**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-Q**

----

** **

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934**

Forthe quarterly period ended **September 30, 2006**

** **

**SITEL CORPORATION**Exact name of registrantas specified in its charter

| **1-12577** |   | **47-0684333**      |
|-------------|--------|---------------------|
| Commission  |   | IRS Employer        |
| File Number |   | Identification  No. |

** **

**MINNESOTA**(State or OtherJurisdiction of Incorporation or Organization)

| **7277  WORLD COMMUNICATIONS DRIVE**      |   |       |
|-------------------------------------------|--------|------------|
| **OMAHA,  NEBRASKA**                      |   | **68122**  |
| (Address of  Principal Executive Offices) |   | (Zip Code) |

 

**(402) 963-6810**(Registrant’s Telephone Number, IncludingArea Code)

 

**SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THEACT:**

|                                |   | **Name of  Each Exchange**   |
|--------------------------------|--------|------------------------------|
| **Title  of Each Class**       |   | **On  Which Registered**     |
| Common Stock,  $.001 Par Value |   | The New York  Stock Exchange |

** **

**SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THEACT:**Not Applicable

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filing requirementsfor the past 90 days. YES  x    NO  o

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act).YES  x    NO  o

Indicateby check mark whether the registrant is a shell company (as defined in Rule12-2 of the Exchange Act). YES  o    NO  x

**COMMON STOCK, $.001 PAR VALUE —74,651,923 SHARESOUTSTANDING AS OF OCTOBER 31, 2006**

 

 

----

**SITELCORPORATION AND SUBSIDIARIES**

**TABLE OFCONTENTS**
|                                                                                                           | ** ** | **Page** |
|-----------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                      |       |     |
| **PART  I — Financial Information**                                                                  |       |     |
|                                                                                                      |       |     |
| Item  1 — Financial Statements                                                                       |       |     |
|                                                                                                      |       |     |
| Consolidated Condensed Statements of Operations                                                           |       | 1        |
| Consolidated Condensed Balance Sheets                                                                     |       | 2        |
| Consolidated Condensed Statements of Cash Flows                                                           |       | 3        |
| Notes to Consolidated Condensed Financial Statements                                                      |       | 4        |
|                                                                                                      |       |     |
| Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations |       |     |
|                                                                                                      |       |     |
| General                                                                                                   |       | 13       |
| General Business Risks, Critical Accounting Policies  and Estimates                                       |       | 14       |
| Results of Operations                                                                                     |       | 16       |
| Financial Condition and Liquidity                                                                         |       | 21       |
| Other  Matters                                                                                            |       | 24       |
|                                                                                                      |       |     |
| Item 3 — Quantitative and Qualitative Disclosures  About Market Risk                                 |       | 25       |
|                                                                                                      |       |     |
| Item 4 — Controls and Procedures                                                                     |       | 25       |
|                                                                                                      |       |     |
| **PART  II — Other Information**                                                                     |       |     |
|                                                                                                      |       |     |
| Item  1 — Legal Proceedings                                                                          |       | 26       |
|                                                                                                      |       |     |
| Item  5 — Other Information                                                                          |       | 27       |
|                                                                                                      |       |     |
| Item 6 —  Exhibits                                                                                   |       | 27       |
|                                                                                                      |       |     |
| Signature                                                                                                 |       | 28       |
|                                                                                                      |       |     |
| Exhibit  Index                                                                                            |       | 29       |

 

----

**PARTI - FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OFOPERATIONS**

**(UNAUDITED)**

(in thousands, except per share data)
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                                                   | ** ** | **2006**               | ** ** | **2005**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenue**                                                  |       | $                      | 274,526    |                  | $          | 244,042 |   | $ | 827,945 |   | $ | 746,744 |   |
| ** **                                                   |       |                   |       |                  |       |   |   |   |   |
| **Operating (income) expenses:**                             |       |                   |       |                  |       |   |   |   |   |
| Direct labor and  telecommunications expenses                |       | 173,670                |       | 147,432               |       | 524,255 |   | 453,522 |   |
| Subcontracted  and other services expenses                   |       | 10,275                 |       | 12,019                |       | 29,213 |   | 37,780 |   |
| Operating,  selling and administrative expenses              |       | 87,151                 |       | 80,874                |       | 257,281 |   | 242,010 |   |
| Gain on  settlement                                          |       | —                 |       | —                |       | (6,000 | ) | — |   |
| Restructuring  expenses, net                                 |       | —                 |       | 4,616                 |       | (358 | ) | 2,007 |   |
| Total operating  expenses                                    |       | 271,096                |       | 244,941               |       | 804,391 |   | 735,319 |   |
| ** **                                                   |       |                   |       |                  |       |   |   |   |   |
| **Operating income (loss)**                                  |       | 3,430                  |       | (899                  | )          | 23,554 |   | 11,425 |   |
| ** **                                                   |       |                   |       |                  |       |   |   |   |   |
| **Other income (expense):**                                  |       |                   |       |                  |       |   |   |   |   |
| Interest expense                                             |       | (3,720                 | )          | (3,811                | )          | (9,566 | ) | (10,231 | ) |
| Interest income                                              |       | 128                    |       | 144                   |       | 314 |   | 404 |   |
| Equity in  earnings (loss) of affiliates, net                |       | 574                    |       | 27                    |       | 2,524 |   | 315 |   |
| Other income  (expense), net                                 |       | (400                   | )          | 53                    |       | 209 |   | 22 |   |
| Total other  expense, net                                    |       | (3,418                 | )          | (3,587                | )          | (6,519 | ) | (9,490 | ) |
| ** **                                                   |       |                   |       |                  |       |   |   |   |   |
| **Income (loss) before income  taxes and minority interest** |       | 12                     |       | (4,486                | )          | 17,035 |   | 1,935 |   |
| ** **                                                   |       |                   |       |                  |       |   |   |   |   |
| Income tax  expense (benefit)                                |       | 1,355                  |       | (3,438                | )          | 7,024 |   | (800 | ) |
| Minority  interest                                           |       | 442                    |       | 875                   |       | 1,711 |   | 1,538 |   |
| ** **                                                   |       |                   |       |                  |       |   |   |   |   |
| **Net income (loss)**                                        |       | $                      | (1,785     | )                     | $          | (1,923 | ) | $ | 8,300 |   | $ | 1,197 |   |
| ** **                                                   |       |                   |       |                  |       |   |   |   |   |
| **Weighted average common shares  outstanding:**             |       |                   |       |                  |       |   |   |   |   |
| Basic                                                        |       | 74,502                 |       | 74,448                |       | 74,349 |   | 73,986 |   |
| Diluted                                                      |       | 74,502                 |       | 74,448                |       | 75,046 |   | 74,290 |   |
|                                                         |       |                   |       |                  |       |   |   |   |   |
| **Earnings per share:**                                      |       |                   |       |                  |       |   |   |   |   |
| Basic                                                        |       | $                      | (0.02      | )                     | $          | (0.03 | ) | $ | 0.11 |   | $ | 0.02 |   |
| Diluted                                                      |       | $                      | (0.02      | )                     | $          | (0.03 | ) | $ | 0.11 |   | $ | 0.02 |   |

 

*See Notesto Consolidated Condensed Financial Statements.*

1

----

**SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED BALANCE SHEETS**

**(in thousands, except share data)**
| ** **                                                                                                                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                   | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| * *                                                                                                                                     |       | (Unaudited)            |       |                  |       |
| **Assets**                                                                                                                                   | * *   | * *               | * *   | * *              | * *   |
| **Current  assets:**                                                                                                                         |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                   |       | $                      | 30,533     |                  | $          | 25,817 |   |
| Trade accounts  receivable (net of allowance for doubtful accounts of $3,669 and $1,710,  respectively)                                      |       | 212,302                |       | 220,581               |       |
| Prepaid expenses  and other assets                                                                                                           |       | 17,223                 |       | 16,038                |       |
| Deferred income  taxes                                                                                                                       |       | 254                    |       | 666                   |       |
| Total current  assets                                                                                                                        |       | 260,312                |       | 263,102               |       |
|                                                                                                                                         |       |                   |       |                  |       |
| **Property  and equipment, net**                                                                                                             |       | 73,215                 |       | 74,411                |       |
|                                                                                                                                         |       |                   |       |                  |       |
| **Other  assets:**                                                                                                                           |       |                   |       |                  |       |
| Goodwill                                                                                                                                     |       | 47,532                 |       | 46,188                |       |
| Investment in  affiliates                                                                                                                    |       | 19,496                 |       | 17,155                |       |
| Other assets                                                                                                                                 |       | 10,025                 |       | 10,380                |       |
| Deferred income  taxes                                                                                                                       |       | 8,571                  |       | 7,209                 |       |
| **Total  assets**                                                                                                                            |       | $                      | 419,151    |                  | $          | 418,445 |   |
| ** **                                                                                                                                   |       |                   |       |                  |       |
| **Liabilities and Stockholders’  Equity**                                                                                               |       |                   |       |                  |       |
| **Current  liabilities:**                                                                                                                    |       |                   |       |                  |       |
| Current debt                                                                                                                                 |       | $                      | 13,337     |                  | $          | 20,103 |   |
| Current portion  of capital lease obligations                                                                                                |       | 2,920                  |       | 2,510                 |       |
| Trade accounts  payable                                                                                                                      |       | 24,382                 |       | 29,429                |       |
| Accrued wages,  salaries and bonuses                                                                                                         |       | 50,201                 |       | 53,441                |       |
| Accrued  operating expenses                                                                                                                  |       | 48,773                 |       | 57,193                |       |
| Deferred revenue  and other                                                                                                                  |       | 7,551                  |       | 8,434                 |       |
| Income taxes  payable                                                                                                                        |       | 2,526                  |       | 1,475                 |       |
| Deferred income  taxes                                                                                                                       |       | 25                     |       | —                |       |
| Total current  liabilities                                                                                                                   |       | 149,715                |       | 172,585               |       |
| **Long-term  debt and other liabilities:**                                                                                                   |       |                   |       |                  |       |
| Long-term debt,  excluding current portion                                                                                                   |       | 114,468                |       | 107,681               |       |
| Capital lease  obligations, excluding current portion                                                                                        |       | 6,498                  |       | 6,782                 |       |
| Other  liabilities                                                                                                                           |       | 7,566                  |       | 8,464                 |       |
| Deferred income  taxes                                                                                                                       |       | 857                    |       | —                |       |
| Total  liabilities                                                                                                                           |       | 279,104                |       | 295,512               |       |
|                                                                                                                                         |       |                   |       |                  |       |
| **Minority  interests**                                                                                                                      |       | 6,258                  |       | 4,547                 |       |
| **Stockholders’  equity:**                                                                                                              |       |                   |       |                  |       |
| Common stock,  voting, $.001 par value 200,000,000 shares authorized, 75,122,599 and  74,757,729 shares issued and outstanding, respectively |       | 75                     |       | 75                    |       |
| Additional  paid-in capital                                                                                                                  |       | 171,313                |       | 169,662               |       |
| Accumulated  other comprehensive income                                                                                                      |       | 2,516                  |       | (2,823                | )          |
| Accumulated  deficit                                                                                                                         |       | (39,345                | )          | (47,645               | )          |
| Less treasury  stock, at cost, 615,235 and 651,302 common shares, respectively                                                               |       | (770                   | )          | (883                  | )          |
| Total  stockholders’ equity                                                                                                             |       | 133,789                |       | 118,386               |       |
| **Total liabilities and stockholders’ equity**                                                                                          |       | $                      | 419,151    |                  | $          | 418,445 |   |

 

*See Notesto Consolidated Condensed Financial Statements.*

2

----

### **SITELCORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS****(UNAUDITED)**(in thousands)

| ** **                                                                        | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
|                                                                              | * *   | * *                                            | * *   | * * | * * |
| **Cash flows from operating  activities:**                                        |       |                                                |       |   |   |
| Net income                                                                        |       | $                                                   | 8,300      |   | $ | 1,197 |   |
| Adjustments to  reconcile net income to net cash flows from operating activities: |       |                                                |       |   |   |
| Restructuring  expenses, net                                                      |       | (358                                                | )          | 2,007 |   |
| Depreciation and  amortization                                                    |       | 23,834                                              |       | 27,535 |   |
| Loss on disposal  of assets                                                       |       | 11                                                  |       | 163 |   |
| Provision for  deferred income taxes                                              |       | 131                                                 |       | (7,021 | ) |
| Equity in  earnings (loss) of affiliates, net                                     |       | (2,524                                              | )          | (315 | ) |
| Minority  interest in net income of consolidated subsidiaries                     |       | 1,711                                               |       | 1,538 |   |
| Changes in  operating assets and liabilities:                                     |       |                                                |       |   |   |
| Trade accounts  receivable                                                        |       | 18,233                                              |       | (14,890 | ) |
| Other assets                                                                      |       | 3,862                                               |       | (473 | ) |
| Trade accounts  payable                                                           |       | (5,866                                              | )          | (4,783 | ) |
| Other  liabilities                                                                |       | (16,546                                             | )          | 4,097 |   |
| Net cash flows from  operating activities                                         |       | 30,788                                              |       | 9,055 |   |
|                                                                              |       |                                                |       |   |   |
| **Cash flows from investing  activities:**                                        |       |                                                |       |   |   |
| Purchases of property  and equipment                                              |       | (17,444                                             | )          | (21,290 | ) |
| Proceeds from cash  surrender value of life insurance                             |       | —                                              |       | 3,274 |   |
| Dividend paid to  minority interest shareholder                                   |       | —                                              |       | (450 | ) |
| Proceeds from the sale  of property and equipment                                 |       | 134                                                 |       | 98 |   |
| Net cash flows from  investing activities                                         |       | (17,310                                             | )          | (18,368 | ) |
|                                                                              |       |                                                |       |   |   |
| **Cash flows from financing  activities:**                                        |       |                                                |       |   |   |
| Borowings on debt                                                                 |       | 473,455                                             |       | 191,841 |   |
| Repayment of debt                                                                 |       | (478,307                                            | )          | (167,512 | ) |
| Repayments of capital  lease obligations                                          |       | (2,605                                              | )          | (2,597 | ) |
| Debt issuance costs                                                               |       | —                                              |       | (5,503 | ) |
| Proceeds from stock  options exercised                                            |       | 1,135                                               |       | 116 |   |
| Net cash flows from  financing activities                                         |       | (6,322                                              | )          | 16,345 |   |
| Effect of exchange  rates on cash                                                 |       | (2,440                                              | )          | 396 |   |
| **Net increase in cash**                                                          |       | 4,716                                               |       | 7,428 |   |
| **Cash and cash equivalents,  beginning of period**                               |       | 25,817                                              |       | 29,130 |   |
| **Cash and cash equivalents, end  of period**                                     |       | $                                                   | 30,533     |   | $ | 36,558 |   |
| ** **                                                                        |       |                                                |       |   |   |
| **Non-cash investing and  financing activities:**                                 |       |                                                |       |   |   |
| Capital lease  obligations incurred                                               |       | $                                                   | 1,886      |   | $ | 1,768 |   |
| ** **                                                                        |       |                                                |       |   |   |

 

*See Notesto Consolidated Condensed Financial Statements.*

3

----

**SITELCORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

**Note1.  Basis of Consolidation andPresentation**

***General***

References in the Notes to Consolidated Condensed Financial Statementsto “the Company”, “we” and “our” are to SITEL Corporation and its subsidiaries,collectively.

We are a leading global provider of outsourcedcustomer support services. We specialize in the design, implementation, andoperation of multi-channel contact centers. We support the customer management strategiesof large and medium size corporations in North America, Europe, Asia Pacific,and Latin America. We provide customer acquisition, customer care, technicalsupport and risk management services on an outsourced basis, as well asoperational and information technology professional services for bothoutsourced and internal contact centers. We serve clients primarily in the automotive, consumer, financial services,insurance, technology, telecommunications and ISP, media services, andutilities sectors.

The accompanyingunaudited consolidated condensed financial statements reflect all normal andrecurring adjustments that are, in the opinion of management, necessary for afair presentation of the results of operations, financial position, and cashflows for the interim periods presented. The consolidated condensed financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto, together with management’s discussion andanalysis of financial condition and results of operations, contained in ourAnnual Report on Form 10-K for the year ended December 31, 2005. Allsignificant intercompany balances and transactions have been eliminated.

***Use of Accounting Estimates***

Management makesestimates and assumptions when preparing financial statements under accountingprinciples generally accepted in the United States of America that affect our reported amounts of assets and liabilities atthe dates of the financial statements, our disclosure of contingent assets andliabilities at the dates of the financial statements, and our reported amountsof revenue and expenses during the reporting periods. These estimates involvejudgments with respect to, among other things, future economic factors that aredifficult to predict and are beyond management’s control. As a result, actualamounts could differ from these estimates.

***Recently IssuedAccounting Pronouncements***

In May 2005, the FASBissued Statement of Financial Accounting Standards (SFAS) Statement No. 154, *Accounting Changes and Error Corrections,*(SFAS 154).  SFAS 154 is a replacement ofAccounting Principles Board Opinion No. 20 (APB 20) and FASB Statement No.3.  SFAS 154 provides guidance on theaccounting for and reporting of accounting changes and error corrections.  It establishes retrospective application, orthe latest practicable date, as the required method for reporting a change inaccounting principle and the reporting of a correction of an error.  SFAS 154 is effective for accounting changesand corrections of error made in fiscal years beginning after December 15, 2005and we adopted this standard on January 1, 2006.  The adoption of SFAS 154 did not have amaterial impact on our consolidated results of operations, financial conditionand cash flows.

In July 2006, the FASBissued FASB Interpretation (FIN) No. 48, *Accounting for Uncertaintyin Income Taxes,* (FIN 48). FIN 48 applies to all tax positionsaccounted for under SFAS No. 109, *Accounting for IncomeTaxes,* and defines the confidence level that a tax position mustmeet in order to be recognized in the financial statements. The interpretationrequires that the tax effects of a position be recognized only if it is “more-likely-than-not”to be sustained by the taxing authority as of the reporting date. If a taxposition is not considered “more-likely-than-not” to be sustained then nobenefits of the position are to be recognized. FIN 48 requires additionalannual disclosures and is effective as of the beginning of the first fiscalyear beginning after December 15, 2006. We are currently evaluating the effectthat the adoption of FIN 48 will have on our consolidated results of operationsand financial condition.

***Stock-BasedCompensation***

Effective January 1, 2006, we adopted the provisionsof SFAS Statement No. 123R, *Shared-Based Payment,*(SFAS123R).  In conjunction with the adoptionof SFAS 123R on January 1, 2006, we also adopted the following:  Staff Accounting Bulletin (SAB) 107, *Share-Based Payments*, which provides guidance on valuationmethods available and other matters; and Financial Accounting Standards Board(FASB) Staff Position No. 123R-2, *Practical Accommodation tothe Application of Grant Date as*

4

----

*Defined in SFAS 123R,* (SFAS123R-2), which provides guidance on the application of grant date.  The adoption of SFAS 123R did not have amaterial effect on our statement of operations for the three and nine monthsended September 30, 2006.

 SFAS 123Rrequired companies to recognize in their statement of operations the grant-datefair value of stock options and other equity-based compensation issued toemployees and directors.  The standardrequires that compensation expense for most equity-based awards be recognizedover the requisite service period, usually the vesting period, whilecompensation expense for liability-based awards (usually settled in cash ratherthan stock) be measured to fair-value at each balance sheet date until theaward is settled.  Under SFAS 123R, thepro forma disclosures previously permitted are no longer an alternative tofinancial statement recognition.  Weelected to use the modified prospective method which requires us to recordcompensation expense for the non-vested portion of previously issued awardsthat remain outstanding at the initial date of adoption of SFAS 123R and torecord compensation expense for any awards issued or modified after January 1,2006.  Results for prior period have notbeen restated.

Prior to January 1, 2006, we applied the intrinsic-value-basedmethod of accounting prescribed by Accounting Principles Board OpinionNo. 25, *Accounting for Stock Issued to Employees* (APB No. 25)*,* and related interpretations to account for ourfixed-plan stock options. Under this method, compensation expense wasrecorded on the date of grant only if the current market price of theunderlying stock exceeded the exercise price. Statement of Financial AccountingStandard No. 123, *Accounting for Stock-BasedCompensation* (SFAS No. 123)*,* established accounting anddisclosure requirements using a fair-value-based method ofaccounting for stock-based employee compensation plans.

As a result of adopting SFAS 123R, our net loss forthe three months ended September 30, 2006 was $0.2 million higher and our netincome for the nine months ended September 30, 2006 was $0.6 million lower thanif we had continued to account for stock-based compensation under APB No. 25.Basic and diluted loss per share for the three months ended September 30, 2006would have been lower by $0.00 and $0.00, respectively, if we had not adoptedSFAS 123R.  Basic and diluted earningsper share for the nine months ended September 30, 2006 would have been higherby $0.01 and $0.01, respectively, if we had not adopted SFAS 123R.

The following table illustrates the effect on our netincome if the fair-value-based method had been applied to alloutstanding and unvested awards in each period prior to the adoption of SFAS123R:
| ** **                                                                                                               | ** ** | **Three Months Ended**                                      | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                               | ** ** | **September 30,**                                                | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                               | ** ** | **2005**                                                              | ** ** | **2005**                        | ** ** |
| ** **                                                                                                               | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net income (loss):                                                                                                       |       |                                                                  |       |                            |       |
| As reported                                                                                                              |       | $                                                                     | (1,923     | )                               | $          | 1,197 |   |
| Less: total stock based employee compensation  expense determined under the fair value method for all awards, net of tax |       | (164                                                                  | )          | (410                            | )          |
| Pro forma                                                                                                                |       | $                                                                     | (2,087     | )                               | $          | 787 |   |
|                                                                                                                     | ** ** | ** **                                                            |       |                            |       |
| Income (loss)  per common share:                                                                                         |       |                                                                  |       |                            |       |
| As reported:                                                                                                             |       |                                                                  |       |                            |       |
| Basic                                                                                                                    |       | $                                                                     | (0.03      | )                               | $          | 0.02 |   |
| Diluted                                                                                                                  |       | (0.03                                                                 | )          | 0.02                            |       |
| Pro forma:                                                                                                               |       |                                                                  |       |                            |       |
| Basic                                                                                                                    |       | (0.03                                                                 | )          | 0.01                            |       |
| Diluted                                                                                                                  |       | (0.03                                                                 | )          | 0.01                            |       |

 

***SignificantClients***

Our******top 20 clients, whichinclude multiple independently managed business units within the clients’ affiliatedgroup, accounted for 45.5% and 66.4% of our revenue for the three-month periodsended September 30, 2006 and 2005, respectively, and 44.7% and 67.4% for thenine-month periods ended September 30, 2006 and 2005, respectively.  Hewlett-PackardCompany business units were responsible for 10.9% and 11.8% of our revenue for the three-monthperiods ended September 30, 2006 and 2005, respectively, and 11.0% and 12.0% ofour revenue for the nine-month periods ended September 30, 2006 and 2005,respectively.  

5

----

General Motors Corporation (General Motors) businessunits were responsible for 11.9% of our total revenue for the three-monthperiods ended September 30, 2005, and were responsible for 12.0% for thenine-month periods ended September 30, 2005. The primary General Motors contract expired in December 2005.  We did not have any other clients undercommon control that generated more than 10% of our revenue for the periodspresented.

**Note2.  Comprehensive Income (Loss)**

Comprehensive income (loss) for the three andnine-month periods ended September 30, 2006 and 2005 are as follows (inthousands):
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                          | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                  |       | $                                | (1,785     | )                               | $          | (1,923 | ) | $ | 8,300 |   | $ | 1,197 |   |
| Other  comprehensive income (loss): |       |                             |       |                            |       |   |   |   |   |
| Currency translation adjustment     |       | 389                              |       | 344                             |       | 5,339 |   | (9,844 | ) |
| Comprehensive income  (loss)        |       | $                                | (1,396     | )                               | $          | (1,579 | ) | $ | 13,639 |   | $ | (8,647 | ) |

 

Accumulated other comprehensive income (loss)included in our consolidated condensed balance sheets represents theaccumulated foreign currency translation adjustment.

**Note 3.  AssetImpairment and Restructuring Expenses**

Wesummarize the components of the accrued restructuring expenses recorded in ourconsolidated condensed balance sheet in the following table (in millions):
| ** **         | ** ** | ** **    | ** ** | **Facility**        | ** ** | ** **        | ** ** | ** ** | ** ** |
|--------------------|------------|---------------|------------|---------------------|------------|-------------------|------------|------------|------------|
| ** **         | ** ** | ** **    | ** ** | **Closure or** | ** ** | **Grant**         | ** ** | ** ** | ** ** |
| ** **         | ** ** | **Severance** | ** ** | **Reduction**       | ** ** | **Reimbursement** | ** ** | **Total**  | ** ** |
| December 31,  2005 |       | $             | 1.5        |                | $          | 2.2               |       | $          | 3.5        |   | $ | 7.2 |   |
| Reversed           |       | —        |       | —              |       | (0.4              | )          | (0.4       | )          |
| Paid               |       | (1.3          | )          | (1.2                | )          | —            |       | (2.5       | )          |
| Other              |       | (0.2          | )          | 0.3                 |       | 0.3               |       | 0.4        |       |
| September 30, 2006 |       | $             | —     |                | $          | 1.3               |       | $          | 3.4        |   | $ | 4.7 |   |

 

Other changes in theaccrued restructuring expenses represent the impact of foreign currencyfluctuations.

***2006***

As a result of a facilityclosure in 2005, we were no longer able to maintain certain minimum employmentlevels required to retain government grants received and recorded as areduction of operating expenses in previous periods. Consequently, we recordedrestructuring expense of $3.5 million during the year ended December 31, 2005,to establish a liability for the obligation to repay such amounts.  During the fourth quarter of 2006, we settledwith the government agency responsible for the grant for $3.2 million.  As a result, we have reversed $0.4 million ofthe restructuring reserve, including foreign currency impact.  The grant reimbursement is expected to bepaid during the fourth quarter of 2006.

***2005***

On July 7, 2005, incontinuation of the previously announced profit improvement plan, we committedto additional actions to reduce ongoing operating expenses, consolidatefacilities, and reduce our workforce. The additional actions include closingand consolidating certain facilities in Northern Europe and reducing netheadcount by a total of approximately 60 employees. We expect approximately 20positions will be reduced by attrition and the remainder by severance.  We recorded restructuring expenses of $1.7million for severance expenses incurred during the three months ended September30, 2005 as a result of these actions. In addition, we recorded $0.7 million of severance expenses as a resultof previously announced actions.

6

----

As a result of thefacility closures, we will no longer be able to maintain certain minimumemployment levels required to retain government grants received and recorded asa reduction of operating expenses in previous periods. Consequently, werecorded restructuring expense of $3.1 million during the three months endedSeptember 30, 2005, to establish a liability for the obligation to repay suchamounts.

During the nine monthsended September 30, 2005, we decided to open previously closed leasedfacilities in North America to temporarily accommodate new business.  In a prior year, we had recorded arestructuring liability for the future scheduled lease payments for the closedfacilities. As a result of the decision to reopen the facilities, we reversedthe remaining $3.5 million restructuring liability.

**Note 4.  Investmentsin Affiliates**

We have made minorityinterest investments for business and strategic purposes through the purchaseof voting common and preferred stock of companies.  We periodically evaluate whether declines infair value, if any, of our investments are other-than-temporary. Thisevaluation consists of a review of qualitative and quantitative factors. Wealso consider other factors to determine whether declines in fair value areother-than-temporary, such as the investee’s financial condition, results ofoperations and operating trends. We also consider the implied value from anyrecent rounds of financing completed by the investee.

Subcontractedexpenses for services provided by our India joint venture were $6.7 million and$3.4 million for the three-month periods ended September 30, 2006 and 2005,respectively, and $18.1 million and $11.7 million for the nine-month periodsended September 30, 2006 and 2005, respectively.  The Company had payables to our India jointventure of $6.0 million and $4.8 million at September 30, 2006 and December 31,2005, respectively, which are included in trade accounts payable in theaccompanying consolidated condensed balance sheets.  During the nine months ended September 30,2006, the company recorded a $1.2 million gain related to its share ofinsurance proceeds received by our India joint venture for flood damagesustained in the third quarter of 2005. This gain was recorded in the equity in earnings (loss) of affiliates,net in the accompanying statements of operations.

As of September 30, 2006and December 31, 2005, the investment in certain Latin America affiliates wasapproximately $14.7 million and $13.7 million, respectively. Of the investmentin certain Latin America affiliates, approximately $7.7 million is equitymethod goodwill. This equity method goodwill is not amortized.  Subcontractedexpenses for services provided by our Latin America affiliates were $0.7million and $1.6 million for the three-month and nine-month periodsended September 30, 2006, respectively.  Subcontracted services provided by our Latin America joint venture forthe three-month and nine-month periods ended September 30, 2005 were notmaterial.

**Note 5.  Stock-Based Compensation**

A detailed description ofeach of our stock-based compensation plans is provided below, including the1995 Employee Stock Option Plan, 1995 Non-Employee Directors Stock Option Planand 1999 Stock Incentive Plan. Stock-based compensation expense related tothese plans, which is included in the operating, selling and administrativeexpense line in the accompanying condensed consolidated statements ofoperations, was $0.2 million and $0.6 million for the three and nine monthperiods ended September 30, 2006, respectively. There was no related income tax benefit recognized in the accompanyingcondensed consolidated statements of operations for the three or nine monthperiods ended September 30, 2006.

***1995Employee Stock Option Plan and1995 Non-Employee Directors Stock Option Plan, as amended and/or restated(1995 Plans)***

The 1995 Plans, whichwere approved by the Board of Directors and the stock holders in 1995, providedfor the granting of options to purchase up to an aggregate of 9,800,000 and300,000 shares of common stock to employees and directors, respectively.  Options granted under the 1995 Employee StockOption Plan could be incentive options or non-qualified options.  Options granted under the 1995 Non-EmployeeDirectors Stock Option Plan could be non-qualified options.  The options were granted at the common stockprice on the day of grant and generally vested ratably over one to fiveyears.  All options granted under the1995 Plans expire if not exercised by the tenth anniversary of their grantdate. The fair value of each stock option awarded was estimated on the date ofgrant using the Black-Scholes valuation model that uses various assumptions.Expected volatility was based on historical volatility of the Company’s stock.The risk-free rate for periods within the contractual life of the award isbased on the yield curve of a zero-coupon U.S. Treasury bond on the date theaward is granted with a maturity equal to the expected term of the award. Nostock options were granted under the 1995 Plans subsequent to stockholderapproval of the 1999 Stock Option Plan.

7

----

 
| ** **                         | ** ** | **Number of  Options** | ** ** | **Weighted-Average  Exercise Price  per Share** | ** ** | **Weighted-Average  Remaining Contractual  Term (in years)** | ** ** | **Aggregate  Intrinsic Value  (in thousands)** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
|                               |       |                        |       |                                                      |       |                                                                        |       |                                                     |       |
| Outstanding at  January 1, 2006    |       | 2,150,125                   |       | $                                                         | 4.75       |                                                                        |       |                                                     |       |   |
| Granted                            |       | —                      |       | —                                                    |       |                                                                        |       |                                                     |       |
| Exercised                          |       | (123,142                    | )          | 3.50                                                      |       |                                                                        |       |                                                     |       |
| Canceled                           |       | (121,383                    | )          | 5.40                                                      |       |                                                                        |       |                                                     |       |
| Outstanding at  September 30, 2006 |       | 1,905,600                   |       | $                                                         | 4.79       |                                                                        | 1.1        |                                                     | $          | — |   |
| Exercisable at  September 30, 2006 |       | 1,905,600                   |       | $                                                         | 4.79       |                                                                        | 1.1        |                                                     | $          | — |   |

 

The following tablesummarizes the status of nonvested stock options under the 1995 Plans as ofSeptember 30, 2006, and changes during the nine months then ended:
| ** **                       | ** ** | **Number of  Options** | ** ** | **Weighted-Average  Grant - Date  Fair Value** | ** ** |
|----------------------------------|------------|-----------------------------|------------|---------------------------------------------------------------|------------|
|                             |       |                        |       |                                                          |       |
| Nonvested at  January 1, 2006    |       | 884,631                     |       | $                                                             | 3.22       |   |
| Granted                          |       | —                      |       | —                                                        |       |
| Vested                           |       | (851,478                    | )          | 3.22                                                          |       |
| Forfeited                        |       | (33,153                     | )          | 3.22                                                          |       |
| Nonvested at September  30, 2006 |       | —                      |       | $                                                             | —     |   |

 

***1999Stock Incentive Plan, as amended (1999 Plan)***

On May 6, 1999, our stockholders approved the 1999 Plan, which replaced the 1995 Employee Stock Option Plan and the 1995 Non-Employee Directors Stock Option Plan.  The 1999 Plan provides for the  granting of various  types of incentive  awards  (including  incentive  stock options,  nonqualified options, stock appreciation rights, restricted shares, and performance shares or units) for the  issuance of up to an  aggregate of 10,500,000 shares of common  stock to  employees,  consultants  and  non-employee directors of the Company and its subsidiaries. Vesting terms vary with each grant, and option terms may not exceed ten years.

Options are granted atfair market value on the date of the grant and generally vest over five years,other than for the 2006 Option Grant as discussed separately. All optionsgranted under the 1999 Plan expire if not exercised by the tenth anniversary oftheir grant date. The fair value of each stock option award is estimated on thedate of grant using the Black-Scholes valuation model that uses variousassumptions. The fair value of the stock option awards is expensed on astraight-line basis over the vesting period of the award. Expected volatilityis based on historical volatility of the Company’s stock. The risk-free ratefor periods within the contractual life of the award is based on the yieldcurve of a zero-coupon U.S. Treasury bond on the date the award is granted witha maturity equal to the expected term of the award. Forfeitures are estimatedwithin the valuation model using historical data. The expected term of thestock option awards granted is derived from historical exercise experienceunder the Plan and represents the period of time that stock option awardsgranted are expected to be outstanding.

The fair value of optionsgranted during the nine months ended September 30, 2006, was estimated at thedate of the grant using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions:
| ** **                | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|
|                      | * *   | * * | * *   |
| Volatility  factor        |       | 56.2     | %          |
| Risk-free  interest rate  |       | 4.8      | %          |
| Expected life  (in years) |       | 5        |       |
| Dividend yield            |       | 0.0      | %          |

 

8

----

 
| ** **                         | ** ** | **Number of  Options** | ** ** | **Weighted-Average  Exercise Price  per Share** | ** ** | **Weighted-Average  Remaining Contractual  Term (in years)** | ** ** | **Aggregate  Intrinsic Value  (in thousands)** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
|                               |       |                        |       |                                                      |       |                                                                        |       |                                                     |       |
| Outstanding at  January 1, 2006    |       | 3,738,093                   |       | $                                                         | 3.12       |                                                                        |       |                                                     |       |   |
| Granted                            |       | 40,000                      |       | 2.78                                                      |       |                                                                        |       |                                                     |       |
| Exercised                          |       | (241,728                    | )          | 2.49                                                      |       |                                                                        |       |                                                     |       |
| Canceled                           |       | (193,600                    | )          | 3.34                                                      |       |                                                                        |       |                                                     |       |
| Outstanding at  September 30, 2006 |       | 3,342,765                   |       | $                                                         | 3.15       |                                                                        | 5.1        |                                                     | $          | 1,478 |   |
| Exercisable at  September 30, 2006 |       | 2,305,059                   |       | $                                                         | 3.38       |                                                                        | 4.7        |                                                     | $          | 1,027 |   |

 

The following tablesummarizes the status of nonvested stock options under the 1999 Plan, excludingthe 2006 Option Grant, as of September 30, 2006, and changes during the ninemonths then ended:
| ** **                       | ** ** | **Number of  Options** | ** ** | **Weighted-Average  Grant - Date  Fair Value** | ** ** |
|----------------------------------|------------|-----------------------------|------------|---------------------------------------------------------------|------------|
|                             |       |                        |       |                                                          |       |
| Nonvested at  January 1, 2006    |       | 1,477,550                   |       | $                                                             | 1.29       |   |
| Granted                          |       | 40,000                      |       | 1.48                                                          |       |
| Vested                           |       | (376,431                    | )          | 1.44                                                          |       |
| Forfeited                        |       | (103,413                    | )          | 1.28                                                          |       |
| Nonvested at September  30, 2006 |       | 1,037,706                   |       | $                                                             | 1.46       |   |

 

As of September 30, 2006,there was $0.6 million of total unrecognized compensation cost related to thenonvested stock options granted under the 1999 Plan including the effect ofestimated forfeitures.  This cost isexpected to be recognized over a weighted-average period of 2.5 years. Thetotal fair value of stock options vested during the three months endedSeptember 30, 2006 and 2005, was $0.1 million and $0.2 million,respectively.  The total fair value ofstock options vested during the nine months ended September 30, 2006 and 2005,was $0.3 million and $0.4 million, respectively.

***2006Option Grant under the1999 Stock Incentive Plan, as amended (2006 Option Grant)***

On February 1,2006, we granted 1,463,000 stock options under the 1999 Plan.  Vesting of the options is contingent upon theCompany achieving one of three EPS targets for 2006, 2007 or 2008.  If the lowest target is achieved 50% of theoptions would vest, 80% if the second target is met and 100% if the highest ismet.  If one of the targets is met forthe first year (2006), the employee would be required to remain with theCompany for an additional year until our annual report on Form 10-K is filedfor 2007, at which point the relevant percentage of the options would vest.  If one of the targets is met for the second(2007) or third (2008) year, the relevant percentage of the options would vestimmediately upon the filing of our annual report on Form 10-K for such year.  Any options that have not vested would becancelled at the time of filing the annual report on Form 10-K for 2008.

The fair value of optionsgranted during the nine months ended September 30, 2006, was estimated at thedate of the grant using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions:
| ** **                | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|
|                      | * *   | * * | * *   |
| Volatility  factor        |       | 56.0     | %          |
| Risk-free  interest rate  |       | 4.5      | %          |
| Expected life  (in years) |       | 5        |       |
| Dividend yield            |       | 0.0      | %          |

 

There were no optionsgranted during the nine-month period ended September 30, 2005.

9

----

 
| ** **                         | ** ** | **Number of  Options** | ** ** | **Weighted-Average  Exercise Price  per Share** | ** ** | **Weighted-Average  Remaining Contractual  Term (in years)** | ** ** | **Aggregate  Intrinsic Value  (in thousands)** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
|                               |       |                        |       |                                                      |       |                                                                        |       |                                                     |       |
| Outstanding at  January 1, 2006    |       | —                      |       | $                                                         | —     |                                                                        |       |                                                     |       |   |
| Granted                            |       | 1,463,000                   |       | 3.41                                                      |       |                                                                        |       |                                                     |       |
| Exercised                          |       | —                      |       | —                                                    |       |                                                                        |       |                                                     |       |
| Canceled                           |       | (79,000                     | )          | 3.41                                                      |       |                                                                        |       |                                                     |       |
| Outstanding at  September 30, 2006 |       | 1,384,000                   |       | $                                                         | 3.41       |                                                                        | 9.2        |                                                     | $          | — |   |
| Exercisable at  September 30, 2006 |       | —                      |       | $                                                         | —     |                                                                        | —     |                                                     | $          | — |   |

 

The following tablesummarizes the status of nonvested stock options under the 2006 Option Grant asof September 30, 2006, and changes during the nine months then ended:
| ** **                       | ** ** | **Number of  Options** | ** ** | **Weighted-Average  Grant - Date  Fair Value** | ** ** |
|----------------------------------|------------|-----------------------------|------------|---------------------------------------------------------------|------------|
|                             |       |                        |       |                                                          |       |
| Nonvested at  January 1, 2006    |       | —                      |       | $                                                             | —     |   |
| Granted                          |       | 1,463,000                   |       | 1.79                                                          |       |
| Vested                           |       | —                      |       | —                                                        |       |
| Forfeited                        |       | (79,000                     | )          | 1.79                                                          |       |
| Nonvested at September  30, 2006 |       | 1,384,000                   |       | $                                                             | 1.79       |   |

 

As of September 30, 2006,there was $0.7 million of total unrecognized compensation cost related to thenonvested stock options granted under the Plan including the effect ofestimated forfeitures.  This cost is expectedto be recognized over a weighted-average period of 1.3 years. No stock optionsunder the 2006 Option Grant have vested as of September 30, 2006 as the EPStarget is measured on a fiscal year basis.

Cash received from stockoptions exercised under all stock-based compensation plans for the nine monthsended September 30, 2006 and 2005, was $1.1 million and $30,000,respectively. The actual tax benefit realized for the tax deductions from thesestock option exercises is not material for either period.

***Employee Stock Purchase Plan (ESPP)***

During 1998, we implemented an ESPP that enables eligible employees topurchase our stock at 85% of the current market value on a quarterly basis. Thecompensation expense in connection with this plan is not material. Total purchasesand shares purchased under the ESPP were $66,000 and 19,106 shares for the ninemonths ended September 30, 2006 and $0.1 million and 33,594 shares for the ninemonths ended September 30, 2005.

**Note 6.  Contingencies**

From time to time, during the normal course ofbusiness, we may make certain indemnities, commitments and guarantees underwhich we may be required to make payments in relation to certain transactions.These include for example: (i) indemnities to clients pertaining to claims basedon our negligence or willful misconduct and (ii) indemnities involving theaccuracy of representations and warranties in certain contracts.

From time to time, we are involved in litigationincidental to our business. We cannot predict the ultimate outcome of suchlitigation with certainty, but management believes, after consultation withcounsel, except for the items discussed below for the reasons mentionedtherein, that the resolution of such matters will not have a material adverseeffect on our consolidated financial position or results of operations.

On March 1, 2006, wecontacted the U.S. Securities and Exchange Commission Enforcement Division andreported that we had identified accounting and other irregularities in ourBrazil subsidiary that raised the possibility of violations of the U.S. ForeignCorrupt Practices Act.   We completed aninternal investigation into these irregularities, with the assistance ofindependent outside counsel in Brazil. The investigation did not reveal any prior involvement or knowledgeregarding the irregularities by any officer or director of the Company.   We have taken and are taking remedialactions.  We restated our financialstatements for the years ended December 31, 2001 through 2004 and for thequarters ended March 31, June 30, and 

10

----

September 30, 2005 as a result of errors in the prior financialstatements identified as a result of the investigation.  We reported to the SEC on the results of theinternal investigation and are responding to the SEC’s requests for furtherinformation.  We cannot predict theultimate outcome of the ongoing discussions with the SEC. The outcome couldinclude the institution of administrative or civil injunctive proceedingsinvolving the Company and/or current or former Company employees, officersand/or directors, the imposition of fines and other penalties, remedies and/orsanctions and/or a referral to other governmental agencies.

One of our clients has been sued on a claim that it is infringingcertain patents related to computerized telephonic voice response systems.  This client has tendered defense of thepatent infringement action to many vendors including us, though because of thenumber of vendors, we anticipate that the client will retain control of thedefense.  Regardless of which companycontrols the defense of this matter, we may be required to indemnify our clientagainst its losses and reasonable attorneys’ fees incurred in connection withthe lawsuit.  The client that has beensued is one of two clients that we have reported about in past periods ashaving received letters from time to time containing an offer to license andsuggesting that the clients might be infringing certain patents related tocomputerized telephonic voice response systems without the license. Bothclients have indicated that if any infringement occurred the clients would seekcontractual indemnity from us.  To ourknowledge, the second client has not yet been sued.  We plan to seek contractual indemnity fromcertain of our vendors in connection with the pending lawsuit. Any suchcontractual indemnity we might obtain may not be sufficient to cover all of thecosts of investigating and resolving this matter. We might also seek a licenseof the patents. Any such license may not be available under commerciallyreasonable terms. Any license costs would increase the cost of doing businessin the future and may or may not be fully reflected in our pricing.  To our knowledge, no litigation has beeninitiated against us concerning these matters. At this stage, due to theinherent uncertainties, we are unable to predict whether these matters may havea material adverse effect on our business or on our financial condition orresults of operation.

In August 2006,our subsidiary in Brazil received an assessment from the Brazilian FederalRevenue Service for approximately 18.2 million Brazilian Real(approximately $7.8 million) of income taxes including penalty and interestthrough the date of the assessment for the tax years 2001 through 2003. Webelieve certain technical aspects of the assessment are without merit and havereceived an opinion from our external Brazilian counsel that it is probablethat we will be successful in appealing the assessment. Therefore, no taxprovision has been recorded related to this assessment. However, there can beno assurance that we will not have to pay the assessment and further penaltiesand interest or some portion thereof in the future.

As a result of the restatement of our financialstatements for 2001 through 2004, we identified technical errors in the filingsof our US federal tax returns for fiscal years 2001 through 2003 and a relatedaccounting error. We have requested private letter rulings from the InternalRevenue Service, which would permit us to correct the technical errors.  We expect to receive favorable rulings fromthe IRS.  Therefore, no tax provision hasbeen recorded related to this matter. However, there can be no assurance that the IRS will grant any suchrulings or, if such rulings are granted, when they will be received.  If the requested rulings are not granted, weestimate the total cash charge relating to this matter could be $9 million to$11 million.  An unfavorable ruling couldalso result in a higher effective tax rate on our U.S. earnings.

**Note 7.  EarningsPer Share**

Wecalculate income (loss) per common share by dividing our reported net income(loss) by the weighted average number of common shares and common equivalentshares outstanding during each period. Our reported net income (loss) is used inthe computation of both basic and diluted income (loss) per share.

Thedifference between the number of shares used to calculate basic and dilutedearnings per share represents the number of shares assumed to be issued fromthe exercise of dilutive stock options under our stock option plans, lessshares assumed to be purchased with proceeds from the exercise of the stockoptions and the related tax benefits. At September 30, 2006 and 2005, wehad 2.8 million and 3.2 million options, respectively, that have been excludedfrom the nine-month diluted net income per share computation because theirexercise price exceeds the fair market value. In addition, at September 30, 2006, we have an additional 1.4 millionoptions that have been excluded from the diluted net income per sharecomputation because they are contingently issuable options for which theconditions have not been satisfied as of the report date.  For the three-month diluted net income pershare computation for September 30, 2006 and 2005, all 6.7 million and 6.2million options, respectively, were excluded from the computation due to thenet losses.

11

----

**Note8.  Income Taxes**

***2006***

During the years 2001through 2005, certain Brazilian municipal and Federal taxes totalingapproximately $8.3 million were collected and accrued but not paid. As aresult, we incurred accumulated interest of approximately $2.6 million, plusapproximately $1.4 million in penalties as of December 31, 2005.

On April 7, 2006, newlegislation was enacted in Brazil that resulted in a reduction in the amount ofpenalties and interest we will be required to pay for unpaid municipal taxes.We recorded a gain of $1.8 million during the nine months ended September 30,2006 resulting from a reduction in the tax obligation recorded as of December31, 2005 for a portion of the cumulative interest and penalties on unpaidmunicipal taxes for the four years ended December 31, 2004.  Of the $1.8 million, $1.4 million wasincluded in interest expense and $0.4 million was included in operating,selling and administrative expenses in the accompanying consolidated statementsof operations.

During the nine months ended September 30, 2006, we paidapproximately $8.2 million of unpaid taxes including interest andpenalties.  The remaining balance isbeing paid through two installment loans with a Brazilian federal tax agencyincluded in current debt and long-term debt, excluding current portion, in theaccompanying consolidated condensed balance sheet.

***2005***

During the three monthsended September 30, 2005, we recorded a non-cash tax benefit of approximately$5.8 million, which is included in income tax expense (benefit) in theaccompanying consolidated condensed statements of operations. This tax benefitresults from the release of a valuation allowance associated with deferred taxassets in one of our European business units. The decision to release thisvaluation allowance was based on a sustained improvement of earnings combinedwith an improved financial outlook for the business unit. The improvedfinancial situation led management to decide that the tax losses in thebusiness unit would be fully utilized before they expire.

**In the future, we will continueto periodically assess the recoverability of the remaining deferred income taxassets, which is principally dependent upon our ability to achieve taxableincome in the US and certain foreign jurisdictions. In addition, the deferredtax asset and its potential realizability will be evaluated to determine if aportion of the valuation allowance should be reversed. Any reversal of thisvaluation allowance in the future will result in a reduction of our effectivetax rate.**

**Note 9.  Gain on Settlement**

**On April 12,2006, we entered into a settlement agreement with a business partner over thehandling of certain business transactions. For the settlement, we received a payment of $5.0 million in April of2006 and will receive an additional $1.0 million in installments during thesecond half of 2006.  As a result of thesettlement, we recorded a $6.0 million gain in the nine months ended September30, 2006.**

**Note10.  Subsequent Events**

On October 13, 2006, the Companyand ClientLogic Corporation (ClientLogic) issued a joint press releaseannouncing that the Company and ClientLogic have signed a definitivemerger agreement.  Under the terms of theagreement, a newly formed subsidiary of ClientLogic will merge with the Companyand pay $4.05 per share in cash for all of the outstanding common stock of theCompany. The Board of Directors of each company has unanimously approved thetransaction. The transaction is expected to be completed in the first quarterof 2007 and is subject to customary closing conditions, including approval ofthe Company’s shareholders and regulatory clearances.  The Company’s Board of Directors hasrecommended to our shareholders that they vote in favor of thetransaction.  Approximately 19.9% of theoutstanding common stock of the Company is subject to voting agreements whichrequire such shares to be voted in favor of the merger. The Company has agreedto pay a termination fee to ClientLogic should the transaction not close due tocertain circumstances. ClientLogic will fund the transaction with the proceedsof a committed loan facility.

 

12

----

**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

##### **General**

References in this report to “we”, “our”, and the “Company” are toSITEL Corporation and its subsidiaries, collectively.

We are a leading global provider of outsourcedcustomer support services. We specialize in the design, implementation, andoperation of multi-channel contact center solutions. We support the customermanagement strategies of large and medium size corporations in North America,Europe, Asia Pacific, and Latin America. We provide customer acquisition,customer care, technical support and risk management services on an outsourcedbasis, as well as operational and information technology professional servicesfor both outsourced and in-house contact centers. We serve clients primarily inthe automotive, consumer,financial services, insurance, technology, telecommunications and ISP, mediaservices, and utilities sectors.

In Management’s Discussion and Analysis, we provide information aboutour general business risks, critical accounting policies and estimates, resultsof operations, financial condition and liquidity, and certain other mattersaffecting our operating results for the periods covered by this report.

As you read this discussion and analysis, refer to our ConsolidatedCondensed Statements of Operations, which present the results of our operationsfor the three and nine month periods ended September 30, 2006 and 2005, and aresummarized on the following pages. We analyze and explain the differencesbetween periods for the components of operations in the following sections. Ouranalysis is important in making decisions about your investment in SITELCorporation.

During the years 2001through 2005, certain Brazilian municipal and Federal taxes totalingapproximately $8.3 million were collected and accrued but not paid. As aresult, we incurred accumulated interest of approximately $2.6 million, plusapproximately $1.4 million in penalties as of December 31, 2005.

On April 7, 2006, newlegislation was enacted in Brazil that resulted in a reduction in the amount ofpenalties and interest we will be required to pay for unpaid municipal taxes.We recorded a gain of $1.8 million during the nine months ended September 30,2006 resulting from a reduction in the tax obligation recorded as of December31, 2005 for a portion of the cumulative interest and penalties on unpaidmunicipal taxes for the four years ended December 31, 2004.  Of the $1.8 million, $1.4 million wasincluded in interest expense and $0.4 million was included in operating,selling and administrative expenses in the accompanying consolidated statementsof operations.

**During thenine months ended September 30, 2006, we paid approximately$8.2 million of unpaid taxes including interest and penalties. Theremaining balance is being paid through two installment loans with a Brazilianfederal tax agency included in current debt and long-term debt, excludingcurrent portion, in the accompanying consolidated condensed balance sheet.**

**On April 12,2006, we entered into a settlement agreement with a business partner over thehandling of certain business transactions. For the settlement, we received a payment of $5.0 million in April of2006 and will receive an additional $1.0 million in installments during thesecond half of 2006.  As a result of thesettlement, we recorded a $6.0 million gain during the nine months endedSeptember 30, 2006.**

Duringthe nine months ended September 30, 2006, the company recorded a $1.2 milliongain related to its share of insurance proceeds received by our India jointventure for flood damage sustained in the third quarter of 2005.  This gain was recorded in the equity inearnings (loss) of affiliates, net in the accompanying statements ofoperations.

***Subsequent Event***

On October 13, 2006, the Companyand ClientLogic Corporation (ClientLogic) issued a joint press releaseannouncing that the Company and ClientLogic have signed a definitivemerger agreement.  Under the terms of theagreement, a newly formed subsidiary of ClientLogic will merge with the Companyand pay $4.05 per share in cash for all of the outstanding common stock of theCompany. The Board of Directors of each company has unanimously approved thetransaction. The transaction is expected to be completed in the first quarterof 2007 and is subject to customary closing conditions, including approval ofthe Company’s shareholders and regulatory clearances.  The Company’s Board of Directors hasrecommended to our shareholders that they vote in favor of thetransaction.  Approximately 19.9% of theoutstanding common stock of the Company is subject to voting agreements whichrequire such shares to be voted in favor of the merger. The Company has agreedto pay a termination fee to ClientLogic should the transaction not close due tocertain circumstances. ClientLogic will fund the transaction with the proceedsof a committed loan facility.

13

----

**GeneralBusiness Risks, Critical Accounting Policies and Estimates**

**General BusinessRisks**

Our business success depends on our ability toefficiently deploy our human and capital resources in the delivery of servicesto our clients. Consequently, the needs of our clients may significantly impactour results of operations, financial condition, and liquidity.

Our results of operations and operating cash flowsmay vary with periodic wins, expansions, and losses of client contracts andwith changes in the scope of client requirements.  Our******top20 clients accounted for 45.5% and 66.4% of our revenue for the three-monthperiods ended September 30, 2006 and 2005, respectively, and 44.7% and 67.4%for the nine-month periods ended September 30, 2006 and 2005,respectively.  Some of these top 20clients include multiple business units within the clients’ affiliated group.  Hewlett-PackardCompany business units were responsible for 10.9% and 11.8% of our revenue for the three-monthperiods ended September 30, 2006 and 2005, respectively, and 11.0% and 12.0%for the nine-month periods ended September 30, 2006 and 2005,respectively.  General Motors Corporation(General Motors) business units were responsible for 11.9% of our revenue for the three-month periods endedSeptember 30, 2005, and 12.0%for the nine-month periods ended September 30,2005. The primary GeneralMotors contract expired in December 2005. The financial failure of any of theseclients or the loss of any or all of their business could have an adverseimpact on our operating results.

Our liquidity, including our ability to complywith restrictive debt covenants, may be adversely affected if we were to lose asignificant client or as a result of significant changes in client demand if weare unable to efficiently re-deploy our human and capital resources.

In the following sections, we also discuss theimportance of our critical accounting policies and the use of accountingestimates, and their potential impacts on our results of operations.

**CriticalAccounting Policies and Estimates**

Theprocess of preparing financial statements requires the use of estimates on thepart of management. These estimates involve judgments with respect to, amongother things, future economic factors that are difficult to predict and arebeyond management’s control. As a result, actual results could differ fromthese estimates.

We have identified the following to be critical accounting policiesbecause they are the most important to the portrayal of our results ofoperations and financial condition, and they require management’s mostdifficult, subjective, or complex judgments.

***Revenue Recognition***

We recognize revenue in accordance with applicable accountingstandards, including Securities and Exchange Commission Staff AccountingBulletin (SAB) No. 104, *RevenueRecognition*.  We recognizerevenue at the time services are performed based on the rate detailed in theclient contract, such as hourly, monthly, per call or per employee.  A portion of our revenue is often subject toperformance standards, such as sales per hour, average handle time, occupancyrate and abandonment rate.  Our performance against such standards mayresult in incentives or penalties, which are recognized as earned or incurred.In certain circumstances, we receive payment in advance of providing service.Amounts billed but not earned under these contracts are excluded from revenueand included in deferred revenue and other in the consolidated balance sheet.Revenue for services performed under certain collection service agreements isrecognized as the related consumer debts are collected and is calculated basedupon a percentage of cash collected or other agreed upon contractualparameters.

***Trade Accounts Receivable***

We report our tradeaccounts receivable net of an allowance for doubtful accounts, which representsmanagement’s estimates of the amount of our receivables that may not becollectible, net of recoveries of amounts previously written off. Theseestimates are based on a detailed aging analysis of accounts receivable,historical bad debts, client credit-worthiness, and changes in our clientpayment terms. The financial condition of our clients may deteriorate, whichmay require us to increase our allowance for doubtful accounts. We would recordan increase in the allowance for doubtful accounts as operating, selling, andadministrative expense in our consolidated condensed statements of income(loss), which would reduce our results of operations.

***Property and Equipment***

We record property andequipment at cost, and calculate depreciation using the straight-line methodover the estimated useful lives of the assets, which range from 3 to20 years. We amortize leasehold improvements and assets under capitalleases on a 

14

----

straight-line basis overthe shorter of the lease term or the estimated useful life of the asset. If theactual useful lives of these assets are less than the estimated depreciablelives, we would record additional depreciation expense or losses on disposal tothe extent the net book value of such asset is not recovered upon sale.

***Asset Impairment***

We evaluate long-livedassets for impairment whenever events or changes in circumstances indicate thecarrying amount of an asset may not be recoverable.  Triggering events include a significant changein the extent or manner in which long-lived assets are being used or in itsphysical condition, in legal factors, or in the business climate that couldaffect the value of the long-lived assets. The interpretation of such eventsrequires judgment from management as to whether such an event has occurred.

Upon the occurrence of atriggering event, the carrying amount of a long-lived asset is reviewed toassess whether the recoverable amount has declined below its carryingamount.  The recoverable amount is theestimated net future cash flows that we expect to recover from the future useof the asset, undiscounted and without interest, plus the asset’s residualvalue on disposal. Where the recoverable amount of the long-lived asset is lessthan the carrying value, an impairment loss would be recognized to write downthe asset to its fair value, which is based on discounted estimated cash flowsfrom the future use of the asset.

The estimated cash flowsarising from future use of the asset that are used in the impairment analysisrequires judgment regarding what we would expect to recover from future use ofthe asset.  Any changes in the estimatesof cash flows arising from future use of the asset or the residual value of theasset on disposal based on changes in the market conditions, changes in the useof the assets, management’s plans, and the determination of the useful life ofthe assets could significantly change the recoverable amount of the asset orthe calculation of the fair value and the resulting impairment loss, whichcould significantly affect the results of operations.

***Goodwill***

At least annually or morefrequently, as changes in circumstances indicate, we will evaluate theestimated fair value of our goodwill. On these evaluation dates, to the extentthat the carrying value of the net assets of any of our reporting units havinggoodwill is greater than their estimated fair value, we will be required totake additional goodwill impairment charges. We are required to make certainassumptions and estimates regarding the fair value of goodwill when assessingfor impairment. Changes in the fact patterns underlying such assumptions andestimates could ultimately result in the recognition of additional impairmentlosses.

***Deferred Income Taxes***

We record deferred taxassets and liabilities using enacted tax rates in the jurisdictions in which weoperate for the effect of temporary differences between the book and tax basisof assets and liabilities in accordance with Statement of Financial AccountingStandards, No. 109, *Accounting for IncomeTaxes*. If enacted tax rates change, we would adjust the deferred taxassets and liabilities, through the provision for income taxes in the period ofchange, to reflect the enacted tax rate expected to be in effect when the deferredtax items reverse. To the extent that we believe that recovery is not likely,we establish a valuation allowance to reduce the deferred tax assets to theamount that is more likely than not to be realized. The valuation allowance isbased on our estimates of future taxable income by jurisdiction in which weoperate and the period over which the deferred tax assets can be recovered. A review of all available positive and negativeevidence needs to be considered, including our current and past performance,the market environment in which we operate, the utilization of past taxcredits, length of carryback and carryforward periods, and existing orprospective contracts that will result in future profits.

Forming aconclusion that a valuation allowance is not needed is difficult when there isnegative evidence such as cumulative losses in recent years in certain taxjurisdictions. Cumulative losses weigh heavily in the overall assessment. Wehave established valuation allowances for future tax benefits related to netoperating losses incurred in certain federal, state and foreign taxjurisdictions. We expect to continue to record a valuation allowance on futuretax benefits in certain tax jurisdictions until an appropriate level ofprofitability is sustained.

***Self-Insurance Reserves***

We are self-insured inNorth America for health care claims for eligible participating employees,subject to certain deductibles and limitations. The costs include an estimateof expected settlements on pending claims and a provision for claims incurredbut not reported. These estimates are based on our assessment of potentialliability using an analysis of available information with respect to pendingclaims, historical experience, and current cost trends. Actual claims results coulddiffer from these estimates.

15

----

***Contingencies***

We consider thelikelihood of various loss contingencies, including tax and legal contingenciesarising in the ordinary course of business, and our ability to reasonablyestimate the amount of loss in determining loss contingencies. An estimatedloss contingency is accrued when it is probable that a liability has beenincurred and the amount of loss can be reasonably estimated. We regularlyevaluate current information available to us to determine whether such accrualsshould be adjusted.

##### **Resultsof Operations for the Three and Nine Month Periods Ended September 30, 2006Compared with the Same Periods of 2005**

Inthis section, we discuss our operating results and the factors affecting them.We describe our general business risks, critical accounting policies, andestimates that are important to our operating results on the previouspages.  Please refer to that discussionas you read this section.

**Components of Operations**

The following table summarizes our statement ofoperations data on a percentage-of-revenue basis.

 
| ** **                                                   | ** **   | **Three Months Ended **September 30, | ** **   | **Nine Months Ended September 30,** | ** **   |
|--------------------------------------------------------------|--------------|----------------------------------------------------------|--------------|---------------------------------------------------------|--------------|
| ** **                                                   | ** **   | **2006**                                                 | ** **   | **2005**                                                | ** **   | **2006** | ** ** | **2005** | ** ** |
| ** **                                                   | ** **   | **$**                                                    | ** **   | **%**                                                   | ** **   | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                                   | *** *** | **(in thousands)**                                  | ** **   | **(in thousands)**                                 | *** *** |
| **Revenue**                                                  |         | $                                                        | 274,526      | *** ***                                            | ***100.0***  | ***%*** | $ | 244,042 | *** *** | ***100.0*** | ***%*** | $ | 827,945 | *** *** | ***100.0*** | ***%*** | $ | 746,744 | *** *** | ***100.0*** | ***%*** |
|                                                         |         |                                                     |         |                                                    |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Direct labor and telecommunications expenses                 |         | 173,670                                                  | *** *** | ***63.3***                                              | ***%***      | 147,432 | *** *** | ***60.4*** | ***%*** | 524,255 | *** *** | ***63.3*** | ***%*** | 453,522 | *** *** | ***60.7*** | ***%*** |
| Subcontracted and other services expenses                    |         | 10,275                                                   | *** *** | ***3.7***                                               | ***%***      | 12,019 | *** *** | ***4.9*** | ***%*** | 29,213 | *** *** | ***3.5*** | ***%*** | 37,780 | *** *** | ***5.1*** | ***%*** |
| Operating, selling and administrative expenses               |         | 87,151                                                   | *** *** | ***31.7***                                              | ***%***      | 80,874 | *** *** | ***33.1*** | ***%*** | 257,281 | *** *** | ***31.1*** | ***%*** | 242,010 | *** *** | ***32.4*** | ***%*** |
|                                                         |         |                                                     |         |                                                    |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Gain on settlement                                           |         | —                                                   | *** *** | ***0.0***                                               | ***%***      | — | *** *** | ***0.0*** | ***%*** | (6,000 | ) | ***-0.7*** | ***%*** | — | *** *** | ***0.0*** | ***%*** |
|                                                         |         |                                                     |         |                                                    |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Restructuring expenses, net                                  |         | —                                                   | *** *** | ***0.0***                                               | ***%***      | 4,616 | *** *** | ***1.9*** | ***%*** | (358 | ) | ***0.0*** | ***%*** | 2,007 | *** *** | ***0.3*** | ***%*** |
| **Operating  income (loss)**                                 |         | 3,430                                                    | *** *** | ***1.2***                                               | ***%***      | (899 | ) | ***-0.4*** | ***%*** | 23,554 | *** *** | ***2.8*** | ***%*** | 11,425 | *** *** | ***1.5*** | ***%*** |
|                                                         |         |                                                     |         |                                                    |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                             |         | (3,720                                                   | )            | ***-1.4***                                              | ***%***      | (3,811 | ) | ***-1.6*** | ***%*** | (9,566 | ) | ***-1.2*** | ***%*** | (10,231 | ) | ***-1.4*** | ***%*** |
| Interest income                                              |         | 128                                                      | *** *** | ***0.0***                                               | ***%***      | 144 | *** *** | ***0.1*** | ***%*** | 314 | *** *** | ***0.0*** | ***%*** | 404 | *** *** | ***0.1*** | ***%*** |
| Equity in earnings (loss) of affiliates, net                 |         | 574                                                      | *** *** | ***0.2***                                               | ***%***      | 27 | *** *** | ***0.0*** | ***%*** | 2,524 | *** *** | ***0.3*** | ***%*** | 315 | *** *** | ***0.0*** | ***%*** |
| Other income (expense), net                                  |         | (400                                                     | )            | ***-0.1***                                              | ***%***      | 53 | *** *** | ***0.0*** | ***%*** | 209 | *** *** | ***0.0*** | ***%*** | 22 | *** *** | ***0.0*** | ***%*** |
| **Income  (loss) before income taxes and minority interest** |         | 12                                                       | *** *** | ***0.0***                                               | ***%***      | (4,486 | ) | ***-1.8*** | ***%*** | 17,035 | *** *** | ***2.1*** | ***%*** | 1,935 | *** *** | ***0.3*** | ***%*** |
|                                                         |         |                                                     |         |                                                    |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Income tax expense (benefit)                                 |         | 1,355                                                    | *** *** | ***0.5***                                               | ***%***      | (3,438 | ) | ***-1.4*** | ***%*** | 7,024 | *** *** | ***0.8*** | ***%*** | (800 | ) | ***-0.1*** | ***%*** |
| Minority interest                                            |         | 442                                                      | *** *** | ***0.2***                                               | ***%***      | 875 | *** *** | ***0.4*** | ***%*** | 1,711 | *** *** | ***0.2*** | ***%*** | 1,538 | *** *** | ***0.2*** | ***%*** |
| **Net income (loss)**                                        |         | $                                                        | (1,785       | )                                                       | ***-0.7***   | ***%*** | $ | (1,923 | ) | ***-0.8*** | ***%*** | $ | 8,300 | *** *** | ***1.0*** | ***%*** | $ | 1,197 | *** *** | ***0.2*** | ***%*** |

 

16

----

# **ThreeMonth Period Ended September 30, 2006 Compared to the Same Period of 2005**

***Revenue***

Revenue increased $30.5 million, or 12.5%, in thethree months ended September 30, 2006 compared to the same period of 2005. Thechanges in revenue by geographic region are shown in the following table:
| ** **                                           | ** ** | ** **             | ** ** | ** ** | ** ** | **$**    | ** ** | **%**      | ** ** |
|------------------------------------------------------|------------|------------------------|------------|------------|------------|----------|------------|------------|------------|
| **Three months  ended September 30,** | ** ** | ** **             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                                           | ** ** | **(in millions)** | ** ** |
| North America                                        | ** ** | **$**                  | **118.4**  |       | $          | 124.0    |       | $          | (5.6       | ) | -4.5 | % |
| Europe                                               | ** ** | **129.3**              |       | 95.2       |       | 34.1     |       | 35.8       | %          |
| Asia Pacific                                         | ** ** | **11.1**               |       | 13.4       |       | (2.3     | )          | -17.2      | %          |
| Latin America                                        | ** ** | **15.7**               |       | 11.4       |       | 4.3      |       | 37.7       | %          |
| Totals                                               | ** ** | **$**                  | **274.5**  |       | $          | 244.0    |       | $          | 30.5       |   | 12.5 | % |
|                                                      |            |                        |            |            |            |          |            |            |            |  |  |  |  |  |

 

North American revenue decreased $5.6 million forthe three months ended September 30, 2006 compared to the same period in 2005. Adecrease of $23.8 million of revenue resulting from the loss of General Motorswas offset by $18.2 million of revenue growth primarily in customer care,customer acquisition and risk management. The weakening of the U.S. dollarversus the Canadian dollar accounted for $0.5 million of the offsettingincrease.

European revenue increased $34.1 million for thethree months ended September 30, 2006 compared to the same period in 2005. Highersales volumes from new and existing clients resulted in a $28.3 millionincrease. The weakening of the U.S. dollar versus the British pound and theEuro resulted in the remaining $5.8 million of the increase.

Asia Pacific revenue decreased $2.3 million forthe three months ended September 30, 2006 compared to the same period in 2005. Lowersales volumes from existing clients resulted in $1.7 million of the decrease. Thestrengthening of the U.S. dollar versus the New Zealand and Australian dollarsresulted in the remaining $0.6 million of the decrease.

Latin American revenue increased $4.3 million forthe three months ended September 30, 2006 compared to the same period in 2005. Highersales volumes from new and existing clients resulted in $3.6 million of theincrease. The weakening of the U.S. dollar versus the Brazilian Real resultedin the remaining $0.7 million of the increase.

***Direct Labor andTelecommunications Expenses***

Direct labor and telecommunications expensesinclude the compensation of our customer service professionals and their firstline supervisors and telephone usage expenses directly related to theproduction of revenue.

Direct labor and telecommunications expenses as apercentage of revenue can vary based on the nature of the contract, the natureof the work, and the market in which the services are provided. Accordingly,direct labor and telecommunications expenses as a percentage of revenue canvary, sometimes significantly, from period to period.

Direct labor and telecommunications expensesincreased $26.2 million, or 17.8%, for the three months ended September 30,2006 compared to the same period of 2005. As a percentage of revenue, directlabor and telecommunications expenses increased to 63.3% for the threemonths ended September 30, 2006 compared to 60.4% in same period in 2005. Theincrease was primarily the result of higher ramp-up costs of new clientprograms, particularly in Europe, and a change in the mix of services providedin the three months ended September 30, 2006 compared to the same period in2005.

***Subcontracted and Other ServicesExpenses***

Subcontracted and other services expensesincluded services provided to clients through subcontractors and otherout-of-pocket expenses. Subcontracted and other services expenses decreased$1.7 million for the three months ended September 30, 2006 compared to the sameperiod of 2005 primarily as theresult of lower subcontracted IT costs to support client programs partiallyoffset by higher subcontracted services provided by our India joint venture.

17

----

Subcontracted expensesfor services provided by our India joint venture for the three months endedSeptember 30, 2006 and 2005 were $6.7 million and $3.4 million, respectively. Subcontractedexpenses for services provided by our Latin America affiliates was $0.7million for the three-month ended September 30, 2006. Subcontracted expensesfor services provided for the same period in 2005 was not material.

***Operating, Selling andAdministrative Expenses***

Operating, selling and administrative expenses representexpenses incurred to directly support and manage the business, including costsof management, administration, technology, facilities, depreciation andamortization, maintenance, sales and marketing, and client support services.

Operating, selling and administrative expensesincreased $6.3 million for the three months ended September 30, 2006 comparedto the same period of 2005. The weakening of the U.S. dollar compared to theprimary currency in the jurisdictions that we operate accounted for $1.8million of the increase. The remainder of the increase in these expenses wasassociated with our revenue increase. As a percentage of revenue, operating,selling and administrative expenses decreased to 31.7% for the three monthsended September 30, 2006 compared to 33.1% for the same period of 2005 primarily as the result of cost reductions andrestructuring actions taken at the end of 2004 and during 2005.

***RestructuringExpense, Net***

On July 7, 2005, incontinuation of the previously announced profit improvement plan, we committedto additional actions to reduce ongoing operating expenses, consolidatefacilities, and reduce our workforce. The additional actions include closingand consolidating certain facilities in Northern Europe and reducing netheadcount by a total of approximately 60 employees. We expect approximately 20positions will be reduced by attrition and the remainder by severance. Werecorded restructuring expenses of $1.7 million for severance expenses incurredduring the three months ended September 30, 2005 as a result of these actions.

As a result of thefacility closures, we will no longer be able to maintain certain minimumemployment levels required to retain government grants received and recorded asa reduction of operating expenses in previous periods. Consequently, werecorded restructuring expense of $3.1 million during the three months endedSeptember 30, 2005, to establish a liability for the obligation to repay suchamounts.

During the three monthsended September 30, 2005, we decided to open a previously closed leasedfacility in North America to temporarily accommodate new business. In a prioryear, we had recorded a restructuring liability for the future scheduled leasepayments for the closed facility. As a result of the decision to reopen thefacility, we reversed the remaining $0.2 million restructuring liability.

There were no restructuring expenses for the same period in 2006.

***Operating Income(Loss)***

Operating income improved by $4.3 million for thethree months ended September 30, 2006 compared to the same period in 2005 dueto the factors discussed above.

***Interest Expense***

Interest expense remained consistent for the threemonths ended September 30, 2006 compared to the same period in 2005.

***InterestIncome***

Interest incomeremained consistent for the three months ended September 30, 2006 compared tothe same period in 2005.

***Equity in Earnings (loss) ofAffiliates, Net***

Equity in earnings (loss) of affiliates, netincreased for the three months ended September 30, 2006 compared to the sameperiod in 2005 primarily as a result of reduced volumes from our India joint venturefollowing flooding that occurred at their Mumbai facility during the threemonths ended September 30, 2005.

***Other Income (Expense), Net***

Other income (expense), net decreased $0.5 millionfor the three months ended September 30, 2006 compared to the same period in2005 primarily as a result of fluctuations in foreign currency remeasurementgains (losses) arising from monetary assets and liabilities denominated incurrencies other than a business unit’s functional currency.

18

----

***Income Tax Expense***

The effective tax rates for the three-months endedSeptember 30, 2006 and 2005, was more than the statutory U.S. Federal rate of35% due to not reflecting any significant tax benefits for the current netoperating losses in certain federal, state and foreign tax jurisdictions.

During the three months ended September 30, 2005, we recorded anon-cash tax benefit of approximately $5.8 million, which is included in incometax expense (benefit) in the accompanying consolidated condensed statements ofoperations. This tax benefit results from the release of a valuation allowanceassociated with deferred tax assets in one of our European business units. Thedecision to release this valuation allowance was based on a sustainedimprovement of earnings combined with an improved financial outlook for thebusiness unit. The improved financial situation led management to decide thatthe tax losses in the business unit would be fully utilized before they expire.

**NineMonths Ended September 30, 2006 Compared to the Same Period of 2005**

***Revenue***

Revenue increased $81.2 million, or 10.9%, for thenine months ended September 30, 2006 compared to the same period of 2005. Thechanges in revenue by geographic region are shown in the following table:
| ** **                                          | ** ** | ** **             | ** ** | ** ** | ** ** | **$**    | ** ** | **%**      | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|------------|------------|----------|------------|------------|------------|
| **Nine months  ended September 30,** | ** ** | ** **             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                                          | ** ** | **(in millions)** | ** ** |
| North America                                       | ** ** | **$**                  | **369.9**  |       | $          | 370.5    |       | $          | (0.6       | ) | -0.2 | % |
| Europe                                              | ** ** | **380.5**              |       | 309.2      |       | 71.3     |       | 23.1       | %          |
| Asia Pacific                                        | ** ** | **34.1**               |       | 38.3       |       | (4.2     | )          | -11.0      | %          |
| Latin America                                       | ** ** | **43.4**               |       | 28.7       |       | 14.7     |       | 51.2       | %          |
| Totals                                              | ** ** | **$**                  | **827.9**  |       | $          | 746.7    |       | $          | 81.2       |   | 10.9 | % |
|                                                     |            |                        |            |            |            |          |            |            |            |  |  |  |  |  |

 

North American revenue remainedconsistent for the nine months ended September 30, 2006 compared to the sameperiod in 2005. A decrease of $72.9 million of revenue resulting from the lossof General Motors was offset by $71.5 million of revenue growth primarily incustomer care, customer acquisition, and risk management. The weakening of theU.S. dollar versus the Canadian dollar resulted in $1.4 million of theoffsetting increase.

European revenue increased $71.3 million for thenine months ended September 30, 2006 compared to the same period in 2005. Highersales volumes from new and existing clients resulted in $76.9 million of theincrease. The strengthening of the U.S. dollar versus the British pound andEuro partially offset the increase by $5.6 million.

Asia Pacific revenue decreased $4.2 million forthe nine months ended September 30, 2006 compared to the same period in 2005. Lowersales volume from existing clients resulted in $1.7 million of the decrease.  The strengthening of the U.S. dollar versusthe New Zealand and Australian dollars resulted in the remaining $2.5 millionof the decrease.

Latin American revenue increased $14.7 million for thenine months ended September 30, 2006 compared to the same period in 2005. Highersales volume from new and existing clients resulted in $11.7 million of theincrease. The weakening of the U.S. dollar versus the Brazilian Real accountedfor the remaining $3.0 million of the increase.

***Direct Labor andTelecommunications Expenses***

During the nine months ended September 30, 2006,direct labor and telecommunications expenses as a percentage of revenueincreased to 63.3% compared to 60.7% in same period in 2005.The increase was primarily the result ofhigher ramp-up costs of new client programs, particularly in Europe, and achange in the mix of services provided in the nine months ended September 30,2006 compared to the same period in 2005.

***Subcontracted and Other ServicesExpenses***

Subcontracted and other services expenses includedservices provided to clients through subcontractors and other out-of-pocketexpenses. Subcontracted and other services expenses decreased $8.6 million forthe nine months ended September 30, 2006 

19

----

compared to the same period in 2005 primarily asthe result of lower subcontracted IT costs to support client programs partiallyoffset by higher subcontracted services provided by our India joint venture.

Subcontracted expenses for services provided byour India joint venture for the nine months ended September 30, 2006 and 2005were $18.1 million and $11.7 million, respectively. Subcontracted expenses forservices provided by our Latin America affiliates was $1.6 million for thenine-months ended September 30, 2006. Subcontracted expenses for servicesprovided for the same period in 2005 was not material.

***Operating, Selling andAdministrative Expenses***

Operating, selling and administrative expensesrepresent expenses incurred to directly support and manage the business,including costs of management, administration, technology, facilities,depreciation and amortization, maintenance, sales and marketing, and clientsupport services.

Operating, selling and administrative expensesincreased $15.3 million, or 6.3%, for the nine months ended September 30, 2006compared to the same period of 2005. During the nine months ended September 30,2006, operating, selling and administrative expenses as a percentage of revenuedecreased to 31.1% for the nine months ended September 30, 2006 compared to32.4% for the same period in 2005 primarilyas the result of cost reductions and restructuring actions taken at the end of2004 and during 2005 and a decrease in management performance incentive expense.

***Gainon settlement***

Duringthe nine months ended September 30, 2006, we entered into a settlementagreement with a business partner over the handling of certain businesstransactions. For the settlement, we received a payment of $5.0 million inApril of 2006 and will receive an additional $1 million in installments duringthe second half of 2006. As a result of the settlement, we recorded a $6million gain during the nine months ended September 30, 2006.

***Restructuring Expenses, Net***

As a result of a facility closure in 2005, we were nolonger able to maintain certain minimum employment levels required to retaingovernment grants received and recorded as a reduction of operating expenses inprevious periods. Consequently, we recorded restructuring expense of $3.5million during the year ended December 31, 2005, to establish a liability forthe obligation to repay such amounts. During the fourth quarter of 2006, wesettled with the government agency responsible for the grant for $3.2 million. Asa result, we have reversed $0.4 million of the restructuring reserve, includingforeign currency impact of $0.1 million, during the nine months ended September30, 2006.

On July 7, 2005, incontinuation of the previously announced profit improvement plan, we committedto additional actions to reduce ongoing operating expenses, consolidatefacilities, and reduce our workforce. The additional actions include closingand consolidating certain facilities in Northern Europe and reducing netheadcount by a total of approximately 60 employees. We expect approximately 20positions will be reduced by attrition and the remainder by severance. Werecorded restructuring expenses of $1.7 million for severance expenses incurredduring the nine months ended September 30, 2005 as a result of these actions. Inaddition, we recorded $0.7 million of severance expenses as a result ofpreviously announced actions.

As a result of thefacility closures, we will no longer be able to maintain certain minimumemployment levels required to retain government grants received and recorded asa reduction of operating expenses in previous periods. Consequently, werecorded restructuring expense of $3.1 million during the nine months endedSeptember 30, 2005, to establish a liability for the obligation to repay suchamounts.

During the nine monthsended September 30, 2005, we decided to open previously closed leasedfacilities in North America to temporarily accommodate new business. In a prioryear, we had recorded a restructuring liability for the future scheduled leasepayments for the closed facilities. As a result of the decision to reopen thefacilities, we reversed the remaining $3.5 million restructuring liability.

***Operating Income***

Operating incomeincreased $12.1 million for the nine months ended September 30, 2006 comparedto the same period in 2005 due to the factors discussed above.

20

----

***Interest Expense***

Interest expense decreased $0.7 million for thenine months ended September 30, 2006 compared to the same period in 2005. Duringthe nine months ended September 30, 2006, interest expenses were lower due to again of $1.4 million for a reduction in interest on a Brazil tax obligationbeing recorded as a reduction of these expenses. This gain was partially offsetby higher amortization of debt acquisition costs. See Note 8 to the accompanyingcondensed consolidated financial statements.

***InterestIncome***

Interest income remained consistent for the ninemonths ended September 30, 2006 compared to the same period in 2005.

***Equity in Earnings (loss) ofAffiliates, Net***

Equity in earnings (loss) of affiliates, netincreased $2.2 million for the nine months ended September 30, 2006 compared tothe same period in 2005 primarily due insurance proceeds of $1.2 millionreceived by our India joint venture related to flood damage in 2005 and the resultof reduced volumes from our India joint venture following the flooding thatoccurred at their Mumbai facility during the three-months ended September 30,2005.

***Other Income (Expense), Net***

Other income (expense), net increased $0.2 millionfor the nine months ended September 30, 2006 compared to the same period in2005. The increase was primarily as a result of fluctuations in foreigncurrency remeasurement gains (losses) arising from monetary assets andliabilities denominated in currencies other than a business unit’s functionalcurrency.

***Income Tax Expense***

The effective tax rates for the nine-months endedSeptember 30, 2006 and 2005, was more than the statutory U.S. Federal rate of35% due to not reflecting any significant tax benefits for the current netoperating losses in certain federal, state and foreign tax jurisdictions.

During the three monthsended September 30, 2005, we recorded a non-cash tax benefit of approximately$5.8 million, which is included in income tax expense (benefit) in the accompanyingconsolidated condensed statements of operations. This tax benefit results fromthe release of a valuation allowance associated with deferred tax assets in oneof our European business units. The decision to release this valuationallowance was based on a sustained improvement of earnings combined with animproved financial outlook for the business unit. The improved financialsituation led management to decide that the tax losses in the business unitwould be fully utilized before they expire.

**Financial Condition and Liquidity**

Inthis section, we discuss our financial condition and liquidity and the factorsaffecting them. We separately discuss cash flows, capital resources, andcontractual obligations and commitments. We describe our general businessrisks, critical accounting policies, and estimates that are important to ourfinancial condition and liquidity earlier in this report. Please refer to thatdiscussion as you read this section.

# **Cash Flows**

Thefollowing table sets forth summary cash flow data for the periods indicated.Please refer to this summary as you read our discussion of the sources and usesof cash in each year.
| **Nine Months Ended September 30,** | ** ** | ** **              | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                              | ** ** | **(in thousands)** | ** ** |
| **Net  cash provided by (used in):**                    |       |                    |       |     |       |
| Operating activities                                    | ** ** | **$**                   | **30,788** |     | $          | 9,055    |       |
| Investing activities                                    | ** ** | **(17,310**             | **)**      | (18,368  | )          |
| Financing  activities                                   | ** ** | **(6,322**              | **)**      | 16,345   |       |
|                                                         |            |                         |            |          |            |          |            |  |  |

 

**2006**

In the nine months ended September 30, 2006, cash provided by operatingactivities resulted primarily from $31.1 million in income before depreciationand amortization, and other non-cash charges and benefits, and a $22.1 milliondecrease in trade accounts receivable and other assets, partially offset by a$22.4 million decrease in trade accounts payable and other liabilities.

21

----

In the nine months ended September 30, 2006, we used cash for investingactivities to purchase $17.4 million of property and equipment.

In the nine months ended September 30, 2006, cash used for financingactivities resulted from net repayments of debt and other obligations of $7.5million, partially offset by $1.1 million in proceeds from stock optionsexercised.

**2005**

In the nine months ended September 30, 2005, cash provided by operatingactivities resulted primarily from $25.1 million in income before depreciationand amortization, and other non-cash charges and benefits, and a $4.1 milliondecrease in other liabilities, partially offset by a $15.4 million increase inaccount receivable and other assets and a $4.8 million decrease in tradeaccounts payable.

In the nine months ended September 30, 2005, we used cash for investingactivities to purchase $21.3 million of property and equipment and used $0.5million for dividends paid to a minority interest shareholder. This waspartially offset by $3.3 million in proceeds from the cash surrender value oflife insurance.

In the nine months ended September 30, 2005, cash provided by financingactivities resulted from net borrowings of debt and other obligations of $21.7million, offset by the payment of $5.5 million of debt issue costs associatedwith the new Credit Facility.

**CapitalResources**

We have historically used fundsgenerated from operations, leases of property and equipment, equity capital,senior subordinated notes, and borrowings under credit facilities with banks tofinance business acquisitions, capital expenditures, and working capitalrequirements.

On August 19, 2005,the Company entered into a five year $145 million credit facility (theCredit Facility) with certain lenders. The Credit Facility is comprised of twocredit agreements (the Credit Agreements). ACredit Agreement with Wells Fargo Foothill, Inc., entered into by US andforeign borrowers, consists of a senior revolving credit facility (Revolver) of$90 million and an amortizing term loan (Term Loan A) of $20 million, securedby a first lien on the Company’s assets in the United States and a first lienon the Company’s accounts receivable and related assets and deposit accounts inCanada, the United Kingdom, Ireland and Germany. A second Credit Agreement withAbleco Finance LLC, entered into by US borrowers, provides for abullet-repayment term loan (Term Loan B) of $35 million secured by a secondlien on the Company’s assets in the United States. Certain other non-U.S. subsidiaries haveguaranteed the obligations of the foreign borrowers.

Borrowings under eachCredit Agreement bear interest, at the Company’s option, at either the PrimeRate plus the Applicable Margins or the LIBOR Rate plus the Applicable Margins(each term as defined in the Credit Agreements). The Term Loan A requiresmonthly principal payments of $0.3 million each, with the balance payable atmaturity. On September 30, 2006, the weighted average interest rates applicableto the Revolver was 7.57%, Term Loan A was 8.27% and the interest rateapplicable to the Term Loan B was 12.01%.

The Credit Agreementsrequire prepayment from excess cash flow and proceeds of certain asset sales,debt issuances, and extraordinary receipts. The Company may prepay the termloans without prepayment premium under certain circumstances. If the CreditFacility is terminated during the first four years, the applicable prepaymentpremium is 4% in year one on the maximum Revolver and any remaining principalof Term Loan A, declining by one percent each year thereafter, and 2% on anyremaining principal of Term Loan B, declining by one-half percent each yearthereafter.

The Credit Agreements contain covenants thatamong other things limit the ability of the Company and certain othersubsidiaries to incur indebtedness; incur liens; liquidate, merge orconsolidate with others; sell assets; change the nature of its business; prepayor amend the terms of other indebtedness; have a change in control; paydividends or make certain other restricted payments; make investments; enterinto certain transactions with affiliates; or permit liens or indebtednessabove certain limits in other subsidiaries. The Company must also comply withcertain financial covenants.

The Credit Agreements contain events of defaultincluding failure to make required payments; failure to comply with covenantsor other agreements in the Credit Agreements; failure to pay, or the right ofacceleration of, certain other indebtedness; certain events of bankruptcy,insolvency, and injunction; material breach of representations and warranties; 

22

----

and certain judgments. Upon the occurrence andcontinuance of an event of default, amounts due under the Credit Agreements maybe accelerated.

At September 30, 2006 andDecember 31, 2005, we had $119.6 million and $110.6 million outstanding underthe Credit Agreements, respectively, of which $3.6 million is included inrevolving credit facility and other current debt in the accompanyingconsolidated condensed balance sheet. The remainder is included in long-termdebt in the accompanying consolidated condensed balance sheet.

Primarilyas a result of matters arising out of and related to our investigation ofirregularities at our Brazilian subsidiary, we were not in compliance withcertain covenants of our credit agreements with Wells Fargo Foothill,Inc. and Ableco Finance LLC as Agents as ofDecember 31, 2005.  We subsequentlyobtained waivers of the non-compliance.

The waivers addresseddefaults, including among other things, (1) the making of intercompany loans toour Brazilian subsidiary to pay certain taxes, (2) the delayed submission ofour audited financial statements for the year ended December 31, 2005 andcertain quarterly and monthly unaudited financial statements, compliancecertificates, borrowing base certificates and projections; (3) our exceedingthe maximum leverage ratio of 2.75 to 1.0 for the four fiscal quarters endedSeptember 30, 2005 based on the restatement of prior financial statements; and(4) inaccuracies in prior financial statements and related compliancecertificates due to the restatement of such financial statements. The waiversalso enable us to avoid default related to any delinquent payment of certainU.S. income taxes that would result if we do not receive the expected favorableIRS rulings concerning technical errors in the filings of the Company’s USfederal tax returns for fiscal years 2001-2003.

We also secured thelenders’ consent to certain items, including, among other things, (1)additional intercompany loans totalling up to $750,000 to the Braziliansubsidiary for working capital; (2) a UK subsidiary using proceeds of anadvance under the WFF Credit Agreement to repay $3.95 million of intercompanydebt to the Company; (3) the Brazilian subsidiary incurring additional securedindebtedness of up to 2 million Brazilian Reais; and (4) excluding theBrazilian subsidiary’s intercompany loans and previously incurred securedindebtedness from the Investment, Indebtedness and Lien basket limitations.

We obtained amendments tothe credit agreements to, among other things, (1) increase the Minimum EBITDArequirement to $55 million (from $45 million) for the twelve month periodending September 30, 2006 and thereafter; and (2) postpone by one quarter thetightening of the Leverage Ratio (debt divided by EBITDA, as defined), nowrequiring the ratio not to exceed 2.50 to 1 for the four fiscal quarters endingJune 30, 2006, 2.25 to 1 for the four fiscal quarters ending September 30,2006, and 2.00 to 1 for the four fiscal quarters ending thereafter.

Wewere in compliance with all covenants as of September 30, 2006.

We expect to finance our currentoperations, planned capital expenditures, and internal growth for theforeseeable future using funds generated from operations, existing cash andavailable funds under our credit facility in addition to lease financing forproperty and equipment. We expect capital expenditures in the fourthquarter of 2006 to be in the range of $8 million to $10 million, as we continueto cover maintenance and technology upgrades, asset replacements, efficiencyinvestments, and investment for continued growth. Future acquisitions, ifany, may require additional debt or equity financing.

Under a stock repurchase program that wasauthorized by our Board of Directors in February 2001, we may repurchase up to$10 million of our shares from time to time in the open market or in privatelynegotiated transactions, depending on general business and market conditions.Through the date of this report, we had repurchased a total of 881,700 sharesat a total cost of $1.5 million.

# **Contractual Obligations and Commitments**

We summarize various contractual obligations andcommitments in the Notes to our Consolidated Financial Statements in our Reporton Form 10-K for the year ended December 31, 2005. These contractualobligations and commitments include:

·            $114.5 million of Long-term Debt as shown in ourconsolidated condensed balance sheet at September 30, 2006,

·            $13.3 million of short-term borrowings debt asshown in our consolidated condensed balance sheet at September 30, 2006,

·            $9.4 million of capital lease obligations as shownin our consolidated condensed balance sheet at September 30, 2006, and operating lease obligations for property andcertain equipment under noncancelable operating lease arrangements, whichexpire at various dates through 2018.

23

----

**Other Matters**

***Quarterly Results and Seasonality***

We have experienced, and expect to continue toexperience, quarterly variations in our results of operations mostly due to:

·                  the timing of our clients’ customer relationshipmanagement initiatives and customer acquisition and loyalty campaigns,

·                  the commencement of new contracts and thediscontinuance and termination of existing contracts,

·                  revenuemix,

·                  thetiming of additional operating, selling, and administrative expenses to supportnew business, and

·                  the timing of recognition of incentive fees.

We experience periodic fluctuations in our results of operationsrelated to both the start-up costs associated with expansion and theimplementation of clients’ CRM activities. In addition, our business generallycan be slower in the third quarter due to summer holidays in Europe.

***Effects of Inflation***

Inflation has not had asignificant effect on our operations. However, there can be no assurance thatinflation will not have a material effect on our operations in the future.

***RelatedParty Transactions***

We have made minorityinterest investments for business and strategic purposes through the purchaseof voting common and preferred stock of companies.  We periodically evaluate whether declines infair value, if any, of our investments are other-than-temporary. Thisevaluation consists of a review of qualitative and quantitative factors. Wealso consider other factors to determine whether declines in fair value areother-than-temporary, such as the investee’s financial condition, results ofoperations and operating trends. We also consider the implied value from anyrecent rounds of financing completed by the investee.

Subcontractedexpenses for services provided by our India joint venture were $6.7 million and$3.4 million for the three-month periods ended September 30, 2006 and 2005,respectively, and $18.1 million and $11.7 million for the nine-month periodsended September 30, 2006 and 2005, respectively.  The Company had payables to our India jointventure of $6.0 million and $4.8 million at September 30, 2006 and December 31,2005, respectively, which are included in trade accounts payable in theaccompanying consolidated condensed balance sheets.  During the nine months ended September 30,2006, the company recorded a $1.2 million gain related to its share ofinsurance proceeds received by our India joint venture for flood damagesustained in the third quarter of 2005. This gain was recorded in the equity in earnings (loss) of affiliates,net in the accompanying statements of operations.

As of September 30, 2006and December 31, 2005, the investment in certain Latin America affiliates wasapproximately $14.7 million and $13.7 million, respectively. Of the investmentin certain Latin America affiliates, approximately $7.7 million is equitymethod goodwill. This equity method goodwill is not amortized.  Subcontractedservices provided by our Latin America joint venture for the three-month andnine-month periods ended September 30, 2006 and 2005 were not material.  Subcontracted expenses for services providedby our Latin America affiliates were $0.7 million and $1.6 million for thethree-month and nine-month periods ended September 30, 2006, respectively.Subcontracted expenses for services provided by our Latin Americaaffiliates for the three-month and nine-month periods ended September 30, 2005were not material.

***Recently IssuedAccounting Pronouncements***

In May 2005, the FASBissued SFAS Statement No. 154, *AccountingChanges and Error Corrections,* (SFAS 154).  SFAS 154 is a replacement of AccountingPrinciples Board Opinion No. 20 (APB 20) and FASB Statement No. 3.  SFAS 154 provides guidance on the accountingfor and reporting of accounting changes and error corrections.  It establishes retrospective application, orthe latest practicable date, as the required method for reporting a change inaccounting principle and the reporting of a correction of an error.  SFAS 154 is effective for accounting changesand corrections of error made in fiscal years beginning after December 15, 2005and we adopted this standard on January 1, 2006.  The adoption of SFAS 154 did not have amaterial impact on our consolidated results of operations, financial conditionand cash flows.

In July 2006, the FASBissued FASB Interpretation (FIN) No. 48, *Accounting for Uncertaintyin Income Taxes,* (FIN 48). FIN 48 applies to all tax positionsaccounted for under SFAS No. 109, *Accounting for IncomeTaxes,* and defines the confidence level that a tax position mustmeet in order to be recognized in the financial statements. The interpretation 

24

----

requires that the taxeffects of a position be recognized only if it is “more-likely-than-not” to besustained by the taxing authority as of the reporting date. If a tax positionis not considered “more-likely-than-not” to be sustained then no benefits ofthe position are to be recognized. FIN 48 requires additional annualdisclosures and is effective as of the beginning of the first fiscal yearbeginning after December 15, 2006. We are currently evaluating the effect thatthe adoption of FIN 48 will have on our consolidated results of operations andfinancial condition.

**Item 3.Quantitative and Qualitative Disclosures about Market Risk**

***Foreign Currency Risk***

We are exposed to market risks associatedprimarily with changes in foreign currency exchange rates. We have operationsin many parts of the world; however, both revenue and expenses of thoseoperations are typically denominated in the currency of the country ofoperations, providing a natural hedge.

Ourfinancial statements are presented in U.S. dollars and can be impacted byforeign exchange fluctuations through both (i) translation risk, which isthe risk that the financial statements for a particular period or as of acertain date depend on the prevailing exchange rates of the various currenciesagainst the U.S. dollar, and (ii) transaction risk, which is the risk thatthe currency impact of transactions denominated incurrencies other than the business unit’s functional currency may varyaccording to currency fluctuations.

With respect to translation risk, even though the fluctuations ofcurrencies against the U.S. dollar can be substantial and thereforesignificantly impact comparisons with prior periods, the translation impact isincluded in accumulated other comprehensive income, a component of stockholders’ equity, and does not affect theunderlying results of operations. Gains andlosses related to transactions denominated in a currency other than thefunctional currency of the countries in which we operate including short-termintercompany accounts are included in the determination of net income.

***Interest Rate Risk***

We are also exposed tochanges in interest rates on our variable rate borrowings. Interest rates onour capital lease obligations are fixed, but rates on borrowings under ourCredit Facility are variable. During the nine-month period ended September 30,2006, our average borrowings under our revolving credit facility were $67.8million.  Based on our projected cashneeds for the foreseeable future, we do not expect that our exposure to changesin interest rates for these borrowings will have a material impact on ourinterest expense.

**Item 4. Controls and Procedures**

*Evaluationof Disclosure Controls and Procedures*

In the preparation andfiling of this Form 10-Q, we carried out an evaluation as of September 30,2006, under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). Based upon thisevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were not effective as of that date.Disclosure controls and procedures are controls and procedures that aredesigned to ensure that information required to be disclosed in reports filedor submitted by us under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms. Our conclusions regarding our disclosure controlsand procedures were based on the material weaknesses disclosed in our annualreport on Form 10-K for the fiscal year ended December 31, 2005. We haveinstituted remediation efforts and continue to implement others, including insome instances, instituting changes in our internal controls over financialreporting.

Remedial efforts relatingto our disclosure controls and procedures and internal controls over financialreporting which have been implemented since December 31, 2005 include thefollowing:

1. Performed an extensivereview and reconciliation of the accounting records at our Brazil subsidiary.In addition, the more enhanced reconciliation procedures performed to addressthis issue subsequent to the 2005 year-end will continue to be performed in thefuture to ensure the internal control deficiency is remediated.

2. Replaced thesubsidiary financial and accounting personnel and created a financialcontroller position for the Latin America region to enhance the monitoring andreview for compliance with corporate policies and procedures.

25

----

While we have implementedor continue to implement our remediation activities, we believe it will takemultiple quarters of effective application of the control activities (includingadequate testing of such control activities) in order for us to revise ourconclusion regarding the effectiveness of our internal controls over financialreporting.

*Changes in Internal Control OverFinancial Reporting*

There were no changes inthe Company’s internal control over financial reporting (as defined in Rule13a-15(f) under the Exchange Act) during the fiscal quarter ended September 30,2006 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

We do not expect that ourdisclosure controls and procedures or our internal controls over financialreporting will prevent all error and all fraud. A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Further, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within SITEL have been detected.

**PART II — OTHER INFORMATION**

**Item1. Legal Proceedings**

From time to time, during the normal course ofbusiness, we may make certain indemnities, commitments and guarantees underwhich we may be required to make payments in relation to certain transactions.These include for example: (i) indemnities to clients pertaining to claimsbased on our negligence or willful misconduct and (ii) indemnities involvingthe accuracy of representations and warranties in certain contracts.

From time to time, we are involved in litigationincidental to our business. We cannot predict the ultimate outcome of suchlitigation with certainty, but management believes, after consultation withcounsel, except for the items discussed below for the reasons mentionedtherein, that the resolution of such matters will not have a material adverseeffect on our consolidated financial position or results of operations.

On March 1, 2006, wecontacted the U.S. Securities and Exchange Commission Enforcement Division andreported that we had identified accounting and other irregularities in ourBrazil subsidiary that raised the possibility of violations of the U.S. ForeignCorrupt Practices Act.   We completed aninternal investigation into these irregularities, with the assistance ofindependent outside counsel in Brazil. The investigation did not reveal any prior involvement or knowledgeregarding the irregularities by any officer or director of the Company.   We have taken and are taking remedialactions.  We restated our financialstatements for the years ended December 31, 2001 through 2004 and for thequarters ended March 31, June 30, and September 30, 2005 as a result of errorsin the prior financial statements identified as a result of theinvestigation.  We reported to the SEC onthe results of the internal investigation and is responding to the SEC’srequests for further information.  Wecannot predict the ultimate outcome of the ongoing discussions with the SEC.The outcome could include the institution of administrative or civil injunctiveproceedings involving the Company and/or current or former Company employees,officers and/or directors, the imposition of fines and other penalties,remedies and/or sanctions and/or a referral to other governmental agencies.

One of our clients hasbeen sued on a claim that it is infringing certain patents related tocomputerized telephonic voice response systems. This client has tendered defense of the patent infringement action tomany vendors including us, though because of the number of vendors, weanticipate that the client will retain control of the defense.  Regardless of which company controls thedefense of this matter, we may be required to indemnify our client against itslosses and reasonable attorneys’ fees incurred in connection with thelawsuit.  The client that has been suedis one of two clients that we have reported about in past periods as havingreceived letters from time to time containing an offer to license andsuggesting that the clients might be infringing certain patents related tocomputerized telephonic voice response systems without the license. Bothclients have indicated that if any infringement occurred the clients would seekcontractual indemnity from us.  To ourknowledge, the second client has not yet been sued.  We plan to seek contractual indemnity fromcertain of our vendors in connection with the pending lawsuit. Any suchcontractual indemnity we might obtain may not be sufficient to cover all of thecosts of investigating and resolving this matter. We might also seek a licenseof the patents. Any such license may not be available under commerciallyreasonable terms. Any license costs would increase the cost of doing businessin the future and may or may not be fully reflected in our pricing.  To our knowledge, no litigation has beeninitiated against us concerning these matters. At this stage, due to the inherentuncertainties, we are 

26

----

unable to predict whetherthese matters may have a material adverse effect on our business or on ourfinancial condition or results of operation.

**Item 5. OtherInformation**

**Forward-LookingStatements**

We make statements in this report that are consideredforward-looking statements within the meaning of the Securities Exchange Act of1934. Sometimes these statements will contain words such as “believes,” “expects,”“intends,” “should,” “will,” “plans,” and other similar words. These statementsare not guarantees of our future performance and are subject to risks,uncertainties, and other important factors that could cause our actualperformance or achievements to be materially different from those we project.These risks, uncertainties, and factors include, but are not limited to:reliance on major clients, conditions affecting clients’ industries, clients’budgets and plans, unanticipated labor, contract or technical difficulties,delays in ramp up of services under contracts, reliance on major subcontractorsand strategic partners, risks associated with managing a global business,fluctuations in operating results, relianceon telecommunications and computer technology, dependence on laborforce, industry regulation, general and local economic conditions, competitivepressures in our industry, risks associated with litigation and claims, foreigncurrency risks, the effects of leverage, dependency on credit availability,restrictions imposed by the terms of indebtedness, and dependence on key personnel and control by management.

Given these uncertainties, you should not place undue reliance on theseforward-looking statements. Please see the other sections of this report andour other periodic reports filed with the Securities and Exchange Commissionfor more information on these factors.

**Item 6. Exhibits**

(a)      Exhibits:
|        | **Exhibit No**. | ** ** | ** **                                                                                                                                                               |
|--------|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.1            |       | Settlement Agreement dated as of August 4, 2006  between SITEL Corporation and JANA Partners LLC (see Exhibit 10.1 to the  Company’s Form 8-K filed August 8, 2006) |
|   | 10.2            |       | Wells Fargo Foothill, Inc. Waiver, Consent and First  Amendment to Credit Agreement (see Exhibit 10.1 to the Company’s Form 8-K  filed August 21, 2006)             |
|   | 10.3            |       | Ableco Finance LLC Waiver, Consent and First  Amendment to Credit Agreement (see Exhibit 10.2 to the Company’s Form 8-K  filed August 21, 2006)                     |
|   | 10.4            |       | Summary of compensation arrangements for  non-employee directors as of August 7, 2006 (see Exhibit 10.1 to the  Company’s Form 8-K filed September 13, 2006)        |
|   | 31.1            |       | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                  |
|   | 31.2            |       | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                  |
|   | 32.1            |       | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                  |
|   | 32.2            |       | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                  |

 

27

----

### **SIGNATURE**

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                          | ** ** | SITEL Corporation            |
|--------------------------|------------|------------------------------|
|                     | ** ** | **(Registrant)**             |
|                     | ** ** | ** **                   |
|                     | ** ** | ** **                   |
|                     | ** ** | ** **                   |
| Date: November 30,  2006 | By         | /s/ *Jorge A. Celaya*   |
|                     | ** ** | **Jorge A. Celaya**          |
|                     | ** ** | *Chief Financial Officer*    |
|                     | ** ** | (Duly Authorized Officer and |
|                     | ** ** | Principal Financial Officer) |

 

28

----

**EXHIBIT INDEX**
| Exhibit No. | ** ** | ** **                                                                                                                                                               |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1        |       | Settlement Agreement dated as of August 4, 2006  between SITEL Corporation and JANA Partners LLC (see Exhibit 10.1 to the  Company’s Form 8-K filed August 8, 2006) |
|        |       |                                                                                                                                                                     |
| 10.2        |       | Wells Fargo Foothill, Inc. Waiver, Consent and First  Amendment to Credit Agreement (see Exhibit 10.1 to the Company’s Form 8-K  filed August 21, 2006)             |
|        |       |                                                                                                                                                                     |
| 10.3        |       | Ableco Finance LLC Waiver, Consent and First  Amendment to Credit Agreement (see Exhibit 10.2 to the Company’s Form 8-K  filed August 21, 2006)                     |
|        |       |                                                                                                                                                                     |
| 10.4        |       | Summary of compensation arrangements for  non-employee directors as of August 7, 2006 (see Exhibit 10.1 to the  Company’s Form 8-K filed September 13, 2006)        |
|        |       |                                                                                                                                                                     |
| 31.1        |       | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                  |
|        |       |                                                                                                                                                                     |
| 31.2        |       | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                  |
|        |       |                                                                                                                                                                     |
| 32.1        |       | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                  |
|        |       |                                                                                                                                                                     |
| 32.2        |       | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                  |

 

29

----