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                                 UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                            ------------------------
                                   FORM 10-K

(MARK ONE)

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<C>        <S>

   / /     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
           OF THE SECURITIES EXCHANGE ACT OF 1934
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                   FOR THE FISCAL YEAR ENDED JANUARY 2, 2000
                                       OR

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<C>        <S>
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
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        FOR THE TRANSITION PERIOD FROM ______________ TO ______________

                        COMMISSION FILE NUMBER: 0-26786

                          APAC CUSTOMER SERVICES, INC.

             (Exact name of registrant as specified in its charter)

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<S>                                   <C>
           ILLINOIS                              36-2777140
 (State or other jurisdiction                 (I.R.S. Employer
     of Incorporation or                     Identification No.)
        organization)
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         SIX PARKWAY NORTH CENTER, SUITE 400, 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:

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                                                             NAMES OF EACH EXCHANGE
              TITLE OF EACH CLASS                              ON WHICH REGISTERED
              -------------------                            ----------------------
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                     None                                             None
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    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.

                              Yes / /      No /X/

    As of MARCH 16, 2000, 49,370,371 Common Shares were outstanding.

    The aggregate market value of the Registrant's Common Shares held by
non-affiliates on MARCH 16, 2000 WAS APPROXIMATELY $382,620,375

                      DOCUMENTS INCORPORATED BY REFERENCE

    Certain portions of the Registrant's Proxy Statement for Annual Meeting
  of Share Owners to be held on JUNE 9, 2000 are incorporated by reference in
                                    Part III

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                                     PART I

ITEM 1. BUSINESS.

GENERAL

    APAC Customer Services, Inc. and its Subsidiaries ("APAC" or the "Company")
provides high volume telephone and Internet-based customer relationship
management ("CRM") sales, marketing and solutions for corporate clients
operating in the business and consumer products, parcel delivery, financial
services, insurance, retail, health care and pharmaceuticals, and
telecommunications industries throughout the United States. The Company's client
base is mainly comprised of large companies with the need for cost-effective
means of acquiring and servicing current and prospective customers. In
December 1999, the Company formed CustomerAssistance.com, Inc.
("CustomerAssistance.com") which will provide electronic customer relationship
management products and services for Fortune 1000 and "dot com" companies. The
Company operates and manages approximately 11,000 workstations in 58 Customer
Interaction Centers. The Customer Interaction Centers are managed centrally
through the application of extensive telecommunications and computer technology
to promote the consistent delivery of quality service. In fiscal 1999 the
Company has had two primary service offerings: Customer Acquisition and Customer
Care. For 2000 service offerings have been expanded to include the service
offerings of CustomerAssistance.com.

CUSTOMER CARE

    SERVICES.  Customer Care provides customer relationship management solutions
applications supporting inbound customer care, customer retention, direct mail
response, integrated voice response, "help" line support, and customer order
processing. Certain Customer Care 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. Customer Care generated $264.9 million of net revenue,
or 62.0% of the Company's total net revenue, in fiscal 1999, an increase of
$39.4 million or 17.5% when compared to fiscal 1998. APAC believes significant
opportunities to generate new business in Customer Care exist as more companies
move to outsource all or a portion of their marketing and customer service
functions.

    Customer Care 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.  Customer Care directs its business development efforts primarily
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 customer service operations. Customer Care
provided services to 41 clients in fiscal 1999. The Company's significant
relationships include a large parcel delivery client, and two major
telecommunications clients, which accounted for 23.4%, 14.8% and 4.3%,
respectively, of the Company's Customer Care net revenue and 26.4% of the
Company's consolidated net revenue in fiscal 1999.

    Customer Care 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 Customer Care 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

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of inbound calls. Except for the parcel delivery client, no Customer Care client
of the Company accounted for more than ten percent of the Company's total net
revenue in fiscal years 1999, 1998 or 1997.

CUSTOMER ACQUISITION

    SERVICES.  Customer Acquisition provides sales support to consumers and
businesses, market research, targeted marketing plan development and customer
lead generation, acquisition and retention. Customer Acquisition generated
$162.7 million of net revenue, or 38.0% of the Company's total net revenue, in
fiscal 1999, a decrease of $36.8 million or 18.5% compared to fiscal 1998. The
decrease was primarily due to the consolidation of certain large clients and the
loss of other clients previously associated with ITI Marketing Services, Inc.
which the Company acquired in 1998, thereby substantially reducing out bound
telemarketing call volumes available to Customer Acquisition. The decrease also
reflects the Company's current strategy to manage call center capacity with
demand for customer acquisition services.

    Customer Acquisition activities typically begin when APAC Customer Services
calls a consumer or business prospect targeted by one of its clients to offer
the client's products or services. Prospect information, which APAC Customer
Services 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 Customer Acquisition Customer
Interaction 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 Customer Services 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. Customer Acquisition
currently specializes in three industries; Telecommunications, Insurance and
Financial Services which provided services to 49 clients in fiscal 1999.
Customer Acquisition 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 Customer Acquisition
contracts. Except for one telecommunications client, no Customer Acquisition
client accounted for more than ten percent of the Company's total net revenue in
fiscal years 1998 or 1997. No Customer Acquisition client accounted for more
than 10% of the Company's total net revenue in 1999.

CUSTOMERASSISTANCE.COM

    In December 1999, the Company formed a wholly-owned subsidiary,
CustomerAssistance.com, which has entered the e-CRM marketplace with its
e-Commerce customer relationship management platform: e.PAC(sm). Based on open
industry standards, e.PAC(sm) is a multi-channel platform that enables users to
integrate a suite of Internet-based interaction capabilities such as
collaboration, form sharing, web chat and voice over IP with traditional
customer care functions. CustomerAssistance.com will provide services for
Fortune 1000 and "dot com" companies.

    The e.PAC(sm) platform allows the customer to select its preferred method of
interaction such as online chat or e-mail, or request an immediate or scheduled
call back from a service agent. To further assist customers, the e.PAC(sm)
platform allows service agents to share forms, share browser control, provide
split screen comparison functionality and even "push" web pages to a customer
for their review. This real-time synchronization of customer and agent screens
facilitates clear communication and enhances overall

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customer satisfaction. Additional features include automated e-mail response and
an "agent meet me" capability, which allows customers to call an agent and ask
him or her to meet them online.

TECHNOLOGY RESOURCES

    APAC Customer Services has successfully integrated call management and
database marketing and management information systems within its Customer
Interaction Centers. The technologies used by APAC Customer Services incorporate
both "off the shelf" software components as well as APAC's own Advanced
Technology Platform ("ATP") software. These technologies allow APAC to provide
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. The technologies used by APAC Customer Services
enables sales and service representatives to focus on assisting the customer,
rather than on 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 Interaction
Center's systems to the Company's operational headquarters. This open
architecture system provides APAC Customer Services with the flexibility to
integrate its client server and mid-range systems with the variety of systems
maintained by its clients. By integrating with its clients' systems, APAC
Customer Services 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.

SALES AND MARKETING

    The Company seeks to differentiate itself from other providers of customer
relationship management 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 Customer Services 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.

HUMAN RESOURCES

    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

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personnel. APAC Customer Services generally locates Customer Interaction 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 Interaction 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 the nature of the services
being offered for the client to which the representative will be assigned. 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.

    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. The 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 12,500 full and 5,300 part-time employees for
a total of 17,800 employees on March 16, 2000. 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 customer acquisition and customer
service operations 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 Internet and other new
technologies are creating new and competing forms of marketing and data
collection, such as interactive television and targeted electronic mail and
advertisements, which, if successful, may cause

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new competitors to enter the field and increase competition. 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 prohibits the use of certain
automated sequential telephone-dialers and their ability to call certain
numbers. In addition, the FCC's 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.

    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 a certain period of time. 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 Customer Services generally
undertakes to indemnify its clients against claims and expenses resulting from
any failure by APAC Customer Services 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 Customer Services. The Company has never been held responsible
for regulatory noncompliance by a client. APAC Customer Services 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 leases approximately 70,000 square feet of office space in
Deerfield, Illinois. The term of this lease expires in July 2008. This space
houses corporate headquarters, business unit management and the operations of
CustomerAssistance.com. In addition, the Company has additional facilities in
Deerfield, Illinois of approximately 16,000 square feet of office space. The
term of this lease expires in April 2001. The Company also leases approximately
89,000 square feet of office space in Cedar Rapids, Iowa. This

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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 lease for the Omaha office space expires
in August 2007. Approximately 58,000 square feet of this space has already been
sublet and the Company intends to sublet the remainder in 2000.

    The Company also leases the facilities listed below, except for the
Erlanger, Newport News, Fort Worth and High Point facilities which are not
leased by the Company, but are managed, staffed and operated by the Company on
behalf of facilities management clients. As of January 2, 2000, the Company
operated the following Customer Interaction Centers and workstations:

                    CUSTOMER ACQUISITION INTERACTION CENTERS

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                                                                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
Ottumwa, Iowa...............................................  November, 1993           144
Decorah, Iowa...............................................  January, 1994             80
Marshalltown, Iowa (2)......................................  February, 1994            80
Fort Madison, Iowa..........................................  March, 1994               96
Keokuk, Iowa................................................  May, 1994                 80
Mason City, Iowa............................................  December, 1994            80
Knoxville, Iowa.............................................  March, 1995               80
Muscatine, Iowa.............................................  April, 1995               96
Spencer, Iowa...............................................  May, 1995                 64
Davenport, Iowa.............................................  February, 1996            96
Maquoketa, Iowa.............................................  February, 1996            80
Kewanee, Illinois...........................................  February, 1996            96
Quincy, Illinois............................................  February, 1996            96
Freeport, Illinois..........................................  March, 1996               96
Rock Falls, Illinois........................................  March, 1996               96
Waverly, Iowa...............................................  March, 1996               64
Jacksonville, Illinois......................................  April, 1996               96
Canton, Ohio................................................  May, 1996                 96
Lincoln, Illinois...........................................  May, 1996                 96
Pekin, Illinois.............................................  May, 1996                 88
Peoria, Illinois............................................  May, 1996                160
Galesburg, Illinois.........................................  June, 1996                96
Mt. Vernon, Illinois........................................  June, 1996                96
Alton, Illinois.............................................  December, 1996           152
Marion, Illinois............................................  December, 1996           192
Granite City, Illinois......................................  December, 1996            96
Freemont, Ohio..............................................  March, 1997               96
Aberdeen, South Dakota......................................  May, 1998                 88
Bellevue, Nebraska (2)......................................  May, 1998                120
Grand Island, Nebraska......................................  May, 1998                 88
</TABLE>

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                                                                DATE OPENED        NUMBER OF
LOCATION                                                        OR ACQUIRED     WORKSTATIONS(1)
--------                                                      ---------------   ---------------
<S>                                                           <C>               <C>
Kearney, Nebraska (2).......................................  May, 1998                 88
Lawton, Oklahoma............................................  May, 1998                120
Newton, Kansas..............................................  May, 1998                 52
Pawnee, Oklahoma............................................  May, 1998                 96
Salina, Kansas..............................................  May, 1998                 96
St. Joseph, Missouri........................................  May, 1998                 96
Westminster, Oklahoma.......................................  May, 1998                120
                                                                                     -----
    Total Customer Acquisition..............................                         4,148
                                                                                     =====
</TABLE>

                       CUSTOMER CARE INTERACTION CENTERS

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<CAPTION>
                                                                                 NUMBER OF
                                                                DATE OPENED     WORKSTATIONS
LOCATION                                                        OR ACQUIRED         (1)
--------                                                      ---------------   ------------
<S>                                                           <C>               <C>
Cedar Rapids, Iowa--3rd Avenue..............................  August, 1994           203
Cedar Rapids, Iowa--Park Place I............................  January, 1995          120
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
Waterloo, Iowa..............................................  October 1996           304
Corpus Christi, Texas.......................................  October, 1996          829
Columbia, South Carolina....................................  December, 1996         577
LaCrosse, Wisconsin.........................................  May, 1997              350
Oklahoma City, Oklahoma.....................................  May, 1998              386
Green Bay, Wisconsin........................................  May, 1998              427
Omaha, Nebraska.............................................  May, 1998              323
Davenport, Iowa.............................................  September, 1998        468
Utica, New York.............................................  December 1998          400
Erlanger, Kentucky..........................................  October, 1999          150
                                                                                   -----
    Total Customer Care.....................................                       6,718
                                                                                   =====
</TABLE>

------------------------

(1) During fiscal 1999, the Company closed 19 Customer Acquisition Interaction
    Centers and ended Customer Acquisition activity at one blended center. Some
    of the workstations at these centers were relocated resulting in the net
    elimination of 1,843 workstations in the Customer Acquisition business. Also
    during fiscal 1999, the Company closed one Customer Care Interaction Center,
    opened an additional center, and changed the number of workstations at
    several others for a net decrease of 11 workstations in the Customer Care
    business. The leases of the Customer Interaction Centers have terms ranging
    from two to twelve years and typically contain renewal options and early
    termination buyouts. Customer Acquisition centers are generally leased for
    periods of two to three years while Customer Care 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.

(2) During the first quarter of 2000 this facility was closed as part of the
    Company's continuing efforts to maximize utilization.

    The Company's profitability is influenced significantly by its Customer
Interaction Center capacity utilization. The Company's Customer Acquisition
operations tend to be utilized primarily in the early evening hours on weekdays
and to a limited extent on weekends. The Company's Customer Care operations tend
to be utilized primarily during normal business hours on weekdays and to a
limited extent

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on weekends. In an attempt to improve profitability and maximize utilization the
Company monitors its Customer Interaction Centers with the intention of
achieving higher levels of fixed cost absorption. The Company carefully plans
the development and opening of new Customer Interaction 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 Interaction Center capacity may be
required in the future. In the fourth quarter of 1999, the Company opened its
first CustomerAssistance.com Customer Interaction Center in Deerfield, Illinois
which includes 60 workstations.

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 instituted by various
persons who purchased the Company's Common Shares in such offerings. 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. On or about
November 15, 1999, the court denied the motion to dismiss. Discovery is
proceeding in this action. The Company denies all allegations of wrongdoing and
continues to believe that it has meritorious defenses.

    The Company is engaged in two arbitration proceedings with the former owner
of Paragen Technologies, Inc. In the first proceeding, the former owner alleged
that the Company breached representations and warranties made pursuant to the
related merger agreement and claimed compensation totaling $24.9 million. APAC
Customer Services will vigorously defend these claims. This arbitration is
scheduled for April 2000. APAC Customer Services asserted certain counterclaims
against the same former owner which are now the subject of a separate
arbitration. The counterclaims allege that the former owner violated the
non-compete and non-solicitation provisions of his employment agreement, as well
as the provision that required him to devote his best efforts to Paragen
Technologies on a full-time basis. The second arbitration is scheduled for
June 2000. In January 2000, APAC Customer Services filed a lawsuit against the
former owner of Paragen Technologies and another individual alleging among other
things, breach of fiduciary duty and inducement of breach of fiduciary duty,
tortious interference with business expectancy and with contractual relations,
and trade secret violations. The lawsuit is in the initial stages, and no
discovery has been taken.

    On January 5, 2000, APAC, Inc. filed suit against the Company in the U.S.
District Court for the Northern District of Georgia (Atlanta Division) alleging
that the Company's use of "APAC" in the Company's name infringes a trademark of
APAC, Inc. The suit asserts violations of the federal Lanham Act and various
Georgia state statues, as well as a breach by the Company of an agreement
between APAC, Inc. and the Company. The Company has answered the complaint and
intends to defend itself vigorously.

    Additionally, the Company is subject to occasional lawsuits, governmental
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.

    Although the Company does not believe that these proceedings will result in
a material adverse effect on its consolidated financial position, no assurance
to that effect can be given.

                                       9
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    None

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.................     46      Chairman and Director
Peter M. Leger.......................     49      President, Chief Executive Officer and Director
Marc S. Simon........................     51      Executive Vice President, Customer Acquisition
                                                  and Director
Donald B. Berryman...................     42      Senior Vice President, Sales
John R. Bowden.......................     45      Senior Vice President, Customer Care [Client
                                                  Facilities Management]
John L. Gray.........................     42      Senior Vice President, Customer Assistance.com
Gary S. Holter.......................     45      Senior Vice President and Chief Financial Officer
Warren N. Rothman....................     54      Senior Vice President, Human Resources
Steven A. Shlensky...................     38      Senior Vice President, Strategic Planning and
                                                  Corporate Development
L. Clark Sisson......................     38      Senior Vice President, Customer Care
Linda R. Witte.......................     47      Senior Vice President, General Counsel and Secretary
Carlos E. Galarce....................     39      Vice President, Chief Information Officer
</TABLE>

    Theodore G. Schwartz has served as the Company's Chairman since its
formation in May 1973.

    Peter M. Leger joined the Company in October 1999 as President and Chief
Operating Officer. In January 2000 Mr. Leger was appointed Chief Executive
Officer. From October 1998 through September 1999 Mr. Leger was President and
Chief Executive Officer of Credit Management Solutions, Inc. Prior to
October 1998 Mr. Leger served in various capacities with Automatic Data
Processing, most recently as President of ADP Dealer Services Group.

    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 and its predecessors in Chicago, Illinois
for more than 20 years. Mr. Simon is a certified public accountant.

    Donald B. Berryman joined the Company as Vice President and General
Manager-Service Solutions in March 1993 and became Senior Vice President-Service
Solutions in October 1995. Mr Berryman became Senior Vice President, Sales in
December 1998.

    John R. Bowden joined the Company as Senior Vice President, Customer Care
[Client Facilities Management] in October 1999. From January 1996 to May 1999
Mr. Bowden was Vice President--Consumer Sales and Customer Service for
Ameritech, Inc. Prior to January 1996 he held the office of Vice President for
LCI, Inc. and MCI Communications, Inc.

    John L. Gray joined the Company as Senior Vice President, Customer
Assistance.com in January 2000. From October 1995 to January 2000, Mr. Gray held
the positions of Senior Vice President, Marketing and E-Commerce, Senior Vice
President, Global R & D and Marketing and Vice President, Marketing and Product
Management, respectively, for Automatic Data Processing, Inc. Prior to
October 1995 Mr. Gray was Vice President, Retail Product Marketing & Management
for AT & T Global Solutions.

                                       10
<PAGE>
    Gary S. Holter joined the Company as Senior Vice President and Chief
Financial Officer in August 1999. From January 1997 to February 1999 Mr. Holter
was Chief Financial Officer of GeoLogistics Corporation. From February 1995
through December 1996 Mr. Holter was Executive Vice President and Chief
Financial Officer of The Bekins Company, a wholly owned subsidiary of
GeoLogistics Corporation. Prior to February 1995 Mr. Holter served as Executive
Vice President and Chief Operating Officer of Knapp Shoes, Inc. Mr. Holter is a
certified public accountant.

    Warren N. Rothman joined the company as Senior Vice President of Human
Resources in July 1999. From September 1996 through November 1998 Mr. Rothman
was Vice President of Human Resources for Ameritech: Consumer Services
(residential) Division. Prior to September 1996 Mr. Rothman served in Human
Resources for Federated Department Stores.

    Steven A. Shlensky joined the Company in November 1999 as Senior Vice
President, Strategic Planning and Corporate Development. From March 1996 through
October 1999 Mr. Shlensky served as Managing Director of TCS Group, L.L.C., the
private investment office of Theodore G. Schwartz. Prior to March 1996
Mr. Shlensky was a Senior Tax Manager for Arthur Andersen, LLP.

    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. Mr. Sisson became Senior Vice President, Customer Care in
December 1999.

    Linda R. Witte joined the Company as Vice President, General Counsel and
Secretary in June 1999 and was promoted to Senior Vice President in March 2000.
From July 1997 to May 1999 Ms. Witte was Senior Vice President, General Counsel
and Secretary of Beloit Corporation, an 80% owned subsidiary of Harnischfeger
Industries, Inc. Prior to that Ms. Witte was Vice President and General Counsel
of Wheelabrator Water Technologies, Inc. a division of Waste Management, Inc.
Before joining Waste Management, Ms. Witte was a partner in Jenner & Block, a
national law firm headquartered in Chicago, IL.

    Carlos E. Galarce joined the Company as Vice President and Chief Information
Officer in November 1999. From October 1997 through October 1999 Mr. Galarce was
Director- Information Technology for Sears, Roebuck, and Co. Home Services
Division. From October 1995 through September 1997 Mr. Galarce was Division Vice
President for Automatic Data Processing, Dealer Service Division. Prior to
October 1995 Mr. Galarce was Director of Development--Auburn Hills Region,
Automatic Data Processing.

                                       11
<PAGE>
                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHARE OWNER MATTERS

    The Company's Common Stock is 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 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

Fiscal 1999:
  First Quarter.............................................   $ 4.84     $ 2.53
  Second Quarter............................................   $ 4.00     $ 2.66
  Third Quarter.............................................   $ 4.63     $ 2.19
  Fourth Quarter............................................   $14.06     $ 3.63
</TABLE>

    As of March 16, 2000 there were 272 holders of record of the Common Shares.
The Company did not pay any dividends on its Common Shares in fiscal years 1999
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 the Board of Directors considers appropriate.

                                       12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

                          APAC CUSTOMER SERVICES, INC.
                            SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                               FOR THE FISCAL YEARS ENDED (1)
                                             ------------------------------------------------------------------
                                                                            DECEMBER     DECEMBER     DECEMBER
                                              JANUARY 2,     JANUARY 3,       28,          29,          31,
                                                 2000           1999        1997 (2)       1996         1995
                                             ------------   ------------   ----------   ----------   ----------
                                               (IN THOUSANDS, EXCEPT PER SHARE AND SELECTED STATISTICAL DATA)
<S>                                          <C>            <C>            <C>          <C>          <C>
OPERATING DATA:
  Customer Acquisition division............    $162,702       $199,523      $182,874     $141,860      $72,692
  Customer Care division...................     264,943        225,505       167,659      134,583       28,975
                                               --------       --------      --------     --------      -------
    Total net revenue......................     427,645        425,028       350,533      276,443      101,667
  Cost of services (9).....................     347,005        353,979       268,177      193,967       71,982
  Selling, general and administrative
    expenses...............................      50,445         56,230        45,810       33,397       16,398
  Asset impairment charges (2).............          --         71,172         3,238           --           --
  Restructuring charges (3)................       7,600          9,000            --           --           --
                                               --------       --------      --------     --------      -------
    Operating income (loss)................      22,595        (65,353)       33,308       49,079       13,287
  Interest expense, net....................      13,365          8,139         1,499           29          804
  Income taxes (benefit)...................       3,580         (5,200)       12,100       18,500        4,330
                                               --------       --------      --------     --------      -------
  Income (loss) from continuing
    operations.............................       5,650        (68,292)       19,709       30,550        8,153
  Loss from discontinued operations (4)....          --        (11,028)      (18,726)          --           --
  Cumulative effect of accounting change
    (5)....................................          --             --        (2,200)          --           --
                                               --------       --------      --------     --------      -------
  Net income (loss) (6)....................    $  5,650       $(79,320)     $ (1,217)    $ 30,550      $ 8,153
                                               ========       ========      ========     ========      =======
  Pro forma income (unaudited):
Net income as reported.....................                                                            $ 8,153
    Pro forma adjustment for income
      taxes (6)............................                                                                670
                                                                                                       -------
    Pro forma net income...................                                                            $ 7,483
                                                                                                       =======
  Net income (loss) per share (pro forma
    for fiscal 1995):
  Basic:
    Continuing operations..................    $   0.12       $  (1.40)     $   0.36     $   0.66      $  0.19
    Discontinued operations................          --          (0.23)        (0.39)          --           --
                                               --------       --------      --------     --------      -------
    Net Income (loss)......................    $   0.12       $  (1.63)     $  (0.03)    $   0.66      $  0.19
                                               ========       ========      ========     ========      =======
  Diluted:
    Continuing operations..................    $   0.12       $  (1.40)     $   0.36     $   0.64      $  0.18
    Discontinued operations................          --          (0.23)        (0.39)          --           --
                                               --------       --------      --------     --------      -------
    Net Income (loss)......................    $   0.12       $  (1.63)     $  (0.03)    $   0.64      $  0.18
                                               ========       ========      ========     ========      =======
  Weighted average shares outstanding:
    Basic:.................................      47,341         48,609        47,453       46,350       40,425
    Diluted................................      47,822         48,609        48,505       47,935       41,624
</TABLE>

                                       13
<PAGE>

<TABLE>
<CAPTION>
                                                               FOR THE FISCAL YEARS ENDED (1)
                                             ------------------------------------------------------------------
                                                                            DECEMBER     DECEMBER     DECEMBER
                                              JANUARY 2,     JANUARY 3,       28,          29,          31,
                                                 2000           1999        1997 (2)       1996         1995
                                             ------------   ------------   ----------   ----------   ----------
                                               (IN THOUSANDS, EXCEPT PER SHARE AND SELECTED STATISTICAL DATA)
<S>                                          <C>            <C>            <C>          <C>          <C>
STATISTICAL DATA:
  Number of Customer Interaction Centers
    (7):
    Customer Acquisition division..........          43             62            56           48           26
    Customer Care division.................          16             15            12           14            7
  Number of workstations (7):
    Customer Acquisition division..........       4,148          5,991         5,584        4,592        2,128
    Customer Care division.................       6,718          6,729         5,186        3,858        2,082
  Net revenue per workstation (8):
    Customer Acquisition division..........    $ 32,404       $ 36,178      $ 33,666     $ 36,005      $39,442
    Customer Care division.................    $ 40,685       $ 39,035      $ 33,075     $ 38,158      $29,871
BALANCE SHEET DATA:
    Cash and short-term investments........    $ 18,876       $  3,543      $     17     $    141      $30,186
    Net assets of discontinued operations
      (4)..................................      10,028          7,096        15,318           --           --
    Working capital........................      51,957         17,748        34,090       13,354       33,045
    Capital expenditures...................       7,789         17,076        43,742       64,417       16,626
    Total assets...........................     236,480        267,502       185,831      141,381       74,332
    Long-term debt, less current
      maturities...........................     115,987        132,427         1,863        1,325        1,474
    Share owners' equity...................      48,622         41,824       124,783       88,206       52,707
</TABLE>

------------------------

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, which ended January 3,1999, is the only
    period presented that consists of 53 weeks.

(2) The asset impairment charges in 1998 consist of $69,700 for the write-down
    of long-lived assets acquired with the purchase of ITI Holdings, Inc.
    ("ITI") in May 1998, and $1,472 of capitalized software abandoned by the
    Company during the year. The asset impairment charge in 1997 consists of a
    provision for software impairment of $3,238 recorded as a result of plans to
    replace software platforms used by the Company.

(3) The restructuring charges in fiscal 1999 related to a program to close
    24 Customer Interaction Centers and to reduce the supporting salaried
    workforce. The restructuring charges in fiscal 1998 relate to a similar
    program to close Customer Interaction Centers, reconfigure certain
    administrative support facilities and reduce the salaried workforce.

(4) In January 2000, pursuant to an agreement executed in December 1999, the
    Company sold the stock of Paragren Technologies, Inc. (representing
    substantially all of the assets of Paragren) and received $17 million in
    cash proceeds. In addition, the Company may receive up to an additional
    $3 million in proceeds subject to the terms of escrow and earn-out
    agreements. After selling expenses and other costs, $11 million of the
    proceeds were used to reduce outstanding borrowings under the Term Loan in
    accordance with the financial covenants concerning the sale of assets.
    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. For fiscal year 1999,
    Paragren's net loss from discontinued operations of $5,500 was partially
    offset by the provision for anticipated losses established in fiscal 1998.
    In fiscal 1998, the reported loss from discontinued operations includes an
    estimated loss on disposal of $8,400, net of income tax benefit of $1,100.
    In fiscal 1997, the reported loss from discontinued operations includes a
    special charge of $19,800 to write-off in-process research and development
    acquired in connection with the purchase of Paragren in August 1997.

                                       14
<PAGE>
(5) Cumulative effect of accounting change in 1997 reflects the adoption of EITF
    Bulletin No. 97-13 which requires that business process reengineering costs
    be expensed as incurred. Approximately $2,200 of 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) 1995 net income and net income per share are presented on a pro forma basis
    because prior to the initial public offering on October 16, 1995, the
    Company was an S Corporation. As an S Corporation, the Company was not
    subject to Federal and certain state corporate income taxes. 1995 net
    income, as shown, consists of net income of $8,153, as originally reported,
    and a pro forma adjustment of $670 for income taxes as if the Company were
    subject to corporate income taxes. 1995 net income per share, as shown, is
    based on the pro forma net income of $7,483.

(7) The number of Customer Interaction Centers, which includes one shared
    center, 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 Customer
    Care division's net revenue per workstation, exclusive of revenue earned
    from client-owned workstations managed for the Company's clients, was as
    follows: $ 45,023, 1999; $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.

(9) Cost of Services includes the reversal of nonrecurring telephone charges
    originally recorded during fiscal 1998. The Company reversed $4.9 million in
    1999 of accrued telephone charges originally recorded in the fourth quarter
    of 1998. This reversal resulted from the Company negotiating favorable
    dispositions of costs associated with certain guaranteed minimum usage
    telecommunications contracts during the second and third quarters of fiscal
    1999. Excluding both the charge in 1998 and the reversal in 1999, cost of
    services was $351.9 million in 1999 compared to $349.1 million in 1998.

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

    The Company provides multi-channel customer relationship management ("CRM")
solutions for corporate clients operating in the parcel delivery, financial
services, insurance, retail, health care and pharmaceuticals, and
telecommunications industries throughout the United States. The Customer
Acquisition business unit, formerly known as Sales Solutions, provides customer
lead generation, acquisition and retention through outbound sales support to
consumers and businesses, market research and targeted marketing plan
development. The Customer Care business unit, formerly known as Service
Solutions, provides inbound customer service, direct mail response, integrated
voice response, "help" line support and customer order processing through its
own customer interaction centers as well as through facilities managed by the
Company but owned/operated by its clients. In December 1999, the Company formed
a wholly-owned subsidiary, CustomerAssistance.com which will provide electronic
CRM ("e-CRM") products and services including e.PAC(SM), a multi-channel
platform that supports a broad range of integrated, e-commerce-based interaction
capabilities. In August 1997, the Company expanded its service offerings through
the acquisition of Paragren Technologies, Inc. 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 did not believe that additional investment in the software development
business

                                       15
<PAGE>
was consistent with its long-term strategic goals and objectives. Accordingly,
Paragren was 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. The sale of
Paragren's software business was completed in January 2000. As of January 2,
2000, the Company operated and managed approximately 11,000 workstations in
58 customer interaction 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 one client, a parcel delivery client, which individually accounted for more
than 10% of the Company's consolidated net revenues. This client accounted for
14.5% of the Company's consolidated net revenues and 23.4% of the Company's
Customer Care net revenues in fiscal 1999, compared to 16.1% and 30.4%
respectively, in fiscal 1998.

    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 programs. Under this facilities management programs, the Customer
Interaction Centers where the work is performed are owned by the client, but are
staffed and managed by the Company. Accordingly, facilities management programs
have higher costs of services as a percentage of net revenue and lower selling,
general and administrative expenses as a percentage of net revenue compared to
fully outsourced programs.

    As a result of the facilities management programs, 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 programs. 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.

                                       16
<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 2, 2000, January 3, 1999, and December 28, 1997, fiscal 1999, fiscal
1998 and fiscal 1997, respectively.

<TABLE>
<CAPTION>
                                                                1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Net revenue:
  Customer Acquisition division.............................    38.0%       46.9%     52.2%
  Customer Care division....................................    62.0        53.1      47.8
                                                               -----      ------     -----
    Total net revenue.......................................   100.0       100.0     100.0
Operating expenses:
  Cost of services..........................................    81.1        83.3      76.5
  Selling, general and administrative expenses..............    11.8        13.2      13.1
  Asset impairment charges..................................      --        16.8       0.9
  Restructuring charges.....................................     1.8         2.1        --
                                                               -----      ------     -----
    Total operating expenses................................    94.7       115.4      90.5
                                                               -----      ------     -----
Operating income (loss).....................................     5.3       (15.4)      9.5
Interest expense, net.......................................     3.2         1.9       0.4
                                                               -----      ------     -----
Income (loss) from continuing operations before income taxes
  and cumulative effect of accounting charge of accounting
  change....................................................     2.1       (17.3)      9.1
Provision (benefit) for income taxes........................     0.8        (1.2)      3.5
                                                               -----      ------     -----
Income (loss) from continuing operations before cumulative
  effect of accounting change...............................     1.3       (16.1)      5.6
Discontinued operations, less income tax benefit............      --        (2.6)     (5.3)
Cumulative effect of accounting change, less income tax
  benefit...................................................      --          --      (0.6)
                                                               -----      ------     -----
Net income (loss)...........................................     1.3%      (18.7%)    (0.3%)
                                                               =====      ======     =====
</TABLE>

FISCAL 1999 COMPARED TO FISCAL 1998

    Net revenue increased to $427.6 million in fiscal 1999 from $425.0 million
in fiscal 1998, an increase of $2.6 million. Customer Care net revenue increased
by $39.4 million or 17.5% over fiscal 1998 levels. The increase in Customer Care
net revenue was due primarily to growth in call volumes with existing clients
and the full year inclusion of the results of ITI. Customer Acquisition net
revenue decreased by $36.8 million or 18.5% below fiscal 1998 levels. This
decrease in Customer Acquisition net revenue was primarily due to the
consolidation of certain large clients and the loss of other clients previously
associated with ITI Marketing Services, Inc. substantially reducing outbound
telemarketing call volumes available to the Company. The decrease also reflects
the Company's current strategy to balance call center capacity with demand for
customer acquisition services.

    Cost of Services decreased $7.0 million, or 2.0% to $347.0 million from
$354.0 Million in fiscal 1998. The decrease in the cost of services includes the
reversal of nonrecurring telephone charges originally recorded during fiscal
1998. The Company reversed $4.9 million in 1999 of accrued telephone charges
recorded in the fourth quarter of 1998. This reversal resulted from the Company
negotiating favorable dispositions of costs associated with certain guaranteed
minimum usage telecommunications contracts during the second and third quarters
of fiscal 1999. Excluding both the charge in 1998 and the reversal in 1999, cost
of services was virtually unchanged at 82.3% in 1999 compared to 82.1% in 1998.

    Selling, general and administrative expenses decreased to $50.4 million in
fiscal 1999 from $56.2 million in fiscal 1998, a decrease of $5.8 million or
10.3%. As a percent of net revenue, selling, general and

                                       17
<PAGE>
administrative expenses decreased to 11.8% in fiscal 1999 from 13.2% in fiscal
1998. This decrease was primarily due to reductions in workforce and related
expense savings achieved through restructuring initiatives and the consolidation
of the administrative functions of ITI.

    During fiscal years 1999 and 1998, the Company recorded restructuring
charges of $7.6 million and $9.0 million, respectively, in connection with the
consolidation of the Customer Acquisition business unit, closure of certain
customer interaction centers and reductions in the salaried workforce. During
fiscal 1999, the Company closed 19 customer interaction centers containing
approximately 1,843 seats. In fiscal 1998, the Company also adjusted the
carrying value of the Customer Acquisition business unit's long-lived assets to
their fair value. This adjustment resulted in a non-cash impairment charge of
$69.7 million to write-off goodwill and intangible assets acquired with the
acquisition of ITI. Additionally, the Company recorded a non-cash impairment
charge of $1.5 million on certain capitalized software abandoned during 1998.

    The Company generated operating income of $22.6 million for fiscal 1999.
Excluding the restructuring charges, operating income for fiscal 1999 was
$30.2 million compared to $14.8 million (before restructuring and asset
impairment charges) for fiscal 1998. For the Customer Care business unit,
operating income for fiscal 1999 was $25.5 million, or 9.6% of net revenue,
compared to operating income (before restructuring and asset impairment charges)
of $15.8 million, or 7.0% of net revenue, for the same period in fiscal 1998.
Customer Care operating income increased $9.7 million (before restructuring and
asset impairment charges), principally due to increased net revenue and a more
profitable client mix. The Customer Acquisition business unit generated
operating income of $4.6 million prior to restructuring charges of $7.6 million
in fiscal 1999, compared to an operating loss of $1.0 million before
restructuring and asset impairment charges, for the same period in fiscal 1998.
The operating performance of the Customer Acquisition business unit in fiscal
1999 was affected by decreased net revenue, the cost of underutilized customer
interaction center capacity and higher direct wages, partially offset by the
reversal in fiscal 1999 of $4.9 million in accrued telephone charges recorded in
the fourth quarter of fiscal 1998. While the full year performance for Customer
Acquisition was down compared to 1998, operating performance in the 3(rd) and
4(th) quarters of fiscal 1999 were significantly improved over the comparable
periods in fiscal 1998. Improved operating performance coupled with reduced
workstation capacity contributed to the improved financial performance.

    Net interest expense for fiscal 1999 increased by $5.2 million compared to
the same period in fiscal 1998. This increase reflects a full year of interest
and related debt costs in fiscal 1999 on the $150.0 million term loan used to
finance the purchase of ITI. While full year fiscal 1999 net interest expense is
up significantly compared to fiscal 1998, the quarterly trend is decreasing as
total debt levels are being reduced and positive results from the Company's
working capital management efforts have contributed to increased cash balances
and lower net interest expense.

    The change in the Company's effective income tax rate to 38.8% in fiscal
1999 from (7.1)% in fiscal 1998 was primarily due to the effect of the write off
of non-deductible goodwill and asset impairment charges in 1998.

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
Customer Acquisition business unit 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 Customer Acquisition 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 Customer Care business unit 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

                                       18
<PAGE>
for a new telecommunications client. The growth in the Company's Customer Care
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 Customer Acquisition business unit,
and higher direct wages and benefits in both business units. Customer
Acquisition 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.

    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
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. As a result of ITI clients who provided 65% of ITI's Customer Acquisition
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 Customer Acquisition
business were less than the carrying value of its long-lived assets.
Accordingly, the Company adjusted the carrying value of the Customer Acquisition
business units' long-lived assets to their fair value resulting in a non-cash
impairment loss of $69.7 million in the fourth quarter of 1998. 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
Interaction Centers, reconfigure certain administrative support facilities and
reduce the workforce by approximately 80 salaried employees.

    The Company incurred an operating loss of $65.4 million in fiscal 1998
compared to operating income of $33.3 million in fiscal 1997. Excluding 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 Customer Acquisition business unit, operating income excluding the
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 Customer Care business
unit'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

                                       19
<PAGE>
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. 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.

                         NEW ACCOUNTING PRONOUNCEMENTS

STATEMENT OF FINANCIAL ACCOUNTING STANDARD NUMBER 133, ACCOUNTING FOR DERIVATIVE
AND HEDGING ACTIVITIES

    This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Statement is effective for fiscal years beginning after
June 15, 2000. Management believes that the impact SFAS 133 will not
significantly affect its financial reporting.

                        LIQUIDITY AND CAPITAL RESOURCES

    The following table sets forth consolidated statements of cash flow data for
the Company for years ended January 2, 2000, January 3, 1999, and December 28,
1997, respectively.

<TABLE>
<CAPTION>
                                                        1999       1998       1997
                                                      --------   --------   --------
                                                              (IN MILLIONS)
<S>                                                   <C>        <C>        <C>
Net cash provided by operating activities...........   $ 47.5    $  46.2     $ 31.2
Net cash used by investing activities...............     (8.0)    (166.6)     (44.3)
Net cash provided (used) by financing activities....    (24.2)     123.9       13.0
                                                       ------    -------     ------
Net increase (decrease) in cash.....................     15.3        3.5       (0.1)
                                                       ======    =======     ======
</TABLE>

    Cash provided by operations during fiscal 1999 totaled $47.5 million, an
increase of $1.3 million from fiscal 1998. This increase was principally due to
improved operating results, offset by the use of cash to fund certain
acquisition-related liabilities as well as funding costs related to closing
facilities, terminating unfavorable contracts and reducing the workforce. The
Company spent $7.8 million and $17.1 million during fiscal 1999 and 1998,
respectively, for capital expenditures, primarily to construct additional call
center capacity for Customer Care clients and to upgrade equipment in existing
centers. These capital expenditures were funded with cash provided by
operations. In conjunction with the move to the new headquarters facility in
Deerfield, the Company has committed to spend approximately $5 million for
furniture, renovations and technology equipment.

                                       20
<PAGE>
    In connection with the acquisition of ITI in May 1998, the Company provided
acquisition-related reserves of $21.2 million to close facilities, terminate
unfavorable contacts, and reduce the salaried workforce. Of this reserve
$11.9 million has been utilized or paid through January 2, 2000 and
$6.1 million has been taken as a reduction in goodwill. During fiscal years 1999
and 1998, the Company recorded restructuring charges of $7.6 million and
$9.0 million, respectively, in connection with the consolidation of Customer
Acquisition call centers and reductions in the salaried workforce. The Company
utilized these restructuring reserves aggregating $9.1 million and
$5.3 million, in 1999 and 1998, respectively. Reserve utilization for employee
severance, lease termination costs and telecommunications contract penalties
were $3.0 million and $2.8 million, respectively in 1999 and 1998. In addition
the Company wrote off $6.1 million in 1999 and $2.5 million in 1998 of leasehold
improvements and equipment.

    At January 3, 1999, the Company had received $11.1 million in nonrecurring
customer deposits of which $9.6 million were offset against invoices for
services rendered during fiscal 1999. In the second quarter of fiscal 1999, the
Company received $5.0 million in refunds from the Internal Revenue Service for
overpayment of estimated taxes during fiscal 1998.

    At January 2, 2000, the Company had a $75.0 million revolving credit
facility (the "Revolving Facility") available for general working capital
purposes and capital expenditures. On January 20, 2000, as described in Note 9
to the financial statements, the Company amended the Credit Facility, reducing
the Revolving Facility to $50.0 million. Availability of $10.0 million of the
$50.0 million total is restricted subject to the attainment of trailing four
quarter EBITDA of at least $60.0 million. As of January 2, 2000, there were no
borrowings outstanding under the Revolving Facility. The Company made
$14.0 million of scheduled repayments on its term loan during fiscal 1999,
resulting in an outstanding balance at January 2, 2000, of $130.0 million. An
additional $16.0 million in principal payments will be made in fiscal 2000. In
addition, in January 2000, the Company prepaid $11 million on the term loan in
conjunction with the sale of Paragren Technologies.

    The Company expects that cash from future operations and available
borrowings under the Revolving Facility will be sufficient to meet normal
operating needs as well as fund any planned capital expenditures during fiscal
year 2000.

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 post-holiday and summer months.

YEAR 2000 COMPLIANCE

    The Year 2000 issue, common to most companies, concerned 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. In 1998, the Company's 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,

                                       21
<PAGE>
applications and other date-sensitive equipment. Equipment and systems that were
not Year 2000 compliant were identified and corrected through equipment
replacement, remediation of code in software programs, or migration to a Year
2000 compliant platform. Total costs required to correct Year 2000 issues were
approximately $ 2.4 million and principally consisted of equipment upgrades and
software code remediation. The Company did not, nor does it believe it will
experience any significant effects as a result of the Year 2000 issue.

                INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

    The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Report on Form 10-K may
contain forward-looking statements that reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements subject to certain risks and uncertainties, which could cause future
results to differ materially from historical results or those anticipated. The
words "believe," "expect," "anticipate," "intend," "estimate," "goals," "would,"
"could," "should," and other expressions which indicate future events and trends
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. If no date is provided, such statements speak only as of the date of this
Report on Form 10-K. The Company undertakes no obligation to publicly update or
revise any forward-looking statements in connection with new information or
future events or otherwise. Factors that could cause future results to differ
materially from historical results or those anticipated include, but are not
limited to, reliance by the Company on a small number of principal clients for a
substantial proportion of its total revenue; possible changes in or events
affecting the business of the Company's clients, including changes in customers'
interest in, and use of, clients' products and services; fluctuations in
quarterly results of operations due to timing of clients' initiation and
termination of large programs; changes in competitive conditions affecting the
Company's industry; the ability of the Company's clients to terminate contracts
with the Company on a relatively short notice; changes in the availability and
cost of qualified employees; variations in the performance of the Company's
automated system and other technological factors; changes in government
regulations affecting the teleservices and telecommunications industries; and
competition from other outside providers of customer relationship management
solutions and in-house customer relationship operations.

    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 1999, 1998, and 1997. The Company's ten and four largest clients
collectively accounted for 61.7% and 39.3%, respectively, of the Company's net
revenue in fiscal 1999. The Company's largest client in fiscal 1999 was a large
parcel delivery client, which accounted for 14.5% of the Company's net revenue
in fiscal 1999. The Company's second largest client in fiscal 1999 was a major
telecommunications client, which accounted for 10.1% of the Company's net
revenue during that period. The Company's third largest client in fiscal 1999
was a financial services subsidiary of a national retailer, which accounted for
8.2% of the Company's net revenue during the period. In fiscal 1998, two clients
accounted for 16.1% and 13.5% of the Company's net revenue and in fiscal 1997,
two clients accounted for 25.7% and 17.1% of the Company's net revenue,
respectively. Many of the Company's clients are concentrated in the business and
consumer products, parcel delivery, financial services, insurance, retail,
health care and pharmaceuticals, 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

                                       22
<PAGE>
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. Additionally, the
Company's contracts do not typically ensure that it will generate a minimum
level of revenues or generate a minimum level of volume, and the profitability
of each client program may fluctuate, sometimes significantly, throughout the
various stages of such program.

    The Company's contract with its parcel delivery client was extended for
three years, beginning September 20, 1999, after which the Agreement is subject
to automatic one year renewals. Pursuant to the Amendment, however, the client
has the right to terminate any of the services contemplated by the Agreement or
the entire Agreement upon prior notice to the Company. In the event of
termination, the affected services would be phased out over a period of not less
than nine months from the notice of termination. The client agreed to use its
best efforts not to reduce revenue for the terminated services under the
Agreement by more than one third per quarter during the ramp down period. The
contract is a facilities management contract. Under this facilities management
program, the Customer Interaction Centers where the work is performed are owned
by the client, but are staffed and managed by the Company.

    There can be no assurance that the Company will be able to retain any of its
largest clients, that such clients will not terminate their contracts before
their scheduled expiration date 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
Interaction 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, including the internet. 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

                                       23
<PAGE>
demand for the Company's Customer Acquisition 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 Customer Care 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 as well as
technologies and service devices to screen calls from marketers. 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.

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.

INABILITY TO EFFECTIVELY IMPLEMENT AND EXPAND OUR INTERNET PRODUCTS AND
SERVICES.

    An important part of the Company's growth strategy includes providing a full
suite of electronic customer relationship management products and services over
the Internet through CustomerAssistance.com. The effective implementation and
growth of our Internet based products and services is dependant on the
anticipated growth in and industry trends towards outsourcing and co-sourcing of
Internet based marketing and customer service operations and a variety of other
external and internal factors.

    The Internet based information and services market is new and rapidly
evolving. Our Internet strategy would be materially adversely affected if
Internet usage does not continue to grow or grows slowly. Internet usage may be
inhibited for a number of reasons, such as inadequate network infrastructure,
system failures, delays or other difficulties, security and privacy concerns,
and the unavailability of cost-effective, high-speed access to the Internet.

    The Company's ability to provide reliable, high quality Internet products
and services is dependent on the efficient and uninterrupted operation of our
computer and communications hardware and software systems. These systems are
vulnerable to damage or interruption from human error, natural disasters,
telecommunication failures, power outages, break-ins, sabotage, computer
viruses, intentional acts of vandalism and similar events. Any system failure,
including network, software, or hardware, whether internal or external to the
Company, that causes an interruption in our service or a decrease in
responsiveness of our Internet site could result in reduced traffic, reduced
revenue and harm to our reputation, brand and relationship with our clients.

    The success of the Company's Internet products and services is dependant on
the timely development, integration and continued enhancement of our Internet
products and services including: the effective and timely marketing to, and
level of acceptance and increased utilization by, existing and new clients of
the Company; the accurate estimation by the Company of the level of need and
demand for customer support and service through the use of the Internet; the
ability of the Company to hire, train and retain qualified technology and other
personnel in connection with its development, implementation and/or enhancement
efforts and the operation of CustomerAssistance.com; the compatibility of
CustomerAssitance.com and

                                       24
<PAGE>
other Internet products and services with existing systems of the Company's
clients and the extent of the technical problems arising with respect to
obtaining such compatibility; and the introduction of the new competitive
products and services in the Company's industry by other companies and, in
connection therewith, the ability of the Company to maintain a leadership role
in both traditional and Internet based products and services.

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
each 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 many 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 have a materially adverse effect on 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 particularly with respect
to the activities of its Customer Acquisition business. 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.

    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

                                       25
<PAGE>
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 revenue 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.

VOLATILITY OF STOCK PRICE

    The market price of the Company's Common Shares has fluctuated over a wide
range during the past several years and may continue to do so in the future. See
"Market for Registrant's Common Equity and Related Share Owner Matters." The
market price of the Common Shares could be subject to significant fluctuations
in response to various factors or events, including among other things, the
depth and liquidity of the trading market of the Common Shares, quarterly
variations in actual liquidity of the trading market of the Common Shares,
quarterly variations in actual and anticipated operating results, growth rates,
progress on the Company's Internet initiative, changes in estimates by analysts,
market conditions in the industry in which the Company competes, announcements
by competitors, the loss of a significant client or a significant change in the
Company's relationship with a significant client, regulatory actions,
litigation, including class action litigation, and general economic conditions.

CONTROL BY PRINCIPAL SHARE OWNER

    Mr. Schwartz, the Company's Chairman, beneficially owns approximately 39.9%
of the outstanding Common Shares. In addition, two trusts, established by
Mr. Schwartz, each beneficially own approximately 5.3% 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

    The Company is exposed to the impact of U.S. interest rate changes directly
related to its normal operating and funding activities. The Company enters into
derivatives in order to minimize these risks, but not for trading purposes and
has entered into interest rate agreements which effectively fix all of its term
loan obligations. As a result, the interest rate on approximately 98% of debt
obligations as December 31, 1999 are fixed.

    The Company prepared a sensitivity analysis of its derivatives assuming a
one percentage point adverse change in interest rates. Holding all other
variables constant, the hypothetical adverse change would increase interest
expense by $0.5 million. The effect of the interest change on the fair market
value

                                       26
<PAGE>
of the outstanding debt is insignificant and the sensitivity analysis assumes no
changes in the Company's financial structure.

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....................      28
Consolidated Statements of Operations for the Fiscal Years
  Ended January 2, 2000, January 3, 1999, and December 28,
  1997......................................................      29
Consolidated Balance Sheets as of January 2, 2000, and
  January 3, 1999...........................................      30
Consolidated Statements of Share Owners' Equity for the
  Fiscal Years Ended January 2, 2000, January 3, 1999, and
  December 28, 1997.........................................      31
Consolidated Statements of Cash Flows for the Fiscal Years
  Ended January 2, 2000, January 3, 1999, and December 28,
  1997......................................................      32
Notes to Consolidated Financial Statements..................      33
</TABLE>

                                       27
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Share Owners of
APAC Customer Services, Inc.:

We have audited the accompanying consolidated balance sheets of APAC CUSTOMER
SERVICES, INC. (an Illinois corporation) and subsidiaries as of January 2, 2000
and January 3, 1999, and the related consolidated statements of operations,
share owners' equity and cash flows for the years ended January 2, 2000,
January 3, 1999, and December 28, 1997. 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 Customer Services, Inc.
and Subsidiaries as of January 2, 2000 and January 3, 1999, and the results of
its operations and its cash flows for the years ended January 2, 2000,
January 3, 1999, and December 28, 1997, in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Chicago, Illinois
February 9, 2000

                                       28
<PAGE>
                          APAC CUSTOMER SERVICES, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                    FOR THE FISCAL YEARS ENDED
                                                              --------------------------------------
                                                              JANUARY 2,   JANUARY 3,   DECEMBER 28,
                                                                 2000         1999          1997
                                                              ----------   ----------   ------------
<S>                                                           <C>          <C>          <C>
NET REVENUE.................................................   $427,645     $425,028      $350,533
OPERATING EXPENSES:
  Cost of services..........................................    347,005      353,979       268,177
  Selling, general and administrative expenses..............     50,445       56,230        45,810
  Asset impairment charges..................................         --       71,172         3,238
  Restructuring charges.....................................      7,600        9,000            --
                                                               --------     --------      --------
      Total operating expenses..............................    405,050      490,381       317,225
                                                               --------     --------      --------
  Operating income (loss)...................................     22,595      (65,353)       33,308
INTEREST EXPENSE............................................     13,365        8,139         1,499
                                                               --------     --------      --------
  Income (loss) from continuing operations before income
    taxes and cumulative effect of accounting change........      9,230      (73,492)       31,809
PROVISION (BENEFIT) FOR INCOME TAXES........................      3,580       (5,200)       12,100
                                                               --------     --------      --------
  Income (loss) from continuing operations before cumulative
    effect of accounting change.............................      5,650      (68,292)       19,709
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)...........................................   $  5,650     $(79,320)     $ (1,217)
                                                               ========     ========      ========

NET INCOME (LOSS) PER SHARE:
  Income (loss) from continuing operations before cumulative
    Effect of accounting change.............................   $   0.12     $  (1.40)     $   0.41
  Loss from discontinued operations.........................         --        (0.23)        (0.39)
  Cumulative effect of accounting change....................         --           --         (0.05)
                                                               --------     --------      --------
      Net income (loss).....................................   $   0.12     $  (1.63)     $  (0.03)
                                                               ========     ========      ========

WEIGHTED AVERAGE SHARES OUTSTANDING:
  BASIC.....................................................     47,341       48,609        48,453
  DILUTED...................................................     47,822       48,609        48,505
                                                               ========     ========      ========
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       29
<PAGE>
                          APAC CUSTOMER SERVICES, INC.
                          CONSOLIDATED BALANCE SHEETS

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              JANUARY 2,   JANUARY 3,
                                                                 2000         1999
                                                              ----------   ----------
<S>                                                           <C>          <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents.................................   $ 18,876     $  3,543
  Accounts receivable, less allowances of $1,560 and
    $4,250..................................................     72,031       75,377
  Net assets of discontinued operations.....................     10,028        7,096
  Other current assets......................................     14,346       18,914
                                                               --------     --------
      Total current assets..................................    115,281      104,930
                                                               --------     --------
Property and equipment, net.................................     65,884       94,593
Goodwill and other intangible assets, net...................     52,541       64,875
Other Assets................................................      2,774        3,104
                                                               --------     --------
                                                               $236,480     $267,502
                                                               ========     ========

LIABILITIES AND SHARE OWNERS' EQUITY
CURRENT LIABILITIES
  Current maturities of long-term debt......................   $ 16,808     $ 16,122
  Accounts payable..........................................      7,588        5,705
  Customer deposits.........................................      1,489       11,123
  Accrued liabilities:......................................     37,439       54,232
                                                               --------     --------
      Total current liabilities.............................     63,324       87,182
                                                               --------     --------
Long-term debt, less current maturities.....................    115,987      132,427
Deferred income taxes.......................................      2,623        1,670
Other liabilities...........................................      5,924        4,399
Commitments and contingencies
Share owners' equity
  Common Shares, $0.01 par value; 200,000,000 shares
    authorized Issued: 49,079,617 shares in 1999 and
    48,893,873 shares in 1998...............................        491          489
  Additional paid-in capital................................     94,945       93,799
  Retained earnings (deficit)...............................    (41,163)     (46,813)
  Treasury shares; 1,609,000 shares at cost.................     (5,651)      (5,651)
                                                               --------     --------
      Total share owners' equity............................     48,622       41,824
                                                               --------     --------
                                                               $236,480     $267,502
                                                               ========     ========
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       30
<PAGE>
                          APAC CUSTOMER SERVICES, INC.
                CONSOLIDATED STATEMENTS OF SHARE OWNERS' EQUITY

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 ADDITIONAL               TOTAL
                                           SHARES                 PAID-IN     RETAINED   TREASURY   SHARE OWNERS'
                                           ISSUED      AMOUNT     CAPITAL     EARNINGS    SHARES       EQUITY
                                         ----------   --------   ----------   --------   --------   -------------
<S>                                      <C>          <C>        <C>          <C>        <C>        <C>
BALANCE, DECEMBER 29, 1996.............  46,540,057    $  465      $54,017    $ 33,724   $    --       $88,206
  Net income...........................          --        --           --      (1,217)       --        (1,217)
  Exercise of employee stock options,
    including related income 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 income 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
  Net income...........................          --        --           --       5,650        --         5,650
  Exercise of employee stock options,
    Including related income tax
    benefits...........................      93,418         1          546          --        --           547
  Issuance of Common Shares Through
    employee stock purchase plan.......      92,326         1          266          --        --           267
  Stock option and warrant
    Transactions.......................          --        --          334          --        --           334
                                         ----------    ------      -------    --------   -------       -------
BALANCE, JANUARY 2, 2000...............  49,079,617    $  491      $94,945    $(41,163)  $(5,651)      $48,622
                                         ==========    ======      =======    ========   =======       =======
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       31
<PAGE>
                          APAC CUSTOMER SERVICES, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                    FOR THE FISCAL YEARS ENDED
                                                              --------------------------------------
                                                              JANUARY 2,   JANUARY 3,   DECEMBER 28,
                                                                 2000         1999          1997
                                                              ----------   ----------   ------------
<S>                                                           <C>          <C>          <C>
OPERATING ACTIVITIES:
  Net income (loss).........................................   $ 5,650      $(79,320)     $(1,217)
  Depreciation and amortization.............................    34,420        35,470       21,290
  Deferred income taxes.....................................     5,932        (8,130)       1,110
  Asset impairment charges..................................        --        71,172           --
  Restructuring charges.....................................     7,600         9,000           --
  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 liabilities, net of
    effects of acquisition and restructuring charges:
    Receivables.............................................     3,346        12,399      (10,425)
    Other current assets....................................     1,289         3,181          542
    Accounts payable........................................     1,883        (4,206)      (5,812)
    Accrued expenses........................................    (9,721)       (1,584)       3,835
    Discontinued operations.................................    (2,932)       (2,806)      (2,270)
                                                               -------      --------      -------
      Net cash provided by operating activities.............    47,467        46,204       31,217
INVESTING ACTIVITIES:
  Purchase of property and equipment, net of disposals......    (7,789)      (17,076)     (43,742)
  Increase in other assets..................................      (105)         (306)        (619)
  ITI Holdings, Inc. acquisition costs, net of cash
    acquired................................................        --      (149,229)          --
                                                               -------      --------      -------
      Net cash used by investing activities.................    (7,894)     (166,611)     (44,361)
FINANCING ACTIVITIES:
  Proceeds from issuance of long-term debt..................        --       150,000           --
  Repayment of revolving credit facility with proceeds from
    Refinancing.............................................        --        (7,500)          --
  Net (payments) borrowings on revolving credit
    facilities..............................................        --       (16,100)       7,700
  Payments on long-term debt................................   (15,754)       (7,102)        (149)
  Payment of debt issuance costs............................        --        (2,031)          --
  Decrease in book overdraft................................        --        (4,679)        (434)
  (Decrease) increase in customer deposits and other
    liabilities.............................................    (9,634)       14,985           --
  Stock option and warrant transactions, including related
    income
    tax benefits............................................     1,148         2,011        5,903
  Purchase of treasury shares...............................        --        (5,651)          --
                                                               -------      --------      -------
      Net cash provided by financing activities.............   (24,240)      123,933       13,020
                                                               -------      --------      -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........    15,333         3,526         (124)
CASH AND CASH EQUIVALENTS:
  Beginning of year.........................................     3,543            17          141
                                                               -------      --------      -------
  End of year...............................................   $18,876      $  3,543      $    17
                                                               =======      ========      =======
SUPPLEMENTAL DISCLOSURES:
  Cash flow information:
    Cash payments for interest (net of amounts
      capitalized)..........................................   $12,797      $  7,008      $ 1,381
    Cash payments for income taxes..........................       106         5,927        8,955
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
                                                               =======      ========      =======
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       32
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

    APAC Customer Services, Inc. and Subsidiaries (the "Company") provides high
volume telephone and Internet-based sales, marketing and customer relationship
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.

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.

    Certain reclassifications of prior years' amounts have been made to conform
with the current year presentation.

USE OF ESTIMATES

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

FISCAL YEAR

    The Company operates on a 52-/53-week fiscal year that ends on the Sunday
closest to December 31. Fiscal years for the consolidated financial statements
included herein ended on January 2, 2000 (52 weeks), January 3, 1999 (53 weeks)
and December 28, 1997 (52 weeks).

CASH EQUIVALENTS

    Cash equivalents consist of highly liquid, short-term investments readily
converted to cash.

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. Long-lived assets are reviewed for impairment
whenever events or circumstances indicate that the carrying value of an asset
may not be recoverable. An impairment loss is recognized when the estimated
undiscounted cash flows produced by an asset are less than the asset's carrying
value.

                                       33
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    PROPERTY AND EQUIPMENT.  Property and equipment are recorded at cost and
depreciated on a straight-line basis, using estimated useful lives of up 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 1999,
1998 and 1997 was $25,770, $28,862 and $19,642, respectively.

    Interest is capitalized on significant capital projects. No interest was
capitalized in fiscal years 1999 and 1998. During the 1997 fiscal year, the
Company capitalized $483 of interest.

    CAPITALIZED SOFTWARE.  The Company capitalizes certain costs related to the
purchase and installation of computer software for internal use as well as
certain costs related to software products and services sold to third parties.
Amortization is provided on a straight-line basis over estimated useful lives
ranging up to 5 years. Amortization on capitalized software costs for fiscal
years 1999, 1998 and 1997 was $3,721, $2,837 and $1,180, respectively.

    INTANGIBLE ASSETS.  Goodwill and other intangible assets are amortized on a
straight-line basis over the expected period of benefit ranging from 4 to
21 years. Total amortization of goodwill and other intangible assets for fiscal
years 1999, 1998 and 1997 was $4,494, $5,130 and $1,394, respectively.

REVENUE RECOGNITION

    The Company recognizes customer services revenue 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.

ACCOUNTING FOR STOCK-BASED COMPENSATION

    For stock-based employee compensation plans, the Company has elected to use
the intrinsic value method prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." No compensation expense is
recognized for stock options issued to employees when the option price equals or
exceeds the fair market value of the Company's Common Shares at the date of
grant. In accordance with Financial Accounting Standards No. 123 ("SFAS
No. 123"), "Accounting for Stock-Based Compensation," the Company provides pro
forma disclosures of net income and net income per share as if the fair value
based method had been used. Stock-based compensation expense for non-employees
is recognized in accordance with SFAS No. 123.

INTEREST RATE AGREEMENTS

    The Company uses interest rate swaps and caps to effectively hedge interest
rate exposures. 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.

                                       34
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 by dividing net
income by the weighted average number of Common Shares outstanding. "Diluted
earnings per share" is calculated similarly, except the denominator is increased
to include the number of additional Common Shares that would have been
outstanding if the dilutive potential Common Shares associated with stock
options and warrants had been issued. For fiscal years 1999, 1998 and 1997,
basic and diluted earnings per share are the same amount.

COMPREHENSIVE INCOME

    In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income," which established
standards for reporting of comprehensive income. The Company adopted the
provisions of SFAS No. 130 in January 1998. As of January 2, 2000 and January 3,
1999, the Company had no transactions separately identified as components of
"other comprehensive income" under SFAS No. 130.

2. NEW ACCOUNTING PRONOUNCEMENTS

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

    In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133") "Accounting for
Derivative Instruments and Hedging Activities." This standard requires that an
entity recognize derivatives as either assets or liabilities on its balance
sheet and measure those instruments at fair value. SFAS No. 137 amended the
effective date of SFAS No. 133 to being effective for fiscal years beginning
after June 15, 2000. As a result, the Company will adopt the requirements of
SFAS No. 133 in the first quarter of the fiscal year 2001. Based on current
circumstances, the Company does not believe the adoption of SFAS No. 133 will
have a material effect on the financial position or results of operations of the
Company.

3. 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 established that business
process reengineering costs should be expensed as incurred, and any unamortized
reengineering costs at November 20, 1997 should be expensed and reported as the
cumulative effect of an accounting change. The Company had been capitalizing
such costs related to the installation of internal computer systems. In the
fourth quarter of fiscal year 1997, the Company adopted the provisions of EITF
No. 97-13 and recorded a charge of $2,200 as the cumulative effect of an
accounting change, which is net of the applicable income tax benefit of $1,349.

                                       35
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

4. SUPPLEMENTAL BALANCE SHEET DATA

<TABLE>
<CAPTION>
                                                          JANUARY 2,   JANUARY 3,
CONSOLIDATED BALANCE SHEET                                   2000         1999
--------------------------                                ----------   ----------
<S>                                                       <C>          <C>
Deferred tax assets.....................................    $ 5,511      $ 8,790
Refundable Federal income taxes.........................      4,310        5,825
Prepaid expenses........................................      3,857        3,058
Non-trade receivables...................................        668        1,241
                                                            -------      -------
      Other current assets..............................    $14,346      $18,914
                                                            =======      =======
Building and leasehold improvements.....................    $30,833      $27,552
Telecommunications equipment............................     74,144       88,958
Workstations and office equipment.......................     14,740       16,918
Capitalized software....................................     12,780       11,852
Construction in progress................................      1,463        6,915
Accumulated depreciation and amortization...............    (68,076)     (57,602)
                                                            -------      -------
      Property and equipment, net.......................    $65,884      $94,593
                                                            =======      =======
Goodwill................................................    $28,916      $36,757
Assembled workforce.....................................      3,600        3,600
Customer relationships..................................     28,493       28,493
Accumulated amortization................................     (8,468)      (3,975)
                                                            -------      -------
      Goodwill and other intangibles, net...............    $52,541      $64,875
                                                            =======      =======
Payroll and related items...............................    $22,248      $19,494
Acquisition-related costs...............................      1,145       14,377
Telecommunications expenses.............................      3,619        9,529
Other accrued liabilities...............................     10,427       10,832
                                                            -------      -------
      Accrued liabilities...............................    $37,439      $54,232
                                                            =======      =======
</TABLE>

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 $149.2 million, net of cash
acquired. The initial purchase price was funded with proceeds from a
$150 million Term Loan. ITI's business consisted of telephone-based sales,
marketing and customer management services to corporate clients with high
volumes of outgoing or incoming calls through a network of customer interaction
centers. The acquisition was 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 tangible assets
acquired, liabilities assumed and additional liabilities recorded of
$136.7 million was initially allocated to intangible assets based upon their

                                       36
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

5. ACQUISITION OF ITI HOLDINGS, INC. (CONTINUED)
estimated fair values as determined by independent appraisal. Purchased
intangibles consisted of assembled workforce of $3.6 million, customer
relationships of $36.8 million and goodwill of $96.3 million. The intangible
assets are being amortized over their estimated useful lives ranging from 7 to
21 years. In addition, ITI had accumulated net operating loss carryforwards of
$12.8 million as of the date of acquisition, which are fully reserved through a
valuation allowance.

    In connection with the acquisition, the Company provided a total of
$21.2 million in estimated costs to close facilities, terminate unfavorable
contracts, write-off uncollectible trade receivables and reduce the workforce by
135 employees. The amounts provided included $6.5 million for facilities,
$9.7 million for contracts, $2.4 million for trade receivables and $2.6 million
for employee severance. Of this reserve $11.9 million has been utilized or paid
through January 2, 2000 and $6.1 million has been taken as a reduction of
goodwill. The remaining balance of acquisition related reserves was
$3.2 million and $14.4 million as of January 2, 2000 and January 3, 1999,
respectively. To the extent that unused facilities covered by long-term leases
were subleased and unfavorable contracts were renegotiated, a reduction in the
acquisition-related reserves and goodwill recorded as of the end of fiscal year
1998 was required during fiscal year 1999, as discussed below.

VALUATION ADJUSTMENTS

    During fiscal year 1999, the Company recorded a $7.8 million reduction in
goodwill related to the 1998 acquisition of ITI. The decrease in goodwill did
not affect the reported results of operations. The Company reduced liabilities
relating to the ITI purchase by $6.1 million due to a reduction in the estimated
costs to close facilities and renegotiate contracts, and the Company revalued
and increased certain deferred income tax assets by $1.7 million.

NONRECURRING CHARGES

    During fiscal year 1998, the Company recorded two nonrecurring charges in
connection with the ITI purchase. The Company provided allowances for doubtful
accounts of $2.5 million to fully reserve trade accounts receivable balances due
from two ITI clients who had filed for protection under Federal bankruptcy law.
The Company also accrued a total of $7.1 million in future telecommunications
costs guaranteed under two minimum usage contracts scheduled to expire in the
year 2000. As a result of the downturn in ITI's business, the Company had not
expected to achieve the minimum volumes under these contracts and, accordingly,
did not expect to recover the guaranteed costs from future results of
operations.

    During fiscal year 1999, results of operations were favorably affected by
the reversal of $4.9 million of telecommunications charges that had been accrued
in fiscal 1998. These reversals were realized when the Company was able to
negotiate the favorable dispositions of costs associated with guaranteed minimum
usage telecommunications contracts.

ASSET IMPAIRMENT

    During fiscal year 1998, fourth quarter reductions in clients' use of
outbound telemarketing programs as a method of customer acquisition had reduced
ITI's Customer Acquisition division net revenue and profitability substantially
below levels that existed at the date of acquisition. Six clients, comprising
approximately 65% of ITI's Customer Acquisition net revenue, had either ceased
or substantially reduced

                                       37
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

5. ACQUISITION OF ITI HOLDINGS, INC. (CONTINUED)
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 had prevented the Company from
realizing synergies anticipated with and valued in the ITI acquisition.

    These events required the Company to evaluate the recoverability of the
long-lived assets of the Customer Acquisition division of ITI in the fourth
quarter of fiscal year 1998. As a result of the loss of ITI's client base,
estimated future undiscounted cash flows from ITI's Customer Acquisition
business were less than the carrying value of its long-lived assets.
Accordingly, the Company adjusted the carrying value of the Customer Acquisition
division's long-lived assets to their fair value of $13.6 million resulting in
an impairment loss of $69.7 million ($65.9 million, or $1.36 per share, net of
income tax benefit). The impairment loss was comprised of a write-off of
property and equipment of $1.9 million, customer relationships of $8.3 million
and goodwill of $59.5 million. The fair market valuation was based upon the
appraised value of the remaining customer base of the Customer Acquisition
division as determined from projections of discounted future cash flows. The
remainder of ITI's business had not been impaired.

PRO FORMA INFORMATION

    The unaudited pro forma results of operations, as if the ITI acquisition had
occurred at the beginning of fiscal years 1998 and 1997, respectively, are
summarized below (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                            1998       1997
                                                          --------   --------
<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 loss................................................   (79,190)   (10,524)
Income (loss) per diluted share from continuing
  operations
  before cumulative
  effect of accounting change...........................  $  (1.40)  $   0.21
Net loss per diluted share..............................  $  (1.63)  $  (0.23)
</TABLE>

    The pro forma results include adjustments for unfavorable telephone
contracts, goodwill and intangible asset amortization, interest expense and
income taxes. 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.

    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 for
as a purchase. The purchase price of approximately $32.9 million was allocated
to the assets

                                       38
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

6. DISCONTINUED OPERATIONS (CONTINUED)
acquired and the liabilities assumed based upon their estimated fair values as
determined by an independent appraisal. The allocation of values to intangible
assets consisted of $1.5 million to assembled workforce and non-compete
covenants, $19.8 million to in-process research and development, and
$12.0 million to goodwill.

    In December 1998, the Company's management approved a plan to sell Paragren
when it decided that additional investment in the software development business
was not consistent with the Company's long-term strategic goals and objectives.
Accordingly, Paragren was reported as a discontinued operation, and the
consolidated financial statements for fiscal years 1998 and 1997 were
reclassified to segregate the operating results and net assets of the business.
At that time, the Company fully expected to sell Paragren during fiscal year
1999. During fiscal year 1998, the estimated loss relating to the disposal of
Paragren was $8.4 million, consisting of a pre-tax amount of $9.5 million, net
of an income tax benefit of $1.1 million. The estimate included a reduction in
asset values of $6.5 million for the expected loss on disposal based upon a
preliminary offer for the business which the Company had received. The estimate
also included a provision for anticipated operating losses until disposal of
$1.9 million consisting of a pre-tax amount of $3.0 million net of an income tax
benefit of $1.1 million.

    In January 2000, pursuant to an agreement executed in December 1999, the
Company sold the stock of Paragren Technologies, Inc. (representing
substantially all of the assets of Paragren) and received $17 million in cash
proceeds. In addition, the Company may receive up to an additional $3 million in
proceeds subject to the terms of escrow and earn-out agreements. After selling
expenses and other costs, $11 million of the proceeds were used to reduce
outstanding borrowings under the Term Loan in accordance with the financial
covenants concerning the sale of assets.

    The operations and anticipated disposal of Paragren did not affect the
Company's results of operations in 1999 as the loss provision established in
fiscal 1998, was sufficient to absorb Paragren's 1999 activity. The anticipated
proceeds from the sale of Paragren exceeded the amount estimated in 1998, and,
accordingly, asset values were increased by $3.6 million. However, actual losses
from operations for Paragren in fiscal 1999 were $3.6 million greater than the
amount estimated in 1998 and offset the increase in the estimated proceeds. As a
result, there was no income statement impact to the Company in 1999.

                                       39
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

6. DISCONTINUED OPERATIONS (CONTINUED)
    Summary operating results for Paragren for fiscal years 1999, 1998 and 1997
are as follows (in thousands):

<TABLE>
<CAPTION>
                                                    1999       1998       1997
                                                  --------   --------   --------
<S>                                               <C>        <C>        <C>
Net revenue.....................................  $ 7,465    $10,711    $  5,857
Operating expenses:
  Cost of services..............................    5,190      5,496       1,149
  Selling, general and administrative
    expenses....................................   10,603      8,978       2,974
  Acquired in-process research and
    development.................................       --         --      19,800
                                                  -------    -------    --------
      Total operating expenses..................   15,793     14,474      23,923
                                                  -------    -------    --------
  Loss from operations..........................   (8,328)    (3,763)    (18,066)
Interest income, net............................     (286)        35          10
                                                  -------    -------    --------
  Loss before income taxes......................   (8,614)    (3,728)    (18,056)
(Benefit) provision for income taxes............   (3,139)    (1,100)        670
                                                  -------    -------    --------
Net loss........................................  $(5,475)   $(2,628)   $(18,726)
                                                  =======    =======    ========
</TABLE>

    Net assets of discontinued operation held for sale are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                          JANUARY 2,   JANUARY 3,
                                                             2000         1999
                                                          ----------   ----------
<S>                                                       <C>          <C>
Current assets..........................................    $ 3,013      $ 3,349
Property and equipment..................................      1,201        1,767
Goodwill and other intangibles..........................      7,926        4,992
Capitalized software....................................      1,578        1,561
                                                            -------      -------
      Total assets......................................     13,718       11,669
                                                            -------      -------
Current liabilities.....................................      3,338        2,351
Deferred income taxes...................................        352          322
Provision for loss until disposal, less income tax
  benefit
  of $1,100                                                      --        1,900
      Total liabilities.................................      3,690        4,573
                                                            -------      -------
Net assets of discontinued operations...................    $10,028      $ 7,096
                                                            =======      =======
</TABLE>

7. RESTRUCTURING CHARGES

    Fiscal year 1999 results include three separate restructuring charges
totaling $7.6 million ($4.7 million after tax) related to a program to close a
total of 24 Customer Acquisition Customer Interaction Centers and to reduce the
supporting salaried workforce. A charge of $2.0 million was recorded in the
first quarter including $1.4 million for the write-down of property and
equipment and $0.6 million for employee severance costs. An additional charge of
$4.0 million was recorded in the second quarter including $2.7 million for the
write-down of property and equipment, $0.3 million for employee severance costs
and

                                       40
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

7. RESTRUCTURING CHARGES (CONTINUED)
$1.0 million for lease termination costs. The final charge of $1.6 million was
recorded in the third quarter including $1.3 million for the write-down of
property and equipment and $0.3 for lease termination costs.

    As of January 2, 2000, approximately $5.4 million of the 1999 restructuring
accruals were utilized including all of the first quarter charge. The remaining
$2.2 million includes $1.4 million for the write-down of property and equipment,
$0.3 million for employee severance costs and $0.5 million for lease termination
costs. The full amount will be utilized during the 2000 fiscal year.

    In the second quarter of fiscal year 1998, the Company recorded a
restructuring charge of $9.0 million ($5.6 million after tax). The restructuring
initiatives involved closing Customer Interaction Centers, reconfiguring certain
administrative support facilities and reducing the workforce by approximately 80
salaried employees. The 1998 restructuring charge included $4.5 million for the
write-off of leasehold improvements and equipment, $3.3 million for employee
severance costs and $1.2 million for lease termination costs.

8. INCOME TAXES

    The provision (benefit) for income taxes for continuing operations for
fiscal years 1999, 1998 and 1997 consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                     1999       1998       1997
                                                   --------   --------   --------
<S>                                                <C>        <C>        <C>
Current provision (benefit)......................  $(2,352)   $ 3,460    $10,990
Deferred provision (benefit).....................    5,932     (8,660)     1,110
                                                   -------    -------    -------
      Total provision (benefit) for income
        taxes....................................  $ 3,580    $(5,200)   $12,100
                                                   =======    =======    =======
</TABLE>

    A reconciliation of the statutory Federal income tax rate to the actual
effective income tax rate for continuing operations for fiscal years 1999, 1998
and 1997 is as follows:

<TABLE>
<CAPTION>
                                                        1999           1998           1997
                                                      --------       --------       --------
<S>                                                   <C>            <C>            <C>
Statutory rate......................................    35.0%         (35.0)%         35.0%
State taxes, net of Federal benefit and state
  credits...........................................     3.6           (0.2)           3.0
Non-deductible goodwill.............................     4.7           29.3             --
Work Opportunity Tax credit.........................    (5.8)          (0.5)          (1.1)
Other...............................................     1.3           (0.7)           1.1
                                                        ----          -----          -----
      Effective rate................................    38.8%          (7.1)%         38.0%
                                                        ====          =====          =====
</TABLE>

                                       41
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

8. INCOME TAXES (CONTINUED)
    The significant components of deferred income tax assets and liabilities for
continuing operations are as follows (in thousands):

<TABLE>
<CAPTION>
                                                          JANUARY 2,   JANUARY 3,
                                                             2000         1999
                                                          ----------   ----------
<S>                                                       <C>          <C>
Deferred tax assets:
  Vacation accrual......................................    $1,047       $  906
  Self-insurance related costs..........................       791          460
  Acquisition-related costs.............................     1,883        4,703
  Restructuring charge..................................     1,202        1,699
  Revenue recognition...................................     1,230        1,230
  Allowance for doubtful accounts.......................     1,261        1,146
  Purchased intangibles.................................       380        2,665
  Tax loss carryforwards................................     4,471        8,560
  Other.................................................       757          431
                                                            ------       ------
      Total deferred tax assets.........................    13,022       21,800
                                                            ------       ------
Deferred tax liabilities:
  Excess depreciation...................................     5,002        5,130
  Change in accounting methods..........................       303          461
  Other.................................................       358          529
                                                            ------       ------
      Total deferred tax liabilities....................     5,663        6,120
                                                            ------       ------
  Gross deferred tax assets.............................     7,359       15,680
Valuation allowance.....................................    (4,471)      (8,560)
                                                            ------       ------
  Net deferred tax assets...............................    $2,888       $7,120
                                                            ======       ======
</TABLE>

    At January 2, 2000, the Company had net operating loss carryforwards for tax
purposes of $12.8 million 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 approximately $4.5 million has been
recorded as an offset to these deferred tax assets that 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.

                                       42
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

9. LONG-TERM DEBT

    Long-term debt consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                              JANUARY 2,   JANUARY
                                                                 2000      3, 1999
                                                              ----------   --------
<S>                                                           <C>          <C>
Term Loan, effective fixed interest rate of 9% and 7%, final
  payment due June 2003. See note (1) below.................   $130,000    $144,000
Industrial Revenue Bonds, payable monthly at 7%, final
  payment due June 2008.....................................      1,147       1,239
County Development Note, payable monthly at 4%, final
  payment due January 2004..................................        612         748
Promissory Note, payable monthly at 9%, final payment due
  July 2002.................................................        236         342
Capital leases, payable monthly at 8.9% average rate, final
  payment due January 2003..................................        800       2,220
                                                               --------    --------
    Total long-term debt....................................    132,795     148,549
Less--current maturities....................................     16,808      16,122
                                                               --------    --------
    Long-term debt, net.....................................   $115,987    $132,427
                                                               ========    ========
</TABLE>

    As of January 2, 2000, the carrying value of debt obligations reasonably
approximates their fair value, and the principal payments of long-term debt are
due as follows:

<TABLE>
<S>                                                           <C>
2001........................................................  $ 20,504
2002........................................................    26,500
2003(1).....................................................    68,301
2004........................................................       163
Thereafter..................................................       519
                                                              --------
  Total payments............................................  $115,987
                                                              ========
</TABLE>

------------------------

(1) On January 18, 2000, in connection with the Company's sale of Paragren
    Technologies, the Company prepaid $11 million on the Term Loan reducing the
    final principal payment due in June 2003 from $61 million to $50 million.

    On May 20, 1998, the Company entered into a $250 million Senior Credit
Facility ("Credit Facility") with a group of lending institutions and at the
same time repaid all amounts outstanding on its prior $80 million credit
facility. The Credit Facility consisted of a $150 million Term Loan and a
$100 million Revolving Facility. Borrowings under the Revolving Facility would
be used to provide working capital and fund capital expenditures. Proceeds from
the Term Loan were used to acquire the common stock of ITI Holdings, Inc. The
common stock of ITI and all existing or acquired subsidiaries serve as
collateral under the terms of the Credit Facility.

    On September 8, 1998, the Credit Facility was amended and restated, reducing
the available borrowings to $225 million consisting of a $150 million Term Loan
and a $75 million Revolving Facility. Subsequently, there have been four
amendments to the September 8, 1998 amended and restated Credit Facility. Most
recently, the Fourth Amendment was adopted on January 20, 2000.

                                       43
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

9. LONG-TERM DEBT (CONTINUED)
    On September 29, 1998, the First Amendment to the amended and restated
Credit Facility revised certain financial covenants. As of the end of the 1998
fiscal year, however, the Company was not in compliance with the financial
covenants of the Credit Facility.

    On April 1, 1999, the Second Amendment to the amended and restated Credit
Facility granted waivers of default and several of the financial covenants were
revised. 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, and the Company's ability to make
certain restricted payments, as defined in the agreement, was reduced. In
addition, the Second Amendment to the Credit Facility limited the Company to
$15 million in annual capital expenditures.

    On November 22, 1999, the Third Amendment to the amended and restated Credit
Facility granted additional flexibility over investments and capital
expenditures.

    Subsequently, on January 20, 2000, the Fourth Amendment to the amended and
restated Credit Facility reduced the total facility amount and revised some of
the financial covenants. The new facility amount was reduced in total to
$169 million consisting of a $119 million Term Loan and a $50 million Revolving
Facility. Availability of up to $10 million of the $50 million Revolving
Facility is restricted subject to the attainment of trailing four-quarter EBITDA
of at least $60 million. The annual limit on capital expenditures was removed.

    Under the terms of the Credit Facility in effect at the end of fiscal year
1999, the Company is required to make quarterly principal payments on the Term
Loan, ranging from $3 million to $7 million per quarter, with a specified final
payment of $61 million due June 1, 2003. At January 2, 2000, the Company had
$130 million outstanding under the Term Loan. On January 18, 2000, in connection
with the Company's sale of Paragren Technologies the Company prepaid
$11 million on the Term Loan reducing the final principal installment payment
due June 1, 2003, from $61 million to $50 million.

    Under the terms of the Credit Facility the Company is required to maintain
certain financial covenants which limit the Company's ability to incur
additional indebtedness, repurchase outstanding common shares, create liens,
acquire, sell or dispose of certain assets, engage in certain mergers and
acquisitions, and to make certain restricted payments. As a result, the Company
is not allowed to pay dividends on its Common Shares. The Company is currently
in compliance with all covenants and restrictions imposed by the terms of the
Credit Facility.

    Borrowings under the Credit Facility incur a floating interest rate usually
based on the LIBOR index rate, although the Company has the option of using an
alternate base rate defined in the agreement. In addition, the Company pays a
commitment fee on the unused portion of the Revolving Facility as well as an
annual fee on the outstanding letters of credit. As of January 2, 2000, the
Company had $2.0 million of outstanding letters of credit. Subsequently, in
January 2000, an existing letter of credit was increased by $0.4 million, and in
February 2000, the Company issued an additional letter of credit for
$1.7 million to guarantee payment of the lease obligation associated with new
headquarters facilities in Deerfield, Illinois.

    In connection with securing the Credit Facility in 1998, the Company paid
fees and expenses of $2.0 million. The debt issuance costs are recorded as
deferred charges and are being amortized over the

                                       44
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

9. LONG-TERM DEBT (CONTINUED)
term of the Credit Facility of five years. The amortization of deferred debt
costs for fiscal years 1999 and 1998 was $0.4 million and $0.2 million,
respectively.

INTEREST RATE AGREEMENTS

    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 million and
amortizes, pro rata, with principal payments on the Term Loan. The notional
amount on the Swap was reduced by $11 million, by way of sale in the open
market, to reflect the $11 million prepayment on the Term Loan on January 18,
2000. 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 million and amortizes, pro rata, with principal payments
on the Term Loan. At January 2, 2000, the fair market value of the Swap and Cap
were $1.5 million and $0.5 million, respectively.

10. COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS

    The Company leases its Customer Interaction Centers and administrative
offices. Rent expense for the fiscal years 1999, 1998 and 1997 was $7,548,
$8,885 and $5,631, respectively.

    Minimum future rental payments at January 2, 2000, are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                              OPERATING
                                                               LEASES
                                                              ---------
<S>                                                           <C>
2000........................................................   $ 7,419
2001........................................................     5,223
2002........................................................     3,852
2003........................................................     2,672
2004........................................................     2,432
Thereafter..................................................     4,964
                                                               -------
  Total payments............................................   $26,562
                                                               =======
</TABLE>

    In February 2000, the Company entered into lease agreements for new
headquarter facilities in Deerfield, Illinois. The future minimum rental
payments under these lease agreements are as follows (in thousands): 2000--$279;
2001--$1,292; 2002--$1,331; 2003--$1,371; 2004--$1,412; and thereafter--$5,433.

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

                                       45
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
instituted by various persons who purchased the Company's Common Shares in such
offerings. 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. On or about November 15, 1999, the court denied
the motion to dismiss. Discovery is proceeding in this action. The Company
denies all allegations of wrongdoing and continues to believe that it has
meritorious defenses.

    The Company is engaged in two arbitration proceedings with the former owner
of Paragen Technologies, Inc. In the first proceeding, the former owner alleged
that the Company breached representations and warranties made pursuant to the
related merger agreement and claimed compensation totaling $24.9 million. APAC
Customer Services will vigorously defend these claims. This arbitration is
scheduled for April 2000. APAC Customer Services asserted certain counterclaims
against the former owner which are now the subject of a separate arbitration.
The counterclaims allege that the former owner violated the non-compete and
non-solicitation provisions of his employment agreement, as well as the
provision that required him to devote his best efforts to Paragen Technologies
on a full-time basis. The second arbitration is scheduled for June 2000. In
January 2000, APAC Customer Services filed a lawsuit against the same former
owner of Paragen Technologies and another individual alleging among other
things, breach of fiduciary duty and inducement of breach of fiduciary duty,
tortious interference with business expectancy and with contractual relations,
and trade secret violations. The lawsuit is in the initial stages, and no
discovery has been taken.

    On January 5, 2000, APAC, Inc. filed suit against the Company in the U.S.
District Court for the Northern District of Georgia (Atlanta Division) alleging
that the Company's use of "APAC" in the Company's name infringes a trademark of
APAC, Inc. The suit asserts violations of the federal Lanham Act and various
Georgia state statues, as well as a breach by the Company of an agreement
between APAC, Inc. and the Company. The Company has answered the complaint and
intends to defend itself vigorously.

    Additionally, the Company is subject to occasional lawsuits, governmental
investigations and claims arising out of the normal conduct of business.
Management does not believe the outcome of any pending claims will have a
materially adverse impact on the Company's consolidated financial position.

    Although the Company does not believe that these proceedings will result in
a material adverse effect on its consolidated financial position, no assurance
to that effect can be given.

TRAINING BONDS

    At the end of the 1999, 1998 and 1997 fiscal years, the Company had
guaranteed the repayment of approximately $887, $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 2, 2000,
the Company estimates that the deposits made into escrow will be adequate to
cover the cost of the maturing bonds.

                                       46
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

11. SHARE OWNERS' EQUITY

    The authorized capital stock of APAC Customer Services, Inc. consists of
(a) 200 million Common Shares, $.01 par value per share, of which 49,079,617
were issued as of January 2, 2000, and (b) 50 million Preferred Shares, $.01 par
value per share, of which no shares have been issued. 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. During fiscal 1998, the Company repurchased 1,609,000 shares
at an average price of $3.50 per share. Additional stock repurchases made after
January 1, 2000, however, are limited to $5 million per fiscal year and
$10 million in the aggregate under the terms of the amended and restated Credit
Facility.

12. EQUITY INSTRUMENTS

STOCK OPTIONS

    The Company has granted options to purchase Common Shares under three plans
all established in 1995. Under the Executive 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 2, 2000, 452,027 of these options were vested.

    Under the Incentive Stock Option Plan, officers, key employees and
non-employee consultants may be granted nonqualified stock options, incentive
stock options, stock appreciation rights, performance shares and stock awards,
all as determined by a committee of the Board of Directors. A total of
9 million shares have been authorized for grant under the Incentive Stock Option
Plan. The exercise price of incentive stock options granted may not be less than
100% of the fair market value of the Common Shares at the date of grant. The
exercise price of non-qualified stock options granted may not be less than 85%
of the fair market value of the Common Shares at the date of grant.

    Under the Non-employee Director Stock Option Plan, the Company provides for
annual grants of non-qualified stock options to each non-affiliated director of
the Company. In May 1999, the Board of Directors set the annual grant amount at
20,000 options for 1999. In addition, the Board approved attendance grants for
the non-affiliated directors. For each meeting, 1,000 options are awarded for
attendance and 500 options are awarded for participation by telephone. A total
of 300,000 shares have been authorized for grant under the Director Stock Option
Plan. The exercise price of the directors' options granted is equal to the fair
market value of the Common Shares at the date of grant, and the options vest
equally over a three-year period.

    Options under both the Incentive Stock Option Plan and the Non-employee
Director Stock Option Plan expire at periods between 5 and 15 years after date
of grant.

                                       47
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

12. EQUITY INSTRUMENTS (CONTINUED)
    Stock option activity under the Company's Executive Plan, Incentive Stock
Option Plan, and Non-employee Director Stock Option Plan for fiscal years 1999,
1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                                                                              WEIGHTED
                                                                                              AVERAGE
                                                                                              EXERCISE
DESCRIPTION                                                  SHARES         PRICE RANGE        PRICE
-----------                                                ----------   --------------------  --------
<S>                                                        <C>          <C>                   <C>
Outstanding as of December 29, 1996......................   2,591,304          $3.12--$51.75   $15.37
  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......................   3,514,831          $0.97--$38.13   $11.45
  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........................   5,388,501          $0.97--$38.13   $ 6.70
  Granted................................................   4,372,271          $2.34--$13.13   $ 4.17
  Exercised..............................................     (93,418)         $0.97--$ 8.50   $ 5.72
  Canceled...............................................  (2,495,744)         $0.97--$38.13   $ 5.66
                                                           ----------
Outstanding as of January 2, 2000........................   7,171,610          $0.97--$38.13   $ 5.71
                                                           ==========   ====================   ======
  Stock options exercisable at January 2, 2000...........   1,778,664          $0.97--$38.13   $ 6.60
                                                           ==========   ====================   ======
</TABLE>

    The following table summarizes information concerning stock options
outstanding as of January 2, 2000:

<TABLE>
<CAPTION>
                                                   EXERCISE PRICE RANGES                             TOTAL
                                ------------------------------------------------------------   ------------------
                                   $0.97--$6.00        $6.01--$11.00        $13.00--$38.13       $0.97--$38.13
                                ------------------   ------------------   ------------------   ------------------
<S>                             <C>                  <C>                  <C>                  <C>
Outstanding as of
  January 2, 2000.............           4,563,037            2,193,718              414,855            7,171,610
  Remaining life..............           9.0 years            7.8 years            7.6 years            8.5 years
  Weighted Average Exercise
    Price.....................               $3.39                $7.46               $21.97                $5.71
Exercisable as of
  January 2, 2000.............             705,293              916,991              156,380            1,778,664
  Remaining life..............           6.5 years            6.8 years            7.2 years            6.7 years
  Weighted Average Exercise
    Price.....................               $3.10                $6.72               $21.67                $6.60
</TABLE>

    During fiscal years 1998 and 1997, on three occasions, the Company's Board
of Directors authorized repricing of certain of its outstanding stock options
having an exercise price in excess of the then current market value. The actions
were taken on the recommendation of the Compensation Committee, in order to
preserve an economic incentive for continued commitment to the Company's
success. The last of these actions was taken on August 5, 1998. On that date,
all options held by employees, other than those held by

                                       48
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

12. EQUITY INSTRUMENTS (CONTINUED)
the Company's then Chief Executive Officer, President and certain other members
of senior management, with an exercise price in excess of $6.50 per share, when
the then current market value was $5.38 per share, were repriced to have an
exercise price of $6.50 per share. Employees at the senior vice president level
had their options repriced to $8.50 per share. After repricing, 4,264,843
options were priced between $0.97 and $8.50 per share. Options for 558,624
shares, which were not repriced on August 5, 1998 ranged in price from $9.50 to
$38.13 per share.

    The Company applies APB No. 25 in accounting for the stock option plans
above. No compensation expense has been recognized for stock options when the
option price equals or exceeds the fair market value at date of grant. In order
to calculate the pro forma information below, the fair value of each option is
estimated on the date of grant based on the Black-Scholes option pricing model.
Assumptions include no dividend yield, risk-free interest rates ranging from of
6.5% to 7%, expected volatility ranging between 70% and 90%, and an expected
life ranging from 7 years to 10 years. Pro forma results of operations for
fiscal years 1999, 1998 and 1997 which reflect the adjustment to compensation
expense to account for stock options in accordance with SFAS No. 123 are as
follows:

<TABLE>
<CAPTION>
                                                                   1999           1998           1997
                                                                 --------       --------       --------
                                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                              <C>            <C>            <C>
Net income (loss) as reported.............................        $5,650        $(79,320)      $(1,217)
Less--compensation expense on stock options, net of income
  tax benefit.............................................         5,189          12,320         5,500
                                                                  ------        --------       -------
Pro forma net income (loss)...............................        $  461        $(91,640)      $(6,717)
                                                                  ------        --------       -------
Pro forma net income (loss) per diluted share.............        $ 0.01        $  (1.89)      $ (0.14)
                                                                  ======        ========       =======
</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 over the next four years. 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 $153 and $250 in selling
expense in fiscal years 1999 and 1998, respectively, for warrants that 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

                                       49
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

13. BENEFIT PLANS (CONTINUED)
plan. Company matching contributions vest 20% per year over a five-year period.
For fiscal years 1999, 1998 and 1997, the Company made matching contributions to
the plan of $365, $270 and $250, respectively.

    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 1999, 1998 and 1997, 92,326, 57,669 and 34,693 Common Shares,
respectively, were issued to employees under this plan.

14. SEGMENT INFORMATION

    Through fiscal year 1999, the Company had three reportable segments
organized around operating divisions providing separate and distinct services to
clients. The operating divisions were managed separately because the service
offerings require different technology and marketing strategies and have
different operating models and performance metrics. The Customer Acquisition
division provides outbound sales support to customers and businesses, market
research, targeted marketing plan development and customer lead generation,
acquisition and retention. The Customer Care division provides inbound customer
service, direct mail response, "help" line support and customer order
processing. In December 1999, the Company established CustomerAssistance.com to
provide customer relationship management services in the e-commerce environment.
For fiscal 1999, the limited activity of CustomerAssistance.com is included in
the results of the Customer Care division. CustomerAssistance.com will be
reported as a separate business segment for fiscal year 2000.

    The Software Development division was managed by the Company's wholly-owned
subsidiary, Paragren Technologies, Inc. ("Paragren"), which specialized 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 the sale of Paragren in January 2000
and the discontinued operations is reported in Note 6 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 that 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.

                                       50
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

14. SEGMENT INFORMATION (CONTINUED)
    The nature of the industry is such that the Company receives a significant
portion of its annual net revenue from several large clients. The Company's
largest client, a parcel delivery company provided 14%, 16% and 26% of annual
net revenue for fiscal years 1999, 1998 and 1997, respectively, all of which was
in the Customer Care division. In addition, a telecommunications company
provided 10% of total annual net revenue in 1999, of which over 90% was in the
Customer Care division. Another telecommunications client provided 13% and 17%
of total net revenue in 1998 and 1997, respectively, of which over 70% was in
the Customer Acquisition division.

    Segment information for fiscal years 1999, 1998, and 1997 is as follows (in
thousands):

<TABLE>
<CAPTION>
                                            CUSTOMER     CUSTOMER    SOFTWARE      SHARED
FISCAL YEARS ENDED                         ACQUISITION     CARE     DEVELOPMENT   SERVICES   COMBINED
------------------                         -----------   --------   -----------   --------   --------
<S>                                        <C>           <C>        <C>           <C>        <C>
January 2, 2000:
  Net revenue............................   $162,702     $264,943     $    --     $    --    $427,645
  Operating income (loss)................     (2,951)      25,546          --          --      22,595
  Restructuring charge (a)...............      7,600           --          --          --       7,600
  Capital expenditures...................      3,032        1,405          --       3,352       7,789
  Depreciation and amortization..........     14,663       19,757          --          --      34,420
  Identifiable assets (c)................     52,018      119,513      10,028      54,921     236,480
                                            --------     --------     -------     -------    --------
January 3, 1999:
  Net revenue............................   $199,523     $225,505     $    --     $    --    $425,028
  Operating income (loss)................    (77,315)      11,962          --          --     (65,353)
  Asset impairment charges (b)...........     69,700        1,472          --          --      71,172
  Restructuring charge (a)...............      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
                                            --------     --------     -------     -------    --------
</TABLE>

------------------------

NOTES:

a.  During fiscal year 1999 and 1998, the Company recorded restructuring charges
    to close customer contact centers, reconfigure certain administrative
    support facilities and reduce the salaried workforce.

b.  During fiscal year 1998, the Company's Customer Acquisition division
    recognized an impairment loss of $69,700 on long-lived assets acquired with
    the purchase of ITI in May 1998. In addition, the

                                       51
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

14. SEGMENT INFORMATION (CONTINUED)
    Company's Customer Care division recognized an impairment loss of $1,472 on
    capitalized software abandoned by the division during the year.

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 that are being held for sale.

d.  During fiscal year 1997, the Customer Acquisition and Customer Care
    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.

15. QUARTERLY DATA (UNAUDITED)

    The following is a summary of the quarterly results of operations including
income per share for APAC Customer Services, Inc. for the quarterly periods of
1999 and 1998 fiscal years (in thousands, except per share data):

<TABLE>
<CAPTION>
                                             FIRST      SECOND     THIRD      FOURTH      FULL
FISCAL YEARS ENDED                          QUARTER    QUARTER    QUARTER    QUARTER      YEAR
------------------                          --------   --------   --------   --------   --------
<S>                                         <C>        <C>        <C>        <C>        <C>
1999 FISCAL YEAR ENDED JANUARY 2, 2000:
  Net revenue.............................  $107,421   $102,976   $103,188   $114,060   $427,645
  Gross profit............................    16,973     21,649     20,413     21,605     80,640
  Income (loss) from continuing operations
    (a)(b)(c).............................      (202)     1,145      1,929      2,778      5,650
  Net income (loss).......................      (202)     1,145      1,929      2,778      5,650
NET INCOME (LOSS) PER SHARE:
  Income (loss) from continuing operations
    (a)(b)................................  $  (0.00)  $   0.02   $   0.04   $   0.06   $   0.12
  Net income(loss) (a)(b).................     (0.00)      0.02       0.04       0.06       0.12
1998 FISCAL YEAR ENDED 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 (c)...      (436)      (630)      (190)    (9,772)   (11,028)
  Net income (loss) (a)(b)................     4,917     (3,588)     3,423    (84,072)   (79,320)
NET INCOME (LOSS) PER SHARE:
  Income (loss) from continuing operations
    (a)(b)................................  $   0.11   $  (0.06)  $   0.07   $  (1.57)  $  (1.40)
  Net income(loss) (a)(b).................      0.10      (0.07)      0.07      (1.78)     (1.63)
</TABLE>

------------------------

NOTES:

a.  Fiscal year 1999 results include restructuring charges totaling $7,600 with
    $1,987, $3,986 and $1,627 recorded in the first, second and third quarters,
    respectively. Similarly, fiscal year 1998 results include

                                       52
<PAGE>
                          APAC CUSTOMER SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)

15. QUARTERLY DATA (UNAUDITED) (CONTINUED)
    a restructuring charge of $9,000 recorded in the second quarter. These
    charges related to a restructuring plan involving the closing of selected
    customer interaction centers, reconfiguration of certain administrative
    support facilities and reduction in the salaried work force.

b.  The second and third quarters of fiscal year 1999 include favorable impacts
    in the amount of $3,686 and $1,229, respectively, relating to the reversal
    of telephone charges which had been accrued in the fourth quarter of 1998.
    These reversals resulted from the Company negotiating favorable dispositions
    of cost associated with guaranteed minimum usage telecommunications
    contracts. The fourth quarter of 1998 includes a total of $9,600 of
    nonrecurring charges associated with the 1998 purchase of ITI
    Holdings, Inc. ("ITI"). These consist of $2,500 to provide allowances for
    doubtful accounts for financially impaired clients and a total of $7,100 to
    accrue future telecommunications costs guaranteed under minimum usage
    contracts not expected to be recovered from future operations.

c.  In December 1998, the Company's management approved a plan to sell the
    Paragren software development business. This sale was completed in
    January 2000. Accordingly, Paragren is reported as a discontinued operation.
    For fiscal year 1999, there was no income statement effect from the
    operations or disposal of Paragren. The loss provision of $8.4 million,
    established in the fourth quarter of 1998, was sufficient to offset
    Paragren's 1999 activity.

d.  The loss from continuing operations in the fourth quarter of fiscal year
    1998 includes impairment losses of $71,172 consisting of $69,700 of
    long-lived assets acquired with the purchase of ITI in May 1998, and $1,472
    on capitalized software abandoned by the Company during the quarter.

                                       53
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

    None

                                    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
June 9, 2000, 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 June 9, 2000,
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 June 9, 2000,
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 June 9, 2000,
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 2, 2000, and January 3,
             1999

       (iii) Consolidated Statements of Operations for the Fiscal Years Ended
             January 2, 2000, January 3, 1999, and December 28, 1997

        (iv) Consolidated Statements of Share Owners' Equity for the Fiscal
             Years Ended January 2, 2000, January 3, 1999, and December 28, 1997

        (v) Consolidated Statements of Cash Flows for the Fiscal Years Ended
            January 2, 2000, January 3, 1999, and December 28, 1997

        (vi) Notes to Consolidated Financial Statements

                                       54
<PAGE>
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

    None

                                       55
<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.

<TABLE>
<S>                                                    <C>  <C>
                                                       APAC CUSTOMER SERVICES, INC.

                                                                        /s/ GARY S. HOLTER
                                                            -----------------------------------------

                                                                          Gary S. Holter
                                                                    SENIOR VICE PRESIDENT AND
                                                                     CHIEF FINANCIAL OFFICER
Dated: March 28, 2000
</TABLE>

                                       56
<PAGE>
    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
                      ---------                                    -----                    ----
<C>                                                    <S>                             <C>
              /s/ THEODORE G. SCHWARTZ*                Chairman of the Board of
     -------------------------------------------         Directors                     March 28, 2000
                Theodore G. Schwartz

                 /s/ PETER M. LEGER*                   President, Chief Executive
     -------------------------------------------         Officer (Principal Executive  March 28, 2000
                   Peter M. Leger                        Officer) and Director

                 /s/ MARC S. SIMON*                    Executive Vice President and
     -------------------------------------------         Director                      March 28, 2000
                    Marc S. Simon

                                                       Executive Vice President and
                 /s/ GARY S. HOLTER                      Chief Financial Officer
     -------------------------------------------         (Principal Financial          March 28, 2000
                   Gary S. Holter                        Officer) March 28, 2000

               /s/ THOMAS M. COLLINS*                  Director
     -------------------------------------------                                       March 28, 2000
                  Thomas M. Collins

                /s/ GEORGE D. DALTON*                  Director
     -------------------------------------------                                       March 28, 2000
                  George D. Dalton

                /s/ PAUL G. YOVOVICH*                  Director
     -------------------------------------------                                       March 28, 2000
                  Paul G. Yovovich

                                                       Director
     -------------------------------------------
                  Clark E. McLeod**
</TABLE>

* GARY S. HOLTER, AS ATTORNEY IN FACT FOR EACH PERSON INDICATED.

** MR. MCLEOD WAS APPOINTED AS A DIRECTOR EFFECTIVE MARCH 28, 2000.

                                       57
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Share Owners of APAC Customer Services, Inc.:

We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of APAC Customer Services, Inc. and issued our
unqualified opinion thereon dated February 9, 2000. Our audits were made for the
purpose of forming an opinion on the basic consolidated financial statements.
The schedule of Valuation and Qualifying Accounts 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 our audits of the basic consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic consolidated financial statements taken as a
whole.

ARTHUR ANDERSEN LLP

Chicago, Illinois
February 9, 2000

                                       58
<PAGE>
SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
             COLUMN A                COLUMN B                COLUMN C                 COLUMN D     COLUMN E
----------------------------------   --------                --------                 --------     --------
                                                             ADDITIONS
                                    BALANCE AT   ---------------------------------                BALANCE AT
                                    BEGINNING    CHARGED TO COSTS     CHARGED TO                    END OF
DESCRIPTION                         OF PERIOD      AND EXPENSES     OTHER ACCOUNTS   DEDUCTIONS     PERIOD
----------------------------------  ----------   ----------------   --------------   ----------   ----------
                                                                         (A)            (B)
<S>                                 <C>          <C>                <C>              <C>          <C>
Allowance for doubtful accounts:
  Year ended December 28, 1997....    $  360          $  300            $   --         $  213       $  447
  Year ended January 3, 1999......       447           3,090             3,052          2,339        4,250
  Year ended January 2, 2000......     4,250           1,080                --          3,770        1,560

Accrued Restructuring Charge:
  Year ended January 3, 1999......    $   --          $9,000            $   --         $5,264       $3,736
  Year ended January 2, 2000......     3,736           7,600                --          9,086        2,250
</TABLE>

------------------------

NOTES:

(A) RELATED TO THE ACQUISITION OF ITI HOLDINGS, INC.

(B) REPRESENTS CHARGES FOR WHICH THE ALLOWANCE AND RESERVE ACCOUNTS WERE
    CREATED.

                                       59
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                          DESCRIPTION
-------                                         -----------
<C>                     <S>
        3.1             Articles of Incorporation of APAC Customer Services, Inc. is
                        incorporated by reference to Exhibit 3.1 to APAC Customer
                        Services, Inc.'s quarterly Report on Form 10-Q for the
                        quarter ended October 3, 1999.

        3.2             Amended and Restated Bylaws of APAC Customer Services, Inc.
                        as amended through September 29, 1999 incorporated by
                        reference to Exhibit 3.2 to APAC Customer Services, Inc.'s
                        Quarterly Report on Form 10-Q for the quarter ended
                        October 3, 1999.

        4.1             Specimen Common Stock Certificate incorporated by reference
                        to Exhibit 4 to APAC Customer Services, Inc.'s Quarterly
                        Report on Form 10-Q for the quarter ended October 3, 1999.

      *10.1             APAC TeleServices, Inc. Amended and Restated 1995 Incentive
                        Stock Plan, as amended, incorporated by reference to
                        Exhibit 99.1 to APAC TeleServices, Inc.'s Current Report on
                        Form 8-K dated April 10, 1998

      *10.2             Amendment No. 1 to Amended and Restated APAC TeleServices,
                        Inc. 1995 Incentive Stock Plan incorporated by reference to
                        Exhibit 10.11 to APAC TeleServices, Inc.'s Registration
                        Statement on Form S-1, as amended, Registration
                        No. 33-95638

      *10.3             Amended and Restated APAC TeleServices, Inc. 1995
                        Nonemployee Director Stock Option Plan incorporated by
                        reference to Exhibit 10.2 to APAC TeleServices, Inc.'s
                        Registration Statement on Form S-1, as amended, Registration
                        No. 33-95638

      *10.4             Employment Agreement with Marc S. Simon, as amended,
                        incorporated by reference to Exhibit 10.3 to APAC
                        TeleServices, Inc.'s Registration Statement on Form S-1, as
                        amended, Registration No. 33-95638

      *10.5             Employment Agreement with Donald B. Berryman incorporated by
                        reference to Exhibit 10.4 to APAC TeleServices, Inc.'s
                        Registration Statement on Form S-1, as amended, Registration
                        No. 33-95638

      *10.6             Employment Agreement with Peter M. Leger incorporated by
                        reference Exhibit 10.2 to APAC Customer Services, Inc.
                        Quarterly Report on Form 10-Q for the quarter ended
                        October 3, 1999.

       10.7             Employment and relocation agreement with L. Clark Sisson.

       10.8             Amended and Restated Credit Agreement dated September 8,
                        1998 and First Amendment to Agreement, incorporated by
                        reference to Exhibit 10 to APAC TeleServices, Inc.'s
                        Quarterly Report on Form 10-Q for the period ended
                        September 27, 1998

       10.9             Second Amendment and Waiver to Amended and Restated Credit
                        Agreement.

       10.10            Third Amendment and Waiver to Amended and Restated Credit
                        Agreement.

       10.11            Fourth Amendment to Amended and Restated Credit Agreement.

       10.12**          Agreement with United Parcel Service General Services Inc.
                        incorporated by reference to Exhibit 10.6 to APAC
                        TeleServices, Inc.'s Registration Statement on Form S-1, as
                        amended, Registration No. 33-95638
</TABLE>

                                       60
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                          DESCRIPTION
-------                                         -----------
<C>                     <S>
       10.13**          Amendment, dated September 22, 1999, to Agreement for
                        In-Bound Telemarketing with United Parcel Services Global
                        Services Co. incorporated by reference to Exhibit 10.1 to
                        APAC Customer Services, Inc. Quarterly Report on Form 10-Q
                        for the quarter ended October 3, 1999.

       10.14            Registration Rights Agreement incorporated by reference to
                        Exhibit 10.7 to APAC TeleServices, Inc.'s Registration
                        Statement on Form S-1, as amended, Registration
                        No. 33-95638

       10.15            Tax Agreement incorporated by reference to Exhibit 10.8 to
                        APAC TeleServices, Inc.'s Registration Statement on
                        Form S-1, as amended, Registration No. 33-95638

       10.16**          Agreement with J.C. Penney Insurance Company, dated
                        November 1, 1994 incorporated by reference to Exhibit 10.9
                        to APAC TeleServices, Inc.'s Registration Statement on
                        Form S-1, as amended, Registration No. 33-95638

       21.1             Subsidiaries of APAC Customer Services, Inc.

       23.1             Consent of Arthur Andersen LLP

       24.1             Power of attorney executed by Theodore G. Schwartz,
                        Peter M. Leger, Marc S. Simon, Thomas M. Collins, George D.
                        Dalton, Paul G Yovovich

       27.1             Financial Data Schedule
</TABLE>

------------------------

 *  Indicates management employment contracts or compensatory plans or
    arrangements.

**  Portions of this Exhibit were omitted and filed separately with the
    Securities and Exchange Commission pursuant to a request for confidential
    treatment.

                                       61