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                       SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C.
 
                                   FORM 10-K
 
      [X] Annual report pursuant to Section 13 or 15(d) of the Securities
                              Exchange Act of 1934
 
                  For the fiscal year ended DECEMBER 31, 1998
 
    [ ] Transition report pursuant to Section 13 or 15(d) of the Securities
                              Exchange Act of 1934
 
           For the transition period from             to
 
                        Commission file number: 0-20941
 
                         PRECISION RESPONSE CORPORATION
             (Exact name of Registrant as specified in its charter)
 
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<S>                                                    <C>
                       FLORIDA
           (State or other jurisdiction of                                  59-2194806
           incorporation or organization)                      (I.R.S. Employer Identification No.)
</TABLE>
 
                  1505 N.W. 167TH STREET, MIAMI, FLORIDA 33169
               (Address of principal executive offices)(Zip code)
 
                                 (305) 816-4600
              (Registrant's telephone number, including area code)
 
        Securities registered pursuant to Section 12(b) of the Act: NONE
 
          Securities registered pursuant to Section 12(g) of the Act:
 
                         COMMON STOCK, $0.01 PAR VALUE
                                (Title of class)
 
     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]
 
     ON MARCH 22, 1999, THE REGISTRANT HAD 21,549,000 OUTSTANDING SHARES OF
COMMON STOCK, $0.01 PAR VALUE, AND BASED UPON THE CLOSING MARKET PRICE OF THE
REGISTRANT'S COMMON STOCK ON THE NASDAQ NATIONAL MARKET ON SUCH DATE, THE
AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT WAS APPROXIMATELY $42,216,750.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Certain portions of the Registrant's Definitive Proxy Statement for its
1999 Annual Meeting of Shareholders are incorporated by reference in Part III of
this report.
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                                     INDEX
 
                                    PART I.
 
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  ITEM NO.                                                                  PAGE
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   1.         Business....................................................    3
   2.         Properties..................................................   12
   3.         Legal Proceedings...........................................   13
   4.         Submission of Matters to a Vote of Security-Holders.........   13
 
PART II.
   5.         Market for the Registrant's Common Equity and Related
              Stockholder Matters.........................................   14
   6.         Selected Financial Data.....................................   16
   7.         Management's Discussion and Analysis of Financial Condition
              and Results of Operations...................................   18
   7A.        Quantitative and Qualitative Disclosures About Market
              Risk........................................................   31
   8.         Financial Statements and Supplementary Data.................   31
   9.         Changes in and Disagreements With Accountants on Accounting
              and Financial Disclosure....................................   31
 
PART III.
   10.        Directors and Executive Officers of the Registrant..........   31
   11.        Executive Compensation......................................   32
   12.        Security Ownership of Certain Beneficial Owners and
              Management..................................................   32
   13.        Certain Relationships and Related Transactions..............   32
 
PART IV.
   14.        Exhibits, Financial Statement Schedules and Reports on Form
              8-K.........................................................   32
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                                    PART I.
 
ITEM 1. BUSINESS
 
GENERAL
 
     Precision Response Corporation ("PRC" or the "Company") was incorporated in
the state of Florida in 1982 as a fulfillment company and is currently a leading
full-service provider of telephone-based customer service and marketing
solutions on an outsourced and cosourced basis to large corporations. Through
the integration of its teleservicing, Internet, database marketing and
management, and fulfillment capabilities, the Company is able to provide a
"one-stop" solution to meet its clients' needs. The Company believes that its
one-stop approach, combined with its sophisticated use of advanced technology,
provides a distinct competitive advantage in attracting clients seeking to
cost-effectively contact or service prospective and/or existing customers.
 
     The Company is focused on attracting large corporate clients that have
significant customer service needs including database design and management,
substantial ongoing teleservicing, and electronic data processing. Typically,
the Company's customer care associates are dedicated to a specific PRC client.
The Company believes that the inbound (customer-initiated) segment of the
customer care industry possesses the greatest long-term growth potential and is,
therefore, concentrating its efforts primarily on that industry niche. The
Company's teleservicing activities principally involve inbound calls. In most
cases, outbound (PRC-initiated) calls are made to existing customers of a PRC
client or to respond to customer-initiated inquiries. In 1998, 86% of the
Company's revenues from teleservicing activities related to inbound calls.
 
     During 1998, the Company began strategic initiatives to capitalize on the
extraordinary growth of Internet commerce by integrating Internet technologies
with current PRC products and services to, in effect, create multimedia
"customer interaction centers." PRC's technology, when fully implemented, will
allow its customer care associates to interact on a real-time basis with a
customer through voice or written transmissions via conventional telephone or
over the Internet, facsimile, e-mail and Worldwide Web or "text chat" sessions.
The Company's new and enhanced products and services which are being designed to
support Internet commerce and communications are a natural extension to the
Company's current teleservicing, database marketing and management and
fulfillment services. Assisting clients to improve the utility of Web-based and
e-mail commerce applications is a major business opportunity for the Company.
 
RECENT DEVELOPMENTS
 
     On February 25, 1999, the Company announced the launch of a new corporate
division, prcnetcare.com, Inc. ("prcnetcare.com"), to capitalize on the expected
customer service opportunities related to the extraordinary growth of Internet
commerce. The division is dedicated to offering a variety of interactive
customer service communications, e-commerce and Internet customer care support.
The formation of prcnetcare.com and a currently projected total capital
commitment in excess of $6.0 million are key steps in the Company's continued
efforts to leverage its sophisticated technology capabilities and experience in
the teleservice customer care industry into a leadership position in
Internet-based customer service.
 
     The division's Internet product offerings include InfiniteAccess and
Precision Resolution, both of which have been in development for over a year.
These offerings are significant enhancements to and expand upon certain Internet
services already being provided by the Company to several large corporations.
 
     INFINITEACCESS products integrate clients' Internet-based customer care and
commerce activities with the Company's existing teleservicing, database
marketing and management and fulfillment services thereby, in effect,
transforming the Company's call centers into multimedia customer interaction
centers. Specifically, the Company is developing and will offer during 1999, the
following InfiniteAccess products and services:
 
        PRC SMART MAIL is an electronic messaging service which reduces the cost
and time of processing large volumes of e-mail by providing automated answers
and interactive assistance.
 
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        PRC WEB ON-LINE is a Web collaborative service which enables customer
care associates to simultaneously interact with clients' customers over the
telephone and the Web. This product complements Web-based self-service aids by
providing live associate assistance designed to answer questions asked by
customers or business partners. This service will also provide "text chat"
capabilities which enable interaction between customer care associates and
customers.
 
        PRC INTERNET FULFILLMENT SERVICE provides e-mail and Web-based
fulfillment processes to service Internet commerce transactions or requests for
information such as brochures and other documents.
 
        PRC HOST is a Web application hosting service and Web information
service which enables clients to conduct Web-based commerce without the
expenditure to establish and support Internet commerce technology infrastructure
and provides clients with Internet-related information and reports about their
business performance, including sales performance, customer feedback and market
analyses.
 
     PRECISION RESOLUTION provides clients with solutions for record
standardization and error resolution for information transferred electronically
or over the Internet that functions on an automated, real-time basis. This
allows PRC to dynamically manage the people processes and workflow of highly
transactional databases. This system provides greater control, increased
productivity, enhanced quality, improved efficiency, reduced cycle times and
streamlined processes to users. During 1998 the product was enhanced to allow
Web-based transaction processing.
 
     In addition to these product offerings, the Company has invested in a
state-of-the-art Internet protocol network and has formed key business
relationships with Lucent Technologies, Oracle Corporation, Sun Micro Systems
and Cisco, Inc. to develop future enhancements to its products.
 
INDUSTRY OVERVIEW
 
     The traditional telephone-based customer service and marketing industry is
growing rapidly and quickly changing as multiple communication channels, such as
fax, e-mail and the Internet, are now available to customers. Today customers
are accessing information through these alternative methods as well as by the
telephone. Direct contact with customers via the telephone and electronically is
increasing as more companies realize its benefits, including high response
rates, low cost per transaction and direct interaction with customers, which
allow on-line access to detailed customer or product information and immediate
response to customer inquiries. The growth of the Internet has created an
expanded means of providing customer service, in addition to the telephone which
remains the principal means in the industry of providing customer care.
 
     The Company expects that large companies increasingly will outsource their
customer care activities in order to focus internal resources on their core
competencies and to improve the quality and cost-effectiveness of their customer
service and marketing efforts by using the experience and specialized
capabilities of larger-scale teleservices and Internet-based customer care,
marketing and management providers. The Company also believes that organizations
with superior customer service and sophisticated advanced technology, such as
PRC, will particularly benefit from this outsourcing trend.
 
     PRC believes that the long-term outlook for outsourcing customer service
and marketing is favorable. Along with an increase in traditional teleservicing
customer care, research indicates an expected 230% cumulative annual growth rate
in the number of on-line transactions over the next four years. The Company sees
customer care over the Internet as the next major trend in the industry.
 
BUSINESS STRATEGY
 
     PRC's objective is to become the premier provider of interactive customer
communications between large corporations and their existing and prospective
customers. The Company's strategy for achieving this objective is to offer its
clients high-quality, fully integrated services that are customized to address
each client's unique
 
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needs and to improve the quality and cost-effectiveness of the client's customer
service and marketing operations. The Company seeks to implement this strategy
through the following:
 
  "One-Stop" Solutions Through Fully Integrated Services
 
     The Company's current integration of teleservices, information marketing
and management and fulfillment services as part of a one-stop solution provides
a cost-effective and efficient method for its clients to manage their growing
customer service and marketing needs. In addition, the Company is in the process
of integrating Internet communications as yet another part of the one-stop
solution. The Company is typically involved in all stages of formulating,
designing and implementing its clients' customer service and marketing programs.
PRC believes that this solution-oriented, value-added approach to addressing its
clients' needs distinguishes PRC from its competitors and plays a vital role in
the Company's ability to attract and retain clients.
 
  Information Services Capabilities
 
     Through the efforts of its information services and Internet application
groups, the Company is able to rapidly design, develop and implement application
software for each client's unique customer service and marketing programs. PRC
offers a wide array of services, including formulating, designing and
customizing teleservicing and electronic applications, programming, and
demographic and psychographic profiling. The information services group also
integrates the Company's centrally managed wide area network with the client's
management information systems, thereby enabling clients to access real-time
program information and obtain comprehensive trend analyses. As the needs of a
client evolve, PRC's information systems specialists work with the client to
modify their programs. The Company believes that the services provided by its
information systems specialists attract clients with long-term, complex customer
service and marketing needs.
 
  Advanced Technology
 
     The Company's sophisticated use of advanced technology enables it to
develop and deliver solutions to its clients' complex customer service and
marketing needs. PRC has developed a specialized component-based software
development strategy with related proprietary products for its traditional
teleservicing and fulfillment services. PRC has also developed InfiniteAccess,
PRC On-Line, Precision Resolution and other specialized software which
cost-effectively utilize the Company's hardware capabilities. PRC's
component-based software approach allows the Company's information services
group to build and to test customer interaction center applications much more
quickly than with conventional approaches. As a result, clients receive a
customer interaction center solution of superior quality. See "Operations
Overview -- Operations" and "Technology" below.
 
  Long-Term Client Relationships
 
     The Company seeks to develop long-term client relationships by becoming an
integral part of its clients' overall customer service and marketing efforts.
Dedicated client commitment teams, headed by a general manager and comprised of
representatives of the teleservices, Internet application, information services
and fulfillment operating groups, are assigned to and work closely with each
client to formulate, design, implement, and operate the client's program
throughout its term. In addition, the Company's customer care associates
typically are trained for and dedicated to only one client's program. This close
working relationship and continuity of personnel positions PRC as a strategic
partner with its clients.
 
  Strong Commitment to Quality
 
     PRC strives to achieve the highest quality standards in the industry. As of
March 9, 1999, approximately 98% of PRC's customer care associates are full-time
which the Company believes results in greater stability and quality in its
workforce. The Company has a rigorous screening process for new hires. All new
associates participate in extensive classroom and on-the-job training programs
lasting up to five weeks. After training,
 
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each associate's performance is monitored regularly through on-site supervision,
remote and on-site call monitoring, and on-line performance tracking. The
Company's client commitment team ensures that the Company fulfills its
commitments in connection with each client program in a timely manner. Because
PRC's services involve direct contact with its clients' customers, the Company's
commitment to quality is critical to its ability to attract and retain clients.
 
OPERATIONS OVERVIEW
 
     PRC's operations are organized to effectively provide one-stop solutions
for its clients' customer service and marketing needs.
 
     Management of Clients Through General Managers Teams.  Each client program
is managed by a general manager who is dedicated to a single or a small group of
clients and is the sole point of contact for all matters related to the client's
program. The general manager's responsibility includes full operational,
financial and client relations functions. The general manager assembles a client
commitment team consisting of members from the teleservices, Internet
application, information services and fulfillment operating groups, which is
assigned responsibility for that program. This team works with the client to
formulate and design a customer service or marketing program tailored to achieve
that client's objectives. In implementing the program, the team is supported by
the human resources department which carefully selects the customer care
associates for that particular program. In addition, the quality assurance and
client commitment teams monitor the program to ensure that it is carried out in
accordance with specifications. The Company believes that its integrated team
approach and solution-oriented focus provide PRC with a distinct competitive
advantage.
 
     Program Formulation and Design.  PRC's client commitment teams work with
clients to formulate a customer service and marketing program suited to each
client's needs. The information services group uses its substantial expertise in
rapid application development and systems integration to help clients more
effectively target marketing programs, resulting in higher response rates and
profitability, and to design customer service programs which capture information
useful in the client's customer retention programs and other marketing efforts.
PRC offers a wide array of services, including formulating, designing and
customizing database architecture, programming, demographic and psychographic
profiling, and scripting.
 
     Program Implementation.  PRC's general manager teams work with the
teleservices, fulfillment, information services and Internet application
operating groups to implement the client's customer service and/or marketing
program.
 
     Operations.  Teleservicing operations involve direct communication with the
clients' customers through inbound or outbound calls. In 1998, teleservicing
activities accounted for 80% of the Company's total revenues. Of this amount,
86% related to inbound calls.
 
     In handling inbound calls, the Company's customer service representatives
respond to a variety of customer requests, including inquiries, complaints,
direct mail responses and order processing. The customers typically call a
toll-free "800" number to request product or service information, place an order
for a product or service, or obtain assistance regarding a previous order or
purchase (including "help line" support). PRC's automated call distributors and
digital switches identify each inbound call by "800" number and route the call
to a PRC associate trained for that particular client's program. Simultaneously
with receipt of the call, the associate's computer screen displays customer,
product and service information relevant to the call.
 
     PRC's outbound services include conducting customer satisfaction and
preference surveys and cross-selling client products, as well as providing
proactive customer management with the goal of increased sales and enhanced
customer retention. Almost all outbound calls are in response to
customer-initiated inquiries or are made to a client's existing customers. The
Company's outbound call management system utilizes predictive dialers which
automatically dial the telephone numbers, determine if a live connection is made
and present connected calls to a customer care associate who has been trained
specifically for that client's program. The customer's name, other information
about the customer and the program script simultaneously appear on
 
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the customer care associate's computer screen. The associate then uses the
script to take an order for the client's product or service or to request
information for addition to the client's database.
 
     The Company's teleservicing operations are enhanced by the use of universal
workstation technology. Universal workstations allow the customer care associate
to handle either inbound or outbound calls as dictated by demand. From the
client's standpoint, universal workstations provide increased efficiencies by
allowing the customer care associate (for whose service the client generally
pays on an hourly basis) to be productive with either inbound or outbound calls.
 
     Information obtained during a customer call by the PRC customer care
associate is captured by the Company's database marketing and management
systems. This information is used by PRC to ensure high quality performance and
to provide fulfillment services, if necessary. PRC's database marketing and
management technology also enables the Company to seamlessly connect with its
clients' systems and thus deliver on-line, real-time program information.
 
     Fulfillment services include high-speed laser and electronic document
printing, lettershop and mechanical inserting, sorting, packaging and mailing
capabilities. While fulfillment services represent a relatively small portion of
the Company's revenues, they enable the Company to support full-service customer
service and marketing programs by managing and fulfilling requests for
literature, products and other specialty items and by permitting the rapid
distribution of client marketing information. Fulfillment services accounted for
11% of the Company's total revenues in 1998.
 
     prcnetcare.com is a new division of PRC dedicated to interactive customer
communications, e-commerce and Internet customer care support. The division
currently has two-products: InfiniteAccess and Precision Resolution.
 
     InfiniteAccess products integrate clients' Internet-based customer care and
commerce activities with the Company's existing teleservicing, database
marketing and management, and fulfillment services thereby, in effect,
transforming the Company's call centers into multimedia customer interaction
centers. Specifically, the Company is developing and will offer during 1999, the
following InfiniteAccess products and services:
 
     PRC Smart Mail is an electronic messaging service which reduces the cost
and time of processing large volumes of e-mail by providing automated answers
and interactive assistance.
 
     PRC Web On-Line is a Web collaborative service which enables customer care
associates to simultaneously interact with clients' customers over the telephone
and the Web. This product complements Web-based self-service aids by providing
live associate assistance designed to answer questions asked by customers or
business partners. This service will also provide "text chat" capabilities which
enable interaction between customer care associates and customers.
 
     PRC Internet Fulfillment Service provides e-mail and Web-based fulfillment
processes to service Internet commerce transactions or requests for information
such as brochures and other documents.
 
     PRC Host is a Web application hosting service and Web information service
which enables clients to conduct Web-based commerce without the expenditure to
establish and support Internet commerce technology infrastructure and provides
clients with Internet-related information and reports about their business
performance, including sales performance, customer feedback and market analyses.
 
     Precision Resolution provides clients with solutions for record
standardization and error resolution for information transferred electronically
or over the Internet that functions on an automated, real-time basis. This
allows PRC to dynamically manage the people processes and workflow of highly
transactional databases. This system provides greater control, increased
productivity, enhanced quality, improved efficiency, reduced cycle times and
streamlined processes to users. It allows the Company to dynamically manage
higher volumes of repetitive processing work with increased efficiency, accuracy
and productivity. In 1998, the Company invested in new development to meet the
demands of clients for new functionality and to prepare the next generation of
the product. This significant reengineering process included a lower cost data
entry module, a task management engine, an inbound telephony link and imaging
component, and a Web-enabled application for remote input.
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     Quality Assurance.  PRC maintains its strong commitment to quality through
its quality assurance and client commitment teams. Within each of PRC's
operating departments, the quality assurance teams monitor performance to ensure
that the Company's services are delivered at a level of quality that meets both
the Company's and the client's standards. The client commitment team functions
on a Company-wide basis to audit the fulfillment of the Company's commitments to
each client program.
 
     Client Reporting.  Data derived from customer service and marketing
programs are a source of valuable information to PRC's clients in evaluating
ongoing programs and planning and designing future programs. PRC has developed
technologies and reporting procedures that effectively convert raw data gathered
during the course of the program into useful information upon which clients can
base strategic decisions and more effectively respond to customer needs and
inquiries. PRC's proprietary software product, PRC On-Line, allows clients to
monitor their teleservicing and Internet-based programs on-line, in real-time,
to obtain comprehensive trend analyses and to modify program parameters as
necessary. In addition, PRC provides clients with customized reports in printed
form, electronic mail, computer-to-computer transmission, disk, tape and
on-line.
 
TECHNOLOGY
 
     Overview.  PRC's sophisticated use of advanced technology enables the
Company to develop and deliver solutions for its clients' complex customer
service and marketing needs. The Company's information services and Internet
applications groups have developed the Company's call management and database
marketing and management systems. The information services group uses this
platform to design and implement application software for each client's program.
The Company believes that its platform is among the most advanced in the
industry and provides a competitive advantage in attracting new business.
 
     The Company utilizes a UNIX-based open architecture system comprised of
multiple computer systems which, in conjunction with its rapid application tool
for user interface development, allows PRC to expand capacity from a PC-class
computer to a mainframe without rewriting software and provides flexibility in
designing applications tailored to the client's needs. In conjunction with the
Company's use of Oracle database applications and Windows/NT applications, the
UNIX-based open architecture system permits the Company to seamlessly interact
with many different types of client systems and allows an electronic link from
each call center's system to the Company's operational headquarters, resulting
in a centrally managed wide area network. PRC also utilizes computer-telephone
integration and universal workstation technologies as part of its wide area
network. All PRC hardware is supported by an uninterruptable power supply
designed for protection against outages or any data loss due to power
variations, as well as a diesel generator to assure an uninterrupted power
source. The Company believes that the integrity of client information is
adequately protected by its data security system and its off-site disaster
back-up storage facilities.
 
     Component-Based Development.  Component-based development refers to the
tools and techniques employed by the information services group to assemble
and/or modify software applications from reusable software "parts" as opposed to
building an application from scratch. PRC's component-based software approach
allows the Company's information services and Internet application groups to
build and test customer interaction center applications much more quickly than
with conventional approaches. As a result, clients receive a customer
interaction center solution of superior quality, while the Company reduces the
time and expense needed in the development of call center applications. The
primary benefit of component-based development is PRC's ability to respond
rapidly to new business opportunities and sustain its competitive advantage in
the industry. An ancillary result of component-based development is a reduction
in training time of customer care associates due to the creation of call center
applications that are more uniform in nature.
 
     PRC On-Line.  The Company's proprietary software application, PRC On-Line,
allows its clients to review their teleservicing and Internet-based programs
on-line, in real-time, to obtain comprehensive trend analyses and to modify
program parameters. The Company believes that the capabilities of its PRC
On-Line software application provide it with a significant competitive
advantage, particularly with large, sophisticated marketing-oriented companies.
The increased communication and control provided by PRC On-Line allows
 
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clients to utilize PRC's teleservicing or Internet-based services as a seamless
extension of their in-house marketing and customer services operations.
 
     IMA Advantage/Edge.  The Company is in the process of implementing IMA
Advantage/Edge, a third-party software product. The Company's implementation of
this product will complete a three-tiered software development strategy
consisting of component-based, custom built and off-the-shelf software
offerings. As of December 31, 1998, the Company had invested approximately $3.9
million in this application. Upon implementation, the Company believes that the
IMA Advantage/Edge product will provide the Company with pre-built,
off-the-shelf applications that will assist in rapid deployment, decreased
set-up and maintenance costs, increased sales opportunities and increased
capability to provide excellent customer sales and service. The Company
currently estimates that IMA Advantage/Edge will be fully implemented during the
second quarter of 1999.
 
MANAGEMENT INFORMATION SYSTEMS
 
     During 1997, PRC initiated an entity-wide review of its management and
financial information systems. The review resulted in a decision to implement an
Enterprise Resource Planning ("ERP") solution, which will allow for all internal
systems (including those related to billing, payroll, client profitability
management, human resource management and general ledger) to be fully integrated
using a common platform.
 
     The Company designated its ERP implementation as the PRISM Project. During
the first quarter of 1998, the Company began its implementation of the PRISM
Project. This project is a substantial undertaking for PRC. In order to allow
for a quick and efficient implementation, the Company is utilizing both internal
resources and outside consultants. The PRISM Project is being implemented in
phases with certain systems or modules becoming functional at different points
in the project timeframe. Full implementation is expected to be completed by the
third quarter of 1999 at an estimated total cost of approximately $13.0 million,
including software, hardware, consulting fees, training and internal resources.
The first modules of the PRISM Project, human resources/payroll, general ledger,
accounts receivable and accounts payable, were placed in service during the
fourth quarter of 1998. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Year 2000 Issue" for a discussion
of the impact and effect on the Company of the Year 2000 issue.
 
PERSONNEL AND TRAINING
 
     PRC believes that its rigorous approach to hiring and training its
employees is a key component of its ability to provide high quality client and
customer service. The Company selects the locations for its call centers based
on demographic studies as an attempt to ensure the availability of an adequate
and qualified pool of potential employees. Its hiring procedures are designed to
ensure that only the most qualified candidates are offered employment. The
Company offers extensive classroom and on-the-job training programs for its
personnel, including instruction on the businesses of PRC's clients and proper
customer service techniques. Each new customer care associate receives up to
five weeks of training, which provides the skills training he or she needs to
work on a specific, dedicated client program. The Company offers a benefits
package to full-time customer care associates after three to six months of
employment. The Company believes that such a careful selection process results
in a high quality, dedicated work force. The Company also provides a full array
of management courses and materials designed to ensure that its operations and
administrative managers receive continuous and up-to-date training using the
latest trends and techniques.
 
     As of March 9, 1999, the Company had approximately 5,100 full-time and 90
part-time employees, of which 4,140 of the full-time employees and 83 of the
part-time employees were customer care associates. The Company believes that its
percentage of full-time customer care associates is high relative to that of its
competitors, resulting in greater stability and quality in its workforce. None
of PRC's employees are subject to a collective bargaining agreement. The Company
considers its relations with its employees to generally be good.
 
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SALES AND MARKETING
 
     The Company believes its reputation for providing high quality, one-stop
solutions has enabled it to obtain new business through requests for proposals,
client referrals and cross-selling opportunities to existing clients. In
addition, the Company's sales and marketing group actively pursues new business
opportunities by identifying companies and industries which can benefit from the
Company's services. Working with the information services and Internet
applications groups, the sales and marketing team is able to demonstrate to
prospective clients the Company's rapid application development and effective
systems integration capabilities to meet the proposed program objectives.
 
CLIENT RELATIONSHIPS
 
     The Company seeks to develop and maintain long-term relationships with its
clients. PRC targets those companies which have the potential for generating
recurring revenues due to the magnitude of their customer service departments or
marketing programs. The Company believes that its clients view PRC as a
strategic partner and a valuable resource in formulating, designing and
implementing their customer service and marketing programs. During 1998, the
Company provided its services to approximately 60 clients in industries such as
telecommunications, transportation, consumer products, financial services and
food and beverage. The Company's ongoing clients include several business units
of AT&T, American Express, British Airways, Citibank, Conectiv Energy, DIRECTV,
GE Capital, Lucent Technologies, Pizza Hut, Ryder TRS, Taco Bell and The College
Entrance Examination Board. The Company's five largest clients accounted for 76%
of its total gross revenues for 1998. Revenues generated by the various business
units of AT&T, the Company's largest client, accounted for 45% of gross revenues
for 1998. Besides AT&T, Ameritech, representing 12% of gross revenues, was the
only other client that accounted for 10% or more of total gross revenues for
1998. At the end of the third quarter of 1998, the Company made a strategic
decision to exit the incentive-based outbound program with Ameritech. This
incentive-based program ended in the fourth quarter of 1998, and the first
quarter of 1999 saw the gradual wind down of the remaining programs with this
client. The Company's client relationship with Ameritech ended in March 1999.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Overview and Basis of Presentation."
 
     Although the Company enters into written contracts with its clients,
generally either party retains the right to terminate on varying periods of
prior notice. The contracts do not assure the Company will generate a specific
level of revenue or designate the Company as the exclusive service provider.
Contracts typically encompass all aspects of the Company's relationship with the
client, together with all applicable charges. The Company's teleservicing
charges are primarily based on a fixed hourly fee for dedicated service. The
Company has also generated teleservicing revenues under incentive-based
compensation agreements whereby the amount of revenue earned correlated to the
achievement of established targets. As described above, the Company made a
strategic decision to exit this type of business due to margin constraints and
to focus its efforts on more predictable and profitable programs going forward.
 
     Charges for database marketing and management services are based on an
hourly rate or on the volume of information stored. Charges for fulfillment
services are typically assessed on a transaction basis, with an additional
charge for warehousing products for clients. The Company assesses separate
charges for program design, development and implementation, database design and
management, training or retraining of personnel, processing and access fees, and
account services, where appropriate.
 
     Billing charges assessed by the Company for Internet customer care and
electronic message servicing will be based on hourly rates and on a transaction
basis, respectively, or a combination of charges thereof.
 
COMPETITION
 
     The interactive customer communications industry in which PRC operates is
very competitive and highly fragmented. PRC's competitors range in size from
very small firms offering specialized applications and short-term projects to
large independent and international firms and the in-house operations of many
clients and potential clients. In-house interactive customer communications
organizations comprise the largest segment of the industry. The market includes
non-captive interactive customer service operations such as APAC TeleServices,
Convergys Corporation, SITEL, TeleSpectrum Worldwide, TeleTech Holdings and West
 
                                       10
<PAGE>   11
 
TeleServices. In addition, some of PRC's services also compete with other forms
of direct marketing such as mailhouses, television, radio and on-line services.
PRC believes that the principal competitive factors in its industry are a
reputation for quality, sales and marketing results, price, technological
expertise and application, and the ability to promptly provide clients with
customized and creative solutions and approaches to their customer service and
marketing needs. The Company believes that it competes favorably with other
companies with respect to the foregoing factors for large-scale, ongoing
customer service and marketing programs where the principal competitive factor
is quality. The Company has not generally chosen to compete for high-volume
outbound marketing programs where the principal competitive factor is price.
Certain competitors may have capabilities and resources greater than the
Company's which might competitively disadvantage PRC in bidding for very large
programs.
 
GOVERNMENT REGULATION
 
     Telephone sales practices are regulated at both the Federal and state
level. The rules of the Federal Communications Commission (the "FCC") under the
Federal Telephone Consumer Protection Act of 1991 (the "TCPA") prohibit the
initiation of telephone solicitations to residential subscribers before 8:00
a.m. or after 9:00 p.m., local time, and prohibit the use of automated telephone
dialing equipment to call certain telephone numbers. In addition, the FCC rules
require telemarketers to have procedures in place to maintain lists of
residential customers who do not want to receive telephone solicitations and to
avoid making calls to those customers. The FCC rules also prohibit the use of
pre-recorded or artificial voice calls to consumers (with limited exceptions)
and advertising via telephone facsimile machines. The FCC, private individuals
and state attorneys general may seek both injunctive and monetary relief for
violation of these FCC rules. Monetary damages may be awarded for the greater of
actual damages or $1,500 per offense for willful violation of these rules.
 
     The Federal Telemarketing and Consumer Fraud and Abuse Prevention 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 set forth disclosure
requirements for telemarketers when placing calls, prohibit deceptive
telemarketing acts or practices during solicitation, provide guidelines on
collecting payments by check and credit cards, provide restrictions on abusive
telephone solicitation practices and promulgate certain record keeping
requirements. The FTC, private individuals and state attorneys general may seek
both injunctive and monetary damages for violation of these FTC rules. Penalties
may range up to $10,000 for each intentional violation of these rules.
 
     The Company believes that it is in compliance with the TCPA and FCC rules
thereunder and with the FTC's rules under the TCFAPA. The Company trains its
customer care associates to comply with the FTC and FCC rules and programs its
call management system to avoid telephone calls during restricted hours or to
individuals maintained on PRC's restricted "do-not-call" list.
 
     Most states have enacted or are considering legislation to regulate
telephone solicitations. For example, some states require telemarketers to be
licensed by state regulatory agencies prior to soliciting purchasers within that
state. Additionally, telephone sales in certain states cannot be final unless a
written contract is delivered to and signed by the buyer and may be canceled
within three business days. At least one state also prohibits telemarketers from
requiring credit card payment and several other states require certain
telemarketers to obtain licenses and post bonds. Penalties for violation of
these state telemarketing regulations vary from state to state and include civil
as well as criminal penalties. From time to time, bills are introduced in
Congress which, if enacted, would regulate the use of credit information. In
addition, legislation could be introduced in the future with respect to the use
of the Internet, including regulations relating to its use in connection with
customer care and service. The Company cannot predict whether any of these types
of legislation will be enacted and what effect, if any, it would have on the
Company or its industry.
 
     The industries served by the Company are also subject to varying degrees of
government regulation. The Company works closely with its clients and their
advisors to develop the scripts to be used by PRC in connection with making
customer contacts. The Company generally requires its clients to indemnify PRC
against claims and expenses arising with respect to the Company's services
performed on its clients' behalf. The Company has never been held responsible
for regulatory noncompliance by a client.
                                       11
<PAGE>   12
 
ITEM 2. PROPERTIES
 
     In 1998, in conjunction with the Company's restructuring and cost savings
initiatives announced during the third quarter of 1997, the Company completed
the consolidation of three administrative/corporate locations into available
space at one of its call centers in Miami, Florida. The Company still maintains
approximately 12,000 square feet of office space for its principal executive
offices in a separately leased facility in Miami, Florida, which terminates in
April 2000. The Company's fulfillment operations are located in a separate
leased facility in Miami, Florida, consisting of 47,577 square feet, the lease
for which expires in 2001, with a 5-year renewal option.
 
     The Company is in the process of transitioning its traditional call centers
into customer interaction centers. The Company had eight call centers in
operation, of which three had multimedia capabilities, as of December 31, 1998
and eight call centers in operation as of December 31, 1997. One new call center
was opened in both the first and second quarters of 1997, while one small call
center in Miami was converted into administrative offices in the first quarter
of 1997 and another call center in Miami was closed during the third quarter of
1997 as part of the Company's restructuring plan. As of December 31, 1998, the
Company leased and operated the following call centers, all of which are located
in Florida:
 
<TABLE>
<CAPTION>
                                                                             CURRENT
                                                                           APPROXIMATE
                                                                            NUMBER OF
LOCATION                                                    DATE OPENED    WORKSTATIONS
--------                                                   --------------  ------------
<S>                                                        <C>             <C>
Miami(1).................................................  July 1992            280
Miami Lakes(3)...........................................  January 1996         490
Miami....................................................  April 1996           420
Orlando..................................................  June 1996            590
Margate(3)...............................................  September 1996       520
Miami(2)(3)..............................................  December 1996        990
Jacksonville.............................................  February 1997        790
Margate (Coconut Creek)..................................  April 1997           420
                                                                              -----
                                                                              4,500
                                                                              =====
</TABLE>
 
-------------------------
 
(1) The Company's principal executive offices are also located in this facility.
(2) Certain administrative and operational departments are also located in this
    facility.
(3) These centers have multimedia capabilities.
 
     The leases for these facilities would generally expire between 2004 and
2022 assuming the Company's exercise of all renewal options (see Note 6 -- Lease
Commitments of the Notes to Consolidated Financial Statements). However, as a
result of the 1998 restructuring plan and continual assessment of the capacity
requirements in Jacksonville and Margate (Coconut Creek), the Company will
terminate the lease agreements relating to these locations no later than the
lease option dates in May 2002. Additionally, in connection with the 1998
restructuring plan, the Company expects to fully vacate the Margate (Coconut
Creek) facility and reduce its occupancy level of the Jacksonville facility
during 1999 (see Note 5 -- Credit Facilities and Long-Term Debt of the Notes to
Consolidated Financial Statements). The Company also leases additional
facilities and certain other real property incidental to its operations. The
Company believes that its existing facilities and other real property are
suitable and adequate for its current operations, but additional facilities may
be required to support growth. The Company further believes that suitable space
will be available as needed to expand its business on commercially reasonable
terms.
 
     The Company acquired a facility in Sunrise, Florida, for which it secured a
mortgage during the second quarter of 1998. As a result, the Company owns land
and a building with a book value of approximately $5.9 million that is currently
unoccupied. The Company intends to maintain this property as a possible location
for new administrative offices or, should utilization levels warrant, as a new
call center. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
 
                                       12
<PAGE>   13
 
ITEM 3. LEGAL PROCEEDINGS
 
     On or about August 26, 1998 a lawsuit, captioned Henry E. Freeman and
Freeman Industrial Enterprises Corporation v. Precision Response Corporation,
Mark J. Gordon, David L. Epstein and Richard D. Mondre (Case No. 398-CV-1895-DJS
(D. Conn)), was filed in the Superior Court of the Judicial District of
Stamford/Norwalk in the state of Connecticut. The lawsuit has since been removed
by the Company to the United States District Court for the District of
Connecticut. This lawsuit alleges that the Company breached its contracts with
the plaintiffs by allegedly failing to pay all commissions relating to certain
clients whom the plaintiffs allegedly claim they procured for the Company. The
complaint also contains claims of breach of fiduciary duty, breach of covenant
of good faith and fair dealing, civil conspiracy, fraud/fraud in the inducement,
intentional infliction of emotional distress and violations of the Connecticut
Unfair Trade Practices Act. The plaintiffs seek actual, compensatory and
punitive damages, declaratory judgement that certain contracts are invalid due
to undue influence exercised upon plaintiffs or, in the alternative, recission
of such contracts, an accounting and interest, costs and attorneys' fees.
 
     On November 16, 1998, the Company filed a motion (i) to dismiss for lack of
personal jurisdiction as to Richard Mondre and (ii) to dismiss for improper
venue or, in the alternative, to transfer to the U.S. District Court for the
Southern District of Florida. On that same day, the Company filed a motion to
dismiss the complaint for failure to state a cause of action. Both motions are
currently pending before the Court.
 
     On January 6, 1999, the plaintiffs voluntarily dismissed with prejudice
this lawsuit against Richard Mondre, which dismissal has been approved by the
Court. On or about February 12, 1999, the plaintiffs filed an Amended Complaint,
asserting the same causes of action as in the original complaint, as well as a
claim for negligent misrepresentation.
 
     The case is currently in the discovery stage. The Company believes that the
plaintiffs' allegations are totally without merit and intends to defend the
lawsuit vigorously.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
 
     There were no matters submitted to a vote of the Company's security-holders
during the quarter ended December 31, 1998.
 
                                       13
<PAGE>   14
 
                                    PART II.
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
        STOCKHOLDER MATTERS
 
COMMON STOCK INFORMATION
 
     The Company and certain selling shareholders completed the Company's
initial public offering, declared effective on July 16, 1996 (with an actual
closing date of July 22, 1996), of 4,600,000 shares of common stock at an
offering price of $14.50 per share (the "Initial Public Offering"). Prior to the
Initial Public Offering, the Company's common stock was not listed or quoted on
any organized market system. Since the Initial Public Offering, the common stock
of the Company is traded on the Nasdaq National Market under the symbol "PRRC."
The following table sets forth, for the calendar quarters indicated, the high
and low closing sale prices of the common stock as reported on the Nasdaq
National Market during such period:
 
<TABLE>
<CAPTION>
                                                              HIGH      LOW
                                                              ----      ---
<S>                                                           <C>       <C>
1998
  First quarter.............................................  $11       $ 7 5/8
  Second quarter............................................    9 3/4     5 7/16
  Third quarter.............................................    8 9/16    3 3/4
  Fourth quarter............................................    8 7/8     4 1/4
1997
  First quarter.............................................  $36       $20 3/4
  Second quarter............................................   24        14 7/8
  Third quarter.............................................   17 1/8     7 1/4
  Fourth quarter............................................   10 9/16    6 3/4
</TABLE>
 
As of March 22, 1999, there were 21,549,000 shares of the Company's common stock
outstanding held by approximately 69 holders of record. The Company estimates,
based upon information provided by the Company's transfer agent, that it has
approximately 3,000 beneficial owners of its common stock as of March 22, 1999.
 
DIVIDEND POLICY
 
     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 revolving credit
facility prohibits the payment of cash dividends by the Company. Payment of any
future dividends will depend upon the future earnings and capital requirements
of the Company and other factors which the Company's Board of Directors
considers appropriate.
 
     Prior to the consummation of the Initial Public Offering, the Company's
Board of Directors declared a cash dividend (the "Dividend") to the then current
shareholders of the Company of approximately $5,243,000. The Dividend was equal
to the Company's estimate of its cumulative taxable income, prior to the
Company's conversion from an S corporation to a C corporation and immediately
prior to the consummation of the Initial Public Offering to the extent such
taxable income had not previously been distributed. The Dividend was subject to
adjustment based upon actual cumulative taxable income as finally determined
based on the Company's final tax return as an S corporation. During the second
quarter of 1997, the Company's final tax return as an S corporation was
completed and filed. As a result, an additional $174,000 was paid to the
Company's existing shareholders prior to the Initial Public Offering as a final
distribution of the Company's accumulated taxable income prior to conversion to
C corporation status. No cash dividends were paid to the shareholders in 1998.
See Note 1 -- Operations and Significant Accounting Policies and Note
10 -- Capital Stock of the Notes to Consolidated Financial Statements.
 
                                       14
<PAGE>   15
 
RECENT SALES OF UNREGISTERED SECURITIES
 
     The Company did not issue or sell any unregistered securities during the
quarter ended December 31, 1998, except that the Company granted options to
purchase 1,165,250 shares of Common Stock to 102 employees pursuant to the
Company's Amended and Restated 1996 Incentive Stock Plan. The exercise price of
the options range between $5.09 and $6.94 per share. These options have a term
of seven years and vest as follows:
 
<TABLE>
<CAPTION>
NUMBER OF SHARES                           VESTING RATE
----------------                           ------------
<C>                <S>
      85,000       50% at grant date and 25% after 1 and 2 years
     350,000       50% after 6 months, 17% after 1 and 2 years and 16% after 3
                   years
     400,000       33 1/3% per year
     330,250       20% per year
   ---------
   1,165,250
   =========
</TABLE>
 
     The Company granted the foregoing stock options in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
of 1933, as amended.
 
                                       15
<PAGE>   16
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The following Selected Financial Data of the Company as of and for the
years ended 1994 through 1998 has been derived (except for Other Data) from the
audited consolidated financial statements of the Company. Such data is qualified
by reference to and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements (the "Financial Statements") and the Notes to Consolidated
Financial Statements included elsewhere in this report. See also Note
15 -- Unaudited Quarterly Financial Data of the Notes to Consolidated Financial
Statements for certain financial information presented on a quarterly basis for
1998 and 1997.
 
<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                             --------------------------------------------------------------
                                                              1998(7)      1997(7)        1996         1995         1994
                                                             ----------   ----------   ----------   ----------   ----------
                                                                     (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                          <C>          <C>          <C>          <C>          <C>
SUMMARY OF OPERATIONS:
(For the fiscal year):
  REVENUES.................................................  $  175,173   $  143,584   $   97,637   $   30,204   $   14,998
                                                             ----------   ----------   ----------   ----------   ----------
  OPERATING EXPENSES:
    Cost of services.......................................     153,638      128,177       71,345       21,212       10,190
    Selling, general and administrative expenses...........      23,290       25,874       14,727        7,164        4,888
    Restructuring and asset impairment charges.............      13,583       11,591           --           --           --
                                                             ----------   ----------   ----------   ----------   ----------
        Total operating expenses...........................     190,511      165,642       86,072       28,376       15,078
                                                             ----------   ----------   ----------   ----------   ----------
        Operating (loss) income............................  $  (15,338)  $  (22,058)  $   11,565   $    1,828   $      (80)
                                                             ==========   ==========   ==========   ==========   ==========
  NET (LOSS) INCOME(1).....................................  $  (10,189)  $  (13,066)  $    7,850   $    1,456   $     (372)
                                                             ==========   ==========   ==========   ==========   ==========
  PROFORMA DATA (UNAUDITED)(1):
    Income (loss) before proforma income taxes.............                            $   10,877   $    1,456   $     (372)
    Proforma provision (benefit) for income taxes relating
      to S corporation.....................................                                 4,358          619          (86)
                                                                                       ----------   ----------   ----------
        PROFORMA NET INCOME (LOSS).........................                            $    6,519   $      837   $     (286)
                                                                                       ==========   ==========   ==========
COMMON STOCK DATA(2):
  Net loss per common share (diluted)......................  $    (0.47)  $    (0.61)
  Proforma net income per common share
    (diluted)(1)(3)(4)(5)..................................                            $     0.36   $     0.05
  Book value per share(5)..................................  $     3.68   $     4.15   $     2.65   $     0.17   $     0.09
  Number of shares outstanding (at year-end)(5)............  21,549,000   21,542,000   20,000,000   16,400,000   16,400,000
  Weighted average number of common shares outstanding
    (diluted)(3)...........................................  21,547,981   21,392,814   18,171,000   16,527,061          N/M
FINANCIAL POSITION(2):
(At year-end):
    Working capital (deficit)..............................  $   22,019   $   23,521   $   11,849   $    1,365   $   (1,423)
    Current ratio..........................................        1.65x        1.68x        1.40x        1.23x        0.73x
    Property and equipment, net............................  $   71,414   $   63,301   $   42,034   $    5,284   $    3,834
    Total assets...........................................  $  133,446   $  127,413   $   88,415   $   12,713   $    7,737
    Long-term obligations, less current maturities(6)......  $   16,916   $    3,493   $    4,190   $    3,924   $    1,020
    Shareholders' eqiuty...................................  $   79,359   $   89,440   $   52,950   $    2,816   $    1,473
OTHER DATA:
(At year-end):
    Number of workstations.................................       4,500        4,500        3,220          550          320
    Number of call centers.................................           8            8            8            2            2
</TABLE>
 
-------------------------
 
(1) Prior to the Company's Initial Public Offering on July 16, 1996, the Company
    was an S corporation and not subject to Federal and state corporate income
    taxes. On July 16, 1996, the Company revoked its S election and changed its
    tax status from an S corporation to a C corporation, recorded deferred
    income taxes totaling $90,000 and began providing for Federal and state
    corporate income taxes from and including that date. The summary of
    operations data reflects a proforma provision (benefit) for income taxes as
    if the Company were subject to Federal and state corporate income taxes for
    all years. This proforma provision (benefit) for income taxes is computed
    using a combined Federal and state tax rate of 37.6%. See Note 9 -- Income
    Taxes of the Notes to Consolidated Financial Statements.
 
(2) Effective January 29, 1997 (the actual closing date was February 4, 1997),
    the Company and certain selling shareholders completed a second equity
    offering of 4,740,000 shares of common stock at an offering price of $35.125
    per share (the "Second Equity Offering"). Of the 4,740,000 shares, 1,500,000
 
                                       16
<PAGE>   17
 
    shares were sold by the Company. See Note 2 -- Public Offerings of the Notes
    to Consolidated Financial Statements.
 
(3) The actual weighted average number of common shares outstanding for the
    years ended December 31, 1996 and 1995 were 18,013,115 and 16,400,000,
    respectively, after giving effect to the stock splits effected by way of
    share dividends discussed in note (5) below. However, as required by
    generally accepted accounting principles, the weighted average number of
    common shares outstanding has been increased by 127,061 shares (weighted for
    the applicable period), which shares are not actually outstanding. This
    number is equal to the number of shares which, when multiplied by $14.50 per
    share (the price in the Initial Public Offering), would have been sufficient
    to replace the amount of the Dividend in excess of proforma earnings for the
    12 months ended June 30, 1996.
 
(4) Supplemental proforma net income per common share would have been $0.36 per
    share and $0.06 per share for the years ended December 31, 1996 and 1995,
    respectively, giving effect to the use of a portion of the net proceeds of
    the Initial Public Offering to repay the Company's bank borrowings at
    January 1, 1995, and assuming an increase in the weighted average number of
    common shares outstanding to 18,285,311 and 16,729,131, respectively (based
    on the price in the Initial Public Offering of $14.50 per share).
 
(5) Includes a retroactive adjustment for stock splits effected by way of share
    dividends described more fully in Note 10 -- Capital Stock of the Notes to
    Consolidated Financial Statements.
 
(6) Long-term obligations for 1998 consist of the outstanding balance of the
    Company's revolving credit facility, mortgage loan payable to the lender on
    the revolving credit facility, capital lease obligations and other long-term
    obligations, all of which are described more fully in Note 5 -- Credit
    Facilities and Long-Term Debt of the Notes to Consolidated Financial
    Statements. Long-term obligations for 1997 and 1996 consist only of capital
    lease obligations. For the years ended 1995 and 1994, long-term obligations
    consist of capital lease obligations, a note payable to a bank and certain
    installment loans. Fiscal 1995 also includes the outstanding balance of the
    Company's revolving credit loan.
 
(7) Includes special charges of $22.1 million and $26.2 million before taxes in
    1998 and 1997, respectively, described more fully in "Management's
    Discussion and Analysis of Financial Condition and Results of
    Operations -- Overview and Basis of Presentation" and Note
    3 -- Restructuring and Other Non-Recurring Special Charges of the Notes to
    Consolidated Financial Statements.
 
N/M -- Not meaningful since past operations and capital structure are not
       necessarily indicative of current and future operations and capital
       structure.
 
                                       17
<PAGE>   18
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
     The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with "Selected Financial
Data," the Financial Statements and the Notes to Consolidated Financial
Statements.
 
OVERVIEW AND BASIS OF PRESENTATION
 
     The Company was incorporated in 1982 as a fulfillment company, expanding
its services to include database marketing and management beginning in 1984 and
to teleservices and customer care in 1988. In 1993, the Company initiated the
implementation of certain strategic measures to become a full-service provider
of integrated services in order to attract larger corporate clients with a
variety of ongoing telephone-based customer service and marketing needs. In
1998, the Company integrated these resources, products and services with
Internet technologies to introduce interactive customer communications. During
the last three years, the Company has invested over $100 million in systems,
facilities and equipment, including the capitalized value of all leased property
and equipment, to facilitate growth and enhance its technology capabilities.
 
     The Company currently offers its customers single source, integrated
solutions for their teleservicing, Internet communications, database marketing
and management, and fulfillment needs. The Company's primary source of revenue
is teleservicing activities which are comprised of both inbound
(customer-initiated) and outbound (PRC-initiated) calls. Teleservicing revenues
are generally earned for providing services on a rate-per-hour basis. However,
beginning in the third quarter of 1997, the Company also generated teleservicing
revenues under incentive-based outbound compensation agreements whereby the
amount of revenue earned correlates to the achievement of established targets.
At the end of the third quarter of 1998, the Company made a strategic decision
to exit the incentive-based outbound programs, which was completed during the
fourth quarter of 1998. The majority of teleservicing revenues are derived from
inbound calls, which represented 86% of teleservicing revenues and 68% of total
revenues in 1998 and 80% of teleservicing revenues and 59% of total revenues in
1997. Inbound teleservicing consists mostly of longer-term customer care and
customer service programs which tend to be more predictable than other
teleservicing revenues. Outbound teleservicing and, in particular,
incentive-based outbound teleservicing, is driven by marketing programs which
change frequently relative to inbound programs. As such, outbound teleservicing
is subject to greater variation in operating results (see "Fluctuations in
Quarterly Results" below).
 
     During 1998, the Company began strategic initiatives to capitalize on the
extraordinary growth of Internet commerce by integrating Internet technologies
with current PRC products and services to, in effect, create multimedia customer
interaction centers. While the Company began to offer certain Internet and e-
mail service capabilities during 1998, insignificant revenue was generated from
these activities. The Company has identified these capabilities as significant
business opportunities and is committing to investing in and expanding its
Internet and e-mail commerce services in order to enhance its offering of these
types of services within the customer interaction center concept.
 
     Information services provided by the database marketing and management
group typically include the design, development and implementation of software
applications for use in a particular client program and the integration of the
Company's systems with those of its clients.
 
     Fulfillment services include high-speed laser and electronic document
printing, lettershop and mechanical inserting, sorting, packaging and mailing
capabilities. While fulfillment services represent a relatively small portion of
the Company's total revenues, it is an important element in the Company's
overall marketing strategy of providing its customers with a "one-stop" solution
to their telephone-based and interactive customer service and marketing needs.
 
     Prior to the Initial Public Offering of the Company's common stock, which
was declared effective on July 16, 1996 (the actual closing date was July 22,
1996), the Company elected for Federal and state income tax purposes to be
treated as an S corporation under the Internal Revenue Code and comparable state
tax
 
                                       18
<PAGE>   19
 
laws. As a result, earnings of the Company were taxed for Federal and state
income tax purposes directly to the shareholders of the Company, rather than to
the Company. Immediately prior to the Initial Public Offering, the Company
revoked its S corporation election and converted from an S corporation to a C
corporation. The statements of operations data for 1994 through 1996 includes a
provision (benefit) for Federal and state income taxes as if the Company were
subject to Federal and state corporate income taxes for such years. The proforma
provision (benefit) was computed using a combined Federal and state tax rate of
37.6%. For further discussion of the Company's change in income tax status and
the Dividend paid to the Company's shareholders immediately prior to the Initial
Public Offering, see Note 1 -- Operations and Significant Accounting Policies
and Note 10 -- Capital Stock of the Notes to Consolidated Financial Statements.
 
RESULTS OF OPERATIONS
 
     The following table sets forth certain statements of operations data, as a
percentage of revenues, for the years indicated:
 
<TABLE>
<CAPTION>
                                                              1998     1997     1996
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
SELECTED OPERATING RESULTS:
  Revenues..................................................  100.0%   100.0%   100.0%
  Cost of services..........................................   87.7     89.3     73.1
                                                              -----    -----    -----
     Gross margin...........................................   12.3     10.7     26.9
  Selling, general and administrative expenses..............   13.3     18.0     15.1
  Restructuring and asset impairment charges................    7.8      8.1       --
                                                              -----    -----    -----
     Operating (loss) income................................   (8.8)%  (15.4)%   11.8%
                                                              =====    =====    =====
</TABLE>
 
1998 VS. 1997
 
     During the third quarter of 1998, the Company performed an extensive review
of its operations and existing available workstation capacity. Such review
focused on determining the needed workstation capacity appropriate and desirable
in light of several factors. These factors included the requirements for
servicing the Company's current, recently attained and anticipated new clients;
the Company's less than satisfactory operating results relative to a large
incentive-based, outbound teleservices program; and the Company's inability to
recruit, train and maintain an employee base relative to available workstations
in certain strained labor markets without paying premium wage rates not able to
be supported by the operating margins being generated.
 
     As a result of this review, the Company initiated a restructuring and
performance enhancing initiatives plan designed to improve profit margins,
reduce its cost structure and adjust its infrastructure to significantly improve
efficiencies and performance in the utilization of its workstation capacity. The
Company expects to realize $2.1 million in annual savings from the consolidation
and reduction of call centers, $1.8 million in annual savings from a reduction
in overhead and administrative headcount resulting in the termination of nine
employees and the exiting of an incentive-based outbound program, $0.5 million
in annual savings from the replacement of existing call center software with new
customer interactive software reflective of advances in customer care technology
and $0.2 million in other annual cost savings initiatives mainly related to
termination of a facility maintenance contract. Therefore, once fully
implemented, the cost reductions are expected to result in annual savings of
approximately $4.6 million. The Company began to benefit from these cost savings
beginning in the fourth quarter of 1998; however, the full impact of the cost
savings initiatives will not be realized until all of these initiatives have
been completed, which is currently expected to be during the third quarter of
1999.
 
     The Company's operating results for the fiscal year ended December 31, 1998
include the effects of a pre-tax non-recurring special charge of $22.1 million
recorded in conjunction with the implementation of the restructuring and
performance enhancing initiatives plan. Approximately $9.9 million, or 45%, of
the charge is for cash items, of which $7.2 million is accrued at December 31,
1998. These cash items are primarily for
 
                                       19
<PAGE>   20
 
lease and other facility exit costs and, to a lesser extent, for payment of
severance and other employee-related costs. The special charge to earnings is
included in the following categories on the Consolidated Statements of
Operations:
 
<TABLE>
<CAPTION>
                                                                                AFTER-TAX
                                                             PRE-TAX DOLLAR     PER SHARE
                                                                 AMOUNT         (DILUTED)
                                                              (IN MILLIONS)      AMOUNT
                                                             ---------------    ---------
<S>                                                          <C>                <C>
Restructuring and asset impairment charges.................       $13.6          $(0.39)
Cost of services...........................................         2.3           (0.07)
Selling, general and administrative expenses...............         6.2           (0.18)
                                                                  -----          ------
       Total...............................................       $22.1          $(0.64)
                                                                  =====          ======
</TABLE>
 
     See Note 3 -- Restructuring and Other Non-Recurring Special Charges of the
Notes to Consolidated Financial Statements for further discussion of the
non-recurring special charges.
 
REVENUES
 
     During 1998, revenues increased by $31.6 million to $175.1 million, or 22%,
in comparison to the prior year. The principal components of revenues are
teleservicing activities, including account services (representing 80% of
revenues in 1998), and fulfillment services (representing 11% of revenues in
1998), with the balance primarily represented by information services. The
Company had approximately 4,500 workstations in operation as of both December
31, 1998 and 1997 (see "1997 vs. 1996 -- Revenues"). As of December 31, 1998 and
1997, the Company was operating at approximately 78% and 55%, respectively, of
full utilization of these workstations. In connection with its restructuring and
performance-enhancing initiatives plan, the Company plans to eliminate 800
workstations in two specific call centers. Absent the award of any significant
new business, the Company has no immediate plans for new call center/workstation
expansion and will reallocate existing site resources to meet capacity needs.
Although utilization will automatically increase with the reduction of
workstations, the Company continues to attempt to seek the award of additional
work from existing clients and pursue new client opportunities in order to
improve the utilization of its workstations.
 
     During 1998, the Company generated several new client opportunities. The
Company commenced both customer care services and use of its proprietary,
automated error resolution system, Precision Resolution, for a large East
coast-based utility company. The Company also began a database, telemarketing
and fulfillment services program targeting information technology professionals
for an international manufacturer and provider of computer products and
services.
 
     Teleservicing activities, including account services, accounted for the
majority of the revenue growth during 1998 with an increase of $34.6 million, or
33%, to $140.3 million in 1998. Major factors contributing to the increase in
teleservicing revenues were the addition of several new programs for existing
clients as well as the addition of new clients, principally in the utility,
computer products and services and financial services industries. Overall, new
client business accounted for $16.7 million, or 10%, of total revenues for 1998,
while revenues from the Company's largest client accounted for 45% of total
revenues, up from 38% for 1997. Generally, teleservicing revenues are earned on
a rate-per-hour basis. However, during 1998 and 1997, approximately 10% of total
revenues were earned under incentive-based compensation agreements.
 
     Revenues from fulfillment services for 1998 were $18.8 million, an increase
of $4.1 million, or 28%, from the prior year. The increase is reflective of
fulfillment services provided in connection with the incentive-based outbound
teleservice program which was exited in the fourth quarter of 1998.
 
     Revenues from information services for 1998 were $16.1 million, a decrease
of $7.2 million, or 31%, from 1997. The decrease was primarily attributable to
the transfers of teleservicing-based application software totaling $9.8 million
in 1997, compared with no such transfers in 1998, offset by an increase in
traditional information services revenues in 1998. Transfers of
teleservicing-based application software produce substantially higher margins
than other information services (which involve the development of unique,
individual customer-based applications). Due to the substantially higher margins
on these transfers, the Company's
 
                                       20
<PAGE>   21
 
operating results can be significantly impacted based upon the Company effecting
these transactions in any period.
 
COST OF SERVICES
 
     Cost of services generally include all direct and some indirect costs
incurred in connection with the Company's revenue-producing departments,
including, but not limited to, labor, telephone expenses directly related to
revenue-generating activities, equipment under operating leases used in the call
centers and fulfillment facility, direct overhead for all such operational
facilities, such as rent, security and insurance, and depreciation and
amortization of property and equipment used in operations. Cost of services,
excluding the impact of the restructuring and non-recurring special charges,
increased by $30.9 million, or 25.7%, to $151.3 million in 1998, principally as
a result of the growth in operations. Including the impact of the restructuring
and non-recurring special charges of $2.3 million in 1998 and $7.8 million in
1997, cost of services increased by $25.5 million, or 19.9%, to $153.6 million
in 1998.
 
     Excluding the impact of restructuring and non-recurring special charges,
the increase in cost of services as a percentage of revenues from 83.8% in 1997
to 86.4% in 1998 is primarily attributable to the Company's expansion of its
infrastructure in 1997 and the resultant excess capacity together with lower
than expected yield on incentive-based programs and higher wage rates paid in
call centers in strained labor markets in 1998. Approximately 1,280 workstations
were added in two call centers opened during the first six months of 1997. The
opening of these new call centers, and the related increase in workstation
capacity, was carried out primarily in anticipation of providing increased
services to the Company's largest client. This increase in services did not
materialize leaving the Company with excess capacity and a higher than desired
fixed cost structure. Additionally, the Company's largest client instituted an
across-the-board price reduction in the third quarter of 1997. Cost of services
as a percentage of revenues, including the impact of the restructuring and
non-recurring special charges, decreased from 89.3% in 1997 to 87.7% in 1998.
 
     Continued improvement in the utilization of workstation capacity is a key
component that is expected to enable the Company to reduce cost of services as a
percentage of revenues and achieve its gross margin percentage targets in the
future. As of December 31, 1998 and 1997, the Company was operating at
approximately 78% and 55%, respectively, of full utilization of workstations.
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
     Selling, general and administrative expenses ("SG&A") generally include the
costs of central services the Company provides to support and manage its
operations, including senior management, sales and marketing, human resources,
finance and management information systems functions. SG&A, excluding the impact
of the restructuring and non-recurring special charges, decreased $2.0 million,
or 10.4%, to $17.1 million in 1998. The decrease is indicative of the Company's
successful implementation of its cost-cutting initiatives associated with the
restructuring plans announced in the third quarters of 1997 and 1998 along with
management's efforts to postpone, or temporarily reduce, non-revenue-producing
expenditures, whenever possible. Including the impact of the restructuring and
non-recurring special charges of $6.2 million in 1998 and $6.8 million in 1997,
SG&A decreased by $2.6 million, or 10.0%, to $23.3 million in 1998.
 
     As a percentage of revenues, excluding the impact of restructuring and
non-recurring special charges, SG&A decreased from 13.3% in 1997 to 9.8% in
1998. This decrease is a result of increased revenues during 1998 coupled with
the cost-cutting initiatives and the postponement or reduction of expenditures.
SG&A, as a percentage of revenues, including the impact of restructuring and
non-recurring special charges, decreased from 18.0% in 1997 to 13.3% in 1998.
 
INTEREST, NET
 
     Interest expense, net of interest income and capitalized interest, was
$789,000 for 1998 compared to net interest income of $282,000 for 1997. During
1997, the Company generated interest income from the investment of a portion of
the net proceeds from the Second Equity Offering and had an absence of
borrowings
 
                                       21
<PAGE>   22
 
under its revolving credit facility, while during 1998 the Company incurred
interest charges from borrowings on its revolving credit facility.
 
INCOME TAXES
 
     The Company had a deferred tax asset of $12.4 million at December 31, 1998
and $6.4 million at December 31, 1997. The net deferred tax asset at December
31, 1998 is based upon expected utilization of net operating loss carryforwards
and reversal of certain temporary differences. Although realization is not
assured, the Company believes it is more likely than not that all of the net
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced. The Company
will continue to review the assumptions used on a quarterly basis and make
adjustments as appropriate.
 
NET LOSS AND NET LOSS PER SHARE
 
     For the fiscal year ended December 31, 1998, the net loss was $10.2 million
compared to the net loss of $13.1 million for the comparable period of 1997,
including the impact of the restructuring and non-recurring special charges as
set forth in the next paragraph. The net loss per share for 1998 was $0.47,
compared to the net loss per share of $0.61 in 1997, including the impact of the
restructuring and non-recurring special charges as set forth in the next
paragraph.
 
     The net loss and net loss per share amounts associated with the
restructuring and non-recurring special charges were $13.8 million and $0.64,
respectively, for the fiscal year ended December 31, 1998, and $15.7 million and
$0.73, respectively, for the fiscal year ended December 31, 1997. See Note
3-Restructuring and Other Non-Recurring Special Charges of the Notes to
Consolidated Financial Statements for further discussion of the restructuring
and non-recurring special charges.
 
     For the fiscal year ended December 31, 1998, excluding the impact of the
restructuring and non-recurring special charges, net income was $3.6 million
compared to net income of $2.6 million for the comparable period of 1997.
Excluding the impact of the restructuring and non-recurring special charges, net
income per share for 1998 was $0.17 compared to net income per share of $0.12
for 1997.
 
1997 VS. 1996
 
     During the third quarter of 1997, the Company initiated an extensive and
systematic review of its operations and cost structure in response to
inefficiencies primarily resulting from the addition of capacity and
infrastructure to accommodate a contract for its largest client that has been
delayed indefinitely and an across-the-board price reduction imposed by this
client. This review focused on reducing operating expenses, increasing customer
service efficiencies and generally strengthening the Company's position to
provide telephone-based customer service and marketing solutions on an
outsourced and cosourced basis to large corporations.
 
     As a result of this review, the Company announced a major restructuring and
cost reduction plan designed to reduce its cost structure and adjust its
infrastructure to significantly improve operating efficiencies and performance
as the Company seeks to shift its customer base to a more diversified portfolio.
 
                                       22
<PAGE>   23
 
     The Company's operating results for the fiscal year ended December 31, 1997
include the effects of a pre-tax non-recurring special charge of $26.2 million
recorded in conjunction with the implementation of the restructuring and cost
reduction plan. The special charge to earnings is included in the following
categories on the Consolidated Statements of Operations:
 
<TABLE>
<CAPTION>
                                                                                AFTER-TAX
                                                             PRE-TAX DOLLAR     PER SHARE
                                                                 AMOUNT         (DILUTED)
                                                              (IN MILLIONS)      AMOUNT
                                                             ---------------    ---------
<S>                                                          <C>                <C>
  Restructuring and asset impairment charges...............       $11.6          $(0.32)
  Cost of services.........................................         7.8           (0.22)
  Selling, general and administrative expenses.............         6.8           (0.19)
                                                                  -----          ------
          Total............................................       $26.2          $(0.73)
                                                                  =====          ======
</TABLE>
 
     See Note 3 -- Restructuring and Other Non-Recurring Special Charges of the
Notes to Consolidated Financial Statements for further discussion of the
non-recurring special charges.
 
REVENUES
 
     During 1997, revenues increased by $45.9 million, or 47%, in comparison to
the prior year. The principal components of revenues are teleservicing
activities, including account services (representing 74% of revenues in 1997),
and information services (representing 16% of revenues in 1997), with the
balance primarily represented by fulfillment services. Although the Company had
eight call centers in operation as of both December 31, 1997 and December 31,
1996, the composition of those eight call centers changed. One new call center
was opened in both the first and second quarters of 1997, while one small call
center was converted into administrative offices in the first quarter of 1997
and another call center was closed during the third quarter of 1997 as part of
the Company's restructuring plan. As a result of this change in composition,
workstation capacity increased from approximately 3,200 workstations as of
December 31, 1996 to approximately 4,500 workstations as of December 31, 1997.
However, for most of 1997, the Company's workstation capacity exceeded its
requirements for the level of business the Company experienced and, as of
December 31, 1997, approximately 1,100 workstations were not being utilized to
generate revenues.
 
     Teleservicing activities, principally inbound services, accounted for the
majority of the revenue growth during 1997 with an increase of $40.1 million, or
61%, to $105.7 million in 1997. Major factors contributing to the increase in
teleservicing revenues were the addition of several new programs for existing
clients as well as the addition of new clients, principally in the
telecommunications service and equipment industries. Overall, new client
business accounted for $24.7 million, or 17%, of total revenues for 1997, while
revenues from the Company's largest client accounted for 38% of total revenues,
down from 68% for 1996. Generally, teleservicing revenues are earned on a
rate-per hour basis. However, during 1997, approximately 10% of total revenues
were earned under incentive-based compensation agreements.
 
     Revenues from information services for 1997 were $23.3 million, a decrease
of $2.2 million, or 9%, from 1996. This decrease was primarily attributable to
the performance of a $14.0 million non-recurring client project during 1996
offset by an increase of $6.8 million in teleservicing-based application
software transfers and the overall growth in operations during 1997. Such
transfers produce substantially higher margins than other information services
(which involve the development of unique, individual customer-based
applications).
 
COST OF SERVICES
 
     Cost of services increased by $56.8 million, or 80%, to $128.2 million in
1997, principally as a result of the growth in operations and the absorption of
$7.8 million in non-recurring special charges in conjunction with the Company's
restructuring and cost-reduction initiatives. See Note 3 -Restructuring and
Other Non-Recurring Special Charges of the Notes to Consolidated Financial
Statements for further discussion of the restructuring and non-recurring special
charges.
 
                                       23
<PAGE>   24
 
     The increase in cost of services as a percentage of revenues from 73.1% in
1996 to 89.3% for 1997 was primarily attributable to the Company's expansion of
its infrastructure and operations and the resultant excess capacity together
with lower than expected yield on incentive-based programs. This included
increasing the number of workstations in anticipation of providing increased
services to the Company's largest customer. This increase in services did not
materialize leaving the Company with excess capacity for most of 1997 and a
higher than desired cost structure during the second and third quarters of 1997.
Additionally, the Company's largest client instituted an across-the-board price
reduction in the third quarter of 1997. The Company's existing infrastructure
was assessed and realigned for 1998 as part of the Company's restructuring and
cost reduction plan initiatives previously discussed. However, in addition to
these initiatives, a key component to enable the Company to reduce cost of
services as a percentage of revenues and achieve its gross margin percentage
targets in the future will be maximization of current capacity levels by
increasing revenues.
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
     SG&A increased $11.1 million, or 76%, to $25.9 million in 1997. This
increase was primarily due to the increase in administrative salaries and
benefits of approximately $5.8 million to support the Company's growth, along
with an increase in the provision for the allowance for doubtful accounts of
approximately $0.7 million to adequately provide a reserve for the Company's
receivables following various charge-offs. The increase for 1997 also reflects
the absorption of $6.8 million in non-recurring special charges in conjunction
with the Company's restructuring and cost reduction initiatives. However, the
Company did begin to see benefits from its cost reduction initiatives in the
fourth quarter of 1997 as reflected by an improvement in SG&A expenses of $2.6
million over the same period of 1996. See Note 3 -- Restructuring and Other Non-
Recurring Special Charges of the Notes to Consolidated Financial Statements for
further discussion of the restructuring and non-recurring special charges.
 
     The increase in SG&A as a percentage of revenues from 15.1% in 1996 to
18.0% for 1997 reflects the effect of the Company taking a non-recurring special
charge relative to the Company's expansion of its infrastructure to support the
then expected continuing growth of the Company. A significant portion of this
growth was to come from the Company's largest client. However, as mentioned
above, this increase in services did not materialize leaving the Company with a
higher than desired cost structure during the second and third quarters of 1997.
Additionally, the Company's largest client instituted an across-the-board price
reduction in the third quarter of 1997. The Company's SG&A cost structure was
assessed and streamlined for 1998 as part of the Company's restructuring and
cost reduction plan initiatives previously discussed. However, in addition to
these initiatives, a key component to enable the Company to reduce its SG&A
expenses as a percentage of revenues and achieve its operating margin percentage
targets in the future will be maximization of current capacity levels by
increasing revenues.
 
INTEREST, NET
 
     Interest income, net of interest expense, was $282,000 for 1997 compared to
net interest expense of $688,000 for 1996. This improvement primarily represents
interest income generated during 1997 from the investment of a portion of the
net proceeds from the Second Equity Offering and the absence of borrowings from
the Company's existing credit facility during 1997. See Note 2 -- Public
Offerings of the Notes to Consolidated Financial Statements. The proceeds from
borrowings during 1996 were primarily obtained from the then existing revolving
credit loan.
 
INCOME TAXES
 
     Prior to the Initial Public Offering, the Company was an S corporation and,
accordingly, was not subject to Federal and state income taxes. Therefore, the
Consolidated Statement of Operations for the period January 1, 1996 through July
16, 1996 does not include a provision for Federal and state income taxes.
 
     The Company had a deferred tax asset of $6.4 million at December 31, 1997.
Management believes that the Company will generate sufficient taxable income in
the future such that it is more likely than not that this deferred tax asset
will be realized.
 
                                       24
<PAGE>   25
 
NET LOSS AND NET LOSS PER SHARE
 
     For the fiscal year ended December 31, 1997, the net loss was $13.1
million, including the impact of the restructuring and non-recurring special
charges as set forth in the next paragraph, compared to proforma net income of
$6.5 million for the comparable period of 1996. The net loss per share (diluted)
for 1997 was $0.61; including the impact of the restructuring and non-recurring
special charges as set forth in the next paragraph, compared to proforma net
income per share (diluted) of $0.36 in 1996.
 
     The net loss and net loss per share (diluted) amounts associated with the
restructuring and non-recurring special charges were $15.7 million and $0.73,
respectively, for the fiscal year ended December 31, 1997. See Note
3 -- Restructuring and Other Non-Recurring Special Charges of the Notes to
Consolidated Financial Statements for further discussion of the restructuring
and non-recurring special charges.
 
     Proforma net income for the period January 1, 1996 through July 16, 1996
includes a proforma provision for Federal and state income taxes as if the
Company were subject to such taxes as a C corporation for that period. The
Company was a C corporation throughout 1997; therefore, net income for the
fiscal year ended December 31, 1997 includes the appropriate provision under
such income tax status.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     During 1998 and 1997, the Company funded its operations and capital
expenditures primarily through cash flows from operations, bank borrowings and
capital lease financings. During 1997, the Company obtained additional liquidity
from the net proceeds of the Second Equity Offering.
 
     Effective January 29, 1997 (the actual closing date was February 4, 1997),
the Company and certain selling shareholders completed the Second Equity
Offering at an offering price of $35.125 per share. Of the 4,740,000 shares of
common stock sold, 1,500,000 shares were sold by the Company. Net proceeds to
the Company from the Second Equity Offering in the amount of $49.2 million,
after deducting $3.5 million in costs associated with the offering, have been
used for call center expansion, other capital expenditures necessary to support
the Company's growth, working capital and other general corporate purposes.
 
     On March 2, 1998, the Company entered into a new three-year, $25.0 million
revolving credit facility (the "Credit Facility"), replacing its then existing
$15.0 million revolving credit facility (see Note 5-Credit Facilities and
Long-Term Debt of the Notes to Consolidated Financial Statements for discussion
of prior revolving credit facility). The Company may borrow up to 80% of
eligible accounts receivable. The Credit Facility is collateralized by all the
Company's owned and hereafter acquired assets. The Credit Facility accrues
interest at the Company's option at (i) the greater of the prime rate or the
Federal funds rate plus 0.50% or (ii) the LIBOR rate plus a specified percentage
(1.25% to 1.75%) based upon the ratio of funded debt to earnings before
interest, taxes, depreciation and amortization ("EBITDA"). The Company pays a
fee of between 0.1875% and 0.25% per annum on unused commitments under the
Credit Facility based upon the ratio of funded debt to EBITDA. The Company is
required, under the terms of the Credit Facility, to maintain certain financial
covenants and ratios, including minimum tangible net worth and funded debt to
EBITDA and funded debt to capitalization ratios, to limit capital expenditures
and additional indebtedness and is restricted, among other things, with respect
to the declaration and payment of dividends, redemptions and acquisitions. At
December 31, 1998, the outstanding balance of the Credit Facility was $11.0
million ($3.3 million at 7.75% per annum, $5.2 million at 6.56% per annum and
$2.5 million at 6.82% per annum).
 
     On May 29, 1998, the Company secured a mortgage with the lender on its
Credit Facility to acquire a property (land and existing building) located in
Sunrise, Florida. The Company had originally planned on securing a special
leasing arrangement for this property as part of its call center development
plans for 1997 and, to that end, expended approximately $2.1 million during 1997
for building improvements. However, the Company subsequently decided to acquire
the property outright. The new mortgage loan was for $5.1 million, of which $4.0
million was advanced at closing. The remaining $1.1 million available under the
new loan was subject to the Company's completion of future improvements to the
property by November 25, 1998. The Company chose not to complete the
improvements by this date; hence, the $1.1 million additional availability
expired on November 25, 1998. The Company is currently negotiating with the
lender on its Credit Facility to
 
                                       25
<PAGE>   26
 
extend the term of the additional funding for future improvements, although at
this time no assurance can be given if such extension will be obtained. The
mortgage note accrues interest, payable quarterly, at the LIBOR rate plus 1.50%,
of which the interest rate was 6.7% per annum at December 31, 1998. Principal
payments are due quarterly, based upon a 20-year amortization schedule and are
expected to commence after consummation of the additional funding for future
improvements, with a balloon payment due at maturity on June 1, 2005. The
mortgage loan is cross-defaulted with and has terms substantially similar to the
Credit Facility.
 
     Effective September 30, 1998, both the revolving credit agreement and
mortgage loan agreement evidencing the Credit Facility and mortgage loan,
respectively, were amended to modify two financial covenant and ratio
definitions, the amount of the minimum tangible net worth and the fixed charge
coverage ratio.
 
     At December 31, 1998, the Company had cash and cash equivalents of $1.7
million and total long-term obligations (including current maturities thereof)
of $19.4 million. Net cash provided by operating activities was $3.0 million for
1998, while $8.7 million of net cash was used in operating activities in 1997
and $7.1 million of net cash was provided by operating activities in 1996. The
decrease in cash used in operating activities from 1997 to 1998 was attributable
to the Company's receipt of income tax refunds and the increase in net income
after non-cash charges (depreciation and amortization, provision for bad debts
and sales allowances, restructuring and asset impairment charges, and deferred
income taxes) offset by the Company's investment in working capital items. The
increase in net cash used between 1997 and 1996 is primarily attributable to the
reduction in income (loss) before non-cash charges (depreciation and
amortization, restructuring and asset impairment charges, and deferred income
taxes).
 
     The Company's working capital as of December 31, 1998 and 1997 was $22.0
million and $23.5 million, respectively. Major factors contributing to the
decrease in 1998 from 1997 were additional cash and cash equivalents as of
December 31, 1997 due to net proceeds available from the Second Equity Offering
and the significant income tax receivable at December 31, 1997. The decrease was
also offset by increases in accounts receivable in 1998 and deferred current tax
assets generated by the Company's net loss position for 1998.
 
     Net cash used in investing activities in the amounts of $24.9 million,
$34.1 million and $35.5 million in 1998, 1997 and 1996, respectively, was
principally for capital expenditures. Capital expenditures, including the
capitalized value of property and equipment, were $24.9 million, $35.9 million
and $43.8 million for 1998, 1997 and 1996, respectively. The major increases in
capital expenditures for both 1997 and 1996 were telecommunications and computer
equipment principally attributable to the large increase in the Company's total
workstation capacity and leasehold improvements for the new call centers to
house the additional workstations. In 1997, the Company opened one new call
center in both the first and second quarters of 1997, while one small call
center was converted into administrative offices in the first quarter of 1997
and another call center was closed during the third quarter of 1997 as part of
the Company's restructuring plan with respect to the third quarter of 1997. As a
result, workstation capacity increased from approximately 3,200 workstations as
of December 31, 1996 to approximately 4,500 workstations as of December 31,
1997. During 1996, the Company increased its workstation capacity by
approximately 2,670 workstations. The Company is currently in a situation of
excess capacity and, in connection with its restructuring and performance
enhancing incentives plan announced in the third quarter of 1998, the Company
plans on eliminating 800 workstations in two specific call centers. Absent the
award of any significant new business, the Company has no immediate plans for
new call center/workstation expansion and will reallocate existing site
resources to meet capacity needs as warranted. However, the Company had
previously committed to a facility in Sunrise, Florida, which it acquired and
for which it secured a mortgage during the second quarter of 1998 (see
discussion above). As a result, the Company now owns land and a building with a
book value of approximately $5.9 million. The Company intends to maintain this
property as a possible location for new administrative offices or, should
utilization levels warrant, as a new call center. Additional capital
expenditures for 1998 relate primarily to the completion of the relocation and
consolidation of administrative office space into unused space in an existing
facility and costs incurred for the PRISM Project, Precision Resolution,
InfiniteAccess and IMA Advantage/Edge, as discussed below.
 
                                       26
<PAGE>   27
 
     During the first quarter of 1998, the Company began its implementation of
an Enterprise Resource Planning ("ERP") solution, which will allow for all
internal systems (including those related to billing, payroll, client
profitability management, human resource management and general ledger) to be
fully integrated into a common platform. The Company has designated its ERP
implementation as the PRISM Project. The PRISM Project is utilizing both
internal resources as well as outside consultants to allow for a quick and
efficient implementation. Full implementation, including software, hardware,
consulting fees, training and internal resources, will cost approximately $13.0
million and is expected to take place by the third quarter of 1999. The first
modules of the PRISM Project, human resources/payroll, general ledger, accounts
receivable and accounts payable, were placed in service during the fourth
quarter of 1998. A portion of these costs will be charged to earnings based upon
the provisions of AICPA Statement of Financial Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1").
See Note 1 -- Operations and Significant Accounting Policies and Note
4 -- Property and Equipment of the Notes to Consolidated Financial Statements.
 
     In connection with the Company's new division, prcnetcare.com, described in
further detail in "Business -- Recent Developments," beginning in 1998 and
through the end of 1999, the Company currently expects to invest in excess of
$6.0 million in developing software products and technology infrastructure to
accommodate interactive customer communications. In addition, the full
implementation of IMA Advantage/Edge, described in further detail in
"Business -- Technology," is currently expected to cost approximately $5.0
million and is expected to take place during the second quarter of 1999.
 
     Net cash provided by financing activities was $12.5 million, $46.6 million
and $35.4 million in 1998, 1997 and 1996, respectively. Financing activities for
1998 are principally comprised of net borrowings under the Company's Credit
Facility and proceeds from the mortgage loan for the Sunrise, Florida, property
discussed above. In 1997, the Company raised additional capital from the Second
Equity Offering and used a portion of the net proceeds provided by such offering
principally to fund anticipated workstation capacity growth. In 1996, the
Company raised additional capital from the Initial Public Offering and used a
portion of the net proceeds provided by such offering to retire the installment
loans from a bank, totaling $1.0 million, to pay the outstanding balance on its
then existing senior credit facility and to pay the Dividend. Borrowings during
1996 were primarily from its then existing senior credit facility and its
predecessor. See Note 5 -- Credit Facilities and Long-Term Debt of the Notes to
Consolidated Financial Statements.
 
     The Company believes that funds generated from operations, available
borrowings under the Credit Facility and capital lease financings will be
sufficient to finance its planned capital expenditures at least through 1999.
The Company's long-term capital requirements will depend on many factors,
including, but not limited to, the rate at which the Company expands its
business. To the extent that the funds generated from the sources described
above are insufficient to fund the Company's activities in the short or
long-term, the Company would need to raise additional funds through public or
private financing. No assurance can be given that additional financing will be
available or that, if available, it will be available on terms favorable to the
Company.
 
NEW ACCOUNTING STANDARDS
 
     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for reporting operating and geographical segments and the type and
level of financial information to be discussed about those segments. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. The Company
adopted SFAS No. 131 in the current year and determined that it has one
reportable operating segment. See Note 7 -- Information About Services and
Significant Clients of the Notes to Consolidated Financial Statements.
 
     In March 1998, the AICPA issued Statement of Financial Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use ("SOP 98-1"). SOP 98-1 provides guidance for capitalization of certain costs
incurred in the development of internal-use software and is effective for
financial statements for years beginning after December 15, 1998. The Company
adopted SOP 98-1 in the first quarter
 
                                       27
<PAGE>   28
 
of 1998. See Note 1 -- Operations and Significant Accounting Policies and Note
4 -- Property and Equipment of the Notes to Consolidated Financial Statements.
 
YEAR 2000 ISSUE
 
     The Year 2000 issue affects the Company's installed computer systems,
network elements, software applications and other business systems that have
time-sensitive programs, including those with embedded microprocessors, that may
not properly reflect or recognize the year 2000 and years thereafter. Because
many computers and computer applications define dates by the last two digits of
the year, "00" or other two-digit dates after the year 2000 may not be properly
identified as the year 2000 or the appropriate later year, but rather the year
1900 or a year between 1901 and 1999 (as the case may be). This error could
result in system and equipment failures or malfunctions causing disruption of
operations, including among others, a temporary inability to process calls,
transactions and information, or engage in similar normal business activities.
 
     The Company has evaluated its installed computer systems, network elements,
software applications and other business systems that have time-sensitive
programs and has developed a plan to ensure their Year 2000 compliance. The
Company has established a Year 2000 Steering Committee that meets weekly to
monitor the progress and status of the Company's Year 2000 plan. The Company's
Year 2000 plan is divided into seven major sections: Internal Systems and
Equipment (business applications for accounting, administration, human resources
and other company-wide applications and office equipment, including
non-information technology infrastructure in which non-compliant software or
embedded microprocessors might exist); Hardware (Company-wide information
technology architecture); Software Packages (standard personal computer and
individual software packages, such as electronic spreadsheet and word processing
software); Application Tools and Products (products utilized by information
technology development organizations to develop and implement automated business
applications); Client Applications; Client Interfaces; and Third Party
Suppliers. In order to address the Year 2000 issue and the seven major sections
stated above, the Company's Year 2000 plan involves five phases: Planning and
Awareness Phase (developing a budget and project plan); Inventory and Assessment
Phase (identify systems and applications, assess risks and prioritize efforts);
Remediation Phase (repair, replace or retire non-compliant systems or
processes); Validation Phase (perform testing of systems and processes); and
Implementation Phase.
 
     The following chart outlines, by major section, the phases of the Company's
Year 2000 plan that have been completed or if not yet completed, the current
estimated date of completion:
 
<TABLE>
<CAPTION>
                                                                   PHASES
                                      ----------------------------------------------------------------
                                      PLANNING   INVENTORY
                                         AND        AND
           MAJOR SECTION              AWARENESS  ASSESSMENT  REMEDIATION   VALIDATION   IMPLEMENTATION
           -------------              ---------  ----------  -----------   ----------   --------------
<S>                                   <C>        <C>         <C>           <C>          <C>
Internal Systems and Equipment......  Completed  Completed      5/99          6/99           6/99
Hardware............................  Completed     5/99     3/99-6/99        6/99           6/99
Software Packages...................  Completed  3/99-4/99   5/99-6/99        6/99           6/99
Application Tools and Products......  Completed  Completed      3/99          4/99           6/99
Client Applications.................  Completed     3/99        6/99          9/99           9/99
Client Interfaces...................  Completed     3/99        4/99          9/99           9/99
Third Party Suppliers...............  Completed     4/99        5/99          6/99           6/99
</TABLE>
 
     Since the Year 2000 issue may also affect the systems and applications of
the Company's customers or suppliers, the Company has initiated formal
communications with its customers and suppliers to determine their overall Year
2000 readiness and the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
issues. As part of its overall communication process, the Company has mailed
letters to all of its customers and suppliers in an effort to receive the
appropriate warranties and assurances that those parties are, or will be, Year
2000 compliant. Based upon the responses received from its customers and
suppliers, the Company will then determine if further assurances are necessary
or if the Company needs to take further action, including the incurrence of
additional costs and/or the creation of a contingency plan with regard to any
customer or supplier that the Company believes may not be Year 2000 compliant.
Although the Company currently does not anticipate any material adverse
 
                                       28
<PAGE>   29
 
impact on its operations as a result of Year 2000 issues of its customers or
suppliers, no assurance can be given that the failure by one or more of its
major suppliers or customers to become Year 2000 compliant will not have a
material adverse impact on its operations, particularly since the Company is
still awaiting responses from such major suppliers and customers.
 
     The Company, pursuant to the PRISM Project which was undertaken by the
Company for reasons unrelated to any Year 2000 issues, has expended
approximately $8.6 million of the estimated $13.0 million required to upgrade
and enhance its internal financial and administrative systems. An ancillary
benefit of the PRISM Project is that the resulting systems will be Year 2000
compliant with full implementation of all aspects of the PRISM Project expected
by the third quarter of 1999. Based upon its most recent assessment, the Company
has determined that the incremental cost of insuring that its remaining computer
systems and processes are Year 2000 compliant is expected to be approximately
$1.0-$1.5 million. This amount will be funded as part of the Company's budgeted
capital expenditures (see "Liquidity and Capital Resources"). Through December
31, 1998, the Company, exclusive of the PRISM Project, has spent approximately
$151,000 on the Year 2000 issue. These amounts do not include any costs
associated with the implementation of contingency plans, if required, which have
not yet been developed. A portion of the costs related to the PRISM project have
been, and will continue to be, charged to earnings as incurred based upon the
provisions of SOP 98-1 (see Note 1 -- Operations and Significant Accounting
Policies and Note 4 -- Property and Equipment of the Notes to Consolidated
Financial Statements). All incremental costs associated with the Year 2000 issue
are being expensed as incurred.
 
     The extent of the Company's Year 2000 exposure, the costs of achieving Year
2000 compliance and the time period within which the Company believes it will
achieve its Year 2000 compliance are based on management's knowledge to date and
its best estimates to date. Although the Company expects its critical systems
and applications to be Year 2000 compliant prior to any anticipated impact on
its operations, there is no guarantee that these results will be achieved.
Specific factors that give rise to this uncertainty, as well as the timing and
cost of achieving Year 2000 compliance (if at all), include, but are not limited
to, availability and cost of personnel, failure to identify and correct all Year
2000 susceptible systems and applications, non-compliance by customers,
suppliers and other third parties whose systems and operations impact the
Company, and other similar uncertainties. A reasonably possible worst case
scenario might include the failure of third parties to provide services, such as
power and telecommunication services, or the loss of the Company's automated
call distributors or dialers which could, depending on its duration, result in a
material disruption to the Company's operations and its ability to generate
revenue.
 
     The Company has not yet developed a contingency plan; however, the Company
will continue to assess the need for a formal contingency plan and make a
determination as to the nature and scope of its contingency plan, if required,
based on the progress of Year 2000 efforts by the Company and third parties by
June 1999.
 
IMPACT OF INFLATION
 
     Inflation has not had a material impact upon operating results, and the
Company does not expect it to have such an impact in the future. To the extent
the Company experiences cost increases and is not able to increase its billing
rates to offset the costs, such cost increases must be recovered through
operating efficiencies and improved gross profit margins. However, there can be
no assurance that the Company's business will not be so affected by inflation or
that it will be able to absorb cost increases through operating efficiencies or
through billing rate adjustments to customers and remain competitive.
 
FLUCTUATIONS IN QUARTERLY RESULTS
 
     The Company experiences quarterly variations in revenues and operating
income principally as a result of the timing of clients' marketing campaigns and
customer service programs, the commencement of new contracts, changes in the
Company's revenue mix among its various services offered to clients, including
the percentage (if any) of services provided under incentive-based compensation
agreements, and the timing of additional operating expenses to acquire and
support new business. In addition, the completion or termination of a large
customer service program or the loss or delay in the implementation of a large
customer service
 
                                       29
<PAGE>   30
 
program or in a transfer of teleservicing-based application software could cause
the Company to experience such quarterly variations.
 
     Relative to revenue mix, due, for example, to the significantly higher
margins generated from revenue earned from the transfers of teleservicing-based
application software and to actual performance under incentive-based
compensation agreements, fluctuations in gross and operating margins may occur
whenever revenue mix or actual performance results fluctuate from quarter to
quarter. See Note 15 -- Unaudited Quarterly Financial Data of the Notes to
Consolidated Financial Statements.
 
FORWARD-LOOKING STATEMENTS
 
     This report contains forward-looking statements (within the meaning of
Section 21E. of the Securities Exchange Act of 1934, as amended), representing
the Company's current expectations and beliefs concerning future events. When
used in this report, the words "believes," "estimates," "plans," "expects,"
"intends," "anticipates," and similar expressions as they relate to the Company
or its management are intended to identify forward-looking statements. The
actual results of the Company could differ materially from those indicated by
the forward-looking statements because of various risks and uncertainties
related to and including, without limitation, the Company's effective and timely
initiation and development of new client relationships and programs, the
maintenance of existing client relationships and programs (particularly since
the Company's agreements with its clients generally do not assure the Company
will generate a specific level of revenue, do not designate the Company as the
exclusive service provider and are terminable on short notice), the effective
completion of the implementation of the Company's restructuring plan and
performance-enhancing initiatives, the achievement of satisfactory levels of
both gross and operating margins, the opening of new customer interaction
centers in accordance with strategic plans and in a timely and economic manner
consistent with existing capacity requirements, the ability of the Company to
hire, train and retain a sufficient labor force of qualified personnel at
competitive wage rates, the development and continued enhancement of
telecommunication, Internet, computer and information technologies and
operational and financial systems (including the successful and timely
completion of the implementation and installation of the PRISM Project), the
level of acceptance and increased utilization by existing and new clients of the
Company of Precision Resolution, InfiniteAccess and other Internet products and
services, technical difficulties or errors, problems or excessive costs incurred
by the Company in connection with the completion of the development,
implementation and/or future enhancement of InfiniteAccess, Precision Resolution
and/or IMA Advantage/Edge, and/or the integration of Internet technologies with
current PRC products and services to create customer interaction centers and the
success and acceptance by the Company's clients thereof, the failure of the
Company to cost-effectively develop new Internet services and products or to
maintain or enter into new strategic or key business relationships in connection
with the development and/or enhancement of its Internet offerings, the
over-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
operations of prcnetcare.com, the compatibility of InfiniteAccess, Precision
Resolution and 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, the introduction of new competitive Internet
and other products and services in the Company's industry by other companies,
the achievement by the Company and its suppliers and customers of Year 2000
compliance in a timely and cost efficient manner, the anticipated growth in
industry trends towards outsourcing and cosourcing of telephone and
Internet-based marketing and customer service operations (particularly in the
telecommunications services and equipment, transportation, financial services,
utility, consumer products and food and beverage industries), changes in
competition and the forms of direct sales and marketing techniques, consumer
interest in, and use of, the Company's clients' products and services, general
economic conditions, costs of telephone services, financing and leasing of
equipment, the adequacy of cash flows from operations and available financing to
fund capital needs and future growth, changes in and additions to governmental
rules and regulations applicable to the Company, the realization of the
Company's net deferred tax asset and other risks set forth in this report, in
the Company's other filings with the Securities and Exchange Commission and in
the Company's press releases. These risks and uncertainties are beyond the
ability of the Company to control; in many cases, the Company
                                       30
<PAGE>   31
 
cannot predict the risks and uncertainties that could cause actual results to
differ materially from those indicated by the forward-looking statements.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     Interest Rate Risk: The Company's exposure to market risk for changes in
interest rates relates primarily to its long-term debt. The Company's Credit
Facility and mortgage loan with the lender for the Credit Facility both bear
interest at variable rates, as discussed above under "Liquidity and Capital
Resources." The Company mitigates interest rate risk by continually monitoring
the interest rates.
 
     The table below presents outstanding principal amounts and the related fair
values (in thousands), together with maturity dates as of December 31, 1998 and
the weighted average interest rates for the Company's long-term debt (including
current maturities thereof) subject to variable rates for the year then ended:
 
<TABLE>
<CAPTION>
                                                                           WEIGHTED
                                                   OUTSTANDING             AVERAGE
                                                    PRINCIPAL     FAIR     INTEREST     MATURITY
                                                     AMOUNT       VALUE      RATE         DATE
                                                   -----------   -------   --------   -------------
<S>                                                <C>           <C>       <C>        <C>
Credit Facility (prime)..........................    $ 3,300     $ 3,300     8.5%     March 2, 2001
Credit Facility (LIBOR)..........................      7,700       7,700     6.8%     March 2, 2001
Mortgage loan....................................      4,000       4,000     7.0%     June 1, 2005
                                                     -------     -------
Total long-term debt subject to variable rates...    $15,000     $15,000
                                                     =======     =======
</TABLE>
 
     Based on the borrowing rates available to the Company for debt with similar
terms and average maturities, the fair value of the Company's debt approximates
carrying value.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     Information called for by this item is set forth in the Company's Financial
Statements contained in this report. The Financial Statements can be found at
the pages in this report listed in the following index:
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Certified Public
  Accountants -- PricewaterhouseCoopers LLP.................   F-1
Consolidated Balance Sheets as of December 31, 1998 and
  1997......................................................   F-2
For the years ended December 31, 1998, 1997 and 1996:
     Consolidated Statements of Operations..................   F-3
     Consolidated Statements of Shareholders' Equity........   F-4
     Consolidated Statements of Cash Flows..................   F-5
Notes to Consolidated Financial Statements..................   F-6
</TABLE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                   PART III.
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information required by this Item is incorporated by reference to the
information set forth in the Company's Definitive Proxy Statement to be filed
with the Securities and Exchange Commission (the "SEC") within 120 days of the
Company's 1998 fiscal year-end.
 
                                       31
<PAGE>   32
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The information required by this Item is incorporated by reference to the
information set forth in the Company's Definitive Proxy Statement to be filed
with the SEC within 120 days of the Company's 1998 fiscal year-end.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by this Item is incorporated by reference to the
information set forth in the Company's Definitive Proxy Statement to be filed
with the SEC within 120 days of the Company's 1998 fiscal year-end.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by this Item is incorporated by reference to the
information set forth in the Company's Definitive Proxy Statement to be filed
with the SEC within 120 days of the Company's 1998 fiscal year-end.
 
                                    PART IV.
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a) Documents filed as part of this report:
 
<TABLE>
<S>                                                           <C>
1. Financial Statements
     See Index to Financial Statements located in Item 8 of
      this report.
2. Financial Statement Schedule
                                                              PAGE
                                                              ---
 
     Schedule II -- Valuation and Qualifying Accounts.......  S-1
</TABLE>
 
     3. Exhibits
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DESCRIPTION OF EXHIBIT
-------                      ----------------------
<C>       <S>
   3.1    Articles of Incorporation of Precision Response Corporation
          (Exhibit 3.1 to Form S-1)*
   3.2    Bylaws of Precision Response Corporation as amended on July
          23, 1996 (incorporated by reference to Exhibit 3.2 of the
          Company's Quarterly Report on Form 10-Q for the quarter
          ended June 30, 1996, File No. 0-20941) and as further
          amended by Amendment to Article II, Section 6 of the Bylaws
          of the Company effective on February 19, 1997 (incorporated
          by reference to Exhibit 3.2 of the Company's Quarterly
          Report on Form 10-Q for the quarter ended March 31, 1997,
          File No. 0-20941)
   9.1    Voting Trust Agreement, dated as of February 16, 1996,
          between Richard Mondre and Mark Gordon (Exhibit 9.1 to Form
          S-1)*
   9.2    Voting Trust Agreement, dated as of February 16, 1996,
          between Richard Mondre and David Epstein (Exhibit 9.2 to
          Form S-1)*
   9.3    A separate Amendment to Voting Trust Agreement, dated as of
          December 27, 1996, for each of the Voting Trust Agreements
          dated as of February 16, 1996 described in Exhibit numbers
          9.1 and 9.2, hereto (incorporated by reference to Exhibit
          9.5 to Amendment No. 1 to the Company's Registration
          Statement on Form S-1 (File No. 333-18823), initially filed
          on December 26, 1996)
  10.1    Precision Response Corporation Amended and Restated 1996
          Incentive Stock Plan as amended through May 15, 1997
          (incorporated by reference to Exhibit 10.1 of the Company's
          Quarterly Report on Form 10-Q for the quarter ended June 30,
          1997, File No. 0-20941)+
</TABLE>
 
                                       32
<PAGE>   33
 
EXHIBIT
NUMBER                       DESCRIPTION OF EXHIBIT
-------                      ----------------------

10.2     Precision Response Corporation Amended and Restated 1996 Incentive
         Stock Plan (as amended through June 12, 1998) (incorporated by
         reference to Exhibit 10.1 to the Company's Quarterly Report on Form
         10-Q for the quarter ended June 30, 1998, File No. 0-20941)+
10.3     Precision Response Corporation 1996 Nonemployee Director Stock Option
         Plan (Exhibit 10.2 to Form S-1)*+
10.4     Precision Response Corporation Profit Sharing Plan (Exhibit 10.3 to
         Form S-1)*+
10.5     Employment Agreement with Mark Gordon (Exhibit 10.4 to Form S-1)*+
10.6     Employment Agreement with David Epstein (Exhibit 10.5 to Form S-1)*+
10.7     Employment Agreement with Richard Mondre (Exhibit 10.6 to Form S-1)*+
10.8     Stock Purchase and Shareholder Agreement, dated February 16, 1996,
         between Richard Mondre and Mark Gordon, as amended effective as of
         February 16, 1996 (Exhibit 10.8 to Form S-1)*
10.9     Stock Purchase and Shareholder Agreement, dated February 16, 1996,
         between Richard Mondre and David Epstein, as amended effective as of
         February 16, 1996 (Exhibit 10.9 to Form S-1)*
10.10    Agreement, dated February 16, 1996, among Richard Mondre, Mark Gordon
         and David Epstein (Exhibit 10.10 to Form S-1)*
10.11    Stockholder Agreement, dated May 10, 1996, between Mark Gordon and
         David Epstein (Exhibits 10.14 to Form S-1)*
10.12    S Corporation Tax Allocation and Indemnification Agreement (Exhibit
         10.15 to Form S-1)*
10.13    Form of Indemnification Agreement (Exhibit 10.17 to Form S-1)*
10.14    Net Lease, dated May 1, 1996, between MJG Properties, Inc. and
         Precision Response Corporation (13180 N.W. 43rd Avenue lease) (Exhibit
         10.18 to Form S-1)*
10.15    Net Lease, dated May 1, 1996, between MJG Properties, Inc. and
         Precision Response Corporation (4250 N.W. 135th Street lease) (Exhibit
         10.19 to Form S-1)*
10.16    Lease Agreement and Option to Purchase Real Property, dated January 23,
         1996, between Burger King Corporation and Precision Response
         Corporation (without schedules) (Exhibit 10.21 to Form S-1)*
10.17    Assignment of Lease, dated as of April 18, 1996, between Precision
         Response Corporation and Deerwood Realty Partners, Ltd (Exhibit 10. 22
         to Form S-1)*
10.18    Sublease, dated May 1, 1996, between Precision Response Corporation and
         Deerwood Realty Partners, Ltd. (Exhibit 10.23 to Form S-1)*
10.19    Lease, dated January 25, 1996, between Donald V. Mariutto and Eugene L.
         Mariutto, and Precision Response Corporation (Exhibit 10.24 to Form
         S-1)*
10.20    Assignment of Lease, dated April 30, 1996, between Precision Response
         Corporation and Deerwood Realty Partners, Ltd. (Exhibit 10.25 to Form
         S-1)*
10.21    Sublease, dated May 1, 1996, between Precision Response Corporation and
         Deerwood Realty Partners, Ltd. (Exhibit 10.26 to Form S-1)*
10.22    Registration Rights Agreement, dated May 15, 1996, between Precision
         Response Corporation and Mark Gordon (Exhibit 10.27 to Form S-1)*
10.23    Registration Rights Agreement, dated May 15, 1996, between Precision
         Response Corporation and David Epstein (Exhibit 10.28 to Form S-1)*
10.24    Employment Agreement with Richard N. Ferry, Jr. dated May 15, 1996*, as
         amended by Amendment to Employment Agreement dated as of November 10,
         1997 between the Company and Mr. Ferry (incorporated by reference to
         Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year
         ended December 31, 1997, File No. 0-20941)+ 
 
                                       33
<PAGE>   34
 

10.25    Net Lease, dated May 1, 1996, between Deerwood Realty Partners, Ltd.
         and Precision Response Corporation (Exhibit 10.30 to Form S-1)*
10.26    Employment Agreement with Paul M. O'Hara dated August 9, 1996
         (incorporated by reference to Exhibit 10.2 to the Company's Quarterly
         Report on Form 10-Q for the quarter ended September 30, 1996, File No.
         0-20941), as amended by Amendment to Employment Agreement dated as of
         November 10, 1997 between the Company and Mr. O'Hara (incorporated by
         reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K
         for the year ended December 31, 1997, File No. 0-20941)+
10.27    Independent Contractor Agreement, dated July 26, 1996, between Bernie
         Kosar, Jr. and Precision Response Corporation (incorporated by
         reference to Exhibit 10.3 to the Company's Quarterly Report on Form
         10-Q for the quarter ended September 30, 1996, File No. 0-20941) and
         Amendment to Stock Option Agreement effective as of July 26, 1996
         between Bernie Kosar, Jr. and Precision Response Corporation
         (incorporated by reference to Exhibit 10.33 to the Company's
         Registration Statement on Form S-1 (File No. 333-18823), initially
         filed on December 26, 1996)+
10.28    Employment Agreement with Bernie Kosar, Jr. dated February 19, 1997
         (incorporated by reference to Exhibit 10.35 to the Company's Annual
         Report on Form 10-K for the year ended December 31, 1996, File No.
         0-20941), as amended by Amendment to Employment Agreement dated as of
         October 1, 1997 between the Company and Mr. Kosar (incorporated by
         reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K
         for the year ended December 31, 1997, File No. 0-20941)+
10.29    Employment Agreement dated as of April 15, 1997 between the Company and
         Thomas C. Teper (incorporated by reference to Exhibit 10.2 to the
         Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
         1997, File No. 0-20941)+
10.30    Credit Agreement (with exhibits but without schedules) Dated as of
         March 2, 1998 among the Company, as the Borrower, NationsBank, N.A. and
         the other lenders that become signatories thereto, as the Banks, and
         NationsBank, N.A., as the Agent (incorporated by reference to Exhibit
         10.38 to the Company's Annual Report on Form 10-K for the year ended
         December 31, 1997, File No. 0-20941)
10.31    First Amendment to Credit Agreement effective as of June 30, 1998
         between the Company and NationsBank, N.A. (incorporated by reference to
         Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the
         quarter ended June 30, 1998, File No. 0-20941)
10.32    Second Amendment to Revolving Credit Agreement effective as of
         September 30, 1998 between the Company and NationsBank, N.A.
         (incorporated by reference to Exhibit 10.3 to the Company's Quarterly
         Report on Form 10-Q for the quarter ended September 30, 1998, File No.
         0-20941)
10.33    Mortgage Loan Agreement dated as of May 29, 1998 between the Company
         and NationsBank, N.A. (incorporated by reference to Exhibit 10.2 to the
         Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
         1998, File No. 0-20941)
10.34    Consolidated Renewal Promissory Note dated as of May 29, 1998 from the
         Company payable to the order of NationsBank, N.A. (incorporated by
         reference to Exhibit 10.3 to the Company's Quarterly Report on Form
         10-Q for the quarter ended June 30, 1998, File No. 0-20941)
10.35    First Amendment to Mortgage Loan Agreement effective as of June 30,
         1998 between the Company and NationsBank, N.A. (incorporated by
         reference to Exhibit 10.4 to the Company's Quarterly Report on Form
         10-Q for the quarter ended June 30, 1998, File No. 0-20941)
10.36    Second Amendment to Mortgage Loan Agreement effective as of September
         30, 1998 between the Company and NationsBank, N.A. (incorporated by
         reference to Exhibit 10.4 to the Company's Quarterly Report on Form
         10-Q for the quarter ended September 30, 1998, File No. 0-20941)
10.37    Confirmation letter dated December 1, 1998 from NationsBank, N.A. to
         the Company regarding definition of "fixed charge coverage ratio"
         (filed herewith)

 
                                       34
<PAGE>   35
 

10.38    Employment Agreement dated as of August 4, 1998 between the Company and
         Robert Tenzer (incorporated by reference to Exhibit 10.1 to the
         Company's Quarterly Report on Form 10-Q for the quarter ended September
         30, 1998, File No. 0-20941)+

10.39    Employment Agreement dated as of October 6, 1998 between the Company
         and James R. Weber (incorporated by reference to Exhibit 10.2 to the
         Company's Quarterly Report on Form 10-Q for the quarter ended September
         30, 1998, File No. 0-20941)+

10.40    Employment Agreement effective as of October 20, 1998 between the
         Company and Wesley T. O'Brien (filed herewith)+

10.41    Letter agreement effective as of October 1, 1998 from the Company to
         and accepted by Bernard J. Kosar, Jr. (filed herewith)+

23.1     Consent of PricewaterhouseCoopers LLP (filed herewith)

27.1     Financial Data Schedule (filed herewith)


 
-------------------------
 
* Previously filed and incorporated by reference to exhibit in the Company's
  Registration Statement on Form S-1, as amended (File No. 333-03209), initially
  filed on May 6, 1996 ("Form S-1"), as set forth after such agreement or
  document.
+ Indicates a management contract or compensatory plan or arrangement.
 
(b) Reports on Form 8-K
 
     No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1998.
 
                                       35
<PAGE>   36
 
                                   SIGNATURES
 
     Pursuant to the requirement 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.
 
                                          PRECISION RESPONSE CORPORATION
                                                             (Registrant)
 
                                          By:      /s/ PAUL M. O'HARA
                                            ------------------------------------
                                            Paul M. O'Hara
                                            Executive Vice President -- Finance
                                            and Chief Financial Officer
                                            (Principal Financial Officer)
 
Dated: March 30, 1999
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed 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/ MARK J. GORDON                    Chairman of the Board          March 30, 1999
-----------------------------------------------------
                   Mark J. Gordon
 
                /s/ DAVID L. EPSTEIN                   Chief Executive Officer and    March 30, 1999
-----------------------------------------------------  Director
                  David L. Epstein                     (Principal Executive Officer)
 
                /s/ RICHARD D. MONDRE                  Executive Vice President,      March 30, 1999
-----------------------------------------------------  General Counsel, Secretary
                  Richard D. Mondre                    and Director
 
                 /s/ PAUL M. O'HARA                    Executive Vice President --    March 30, 1999
-----------------------------------------------------  Finance and Chief Financial
                   Paul M. O'Hara                      Officer
 
             /s/ THOMAS F. JENNINGS, JR.               Vice President and Controller  March 30, 1999
-----------------------------------------------------  (Principal Accounting
               Thomas F. Jennings, Jr.                 Officer)
 
              /s/ BERNARD J. KOSAR, JR.                Director                       March 30, 1999
-----------------------------------------------------
                Bernard J. Kosar, Jr.
 
               /s/ RICHARD N. KRINZMAN                 Director                       March 30, 1999
-----------------------------------------------------
                 Richard N. Krinzman
 
                                                       Director                               , 1999
-----------------------------------------------------
                  Christian Mustad
 
                 /s/ NEIL A. NATKOW                    Director                       March 30, 1999
-----------------------------------------------------
                   Neil A. Natkow
</TABLE>
 
                                       36
<PAGE>   37
 
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
To the Board of Directors and Shareholders
of Precision Response Corporation:
 
     In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 and Item 14(a)(1) and (2) of this Form 10-K present
fairly, in all material respects, the financial position of Precision Response
Corporation and subsidiaries at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
 
/s/ PRICEWATERHOUSECOOPERS LLP
 
Miami, Florida
February 17, 1999
 
                                       F-1
<PAGE>   38
 
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $  1,656    $ 11,080
  Accounts receivable, net of allowances of $8,225 and
     $2,864, in 1998 and 1997, respectively.................    42,771      31,289
  Income taxes receivable...................................       215       6,970
  Deferred income taxes.....................................     6,906       2,796
  Prepaid expenses and other current assets.................     4,186       5,866
                                                              --------    --------
          Total current assets..............................    55,734      58,001
Property and equipment, net.................................    71,414      63,301
Deferred income taxes.......................................     5,516       3,589
Other assets................................................       782       2,522
                                                              --------    --------
          Total assets......................................  $133,446    $127,413
                                                              ========    ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Current maturities of long-term obligations...............  $  2,510    $  2,393
  Accounts payable..........................................    16,571      13,725
  Restructuring accrual.....................................     3,244       2,863
  Accrued compensation expenses.............................     3,108       5,101
  Other accrued expenses....................................     7,174       6,444
  Customer deposits.........................................     1,108       3,954
                                                              --------    --------
          Total current liabilities.........................    33,715      34,480
Long-term obligations, less current maturities..............    16,916       3,493
Restructuring accrual.......................................     3,456          --
                                                              --------    --------
          Total liabilities.................................    54,087      37,973
                                                              --------    --------
Commitments and contingencies (see Notes 6 and 14)..........        --          --
Shareholders' equity:
  Common stock, $0.01 par value; 100,000,000 shares
     authorized; 21,549,000 and 21,542,000 issued and
     outstanding, respectively..............................       215         215
  Additional paid-in capital................................    97,179      97,179
  Accumulated deficit.......................................   (18,035)     (7,846)
  Unearned compensation.....................................        --        (108)
                                                              --------    --------
          Total shareholders' equity........................    79,359      89,440
                                                              --------    --------
          Total liabilities and shareholders' equity........  $133,446    $127,413
                                                              ========    ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-2
<PAGE>   39
 
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                              FOR THE YEAR ENDED DECEMBER 31,
                                                              --------------------------------
                                                                1998        1997        1997
                                                              ---------   ---------   --------
<S>                                                           <C>         <C>         <C>
REVENUES....................................................  $175,173    $143,584    $97,637
                                                              --------    --------    -------
OPERATING EXPENSES:
  Cost of services..........................................   153,638     128,177     71,345
  Selling, general and administrative expenses..............    23,290      25,874     14,727
  Restructuring and asset impairment charges................    13,583      11,591         --
                                                              --------    --------    -------
          Total operating expenses..........................   190,511     165,642     86,072
                                                              --------    --------    -------
          Operating (loss) income...........................   (15,338)    (22,058)    11,565
OTHER INCOME (EXPENSE):
  Interest income...........................................       261         984        298
  Interest expense..........................................    (1,050)       (702)      (986)
                                                              --------    --------    -------
          (LOSS) INCOME BEFORE INCOME TAXES.................   (16,127)    (21,776)    10,877
Income tax (benefit) provision..............................    (5,938)     (8,710)     3,027
                                                              --------    --------    -------
          NET (LOSS) INCOME.................................  $(10,189)   $(13,066)   $ 7,850
                                                              ========    ========    =======
NET LOSS PER COMMON SHARE:
  Basic.....................................................  $  (0.47)   $  (0.61)
                                                              ========    ========
  Diluted...................................................  $  (0.47)   $  (0.61)
                                                              ========    ========
PROFORMA DATA (UNAUDITED):
  Income before proforma income taxes.......................                          $10,877
  Proforma provision for income taxes relating to S
     corporation............................................                            4,358
                                                                                      -------
          PROFORMA NET INCOME...............................                          $ 6,519
                                                                                      =======
PROFORMA NET INCOME PER COMMON SHARE:
  Basic.....................................................                          $  0.36
                                                                                      =======
  Diluted...................................................                          $  0.36
                                                                                      =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
  Basic.....................................................    21,548      21,393     18,083
                                                              ========    ========    =======
  Diluted...................................................    21,548      21,393     18,171
                                                              ========    ========    =======
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-3
<PAGE>   40
 
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                         COMMON STOCK     ADDITIONAL   RETAINED      DUE FROM
                                        ---------------    PAID-IN     EARNINGS    SHAREHOLDERS,     UNEARNED
                                        SHARES   AMOUNT    CAPITAL     (DEFICIT)        NET        COMPENSATION    TOTAL
                                        ------   ------   ----------   ---------   -------------   ------------   --------
<S>                                     <C>      <C>      <C>          <C>         <C>             <C>            <C>
Balance at December 31, 1995..........  16,400    $164     $    72     $  2,787        $(207)         $  --       $  2,816
  Net income..........................      --      --          --        7,850           --             --          7,850
  Payment of dividends................      --      --          --       (5,243)          --             --         (5,243)
  Net repayments from Shareholders....      --      --          --           --          207             --            207
  Issuance of common stock............   3,600      36      47,045           --           --             --         47,081
  Stock option grants.................      --      --         691           --           --           (691)            --
  Amortization of unearned
    compensation......................      --      --          --           --           --            239            239
                                        ------    ----     -------     --------        -----          -----       --------
Balance at December 31, 1996..........  20,000     200      47,808        5,394           --           (452)        52,950
  Net loss............................      --      --          --      (13,066)          --             --        (13,066)
  Payment of dividend.................      --      --          --         (174)          --             --           (174)
  Issuance of common stock............   1,500      15      49,149           --           --             --         49,164
  Exercise of employee stock
    options...........................      42      --         222           --           --             --            222
  Amortization of unearned
    compensation......................      --      --          --           --           --            344            344
                                        ------    ----     -------     --------        -----          -----       --------
Balance at December 31, 1997..........  21,542     215      97,179       (7,846)          --           (108)        89,440
  Net loss............................      --      --          --      (10,189)          --             --        (10,189)
  Exercise of employee stock
    options...........................       7      --          --           --           --             --             --
  Amortization of unearned
    compensation......................      --      --          --           --           --            108            108
                                        ------    ----     -------     --------        -----          -----       --------
Balance at December 31, 1998..........  21,549    $215     $97,179     $(18,035)       $  --          $  --       $ 79,359
                                        ======    ====     =======     ========        =====          =====       ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-4
<PAGE>   41
 
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               FOR THE YEAR ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                1998        1997        1996
                                                              ---------   ---------   ---------
<S>                                                           <C>         <C>         <C>
OPERATING ACTIVITIES:
  Net (loss) income.........................................  $(10,189)   $(13,066)   $  7,850
  Adjustments to reconcile net (loss) income to net cash
     provided by (used in) operating activities:
     Depreciation and amortization..........................    12,822      11,506       3,631
     Provision for bad debts and sales allowances...........    14,534       5,895       5,215
     Amortization of unearned compensation..................       108         344         239
     Restructuring and asset impairment charges.............     6,458       6,832          --
     Other asset write-offs.................................     5,392          --          --
     Deferred income taxes..................................    (6,037)     (4,905)        172
  Changes in operating assets and liabilities, excluding
     effects of acquisition:
     Accounts receivable....................................   (30,165)     (7,205)    (28,647)
     Income taxes receivable................................     6,755      (6,970)         --
     Prepaid expenses and other current assets..............      (448)     (4,048)     (2,545)
     Other assets...........................................      (247)        787      (1,195)
     Accounts payable.......................................     3,549      (3,761)     15,163
     Restructuring accrual..................................     4,497       2,863          --
     Accrued compensation expenses..........................    (1,993)      1,023       2,751
     Income taxes payable...................................        --      (3,297)      1,645
     Other accrued expenses.................................       815       3,748         944
     Customer deposits......................................    (2,846)      1,534       1,864
                                                              --------    --------    --------
          Net cash provided by (used in) operating
            activities......................................     3,005      (8,720)      7,087
                                                              --------    --------    --------
INVESTING ACTIVITIES:
  Cash acquired in acquisition, net of cash paid............        --         192          --
  Purchases of property and equipment.......................   (24,883)    (34,251)    (35,483)
                                                              --------    --------    --------
          Net cash used in investing activities.............   (24,883)    (34,059)    (35,483)
                                                              --------    --------    --------
FINANCING ACTIVITIES:
  Net proceeds (payments) from revolving credit loan........    11,000          --      (2,996)
  Proceeds from long-term obligations.......................     4,000          --          --
  Payments on long-term obligations.........................    (2,546)     (2,615)     (3,658)
  Net proceeds from issuance of common stock................        --      49,386      47,081
  Dividend paid.............................................        --        (174)     (5,243)
  Net payments from shareholders............................        --          --         207
                                                              --------    --------    --------
          Net cash provided by financing activities.........    12,454      46,597      35,391
                                                              --------    --------    --------
Net (decrease) increase in cash and cash equivalents........    (9,424)      3,818       6,995
Cash and cash equivalents at beginning of year..............    11,080       7,262         267
                                                              --------    --------    --------
Cash and cash equivalents at end of year....................  $  1,656    $ 11,080    $  7,262
                                                              ========    ========    ========
Supplemental cash flow information:
  Cash paid for interest, including capital leases, net of
     amounts capitalized....................................  $    893    $    724    $    964
                                                              ========    ========    ========
  Cash paid for income taxes................................  $    215    $  3,330    $  1,210
                                                              ========    ========    ========
Supplemental schedule of non-cash investing and financing
  activities:
  Installment loans and capital lease obligations...........  $     --    $  1,687    $  8,362
                                                              ========    ========    ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-5
<PAGE>   42
 
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Operations
 
     Precision Response Corporation and subsidiaries (the "Company") is a
full-service provider of teleservices, Internet customer communications,
database marketing and management, and fulfillment services on an outsourced and
cosourced basis to large corporations. The Company currently operates 4,500
workstations in eight call centers, of which three have multimedia capabilities,
all located in Florida.
 
  Principles of Consolidation
 
     The consolidated financial statements include the accounts of the Company
and all wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
 
  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. Such estimates consist primarily of the allowance for doubtful
accounts and sales allowances, the valuation allowance on net deferred tax
assets, the useful lives of property and equipment, and accrued expenses. Actual
results could differ from those estimates.
 
  Cash and Cash Equivalents
 
     Highly liquid investments with a maturity of three months or less on their
acquisition date are considered cash equivalents. The Company places its
temporary cash investments with high credit quality financial institutions. At
times, such investments may be in excess of the Federally-insured limits.
 
  Property and Equipment
 
     Property and equipment, including expenditures for major improvements, is
stated at cost less accumulated depreciation and amortization. Repairs and
maintenance are expensed as incurred. Depreciation and amortization is
determined using the straight-line method over the estimated useful lives of the
respective assets or, in relation to leasehold improvements and property under
capital leases, over the lesser of the asset's estimated useful life or the
lease term (see Note 4 -- Property and Equipment).
 
     Upon the sale, retirement or other disposition of assets, the related cost
and accumulated depreciation or amortization is eliminated from the accounts.
Any resulting gains or losses from disposals are included in the Consolidated
Statements of Operations.
 
  Long-Lived Assets
 
     The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable in accordance with Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of (see Note 3 -- Restructuring and Other Non-Recurring
Special Charges).
 
  Capitalized Interest
 
     The Company capitalizes certain interest costs recognized on borrowings as
part of the historical cost of acquiring or producing certain assets in
accordance with Statement of Financial Accounting Standards No. 34,
Capitalization of Interest Cost. The amount capitalized is an allocation of the
interest cost incurred during the
 
                                       F-6
<PAGE>   43
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
period required to complete the asset. During 1998, certain borrowings under the
Company's revolving credit facility (see Note 5 -- Credit Facilities and
Long-Term Debt) were used to partially fund the Company's PRISM Project (see
Note 4 -- Property and Equipment), and the resulting interest costs incurred
have been capitalized. Total interest cost incurred during 1998 was $1.3
million, of which $1.1 million was expensed and is included in the accompanying
1998 Consolidated Statements of Operations, and the remaining $200,000 was
capitalized and is included in Property and equipment, net in the accompanying
Consolidated Balance Sheets. As each module of the PRISM Project is implemented,
all associated capitalized costs, including capitalized interest, will begin to
be amortized on a straight-line basis over the module's estimated useful life.
 
  Revenue Recognition
 
     The Company recognizes revenues as services are performed. Teleservicing
charges are primarily based on a fixed hourly fee for dedicated service.
Beginning in the third quarter of 1997, the Company also generated teleservicing
revenues under incentive-based compensation agreements whereby the amount of
revenue earned correlates to the achievement of established targets. Charges for
database marketing and management services are based on an hourly rate or on the
volume of information stored. Charges for fulfillment services are typically
assessed on a transaction basis, with an additional charge for warehousing
products for customers.
 
     Revenues earned from the transfers of software by the Company are generally
recognized when the software has been shipped, payment is due within one year,
collectibility is probable and there are no significant obligations remaining.
No such revenues were recognized in 1998.
 
  Software Development Costs
 
     The Company capitalized costs related to the development of certain
software products integral to the Company's teleservicing programs and recent
business process reengineering, which were either for internal use or with an
objective of being marketed externally. Capitalized software development costs
were reported at the lower of unamortized cost or net realizable value based
upon future use on a product-by-product basis. In accordance with Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed ("SFAS No. 86"),
capitalization of these software development costs began when technological
feasibility had been established and ended when the product was available for
general use in the Company's teleservicing programs. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, anticipated future demand for teleservicing programs, estimated economic
life and changes in software and hardware technologies.
 
     Commencing upon initial product release, capitalized software costs were
amortized on an individual product basis using the straight-line method over the
estimated economic life of the product or three years. The amount of externally
marketed software development costs capitalized in 1997 was $1,660,000. No
software development costs were incurred during 1998 in accordance with the
provisions of SFAS No. 86. Amortization expense related to externally marketed
software development costs was $744,000, $1,368,000 and $154,000 in 1998, 1997
and 1996, respectively. Externally marketed software development costs, net of
accumulated amortization, in the amount of $1,987,000 as of December 31, 1997 is
included in Other assets in the accompanying Consolidated Balance Sheets. In
conjunction with the Company's restructuring plan during the third quarter of
1998, the remaining unamortized balance of software development costs in the
amount of $1,243,000 was written off (see Note 3 -- Restructuring and Other
Non-Recurring Special Charges).
 
     In accordance with Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"), the
Company capitalizes acquired and internally developed or modified software
solely to meet its internal needs integral to the Company's teleservicing or
Internet-based programs. The Company capitalizes certain internal and external
costs directly associated with
                                       F-7
<PAGE>   44
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
developing or modifying the internal use software, which begins with the
application development stage and ends when the project is substantially
complete and ready for its intended use. The amount of costs capitalized in 1998
relating to internal use software in process was $4.9 million, consisting
principally of software purchased from external vendors, and is included in
Property and equipment, net in the accompanying Consolidated Balance Sheets (see
Note 4 -- Property and Equipment). As of December 31, 1998, no internal use
software development projects were ready for their intended uses and, therefore,
no amortization cost related to this software is included in the accompanying
Consolidated Statements of Operations. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized software
development costs require considerable judgment by management with respect to
certain external factors, including, but not limited to, anticipated future
teleservicing program demand or Internet-based program demand, estimated
economic life and changes in software and hardware technologies.
 
     In addition, in accordance with Emerging Issues Task Force 97-13,
Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project that Combines Business Process Reengineering and Information
Technology Transformation, and the provisions of SOP 98-1, the Company began
capitalizing certain costs incurred in the enhancement of internal financial and
operating systems associated with its initiative to implement an Enterprise
Resource Planning solution, which the Company designated the PRISM Project.
Costs incurred on the PRISM Project, consisting principally of software
purchased from Oracle Corporation, outside consultant fees and, to a lesser
extent, payroll and payroll-related costs for employees directly associated with
the PRISM Project, were $8.6 million as of December 31, 1998 and are included in
Property and equipment, net in the accompanying Consolidated Balance Sheets (see
Note 4 -- Property and Equipment). The PRISM Project is being implemented in
phases with certain systems or modules becoming functional at different points
in the project timeframe. Of the total $8.6 million, $5.5 million represents
PRISM Project modules still in the application development stage and $3.1
million represents the PRISM Project modules that were placed in service during
the fourth quarter of 1998. Amortization expense relating to the modules placed
in service (human resources/payroll, accounts receivable, accounts payable and
general ledger) was approximately $100,000 in 1998. Full implementation of all
aspects of the PRISM Project is expected by the third quarter of 1999. As each
module of the PRISM Project is implemented, all associated capitalized costs
will begin to be amortized on a straight-line basis over the module's estimated
useful life.
 
  Stock-Based Compensation
 
     Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Accordingly, compensation expense for qualified and non-qualified
stock options granted under the Company's stock option plans is generally
measured as the difference between the quoted market price of the Company's
stock at the date of grant and the amount an employee must pay to acquire the
stock. For options granted to other than employees in exchange for goods or
services, compensation cost is measured at fair value in accordance with SFAS
123 (see Note 11 -- Stock-Based Compensation Plans).
 
  Advertising Expenses
 
     Advertising expenses are charged to operations as incurred. During 1998,
1997 and 1996, advertising expenses were $418,000, $341,000 and $464,000,
respectively.
 
                                       F-8
<PAGE>   45
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Income Taxes
 
     Beginning July 16, 1996, the Company began providing for deferred income
taxes under the asset and liability method for financial accounting and
reporting for income taxes. Deferred tax assets and liabilities are determined
based on the differences between the financial statements carrying amounts and
the tax bases of existing assets and liabilities using the enacted statutory tax
rates in effect for the year in which the differences are expected to reverse.
 
     Prior to the initial public offering of the Company's common stock
completed in July 1996 (the "Initial Public Offering") (see Note 2 -- Public
Offerings), the Company included its income and expenses with those of its
shareholders for Federal and state income tax purposes (an S corporation
election). Accordingly, the Consolidated Statement of Operations for the period
from January 1, 1996 through July 15, 1996 does not include a provision for
Federal or state income taxes. The proforma data in the Consolidated Statements
of Operations for 1996 include a provision for Federal and state income taxes as
if the Company were subject to Federal and state corporate income taxes as a C
corporation. This proforma provision is computed using a combined Federal and
state tax rate of 37.6%.
 
     In connection with the Initial Public Offering, the Company converted from
an S corporation to a C corporation effective July 16, 1996. Upon termination of
the S corporation election, deferred income taxes in the amount of $90,000
became a net liability of the Company with a corresponding non-recurring expense
in the Consolidated Statement of Operations for 1996 (see Note 9 -- Income
Taxes). Deferred taxes resulting from the termination of the S corporation
relate primarily to accounts receivable, other accrued expenses and property and
equipment.
 
  Earnings Per Common Share
 
     During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS No. 128"), which supersedes
Accounting Principles Board Opinion No. 15, Earnings Per Share. Basic earnings
per common share calculations are determined by dividing earnings available to
common shareholders by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per common share calculations are
determined by dividing earnings available to common shareholders by the weighted
average number of shares of common stock and dilutive common stock equivalents
outstanding during the year (all related to outstanding stock options discussed
in Note 11 -- Stock-Based Compensation Plans). SFAS No. 128 had no impact on the
Company's reported primary earnings per share for 1996.
 
  Proforma Net Income Per Common Share
 
     Proforma net income per common share amounts are computed based on net
income on a proforma basis, after considering the Company's change in tax
status, and the weighted average number of common shares outstanding during each
year after retroactive adjustment for stock splits effected by way of share
dividends (see Note 10 -- Capital Stock).
 
  New Accounting Pronouncements
 
     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for reporting operating and geographical segments and the type and
level of financial information to be discussed about those segments. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. The Company
adopted SFAS No. 131 in the current year and determined that it has one
reportable operating segment. See Note 7 -- Information About Services and
Significant Clients.
 
                                       F-9
<PAGE>   46
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In March 1998, the AICPA issued Statement of Financial Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use ("SOP 98-1"). SOP 98-1 provides guidance for capitalization of certain costs
incurred in the development of internal-use software and is effective for
financial statements for years beginning after December 15, 1998. The Company
adopted SOP 98-1 in the first quarter of 1998. See Note 1 -- Operations and
Significant Accounting Policies -- Software Development Costs and Note
4 -- Property and Equipment.
 
2. PUBLIC OFFERINGS
 
     Effective July 16, 1996, the Company completed the Initial Public Offering
of its common stock (the actual closing date was July 22, 1996) in which the
Company and certain selling shareholders sold 4,600,000 shares of common stock
at an offering price of $14.50 per share. Of the 4,600,000 shares, 3,600,000
shares were sold by the Company. Net proceeds to the Company, after deducting
$5.1 million in costs associated with the offering, were $47.1 million. A
portion of the net proceeds was used to repay the outstanding balance of $12.8
million on the Company's existing revolving credit facility, various installment
loans totaling $1.0 million and to pay a distribution of S corporation earnings
to the Company's current shareholders at that time estimated at $5.2 million
(the "Dividend"). The balance of the net proceeds was used for general corporate
purposes, including call center expansion and working capital.
 
     Effective January 29, 1997 (the actual closing date was February 4, 1997),
the Company and certain selling shareholders completed a second equity offering
of 4,740,000 shares of common stock at an offering price of $35.125 per share
(the "Second Equity Offering"). Of the 4,740,000 shares, 1,500,000 shares were
sold by the Company. Net proceeds to the Company from the Second Equity Offering
in the amount of $49.2 million, after deducting $3.5 million in costs associated
with the offering, have been used for call center expansion, other capital
expenditures necessary to support the Company's growth, working capital and
other general corporate purposes.
 
3. RESTRUCTURING AND OTHER NON-RECURRING SPECIAL CHARGES
 
     During the third quarter of 1998, the Company performed an extensive review
of its operations and existing available workstation capacity. Such review
focused on determining the needed workstation capacity appropriate and desirable
in light of several factors. These factors included the requirements for
servicing the Company's current, recently attained, and anticipated new clients;
the Company's less than satisfactory operating results relative to a large
incentive-based, outbound teleservices program; and, the Company's inability to
recruit, train and maintain an employee base relative to available workstations
in certain strained labor markets without paying premium wage rates not able to
be supported by the operating margins being generated.
 
     As a result of this review, the Company initiated a restructuring and
performance enhancing initiatives plan which centered on exiting the
incentive-based outbound teleservicing program and making adjustments to certain
call centers' workstation capacity. Additionally, the Company decided to replace
certain existing software programs utilized in its call center operations with
new customer interaction software reflective of advances in customer care
technology. The workstation capacity adjustments relate primarily to strained
labor markets in two areas where the Company had available workstation capacity
of approximately 900 workstations in each area. The Company will adjust the call
center capacity in each of these two markets to approximately 500 workstations
by reducing the size of its center in one of the markets and consolidating its
two existing centers in the other market into a single center. In connection
with the Company's decision to exit the incentive-based outbound teleservicing
program and to make call center capacity adjustments, certain reductions in
overhead and administrative headcount were also made resulting in the
termination of nine employees.
 
                                      F-10
<PAGE>   47
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In adopting this plan, the Company recorded restructuring and other
non-recurring special charges of $22.1 million before taxes with an after-tax
impact of $13.8 million. This pre-tax amount is allocated as follows in the
Consolidated Statements of Operations for the year ended December 31, 1998:
$13.6 million to Restructuring and asset impairment charges (as further
described in the next paragraph); $2.3 million to Cost of services (of which
$700,000 represents cash items and $1.6 million represents non-cash items)
related principally to the write-off of teleservicing software that the Company
decided to replace with new customer interaction software reflective of advances
in customer care technology; and $6.2 million to Selling, general and
administrative expenses (of which $2.1 million represents cash items and $4.1
million represents non-cash items) principally for asset impairments of $4.1
million related to the plan to exit an incentive-based outbound teleservicing
program, $1.5 million related to increases in the provisions for certain accrued
liabilities, and $600,000 related to severance and other employee costs incurred
during the development of the performance enhancing initiatives plan. Of the
total $8.5 million in Cost of services and Selling, general and administrative
expenses described above, $7.5 million was funded during 1998 and the remaining
$1.0 million was accrued at December 31, 1998 and is included in Other accrued
expenses in the accompanying Consolidated Balance Sheets. The Company initiated
the restructuring and performance enhancing initiatives during the third quarter
of 1998 and continued with implementation in the fourth quarter. The Company
expects to be substantially completed during the third quarter of 1999.
Implementation includes the relocation and consolidation of teleservicing
programs to effectuate the closing of one call center and the reduction in size
of another call center, the completion of implementation of the new customer
interaction software reflective of advances in customer care technology,
termination of designated employees, and exploration and realization of
opportunities to divest unused facilities.
 
     Amounts included in Restructuring and asset impairment charges in the
Consolidated Statements of Operations for the year ended December 31, 1998
include cash items such as severance and other employee-related costs of $1.0
million and lease and other facility exit costs associated with the reduction of
workstation capacity of $6.1 million. Of the total $7.1 million, $900,000 was
funded during 1998 and the remaining $6.2 million is accrued as of December 31,
1998 as part of the restructuring accrual. Non-cash restructuring and asset
impairment charges of $6.5 million are primarily related to the write-off of
leasehold improvements and telephone and computer equipment associated with the
reduction in workstation capacity.
 
     During the third quarter of 1997, the Company initiated an extensive and
systematic review of its operations and cost structure in response to
inefficiencies primarily resulting from the addition of capacity and
infrastructure to accommodate a contract for its largest client that has been
delayed indefinitely and an across-the-board price reduction imposed by this
client. The review focused on reducing operating expenses, increasing customer
service efficiencies and generally strengthening the Company's position to
provide telephone-based customer service and marketing solutions on an
outsourced and cosourced basis to large corporations.
 
     This review of the Company's operations focused primarily on operational
and organization structures and systems, client profitability and facilities
rationalization. As a result of this review, the Company initiated a plan to
consolidate three administrative locations into unused space in an existing
facility, to reduce overhead and administrative headcount by 10%, to consolidate
and reorganize various functional departments and to integrate and enhance its
financial and operating systems. The headcount reductions resulted in the
termination of approximately 150 employees primarily in the areas of
teleservicing, information services and administration. Payment of substantially
all termination benefits took place during the fourth quarter of 1997 during
which time actual employee terminations occurred.
 
     In adopting this plan, the Company recorded a non-recurring special charge
of $26.2 million before taxes with an after-tax impact of $15.7 million. This
amount is allocated as follows in the Consolidated Statements of Operations for
the year ended December 31, 1997: $11.6 million to Restructuring and asset
impairment charges (as further described in the next paragraph); $7.8 million to
Cost of services (of which $6.6 million
 
                                      F-11
<PAGE>   48
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
represented cash items and $1.2 million represented non-cash items) related
principally to significant, non-capitalizable start-up and other costs incurred
in expanding and improving the Company's ability to provide certain types of
teleservicing and fulfillment services which it had previously been providing
only on a limited basis (these costs primarily related to development of systems
applications and training modules as well as actual employee training); and $6.8
million to Selling, general and administrative expenses (of which $6.7 million
represented cash items and $100,000 represented non-cash items) principally for
non-recurring operating expenses including $4.8 million of costs associated with
the development of the Company's restructuring and cost reduction initiatives,
increases in the provisions for certain accrued liabilities totaling $1.9
million and various balance sheet write-offs totaling $100,000. Of the total
$14.6 million in Cost of services and Selling, general and administrative
expenses described above, $11.4 million was funded during 1997 and the remaining
$3.2 million was accrued at December 31, 1997 and is included in Other accrued
expenses in the accompanying Consolidated Balance Sheets. The Company initiated
the restructuring and cost savings initiatives during the third quarter of 1997
and, since September 30, 1997, the Company had terminated designated employees
and reorganized its operational and administrative management structure in
connection with the restructuring and cost savings plan. The Company also
completed the relocation and consolidation of administrative office space into
unused space at an existing facility. Additionally, the Company also continued
its attempts to divest unused facilities. This included termination in February
1998 of a lease for an unused facility whose landlord is a corporation that is
wholly owned by the Company's Chairman of the Board. In consideration of a
termination payment of approximately $82,000, the landlord relieved the Company
of its future lease commitments totaling approximately $161,000. The Company
believes that the amount of the termination payment was no less favorable to it
than could have been negotiated from an unaffiliated party. The Company's
implementation throughout 1998 was substantially completed prior to the
Company's initiation of additional restructuring and performance enhancing
initiatives described above.
 
     Amounts included in Restructuring and asset impairment charges in the
Consolidated Statements of Operations for the year ended December 31, 1997
include cash items such as severance and other employee costs of $2.1 million
and lease obligations and other exit costs associated with the consolidation of
three administrative locations into an existing facility and the closing of one
small, unused call center of $2.6 million. Non-cash restructuring and asset
impairment charges of $6.9 million are primarily related to the write-off of
leasehold improvements associated with the administrative facility consolidation
and closing along with the cost to fully amortize redundant systems that are not
deemed recoverable in light of the aforementioned changes with the Company's
largest client. At December 31, 1998, $500,000 is included in Restructuring
accrual in the Consolidated Balance Sheets, relating to facility consolidation
costs associated with the 1997 restructuring plan.
 
     The following table sets forth the details and the cumulative activity in
the restructuring accrual during the year ended December 31, 1998 (in
thousands):
 
<TABLE>
<CAPTION>
                                                     ACCRUAL                                   ACCRUAL
                                                    BALANCE AT                                BALANCE AT
                                                   DECEMBER 31,                              DECEMBER 31,
                                                       1997       ADDITIONS   EXPENDITURES       1998
                                                   ------------   ---------   ------------   ------------
<S>                                                <C>            <C>         <C>            <C>
Severance and other employee costs...............     $  482       $1,057       $  (842)       $   697
Closure and consolidation of facilities
  and related exit costs.........................      2,381        6,075        (2,453)         6,003
                                                      ------       ------       -------        -------
          Total restructuring accrual............     $2,863       $7,132       $(3,295)         6,700
                                                      ======       ======       =======
          Less: current portion..................                                               (3,244)
                                                                                               -------
          Total restructuring accrual,
            long-term............................                                              $ 3,456
                                                                                               =======
</TABLE>
 
                                      F-12
<PAGE>   49
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
4. PROPERTY AND EQUIPMENT
 
     Property and equipment is comprised of both owned property and property
under capital leases, the details of which are set forth below (in thousands):
 
<TABLE>
<CAPTION>
                                                        DECEMBER 31, 1998               DECEMBER 31, 1997         ESTIMATED
                                                  -----------------------------   -----------------------------     USEFUL
                                                   OWNED     LEASED     TOTAL      OWNED     LEASED     TOTAL       LIVES
                                                  --------   -------   --------   --------   -------   --------   ----------
<S>                                               <C>        <C>       <C>        <C>        <C>       <C>        <C>
Land............................................  $  1,057   $    --   $  1,057   $     --   $    --   $     --      N/A
Buildings and improvements......................     4,878        --      4,878         --        --         --      N/A
Telecommunications equipment and software.......    20,946     4,432     25,378     20,823     4,500     25,323   3-7 years
Computer equipment and software.................    33,768     5,523     39,291     27,902     5,720     33,622   3-5 years
Leasehold improvements..........................    11,167        --     11,167     11,843        --     11,843       *
Furniture and fixtures..........................     8,044       242      8,286      7,706       242      7,948   5-7 years
Vehicles........................................       111        --        111        239        70        309    3 years
                                                  --------   -------   --------   --------   -------   --------
                                                    79,971    10,197     90,168     68,513    10,532     79,045
Development in process..........................    11,408        --     11,408        457        --        457      N/A
                                                  --------   -------   --------   --------   -------   --------
                                                    91,379    10,197    101,576     68,970    10,532     79,502
Less: accumulated depreciation and
      amortization..............................   (28,368)   (1,794)   (30,162)   (13,631)   (2,570)   (16,201)
                                                  --------   -------   --------   --------   -------   --------
                                                  $ 63,011   $ 8,403   $ 71,414   $ 55,339   $ 7,962   $ 63,301
                                                  ========   =======   ========   ========   =======   ========
</TABLE>
 
-------------------------
 
* The lesser of the asset's estimated useful life or the lease term (see also
  Note 6 -- Lease Commitments).
 
     Depreciation and amortization expense amounted to $12,078,000, $10,138,000
and $3,477,000 for 1998, 1997 and 1996, respectively.
 
     As discussed in Note 1 -- Operations and Significant Accounting Policies,
the Company capitalizes certain costs in connection with internal use software
and business process reengineering (PRISM Project) which will be amortized when
the software is available for use or project modules are implemented. As of
December 31, 1998, $4.9 million, related to internal use software in process,
and $5.5 million, related to the PRISM Project modules not yet implemented, are
included in Development in process in the above table. In addition, $3.1 million
related to the PRISM Project modules operational as of December 31, 1998, are
included in Computer equipment and software in the above table.
 
     During 1998, the Company acquired a property (land and existing building)
in Sunrise, Florida, which will be used as a possible location for new
administrative offices or, should utilization levels warrant, as a new call
center. See also Note 5 -- Credit Facilities and Long-Term Debt. The building
and related building improvements of $4.9 million as of December 31, 1998 were
not depreciated in 1998 due to the building not being occupied or utilized
during 1998.
 
5. CREDIT FACILITIES AND LONG-TERM DEBT
 
     On May 1, 1996, the Company entered into a three-year senior revolving
credit facility (the "Senior Revolving Facility") which provided for revolving
loans in an aggregate principal amount not to exceed $15.0 million. The Company
was able to borrow up to 85% of eligible accounts receivable. The Senior
Revolving Facility was primarily collateralized by accounts receivable. Based
upon eligible accounts receivable and no outstanding borrowings under the Senior
Revolving Facility as of December 31, 1997, availability thereunder was $15.0
million as of December 31, 1997. The Senior Revolving Facility accrued interest
at the Company's option at the prime rate plus 0.5% or the LIBOR rate plus 3.0%.
The Company paid a fee of 0.25% per annum on unused commitments under the Senior
Revolving Facility.
 
     On March 2, 1998, the Company entered into a new three-year, $25.0 million
revolving credit facility (the "Credit Facility"), replacing the Senior
Revolving Facility. The Company may borrow up to 80% of eligible accounts
receivable. The Credit Facility is collateralized by all of the Company's owned
and hereafter acquired assets. The Credit Facility accrues interest at the
Company's option at (i) the greater of the prime rate or the Federal funds rate
plus 0.50% or (ii) the LIBOR rate plus a specified percentage (1.25% to 1.75%)
 
                                      F-13
<PAGE>   50
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
based upon the ratio of funded debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The Company pays a fee of between
0.1875% and 0.25% per annum on unused commitments under the Credit Facility
based upon the ratio of funded debt to EBITDA. The Company is required, under
the terms of the Credit Facility, to maintain certain financial covenants and
ratios, including minimum tangible net worth and funded debt to EBITDA and
funded debt to capitalization ratios, to limit capital expenditures and
additional indebtedness and is restricted, among other things, with respect to
the declaration and payment of dividends, redemptions and acquisitions. At
December 31, 1998, the outstanding balance of the Credit Facility was $11.0
million ($3.3 million at 7.75% per annum, $5.2 million at 6.56% per annum and
$2.5 million at 6.82% per annum) and is included in Long-term obligations, less
current maturities in the accompanying Consolidated Balance Sheets. At December
31, 1998, the available balance under the terms of the Credit Facility was $14.0
million for which the applicable unused commitment fee was at the rate of
0.1875%.
 
     On May 29, 1998, the Company secured a mortgage with the lender on its
Credit Facility to acquire a property (land and existing building) located in
Sunrise, Florida. The Company had originally planned on securing a special
leasing arrangement for this property as part of its call center development
plans for 1997 and, to that end, expended approximately $2.1 million during 1997
for building improvements. However, the Company subsequently decided to acquire
the property outright. The new mortgage loan was for $5.1 million, of which $4.0
million was advanced at closing. The remaining $1.1 million available under the
new loan was subject to the Company's completion of future improvements to the
property by November 25, 1998. The Company chose not to complete the
improvements by this date; hence, the $1.1 million additional availability
expired on November 25, 1998. The Company is currently negotiating with the
lender on its Credit Facility to extend the term of the additional funding for
future improvements, although at this time no assurance can be given if such
extension will be obtained. The mortgage note accrues interest payable
quarterly, at the LIBOR rate plus 1.50%, of which the interest rate was 6.7% per
annum at December 31, 1998. Principal payments are due quarterly, based upon a
20-year amortization schedule and are expected to commence after consummation of
the additional funding for future improvements, with a balloon payment due at
maturity on June 1, 2005. The mortgage loan is cross-defaulted with and has
terms substantially similar to the Credit Facility.
 
     Effective September 30, 1998, both the revolving credit agreement and
mortgage loan agreement evidencing the Credit Facility and mortgage loan,
respectively, were amended to modify two financial covenant and ratio
definitions, the amount of the minimum tangible net worth and the fixed charge
coverage ratio. As of December 31, 1998, the Company was in compliance with all
financial debt covenants.
 
     Effective May 1997, the Company entered into a ten-year agreement to lease
its operating facility located in Jacksonville, Florida. The terms of the lease
included a construction allowance payment of approximately $1.0 million made by
the lessor to the Company on commencement of the lease and in return the Company
was obligated to make improvements to the facility. The lease agreement also
specifies that if the Company terminates the lease agreement prior to its full
term, it is required to refund the lessor the $1.0 million on a pro-rata basis.
In connection with the restructuring plan adopted in the third quarter of 1998
(see Note 3 -- Restructuring and Other Non-Recurring Special Charges), the
Company will reduce the size of the Jacksonville facility during 1999 and,
therefore, will terminate the Jacksonville lease agreement at the lease option
date in May 2002, which will represent only five years of the specified ten year
lease term. As such, the Company will be obligated to refund the lessor 50% of
the $1.0 million construction allowance, or $500,000, upon termination of the
lease. The $500,000 was accrued at December 31, 1998 and is included in
Long-term obligations, less current maturities in the accompanying Consolidated
Balance Sheets.
 
                                      F-14
<PAGE>   51
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
          Long-term obligations as of December 31, 1998 and 1997 consisted of
     the following (in thousands):
 
<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    ------
<S>                                                           <C>        <C>
Credit Facility.............................................  $11,000    $   --
Mortgage loan...............................................    4,000        --
Capital lease obligations...................................    3,926     5,886
Other long-term obligations.................................      500        --
                                                              -------    ------
                                                               19,426     5,886
Less: current maturities....................................   (2,510)   (2,393)
                                                              -------    ------
Long-term obligations, less current maturities..............  $16,916    $3,493
                                                              =======    ======
</TABLE>
 
     Based on the borrowing rates available to the Company for debt with similar
terms and average maturities, the fair value of the Company's debt approximates
carrying value.
 
6. LEASE COMMITMENTS
 
     The Company's operations are conducted in leased facilities which have
initial terms generally ranging from two to ten years. The leases for these
facilities would generally expire between 2004 and 2022 assuming the Company's
exercise of all renewal options. However, as a result of the 1998 restructuring
plan and continual assessment of the capacity requirements in Jacksonville and
Margate (Coconut Creek), the Company will terminate the lease agreements
relating to these locations no later than the lease option dates in May 2002.
However, prior to such terminations, the Company will fully vacate the Margate
(Coconut Creek) facility and reduce its occupancy level at the Jacksonville
facility during 1999.
 
     The Company also has certain equipment leases which have terms of up to
five years, of which the latest expiration date occurs in 2001. Rent expense
under operating leases was $6,542,000, $5,867,000 and $3,347,000 for 1998, 1997
and 1996, respectively.
 
     Future minimum lease payments under capital and operating leases, including
all renewal periods, and the annual rentals due on the related party leases
discussed in Note 8 -- Related Party Transactions, at December 31, 1998 are as
follows (in thousands):
 
<TABLE>
<CAPTION>
                                                              CAPITAL    OPERATING
YEAR ENDING DECEMBER 31,                                      LEASES      LEASES
------------------------                                      -------    ---------
<S>                                                           <C>        <C>
     1999...................................................  $2,597      $ 6,162
     2000...................................................   1,575        4,864
     2001...................................................     127        4,011
     2002...................................................      --        2,800
     2003...................................................      --        2,128
     Thereafter.............................................      --       29,736
                                                              ------      -------
     Total minimum lease payments...........................   4,299      $49,701
                                                                          =======
Less: amount representing interest..........................    (373)
                                                              ------
Present value of net minimum lease payments under capital
  leases....................................................   3,926
Less: current maturities....................................  (2,310)
                                                              ------
Long-term obligations.......................................  $1,616
                                                              ======
</TABLE>
 
                                      F-15
<PAGE>   52
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
7. INFORMATION ABOUT SERVICES AND SIGNIFICANT CLIENTS
 
     The Company has one reportable operating segment: developing and delivering
solutions to its clients' customer service and marketing needs utilizing
teleservices, e-mail and the Internet, database marketing and management,
electronic data processing and fulfillment services.
 
     A significant portion of the Company's business is dependent upon several
large clients. For the years ended December 31, 1998, 1997 and 1996, the
Company's five largest clients accounted for approximately 76%, 64% and 81% of
revenues, respectively. As of December 31, 1998, 1997 and 1996, approximately
68%, 68% and 69%, respectively, of the Company's accounts receivable were from
the five largest clients. Accounts receivable represents the Company's greatest
concentration of credit risk and is subject to the financial condition of its
largest clients. The Company does not require collateral or other security to
support clients' receivables. The Company conducts periodic reviews of its
clients' financial condition and vendor payment practices to minimize collection
risks on trade accounts receivable.
 
     During 1998, 1997 and 1996, certain clients individually accounted for more
than 10% of the Company's total revenues. The clients and their related
percentage and amount of total revenues (in thousands) were as follows:
 
<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                    ---------------------------------------------------
                                        1998               1997               1996
                                    -------------      -------------      -------------
                                     %    AMOUNT        %    AMOUNT        %    AMOUNT
                                    ---   -------      ---   -------      ---   -------
<S>                                 <C>   <C>          <C>   <C>          <C>   <C>
Company A.........................  45%   $80,559      38%   $55,022      68%   $66,000
Company B.........................  12%   $20,882      11%   $15,139        *         *
</TABLE>
 
-------------------------
 
* Accounted for less than 10% of total revenues for the year indicated.
 
8. RELATED PARTY TRANSACTIONS
 
     During 1996, but prior to the completion of the Initial Public Offering,
the Company entered into various lease agreements for certain real property with
a corporation that is wholly-owned by the Company's Chairman of the Board
providing for aggregate annual rentals of approximately $288,000. Rent expense
under these leases was $293,000, $275,000 and $264,000 for 1998, 1997 and 1996,
respectively. The primary lease term is five years with a renewal option for an
additional five-year period. In accordance with the Company's 1997 restructuring
plan, one of the lease agreements was terminated by the Company, and a
termination payment of approximately $82,000 was made in February 1998. The
Company also subleases another facility and a parking lot and leases an
additional parking lot from a partnership jointly owned by certain of its
shareholders. These subleases expire in January 2002 and the lease expires in
June 2001, with annual rentals aggregating approximately $222,000.
 
     The Company elected the majority owner of one of its customers to its Board
of Directors in October 1996. Sales commissions on revenues generated from
various other customers were paid to this director. Total commissions and fees
earned by this director were approximately $68,000 for 1996. This individual
also served as an executive officer of the Company effective from January 2,
1997 through September 30, 1998. He currently remains a director and employee of
the Company.
 
     The Company paid approximately $198,000 and $200,000 in 1998 and 1997,
respectively, in fees to charter an aircraft in connection with business travel
for the Company's personnel. The aircraft is owned by an entity of which the
Company's Chairman of the Board is the sole shareholder.
 
                                      F-16
<PAGE>   53
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
9. INCOME TAXES
 
     As described in Note 1 -- Operations and Significant Accounting Policies,
on July 16, 1996, the Company converted from an S corporation to a C corporation
and adopted the asset and liability method of accounting for income taxes. As a
result of such conversion, actual income taxes reflected in the Consolidated
Statements of Operations for 1996 are representative of the period from and
including July 16, 1996.
 
     The components of the income tax (benefit) provision for the years ended
December 31, 1998, 1997 and 1996 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                              1998      1997      1996
                                                             -------   -------   ------
<S>                                                          <C>       <C>       <C>
Current:
     Federal...............................................  $    --   $(3,805)  $2,438
     State.................................................       --        --      417
                                                             -------   -------   ------
                                                                  --    (3,805)   2,855
                                                             -------   -------   ------
Deferred:
     Federal...............................................   (5,068)   (3,632)     147
     State.................................................     (870)   (1,273)      25
                                                             -------   -------   ------
                                                              (5,938)   (4,905)     172
                                                             -------   -------   ------
                                                             $(5,938)  $(8,710)  $3,027
                                                             =======   =======   ======
</TABLE>
 
     A reconciliation of the difference between the actual income tax provision
and income taxes computed at the U.S. Federal statutory tax rate for the years
ended December 31, 1998, 1997 and 1996 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                              1998      1997      1996
                                                             -------   -------   ------
<S>                                                          <C>       <C>       <C>
U.S. Federal statutory tax rate applied to pre-tax
  income...................................................  $(5,644)  $(7,622)  $3,807
State income taxes, net of Federal benefit.................     (577)     (790)     287
Nondeductible expenses and other, net......................      283      (298)      99
Deferred income taxes recorded due to change in tax
  status...................................................       --        --       90
Income not subject to taxation at the corporate level due
  to S corporation election................................       --        --   (1,256)
                                                             -------   -------   ------
     Income tax (benefit) provision........................  $(5,938)  $(8,710)  $3,027
                                                             =======   =======   ======
</TABLE>
 
     The significant components of the net deferred tax asset (liability) as of
December 31, 1998 and 1997 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              -------   ------
<S>                                                           <C>       <C>
Deferred tax assets:
  Allowances and reserves...................................  $ 9,898   $2,811
  Net operating loss and tax credit carryforwards...........   10,043    6,530
  Other.....................................................      174       85
                                                              -------   ------
                                                               20,115    9,426
Deferred tax liability:
  Property and equipment....................................    7,693    3,041
                                                              -------   ------
     Net deferred tax asset.................................  $12,422   $6,385
                                                              =======   ======
</TABLE>
 
     The net deferred tax asset in the amount of $12.4 million as of December
31, 1998 is based upon expected utilization of net operating loss ("NOL")
carryforwards and reversal of certain temporary
 
                                      F-17
<PAGE>   54
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
differences. Although realization is not assured, the Company believes it is
more likely than not that all of the net deferred tax asset will be realized in
the future. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced. The Company will continue to review the
assumptions used on a quarterly basis and make adjustments as appropriate.
 
     The Company has a Federal NOL carryforward of approximately $23.5 million
and a state NOL carryforward of approximately $34.5 million, both of which will
begin to expire in 2012.
 
10. CAPITAL STOCK
 
     On May 1, 1996, the Company's shareholders approved an increase in the
number of authorized shares of common stock from 100 shares to 100 million
shares and a reduction in the par value per share of common stock from $1.00 to
$0.01. The Company also authorized 25 million shares, par value $0.01, of
preferred stock, the terms of which have not yet been determined. The Company
has no present plans to issue any preferred stock.
 
     On May 31, 1996, the Company declared a share dividend of an aggregate of
12,734,900 shares of common stock, $0.01 par value, immediately payable to its
shareholders of record in order to effect the equivalent of a 127,350-for-1
stock split to increase the number of shares of common stock outstanding from
100 shares to 12,735,000 shares. On June 20, 1996, the Company declared a share
dividend of an aggregate total of 3,665,000 shares of common stock, $0.01 par
value, immediately payable to its shareholders of record in order to effect the
equivalent of a 1.287789556-for-1 stock split to increase the number of shares
of common stock outstanding from 12,735,000 shares to 16,400,000 shares.
Shareholders' equity has been restated to give retroactive recognition to the
stock splits in prior years by reclassifying from retained earnings to common
stock the par value of the additional shares arising from the splits. All
applicable share and per share data have been adjusted for the stock splits.
 
     Prior to the consummation of the Initial Public Offering, the Company's
Board of Directors declared the Dividend payable in cash to the then current
shareholders of the Company of approximately $5,243,000. The Dividend was equal
to the Company's then estimate of its cumulative taxable income prior to the
conversion to a C corporation to the extent such taxable income had not
previously been distributed. During the second quarter of 1997, the Company's
final tax return as an S corporation was completed and filed. As a result, an
additional $174,000 was paid to the Company's existing shareholders prior to the
Initial Public Offering as a final distribution of the Company's accumulated
taxable income prior to conversion to C corporation status.
 
11. STOCK-BASED COMPENSATION PLANS
 
     On May 31, 1996, the Company adopted the 1996 Incentive Stock Plan (the
"Employee Stock Plan") and the 1996 Non-employee Director Stock Option Plan (the
"Director Stock Plan"; together with the Employee Stock Plan, the "Stock
Plans"). Officers, key employees and certain non-employee consultants may be
granted stock options, stock appreciation rights, stock awards, performance
shares and performance units under the Employee Stock Plan. Participation in the
Director Stock Plan is limited to members of the Company's Board of Directors
who are not salaried officers or employees of the Company. The Company
originally reserved 1,931,684 shares of common stock for issuance under the
Employee Stock Plan and 96,584 shares of common stock for issuance under the
Director Stock Plan, after giving effect to the previously described stock
splits by way of share dividends, and subject in each case to further
anti-dilution adjustments. At the Company's annual meeting of shareholders on
May 15, 1997, the total number of shares reserved for issuance under the
Employee Stock Plan was increased to 3,000,000, and at the Company's annual
meeting of shareholders on June 12, 1998, the total number of shares reserved
under the Employee Stock Plan was increased to 4,000,000.
 
                                      F-18
<PAGE>   55
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Prior to the establishment of a compensation committee (the "Committee") of
the Board of Directors, the Employee Stock Plan was administered by the Board of
Directors of the Company. The Board of Directors or the Committee are authorized
to determine, among other things, the key employees to whom, and the times at
which, options and other benefits are to be granted, the number of shares
subject to each option, the applicable vesting schedule and the exercise price.
The Board of Directors or the Committee also determines the treatment to be
afforded to a participant in the Employee Stock Plan in the event of termination
of employment for any reason, including death, disability or retirement. Under
the Employee Stock Plan, the maximum term of an incentive stock option is 10
years and the maximum term of a non-qualified stock option is 15 years.
Incentive stock options under the Employee Stock Plan are required to be granted
at an exercise price equal to that of 100% of the fair market value at the date
of grant. Non-qualified options under the Employee Stock Plan are required to be
granted at an exercise price not less than 85% of the fair market value at the
date of grant, except for options covering up to 50,000 shares which may be
granted at an exercise price equal to or in excess of par value (or $0.01 per
share) (the "$0.01 Options"). With the exception of the $0.01 Options covering
21,000 shares, non-qualified options granted under the Employee Stock Plan
through December 31, 1998 have been granted at 100% of the fair market value at
the date of grant.
 
     The Director Stock Plan provides for annual grants of non-qualified stock
options to each non-employee director of the Company. The options allow such
directors to annually purchase up to 2,500 shares of common stock at an exercise
price equal to the fair market value of the common stock on the date of grant.
These options will have a term of ten years and vest in equal installments over
three years. Stock options to purchase 7,500, 7,500 and 5,000 shares at exercise
prices ranging between $6.32 and $43.00 per share were granted under the
Director Stock Plan during 1998, 1997 and 1996, respectively.
 
     On July 16, 1996, an executive officer of the Company was granted a
non-qualified stock option to purchase 21,000 shares of common stock at an
exercise price of $0.01 per share under the Employee Stock Plan. In accordance
with APB 25, the difference between the fair market value of the common stock
and the exercise price, which amounted to $304,290, was recorded as unearned
compensation (a separate component of shareholders' equity) and is being
recognized over the related three-year vesting period. Amortization of the
unearned compensation recorded in the accompanying Consolidated Financial
Statements in accordance with APB 25 resulted in compensation expense of
$41,000, $111,000 and $152,000 for 1998, 1997 and 1996, respectively.
 
     During 1996, two then non-employee consultants were granted options under
the Employee Stock Plan to purchase an aggregate total of 85,000 shares of
common stock at various exercise prices equal to 100% of the fair market values
at the dates of grant. Pursuant to the application of SFAS No. 123 in accounting
for these non-employee stock options, the Company recorded $387,000 in unearned
compensation, which is being amortized ratably over the related vesting periods.
Amortization of the unearned compensation recorded in the accompanying
Consolidated Financial Statements in accordance with SFAS No. 123 resulted in
compensation expense of $67,000, $233,000 and $87,000 for 1998, 1997 and 1996,
respectively.
 
     In late November 1997, the Company offered each employee, who had
previously been granted options to purchase the Company's stock, the opportunity
to change the option price, date of grant and vesting period effective December
5, 1997 (the "Repricing"). Under the terms of the Repricing, all previously
granted stock options would be cancelled, including any vested options, and the
employee would be granted the same number of options at the fair market value of
the Company's common stock on December 5, 1997, which was $7.875 per share. The
new grants would generally vest on a straight-line basis on each of the first
five anniversaries from the new date of grant. At the time of the offer, the
Company had approximately 170 employees who had been granted options to purchase
the Company's common stock since the Company's Initial Public Offering with
option prices ranging from $14.50 to $43.00. The Repricing plan was accepted by
approximately 125 eligible Company employees with respect to 925,000 outstanding
stock options.
 
                                      F-19
<PAGE>   56
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Additionally, during the fourth quarter of 1997, three executive officers
of the Company had certain of their existing stock options repriced. Options
covering a total of 646,000 shares of common stock were repriced, with 310,000
shares having a new exercise price of $7.41 per share and 336,000 shares having
a new exercise price of $6.88 per share. As part of the repricing, certain of
these stock options provided for a new vesting schedule. Options covering
254,000 shares now vest 50% on the original date of grant of the options with an
additional 25% vesting on each of the first two anniversaries from the original
date of grant, and options covering 336,000 shares now vest 50% six months from
the repricing date of grant with an additional approximately 16-2/3% vesting on
each of the first three anniversaries from the repricing date of grant.
 
     During the second quarter of 1998, the Company repriced options to purchase
100,000 shares of common stock previously issued to an employee. The exercise
price of the options was reduced from $17.625 per share to $8.00 per share, the
fair market value of the Company's common stock on the date of repricing. The
repriced options were fully vested on the date of repricing and are exercisable
through May 4, 2007.
 
     The fair value of each option grant under the Company's Stock Plans is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions used for grants in 1998, 1997 and
1996:
 
<TABLE>
<CAPTION>
                                                 1998          1997           1996
                                               ---------    -----------    -----------
<S>                                            <C>          <C>            <C>
Expected volatility..........................    73.0%         78.3%          15.0%
                                                                             5.92%-
Risk-free interest rate......................  4.1%-5.9%    5.92%-6.81%       6.74%
Dividend yield...............................    0.0%          0.0%           0.0%
                                                 1-10
Expected life................................    years        7 years       3-8 years
</TABLE>
 
     A summary of the status of the Company's Stock Plans as of December 31,
1998, 1997 and 1996 and changes during the years then ended is presented below:
 
<TABLE>
<CAPTION>
                                                                                WEIGHTED-
                                                                             AVERAGE EXERCISE
                                                              NUMBER OF           PRICE
                                                               OPTIONS          PER OPTION
                                                              ----------     ----------------
<S>                                                           <C>            <C>
Outstanding at January 1, 1996..............................          --          $   --
  Granted:
     Pursuant to the Initial Public Offering(1).............     272,000           13.38(2)
     Subsequent to the Initial Public Offering..............     651,000           31.83
  Exercised.................................................          --              --
  Forfeited.................................................     (18,250)          14.50
                                                              ----------
Outstanding at December 31, 1996............................     904,750           26.63
  Granted...................................................   3,667,750(3)        12.40
  Exercised.................................................     (42,000)           7.02
  Forfeited.................................................  (1,865,117)(3)       25.34
                                                              ----------
Outstanding at December 31, 1997............................   2,665,383            8.26
  Granted...................................................   1,663,750(4)         6.60
  Exercised.................................................      (7,000)           0.01
  Forfeited.................................................    (481,483)(4)       10.06
                                                              ----------
Outstanding at December 31, 1998............................   3,840,650            7.39
                                                              ==========
</TABLE>
 
-------------------------
 
(1) No stock options were initially granted upon adoption of the Company's Stock
    Plans but rather initially as a result of the Initial Public Offering, with
    the effective date of such offering (July 16, 1996) representing the grant
    date for these stock options.
 
                                      F-20
<PAGE>   57
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(2) Includes the $0.01 Options covering 21,000 shares, which were granted on
    July 16, 1996. The remainder of these stock options were granted at an
    exercise price of $14.50 per share.
 
(3) Includes 925,000 shares cancelled and then subsequently re-granted as part
    of the Repricing and 646,000 shares cancelled and then subsequently
    re-granted in the fourth quarter of 1997 as part of a repricing of three
    executive officers' stock options at exercise prices ranging between $6.88
    and $7.41 per share.
 
(4) Includes 100,000 shares cancelled and, then, subsequently re-granted in the
    second quarter of 1998 as part of a repricing of an employee's stock options
    at an exercise price of $8.00 per share.
 
     The number of options exercisable at December 31, 1998, 1997 and 1996, was
1,243,759, 225,464 and 5,000, respectively. The per share weighted-average fair
value of stock options granted during 1998, 1997 and 1996 was $4.30, $9.53 and
$10.49, respectively.
 
     The following table summarizes information about stock options outstanding
at December 31, 1998:
 
<TABLE>
<CAPTION>
                                      OPTIONS OUTSTANDING                     OPTIONS EXERCISABLE
                          --------------------------------------------   -----------------------------
                                               WEIGHTED-
                               NUMBER           AVERAGE      WEIGHTED-        NUMBER         WEIGHTED-
                             OUTSTANDING       REMAINING      AVERAGE       EXERCISABLE       AVERAGE
                           AT DECEMBER 31,    CONTRACTUAL    EXERCISE     AT DECEMBER 31,    EXERCISE
RANGE OF EXERCISE PRICES        1998          LIFE (YEARS)     PRICE           1998            PRICE
------------------------  -----------------   ------------   ---------   -----------------   ---------
<S>                       <C>                 <C>            <C>         <C>                 <C>
$0.01(1)...............           7,000           4.54        $ 0.01                --        $   --
$4.69 to $6.875........       1,216,000           7.13          6.19           502,114          6.72
$6.94..................         730,250           6.01          6.94                --            --
$7.41..................         445,000           5.40          7.41           341,248          7.41
$7.88(2)...............       1,040,750           5.95          7.88           240,116          7.88
$8.00 to $16.00........         364,150           6.19          8.28           129,450          8.26
$21.125 to $43.00......          37,500           3.25         34.05            30,831         34.98
                              ---------                                      ---------
$0.01 to $43.00........       3,840,650           6.27          7.39         1,243,759          7.99
                              =========                                      =========
</TABLE>
 
-------------------------
 
(1) As noted herein, the Employee Stock Plan provides for options covering up to
    50,000 shares which may be granted at an exercise price equal to or in
    excess of par value (or $0.01 per share).
 
(2) Represents the exercise price under the Repricing plan.
 
     Had compensation cost for the Company's Stock Plans been determined based
on the fair value at the grant dates for awards under the Stock Plans consistent
with the method prescribed by SFAS No. 123, the Company's net (loss) income and
net (loss) income per share (diluted) in 1998, 1997 and 1996 would have been
reduced to the proforma amounts indicated below (in thousands, except per share
data):
 
<TABLE>
<CAPTION>
                                                         1998        1997      1996(1)
                                                       --------    --------    -------
<S>                                                    <C>         <C>         <C>
Net (loss) income:
  As reported........................................  $(10,189)   $(13,066)   $6,519
  Proforma...........................................   (14,733)    (18,474)    5,913
Diluted net (loss) income per common share:
  As reported........................................  $  (0.47)   $  (0.61)   $ 0.36
  Proforma...........................................     (0.68)      (0.86)     0.33
</TABLE>
 
-------------------------
 
(1) In 1996, net income and diluted net income per common share are computed on
    a proforma basis and include a provision for Federal and state income taxes
    as if the Company were a C corporation for the entire year pursuant to its
    change in income tax status from an S corporation to a C corporation. For
    further details, see Note 1 -- Operations and Significant Accounting
    Policies.
 
                                      F-21
<PAGE>   58
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The effects of applying SFAS No. 123 in this proforma disclosure are not
indicative of future amounts. The Company anticipates that additional awards
will be granted in future years.
 
12. EARNINGS PER SHARE
 
     The following reconciles the numerators and denominators of the basic and
diluted earnings per share ("EPS") computations (in thousands, except per share
data):
 
<TABLE>
<CAPTION>
                                                           FOR THE YEAR ENDED DECEMBER 31,
                                  ---------------------------------------------------------------------------------
                                             1998                         1997                       1996
                                  --------------------------   --------------------------   -----------------------
                                                                                             PRO
                                                                                            FORMA
                                    NET                PER       NET                PER      NET               PER
                                    LOSS     SHARES   SHARE      LOSS     SHARES   SHARE    INCOME   SHARES   SHARE
                                  --------   ------   ------   --------   ------   ------   ------   ------   -----
<S>                               <C>        <C>      <C>      <C>        <C>      <C>      <C>      <C>      <C>
BASIC EPS:
  (Loss) income available to
    common shareholders.........  $(10,189)  21,548   $(0.47)  $(13,066)  21,393   $(0.61)  $6,519   18,083   $0.36
EFFECT OF DILUTIVE SECURITIES:
  Stock options(1)..............        --      --       --          --      --       --       --       88       --
                                  --------   ------   ------   --------   ------   ------   ------   ------   -----
DILUTED EPS:
  (Loss) income available to
    common shareholders and
    assumed exercises...........  $(10,189)  21,548   $(0.47)  $(13,066)  21,393   $(0.61)  $6,519   18,171   $0.36
                                  ========   ======   ======   ========   ======   ======   ======   ======   =====
</TABLE>
 
-------------------------
 
(1) The effect of 71,679 and 178,684 shares of potential common stock were
    anti-dilutive in 1998 and 1997, respectively.
 
13. RETIREMENT PLANS
 
     The Company has adopted a profit sharing plan (the "Profit Sharing Plan")
which covers substantially all employees who have been employed with the Company
for at least two years and are at least 21 years of age. Under the terms of the
Profit Sharing Plan, the Company makes elective contributions to the Profit
Sharing Plan, the allocation of which to employees is based on relative salary.
 
     Effective January 1, 1997, the Company amended the Profit Sharing Plan to
include certain 401(k) savings plan features (as amended, the "Profit
Sharing/401(k) Plan"). Under the provisions of the Profit Sharing/401(k) Plan,
employees meeting certain eligibility requirements may contribute a maximum of
15% of pre-tax gross wages, subject to certain restrictions imposed pursuant to
the Internal Revenue Code. Company contributions are at the discretion of its
Board of Directors. Vesting occurs over a six-year period at the rate of 20% per
year, beginning after the second year of service. The Company accrued a
contribution of $85,000 to the Profit Sharing/401(k) Plan during 1998. The
Company did not contribute to the Profit Sharing/401(k) Plan or the Profit
Sharing Plan during 1997 or 1996.
 
14. CONTINGENCIES
 
     On or about August 26, 1998 a lawsuit, captioned Henry E. Freeman and
Freeman Industrial Enterprises Corporation v. Precision Response Corporation;
Mark Gordon; David L. Epstein; and Richard Mondre (Case No. 398-CV-1895-DJS (D.
Conn)), was filed in the Superior Court of the Judicial District of
Stamford/Norwalk in the state of Connecticut. The lawsuit has since been removed
by the Company to the United States District Court for the District of
Connecticut. This lawsuit alleges that the Company breached its contracts with
the plaintiffs by allegedly failing to pay all commissions relating to certain
clients whom the plaintiffs allegedly claim they procured for the Company. The
complaint also contains claims of breach of fiduciary duty, breach of covenant
of good faith and fair dealing, civil conspiracy, fraud/fraud in the
 
                                      F-22
<PAGE>   59
                PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
inducement, intentional infliction of emotional distress and violations of the
Connecticut Unfair Trade Practices Act. The plaintiffs seek actual, compensatory
and punitive damages, declaratory judgement that certain contracts are invalid
due to undue influence exercised upon plaintiffs or, in the alternative,
recission of such contracts, an accounting and interest, costs and attorneys'
fees.
 
     On November 16, 1998, the Company filed a motion (i) to dismiss for lack of
personal jurisdiction as to Richard Mondre and (ii) to dismiss for improper
venue or, in the alternative, to transfer to the U.S. District Court for the
Southern District of Florida. On that same day, the Company filed a motion to
dismiss the complaint for failure to state a cause of action. Both motions are
currently pending before the Court.
 
     On January 6, 1999, the plaintiffs voluntarily dismissed with prejudice
this lawsuit against Richard Mondre, which dismissal has been approved by the
Court. On or about February 12, 1999, the plaintiffs filed an Amended Complaint,
asserting the same causes of actions as in the original complaint, as well as a
claim for negligent misrepresentation.
 
     The case is currently in the discovery stage. The Company believes that the
plaintiffs' allegations are totally without merit and intends to defend the
lawsuit vigorously. A provision for legal defense costs has been reflected in
the accompanying Consolidated Financial Statements under Other accrued expenses
and Selling, general and administrative expenses which management believes is
adequate based on available information. No other provisions have been reflected
since management is unable, at this time, to predict the ultimate outcome of
this matter.
 
15. UNAUDITED QUARTERLY FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                                                           FISCAL 1998
                                                         -----------------------------------------------
                                                           FIRST      SECOND       THIRD        FOURTH
                                                          QUARTER     QUARTER     QUARTER       QUARTER
                                                         ---------   ---------   ---------     ---------
                                                          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                      <C>         <C>         <C>           <C>
Revenues...............................................   $40,535     $43,379     $44,978       $46,281
Gross profit...........................................     4,025       6,157       4,437         6,916
Operating income (loss)................................       705       1,727     (19,880)(1)     2,110
Net income (loss)......................................       373         829     (12,604)        1,213
Basic earnings (loss) per common share.................      0.02        0.04       (0.58)         0.06
Diluted earnings (loss) per common share...............      0.02        0.04       (0.58)         0.06
</TABLE>
 
<TABLE>
<CAPTION>
                                                                           FISCAL 1997
                                                         -----------------------------------------------
                                                           FIRST      SECOND       THIRD        FOURTH
                                                          QUARTER     QUARTER     QUARTER       QUARTER
                                                         ---------   ---------   ---------     ---------
                                                          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                      <C>         <C>         <C>           <C>
Revenues...............................................   $38,015     $35,963     $32,002       $37,604
Gross profit (loss)....................................    10,518       6,669      (5,835)        4,055
Operating income (loss)................................     5,315         599     (28,440)(1)       468
Net income (loss)......................................     3,291         475     (17,067)          235
Basic earnings (loss) per common share.................      0.16        0.02       (0.79)         0.01
Diluted earnings (loss) per common share...............      0.16        0.02       (0.79)         0.01
</TABLE>
 
-------------------------
 
(1) Includes non-recurring special charges of $22.1 million before taxes in 1998
    and $26.2 million before taxes in 1997 as part of the Company's
    restructuring and cost reduction initiatives (see Note 3 -- Restructuring
    and Other Non-Recurring Special Charges).
 
                                      F-23
<PAGE>   60
 
                           PRECISION RESPONSE CORPORATION
 
                  SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                    YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                               (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                  ADDITIONS
                                                                 CHARGED TO
                                                     BEGINNING    COSTS AND                    ENDING
                    DESCRIPTION                       BALANCE    EXPENSES(1)   DEDUCTIONS(2)   BALANCE
                    -----------                      ---------   -----------   -------------   -------
<S>                                                  <C>         <C>           <C>             <C>
Year ended December 31, 1998:
  Allowance for doubtful accounts and sales
     allowances....................................   $2,864       $14,534        $9,173       $8,225
Year ended December 31, 1997:
  Allowance for doubtful accounts and sales
     allowances....................................    2,650         5,895         5,681        2,864
Year ended December 31, 1996:
  Allowance for doubtful accounts and sales
     allowances....................................       60         5,215         2,625        2,650
</TABLE>
 
-------------------------
 
(1) Amounts charged to bad debt expense and sales credits were $4,314 and
    $10,220 in 1998, respectively, $448 and $5,447 in 1997, respectively, and
    $2,105 and $3,110 in 1996, respectively.
 
(2) Deductions represent customer accounts written-off and sales credits.
 
                                       S-1
<PAGE>   61
 
                         PRECISION RESPONSE CORPORATION
 
                        INDEX TO EXHIBITS FILED HEREWITH
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION OF EXHIBIT
-------                           ----------------------
<S>       <C>  <C>
10.37     --   Confirmation letter dated December 1, 1998 from NationsBank,
               N.A. to the Company regarding definition of "fixed charge
               coverage ratio"
10.40     --   Employment Agreement effective as of October 20, 1998
               between the Company and Wesley T. O'Brien
10.41     --   Letter agreement effective as of October 1, 1998 from the
               Company to and accepted by Bernard J. Kosar, Jr.
23.1      --   Consent of PricewaterhouseCoopers LLP
27.1      --   Financial Data Schedule
</TABLE>