**UNITED STATES****SECURITIESAND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-Q**

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

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

| 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 Telephone Number, Including Area Code)

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

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

 

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

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

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

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12-2 of the Exchange Act).YES  o   NO  x

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

 

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**SITELCORPORATION AND SUBSIDIARIESTABLE OF CONTENTS**
| **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  5                                 | — | Other  Information                                                                          |   |   |
|                                    |   |                                                                                        |   |   |
| Item 6                                  | — | Exhibits                                                                                    |   |   |
|                                    |   |                                                                                        |   |   |
| Signature                               |   |                                                                                        |
|                                    |   |                                                                                        |
| Exhibit Index                           |   |                                                                                        |

 

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**Item 1. Financial Statements**

**SITELCORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS(UNAUDITED)**(inthousands, except per share data)
| ** **                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                            | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| * *                                              |       | * *                         | * *   | * *                       | * *   | * * | * * | * * | * * |
| **Revenue**                                           | ** ** | $                                | 278,335    |                           | $          | 251,810 |   | $ | 553,419 |   | $ | 502,702 |   |
| ** **                                            |       |                             |       |                           |       |   |   |   |   |
| **Operating (income) expenses:**                      |       |                             |       |                           |       |   |   |   |   |
| Direct labor and  telecommunications expenses         |       | 178,732                          |       | 153,640                        |       | 350,585 |   | 306,090 |   |
| Subcontracted  and other services expenses            |       | 10,019                           |       | 12,881                         |       | 18,938 |   | 25,761 |   |
| Operating,  selling and administrative expenses       |       | 84,876                           |       | 80,897                         |       | 170,130 |   | 161,136 |   |
| Gain on  settlement                                   |       | (6,000                           | )          | —                         |       | (6,000 | ) | — |   |
| Restructuring  expenses, net                          |       | —                           |       | (2,609                         | )          | (358 | ) | (2,609 | ) |
| Total operating  expenses                             |       | 267,627                          |       | 244,809                        |       | 533,295 |   | 490,378 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| **Operating income**                                  |       | 10,708                           |       | 7,001                          |       | 20,124 |   | 12,324 |   |
| ** **                                            |       |                             |       |                           |       |   |   |   |   |
| **Other income (expense):**                           |       |                             |       |                           |       |   |   |   |   |
| Interest expense                                      |       | (2,150                           | )          | (3,258                         | )          | (5,846 | ) | (6,420 | ) |
| Interest income                                       |       | 107                              |       | 140                            |       | 186 |   | 260 |   |
| Equity in  earnings (loss) of affiliates, net         |       | 1,661                            |       | 395                            |       | 1,950 |   | 288 |   |
| Other income  (expense), net                          |       | 528                              |       | (21                            | )          | 609 |   | (31 | ) |
| Total other  income (expense), net                    |       | 146                              |       | (2,744                         | )          | (3,101 | ) | (5,903 | ) |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| **Income before income taxes and  minority interest** |       | 10,854                           |       | 4,257                          |       | 17,023 |   | 6,421 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Income tax expense                                    |       | 2,861                            |       | 1,380                          |       | 5,669 |   | 2,638 |   |
| Minority interest                                     |       | 558                              |       | 305                            |       | 1,269 |   | 663 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| **Net income**                                        | ** ** | $                                | 7,435      |                           | $          | 2,572 |   | $ | 10,085 |   | $ | 3,120 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| **Weighted average common shares  outstanding:**      |       |                             |       |                           |       |   |   |   |   |
| Basic                                                 |       | 74,379                           |       | 73,764                         |       | 74,271 |   | 73,750 |   |
| Diluted                                               |       | 75,419                           |       | 73,843                         |       | 75,134 |   | 74,090 |   |
| ** **                                            |       |                             |       |                           |       |   |   |   |   |
| **Earnings per share:**                               |       |                             |       |                           |       |   |   |   |   |
| Basic                                                 |       | $                                | 0.10       |                           | $          | 0.03 |   | $ | 0.14 |   | $ | 0.04 |   |
| Diluted                                               |       | $                                | 0.10       |                           | $          | 0.03 |   | $ | 0.13 |   | $ | 0.04 |   |

 

*See Notes to Consolidated Condensed FinancialStatements.*

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**SITELCORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED BALANCE SHEETS**(inthousands, except per share data)
| ** **                                                                                                                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                   | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                   | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                   |       |              |       |                  |       |
| **Current assets:**                                                                                                                          |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                    |       | $                 | 26,354     |                  | $          | 25,817 |   |
| Trade accounts receivable (net of allowance for  doubtful accounts of $2,599 and $1,710, respectively)                                       |       | 225,740           |       | 220,581               |       |
| Prepaid expenses and other assets                                                                                                            |       | 18,747            |       | 16,038                |       |
| Deferred income taxes                                                                                                                        |       | 19                |       | 666                   |       |
| Total current assets                                                                                                                         |       | 270,860           |       | 263,102               |       |
|                                                                                                                                         |       |              |       |                  |       |
| **Property and equipment, net**                                                                                                              |       | 74,436            |       | 74,411                |       |
|                                                                                                                                         |       |              |       |                  |       |
| **Other assets:**                                                                                                                            |       |              |       |                  |       |
| Goodwill                                                                                                                                     |       | 47,661            |       | 46,188                |       |
| Investment in affiliates                                                                                                                     |       | 18,795            |       | 17,155                |       |
| Other assets                                                                                                                                 |       | 9,944             |       | 10,380                |       |
| Deferred income taxes                                                                                                                        |       | 7,541             |       | 7,209                 |       |
| **Total assets**                                                                                                                             |       | $                 | 429,237    |                  | $          | 418,445 |   |
| ** **                                                                                                                                   |       |              |       |                  |       |
| **Liabilities  and Stockholders’ Equity**                                                                                               |       |              |       |                  |       |
| **Current liabilities:**                                                                                                                     |       |              |       |                  |       |
| Current debt                                                                                                                                 |       | $                 | 19,474     |                  | $          | 20,103 |   |
| Current portion of capital lease obligations                                                                                                 |       | 3,194             |       | 2,510                 |       |
| Trade accounts payable                                                                                                                       |       | 25,915            |       | 29,429                |       |
| Accrued wages, salaries and bonuses                                                                                                          |       | 56,853            |       | 53,441                |       |
| Accrued operating expenses                                                                                                                   |       | 46,067            |       | 57,193                |       |
| Deferred revenue and other                                                                                                                   |       | 7,809             |       | 8,434                 |       |
| Income taxes payable                                                                                                                         |       | 3,090             |       | 1,475                 |       |
| Deferred income taxes                                                                                                                        |       | 22                |       | —                |       |
| Total current liabilities                                                                                                                    |       | 162,424           |       | 172,585               |       |
| **Long-term debt and other liabilities:**                                                                                                    |       |              |       |                  |       |
| Long-term debt, excluding current portion                                                                                                    |       | 110,823           |       | 107,681               |       |
| Capital lease obligations, excluding current portion                                                                                         |       | 6,980             |       | 6,782                 |       |
| Other liabilities                                                                                                                            |       | 8,259             |       | 8,464                 |       |
| Total liabilities                                                                                                                            |       | 288,486           |       | 295,512               |       |
|                                                                                                                                         |       |              |       |                  |       |
| **Minority interests**                                                                                                                       |       | 5,816             |       | 4,547                 |       |
| ** **                                                                                                                                   |       |              |       |                  |       |
| **Stockholders’ equity:**                                                                                                               |       |              |       |                  |       |
|                                                                                                                                         |       |              |       |                  |       |
| Common stock, voting, $.001 par value 200,000,000  shares authorized, 75,122,599 and 74,757,729 shares issued and outstanding,  respectively |       | 75                |       | 75                    |       |
| Additional paid-in capital                                                                                                                   |       | 171,103           |       | 169,662               |       |
| Accumulated other comprehensive income                                                                                                       |       | 2,127             |       | (2,823                | )          |
| Accumulated deficit                                                                                                                          |       | (37,560           | )          | (47,645               | )          |
| Less treasury stock, at cost, 632,204 and 651,302  common shares, respectively                                                               |       | (810              | )          | (883                  | )          |
| Total stockholders’ equity                                                                                                              |       | 134,935           |       | 118,386               |       |
| **Total liabilities and  stockholders’ equity**                                                                                         |       | $                 | 429,237    |                  | $          | 418,445 |   |

 

*See Notesto Consolidated Condensed Financial Statements.*

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**SITELCORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)**(in thousands)
| ** **                                                                        | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
|                                                                              | * *   | * *                                     | * *   | * * | * * |
| **Cash  flows from operating activities:**                                        |       |                                         |       |   |   |
| Net income                                                                        |       | $                                            | 10,085     |   | $ | 3,120 |   |
| Adjustments to  reconcile net income to net cash flows from operating activities: |       |                                         |       |   |   |
| Restructuring expense, net                                                        |       | (358                                         | )          | (2,609 | ) |
| Depreciation and amortization                                                     |       | 16,028                                       |       | 18,138 |   |
| Loss on disposal of assets                                                        |       | (1                                           | )          | 102 |   |
| Provision for deferred income taxes                                               |       | 526                                          |       | (1,294 | ) |
| Equity in (earnings) loss of affiliates, net                                      |       | (1,950                                       | )          | (288 | ) |
| Minority interest in net income of consolidated  subsidiaries                     |       | 1,269                                        |       | 663 |   |
| Changes in operating assets and liabilities:                                      |       |                                         |       |   |   |
| Trade accounts receivable                                                         |       | 5,278                                        |       | (10,018 | ) |
| Other assets                                                                      |       | 894                                          |       | (2,157 | ) |
| Trade accounts payable                                                            |       | (4,379                                       | )          | (5,939 | ) |
| Other liabilities                                                                 |       | (11,207                                      | )          | 4,002 |   |
| Net cash flows  from operating activities                                         |       | 16,185                                       |       | 3,720 |   |
|                                                                              |       |                                         |       |   |   |
| **Cash  flows from investing activities:**                                        |       |                                         |       |   |   |
| Purchases of  property and equipment                                              |       | (11,602                                      | )          | (14,126 | ) |
| 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                                 |       | 134                                          |       | 40 |   |
| Net cash flows  from investing activities                                         |       | (11,468                                      | )          | (11,262 | ) |
|                                                                              |       |                                         |       |   |   |
| **Cash  flows from financing activities:**                                        |       |                                         |       |   |   |
| Borrowings on  debt                                                               |       | 314,568                                      |       | 126,984 |   |
| Repayments of  debt                                                               |       | (315,621                                     | )          | (117,158 | ) |
| Repayments of  capital lease obligations                                          |       | (1,666                                       | )          | (1,747 | ) |
| Proceeds from  exercise of stock options                                          |       | 1,099                                        |       | 66 |   |
| Net cash flows  from financing activities                                         |       | (1,620                                       | )          | 8,145 |   |
| Effect of  exchange rates on cash                                                 |       | (2,560                                       | )          | (363 | ) |
| **Net  increase in cash**                                                         |       | 537                                          |       | 240 |   |
| **Cash  and cash equivalents, beginning of period**                               |       | 25,817                                       |       | 29,130 |   |
| **Cash  and cash equivalents, end of period**                                     |       | $                                            | 26,354     |   | $ | 29,370 |   |
| ** **                                                                        |       |                                         |       |   |   |
| **Non-cash  investing and financing activities:**                                 |       |                                         |       |   |   |
| Capital lease  obligations incurred                                               |       | $                                            | 1,712      |   | $ | 1,240 |   |

 

*See Notesto Consolidated Condensed Financial Statements.*

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

**Note1. Basis of Consolidation and Presentation**

***General***

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

 

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

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

***Use of Accounting Estimates***

Management makesestimates and assumptions when preparing financial statements under U.S.generally accepted accounting principles that affect our reported amounts of assets and liabilities at the dates of thefinancial statements, our disclosure of contingent assets and liabilities atthe dates of the financial statements, and our reported amounts of revenue andexpenses during the reporting periods. These estimates involve judgments withrespect to, among other things, future economic factors that are difficult topredict and are beyond management’s control. As a result, actual amounts coulddiffer from these estimates.

 

***Recently IssuedAccounting Pronouncements***

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

 

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

***Stock-BasedCompensation***

Effective January1, 2006, we adopted the provisions of SFAS Statement No. 123R, *Shared-Based Payment,*(SFAS 123R).  In conjunction with the adoption of SFAS 123Ron January 1, 2006, we also adopted the following:  Staff Accounting Bulletin (SAB) 107, *Share-Based Payments*, which provides guidance on valuationmethods available and other matters; and Financial Accounting Standards Board(FASB) Staff Position No. 123R-2, *Practical Accommodation tothe Application of Grant Date as Defined in SFAS 123R,* (SFAS123R-2), which provides guidance on the application of grant date.  The adoption of SFAS 123R did not have amaterial effect on our statement of operations for the three and six monthsended June 30, 2006.

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SFAS 123R required companies to recognize in theirstatement of operations the grant-date fair value of stock options and otherequity-based compensation issued to employees and directors.  The standard requires that compensationexpense for most equity-based awards be recognized over the requisite serviceperiod, usually the vesting period, while compensation expense forliability-based awards (usually settled in cash rather than stock) be measuredto fair-value at each balance sheet date until the award is settled.  Under SFAS 123R, the pro forma disclosurespreviously permitted are no longer an alternative to financial statementrecognition.  We elected to use themodified prospective method which requires us to record compensation expensefor the non-vested portion of previously issued awards that remain outstandingat the initial date of adoption of SFAS 123R and to record compensation expensefor any awards issued or modified after January 1, 2006.  Results for prior period have not beenrestated.

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

As a result of adopting SFAS 123R, our net income forthe three and six months ended June 30, 2006 was $0.2 million and $0.4 millionlower, respectively, than if we had continued to account for stock-basedcompensation under APB No. 25. Basic and diluted earnings per share for thethree months ended June 30, 2006 would have been higher by $0.00 and $0.00,respectively, if we had not adopted SFAS 123(R).  Basic and diluted earnings per share for thesix months ended June 30, 2006 would have been higher by $0.00 and $0.01,respectively, if we had not adopted SFAS 123R.

The following tableillustrates the effect on our net income if the fair-value-basedmethod had been applied to all outstanding and unvested awards in each periodprior to the adoption of SFAS 123R:
| ** **                                                                                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                               | ** ** | **2005**                         | ** ** | **2005**                       | ** ** |
| ** **                                                                                                               | ** ** | **(in thousands)**          | ** ** |
| Net income:                                                                                                              |       |                             |       |                           |       |
| As reported                                                                                                              |       | $                                | 2,572      |                           | $          | 3,120 |   |
| Less: total stock based employee compensation  expense determined under the fair value method for all awards, net of tax |       | (119                             | )          | (246                           | )          |
| Pro forma                                                                                                                |       | $                                | 2,453      |                           | $          | 2,874 |   |
|                                                                                                                     | ** ** | ** **                       |       |                           |       |
| Income per  common share:                                                                                                |       |                             |       |                           |       |
| As reported:                                                                                                             |       |                             |       |                           |       |
| Basic                                                                                                                    |       | $                                | 0.03       |                           | $          | 0.04 |   |
| Diluted                                                                                                                  |       | 0.03                             |       | 0.04                           |       |
| Pro forma:                                                                                                               |       |                             |       |                           |       |
| Basic                                                                                                                    |       | 0.03                             |       | 0.04                           |       |
| Diluted                                                                                                                  |       | 0.03                             |       | 0.04                           |       |

 

***SignificantClients***

Our******top20 clients accounted for 55.1% and 67.5% of our revenue in the three-monthperiods ended June 30, 2006 and 2005, respectively, and 56.5% and 68.1% for thesix-month periods ended June 30, 2006 and 2005, respectively, and include multiple independently managed businessunits within the client’s affiliated group. Hewlett-Packard Company business units were responsible for 11.3% and11.9% of our revenue for the three-month periods ended June 30, 2006 and 2005,respectively, and were responsible for 11.1% and 12.1% of our revenue for thesix-month periods ended June 30, 2006 and 2005, respectively.  General Motors Corporation (General Motors)business units were responsible for 11.8% of our total revenue in the three-monthperiod ended June 30, 2005, and were responsible for 12.0% for the six-monthperiod ended June 30, 2005.  The primaryGeneral 

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Motors contract expired in December 2005.  We did not have any other clients undercommon control that generated more than 10% of our revenue for the periodspresented.

**Note2. Comprehensive Income (Loss)**

Comprehensive income (loss) for the three andsix-month periods ended June 30, 2006 and 2005 are as follows (in thousands):
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| ** **                         | ** ** | **2006**               | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
|                               | * *   | * *               | * *   | * *             | * *   | * * | * * | * * | * * |
| Net income                         |       | $7,435                 |       | $2,572               |       | $10,085 |   | $3,120 |   |
| Other comprehensive income (loss): |       |                   |       |                 |       |   |   |   |   |
| Currency translation  adjustment   |       | 4,088                  |       | (6,704               | )          | 4,950 |   | (10,188 | ) |
| Comprehensive income (loss)        |       | $11,523                |       | $(4,132              | )          | $15,035 |   | $(7,068 | ) |

 

Accumulated other comprehensive income (loss) includedin our consolidated condensed balance sheets represents the accumulated foreigncurrency translation adjustment.

**Note 3. Asset Impairment and RestructuringExpenses**

Wesummarize the components of the accrued restructuring expenses recorded in ourconsolidated condensed balance sheet in the following table:
| ** **         | ** ** | ** **    | ** ** | **Facility**        | ** ** | ** **   | ** ** | ** ** | ** ** |
|--------------------|------------|---------------|------------|---------------------|------------|--------------|------------|------------|------------|
| ** **         | ** ** | ** **    | ** ** | **Closure or** | ** ** | **Grant**    | ** ** | ** ** | ** ** |
| ** **         | ** ** | **Severance** | ** ** | **Reduction**       | ** ** | **Reversal** | ** ** | **Total**  | ** ** |
|               |       |          |       |                |       |         |       |       |       |
| December 31,  2005 |       | $             | 1.5        |                | $          | 2.2          |       | $          | 3.5        |   | $ | 7.2 |   |
| Reversed           |       | —        |       | —              |       | (0.4         | )          | (0.4       | )          |
| Paid               |       | (1.1          | )          | (0.6                | )          | —       |       | (1.7       | )          |
| Other              |       | (0.3          | )          | 0.2                 |       | 0.3          |       | 0.2        |       |
| June 30, 2006      |       | $             | 0.1        |                | $          | 1.8          |       | $          | 3.4        |   | $ | 5.3 |   |

 

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

We expect to pay theemployee compensation restructuring liabilities during 2006. The Companyexpects to utilize the remaining facility closure or reduction restructuringliabilities over the respective lease periods through fiscal 2009.

As a result of a facility closure in 2005, we were nolonger able to maintain certain minimum employment levels required to retaingovernment grants received and recorded as a reduction of operating expenses inprevious periods. Consequently, we recorded restructuring expense of $3.5million during the year ended December 31, 2005, to establish a liability forthe obligation to repay such amounts. During the fourth quarter of 2006, we settled with the government agencyresponsible for the grant for $3.2 million. As a result, we have reversed $0.4 million of the restructuring reserve,including foreign currency impact.  Thegrant reimbursement is expected to be paid during the fourth quarter of 2006.

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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**Note 4. Investments in Affiliates**

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

As of June 30, 2006 andDecember 31, 2005, the investment in our India joint venture was approximately$4.6 million and $3.4 million, respectively. Subcontracted expenses for servicesprovided by our India joint venture were $6.2 million and $4.3 million for thethree-month periods ended June 30, 2006 and 2005, respectively, and $11.4million and $8.3 million for the six-month periods ended June 30, 2006 and2005, respectively.  The Company hadpayables to our India joint venture of $5.4 million and $4.8 million at June30, 2006 and December 31, 2005, respectively, which are included in tradeaccounts payable in the accompanying consolidated condensed balance sheets.  During the three months ended June 30, 2006,the company recorded a $1.2 million gain related to its share of insuranceproceeds received by our India joint venture for flood damage sustained in thethird quarter of 2005.  This gain wasrecorded in the equity in earnings (loss) of affiliates, net in theaccompanying statements of operations.

As of June 30, 2006 andDecember 31, 2005, the investment in certain Latin America affiliates wasapproximately $14.2 million and $13.7 million, respectively. Of the investmentin certain Latin America affiliates, approximately $7.7 million is equitymethod goodwill. This equity method goodwill is not amortized.  Subcontractedservices provided by our Latin America joint venture for the three-month andsix-month periods ended June 30, 2006 and 2005 were not material.

**Note 5. Stock-Based Compensation**

A detailed description ofeach of our stock-based compensation plans is provided below, including the1995 Employee Stock Option Plan, 1995 Non-Employee Directors Stock Option Planand 1999 Stock Incentive Plan. Stock-based compensation expense related tothese plans, which is included in operating, selling and administrativeexpenses in the accompanying condensed consolidated statements of operations,was $0.2 million and $0.4 million for the three and six month periods endedJune 30, 2006, respectively.  There wasno related income tax benefit recognized in the accompanying condensedconsolidated statements of operations for the three or six month periods endedJune 30, 2006.

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

The 1995 Plans, which were approved by the Board of Directors and thestock holders in 1995, provided for the granting of options to purchase up toan aggregate of 9,800,000 and 300,000 shares of common stock to employees anddirectors, respectively.  Options grantedunder the 1995 Employee Stock Option Plan could be incentive options ornon-qualified options.  Options grantedunder the 1995 Non-Employee Directors Stock Option Plan could be non-qualifiedoptions.  The options were granted at thecommon stock price on the day of grant and generally vested ratably over one tofive years.  All options granted underthe 1995 Plans expire if not exercised by the tenth anniversary of their grantdate. The fair value of each stock option awarded was estimated on the date ofgrant using the Black-Scholes valuation model that uses various assumptions.Expected volatility was based on historical volatility of the Company’s stock.The risk-free rate for periods within the contractual life of the award isbased on the yield curve of a zero-coupon U.S. Treasury bond on the date theaward is granted with a maturity equal to the expected term of the award. Nostock options were granted under the 1995 Plans subsequent to stockholderapproval of the 1999 Stock Option Plan.

8

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| ** **                      | ** ** | ** **         | ** ** | **Weighted-Average**    | ** ** | **Weighted-Average**           | ** ** | **Aggregate**            | ** ** |
|---------------------------------|------------|--------------------|------------|-------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** | **Remaining Contractual** | ** ** | **Intrinsic Value** | ** ** |
| ** **                      | ** ** | **Options**        | ** ** | **per Share**      | ** ** | **Term (in years)**  | ** ** | **(in thousands)**  | ** ** |
|                            |       |               |       |                    |       |                           |       |                     |       |
| Outstanding at  January 1, 2006 |       | 2,150,125          |       | $                       | 4.75       |                           |       |                     |       |   |
| Granted                         |       | —             |       | —                  |       |                           |       |                     |       |
| Exercised                       |       | (123,142           | )          | 3.50                    |       |                           |       |                     |       |
| Canceled                        |       | (77,163            | )          | 3.83                    |       |                           |       |                     |       |
| Outstanding at  June 30, 2006   |       | 1,949,820          |       | $                       | 4.86       |                           | 1.3        |                     | $          | 545 |   |
| Exercisable at June 30,  2006   |       | 1,949,820          |       | $                       | 4.86       |                           | 1.3        |                     | $          | 545 |   |

 

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

 

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

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

 

Options are granted atfair market value on the date of the grant and generally vest over five years,other than for the 2006 Option Grant as discussed separately. All optionsgranted under the 1999 Plan expire if not exercised by the tenth anniversary oftheir grant date. The fair value of each stock option award is estimated on thedate of grant using the Black-Scholes valuation model that uses variousassumptions. The fair value of the stock option awards is expensed on astraight-line basis over the vesting period of the award. Expected volatilityis based on historical volatility of the Company’s stock. The risk-free ratefor periods within the contractual life of the award is based on the yieldcurve of a zero-coupon U.S. Treasury bond on the date the award is granted witha maturity equal to the expected term of the award. Forfeitures are estimatedwithin the valuation model using historical data. The expected term of thestock option awards granted is derived from historical exercise experienceunder the Plan and represents the period of time that stock option awardsgranted are expected to be outstanding. 
| ** **                      | ** ** | ** **         | ** ** | **Weighted-Average**    | ** ** | **Weighted-Average**           | ** ** | **Aggregate**            | ** ** |
|---------------------------------|------------|--------------------|------------|-------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** | **Remaining Contractual** | ** ** | **Intrinsic Value** | ** ** |
| ** **                      | ** ** | **Options**        | ** ** | **per Share**      | ** ** | **Term (in years)**  | ** ** | **(in thousands)**  | ** ** |
|                            |       |               |       |                    |       |                           |       |                     |       |
| Outstanding at  January 1, 2006 |       | 3,738,093          |       | $                       | 3.12       |                           |       |                     |       |   |
| Granted                         |       | —             |       | —                  |       |                           |       |                     |       |
| Exercised                       |       | (241,728           | )          | 2.49                    |       |                           |       |                     |       |
| Canceled                        |       | (183,124           | )          | 3.16                    |       |                           |       |                     |       |
| Outstanding at  June 30, 2006   |       | 3,313,241          |       | $                       | 3.16       |                           | 5.4        |                     | $          | 3,727 |   |
| Exercisable at June 30,  2006   |       | 2,253,124          |       | $                       | 3.41       |                           | 5.0        |                     | $          | 2,363 |   |

 

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The following tablesummarizes the status of nonvested stock options under the 1999 Plan, excludingthe 2006 Option Grant, as of June 30, 2006, and changes during the six monthsthen ended:
|                              | ** ** | ** **    | ** ** | **Weighted-Average** | ** ** |
|------------------------------|------------|---------------|------------|----------------------|------------|
| ** **                   | ** ** | **Number of** | ** ** | **Grant - Date**     | ** ** |
| ** **                   | ** ** | **Options**   | ** ** | **Fair Value**       | ** ** |
|                         |       |          |       |                 |       |
| Nonvested at January 1, 2006 |       | 1,477,550     |       | $                    | 1.29       |   |
| Granted                      |       | —        |       | —               |       |
| Vested                       |       | (314,220      | )          | 1.45                 |       |
| Forfeited                    |       | (103,213      | )          | 1.28                 |       |
| Nonvested at June 30, 2006   |       | 1,060,117     |       | $                    | 1.44       |   |

 

As of June 30, 2006,there was $0.6 million of total unrecognized compensation cost related to thenonvested stock options granted under the 1999 Plan including the effect ofestimated forfeitures.  This cost isexpected to be recognized over a weighted-average period of 2.8 years. Thetotal fair value of stock options vested during the three months ended June 30,2006 and 2005, was $0.1 million. The total fair value of stock options vested during the six months endedJune 30, 2006 and 2005, was $0.2 million.

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

On February 1, 2006, we granted 1,463,000 stock options under the 1999Plan.  Vesting of the options iscontingent upon the Company achieving one of three EPS targets for 2006, 2007or 2008.  If the lowest target is achieved50% of the options would vest, 80% if the second target is met and 100% if thehighest is met.  If one of the targets ismet for the first year (2006), the employee would be required to remain withthe Company for an additional year until our annual report on Form 10-K isfiled for 2007, at which point the relevant percentage of the options wouldvest.  If one of the targets is met forthe second (2007) or third (2008) year, the relevant percentage of the optionswould vest immediately upon the filing of our annual report on Form 10-K forsuch year.  Any options that have notvested would be cancelled at the time of filing the annual report on Form 10-Kfor 2008.

 

The fair value of optionswas estimated at the date of the grant using the Black-Scholes option-pricingmodel with the following weighted-average assumptions:
| ** **                  | ** ** | **2006** | ** ** |
|-----------------------------|------------|----------|------------|
|                        | * *   | * * | * *   |
| - Volatility  factor        |       | 56.0     | %          |
| - Risk-free  interest rate  |       | 4.5      | %          |
| - Expected life  (in years) |       | 5        |       |
| - Expected  dividend yield  |       | 0.0      | %          |
|                        |       |     |       |

 

There were nooptions granted during the six-month period ended June 30, 2005.
| ** **                      | ** ** | ** **         | ** ** | **Weighted-Average**    | ** ** | **Weighted-Average**           | ** ** | **Aggregate**            | ** ** |
|---------------------------------|------------|--------------------|------------|-------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** | **Remaining Contractual** | ** ** | **Intrinsic Value** | ** ** |
| ** **                      | ** ** | **Options**        | ** ** | **per Share**      | ** ** | **Term (in years)**  | ** ** | **(in thousands)**  | ** ** |
|                            |       |               |       |                    |       |                           |       |                     |       |
| Outstanding at  January 1, 2006 |       | —             |       | $                       | —     |                           |       |                     |       |   |
| Granted                         |       | 1,463,000          |       | 3.41                    |       |                           |       |                     |       |
| Exercised                       |       | —             |       | —                  |       |                           |       |                     |       |
| Canceled                        |       | (54,000            | )          | 3.41                    |       |                           |       |                     |       |
| Outstanding at  June 30, 2006   |       | 1,409,000          |       | $                       | 3.41       |                           | 9.3        |                     | $          | 719 |   |
| Exercisable at June 30,  2006   |       | —             |       | $                       | —     |                           | —     |                     | $          | — |   |

 

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The following tablesummarizes the status of nonvested stock options under the 2006 Option Grant asof June 30, 2006, and changes during the six months then ended:
| ** **                    | ** ** | ** **         | ** ** | **Weighted-Average**       | ** ** |
|-------------------------------|------------|--------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **Number of** | ** ** | **Grant - Date** | ** ** |
| ** **                    | ** ** | **Options**        | ** ** | **Fair Value**        | ** ** |
|                          |       |               |       |                       |       |
| Nonvested at  January 1, 2006 |       | —             |       | $                          | —     |   |
| Granted                       |       | 1,463,000          |       | 1.79                       |       |
| Vested                        |       | —             |       | —                     |       |
| Forfeited                     |       | (54,000            | )          | 1.79                       |       |
| Nonvested at June 30,  2006   |       | 1,409,000          |       | $                          | 1.79       |   |

 

As of June 30, 2006,there was $0.7 million of total unrecognized compensation cost related to thenonvested stock options granted under the Plan including the effect ofestimated forfeitures.  This cost isexpected to be recognized over a weighted-average period of 1.5 years. No stockoptions under the 2006 Option Grant have vested as of June 30, 2006 as the EPStarget is measured on a fiscal year basis.

Cash received from stockoptions exercised under all stock-based compensation plans for the six monthsended June 30, 2006 and 2005, was $1.1 million and $10,000, respectively.The actual tax benefit realized for the tax deductions from these stock optionexercises is not material for either period.

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

During 1998, we implemented an ESPP that enables eligible employees topurchase our stock at 85% of the current market value on a quarterly basis. Thecompensation expense in connection with this plan is not material. Totalpurchases and shares purchased under the ESPP were $41,000 and 13,018 sharesfor the six months ended June 30, 2006 and $58,000 and 23,615 shares for thesix months ended June 30, 2005.

 

**Note 6. Contingencies**

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

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

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

One of our clients has been sued on a claim that it isinfringing certain patents related to computerized telephonic voice responsesystems.  This client has tendereddefense of the patent infringement action to many vendors including us, thoughbecause of the number of vendors, we anticipate that the client will retaincontrol of the defense.  Regardless ofwhich company controls the defense of this matter, we may be required toindemnify our client against its losses and reasonable attorneys’ fees incurredin connection with the lawsuit.  Theclient that has been sued is one of two clients that we have 

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reported about in past periods as having receivedletters from time to time containing an offer to license and suggesting thatthe clients might be infringing certain patents related to computerizedtelephonic voice response systems without the license. Both clients haveindicated that if any infringement occurred the clients would seek contractualindemnity from us.  To our knowledge, thesecond client has not yet been sued.  Weplan to seek contractual indemnity from certain of our vendors in connectionwith the pending lawsuit. Any such contractual indemnity we might obtain maynot be sufficient to cover all of the costs of investigating and resolving thismatter. We might also seek a license of the patents. Any such license may notbe 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 ourknowledge, no litigation has been initiated against us concerning thesematters. At this stage, due to the inherent uncertainties, we are unable topredict whether these matters may have a material adverse effect on ourbusiness or on our financial condition or results of operation.

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

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

**Note 7. EarningsPer Share**

Wecalculate income 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, 2006 and 2005, we had1.3 million and 5.7 million options, respectively, which have been excludedfrom the diluted net income per share computation because their exercise priceexceeds the fair market value.  At June30, 2006, we have an additional 1.4 million options that have been excludedfrom the diluted net income per share computation because they are contingentlyissuable options for which the conditions have not been satisfied as of thereport date.

**Note8.  Brazil Taxes**

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

On April 7, 2006, newlegislation was enacted in Brazil that resulted in a reduction in the amount ofpenalties and interest we will be required to pay for unpaid municipal taxes.We recorded a gain of $1.8 million in the second quarter of 2006 resulting froma reduction in the tax obligation recorded as of December 31, 2005 for aportion of the cumulative interest and penalties on unpaid municipal taxes forthe four years ended December 31, 2004. Of the $1.8 million, $1.4 million was included in interest expense and$0.4 million was included in operating, selling andadministrative expenses in the accompanying consolidated statements ofoperations.

During the six monthsended June 30, 2006, we paid approximately $8.2 million of unpaid taxesincluding interest and penalties.  Theremaining balance is being paid through two installment loans with a Brazilianfederal tax agency included in current debt and long-term debt, excludingcurrent portion, in the accompanying consolidated condensed balance sheet.

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**Note 9. Gain on Settlement**

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

**Note 10. Subsequent Events**

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

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**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**General**

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

We are a leading global provider of outsourcedcustomer support services. We specialize in the design, implementation, andoperation of multi-channel contact center solutions. We support the customermanagement strategies of large and medium size corporations in North America, Europe,Asia Pacific, and Latin America. We provide customer acquisition, customercare, technical support and risk management services on an outsourced basis, aswell as operational 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’s Discussion and Analysis, we provide information aboutour general business risks, critical accounting policies and estimates, resultsof operations, financial condition and liquidity, and certain other mattersaffecting our operating results for the periods covered by this report.

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

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

On April 7, 2006, newlegislation was enacted in Brazil that resulted in a reduction in the amount ofpenalties and interest we will be required to pay for unpaid municipal taxes.We recorded a gain of $1.8 million in the second quarter of 2006 resulting froma reduction in the tax obligation recorded as of December 31, 2005 for aportion of the cumulative interest and penalties on unpaid municipal taxes forthe four years ended December 31, 2004. Of the $1.8 million, $1.4 million was included in interest expense and$0.4 million was included in operating, selling andadministrative expenses in the accompanying consolidated statements ofoperations.

During the six monthsended June 30, 2006, we paid approximately $8.2 million of unpaidtaxes including interest and penalties. The remaining balance is being paidthrough two installment loans with a Brazilian federal tax agency included incurrent debt and long-term debt, excluding current portion, in the accompanyingconsolidated condensed balance sheet.

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

During the three months ended June 30, 2006, thecompany recorded a $1.2 million gain related to its share of insurance proceedsreceived by our India joint venture for flood damage sustained in the thirdquarter of 2005.  This gain was recordedin the equity in earnings (loss) of affiliates in the accompanying statementsof operations.

***Subsequent Events***

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

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

**General BusinessRisks**

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

 

Our results of operations and operating cash flowsmay vary with periodic wins, expansions, and losses of client contracts andwith changes in the scope of client requirements. Our******top 20 clients accounted for 55.1% and 67.5% of ourrevenue for the three-month periods ended June 30, 2006 and 2005, respectively,and 56.5% and 68.1% for the six-month periods ended June 30, 2006 and 2005,respectively, and include multipleindependently managed business units within the client’s affiliated group.  Hewlett-Packard Company business units wereresponsible for 11.3% and 11.9%of our revenue for the three-month period endedJune 30, 2006 and 2005, respectively, and 11.1% and 12.1% for the six-monthperiod ended June 30, 2006 and 2005, respectively.  General Motors Corporation (General Motors)business units were responsible for 11.8% of our revenue for the three-month period ended June 30, 2005, and 12.0%for the six-month period ended June 30, 2005. The primary General Motors contract expired in December2005.  Thefinancial failure of any of these clients or the loss of any or all of theirbusiness could have an adverse impact on our operating results.

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

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

**Critical Accounting Policies andEstimates**

The process of preparing financial statementsrequires the use of estimates on the part of management. These estimatesinvolve judgments with respect to, among other things, future economic factorsthat are difficult to predict and are beyond management’s control. As a result,actual results could differ from these estimates.

 

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

***Revenue Recognition***

We recognize revenue in accordance with applicable accountingstandards, including Securities and Exchange Commission Staff AccountingBulletin (SAB) No. 104, *RevenueRecognition*.  We recognizerevenue at the time services are performed based on the rate detailed in theclient contract, such as hourly, monthly, per call or per employee.  A portion of our revenue is often subject toperformance standards, such as sales per hour, average handle time, occupancyrate and abandonment rate.  Our performance against such standards mayresult in incentives or penalties, which are recognized as earned or incurred.In certain circumstances, we receive payment in advance of providing service.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 trade accounts receivable net of an allowance fordoubtful accounts, which represents management’s estimates of the amount of ourreceivables that may not be collectible, net of recoveries of amountspreviously written off. These estimates are based on a detailed aging analysisof accounts receivable, historical bad debts, client credit-worthiness, andchanges in our client payment terms. The financial condition of our clients maydeteriorate, which may require us to increase our allowance for doubtfulaccounts. We would record an increase in the allowance for doubtful accounts asoperating, selling, and administrative expense in our consolidated statementsof operations, which would reduce our results of operations.

 

***Property and Equipment***

We record property and equipment at cost, and calculate depreciationusing the straight-line method over the estimated useful lives of the assets,which generally range from 2 to 25 years. We amortize leaseholdimprovements and assets under capital leases on a straight-line basis over theshorter of the lease term or the estimated useful life of the asset. If theactual useful lives 

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of these assets are lessthan the estimated depreciable lives, we would record additional depreciationexpense or losses on disposal to the extent the net book value of such asset isnot recovered upon sale.

***Asset Impairment***

We evaluate long-lived assets for impairment whenever events or changesin circumstances indicate the carrying amount of an asset may not berecoverable.  Triggering events include asignificant change in the extent or manner in which long-lived assets are beingused or in its physical condition, in legal factors, or in the business climatethat could affect the value of the long-lived assets. The interpretation ofsuch events requires judgment from management as to whether such an event hasoccurred.

 

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

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

***Goodwill***

At least annually, or more frequently as changes in circumstancesindicate, we will evaluate the estimated fair value of our goodwill. On theseevaluation dates, to the extent that the carrying value of the net assets ofany of our reporting units having goodwill is greater than their estimated fairvalue, we will be required to take additional goodwill impairment charges. Weare required to make certain assumptions and estimates regarding the fair valueof goodwill when assessing for impairment. Changes in the fact patternsunderlying such assumptions and estimates could ultimately result in therecognition of additional impairment losses.

 

***Deferred Income Taxes***

We record deferred tax assets and liabilities using enacted tax ratesin the jurisdictions in which we operate for the effect of temporarydifferences between the book and tax basis of assets and liabilities inaccordance with Statement of Financial Accounting Standards, No. 109, *Accounting for Income Taxes*. If enactedtax rates change, we would adjust the deferred tax assets and liabilities,through the provision for income taxes in the period of change, to reflect theenacted tax rate expected to be in effect when the deferred tax items reverse.To the extent that we believe that recovery is not likely, we establish avaluation allowance to reduce the deferred tax assets to the amount that ismore likely than not to be realized. The valuation allowance is based on ourestimates of future taxable income by jurisdiction in which we operate and theperiod 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 tax credits,length of carryback and carryforward periods, and existing or prospectivecontracts 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 in North America for workers’ compensation andhealth care claims for eligible participating employees, subject to certaindeductibles and limitations. The costs include an estimate of expectedsettlements on pending claims and a provision for claims incurred but notreported. These estimates are based on our assessment of potential liabilityusing an analysis of available information with respect to pending claims,historical experience, and current cost trends. Actual claims results coulddiffer from these estimates.

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***Contingencies***

We consider the likelihood of various loss contingencies, including taxand legal contingencies arising in the ordinary course of business, and ourability to reasonably estimate the amount of loss in determining losscontingencies. An estimated loss contingency is accrued when it is probablethat a liability has been incurred and the amount of loss can be reasonablyestimated. We regularly evaluate current information available to us todetermine whether such accruals should be adjusted.

 

**Results of Operations for the Three and Six MonthPeriods Ended June 30, 2006 Compared with the Same Periods of 2005**

In this section, we discuss our operating results andthe factors affecting them. We describe our general business risks, criticalaccounting policies, and estimates that are important to our operating resultson the previous pages.  Please refer tothat discussion as you read this section.

**Components of Operations**

The following table summarizes our statements ofoperations data on a percentage-of-revenue basis.
| ** **                                            | ** ** | **Three Months Ended June 30,** | ** **   | **Six Months Ended June 30,** | ** **   |
|-------------------------------------------------------|------------|-----------------------------------------------------|--------------|---------------------------------------------------|--------------|
| ** **                                            | ** ** | **2006**                                            | ** **   | **2005**                                          | ** **   | **2006** | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **$**                                               | ** **   | **%**                                             | ** **   | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                            | ** ** | **(in thousands)**                             | ** **   | **(in thousands)**                           | ** **   |
| **Revenues**                                          |       | $                                                   | 278,335      | *** ***                                      | ***100.0%*** |   | $ | 251,810 | *** *** | ***100.0%*** |   | $ | 553,419 | *** *** | ***100.0%*** |   | $ | 502,702 | *** *** | ***100.0%*** | *** *** |
|                                                  |       |                                                |         |                                              |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Direct labor and telecommunications  expenses         |       | 178,732                                             | *** *** | ***64.2%***                                       |         | 153,640 | *** *** | ***61.0%*** |   | 350,585 | *** *** | ***63.3%*** |   | 306,090 | *** *** | ***60.9%*** | *** *** |
| Subcontracted and  other services expenses            |       | 10,019                                              | *** *** | ***3.6%***                                        |         | 12,881 | *** *** | ***5.1%*** |   | 18,938 | *** *** | ***3.4%*** |   | 25,761 | *** *** | ***5.1%*** | *** *** |
| Operating,  selling and administrative expenses       |       | 84,876                                              | *** *** | ***30.5%***                                       |         | 80,897 | *** *** | ***32.1%*** |   | 170,130 | *** *** | ***30.7%*** |   | 161,136 | *** *** | ***32.1%*** | *** *** |
|                                                  |       |                                                |         |                                              |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Gain on  settlement                                   |       | (6,000                                              | )            | ***-2.2%***                                       |         | — | *** *** | ***0.0%*** |   | (6,000 | ) | ***-1.1%*** |   | — | *** *** | ***0.0%*** | *** *** |
|                                                  |       |                                                |         |                                              |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Restructuring  expense, net                           |       | —                                              | *** *** | ***0.0%***                                        |         | (2,609 | ) | ***-1.0%*** |   | (358 | ) | ***-0.1%*** |   | (2,609 | ) | ***-0.5%*** | *** *** |
| **Operating  income**                                 |       | 10,708                                              | *** *** | ***3.8%***                                        |         | 7,001 | *** *** | ***2.8%*** |   | 20,124 | *** *** | ***3.6%*** |   | 12,324 | *** *** | ***2.5%*** | *** *** |
|                                                  |       |                                                |         |                                              |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                      |       | (2,150                                              | )            | ***-0.8%***                                       |         | (3,258 | ) | ***-1.3%*** |   | (5,846 | ) | ***-1.1%*** |   | (6,420 | ) | ***-1.3%*** | *** *** |
| Interest income                                       |       | 107                                                 | *** *** | ***0.0%***                                        |         | 140 | *** *** | ***0.1%*** |   | 186 | *** *** | ***0.0%*** |   | 260 | *** *** | ***0.1%*** | *** *** |
| Equity in earnings  (loss) of affiliates, net         |       | 1,661                                               | *** *** | ***0.6%***                                        |         | 395 | *** *** | ***0.2%*** |   | 1,950 | *** *** | ***0.4%*** |   | 288 | *** *** | ***0.1%*** | *** *** |
| Other income  (expense), net                          |       | 528                                                 | *** *** | ***0.2%***                                        |         | (21 | ) | ***0.0%*** |   | 609 | *** *** | ***0.1%*** |   | (31 | ) | ***0.0%*** | *** *** |
| **Income  before income taxes and minority interest** |       | 10,854                                              | *** *** | ***3.9%***                                        |         | 4,257 | *** *** | ***1.7%*** |   | 17,023 | *** *** | ***3.1%*** |   | 6,421 | *** *** | ***1.3%*** | *** *** |
|                                                  |       |                                                |         |                                              |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Income tax  expense                                   |       | 2,861                                               | *** *** | ***1.0%***                                        |         | 1,380 | *** *** | ***0.5%*** |   | 5,669 | *** *** | ***1.0%*** |   | 2,638 | *** *** | ***0.5%*** | *** *** |
| Minority interest                                     |       | 558                                                 | *** *** | ***0.2%***                                        |         | 305 | *** *** | ***0.1%*** |   | 1,269 | *** *** | ***0.2%*** |   | 663 | *** *** | ***0.1%*** | *** *** |
| **Net income**                                        |       | $                                                   | 7,435        | *** ***                                      | ***2.7%***   |   | $ | 2,572 | *** *** | ***1.0%*** |   | $ | 10,085 | *** *** | ***1.8%*** |   | $ | 3,120 | *** *** | ***0.6%*** | *** *** |

 

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# ***Three MonthsEnded June 30, 2006 Compared to the Same Period of 2005***

***Revenue***

Revenue increased $26.5 million, or 10.5%, in thethree months ended June 30, 2006 compared to the same period of 2005. Thechanges in revenue by geographic region are shown in the following table:

 
| **Three months**        | ** ** | ** **             | ** ** | ** ** | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------|------------|------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Ended June 30,** | ** ** | **2006**               | ** ** | **2005**   | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                   | ** ** | **(in millions)** | ** ** |
|                         |       |                   |       |       |       |       |       |       |       |
| North America                | ** ** | **$**                  | **123.5**  |       | $          | 123.6      |       | $          | (0.1       | ) | -0.1 | % |
| Europe                       | ** ** | **129.8**              |       | 106.1      |       | 23.7       |       | 22.3       | %          |
| Asia Pacific                 | ** ** | **11.2**               |       | 12.6       |       | (1.4       | )          | -11.1      | %          |
| Latin America                | ** ** | **13.8**               |       | 9.5        |       | 4.3        |       | 45.3       | %          |
| Totals                       | ** ** | **$**                  | **278.3**  |       | $          | 251.8      |       | $          | 26.5       |   | 10.5 | % |

 

North American revenue in the first quarter of 2006 remained consistentcompared to the same period in 2005. Adecrease of $24.3 million of revenue resulting from the loss of General Motorswas offset by $24.2 million of revenue growth primarily in customeracquisition, technical support and risk management.  The weakening of the U.S. dollar versus theCanadian dollar resulted in $0.6 million of the increase.

European revenue increased $23.7 million for thethree months ended June 30, 2006 compared to the same period in 2005.  Higher sales volumes from new and existingclients resulted in an increase in revenue of $24.2 million for the three monthsended June 30, 2006 compared to the same period in 2005.  The strengthening of the U.S. dollar versusthe British pound and Euro partially offset this increase by $0.5 million.

Asia Pacific revenue decreased $1.4 million forthe three months ended June 30, 2006 compared to the same period in 2005.  Lower sales volumes with existing clientsresulted in a decrease in revenue of $0.3 million, while the strengthening ofthe U.S. dollar versus the New Zealand and Australian dollars resulted in theremaining $1.1 million of the decrease.

Latin America revenue increased $4.3 million for the three months endedJune 30, 2006 compared to the same period in 2005.  Higher sales volumes from new and existingclients resulted in an increase in revenue of $3.4 million, while the weakeningof the US dollar versus the Brazilian Real resulted in the remaining $0.9million of the increase.

***Direct Labor andTelecommunications Expenses***

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

 

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

Direct labor and telecommunications expensesincreased $25.1 million, or 16.3%, for the three months ended June 30, 2006compared to the same period of 2005.  Asa percentage of revenue, direct labor and telecommunications expenses increasedto 64.2% for the three months ended June 30, 2006 compared to 61.0% insame period in 2005.  The increase wasprimarily the result of higher ramp-up costs of new client programs,particularly in Europe, and a change in the mix of services provided in thethree months ended June 30, 2006 compared to the same period in 2005.

***Subcontracted and Other ServicesExpenses***

Subcontractedand other services expenses included services provided to clients throughsubcontractors and other out-of-pocket expenses.  Subcontracted and other services expensesdecreased $2.9 million or 22.2% for the three months ended June 30, 2006compared to the same period of 2005 primarilythe result of lower subcontracted IT costs to support client 

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programs partially offset byhigher subcontracted services provided by our India joint venture.

Subcontracted expenses for services provided by ourIndia joint venture for the three months ended June 30, 2006 and 2005 were $6.2million and $4.3 million, respectively.

***Operating, Selling andAdministrative Expenses***

Operating, selling andadministrative expenses represent expenses incurred to directly support andmanage the business, including costs of management, administration, technology,facilities, depreciation and amortization, maintenance, sales and marketing,and client support services.

 

Operating, selling and administrative expensesincreased $4.0 million, or 4.9%, for the three months ended June 30, 2006compared to the same period of 2005. During the three months ended June 30, 2006, operating, selling andadministrative expenses were lower as a percentage of revenue primarily as a result of cost reductions andrestructuring actions taken at the end of 2004 and during 2005 and a decreasein management incentive performance expense.

***Gainon settlement***

Duringthe three months ended June 30, 2006, we entered into a settlement agreementwith a business partner over the handling of certain businesstransactions.  For the settlement, wereceived a payment of $5.0 million in April of 2006 and will receive anadditional $1 million in installments during the second half of 2006.  As a result of the settlement, we recorded a$6 million gain in the second quarter of 2006.

 

***RestructuringExpense, net***

During the three 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 income increased $3.7 million or 53.0%for the three months ended June 30, 2006 compared to the same period of 2005.

 

***Interest Expense***

Interest expense decreased $1.1 million or34.0% for the three months ended June 30, 2006 compared to the same period in2005. During the three months ended June 30, 2006, interest expenses werelower due to a gain of $1.4 million for a reduction in interest on a Brazil taxobligation being recorded as a reduction of these expenses.  This gain was partially offset by higheramortization of debt acquisition costs. See Note 8 to the accompanying condensed consolidated financialstatements.

 

***Interest Income***

Interest income remained consistent for the three months ended June 30,2006 compared to the same period in 2005.

 

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

Equity in earnings (loss) of affiliates, netincreased $1.3 million for the three months ended June 30, 2006 compared to thesame period in 2005 primarily due $1.2 million in insurance proceeds receivedby our India joint venture related to flood damage in 2005.

 

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

Other income (expense), net increased $0.5 millionfor the three months ended June 30, 2006 compared to the same period in 2005primarily 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 26.4% and 32.4% for the three-months ended June 30, 2006 and 2005,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.

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**SixMonths Ended June 30, 2006 Compared to the Same Period of 2005**

***Revenue***

Revenue increased $50.7 million, or 10.1%, for thesix months ended June 30, 2006 compared to the same period of 2005. The changesin revenue by geographic region are shown in the following table:

 
| **Six months**          | ** ** | ** **             | ** ** | ** ** | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------|------------|------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Ended June 30,** | ** ** | **2006**               | ** ** | **2005**   | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                   | ** ** | **(in millions)** | ** ** |
|                         |       |                   |       |       |       |       |       |       |       |
| North America                | ** ** | **$**                  | **251.5**  |       | $          | 246.6      |       | $          | 4.9        |   | 2.0 | % |
| Europe                       | ** ** | **251.2**              |       | 213.9      |       | 37.3       |       | 17.4       | %          |
| Asia Pacific                 | ** ** | **23.1**               |       | 24.9       |       | (1.8       | )          | -7.2       | %          |
| Latin America                | ** ** | **27.6**               |       | 17.3       |       | 10.3       |       | 59.5       | %          |
| Totals                       | ** ** | **$**                  | **553.4**  |       | $          | 502.7      |       | $          | 50.7       |   | 10.1 | % |

 

North American revenue increased $4.9 million or2.0% for the six months ended June 30, 2006 compared to the same period in2005. A decrease of $49.1 million of revenue resulting from the loss of GeneralMotors was offset by $54.0 million of revenue growth primarily due to anincrease in technical support, customer care, customer acquisition and riskmanagement services.

European revenue increased $37.3 million or 17.4%for the six months ended June 30, 2006 compared to the same period in2005.  Higher sales volumes from new andexisting clients resulted in an increase in revenue of $48.6 million for thesix months ended June 30, 2006 compared to the same period in 2005.  The strengthening of the U.S. dollar versusthe British pound and Euro partially offset the increase by $11.3 million.

Asia Pacific revenue decreased $1.8 or 7.2%million for the six months ended June 30, 2006 compared to the same period in2005 due to the strengthening of the U.S. dollar versus the New Zealand andAustralian dollars.

Latin America revenue increased $10.3 million or 59.5% for the sixmonths ended June 30, 2006 compared to the same period in 2005.  Higher sales volumes from new and existingclients resulted in an increase in revenue of $7.9 million, while the weakeningof the US dollar versus the Brazilian Real accounted for the remaining $2.4million of the increase.

***Direct Labor andTelecommunications Expenses***

Direct labor and telecommunications expensesincreased $44.5 million, or 14.5%, for the six months ended June 30, 2006compared to the same period of 2005.  Asa percentage of revenue, direct labor and telecommunications expenses increasedto 63.3% for the six months ended June 30, 2006 compared to 60.9% insame period in 2005.  The increase wasprimarily the result of higher ramp-up costs of new client programs,particularly in Europe, and a change in the mix of services provided in the sixmonths ended June 30, 2006 compared to the same period in 2005.

 

***Subcontracted and Other ServicesExpenses***

Subcontracted and other services expenses includedservices provided to clients through subcontractors and other out-of-pocketexpenses.  Subcontracted and other services expenses decreased $6.8 million or26.5% for the six months ended June 30, 2006 compared to the same period of2005 primarily the result of lowersubcontracted IT costs to support client programs partially offset by highersubcontracted services provided by our India joint venture.

 

Subcontracted expenses for services provided byour India joint venture for the six months ended June 30, 2006 and 2005 were$11.4 million and $8.3 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 $9.0 million, or 5.6%, for the six months ended June 30, 2006compared to the same period in 2005. During the six months ended June 30, 2006, operating, selling andadministrative 

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expenses were lower as a percentage of revenue primarily as a result of cost reductions and restructuring actions taken at the end of2004 and during 2005 and a decrease in management incentive performance expense.

***Gainon settlement***

Duringthe six months ended June 30, 2006, we entered into a settlement agreement witha business partner over the handling of certain business transactions.  For the settlement, we received a payment of$5.0 million in April of 2006 and will receive an additional $1 million ininstallments during the second half of 2006. As a result of the settlement, we recorded a $6 million gain in thesecond quarter of 2006.  This gain wasincluded in gain on settlement in the accompanying consolidated statements ofoperations.

 

***RestructuringExpense, net***

As a result of afacility closure in 2005, we were no longer able to maintain certain minimumemployment levels required to retain government grants received and recorded asa reduction of operating expenses in previous periods. Consequently, werecorded restructuring expense of $3.5 million during the year ended December31, 2005, to establish a liability for the obligation to repay suchamounts.  During the fourth quarter of2006, we settled with the government agency responsible for the grant for $3.2million.  As a result, we have reversed$0.4 million of the restructuring reserve, including foreign currency impact of$0.1 million, during the six months ended June 30, 2006.

 

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 incomeincreased $7.8 million for the six months ended June 30, 2006 due to thefactors discussed above.

 

***Interest Expense***

Interest expense decreased $0.6 million, or 8.9%,for the six months ended June 30, 2006 compared to the same period in 2005.  During thesix months ended June 30, 2006, interest expenses were lower due to a gain of$1.4 million for a reduction in interest on a Brazil tax obligation beingrecorded as a reduction of these expenses. This gain was partially offset by a higher average debt balance andamortization of debt acquisition costs.  See Note 8 to the accompanyingcondensed consolidated financial statements.

 

***Interest Income***

Interest income remained consistent for the first quarter of 2006compared to the same period in 2005.

 

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

Equity in earnings(losses) of affiliates, net increased by $1.7 million for the six months endedJune 30, 2006 as compared to the same period in 2005 primarily due to $1.2 million of insuranceproceeds received by our India joint venture related to flood damage in 2005.

 

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

Other income (expense), net increased $0.6 millionfor the six months ended June 30, 2006 compared to the same period in2005.  The increase 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 33.3% and 41.1% for the six months ended June 30, 2006 and 2005,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.

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**FinancialCondition and Liquidity**

In this section, we discuss our financial conditionand liquidity and the factors affecting them. We separately discuss cash flows,capital resources, and contractual obligations and commitments. We describe ourgeneral business risks, critical accounting policies, and estimates that areimportant to our financial condition and liquidity earlier in this report.Please refer to that discussion 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, | ** ** | **2006**           | ** ** | **2005** | ** ** |
|----------------------------|------------|--------------------|------------|----------|------------|
| ** **                 | ** ** | **(in thousands)** | ** ** |
| **Net cash flows from:**   |       |               |       |     |       |
| Operating activities       |       | $                  | 16,185     |     | $          | 3,720 |   |
| Investing activities       |       | (11,468            | )          | (11,262  | )          |
| Financing activities       |       | (1,620             | )          | 8,145    |       |
|                            |            |                    |            |          |            |  |  |

 

**2006**

**In the six months ended June 30, 2006, cash provided byoperating activities resulted primarily from income before depreciation andamortization, and other charges of $25.6 million and a $6.2 million decrease intrade accounts receivable and other assets, partially offset by a $15.6 milliondecrease in trade accounts payable and other liabilities.  During the six months ended June 30, 2006, wepaid approximately $8.2 million of unpaid taxes including interest andpenalties.**

 

**In the six months ended June 30, 2006, we used cash forinvesting activities to purchase $11.6 million of property and equipment.  This was partially offset by $0.1 million inproceeds from the sale of property and equipment.**

**In the six months ended June 30, 2006, cash used byfinancing activities resulted in net repayments of debt and other obligationsof $2.7 million, partially offset by $1.1 million resulting from proceeds fromthe exercise of stock options.**

**2005**

**In the six months ended June 30, 2005, cash provided byoperating activities resulted primarily from income before depreciation andamortization, and other charges of $17.8 million and a $4.0 million increase inother liabilities, partially offset by a $12.2 million increase in tradeaccounts receivable and other assets and a $5.9 million decrease in tradeaccounts payable.**

 

**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 providedby financing activities resulted in net borrowings of debt and otherobligations of $8.1 million.

**CapitalResources**

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

 

On August 19, 2005, the Company entered into afive year $145 million credit facility (the Credit Facility) with certainlenders. The Credit Facility is comprised of two credit agreements (the CreditAgreements). A Credit Agreement with Wells Fargo Foothill, Inc., entered intoby US and foreign borrowers, consists of a senior revolving credit facility(Revolver) of $90 million and an amortizing term loan (Term Loan A) of $20million, secured by a first lien on the Company’s assets in the United Statesand a first lien on the Company’s accounts receivable and related assets anddeposit accounts in Canada, the United Kingdom, Ireland and Germany.  A second Credit Agreement with Ableco FinanceLLC, entered into by US borrowers, provides for a bullet-repayment term loan(Term Loan B) of $35 million 

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secured by a second lien on the Company’s assetsin the United States.  Certain othernon-U.S. subsidiaries have guaranteed the obligations of the foreign borrowers.

Borrowings under each Credit Agreement bearinterest, at the Company’s option, at either the Prime Rate plus the ApplicableMargins or the LIBOR Rate plus the Applicable Margins (each term as defined inthe Credit Agreements). The Term Loan A requires monthly principal payments of$0.3 million each, with the balance payable at maturity.  On June 30, 2006, the weighted averageinterest rates applicable to the Revolver was 7.50%, Term Loan A was 7.86% andthe interest rate applicable to the Term Loan B was 11.59%.

The Credit Agreements require prepayment fromexcess cash flow and proceeds of certain asset sales, debt issuances, andextraordinary receipts. The Company may prepay the term loans withoutprepayment premium under certain circumstances. If the Credit Facility is terminated during the first four years, theapplicable prepayment premium is 4% in year one on the maximum Revolver and anyremaining principal of Term Loan A, declining by one percent each yearthereafter, and 2% on any remaining principal of Term Loan B, declining byone-half percent each year thereafter.

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

The Credit Agreements contain events of defaultincluding failure to make required payments; failure to comply with covenantsor other agreements in the Credit Agreements; failure to pay, or the right ofacceleration of, certain other indebtedness; certain events of bankruptcy,insolvency, and injunction; material breach of representations and warranties;and certain judgments.  Upon theoccurrence and continuance of an event of default, amounts due under the CreditAgreements may be accelerated.

At June 30, 2006 andDecember 31, 2005, we had $115.7 million and $110.6 million outstanding underthe Credit Agreements, respectively, of which $3.6 million is included inrevolving credit facility and other current debt in the accompanyingconsolidated condensed balance sheet. The remainder is included in long-term debt in the accompanyingconsolidated condensed balance sheet.

Primarilyas a result of matters arising out of and related to our investigation ofirregularities at our Brazilian subsidiary, we were not in compliance withcertain covenants of our credit agreements with Wells Fargo Foothill,Inc. and Ableco Finance LLC as Agents as ofJune 30, 2006 and December 31, 2005.   Wesubsequently obtained waivers of the non-compliance.

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

We also secured thelenders’ consent to certain items, including, among other things, (1)additional intercompany loans totalling up to $750,000 to the Brazilian subsidiaryfor working capital; (2) a UK subsidiary using proceeds of an advance under theWFF Credit Agreement to repay $3.95 million of intercompany debt to theCompany; (3) the Brazilian subsidiary incurring additional secured indebtednessof up to 2 million Brazilian Reais; and (4) excluding the Brazilian subsidiary’sintercompany loans and previously incurred secured indebtedness from theInvestment, Indebtedness and Lien basket limitations.

We obtained amendments tothe credit agreements  to, among otherthings, (1) increase the Minimum EBITDA requirement to $55 million (from $45million) for the twelve month period ending September 30, 2006 and thereafter;and (2) postpone by one quarter the tightening of the Leverage Ratio (debtdivided by EBITDA, as defined), now requiring the ratio not to exceed 2.50 to 1for the four fiscal quarters ending June 30, 2006, 2.25 to 1 for the fourfiscal quarters ending September 30, 2006, and 2.00 to 1 for the four fiscalquarters ending thereafter.

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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 2006 to be in the range of $8 million to $10 million, as we continueto cover maintenance and technology upgrades, asset replacements, efficiencyinvestments, and investment for continued growth. Future acquisitions, if any, may require additional debt or equityfinancing.

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.

# ***ContractualObligations and Commitments***

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

 

·            $110.8 million of Long-term Debt as shown in ourconsolidated condensed balance sheet at June 30, 2006,

·            $19.5 million of short-term borrowings debt asshown in our consolidated condensed balance sheet at June 30, 2006,

·            $10.2 million of capital lease obligations asshown in our consolidated condensed balance sheet at June 30, 2006, and

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

**Off-Balance Sheet Arrangements**

We do not have any obligationsthat meet the definition of an off-balance sheet arrangement and that have orare reasonably likely to have a material effect on our consolidated financialstatements.

 

**Other Matters**

***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.

***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 for business and strategicpurposes through the purchase of voting common and preferred stock ofcompanies.  These investments areincluded in investments in affiliates in consolidated financial statements.  As of June 30, 2006 and December 31, 2005,the investment in our India joint venture was approximately $4.6 million and$3.4 million, respectively.  Subcontracted expenses for services provided byour India joint venture were $6.2 million and $4.3 million for the three-monthperiods ended June 30, 2006 and 2005, respectively, and $11.4 million and $8.3million for the six-month periods ended June 30, 2006 and 2005,respectively.  The Company had payablesto our India joint venture of $5.4 million and $4.8 million at June 30, 2006and December 31, 2005, respectively, which are included in trade accountspayable in the accompanying consolidated condensed balance sheets.  During the three months ended June 30, 2006,the company recorded a $1.2 million gain related to its share of insuranceproceeds received by our India joint venture for flood damage sustained in thethird quarter of 2005.  This gain wasrecorded in the equity in earnings (loss) of affiliates, net in theaccompanying statements of operations.

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As of June 30, 2006 andDecember 31, 2005, the investment in certain Latin America affiliates wasapproximately $14.2 million and $13.7 million, respectively. Of the investmentin certain Latin America affiliates, approximately $7.7 million is equitymethod goodwill. This equity method goodwill is not amortized.  Subcontracted services provided by our LatinAmerica joint ventures for the three and six month periods ended June 30, 2006and 2005 were not material.

***Recently IssuedAccounting Pronouncements***

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

 

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

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

***ForeignCurrency Risk***

Weare exposed to market risks associated primarily with changes in foreigncurrency exchange rates. We have operations in many parts of the world;however, both revenue and expenses of those operations are typicallydenominated in the currency of the country of operations, providing a naturalhedge.

 

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

With respect to translation risk, even though thefluctuations of currencies against the U.S. dollar can be substantial andtherefore significantly impact comparisons with prior periods, the translationimpact is included in accumulated other comprehensive income, a component of stockholders’ equity, anddoes not affect the underlying results of operations. Gains and losses related to transactions denominated in a currency otherthan the functional currency of the countries in which we operate includingshort-term intercompany accounts are included in the determination of netincome.

***InterestRate Risk***

We are also exposed to changes in interest rates on our variable rateborrowings. Interest rates on our capital lease obligations are fixed, butrates on borrowings under our Credit Facility are variable. During thesix-month period ended June 30, 2006, our average borrowings under ourrevolving credit facility were $65.6 million. Based on our projected cash needs for the foreseeable future, we do notexpect that our exposure to changes in interest rates for these borrowings willhave a material impact on our 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.

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**Item 4. Controlsand Procedures**

*Evaluation of Disclosure Controlsand Procedures*

In the preparation and filing of this Form 10-Q, we carried out anevaluation as of June 30, 2006, under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”). Based upon this evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures werenot effective as of that date. Disclosure controls and procedures are controlsand procedures that are designed to ensure that information required to bedisclosed in reports filed or submitted by us under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms. Our conclusions regardingour disclosure controls and procedures were based on the material weaknessesdisclosed in our annual report on Form 10-K for the fiscal year endedDecember 31, 2005. We have instituted remediation efforts and continue toimplement others, including in some instances, instituting changes in ourinternal controls over financial reporting.

 

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

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

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

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

*Changes in Internal Control Over FinancialReporting*

There were no changes in the Company’s internal control over financialreporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscalquarter ended June 30, 2006 that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

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

**PART II — OTHERINFORMATION**

**Item 1. LegalProceedings**

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

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

On March 1, 2006, wecontacted the U.S. Securities and Exchange Commission Enforcement Division andreported that we had identified accounting and other irregularities in ourBrazil subsidiary that raised the possibility of violations of the 

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U.S. Foreign CorruptPractices Act.   We completed an internalinvestigation into these irregularities, with the assistance of independentoutside counsel in Brazil.  Theinvestigation did not reveal any prior involvement or knowledge regarding theirregularities by any officer or director of the Company.   We have taken and are taking remedialactions.  We restated our financialstatements for the years ended December 31, 2001 through 2004 and for thequarters ended March 31, June 30, and September 30, 2005 as a result of errorsin the prior financial statements identified as a result of theinvestigation.  We reported to the SEC onthe results of the internal investigation and is responding to the SEC’srequests for further information.  Wecannot predict the ultimate outcome of the ongoing discussions with the SEC.The outcome could include the institution of administrative or civil injunctiveproceedings involving the Company and/or current or former Company employees,officers and/or directors, the imposition of fines and other penalties, remediesand/or sanctions and/or a referral to other governmental agencies.

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

**Item 5. OtherInformation**

**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 Commissionfor more 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: November 29,  2006 | By     | /s/*Jorge A. Celaya*         |
| ** **               |   | **Jorge A. Celaya**          |
| * *                 |   | *Chief Financial Officer*    |
|                     |   | (Duly Authorized Officer and |
|                     |   | Principal Financial Officer) |

** **

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**EXHIBIT INDEX**
| 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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