**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

### **Washington, D.C. 20549**

**FORM 10-Q/A**

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

**For the quarterly period ended****JUNE 30, 2005**
| Commission  |       |                                                  |       | IRS Employer        |
|-------------|------------|-------------------------------------------------------|------------|---------------------|
| File Number |       | Exact name of  registrant as specified in its charter |       | Identification  No. |
| **1-12577** | ** ** | **SITEL  CORPORATION**                                | ** ** | **47-0684333**      |

 

### **MINNESOTA******(State or Other Jurisdiction of Incorporation orOrganization)

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

 

**(402) 963-6810**(Registrant’s TelephoneNumber, Including Area Code)

SECURITIES REGISTERED PURSUANT TO SECTION12(B) OF THE ACT:
|                                |       | **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 SECTION12(G) OF THE ACT:******NotApplicable**

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days. YES o  NO  x

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 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 –73,765,518 SHARESOUTSTANDING AS OF JULY 29, 2005**

 

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**SITELCORPORATION AND SUBSIDIARIES**

**TABLE OFCONTENTS**
|                                         | ** ** | ** **                                                                                  | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|------------|------------|------------|
| **PART I – Financial Information** |       |                                                                                        |
| ** **                              | ** ** | ** **                                                                                  |
| Item 1                                  | –     | Financial Statements                                                                        |       |       |
|                                    |       |                                                                                        |       |       |
|                                    |       | Consolidated  Condensed Statements of Operations                                            |       |       |
|                                    |       | Consolidated  Condensed Balance Sheets                                                      |       |       |
|                                    |       | Consolidated  Condensed Statements of Cash Flows                                            |       |       |
|                                    |       | Notes to  Consolidated Condensed Financial Statements                                       |       |       |
|                                    |       |                                                                                        |       |       |
| Item 2                                  | –     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       |       |
|                                    |       |                                                                                        |       |       |
|                                    |       | General                                                                                     |       |       |
|                                    |       | General  Business Risks, Critical Accounting Policies and Estimates                         |       |       |
|                                    |       | Results of  Operations                                                                      |       |       |
|                                    |       | Financial  Condition and Liquidity                                                          |       |       |
|                                    |       | Other  Matters                                                                              |       |       |
|                                    |       |                                                                                        |       |       |
| Item 3                                  | –     | Quantitative  and Qualitative Disclosures About Market Risk                                 |       |       |
|                                    |       |                                                                                        |       |       |
| Item 4                                  | –     | Controls and  Procedures                                                                    |       |       |
|                                    |       |                                                                                        |       |       |       |       |
| **PART II – Other  Information**   |       |                                                                                        |
| ** **                              | ** ** | ** **                                                                                  |
| Item 1                                  | –     | Legal Proceedings                                                                           |       |       |
|                                    |       |                                                                                        |       |       |
| Item 4                                  | –     | Submission of  Matters to a Vote of Security Holders                                        |       |       |
|                                    |       |                                                                                        |       |       |
| Item 5                                  | –     | Other Information                                                                           |       |       |
|                                    |       |                                                                                        |       |       |
| Item  6                                 | –     | Exhibits  and Reports on Form 8-K                                                           |       |       |
|                                    |       |                                                                                        |       |       |
| Signature                               |       |                                                                                        |       |       |
|                                    |       |                                                                                        |       |       |
| Exhibit  Index                          |       |                                                                                        |       |       |
|                                         |            |                                                                                             |            |            |            |            |  |  |  |  |  |

 

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**EXPLANATORYNOTE:** This quarterly report on Form 10-Q/A is being filed forthe purpose of amending our consolidated financial statements to provide usersof our financial information with additional information relative toadjustments recorded during the first and second quarters of 2005 and 2004. OnFebruary 27, 2006, we determined that it was appropriate to restate previouslyissued consolidated financial statements to record these adjustments.

As described in Note 2 of the consolidated condensed financialstatements, SITEL Corporation has restated its previously filed consolidatedfinancial statements as of June 30, 2005 and December 31, 2004, and for thethree and six month periods ended June 30, 2005 and 2004 included in itsQuarterly Report on Form 10-Q for the quarter ended June 30, 2005, which wasfiled with the Securities and Exchange Commission on August 9, 2005. Weidentified errors in our financial statements related to accountingirregularities identified at our Brazilian subsidiary including interest and penalties on unpaid tax obligations;deferred recognition of expenses; errors in revenue recording; intentionalfalsification of financial results; and intentional misclassification ofrecorded amounts.

We also recordedother adjustments that were previously deemed immaterial.

As a result of the errors referred to above, the net income (loss) forthe six month period ended June 30, 2005 and 2004 was overstated by $1.5million and $1.0 million, respectively, and $0.6 million and $0.3 million forthe three month period ended June 30, 2005 and 2004, respectively.

This amendmentpresents the 2005 Second Quarter Form 10-Q, as amended, in its entirety, exceptfor the Supplemental Guarantor Financial Information that is no longer requiredas a result of the refinancing during the third quarter of 2005, but does notmodify or update the disclosure in the 2005 Second Quarter Form 10-Q in any wayother than as required to reflect the changes discussed above and does notreflect events occurring after the original filing of the 2005 Second QuarterForm 10-Q on August 9, 2005.

All information containedin this Form 10-Q/A is subject to updating and supplementing as provided in ourreports filed with the Securities and Exchange Commission (the SEC) subsequentto the date of the original filing of the Annual Report on Form 10-K. As aresult, we recommend that this Form 10-Q/A be read in conjunction with allother periodic and current reports of the Company filed under the SecuritiesExchange Act of 1934, as amended, after the filing of the original Form 10-Q,including without limitation the information described in Note 2 to theconsolidated financial statements included in this Form 10-Q/A and theinformation contained in the Company’s Quarterly Reports on Form 10-Q/A for thequarter ended September 30, 2005, each as filed on the date hereof.

2

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**Item 1. Financial Statements**

**SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OFOPERATIONS**

**(UNAUDITED)**

(in thousands, except per share data)
| ** **                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                            | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                            | ** ** | **(As restated)**           | ** ** | **(As restated)**         | ** ** |
| * *                                              | * *   | * *                         | * *   | * *                       | * *   | * * | * * | * * | * * |
| **Revenue**                                           |       | $                                | 251,810    |                           | $          | 239,897 |   | $ | 502,702 |   | $ | 483,924 |   |
| ** **                                            | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  expenses:**                              | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct labor and telecommunications expenses          |       | 153,640                          |       | 142,982                        |       | 306,090 |   | 287,065 |   |
| Subcontracted and other services expenses             |       | 12,881                           |       | 13,022                         |       | 25,761 |   | 25,837 |   |
| Operating, selling and administrative expenses        |       | 80,897                           |       | 76,843                         |       | 161,136 |   | 154,362 |   |
| Asset impairment and restructuring expenses, net      |       | (2,609                           | )          | —                         |       | (2,609 | ) | — |   |
| Total operating expenses                              |       | 244,809                          |       | 232,847                        |       | 490,378 |   | 467,264 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| **Operating  income**                                 |       | 7,001                            |       | 7,050                          |       | 12,324 |   | 16,660 |   |
| ** **                                            | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  income (expense):**                          | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense                                      |       | (3,258                           | )          | (3,327                         | )          | (6,420 | ) | (6,777 | ) |
| Interest income                                       |       | 140                              |       | 122                            |       | 260 |   | 240 |   |
| Equity in earnings (loss) of affiliates               |       | 395                              |       | 77                             |       | 288 |   | 70 |   |
| Other income (expense), net                           |       | (21                              | )          | (122                           | )          | (31 | ) | (382 | ) |
| Total other expense, net                              |       | (2,744                           | )          | (3,250                         | )          | (5,903 | ) | (6,849 | ) |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| **Income  before income taxes and minority interest** |       | 4,257                            |       | 3,800                          |       | 6,421 |   | 9,811 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Income tax  expense                                   |       | 1,380                            |       | 1,362                          |       | 2,638 |   | 3,077 |   |
| Minority  interest                                    |       | 305                              |       | 208                            |       | 663 |   | 420 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| **Net  income**                                       |       | $                                | 2,572      |                           | $          | 2,230 |   | $ | 3,120 |   | $ | 6,314 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| **Weighted  average common shares outstanding:**      | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                 |       | 73,764                           |       | 73,670                         |       | 73,750 |   | 73,652 |   |
| Diluted                                               |       | 73,843                           |       | 74,174                         |       | 74,090 |   | 74,077 |   |
| ** **                                            | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Earnings  per share:**                              | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                 |       | $                                | 0.03       |                           | $          | 0.03 |   | $ | 0.04 |   | $ | 0.09 |   |
| Diluted                                               |       | $                                | 0.03       |                           | $          | 0.03 |   | $ | 0.04 |   | $ | 0.09 |   |

 

*See Notesto Consolidated Condensed Financial Statements.*

3

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### **SITELCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED BALANCE SHEETS**

(in thousands, except per share data)
| ** **                                                                                                                                   | ** ** | **June 30,**      | ** ** | **December 31,**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2005**               | ** ** | **2004**               | ** ** |
| ** **                                                                                                                                   | ** ** | **(Unaudited)**        | ** ** | ** **             | ** ** |
| ** **                                                                                                                                   | ** ** | **(As restated)** | ** ** | **(As restated)** | ** ** |
| **Assets**                                                                                                                                   | ** ** | ** **             | ** ** | ** **             | ** ** |
| **Current assets:**                                                                                                                          | ** ** | ** **             | ** ** | ** **             | ** ** |
| Cash and cash equivalents                                                                                                                    |       | $                      | 29,370     |                   | $          | 29,130 |   |
| Trade accounts receivable (net of allowance for  doubtful accounts of $1,978 and $2,391, respectively)                                       |       | 191,060                |       | 192,204                |       |
| Prepaid expenses and other assets                                                                                                            |       | 15,093                 |       | 16,416                 |       |
| Deferred income taxes                                                                                                                        |       | 2,093                  |       | 1,251                  |       |
| Total current assets                                                                                                                         |       | 237,616                |       | 239,001                |       |
|                                                                                                                                         |       |                   |       |                   |       |
| **Property and equipment, net**                                                                                                              |       | 77,813                 |       | 85,934                 |       |
|                                                                                                                                         |       |                   |       |                   |       |
| **Other assets:**                                                                                                                            | ** ** | ** **             | ** ** | ** **             | ** ** |
| Goodwill                                                                                                                                     |       | 46,311                 |       | 48,276                 |       |
| Investment in affiliates                                                                                                                     |       | 16,853                 |       | 16,466                 |       |
| Other assets                                                                                                                                 |       | 6,744                  |       | 8,386                  |       |
| Deferred income taxes                                                                                                                        |       | 786                    |       | 1,360                  |       |
| **Total assets**                                                                                                                             |       | $                      | 386,123    |                   | $          | 399,423 |   |
| ** **                                                                                                                                   | ** ** | ** **             | ** ** | ** **             | ** ** |
| **Liabilities  and Stockholders’ Equity**                                                                                               | ** ** | ** **             | ** ** | ** **             | ** ** |
| **Current liabilities:**                                                                                                                     | ** ** | ** **             | ** ** | ** **             | ** ** |
| Senior Subordinated Notes                                                                                                                    |       | $                      | 90,000     |                   | $          | — |   |
| Revolving credit facility and other current debt                                                                                             |       | 28,040                 |       | 19,712                 |       |
| Current portion of capital lease obligations                                                                                                 |       | 2,945                  |       | 3,435                  |       |
| Trade accounts payable                                                                                                                       |       | 25,705                 |       | 29,318                 |       |
| Accrued wages, salaries and bonuses                                                                                                          |       | 46,408                 |       | 50,273                 |       |
| Accrued operating expenses                                                                                                                   |       | 46,556                 |       | 48,644                 |       |
| Deferred revenue and other                                                                                                                   |       | 7,407                  |       | 8,892                  |       |
| Income taxes payable                                                                                                                         |       | 777                    |       | 1,107                  |       |
| Total current liabilities                                                                                                                    |       | 247,838                |       | 161,381                |       |
| **Long-term debt and other liabilities:**                                                                                                    | ** ** | ** **             | ** ** | ** **             | ** ** |
| Long-term debt, excluding current portion                                                                                                    |       | 1,036                  |       | 91,020                 |       |
| Capital lease obligations, excluding current portion                                                                                         |       | 7,068                  |       | 8,510                  |       |
| Other liabilities                                                                                                                            |       | 8,990                  |       | 9,788                  |       |
| Deferred income taxes                                                                                                                        |       | 141                    |       | 883                    |       |
| Total liabilities                                                                                                                            |       | 265,073                |       | 271,582                |       |
|                                                                                                                                         |       |                   |       |                   |       |
| **Minority interests**                                                                                                                       |       | 2,824                  |       | 2,611                  |       |
| **Stockholders’ equity:**                                                                                                               | ** ** | ** **             | ** ** | ** **             | ** ** |
| Common stock, voting, $.001 par value 200,000,000  shares authorized, 74,440,929 and 74,433,629 shares issued and outstanding,  respectively |       | 74                     |       | 74                     |       |
| Additional paid-in capital                                                                                                                   |       | 168,871                |       | 168,871                |       |
| Accumulated other comprehensive income (loss)                                                                                                |       | (2,467                 | )          | 7,721                  |       |
| Accumulated deficit                                                                                                                          |       | (47,300                | )          | (50,419                | )          |
| Less treasury stock, at cost, 675,411 and 707,927  common shares, respectively                                                               |       | (952                   | )          | (1,017                 | )          |
| Total stockholders’ equity                                                                                                              |       | 118,226                |       | 125,230                |       |
| **Total liabilities and  stockholders’ equity**                                                                                         |       | $                      | 386,123    |                   | $          | 399,423 |   |

 

*See Notesto Consolidated Condensed Financial Statements.*

4

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**SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS**

** (UNAUDITED)**

(inthousands)
| ** **                                                                        | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                        | ** ** | **June 30,**              | ** ** |
| ** **                                                                        | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| ** **                                                                        | ** ** | **(As restated)**         | ** ** | **(As restated)** | ** ** |
| **Cash  flows from operating activities:**                                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                                        |       | $                              | 3,120      |   | $ | 6,314 |   |
| Adjustments to  reconcile net income to net cash flows from operating activities: |       |                           |       |   |   |
| Asset impairment and restructuring provision, net                                 |       | (2,609                         | )          | — |   |
| Depreciation and amortization                                                     |       | 18,138                         |       | 17,890 |   |
| Loss on disposal of assets                                                        |       | 102                            |       | 27 |   |
| Provision for deferred income taxes                                               |       | (1,294                         | )          | (26 | ) |
| Equity in earnings of affiliates                                                  |       | (288                           | )          | (70 | ) |
| Minority interest in net income of consolidated  subsidiaries                     |       | 663                            |       | 420 |   |
| Changes in operating assets and liabilities:                                      |       |                           |       |   |   |
| Trade accounts receivable                                                         |       | (10,018                        | )          | (650 | ) |
| Other assets                                                                      |       | (2,157                         | )          | 967 |   |
| Trade accounts payable                                                            |       | (5,939                         | )          | 2,012 |   |
| Other liabilities                                                                 |       | 4,002                          |       | 3,951 |   |
| Net cash flows  from operating activities                                         |       | 3,720                          |       | 30,835 |   |
|                                                                              |       |                           |       |   |   |
| **Cash  flows from investing activities:**                                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Purchases of  property and equipment                                              |       | (14,126                        | )          | (10,611 | ) |
| Proceeds from  cash surrender value of life insurance                             |       | 3,274                          |       | — |   |
| Dividends paid  to minority interest holders                                      |       | (450                           | )          | — |   |
| Proceeds from  the sale of property and equipment                                 |       | 40                             |       | 8 |   |
| Other                                                                             |       | —                         |       | (440 | ) |
| Net cash flows  from investing activities                                         |       | (11,262                        | )          | (11,043 | ) |
|                                                                              |       |                           |       |   |   |
| **Cash  flows from financing activities:**                                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Borrowings on  debt                                                               |       | 126,984                        |       | 9,476 |   |
| Repayments of  debt                                                               |       | (117,158                       | )          | (8,364 | ) |
| Repayments of  capital lease obligations                                          |       | (1,747                         | )          | (1,493 | ) |
| Treasury stock  reissuances                                                       |       | 66                             |       | 102 |   |
| Net cash flows  from financing activities                                         |       | 8,145                          |       | (279 | ) |
| Effect of  exchange rates on cash                                                 |       | (363                           | )          | 53 |   |
| **Net  increase in cash**                                                         |       | 240                            |       | 19,566 |   |
| **Cash  and cash equivalents, beginning of period**                               |       | 29,130                         |       | 30,131 |   |
| **Cash  and cash equivalents, end of period**                                     |       | $                              | 29,370     |   | $ | 49,697 |   |
| ** **                                                                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Non-cash  investing and financing activities:**                                 | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Capital lease  obligations incurred                                               |       | $                              | 1,240      |   | $ | 753 |   |

 

*See Notes to Consolidated Condensed Financial Statements.*

5

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**SITEL CORPORATION ANDSUBSIDIARIES**

**NOTES TOCONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

**Note1. Basis of Consolidation and Presentation**

***General***

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

Weare a leading global provider of outsourced customer support services. Wespecialize in the design, implementation, and operation of multi-channelcontact centers. We support the customer management strategies of large andmedium size corporations in North America, Europe, Asia Pacific, and LatinAmerica. We provide customer acquisition, customer care, technical support andrisk management services on an outsourced basis, as well as operational andinformation technology professional services for both outsourced and internalcontact 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, which reportsthe restated fiscal 2004 consolidated financial statements and is filed thissame date. All significant intercompany balances and transactions have beeneliminated. Certain amounts in prior fiscal periods have been reclassified forcomparative purposes.

***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 December 2004,the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (R), *Share-Based Payment*, (SFAS 123R). Thisstandard will require the cost of employee compensation paid with equityinstruments to be measured based on grant-date fair values with the costrecorded as compensation expense over the period during which the employee isrequired to perform service in exchange for the award (generally over thevesting period of the award). The proforma disclosures previously permittedunder SFAS 123 will no longer be an alternative to financial statement recognition.See “Stock-Based Compensation” below for the pro forma net income and netincome per share amounts, for the three and six month periods ended June 30,2005 and 2004, as if we had used a fair-value-based method similar to themethods required under SFAS 123R to measure compensation expense foremployee stock incentive awards. In March 2005, the Securities and ExchangeCommission (SEC) issued Staff Accounting Bulletin (SAB) No. 107,which expressed the views of the SEC regarding the interaction betweenSFAS 123R and certain SEC rules and regulations. SAB No. 107provides guidance related to the valuation of share-based payment arrangementsfor public companies, including assumptions such as expected volatility andexpected term. In April 2005, the SEC approved a rule that delayed theeffective date of SFAS 123R for public companies. As a result,SFAS 123R will be effective for the Company in the first quarter of 2006and will apply to all of our outstanding unvested share-based payment awards asof January 1, 2006 and all prospective awards. Although we have not yetdetermined whether the adoption of SFAS 123R will result in amounts thatare similar to the current pro forma disclosures under SFAS 123, we areevaluating the requirements under SFAS 123R and expect the adoption tohave a significant impact on our consolidated statements of operations and netincome per share.

In October 2004, TheAmerican Jobs Creation Act of 2004 (AJCA) was signed into law. The Act createsa temporary incentive for U.S. multinationals to repatriate accumulated incomeearned outside the U.S. In December 2004, the FASB issued FSP 109-2, *Accounting and Disclosure Guidance for the ForeignEarnings Repatriation Provision within the American Jobs Creation Act of 2004*(FSP109-2)*.*FSP 109-2 providesadditional time to companies beyond the financial reporting period of enactmentto evaluate the effects of the AJCA on their plans for repatriation of foreignearnings for purposes of applying SFAS

6

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109, *Accounting for Income Taxes*. The Companyis currently evaluating the repatriation provisions of AJCA, which ifimplemented would affect our tax provision and deferred tax assets andliabilities. Due to the complexity and uncertainty of applying the provisionsof the Act, the income tax effects of such repatriation cannot be reasonablyestimated at this time.

***Stock-BasedCompensation***

We apply the intrinsic-value-based methodof accounting prescribed by Accounting Principles Board Opinion No. 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 isrecorded 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.

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 (in thousands):
| ** **                                                                                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                               | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                               | ** ** | **(As restated)**           | ** ** | **(As restated)**         | ** ** |
| ** **                                                                                                               | ** ** | **(in thousands)**          | ** ** |
| Net income:                                                                                                              |       |                             |       |                           |       |   |   |   |   |
| As reported                                                                                                              |       | $                                | 2,572      |                           | $          | 2,230 |   | $ | 3,120 |   | $ | 6,314 |   |
| Less: total stock based employee compensation  expense determined under the fair value method for all awards, net of tax |       | (119                             | )          | (239                           | )          | (246 | ) | (498 | ) |
| Pro forma                                                                                                                |       | $                                | 2,453      |                           | $          | 1,991 |   | $ | 2,874 |   | $ | 5,816 |   |
|                                                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Income per  common share:                                                                                                |       |                             |       |                           |       |   |   |   |   |
| As reported:                                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                                                    |       | $                                | 0.03       |                           | $          | 0.03 |   | $ | 0.04 |   | $ | 0.09 |   |
| Diluted                                                                                                                  |       | 0.03                             |       | 0.03                           |       | 0.04 |   | 0.09 |   |
| Pro forma:                                                                                                               |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                                                    |       | 0.03                             |       | 0.03                           |       | 0.04 |   | 0.08 |   |
| Diluted                                                                                                                  |       | 0.03                             |       | 0.03                           |       | 0.04 |   | 0.08 |   |

 

The fair value of optionswas estimated at the date of the grant using the Black-Scholes option-pricingmodel with the following weighted-average assumptions:
|                             | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|
|                        |       |     |       |
| - Volatility  factor        |       | 52.3     | %          |
| - Risk-free  interest rate  |       | 3.5      | %          |
| - Expected life  (in years) |       | 5        |       |
| - Expected dividend  yield  |       | 0.0      | %          |

 

There were no optionsgranted during the six-month period ended June 30, 2005.

***SignificantClients***

Our******top 20 clients accounted for67.5% and 66.9% of our revenue in the three-month periods ended June 30, 2005and 2004, respectively, and 68.1% and 66.9% for the six-month periods endedJune 30, 2005 and 2004, respectively, and includemultiple independently managed business units within the client’s affiliatedgroup. Hewlett-Packard Company business units were responsible for 11.9% and11.0% of our revenue for the three-month periods ended June 30, 2005 and 2004,respectively, and were responsible for 12.1% and 11.2% of our revenue for thesix-month periods ended June 30, 2005 and 2004, respectively. General MotorsCorporation (General Motors) business units were responsible for 11.8% and16.0% of our total revenue in the three-month periods ended June 30, 2005 and2004, respectively, and were responsible for 12.0% and 16.7% for the six-month

7

----

periods ended June 30, 2005, and 2004, respectively. Theprimary General Motors contract expires in December 2005, while a secondcontract terminated in June 2004. We did not have any other clients undercommon control that generated more than 10% of our revenue for the periodspresented.

**Note 2. Restatement**

Asa result of accounting irregularities identified at our Braziliansubsidiary, we have restated ourpreviously filed consolidated financial statements as of June 30, 2005 andDecember 31, 2004 and for the six-month and three-month periods ended June 30,2005 and 2004. We have determined that the subsidiary’s formercontroller, in violation of Company policies, engaged in improper accountingpractices and the avoidance of local tax obligations and caused misleadingrecords to be created to prevent the Company’s senior management from detectingthis misconduct.

Additionally, as part ofthe restatement process, we also recorded other adjustments that were previouslydeemed immaterial.

As a result of the restatement, we have determinedthat it is more likely than not that we will not realize the full tax benefitof our net operating losses in Brazil. Consequently, the restatement amountsare presented on a pre-tax basis as we do not expect to realize any significanttax benefit from the additional expenses.

Summary of restatementitems for the following periods:
|                                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                             | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income as  originally reported                     |       | $                                | 3,217      |                           | $          | 2,519 |   | $ | 4,666 |   | $ | 7,345 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Tax obligations,  including interest and penalties (A) |       | (478                             | )          | (268                           | )          | (838 | ) | (550 | ) |
| Deferred expense  recognition (B)                      |       | (48                              | )          | (149                           | )          | (363 | ) | (294 | ) |
| Errors in  revenue recording (C)                       |       | 3                                |       | (89                            | )          | (329 | ) | (89 | ) |
| Intentional  falsification of records (D)              |       | 11                               |       | (78                            | )          | 1 |   | (168 | ) |
| Other (E)                                              |       | (133                             | )          | 295                            |       | (17 | ) | 70 |   |
| Total impact of  restatement adjustments               |       | (645                             | )          | (289                           | )          | (1,546 | ) | (1,031 | ) |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net income as adjusted                                 |       | $                                | 2,572      |                           | $          | 2,230 |   | $ | 3,120 |   | $ | 6,314 |   |

 

----

Errors in previouslyissued financial statements were identified in the following areas:

A) Tax obligations,including interest and penalties

During the years 2001through June 30, 2005, certain Brazilian Municipal and Federal taxes totalingapproximately $7.0 million were collected and accrued but not paid. As aresult, we incurred accumulated interest of approximately $2.1 million, plusapproximately $1.2 million in penalties as of June 30, 2005. Our restatedconsolidated condensed statements of operations reflect the recognition ofinterest and penalties in the prior period incurred based on laws andregulations in effect at the time.

B) Deferred expenserecognition

The subsidiary improperlydeferred expense recognition of certain payments. These payments should havebeen recorded as expense when incurred rather than deferred.

C) Errors in revenuerecording

The subsidiary improperlyrecorded revenue related to certain customer invoices including; recordinghigher revenue than the invoice amount, recording revenue and subsequentlycanceling the invoice and recording revenue for invoices that have not beenlocated or for which cash was not received.

8

----

D) Intentionalfalsification of financial results

The subsidiary’s formercontroller intentionally falsified financial reporting records provided toCorporate management. The actual results reported to Corporate management weremanipulated to present different reported earnings than actually recorded inthe subsidiary’s local financial records.

E) OtherRepresents adjustments recorded to correct other miscellaneous items identifiedin the restatement and other adjustments that were previously deemedimmaterial, none of which are individually significant.

In addition, thesubsidiary’s former controller intentionally misclassified amounts in thebalance sheet. The misclassifications impacted substantially all of the lineitems in the consolidated balance sheets.

The functional currency of our Brazilian subsidiary isthe Brazilian Real. The restatement adjustments presented in our prior periodfinancial statements were recorded using the foreign currency exchange rates ineffect in the applicable period. The assets and liabilities are subsequentlyadjusted for fluctuations in foreign currency exchange rates from the date ofthe original transaction to the balance sheet date. Translation gains andlosses resulting from the revaluation of the assets and liabilities of theforeign subsidiary to US dollars is included in other comprehensive income, acomponent of stockholders’ equity. The cumulative effect of foreign currencyexchange rate fluctuations from the restatement adjustments was a decrease instockholders’ equity of $1.8 million and $0.6 million as of June 30, 2005 andDecember 31, 2004, respectively.

**The following items in the Consolidated Statements ofOperations, Consolidated Balance Sheets and Consolidated Statements of CashFlows have been restated as follows based on the items noted above.**

9

----

** **
| ** **                                        | ** ** | **Three Months Ended June 30, 2005** | ** ** | **Three Months Ended June 30, 2004** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                        | ** ** | **As previously**                                        | ** ** | **As**                                                        | ** ** | **As previously** | ** ** | **As** | ** ** |
| ** **                                        | ** ** | **reported**                                                  | ** ** | **restated**                                                  | ** ** | **reported** | ** ** | **restated** | ** ** |
| *Consolidated  Statements of Operations:*         | * *   | * *                                                      | * *   | * *                                                      | * *   | * * | * * | * * | * * |
| Revenue                                           |       | $                                                             | 251,809    |                                                          | $          | 251,810 |   | $ | 240,055 |   | $ | 239,897 |   |
| Direct labor and  telecommunications expense      |       | 153,636                                                       |       | 153,640                                                       |       | 143,032 |   | 142,982 |   |
| Subcontracted  and other services expenses        |       | 12,886                                                        |       | 12,881                                                        |       | 13,022 |   | 13,022 |   |
| Operating,  selling and administrative expenses   |       | 80,555                                                        |       | 80,897                                                        |       | 76,922 |   | 76,843 |   |
| Total operating  expenses                         |       | 244,468                                                       |       | 244,809                                                       |       | 232,976 |   | 232,847 |   |
| Operating income                                  |       | 7,341                                                         |       | 7,001                                                         |       | 7,079 |   | 7,050 |   |
| Interest expense                                  |       | (2,939                                                        | )          | (3,258                                                        | )          | (3,099 | ) | (3,327 | ) |
| Interest income                                   |       | 140                                                           |       | 140                                                           |       | 121 |   | 122 |   |
| Other income  (expense), net                      |       | (21                                                           | )          | (21                                                           | )          | (118 | ) | (122 | ) |
| Total other  expense, net                         |       | (2,425                                                        | )          | (2,744                                                        | )          | (3,019 | ) | (3,250 | ) |
| Income before  income taxes and minority interest |       | 4,916                                                         |       | 4,257                                                         |       | 4,060 |   | 3,800 |   |
| Income tax  expense                               |       | 1,392                                                         |       | 1,380                                                         |       | 1,331 |   | 1,362 |   |
| Minority  Interest                                |       | 307                                                           |       | 305                                                           |       | 210 |   | 208 |   |
| Net income                                        |       | 3,217                                                         |       | 2,572                                                         |       | 2,519 |   | 2,230 |   |
| Income per  share:                                |       |                                                          |       |                                                          |       |   |   |   |   |
|  Basic and Diluted                           |       | $                                                             | 0.04       |                                                          | $          | 0.03 |   | $ | 0.03 |   | $ | 0.03 |   |

 
| ** **                                        | ** ** | **Six Months Ended June 30, 2005** | ** ** | **Six Months Ended June 30, 2004** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                        | ** ** | **As previously**                                      | ** ** | **As**                                                      | ** ** | **As previously** | ** ** | **As** | ** ** |
| ** **                                        | ** ** | **reported**                                                | ** ** | **restated**                                                | ** ** | **reported** | ** ** | **restated** | ** ** |
| *Consolidated  Statements of Operations:*         | * *   | * *                                                    | * *   | * *                                                    | * *   | * * | * * | * * | * * |
| Revenue                                           |       | $                                                           | 502,978    |                                                        | $          | 502,702 |   | $ | 484,123 |   | $ | 483,924 |   |
| Direct labor and  telecommunications expense      |       | 306,112                                                     |       | 306,090                                                     |       | 287,160 |   | 287,065 |   |
| Subcontracted  and other services expenses        |       | 25,774                                                      |       | 25,761                                                      |       | 25,837 |   | 25,837 |   |
| Operating,  selling and administrative expenses   |       | 160,558                                                     |       | 161,136                                                     |       | 153,762 |   | 154,362 |   |
| Total operating  expenses                         |       | 489,835                                                     |       | 490,378                                                     |       | 466,759 |   | 467,264 |   |
| Operating income                                  |       | 13,143                                                      |       | 12,324                                                      |       | 17,364 |   | 16,660 |   |
| Interest expense                                  |       | (5,796                                                      | )          | (6,420                                                      | )          | (6,332 | ) | (6,777 | ) |
| Interest income                                   |       | 260                                                         |       | 260                                                         |       | 242 |   | 240 |   |
| Other income  (expense), net                      |       | (31                                                         | )          | (31                                                         | )          | (392 | ) | (382 | ) |
| Total other  expense, net                         |       | (5,279                                                      | )          | (5,903                                                      | )          | (6,412 | ) | (6,849 | ) |
| Income before  income taxes and minority interest |       | 7,864                                                       |       | 6,421                                                       |       | 10,952 |   | 9,811 |   |
| Income tax  expense                               |       | 2,531                                                       |       | 2,638                                                       |       | 3,183 |   | 3,077 |   |
| Minority  Interest                                |       | 667                                                         |       | 663                                                         |       | 424 |   | 420 |   |
| Net income                                        |       | 4,666                                                       |       | 3,120                                                       |       | 7,345 |   | 6,314 |   |
| Income per  share:                                |       |                                                        |       |                                                        |       |   |   |   |   |
|  Basic and Diluted                           |       | $                                                           | 0.06       |                                                        | $          | 0.04 |   | $ | 0.10 |   | $ | 0.09 |   |

 

10

----

** **
| ** **                                            | ** ** | **As of June 30, 2005** | ** ** | **As of December 31, 2004** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                            | ** ** | **As previously**                      | ** ** | **As**                                          | ** ** | **As previously** | ** ** | **As** | ** ** |
| ** **                                            | ** ** | **reported**                                | ** ** | **restated**                                    | ** ** | **reported** | ** ** | **restated** | ** ** |
| *Consolidated  Balance Sheets:*                       | * *   | * *                                    | * *   | * *                                        | * *   | * * | * * | * * | * * |
| Cash and cash  equivalents                            |       | $                                           | 29,463     |                                            | $          | 29,370 |   | $ | 28,906 |   | $ | 29,130 |   |
| Trade accounts  receivable                            |       | 190,309                                     |       | 191,060                                         |       | 191,391 |   | 192,204 |   |
| Prepaid expenses  and other assets                    |       | 13,961                                      |       | 15,093                                          |       | 15,859 |   | 16,416 |   |
| Deferred income  taxes                                |       | 2,226                                       |       | 2,093                                           |       | 1,313 |   | 1,251 |   |
| Total current  assets                                 |       | 235,959                                     |       | 237,616                                         |       | 237,469 |   | 239,001 |   |
| Property and  equipment, net                          |       | 78,077                                      |       | 77,813                                          |       | 86,057 |   | 85,934 |   |
| Other assets                                          |       | 6,744                                       |       | 6,744                                           |       | 8,420 |   | 8,386 |   |
| Deferred income  taxes                                |       | 1,012                                       |       | 786                                             |       | 843 |   | 1,360 |   |
| Total assets                                          |       | 384,956                                     |       | 386,123                                         |       | 397,531 |   | 399,423 |   |
| Revolving credit  facility and other current debt     |       | 27,010                                      |       | 28,040                                          |       | 18,802 |   | 19,712 |   |
| Current portion  of capital lease obligations         |       | 2,683                                       |       | 2,945                                           |       | 3,202 |   | 3,435 |   |
| Trade accounts  payable                               |       | 25,653                                      |       | 25,705                                          |       | 32,595 |   | 29,318 |   |
| Accrued wages,  salaries and bonuses                  |       | 46,384                                      |       | 46,408                                          |       | 43,641 |   | 50,273 |   |
| Accrued  operating expenses                           |       | 38,636                                      |       | 46,556                                          |       | 46,533 |   | 48,644 |   |
| Deferred revenue  and other                           |       | 7,407                                       |       | 7,407                                           |       | 8,816 |   | 8,892 |   |
| Income taxes  payable                                 |       | 689                                         |       | 777                                             |       | 1,107 |   | 1,107 |   |
| Total current  liabilities                            |       | 238,462                                     |       | 247,838                                         |       | 154,696 |   | 161,381 |   |
| Long-term debt,  excluding current portion            |       | —                                      |       | 1,036                                           |       | 90,000 |   | 91,020 |   |
| Capital lease  obligations, excluding current portion |       | 6,966                                       |       | 7,068                                           |       | 8,393 |   | 8,510 |   |
| Other  liabilities                                    |       | 8,193                                       |       | 8,990                                           |       | 8,949 |   | 9,788 |   |
| Deferred income  taxes                                |       | 141                                         |       | 141                                             |       | 205 |   | 883 |   |
| Total  liabilities                                    |       | 253,762                                     |       | 265,073                                         |       | 262,243 |   | 271,582 |   |
| Minority  Interest                                    |       | 2,846                                       |       | 2,824                                           |       | 2,629 |   | 2,611 |   |
| Accumulated  other comprehensive income (loss)        |       | (700                                        | )          | (2,467                                          | )          | 8,342 |   | 7,721 |   |
| Accumulated  deficit                                  |       | (38,945                                     | )          | (47,300                                         | )          | (43,611 | ) | (50,419 | ) |
| Total  stockholders’ equity                      |       | 128,348                                     |       | 118,226                                         |       | 132,659 |   | 125,230 |   |
| Total liabilities and  stockholders’ equity      |       | 384,956                                     |       | 386,123                                         |       | 397,531 |   | 399,423 |   |
|                                                       |            |                                             |            |                                                 |            |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **Six Months Ended June 30, 2005** | ** ** | **Six Months Ended June 30, 2004** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                | ** ** | **As previously**                                      | ** ** | **As**                                                      | ** ** | **As previously** | ** ** | **As** | ** ** |
| ** **                                | ** ** | **reported**                                                | ** ** | **restated**                                                | ** ** | **reported** | ** ** | **restated** | ** ** |
| *Consolidated  Statements of Cash Flows:* | * *   | * *                                                    | * *   | * *                                                    | * *   | * * | * * | * * | * * |
| Operating  activities                     |       | $                                                           | 3,991      |                                                        | $          | 3,720 |   | $ | 30,739 |   | $ | 30,835 |   |
| Investing  activities                     |       | (11,170                                                     | )          | (11,262                                                     | )          | (10,978 | ) | (11,043 | ) |
| Financing activities                      |       | 8,523                                                       |       | 8,145                                                       |       | 39 |   | (279 | ) |
|                                           |            |                                                             |            |                                                             |            |  |  |  |  |  |  |  |  |

 

**Note3. Comprehensive Income (Loss)**

Comprehensive income(loss) for the three and six-month periods ended June 30, 2005 and 2004 are asfollows (in thousands):
|                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                      | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(As restated)**           | ** ** | **(As restated)**         | ** ** |
| Net income                      |       | $                                | 2,572      |                           | $          | 2,230 |   | $ | 3,120 |   | $ | 6,314 |   |
| Other  comprehensive loss:      |       |                             |       |                           |       |   |   |   |   |
| Currency translation adjustment |       | (6,704                           | )          | (2,217                         | )          | (10,188 | ) | (2,191 | ) |
| Comprehensive income  (loss)    |       | $                                | (4,132     | )                              | $          | 13 |   | $ | (7,068 | ) | $ | 4,123 |   |

 

11

----

Accumulatedother comprehensive income (loss) included in our consolidated condensedbalance sheets represents the accumulated foreign currency translationadjustment.

**Note 4. Asset Impairmentand Restructuring Expenses**

Wesummarize the components of the accrued restructuring expenses recorded in ourconsolidated condensed balance sheet in the following table:
|                    | ** ** | ** **    | ** ** | **Facility**        | ** ** | ** ** | ** ** |
|--------------------|------------|---------------|------------|---------------------|------------|------------|------------|
| ** **         | ** ** | ** **    | ** ** | **Closure or** | ** ** | ** ** | ** ** |
| ** **         | ** ** | **Severance** | ** ** | **Reduction**       | ** ** | **Total**  | ** ** |
|               |       |          |       |                |       |       |       |
| December 31,  2004 |       | $             | 4.2        |                | $          | 5.9        |       | $ | 10.1 |   |
| Expensed           |       | 0.7           |       | —              |       | 0.7        |       |
| Paid               |       | (3.6          | )          | (0.8                | )          | (4.4       | )          |
| Reversal           |       | —        |       | (3.3                | )          | (3.3       | )          |
| Other              |       | (0.1          | )          | (0.1                | )          | (0.2       | )          |
| June 30, 2005      |       | $             | 1.2        |                | $          | 1.7        |       | $ | 2.9 |   |

 

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

We expect to pay theemployee compensation restructuring liabilities during 2005. The Companyexpects to utilize the remaining facility closure or reduction restructuringliabilities over the respective lease periods through fiscal 2009.

During the three monthsended June 30, 2005, we decided to open a previously closed leased facility totemporarily accommodate new business.  Ina prior year, we had recorded a restructuring liability for the futurescheduled undiscounted lease payments for the closed facility. As a result ofthe decision to reopen the facility, we reversed the remaining $3.2 millionrestructuring liability. This reversal was partially offset by severancerelated to previously announced facility closures, resulting in a net reversalof $2.6 million.

**Note 5. Investments inAffiliates**

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.

As of June 30, 2005 andDecember 31, 2004, the investment in our India joint venture was approximately$4.0 million and $4.1 million, respectively. Subcontracted expenses for servicesprovided by our India joint venture were $4.3 million and $3.1 million for thethree-month periods ended June 30, 2005 and 2004, respectively, and $8.3million and $6.5 million for the six-month periods ended June 30, 2005 and2004, respectively.  The Company hadpayables to our India joint venture of $3.5 million and $3.0 million at June30, 2005 and December 31, 2004, respectively, which are included in tradeaccounts payable in the accompanying consolidated condensed balance sheets.

Subcontractedservices provided by our Latin America joint venture for the three-month andsix-month periods ended June 30, 2005 and 2004 were not material.

12

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**Note 6. Stock-Based Compensation**

The1999 Stock Incentive Plan (1999 Plan) provides for the granting of varioustypes of incentive awards (including incentive stock options, nonqualifiedoptions, stock appreciation rights, restricted shares, and performance sharesor units) for the issuance of up to an aggregate of 10,500,000 shares of commonstock to our employees, consultants and non-employee directors.

Vestingterms vary with each grant, and option terms may not exceed ten years. Optionprices, set by the Compensation Committee of the Board of Directors, may not beless than the fair market value at date of grant for incentive stock options orless than par value for nonqualified stock options. At June 30, 2005, therewere approximately 5.9 million shares available for issuance pursuant to futuregrants under the 1999 Plan.

Prior to the adoption ofthe 1999 Plan, we granted options under several different plans. As of June 30,2005, options granted under these plans aggregating 2.2 million remainedoutstanding with strike prices ranging from $2.41 to $19.50.  The last of these options will expire onFebruary 1, 2009.  We will not grantadditional options under these plans. The following table sets forth sharessubject to options:
|                          | ** ** | ** **         | ** ** | **Weighted-Average**    | ** ** |
|--------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **               | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| ** **               | ** ** | **Options**        | ** ** | **per Share**      | ** ** |
|                     |       |               |       |                    |       |
| Balance January  1, 2005 |       | 6,808,736          |       | $                       | 3.68       |   |
| Granted                  |       | —             |       | —                  |       |
| Exercised                |       | (7,300             | )          | 1.33                    |       |
| Canceled                 |       | (345,202           | )          | 3.58                    |       |
| Balance June 30, 2005    |       | 6,456,234          |       | $                       | 3.59       |   |

 

The options exercisable at the end of each periodwere:
|                    | ** ** | ** **         | ** ** | **Weighted-Average**    | ** ** |
|--------------------|------------|--------------------|------------|-------------------------|------------|
| ** **         | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| ** **         | ** ** | **Options**        | ** ** | **per Share**      | ** ** |
| December 31,  2004 |       | 3,716,345          |       | $                       | 4.28       |   |
| June 30, 2005      |       | 3,895,124          |       | $                       | 4.03       |   |

 

The following tablesummarizes stock options outstanding at June30, 2005:
|                          | ** ** | ** **      | ** ** | **Weighted-Average** | ** ** | **Weighted-Average** | ** ** |
|--------------------------|------------|-----------------|------------|----------------------|------------|----------------------|------------|
| **Range of**        | ** ** | **Number**      | ** ** | **Remaining**        | ** ** | **Exercise**         | ** ** |
| **Exercise Prices** | ** ** | **Outstanding** | ** ** | **Life**             | ** ** | **Price**            | ** ** |
| $1.24 to $1.75           |       | 708,254         |       | 7.7                  |       | $                    | 1.56       |   |
| $1.76 to $4.00           |       | 4,449,401       |       | 4.7                  |       | $                    | 3.07       |   |
| $4.01 to $6.33           |       | 698,404         |       | 3.7                  |       | $                    | 4.84       |   |
| $6.34 to $7.22           |       | 419,775         |       | 4.4                  |       | $                    | 6.70       |   |
| $7.23 to $12.66          |       | 120,400         |       | 2.6                  |       | $                    | 9.76       |   |
| $12.67 to $20.00         |       | 60,000          |       | 1.7                  |       | $                    | 17.35      |   |

 

13

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The following table summarizes stock options exercisable at June 30,2005:
|                          | ** ** | ** **      | ** ** | **Weighted-Average** | ** ** |
|--------------------------|------------|-----------------|------------|----------------------|------------|
| **Range of**        | ** ** | **Number**      | ** ** | **Exercise**         | ** ** |
| **Exercise Prices** | ** ** | **Exercisable** | ** ** | **Price**            | ** ** |
| $1.24 to $1.75           |       | 311,312         |       | $                    | 1.56       |   |
| $1.76 to $4.00           |       | 2,317,283       |       | $                    | 3.01       |   |
| $4.01 to $6.33           |       | 666,754         |       | $                    | 4.83       |   |
| $6.34 to $7.22           |       | 419,775         |       | $                    | 6.70       |   |
| $7.23 to $12.66          |       | 120,000         |       | $                    | 9.75       |   |
| $12.67 to $20.00         |       | 60,000          |       | $                    | 17.35      |   |

 

**Note 7. 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 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 litigation incidentalto our business. We cannot predict the ultimate outcome of such litigation withcertainty, but management believes, after consultation with counsel, except forthe items discussed below for the reasons mentioned therein, that theresolution of such matters will not have a material adverse effect on ourconsolidated financial position or results of operations.

*BankruptcyOP Computers SPA vs. SITEL Kingston Limited* (now known as Mitre Telesales Limited) wasfiled in April 2004 in the Court of Ivrea in Milan, Italy.  The receivers assert that Mitre, as a formersupplier to Olivetti, is required under Italian bankruptcy law to return €5,349,025(approximately $6.9 million) in payments Olivetti had allegedly paid Mitreduring a one-year “clawback” period, which allegedly runs from March 9, 1998until March 9, 1999, the alleged date Olivetti filed for receivership.  Mitre filed its Defence with the court inNovember 2004.  The Defence outlined thefacts and reasons why Mitre did not and should not reasonably have known ofOlivetti’s insolvent state during the time that Mitre was performing servicesfor Olivetti.  The first substantivehearing held in May 2005 was adjourned to November 2005.  The Company and its subsidiary MitreTelesales Limited are currently unable to predict the outcome or reasonablyestimate the possible loss, if any, or range of losses associated with thisclaim.

Two of our clients have received letters from time totime containing an offer to license and suggesting that the clients might beinfringing certain patents related to computerized telephonic voice responsesystems without the license. The clients have indicated that if anyinfringement occurred the clients would seek contractual indemnity from us. Insuch an event, we would expect to seek contractual indemnity from certain ofour vendors. Any such contractual indemnity we might obtain may not besufficient to cover all of the costs of investigating and resolving suchmatter. We might also seek a license under the patents. Any such license maynot be available under commercially reasonable terms. Any license costs wouldincrease the cost of doing business in the future and may or may not be fullyreflected in our pricing. To our knowledge, no litigation has been initiatedagainst our clients or us concerning this matter. At this stage, due to theinherent uncertainties, we are unable to predict whether this matter may have amaterial adverse effect on our business or on our financial condition orresults of operation.

**Note 8. Earnings Per Share**

Wecalculate income per common share by dividing our reported net income by theweighted average number of common shares and common equivalent sharesoutstanding during each period. Our reported net income is used in thecomputation of both basic and diluted income 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 June 30, 2005 and 2004, we had5.7 million and 1.9 million options, respectively, which have been excludedfrom the diluted net income per share computation because their exercise priceexceeds the fair market value.

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**Note 9. Payroll TaxRefund**

During the three monthsended June 30, 2004, we recorded a benefit from the refund of payroll taxoverpayments paid in a prior year. We recorded the payroll tax refund in theaccompanying consolidated condensed statements of operations as a $1.3 millionreduction of direct labor and telecommunications expenses and a $0.4 millionreduction of operating, selling and administrative expenses during the threemonths ended June 30, 2004.

**Note10.  Subsequent Events**

***Restructuring***

During 2004, we initiated a profit improvement plan comprised of a set of initiatives. One of the initiatives was cost reduction.

On July 7, 2005, in continuation of the previously announced profit improvement plan, we committed to additional actions to reduce ongoing operating expenses, consolidate facilities, and reduce our workforce. The additional actions include closing and consolidating certain facilities in Northern Europe and reducing net headcount by a total of approximately 60 employees. We expect approximately 20 positions will be reduced by attrition and the remainder by severance. As a result of the facility closures, we will no longer be able to maintain certain minimum employment levels required to retain government grants received and that were recorded as a reduction of operating expenses in previous periods. Consequently, we will record a charge to establish a liability for the obligation to repay such amounts. The actions also include disposing of certain capital equipment. We expect to complete these activities by the end of fiscal year 2005.

In connection with these actions, we estimate that we will record a total of $7.0 million to $9.0 million of costs. We expect a majority of the charge to be recognized in the third quarter of fiscal year 2005 with the remainder recorded by the end of fiscal year 2005. The majority of the severance costs are expected to be paid out during our fourth quarter of fiscal year 2005, and the facilities costs are expected to be paid out over the remaining lease terms, which range from several months to approximately 5 years.

The following table illustrates the anticipated costs by major categories (in millions):
| Description            | ** ** | **Estimated Range** | ** ** |
|------------------------|------------|--------------------------|------------|
| Cash charges:          |       |                     |       |   |   |   |   |
| Employee severance     |       | $                        | 1.4        |   | to |   | $ | 1.7 |   |
| Facilities leases      |       | 2.0                      |       | to |   | 2.7 |   |
| Grant reimbursement    |       | 2.8                      |       | to |   | 3.6 |   |
| Total cash charges     |       | 6.2                      |       | to |   | 8.0 |   |
|                   |       |                     |       |   |   |   |   |
| Non-cash  charges:     |       |                     |       |   |   |   |   |
| Fixed asset disposals  |       | 0.8                      |       | to |   | 1.0 |   |
| Total non-cash charges |       | 0.8                      |       | to |   | 1.0 |   |
|                   |       |                     |       |   |   |   |   |
| Total charges          |       | $                        | 7.0        |   | to |   | $ | 9.0 |   |

 

***SeniorSubordinated Notes Redemption***

On July 27, 2005, we acquired $6.2 million of our outstanding 9.25%Senior Subordinated Notes (the Notes) due 2006 through open market purchases.

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**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

##### **General**

References in this reportto “we”, “our”, “SITEL”, and the “Company” are to SITEL Corporation and itssubsidiaries, collectively.

Weare a leading global provider of outsourced customer support services. Wespecialize in the design, implementation, and operation of multi-channelcontact center solutions. We support the customer management strategies oflarge and medium size corporations in North America, Europe, Asia Pacific, andLatin 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 in-house contact centers. We serve clients primarily in the automotive, consumer, financial services,insurance, technology, telecommunications and ISP, media services, andutilities sectors.

In Management’sDiscussion and Analysis, we provide information about our general businessrisks, critical accounting policies and estimates, results of operations,financial condition and liquidity, and certain other matters affecting ouroperating results for the periods covered by this report.

As described in Note 2 of the consolidated condensed financialstatements, SITEL Corporation has restated its previously filed consolidatedfinancial statements as of June 30, 2005 and December 31, 2004, and for thethree and six month periods ended June 30, 2005 and 2004 included in itsQuarterly Report on Form 10-Q for the quarter ended June 30, 2005, which wasfiled with the Securities and Exchange Commission on August 9, 2005.  We identified errors in our financialstatements related to accounting irregularities identified at ourBrazilian subsidiary including, interestand penalties on unpaid tax obligations; deferred recognition of expenses;errors in revenue recording; intentional falsification of financial results;and intentional misclassification of recorded amounts.

We also recordedother adjustments that were previously deemed immaterial.

Asa result of the errors referred to above, the net income (loss) for the sixmonth period ended June 30, 2005 and 2004 was overstated by $1.5 million and$1.0 million, respectively, and $0.6 million and $0.3 million for the threemonth period ended June 30, 2005 and 2004, respectively.

As you read thisdiscussion and analysis, refer to our Consolidated Condensed Statements ofOperations, which present the results of our operations for the three and sixmonth periods ended June 30, 2005 and 2004, and are summarized on the followingpages. We analyze and explain the differences between periods for thecomponents of operations in the following sections. Our analysis is importantin making decisions about your investment in SITEL Corporation.

During 2004, we initiateda profit improvement plan comprised of a set of initiatives.  These initiatives include a plan torationalize underutilized facilities, eliminate losses from business units thatare underperforming, right size support functions to better utilize human andphysical assets, reduce and further leverage IT and telecommunication costs,and improve the operating performance of all of our facilities through enhancedefficiency. We will continue to focus on our performance-based pricinginitiatives, invoice and contract management, and statement of work changecontrols.

**SubsequentEvents**

***Restructuring***

During 2004, we initiated a profit improvement plan comprised of a set of initiatives. One of the initiatives was cost reduction.

On July 7, 2005, in continuation of the previously announced profit improvement plan, we committed to additional actions to reduce ongoing operating expenses, consolidate facilities, and reduce our workforce. The additional actions include closing and consolidating certain facilities in Northern Europe and reducing net headcount by a total of approximately 60 employees. We expect approximately 20 positions will be reduced by attrition and the remainder by severance. As a result of the facility closures, we will no longer be able to maintain certain minimum employment levels required to retain government grants received and that were recorded as a reduction of operating expenses in previous periods. Consequently, we will record a charge to establish a liability for the obligation to repay such amounts. The actions also include disposing of certain capital equipment. We expect to complete these activities by the end of fiscal year 2005.

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In connection with these actions, we estimate that we will record a total of $7.0 million to $9.0 million of costs. We expect a majority of the charge to be recognized in the third quarter of fiscal year 2005 with the remainder recorded by the end of fiscal year 2005. The majority of the severance costs are expected to be paid out during our fourth quarter of fiscal year 2005, and the facilities costs are expected to be paid out over the remaining lease terms, which range from several months to approximately 5 years.

 The following table illustrates the anticipated costs by major categories (in millions):
| Description            | ** ** | **Estimated Range** | ** ** |
|------------------------|------------|--------------------------|------------|
| Cash charges:          |       |                     |       |   |   |   |   |
| Employee severance     |       | $                        | 1.4        |   | to |   | $ | 1.7 |   |
| Facilities leases      |       | 2.0                      |       | to |   | 2.7 |   |
| Grant reimbursement    |       | 2.8                      |       | to |   | 3.6 |   |
| Total cash charges     |       | 6.2                      |       | to |   | 8.0 |   |
|                   |       |                     |       |   |   |   |   |
| Non-cash  charges:     |       |                     |       |   |   |   |   |
| Fixed asset disposals  |       | 0.8                      |       | to |   | 1.0 |   |
| Total non-cash charges |       | 0.8                      |       | to |   | 1.0 |   |
|                   |       |                     |       |   |   |   |   |
| Total charges          |       | $                        | 7.0        |   | to |   | $ | 9.0 |   |

 

***SeniorSubordinated Notes Redemption***

OnJuly 27, 2005, we acquired $6.2 million of our outstanding 9.25% SeniorSubordinated Notes (the Notes) due 2006 through open market purchases.

##### **General BusinessRisks, Critical Accounting Policies and Estimates**

**General BusinessRisks**

Ourbusiness success depends on our ability to efficiently deploy our human andcapital resources in the delivery of services to our clients. Consequently, theneeds of our clients may significantly impact our results of operations,financial condition, and liquidity.

Ourresults of operations and operating cash flows may vary with periodic wins,expansions, and losses of client contracts and with changes in the scope ofclient requirements. Our******top20 clients accounted for 67.5% and 66.9% of our revenue for the three-month periodsended June 30, 2005 and 2004, respectively, and 68.1% and 66.9% for thesix-month periods ended June 30, 2005 and 2004, respectively, and include multiple independently managed businessunits within the client’s affiliated group. Hewlett-Packard Company business units were responsible for 11.9% and 11.0% ofour revenue for the three-month period ended June 30, 2005 and 2004,respectively, and 12.1% and 11.2% for the six-month period ended June 30, 2005and 2004, respectively.  General MotorsCorporation (General Motors) business units were responsible for 11.8% and 16.0% of our revenue for the three-monthperiods ended June 30, 2005 and 2004, respectively, and 12.0% and 16.7% for thesix-month periods ended June 30, 2005 and 2004, respectively. On April 21, 2004, we announcedthe signing of a new contract with General Motors to continue to providecustomer support services for General Motors’ North American Vehicle Sales,Service, and Marketing Group through December 31, 2005. An existing agreement underwhich we supported OnStar operations terminated effective June 22, 2004.  We did not have any other clients undercommon control that generated more than 10% of our revenue for the periodspresented.  The financial failure of any of these clients or theloss of any or all of their business could have an adverse impact on ouroperating results.

Ourliquidity, including our ability to comply with restrictive debt covenants, maybe adversely affected if we were to lose a significant client or as a result ofsignificant changes in client demand if we are unable to efficiently re-deployour human and capital resources.

Inthe following sections, we also discuss the importance of our criticalaccounting policies and the use of accounting estimates, and their potentialimpacts on our results of operations.

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**Critical Accounting Policies andEstimates**

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 thefollowing to be critical accounting policies because they are the mostimportant to the portrayal of our results of operations and financialcondition, and they require management’s most difficult, subjective, or complexjudgments:

***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.Accordingly, amounts billed but not earned under these contracts are excludedfrom revenue and included in deferred revenue and other in the consolidatedbalance sheet. Revenue for services performed under certain collection serviceagreements is recognized as the related consumer debts are collected and iscalculated based upon a percentage of cash collected or other agreed uponcontractual parameters.

***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 statements of operations, whichwould 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 generally range from 2 to25 years. We amortize leasehold improvements and assets under capitalleases on a straight-line basis over the shorter of the lease term or theestimated useful life of the asset. If the actual useful lives of these assetsare less than the estimated depreciable lives, we would record additionaldepreciation expense or losses on disposal to the extent the net book value ofsuch 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 significantchange in the extent or manner in which long-lived assets are being used or inits physical 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, ormore frequently 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 having

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goodwill is greater thantheir estimated fair value, we will be required to take additional goodwillimpairment charges. We are required to make certain assumptions and estimatesregarding the fair value of goodwill when assessing for impairment. Changes inthe fact patterns underlying such assumptions and estimates could ultimatelyresult in the recognition of additional impairment losses.

***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 thedeferred tax items reverse. To the extent that we believe that recovery is notlikely, we establish a valuation allowance to reduce the deferred tax assets tothe amount that is more likely than not to be realized. The valuation allowanceis based 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 workers’ compensation and health care claims for eligibleparticipating employees, subject to certain deductibles and limitations. Thecosts include an estimate of expected settlements on pending claims and aprovision for claims incurred but not reported. These estimates are based onour assessment of potential liability using an analysis of availableinformation with respect to pending claims, historical experience, and currentcost trends. Actual claims results could differ from these estimates.

***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.

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**Results of Operations for the Three and Six MonthPeriods Ended June 30, 2005 Compared with the Same Periods of 2004**

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.

**Componentsof Operations**

The following tablesummarizes our statements of operations data on a percentage-of-revenue basis.
| ** **                                            | ** ** | **Three Months Ended June 30,** | ** **   | **Six Months Ended June 30,** | ** **  |
|-------------------------------------------------------|------------|-----------------------------------------------------|--------------|---------------------------------------------------|-------------|
| ** **                                            | ** ** | **2005**                                            | ** **   | **2004**                                          | ** **  | **2005** | ** ** | **2004** | ** ** |
| ** **                                            | ** ** | **$**                                               | ** **   | **%**                                             | ** **  | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                            | ** ** | **(As restated)**                              | ** **   | **(As restated)**                            | ** **  |
| ** **                                            | ** ** | **(in thousands)**                             | ** **   | **(in thousands)**                           | ** **  |
| **Revenues**                                          |       | $                                                   | 251,810      | *** ***                                      | ***100.0*** | ***%*** | $ | 239,897 | *** *** | ***100.0*** | ***%*** | $ | 502,702 | *** *** | ***100.0*** | ***%*** | $ | 483,924 | *** *** | ***100.0*** | ***%*** |
|                                                  |       |                                                |         |                                              |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Direct labor and telecommunications  expenses         |       | 153,640                                             |         | ***61.0***                                        | ***%***     | 142,982 |   | ***59.6*** | ***%*** | 306,090 |   | ***60.9*** | ***%*** | 287,065 |   | ***59.3*** | ***%*** |
| Subcontracted and other  services expenses            |       | 12,881                                              |         | ***5.1***                                         | ***%***     | 13,022 |   | ***5.4*** | ***%*** | 25,761 |   | ***5.1*** | ***%*** | 25,837 |   | ***5.3*** | ***%*** |
| Operating, selling and administrative  expenses       |       | 80,897                                              |         | ***32.1***                                        | ***%***     | 76,843 |   | ***32.0*** | ***%*** | 161,136 |   | ***32.1*** | ***%*** | 154,362 |   | ***31.9*** | ***%*** |
| Asset impairment and restructuring  expenses, net     |       | (2,609                                              | )            | ***-1.0***                                        | ***%***     | — |   | ***0.0*** | ***%*** | (2,609 | ) | ***-0.5*** | ***%*** | — |   | ***0.0*** | ***%*** |
| **Operating income**                                  |       | 7,001                                               | *** *** | ***2.8***                                         | ***%***     | 7,050 | *** *** | ***2.9*** | ***%*** | 12,324 | *** *** | ***2.5*** | ***%*** | 16,660 | *** *** | ***3.4*** | ***%*** |
|                                                  |       |                                                |         |                                              |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                      |       | (3,258                                              | )            | ***-1.3***                                        | ***%***     | (3,327 | ) | ***-1.4*** | ***%*** | (6,420 | ) | ***-1.3*** | ***%*** | (6,777 | ) | ***-1.4*** | ***%*** |
| Interest income                                       |       | 140                                                 | *** *** | ***0.1***                                         | ***%***     | 122 | *** *** | ***0.1*** | ***%*** | 260 | *** *** | ***0.1*** | ***%*** | 240 | *** *** | ***0.0*** | ***%*** |
| Equity in earnings  (loss) of affiliates              |       | 395                                                 | *** *** | ***0.2***                                         | ***%***     | 77 | *** *** | ***0.0*** | ***%*** | 288 | *** *** | ***0.1*** | ***%*** | 70 | *** *** | ***0.0*** | ***%*** |
| Other expense, net                                    |       | (21                                                 | )            | ***0.0***                                         | ***%***     | (122 | ) | ***-0.1*** | ***%*** | (31 | ) | ***0.0*** | ***%*** | (382 | ) | ***-0.1*** | ***%*** |
| **Income before income taxes and minority  interest** | ** ** | 4,257                                               | ** **   | ***1.7***                                         | ***%***     | 3,800 | ** ** | ***1.6*** | ***%*** | 6,421 | ** ** | ***1.3*** | ***%*** | 9,811 | ** ** | ***2.0*** | ***%*** |
|                                                  |       |                                                |         |                                              |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Income tax expense                                    |       | 1,380                                               | *** *** | ***0.5***                                         | ***%***     | 1,362 | *** *** | ***0.6*** | ***%*** | 2,638 | *** *** | ***0.5*** | ***%*** | 3,077 | *** *** | ***0.6*** | ***%*** |
| Minority interest                                     |       | 305                                                 | *** *** | ***0.1***                                         | ***%***     | 208 | *** *** | ***0.1*** | ***%*** | 663 | *** *** | ***0.1*** | ***%*** | 420 | *** *** | ***0.1*** | ***%*** |
| **Net income**                                        |       | $                                                   | 2,572        | *** ***                                      | ***1.0***   | ***%*** | $ | 2,230 | *** *** | ***0.9*** | ***%*** | $ | 3,120 | *** *** | ***0.6*** | ***%*** | $ | 6,314 | *** *** | ***1.3*** | ***%*** |

 

# **Three Months Ended June 30, 2005 Compared to theSame Period of 2004**

***Revenue***

Revenueincreased $11.9 million, or 5.0%, in the three months ended June 30, 2005compared to the same period of 2004. The changes in revenue by geographicregion are shown in the following table:
| Three months            | ** ** | ** **             | ** ** | ** **             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------|------------|------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| **Ended June 30,** | ** ** | **2005**               | ** ** | **2004**               | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                   | ** ** | **(As restated)** | ** ** | **(As restated)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **(in millions)** | ** ** |
|                         |       |                   |       |                   |       |       |       |       |       |
| North America                | ** ** | **$**                  | **123.6**  |                   | $          | 123.7      |       | $          | (0.1       | ) | -0.1 | % |
| Europe                       | ** ** | **106.1**              |       | 99.4                   |       | 6.7        |       | 6.7        | %          |
| Asia Pacific                 | ** ** | **12.6**               |       | 9.8                    |       | 2.8        |       | 28.6       | %          |
| Latin America                | ** ** | **9.5**                |       | 7.0                    |       | 2.5        |       | 35.7       | %          |
| Totals                       | ** ** | **$**                  | **251.8**  |                   | $          | 239.9      |       | $          | 11.9       |   | 5.0 | % |

 

NorthAmerican revenue for the three months ended June 30, 2005 was consistent withthe same period in 2004.

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Europeanrevenue increased $6.7 million for the three months ended June 30, 2005compared to the same period in 2004. Higher sales volumes from new and existing clients resulted in anincrease in revenue of $2.3 million for the three months ended June 30, 2005compared to the same period in 2004.  Theweakening of the U.S. dollar versus the British pound and Euro accounted forthe remaining $4.4 million of the increase.

AsiaPacific revenue increased $2.8 million for the three months ended June 30, 2005compared to the same period in 2004. Higher sales volumes with existing clients resulted in an increase inrevenue of $1.5 million, while the weakening of the U.S. dollar versus the NewZealand and Australian dollars resulted in the remaining $1.3 million of theincrease.

Latin America revenueincreased $2.5 million for the three months ended June 30, 2005 compared to thesame period in 2004.  Higher salesvolumes from new and existing clients resulted in an increase in revenue of $1.3million, while the weakening of the US dollar versus the Brazilian Realresulted in the remaining $1.2 million of the increase.

***Direct Labor andTelecommunications Expenses***

Directlabor and telecommunications expenses include the compensation of our customerservice professionals and their first line supervisors and telephone usageexpenses directly related to the production of revenue.

Directlabor and telecommunications expenses as a percentage of revenue can vary basedon the nature of the contract, the nature of the work, and the market in whichthe services are provided. Accordingly, direct labor and telecommunicationsexpenses as a percentage of revenue can vary, sometimes significantly, fromperiod to period.

Directlabor and telecommunications expenses increased $10.7 million, or 7.5%, for thethree months ended June 30, 2005 compared to the same period of 2004.  As a percentage of revenue, direct labor andtelecommunications expenses increased to 61.0% for the three monthsended June 30, 2005 compared to 59.6% in same period in 2004.  During thethree months ended June 30, 2004, we recorded a benefit from the refund of $1.3million of payroll tax overpayments paid in a prior year as a reduction ofdirect labor and telecommunications expenses. Excluding the impact of the payroll tax refund, direct labor andtelecommunications expenses as a percentage of revenue was 60.1% for thethree months ended June 30, 2004.Theincrease was primarily the result of higher ramp-up costs of new clientprograms, particularly in Europe, reduced pricing on a major client contract,and a change in the mix of services provided in the three months ended June 30,2005 compared to the same period in 2004.

***Subcontracted and Other ServicesExpenses***

Subcontractedand other services expenses included services provided to clients throughsubcontractors and other out-of-pocket expenses.  Subcontracted and other services expensesremained consistent for the three months ended June 30, 2005 compared to thesame period of 2004.

Subcontractedexpenses for services provided by our India joint venture for the three monthsended June 30, 2005 and 2004 were $4.3 million and $3.1 million, respectively.

***Operating, Selling andAdministrative Expenses***

Operating,selling and administrative expenses represent expenses incurred to directlysupport and manage the business, including costs of management, administration,technology, facilities, depreciation and amortization, maintenance, sales andmarketing, and client support services.

Operating,selling and administrative expenses increased $4.1 million, or 5.3%, for thethree months ended June 30, 2005 compared to the same period of 2004.  The weakening of the US dollar compared tothe primary currency in the jurisdictions that we operate accounted for anincrease of $2.5 million in operating, selling and administrative expenses forthe three months ended June 30, 2005 compared to the same period in 2004.  As a percentage of revenue, operating,selling and administrative expenses were consistent at 32.1% for the threemonths ended June 30, 2005 compared to 32.0% for the same period in 2004.

***AssetImpairment and Restructuring Expenses, net***

During the three monthsended June 30, 2005, we decided to open a previously closed leased facility totemporarily accommodate new business.  Ina prior year, we had recorded a restructuring liability for the futurescheduled undiscounted lease payments for the closed facility. As a result ofthe decision to reopen the facility, we reversed the remaining $3.2 millionrestructuring liability. This reversal was partially offset by severancerelated to previously announced facility closures, resulting in a net reversalof $2.6 million.

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***Operating Income***

Operating income remained consistent for the threemonths ended June 30, 2005 compared to the same period of 2004.

***Interest Expense***

Interest expense remained consistent forthe three months ended June 30, 2005 compared to the same period in 2004.

***Interest Income***

Interest income remained consistent for the three months ended June 30,2005 compared to the same period in 2004.

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

Equity in earnings (loss) of affiliates increased$0.3 million for the three months ended June 30, 2005 compared to the sameperiod in 2004 primarily due to higher revenue along with lower training andramp-up costs resulting in higher operating margins from one of our jointventures.

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

Other income (expense), net decreased $0.1 millionfor the three months ended June 30, 2005 compared to the same period in 2004primarily as a result of fluctuations in foreign currency remeasurement gains(losses) arising from monetary assets and liabilities denominated in currenciesother than a business unit’s functional currency.

***Income Tax Expense***

Incometax expense as a percentage of income before income taxes and minority interestwas 32.4% and 35.8% for the three-months ended June 30, 2005 and 2004,respectively. The difference betweenthese rates and the statutory U.S. Federal rate of 35% was primarily due to theutilization of net operating loss carryforwards in certain subsidiaries forwhich a full valuation allowance had previously been provided against the netdeferred tax asset and due to income tax expense incurred in certain non-USsubsidiaries.

**SixMonths Ended June 30, 2005 Compared to the Same Period of 2004**

***Revenue***

Revenue increased $18.8 million, or 3.9%, for thesix months ended June 30, 2005 compared to the same period of 2004. The changesin revenue by geographic region are shown in the following table:
| Six months              | ** ** | ** **             | ** ** | ** **             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------|------------|------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| **Ended June 30,** | ** ** | **2005**               | ** ** | **2004**               | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                   | ** ** | **(As restated)** | ** ** | **(As restated)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **(in millions)** | ** ** |
|                         |       |                   |       |                   |       |       |       |       |       |
| North America                | ** ** | **$**                  | **246.6**  |                   | $          | 252.9      |       | $          | (6.3       | ) | -2.5 | % |
| Europe                       | ** ** | **213.9**              |       | 197.9                  |       | 16.0       |       | 8.1        | %          |
| Asia Pacific                 | ** ** | **24.9**               |       | 19.5                   |       | 5.4        |       | 27.7       | %          |
| Latin America                | ** ** | **17.3**               |       | 13.6                   |       | 3.7        |       | 27.2       | %          |
| Totals                       | ** ** | **$**                  | **502.7**  |                   | $          | 483.9      |       | $          | 18.8       |   | 3.9 | % |

 

North American revenue decreased $6.3 million or2.5% for the six months ended June 30, 2005 compared to the same period in 2004primarily due to a $24.9 million decrease in customer care, customeracquisition and risk management services offset by a $18.1 million increase intechnical support services.  Theweakening of the U.S. dollar versus the Canadian dollar offset $0.6 million ofthe decrease.

European revenue increased $16.0 million or 8.1%for the six months ended June 30, 2005 compared to the same period in2004.  Higher sales volumes from new andexisting clients resulted in an increase in revenue of $6.9 million for the sixmonths ended June 30, 2005 compared to the same period in 2004.  The weakening of the U.S. dollar versus theBritish pound and Euro accounted for the remaining $9.1 million of theincrease.

Asia Pacific revenue increased $5.4 or 27.7%million for the six months ended June 30, 2005 compared to the same period in2004.  Higher sales volume with existingclients resulted in an increase in revenue of $3.6 million, while the weakeningof the U.S. dollar versus the New Zealand and Australian dollars resulted inthe remaining $1.8 million of the increase.

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Latin America revenue increased $3.7 million or 27.2% for the sixmonths ended June 30, 2005 compared to the same period in 2004.  Higher sales volumes from new and existingclients resulted in an increase in revenue of $2.2 million, while the weakeningof the US dollar versus the Brazilian Real accounted for the remaining $1.6million of the increase.

***Direct Labor and TelecommunicationsExpenses***

Direct labor and telecommunications expensesincreased $19.0 million, or 6.6%, for the six months ended June 30, 2005compared to the same period of 2004.  Asa percentage of revenue, direct labor and telecommunications expenses increasedto 60.9% for the six months ended June 30, 2005 compared to 59.3% insame period in 2004.  During the six months ended June 30, 2004, werecorded a benefit from the refund of $1.3 million of payroll tax overpaymentspaid in a prior year as a reduction of direct labor and telecommunicationsexpenses.  Excluding the impact of thepayroll tax refund, direct labor and telecommunications expenses as apercentage of revenue was 59.6% for the six months ended June 30, 2004. Theincrease was primarily the result of higher ramp-up costs of new clientprograms, particularly in Europe, reduced pricing on a major client contract,and a change in the mix of services provided in the six months ended June 30,2005 compared to the same period in 2004.

***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 remained consistent for thesix months ended June 30, 2005 compared to the same period of 2004.

Subcontracted expenses for services provided byour India joint venture for the six months ended June 30, 2005 and 2004 were$8.3 million and $6.5 million, respectively.

***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 $6.8 million, or 4.4%, for the six months ended June 30, 2005compared to the same period in 2004.  Theweakening of the U.S. dollar compared to the currencies in the primaryjurisdictions that we operate in accounted for an increase of $4.9 million forthe six months ended June 30, 2005 compared with the same period in 2004.  As a percentage of revenue, operating,selling and administrative expenses increased to 32.1% for the six months endedJune 30, 2005 compared to 31.9% for the same period of 2004.

***AssetImpairment and Restructuring Expenses, net***

During the six months ended June 30, 2005, we decided to open apreviously closed leased facility to temporarily accommodate new business.  In a prior year, we had recorded arestructuring liability for the future scheduled undiscounted lease paymentsfor the closed facility. As a result of the decision to reopen the facility, wereversed the remaining $3.2 million restructuring liability. This reversal waspartially offset by severance related to previously announced facilityclosures, resulting in a net reversal of $2.6 million.

***Operating Income***

Operating incomedecreased $4.3 million for the six months ended June 30, 2005 due to thefactors discussed above.

***Interest Expense***

Interest expense decreased $0.4 million, or 5.3%,for the six months ended June 30, 2005 compared to the same period in 2004, asa result of lower borrowings.

***Interest Income***

Interest income remained consistent for the first quarter of 2005compared to the same period in 2004.

***Equity in Earnings (Losses) ofAffiliates***

Equity in earnings(losses) of affiliates increased by $0.2 million for the six months ended June30, 2005 as compared to the same period in 2004 primarily due to higher revenue along with lower training and ramp-upcosts resulting in higher operating margins from one of our joint ventures.

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

Other income (expense), net decreased $0.4 millionfor the six months ended June 30, 2005 compared to the same period in2004.  The decrease was primarily as aresult of fluctuations in foreign currency remeasurement gains (losses) arisingfrom monetary assets and liabilities denominated in currencies other than abusiness unit’s functional currency.

***Income Tax Expense***

Incometax expense as a percentage of income before income taxes and minority interestwas 41.1% and 31.4% for the six months ended June 30, 2005 and 2004,respectively. The difference betweenthese rates and the statutory U.S. Federal rate of 35% was primarily due to theutilization of net operating loss carryforwards in certain subsidiaries forwhich a full valuation allowance had previously been provided against the netdeferred tax asset and due to income tax expense incurred in certain non-USsubsidiaries.

**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 provides 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.
| Six Months Ended June 30, | ** ** | **2005**                | ** ** | **2004**               | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **(As restated)**  | ** ** | **(As restated)** | ** ** |
| ** **                                    | ** ** | **(in thousands)** | ** ** |
| **Net  cash flows from:**                     |       |                    |       |                   |       |
| Operating activities                          |       | $                       | 3,720      |                   | $          | 30,835 |   |
| Investing activities                          |       | (11,262                 | )          | (11,043                | )          |
| Financing  activities                         |       | 8,145                   |       | (279                   | )          |
|                                               |            |                         |            |                        |            |  |  |

 

**2005**

**In the six months ended June 30, 2005, cash provided by operatingactivities resulted primarily from income before depreciation and amortization,and other charges of $17.8 million and a $4.0 million increase in otherliabilities, partially offset by a $12.2 million increase in trade accountsreceivable and other assets and a $5.9 million decrease in trade accountspayable.**

**In the six months ended June 30, 2005, we used cash forinvesting activities to purchase $14.1 million of property and equipment and$0.5 million for dividends paid to a minority interest shareholder.  This was partially offset by $3.3 million inproceeds from the cash surrender value of life insurance.**

**In the six months ended June 30, 2005, cash provided byfinancing activities resulted in net borrowings of debt and other obligationsof $8.1 million.**

**2004**

Inthe six months ended June 30, 2004, cash provided by operating activitiesresulted primarily from income before depreciation and amortization, and othercharges of $24.6 million and $6.0 million of increases in trade accountspayable and other liabilities, and a $1.0 million decrease in other assetsoffset by increases in trade accounts receivable of $0.7 million.

Inthe six months ended June 30, 2004,we used cash for investing activities to purchase $10.6 million of property andequipment and used $0.8 million to increase investments in affiliates, offsetpartially by receipts on notes receivable of $0.4 million.

In the six months ended June 30,2004, cash used in financingactivities resulted in net repayments of debt and other obligations of $0.4million offset by cash receipts from the reissuances of treasury stock.

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**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.

We have a three-year $50 million revolving creditfacility that expires in December 2005. The credit facility is secured by accounts receivable in the UnitedStates, Canada and the United Kingdom. We intend to utilize the facility, as needed, for ongoing workingcapital requirements and general corporate purposes. At June 30, 2005, we had$40.7 million of available borrowings under the credit facility, and we were incompliance with all financial covenants of the facility.

Our 9.25% SeniorSubordinated Notes (the Notes) are due in March 2006.  As the Notes are due within one year, theCompany has reclassified the remaining $90.0 million of outstanding bonds to acurrent liability as of June 30, 2005. We are currently in the process ofrefinancing the Notes and our revolving credit facility.

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 thirdquarter of 2005 to be in the range of $8 million to $12 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, 2004.  These contractual obligations and commitmentsinclude:

·            $90.0 million of Senior Subordinated Notes asshown in our consolidated condensed balance sheet at June 30, 2005,

·            $28.0 million of revolving credit facility andother local short-term debt as shown in our consolidated condensed balancesheet at June 30, 2005,

·            $1.0 million of long-term debt, excluding currentportion as shown in our consolidated condensed balance sheet at June 30, 2005,

·            $10.0 million of capital lease obligations asshown in our consolidated condensed balance sheet at June 30, 2005, and

·            operating lease obligations for property andcertain equipment under noncancelable operating lease arrangements, whichexpire at various dates through 2018.

**Off-Balance Sheet Arrangements**

Wedo not have any obligations that meet the definition of an off-balance sheetarrangement and that have or are reasonably likely to have a material effect onour consolidated financial statements.

**OtherMatters**

***QuarterlyResults 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,

·                  revenue mix,

·                  the timing of additional operating, selling, andadministrative expenses to support new 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’ outsourced customer management activities. Inaddition, our business generally can be slower in the third quarter due tosummer holidays in Europe.

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***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.

***Related PartyTransactions***

We have made minority interest investments forbusiness and strategic purposes through the purchase of voting common andpreferred stock of companies.  Theseinvestments are included in investments in affiliates in consolidated financialstatements.  As of June 30, 2005 andDecember 31, 2004, the investment in our India joint venture was approximately$4.0 million and $4.1 million, respectively. Subcontracted services provided byour India joint venture for the three months ended June 30, 2005 and 2004 were$4.3 million and $3.1 million, respectively, and for the six months ended June30, 2005 and 2004 were $8.3 million and $6.5 million, respectively and are includedin subcontracted and other services expenses in the accompanying consolidatedstatements of operations. The Company had payables to our India joint ventureof $3.5 million and $3.0 million at June 30, 2005 and December 31, 2004,respectively, which are included in trade accounts payable in the consolidatedfinancial statements.

As of June 30, 2005 andDecember 31, 2004, the investment in certain Latin America affiliates wasapproximately $12.9 million and $12.4 million, respectively. Of the investmentin certain Latin America affiliates, approximately $7.7 million is equitymethod goodwill. This equity method goodwill is not amortized.  Subcontracted services provided by our LatinAmerica joint ventures for the three and six month periods ended June 30, 2005and 2004 were not material.

***Recently IssuedAccounting Pronouncements***

In December 2004, theFinancial Accounting Standards Board (FASB) issued SFAS No. 123 (R), *Share-Based Payment*, (SFAS 123R). Thisstandard will require the cost of employee compensation paid with equityinstruments to be measured based on grant-date fair values with the costrecorded as compensation expense over the period during which the employee isrequired to perform service in exchange for the award (generally over the vestingperiod of the award). The proforma disclosures previously permitted underSFAS 123 no longer will be an alternative to financial statementrecognition. See “Stock-Based Compensation” in Note 1 to the consolidatedfinancial statements for the pro forma net income and net income per shareamounts, for the three and six month periods ended June 30, 2005 and 2004, asif we had used a fair-value-based method similar to the methods required underSFAS 123R to measure compensation expense for employee stock incentiveawards.  In March 2005, the Securitiesand Exchange Commission (SEC) issued Staff Accounting Bulletin(SAB) No. 107, which expressed the views of the SEC regarding theinteraction between SFAS 123R and certain SEC rules and regulations.SAB No. 107 provides guidance related to the valuation of share-basedpayment arrangements for public companies, including assumptions such asexpected volatility and expected term. In April 2005, the SEC approved a rule that delayed the effectivedate of SFAS 123R for public companies. As a result, SFAS 123R willbe effective for the Company in the first quarter of 2006 and will apply to allof our outstanding unvested share-based payment awards as of January 1,2006 and all prospective awards. Although we have not yet determined whether the adoption ofSFAS 123R will result in amounts that are similar to the current pro formadisclosures under SFAS 123, we are evaluating the requirements underSFAS 123R and expect the adoption to have a significant impact on our consolidatedstatements of income and net income per share.

In October 2004, TheAmerican Jobs Creation Act of 2004 (the Act) was signed into law. The Actcreates a temporary incentive for U.S. multinationals to repatriate accumulatedincome earned outside the U.S. In December 2004, the FASB issued FSP 109-2, *Accounting and Disclosure Guidance for the ForeignEarnings Repatriation Provision within the American Jobs Creation Act of 2004*(FSP109-2)*. *FSP 109-2 providesadditional time to companies beyond the financial reporting period of enactmentto evaluate the effects of the AJCA on their plans for repatriation of foreignearnings for purposes of applying SFAS 109, *Accountingfor Income Taxes*. The Company is currently evaluating therepatriation provisions of AJCA, which if implemented would affect our taxprovision and deferred tax assets and liabilities. Due to the complexity anduncertainty of applying the provisions of the Act, the income tax effects ofsuch repatriation cannot be reasonably estimated at this time.

**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.

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Ourfinancial statements are presented in U.S. dollars and can be impacted byforeign exchange fluctuations through both (i) translation risk, which is therisk that the financial statements for a particular period or as of a certaindate depend on the prevailing exchange rates of the various currencies againstthe U.S. dollar, and (ii) transaction risk, which is the risk that thecurrency 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 Senior Subordinated Notes and capital lease obligations are fixed, butrates on borrowings under our bank credit facility are variable. During thethree-month and six-month periods ended June 30, 2005, our average borrowingsunder our revolving credit facility were $14.6 million and $12.8 million,respectively.  Based on our projectedcash needs for the foreseeable future, we do not expect that our exposure tochanges in interest rates for these borrowings will have a material impact onour interest expense.

***Investment Risk***

We do not use derivative financial or commodity instruments.  Our financial instruments included cash andcash equivalents, accounts receivable, accounts payable, current and long-termdebt.  Our cash and cash equivalents,accounts receivable, accounts payable, and current debt balances are short-termin nature and do not expose us to material investment risk.  Our Senior Subordinated Notes had a bookvalue of $90 million at June 30, 2005 and December 31, 2004.

**Item 4. Controlsand Procedures**

Our management evaluated,with the participation of our Chief Executive Officer and our Chief FinancialOfficer, the effectiveness of our disclosure controls and procedures as of theend of the period covered by the Quarterly Report on Form 10-Q filed on August9, 2005. Based on that evaluation, our Chief Executive Officer and our ChiefFinancial Officer had concluded that our disclosure controls and procedureswere effective to ensure that information we are required to disclose inreports that we file or submit under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.  As a result of the subsequent discovery,discussed below, of a material weakness within our internal controls frameworkas it existed at June 30, 2005, our Chief Executive Officer and our ChiefFinancial Officer have concluded that our disclosure controls and procedureswere not effective to ensure that information we are required to disclose inreports that we file or submit under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms.

There was no change in our internal control over financial reportingthat occurred during the period covered by that Quarterly Report on Form 10-Qthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

We do not expect that our disclosure controls and procedures or ourinternal controls over financial reporting will prevent all error and all fraud.A control system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Further, the design of a control system must reflect the fact thatthere are resource constraints, and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within SITEL have been detected.

**Restatement**

Subsequently, during thefirst quarter of 2006, we identified a deficiency within our internal controlframework.  We determined that our previously reported consolidatedcondensed financial statements for the three and six months ended June 30, 2005and 2004 and our consolidated financial statements for the four years endedDecember 31, 2001 through December 31, 2004, required restatement. ThisForm 10-Q/A restates the June 30, 2005, interim financial statements for 

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the correction of theerror. Because the error resulted in the restatement of previously issuedfinancial statements, we determined the deficiency within our internal controlframework to be a material weakness.

Refer to Note 2 to theconsolidated condensed financial statements for further information regardingthis restatement.

**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 certaintransactions.  These include, forexample:  (i) indemnities to clientspertaining to claims based on our negligence or willful misconduct, and (ii)indemnities involving the accuracy of representations and warranties in certaincontracts.

From time to time, we areinvolved in litigation incidental to our business. We cannot predict theultimate outcome of such litigation with certainty, but management believes,after consultation with counsel, except for the items discussed below for thereasons mentioned therein, that the resolution of such matters will not have amaterial adverse effect on our consolidated financial position or results ofoperations.

*BankruptcyOP Computers SPA vs. SITEL Kingston Limited* (now known as Mitre Telesales Limited) wasfiled in April 2004 in the Court of Ivrea in Milan, Italy.  The receivers assert that Mitre, as a formersupplier to Olivetti, is required under Italian bankruptcy law to return €5,349,025(approximately $6.9 million) in payments Olivetti had allegedly paid Mitreduring a one-year “clawback” period, which allegedly runs from March 9, 1998until March 9, 1999, the alleged date Olivetti filed for receivership.  Mitre filed its Defence with the court inNovember 2004.  The Defence outlined thefacts and reasons why Mitre did not and should not reasonably have known ofOlivetti’s insolvent state during the time that Mitre was performing servicesfor Olivetti.  The first substantivehearing held in May 2005 was adjourned to November 2005.  The Company and its subsidiary MitreTelesales Limited are currently unable to predict the outcome or reasonablyestimate the possible loss, if any, or range of losses associated with thisclaim.

Two of our clients have received letters from time to time containingan offer to license and suggesting that the clients might be infringing certainpatents related to computerized telephonic voice response systems without thelicense. The clients have indicated that if any infringement occurred theclient would seek contractual indemnity from us. In such an event, we wouldexpect to seek contractual indemnity from certain of our vendors. Any suchcontractual indemnity we might obtain may not be sufficient to cover all of thecosts of investigating and resolving such matter. We might also seek a licenseunder 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 ourknowledge, no litigation has been initiated against our clients or usconcerning this matter. At this stage, due to the inherent uncertainties, weare unable to predict whether this matter may have a material adverse effect onour business or on our financial condition or results of operation.

**Item 4. Submission ofMatters to a Vote of Security Holders**

(a)          **Date and Type of Meeting**

The Company held its AnnualMeeting of Stockholders on May 12, 2005.

(b)       **Matters Voted Upon and Number ofVotes Cast**

There were 56,590,826shares of Common Stock represented at the meeting in person or by proxy. Oneproposal was presented to the stockholders for the election of two directorsfor three-year terms.  The voting on theproposal was as follows:

1.
|                  | ** ** | **FOR**    | ** ** | **WITHHELD** | ** ** |
|------------------|------------|------------|------------|--------------|------------|
| Rohit M. Desai   |       | 55,229,111 |       | 1,361,715    |       |
| Nigel T. Gourlay |       | 55,393,171 |       | 1,197,655    |       |

 

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**Item 5. Other Information**

**Forward-Looking Statements**

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 Commission formore information on these factors.

**Item 6. Exhibits**

(a)          Exhibits:
| Exhibit No. | ** ** | ** **                                                                                                              |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------|
| 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 |

 

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### **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:   September 13, 2006 | By     | /s/    | *Jorge  A. Celaya*            | * * |
| ** **                                |   |   | **Jorge  A. Celaya**          |     |
| * *                                  |   |   | *Chief  Financial Officer*    |     |
|                                      |   |   | (Duly Authorized  Officer and |     |
|                                      |   |   | Principal  Financial Officer) |     |

 

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**EXHIBITINDEX**
| Exhibit No. | ** ** | ** **                                                                                                               |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                                                                               |
| 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  |

 

31

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