $  0.10   $  (0.07)  $   0.07   $  (1.78)  $  (1.63)
                          =======   ========   ========   ========   ========
December 28, 1997:
  Net revenue............ $90,318   $ 91,586   $ 77,238   $ 91,391   $350,533
  Gross profit...........  24,955     25,550     14,008     14,605     79,118
  Income (loss) from
   continuing operations
   (c)...................  8,473       8,613      2,500     (2,077)    17,509
  Loss from discontinued
   operations (d)........     --         --        (482)   (18,244)   (18,726)
  Net income (loss)......   8,473      8,613      2,018    (20,321)    (1,217)
  Basic income (loss) per
   share:
    Continuing
     operations.......... $  0.18   $   0.18   $   0.05   $  (0.05)  $   0.36
    Discontinued
     operations..........     --         --       (0.01)     (0.37)     (0.39)
                          -------   --------   --------   --------   --------
    Net income (loss).... $  0.18   $   0.18   $   0.04   $  (0.42)  $  (0.03)
                          =======   ========   ========   ========   ========
  Diluted income (loss)
   per share:
    Continuing
     operations.......... $  0.18   $   0.18   $   0.05   $  (0.05)  $   0.36
    Discontinued
     operations..........     --         --       (0.01)     (0.37)     (0.39)
                          -------   --------   --------   --------   --------
    Net income (loss).... $  0.18   $   0.18   $   0.04   $  (0.42)  $  (0.03)
                          =======   ========   ========   ========   ========
</TABLE>
 
--------
Notes:
a. Loss from continuing operations for the second quarter of fiscal year 1998
   includes a restructuring charge of $9,000. In June 1998, the Company
   recorded a restructuring charge to close Customer Contact Centers,
   reconfigure certain administrative support facilities and reduce the
   salaried workforce.
b. Loss from continuing operations in the fourth quarter of fiscal year 1998
   includes impairment losses of $69,700 on long-lived assets acquired with
   the purchase of ITI Holdings, Inc. ("ITI") in May 1998, and $1,472 on
   capitalized software abandoned by the Company during the quarter. In
   addition, the fourth quarter includes nonrecurring charges of $9,600, also
   in connection with the purchase of ITI, to provide allowances for doubtful
   accounts for financially impaired clients and accrue future
   telecommunications costs guaranteed under minimum usage contracts that can
   not be recovered from results of operations.
c. Loss from continuing operations in the fourth quarter of fiscal year 1997
   includes a provision for software impairment of $3,238 recorded as a result
   of plans to replace software platforms used by the Company with superior
   technologies being developed by Paragren Technologies, Inc. ("Paragren"),
   and a cumulative effect of accounting change of $2,200, net of income tax
   benefit of $1,349. Cumulative effect of accounting
 
                                      46
<PAGE>
 
   change reflects the adoption of EITF Bulletin No. 97-13 which requires that
   business process reengineering costs be expensed as incurred and that all
   previously capitalized and unamortized reengineering costs at November 20,
   1997, be expensed as the cumulative effect of accounting change.
d. In December 1998, the Company's management approved a plan to sell
   Paragren. The Company expects to sell Paragren in fiscal 1999. Accordingly,
   Paragren is reported as a discontinued operation, and the consolidated
   financial statements have been reclassified to segregate the net assets and
   operating results of the business. Loss from discontinued operations in the
   fourth quarter of fiscal year 1998 includes an estimated loss on disposal
   of $8,400, net of income tax benefit of $1,100. Loss from discontinued
   operations in the fourth quarter of fiscal year 1997 includes a special
   charge of $19,200 to write-off acquired in-process research and development
   acquired in connection with the purchase of Paragren in August 1997.
 
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
 
   Not applicable.
 
                                   PART III
 
Item 10. Directors and Executive Officers of the Registrant.
 
   The information required by this Item (except for the information regarding
executive officers required by Item 401 of Regulation S-K which is included in
Part I under the caption "Executive Officers of Registrant") is set forth in
the Company's Proxy Statement for the Annual Meeting of Share owners to be
held on May 18, 1999, under the caption "Election of Directors," which
information is incorporated herein by reference.
 
Item 11. Executive Compensation
 
   The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Share Owners to be held on May 18, 1999,
under the caption "Compensation of Executive Officers," which information is
incorporated herein by reference.
 
Item 12. Security Ownership of Certain Beneficial Owners and Management
 
   The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Share Owners to be held on May 18, 1999,
under the caption "Securities Beneficially Owned by Principal Share Owners and
Management," which information is incorporated hereby by reference.
 
Item 13. Certain Relationships and Related Transactions
 
   The information required by this item is set forth in the Company's Proxy
Statement for the Annual Meeting of Share Owners to be held on May 18, 1999,
under the caption "Certain Transactions" which information is incorporated
herein by reference.
 
                                    PART IV
 
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
 
(a)1. Financial Statements
 
   The following financial statements of the Company are included in Part II,
Item 8:
 
     (i) Report of Independent Public Accountants
 
     (ii) Consolidated Balance Sheets as of January 3, 1999 and December 28,
  1997
 
     (iii) Consolidated Statements of Operations for the Fiscal Years Ended
  January 3, 1999, December 28, 1997 and December 29, 1996
 
                                      47
<PAGE>
 
       (iv) Consolidated Statements of Share Owners' Equity for the Fiscal
  Years Ended January 3, 1999, December 28, 1997 and December 29, 1996
 
      (v) Consolidated Statements of Cash Flows for the Fiscal Years Ended
  January 3, 1999, December 28, 1997 and December 29, 1996
 
       (vi) Notes to Consolidated Financial Statements
 
2. Financial Statement Schedules
 
   The following financial statement schedule is submitted as part of this
report:
 
     (i) Report of Independent Public Accountants
 
     (ii) Schedule II--Valuation and Qualifying Accounts
 
    All other schedules are not submitted because they are not applicable
    or are not required under Regulation S-X or because the required
    information is included in the financial statements or notes thereto.
 
3. Exhibits
 
   The exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index hereto.
 
(b) Reports on Form 8-K
 
   The Company filed a Current Report on Form 8-K on October 21, 1998, which
disclosed its revenues and earnings for each of the thirteen weeks and thirty-
nine weeks ended September 27, 1998.
 
   The Company filed a Current Report on Form 8-K on December 22, 1998, which
disclosed that the Company anticipated that it would report results for its
fourth fiscal quarter ended December 27, 1998 which are significantly lower
than then-current analysts' earnings expectations.
 
                                      48
<PAGE>
 
                                   SIGNATURES
 
   Pursuant to the requirements of Section 13 or 15(d) 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 TeleServices, Inc.
 
                                               /s/ Theodore G. Schwartz
                                          -------------------------------------
                                                   Theodore G. Schwartz
                                            Chairman of the Board of Directors
                                                and Chief Executive Officer
 
Dated: April 5, 1999
 
   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
 
<TABLE>
<CAPTION>
             Signature                           Title                    Date
             ---------                           -----                    ----
 
 
<S>                                  <C>                           <C>
    /s/ Theodore G. Schwartz         Chairman of the Board           April 5, 1999
____________________________________ of Directors and
        Theodore G. Schwartz         Chief Executive Officer
                                     (Principal Executive
                                     Officer)
 
       /s/ Marc S. Simon             President and Director          April 5, 1999
____________________________________
           Marc S. Simon
 
     /s/ Mark O. Remissong           Chief Financial Officer         April 5, 1999
____________________________________ (Principal Financial
         Mark O. Remissong           Officer)
 
       /s/ Philip B. Wade            Vice President and              April 5, 1999
____________________________________ Controller (Principal
           Philip B. Wade            Accounting Officer)
 
     /s/ Thomas M. Collins           Director                        April 5, 1999
____________________________________
         Thomas M. Collins
 
      /s/ George D. Dalton           Director                        April 5, 1999
____________________________________
          George D. Dalton
 
      /s/ Paul G. Yovovich           Director                        April 5, 1999
____________________________________
          Paul G. Yovovich
</TABLE>
 
                                       49
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Share Owners of APAC TeleServices, Inc.:
 
   We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of APAC TeleServices, Inc. and issued
our unqualified opinion thereon dated March 22, 1999 (except with respect to
the matter discussed in Note 9 as to which the date is April 1, 1999). Our
audits were made for the purpose of forming an opinion on those statements
taken as a whole. The schedule of Valuation and Qualifying Accounts is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a
part of the basic consolidated financial statements. This schedule has been
subject to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
 
                                          Arthur Andersen LLP
 
Chicago, Illinois
April 1, 1999
 
                                      50
<PAGE>
 
                                  Schedule II
 
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)
 
<TABLE>
<CAPTION>
         Column A             Column B   Column C   Column D        Column E
         --------            ---------- ---------- -----------   --------------
                                        Additions
                                        ----------
                             Balance at Charged to
                             Beginning  Costs and  Deductions-   Balance at End
        Description          of Period   Expenses  Describe(A)     of Period
        -----------          ---------- ---------- -----------   --------------
<S>                          <C>        <C>        <C>           <C>
Allowance deducted from
 assets to which it
 applies:
Allowance for doubtful
 accounts:
Year ended December 29,
 1996......................     $240      $  120     $   --          $  360
Year ended December 28,
 1997......................      360         300         213            447
                                                        (652)(a)
                                                      (2,400)(b)
Year ended January 3, 1999.      447       3,090       2,339 (c)      4,250
Accrued Restructuring
 Charge:
Year ended January 3, 1999      $--       $9,000     $ 5,264 (d)     $3,736
</TABLE>
--------
Notes:
(a) Allowance for doubtful accounts of acquired business.
(b) Allowance for doubtful accounts provided in purchase accounting.
(c) Write-off of uncollectible accounts.
(d) Facility closure costs and severance payments for workforce reduction.
 
                                       51
<PAGE>
 
                                 Exhibit Index
 
<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
   3.1   Amended and Restated Articles of Incorporation of APAC TeleServices,
         Inc. is incorporated herein by reference to Exhibit 3.1 to APAC
         TeleServices, Inc.'s Registration Statement on Form S-3, as amended,
         Registration No. 333-14097
 
   3.2   Amended and Restated Bylaws of APAC TeleServices, Inc. as amended
         through October 21, 1998, is incorporated herein by reference to
         Exhibit 3.2 to APAC TeleServices, Inc.'s Quarterly Report on Form 10-Q
         for the quarter ended September 27, 1998
 
   4.1   Specimen Common Stock Certificate is incorporated herein by reference
         to Exhibit 4.1 to APAC TeleServices, Inc.'s Registration Statement on
         Form S-1, as amended, Registration No. 33-95638
 
 *10.1   Amended and Restated APAC TeleServices, Inc. 1995 Incentive Stock
         Plan, as amended, is incorporated herein by reference to Exhibit 99.1
         to APAC TeleServices, Inc.'s Current Report on Form 8-K dated April
         10, 1998
 
 *10.2   Amended and Restated APAC TeleServices, Inc. 1995 Nonemployee Director
         Stock Option Plan is incorporated herein by reference to Exhibit 10.2
         to APAC TeleServices, Inc.'s Registration Statement on Form S-1, as
         amended, Registration No. 33-95638
 
 *10.3   Employment Agreement with Marc S. Simon, as amended, is incorporated
         herein by reference to Exhibit 10.3 to APAC TeleServices, Inc.'s
         Registration Statement on Form S-1, as amended, Registration No. 33-
         95638
 
 *10.4   Employment Agreement with Donald B. Berryman is incorporated herein by
         reference to Exhibit 10.4 to APAC TeleServices, Inc.'s Registration
         Statement on Form S-1, as amended, Registration No. 33-95638
 
  10.5   Amended and Restated Credit Agreement dated September 8, 1998 and
         First Amendment to Agreement, are incorporated herein by reference to
         Exhibit 10 to APAC TeleServices, Inc.'s Quarterly Report on Form 10-Q
         for the quarter ended September 27, 1998
 
  10.6   Agreement with United Parcel Service General Services Inc. is
         incorporated herein by reference to Exhibit 10.6 to APAC TeleServices,
         Inc.'s Registration Statement on Form S-1, as amended, Registration
         No. 33-95638
 
  10.7   Registration Rights Agreement is incorporated herein by reference to
         Exhibit 10.7 to APAC TeleServices, Inc.'s Registration Statement on
         Form S-1, as amended, Registration No. 33-95638
 
  10.8   Tax Agreement is incorporated herein by reference to Exhibit 10.8 to
         APAC TeleServices, Inc.'s Registration Statement on Form S-1, as
         amended, Registration No. 33-95638
 
  10.9   Agreement with J.C. Penney Insurance Company, dated November 1, 1994
         is incorporated herein by reference to Exhibit 10.9 to APAC
         TeleServices, Inc.'s Registration Statement on Form S-1, as amended,
         Registration No. 33-95638
 
 *10.10  Amendment No. 1 to Amended and Restated APAC TeleServices, Inc. 1995
         Incentive Stock Plan is incorporated herein by reference to Exhibit
         10.11 to APAC TeleServices, Inc.'s Registration Statement on Form S-1,
         as amended, Registration No. 33-95638
 
  21.1   Subsidiaries of the Registrant (filed herewith)
 
  23.1   Consent of Arthur Andersen LLP (filed herewith)
 
  27.1   Financial Data Schedule (filed herewith)
</TABLE>
--------
*Indicates management employment contracts or compensatory plans or
   arrangements.
 
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