**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

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

**FORM 10-Q**

** **

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

**For the quarterly period ended MARCH 31, 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 or Organization)

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

** **

**(402) 963-6810**

(Registrant’sTelephone Number, Including Area Code)

**SECURITIES REGISTERED PURSUANT TOSECTION 12(B) OF THE ACT:**

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

 

**SECURITIESREGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:**

NotApplicable

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 filingrequirements for 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

Indicateby check mark whether the registrant is a shell company (as defined in Rule12-2 of the Exchange Act).

YES  o   NO  x

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

 

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|                                          | ** ** | ** ** | ** ** | ** **                                                                                  | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|---------------------------------------------------------------------------------------------|------------|------------|------------|------------|
| **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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**PART I****– FINANCIAL INFORMATION**

### **SITELCORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS(UNAUDITED)(in thousands, except per share data)**

| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **March 31,**               | ** ** |
| ** **                                            | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| * *                                              |       | * *                         | * *   | * * | * * |
| **Revenue**                                           | ** ** | $                                | 275,084    |   | $ | 250,892 |   |
| ** **                                            |       |                             |       |   |   |
| **Operating expenses:**                               |       |                             |       |   |   |
| Direct labor and  telecommunications expenses         |       | 171,853                          |       | 152,450 |   |
| Subcontracted  and other services expenses            |       | 8,919                            |       | 12,880 |   |
| Operating,  selling and administrative expenses       |       | 85,254                           |       | 80,239 |   |
| Restructuring  expense, net                           |       | (358                             | )          | — |   |
| Total operating  expenses                             |       | 265,668                          |       | 245,569 |   |
|                                                  |       |                             |       |   |   |
| **Operating income**                                  |       | 9,416                            |       | 5,323 |   |
| ** **                                            |       |                             |       |   |   |
| **Other income (expense):**                           |       |                             |       |   |   |
| Interest expense                                      |       | (3,696                           | )          | (3,162 | ) |
| Interest income                                       |       | 79                               |       | 120 |   |
| Equity in  earnings (loss) of affiliates, net         |       | 289                              |       | (107 | ) |
| Other income  (expense), net                          |       | 81                               |       | (10 | ) |
| Total other  expense, net                             |       | (3,247                           | )          | (3,159 | ) |
|                                                  |       |                             |       |   |   |
| **Income before income taxes and  minority interest** |       | 6,169                            |       | 2,164 |   |
|                                                  |       |                             |       |   |   |
| Income tax expense                                    |       | 2,808                            |       | 1,258 |   |
| Minority interest                                     |       | 711                              |       | 358 |   |
| **Net income**                                        | ** ** | $                                | 2,650      |   | $ | 548 |   |
|                                                  |       |                             |       |   |   |
| **Weighted average common shares  outstanding:**      |       |                             |       |   |   |
| Basic                                                 |       | 74,162                           |       | 73,736 |   |
| Diluted                                               |       | 74,846                           |       | 74,340 |   |
| ** **                                            |       |                             |       |   |   |
| **Earnings per share:**                               |       |                             |       |   |   |
| Basic                                                 |       | $                                | 0.04       |   | $ | 0.01 |   |
| Diluted                                               |       | $                                | 0.04       |   | $ | 0.01 |   |

 

*See Notesto Consolidated Condensed Financial Statements*

 

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### **SITELCORPORATION AND SUBSIDIARIES****CONSOLIDATED CONDENSED BALANCE SHEETS(in thousands, except share data)**

| ** **                                                                                                                                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                   | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                   | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                   |       |               |       |                  |       |
| **Current  assets:**                                                                                                                         |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                   |       | $                  | 25,888     |                  | $          | 25,817 |   |
| Trade accounts  receivable (net of allowance for doubtful accounts of $2,300 and $1,710,  respectively)                                      |       | 223,144            |       | 220,581               |       |
| Prepaid expenses  and other assets                                                                                                           |       | 15,431             |       | 16,038                |       |
| Deferred income  taxes                                                                                                                       |       | 868                |       | 666                   |       |
| Total current  assets                                                                                                                        |       | 265,331            |       | 263,102               |       |
|                                                                                                                                         |       |               |       |                  |       |
| **Property  and equipment, net**                                                                                                             |       | 73,281             |       | 74,411                |       |
|                                                                                                                                         |       |               |       |                  |       |
| **Other  assets:**                                                                                                                           |       |               |       |                  |       |
| Goodwill                                                                                                                                     |       | 46,593             |       | 46,188                |       |
| Investment in  affiliates                                                                                                                    |       | 17,376             |       | 17,155                |       |
| Other assets                                                                                                                                 |       | 10,573             |       | 10,380                |       |
| Deferred income  taxes                                                                                                                       |       | 6,708              |       | 7,209                 |       |
| **Total  assets**                                                                                                                            |       | $                  | 419,862    |                  | $          | 418,445 |   |
| ** **                                                                                                                                   |       |               |       |                  |       |
| **Liabilities and Stockholders’  Equity**                                                                                               |       |               |       |                  |       |
| **Current  liabilities:**                                                                                                                    |       |               |       |                  |       |
| Current debt                                                                                                                                 |       | $                  | 24,240     |                  | $          | 20,103 |   |
| Current portion  of capital lease obligations                                                                                                |       | 2,887              |       | 2,510                 |       |
| Trade accounts  payable                                                                                                                      |       | 20,361             |       | 29,429                |       |
| Accrued wages,  salaries and bonuses                                                                                                         |       | 48,627             |       | 53,441                |       |
| Accrued operating  expenses                                                                                                                  |       | 56,862             |       | 57,193                |       |
| Deferred revenue  and other                                                                                                                  |       | 6,103              |       | 8,434                 |       |
| Income taxes  payable                                                                                                                        |       | 2,294              |       | 1,475                 |       |
| Deferred income  taxes                                                                                                                       |       | 16                 |       | —                |       |
| Total current  liabilities                                                                                                                   |       | 161,390            |       | 172,585               |       |
| **Long-term  debt and other liabilities:**                                                                                                   |       |               |       |                  |       |
| Long-term debt,  excluding current portion                                                                                                   |       | 116,091            |       | 107,681               |       |
| Capital lease  obligations, excluding current portion                                                                                        |       | 6,527              |       | 6,782                 |       |
| Other  liabilities                                                                                                                           |       | 8,234              |       | 8,464                 |       |
| Total  liabilities                                                                                                                           |       | 292,242            |       | 295,512               |       |
|                                                                                                                                         |       |               |       |                  |       |
| **Minority  interests**                                                                                                                      |       | 5,258              |       | 4,547                 |       |
| ** **                                                                                                                                   |       |               |       |                  |       |
| **Stockholders’  equity:**                                                                                                              |       |               |       |                  |       |
| Common stock,  voting, $.001 par value 200,000,000 shares authorized, 74,859,823 and  74,757,729 shares issued and outstanding, respectively |       | 75                 |       | 75                    |       |
| Additional  paid-in capital                                                                                                                  |       | 170,089            |       | 169,662               |       |
| Accumulated  other comprehensive income                                                                                                      |       | (1,961             | )          | (2,823                | )          |
| Accumulated  deficit                                                                                                                         |       | (44,995            | )          | (47,645               | )          |
| Less treasury  stock, at cost, 640,506 and 651,302 common shares, respectively                                                               |       | (846               | )          | (883                  | )          |
| Total  stockholders’ equity                                                                                                             |       | 122,362            |       | 118,386               |       |
| **Total liabilities and  stockholders’ equity**                                                                                         |       | $                  | 419,862    |                  | $          | 418,445 |   |

 

*See Notesto Consolidated Condensed Financial Statements.*

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

| ** **                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
|                                                                              |       |                                             |       |   |   |
| **Cash flows from operating  activities:**                                        |       |                                             |       |   |   |
| Net income                                                                        |       | $                                                | 2,650      |   | $ | 548 |   |
| Adjustments  to reconcile net income to net cash flows from operating activities: |       |                                             |       |   |   |
| Restructuring  expense, net                                                       |       | (358                                             | )          | — |   |
| Depreciation and  amortization                                                    |       | 8,179                                            |       | 8,957 |   |
| (Gain)/Loss on  disposal of assets                                                |       | (32                                              | )          | 88 |   |
| Provision for  deferred income taxes                                              |       | 429                                              |       | (709 | ) |
| Equity in  (earnings) loss of affiliates, net                                     |       | (289                                             | )          | 107 |   |
| Minority  interest in net income of consolidated subsidiaries                     |       | 711                                              |       | 358 |   |
| Changes in  operating assets and liabilities:                                     |       |                                             |       |   |   |
| Trade accounts  receivable                                                        |       | (364                                             | )          | (6,750 | ) |
| Other assets                                                                      |       | 1,146                                            |       | (905 | ) |
| Trade accounts  payable                                                           |       | (9,197                                           | )          | (7,795 | ) |
| Other  liabilities                                                                |       | (7,934                                           | )          | (2,835 | ) |
| Net cash flows from  operating activities                                         |       | (5,059                                           | )          | (8,936 | ) |
|                                                                              |       |                                             |       |   |   |
| **Cash flows from investing  activities:**                                        |       |                                             |       |   |   |
| Purchases of property  and equipment                                              |       | (5,728                                           | )          | (6,653 | ) |
| Proceeds from cash  surrender value of life insurance                             |       | —                                           |       | 3,274 |   |
| Proceeds from sale of  property and equipment                                     |       | 134                                              |       | — |   |
| Net cash flows from  investing activities                                         |       | (5,594                                           | )          | (3,379 | ) |
|                                                                              |       |                                             |       |   |   |
| **Cash flows from financing activities:**                                         |       |                                             |       |   |   |
| Borrowings on debt                                                                |       | 138,465                                          |       | 50,859 |   |
| Repayments of debt                                                                |       | (126,555                                         | )          | (31,580 | ) |
| Repayments of capital  lease obligations                                          |       | (787                                             | )          | (896 | ) |
| Proceeds from exercise  of stock options                                          |       | 269                                              |       | 33 |   |
| Net cash flows from  financing activities                                         |       | 11,392                                           |       | 18,416 |   |
| Effect of exchange  rates on cash                                                 |       | (668                                             | )          | (369 | ) |
| **Net increase in cash**                                                          |       | 71                                               |       | 5,732 |   |
| **Cash and cash equivalents,  beginning of period**                               |       | 25,817                                           |       | 29,130 |   |
| **Cash and cash equivalents, end  of period**                                     |       | $                                                | 25,888     |   | $ | 34,862 |   |
| ** **                                                                        |       |                                             |       |   |   |
| **Non-cash investing and  financing activities:**                                 |       |                                             |       |   |   |
| Capital leases incurred                                                           |       | $                                                | 591        |   | 852 |   |

 

*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 managementstrategies of large and medium size corporations in North America, Europe, AsiaPacific, and Latin America. We provide customer acquisition, customer care,technical support and risk management services on an outsourced basis, as wellas operational 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 accompanying unaudited consolidated condensed financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position, and cash flows for the interim periods presented. The consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in our Annual Report on Form 10-K for the year ended December 31, 2005. All significant 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 FASBissued Statement of Financial Accounting Standards (SFAS) Statement No. 154, *Accounting Changes and Error Corrections,*(SFAS 154).  SFAS 154 is a replacement ofAccounting Principles Board Opinion No. 20 (APB 20) and FASB Statement No.3.  SFAS 154 provides guidance on theaccounting for and reporting of accounting changes and error corrections.  It establishes retrospective application, orthe latest practicable date, as the required method for reporting a change inaccounting principle and the reporting of a correction of an error.  SFAS 154 is effective for accounting changesand corrections of error made in fiscal years beginning after December 15, 2005and we adopted this standard on January 1, 2006.  The adoption of SFAS 154 did not have amaterial impact on our consolidated results of operations, financial conditionand cash flows.

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

***Stock-BasedCompensation***

Effective January 1, 2006, we adopted the provisionsof SFAS Statement No. 123R, *Shared-Based Payment,*(SFAS123R).  In conjunction with the adoptionof SFAS 123R on January 1, 2006, we also adopted or applied 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 months ended March31, 2006.

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SFAS 123R requires 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. SFAS No. 123, *Accounting for Stock-Based Compensation* (SFAS No. 123)*,* established accounting and disclosure requirementsusing a fair-value-based method of accounting for stock-basedemployee compensation plans.

As a result of adopting SFAS 123R, our net income forthe three months ended March 31, 2006 was $0.2 million lower than if we hadcontinued to account for stock-based compensation under APB No. 25. Basic anddiluted earnings per share for the three months ended March 31, 2006 would havebeen higher by $0.00 and $0.00, 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 (in thousands):
| Three Months Ended March 31,                                                                         | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
|                                                                                                                     |       |       |       |
| Net income:                                                                                                              |       |       |       |
| As reported                                                                                                              |       | $          | 548        |   |
| Less: total stock based employee compensation expense  determined under the fair value method for all awards, net of tax |       | (127       | )          |
| Pro forma                                                                                                                |       | $          | 421        |   |
|                                                                                                                     | ** ** | ** ** | ** ** |
| Income per  common share:                                                                                                |       |       |       |
| As reported:                                                                                                             |       |       |       |
| Basic                                                                                                                    |       | $          | 0.01       |   |
| Diluted                                                                                                                  |       | 0.01       |       |
| Pro forma:                                                                                                               |       |       |       |
| Basic                                                                                                                    |       | 0.01       |       |
| Diluted                                                                                                                  |       | 0.01       |       |

 

***SignificantClients***

Our******top 20 clients accounted for57.9% and 68.9% of our revenue in the three-month periods ended March 31, 2006and 2005, respectively, and includemultiple independently managed business units within the client’s affiliatedgroup.  Hewlett-Packard Company business units were responsible for 10.9%and 12.4% of our revenue for the three-month periods ended March 31, 2006 and2005.  General Motors Corporation(General Motors) business units were responsible for 12.2% of our total revenuein the three-month period ended March 31, 2005. The primary General Motors contract expired in December 2005.

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**Note2. Comprehensive Income**

Comprehensive income(loss) for the three months ended March 31, 2006 and 2005 is as follows (inthousands):
|                                     | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 31,**               | ** ** |
| ** **                          | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                          |       | $                                | 2,650      |   | $ | 548 |   |
| Other  comprehensive income (loss): |       |                             |       |   |   |
| Currency translation adjustment     |       | 862                              |       | (3,484 | ) |
| Comprehensive  income (loss)        |       | $                                | 3,512      |   | $ | (2,936 | ) |

 

Accumulated othercomprehensive income (loss) included in our consolidated condensed balancesheets represents the accumulated foreign currency translation adjustment.

**Note 3. Asset Impairment and Restructuring Expenses**

The following table summarizes activity in our restructuring liabilitiesfor the three months ended March 31, 2006:
|                    | ** ** | ** **    | ** ** | **Facility**        | ** ** | ** **        | ** ** | ** ** | ** ** |
|--------------------|------------|---------------|------------|---------------------|------------|-------------------|------------|------------|------------|
| ** **         | ** ** | ** **    | ** ** | **Closure or** | ** ** | **Grant**         | ** ** | ** ** | ** ** |
| ** **         | ** ** | **Severance** | ** ** | **Reduction**       | ** ** | **Reimbursement** | ** ** | **Total**  | ** ** |
|               |       |          |       |                |       |              |       |       |       |
| December 31,  2005 |       | $             | 1.5        |                | $          | 2.2               |       | $          | 3.5        |   | $ | 7.2 |   |
| Reversed           |       | —        |       | —              |       | (0.4              | )          | (0.4       | )          |
| Paid               |       | (1.0          | )          | (0.3                | )          | —            |       | (1.3       | )          |
| Other              |       | —        |       | (0.1                | )          | 0.1               |       | —     |       |
| March 31, 2006     |       | $             | 0.5        |                | $          | 1.8               |       | $          | 3.2        |   | $ | 5.5 |   |

 

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

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.

We expect to pay the employee compensationrestructuring liabilities during 2006. The Company expects to utilize theremaining facility closure or reduction restructuring liabilities over therespective lease periods through fiscal 2009.

**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.

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Subcontractedexpenses for services provided by our India joint venture for the three-monthperiods ended March 31, 2006 and 2005 were $5.3 million and $4.0 million,respectively.  The Company had payablesto our India joint venture of $3.4 million and $4.8 million at March 31, 2006and December 31, 2005, which are included in trade accounts payable in theaccompanying consolidated condensed balance sheets.

As of March 31, 2006 andDecember 31, 2005, the investment in certain Latin America affiliates wasapproximately $13.9 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-monthperiods ended March 31, 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 administrative expensein the accompanying condensed consolidated statements of operations, was $0.2 millionfor the three months ended March 31, 2006. There was no related income tax benefit recognized in the accompanyingcondensed consolidated statements of operations for the three months endedMarch 31, 2006.

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

The 1995 Plans,which were approved by the Board of Directors and the stock holders in 1995,provided for the granting of options to purchase up to an aggregate of9,800,000 and 300,000 shares of common stock to employees and directors,respectively.  Options granted under the1995 Employee Stock Option Plan could be incentive options or non-qualifiedoptions.  Options granted under the 1995Non-Employee Directors Stock Option Plan could be non-qualified options.  The options were granted at the common stockprice on the day of grant and generally vested ratably over one to fiveyears.  All options granted under the1995 Plans expire if not exercised by the tenth anniversary of their grantdate. The fair value of each stock option awarded was estimated on the date ofgrant using the Black-Scholes valuation model that uses various assumptions.Expected volatility was based on historical volatility of the Company’s stock.The risk-free rate for periods within the contractual life of the award isbased on the yield curve of a zero-coupon U.S. Treasury bond on the date theaward is granted with a maturity equal to the expected term of the award. Nostock options were granted under the 1995 Plans subsequent to stockholderapproval of the 1999 Stock Option Plan.
| ** **                      | ** ** | ** **         | ** ** | **Weighted-Average**    | ** ** | **Weighted-Average**           | ** ** | ** **               | ** ** |
|---------------------------------|------------|--------------------|------------|-------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** | **Remaining Contractual** | ** ** | **Aggregate**            | ** ** |
| ** **                      | ** ** | **Options**        | ** ** | **per Share**      | ** ** | **Term (in years)**  | ** ** | **Intrinsic Value** | ** ** |
| ** **                      | ** ** | ** **         | ** ** | ** **              | ** ** | ** **                     | ** ** | **(in thousands)**  | ** ** |
|                            |       |               |       |                    |       |                           |       |                     |       |
| Outstanding at  January 1, 2006 |       | 2,150,125          |       | $                       | 4.75       |                           |       |                     |       |   |
| Granted                         |       | —             |       | —                  |       |                           |       |                     |       |
| Exercised                       |       | (21,400            | )          | 3.50                    |       |                           |       |                     |       |
| Canceled                        |       | (69,033            | )          | 3.75                    |       |                           |       |                     |       |
| Outstanding at  March 31, 2006  |       | 2,059,692          |       | $                       | 4.79       |                           | 1.5        |                     | $          | 956 |   |
| Exercisable at  March 31, 2006  |       | 1,208,114          |       | $                       | 5.73       |                           | 1.7        |                     | $          | 338 |   |

 

The followingtable summarizes the status of nonvested stock options under the 1995 Plans asof March 31, 2006, and changes during the three months then ended:
|                               | ** ** | ** **         | ** ** | **Weighted-Average**       | ** ** |
|-------------------------------|------------|--------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **Number of** | ** ** | **Grant - Date** | ** ** |
| ** **                    | ** ** | **Options**        | ** ** | **Fair Value**        | ** ** |
|                          |       |               |       |                       |       |
| Nonvested at  January 1, 2006 |       | 884,631            |       | $                          | 3.22       |   |
| Granted                       |       | —             |       | —                     |       |
| Vested                        |       | —             |       | —                     |       |
| Forfeited                     |       | (33,153            | )          | 3.22                       |       |
| Nonvested at  March 31, 2006  |       | 851,478            |       | $                          | 3.22       |   |

 

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***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 aregranted at fair market value on the date of the grant and generally vest overfive years, other than for the 2006 Option Grant as discussed separately. Alloptions granted under the 1999 Plan expire if not exercised by the tenthanniversary of their grant date. The fair value of each stock option award isestimated on the date of grant using the Black-Scholes valuation model thatuses various assumptions. The fair value of the stock option awards is expensedon a straight-line basis over the vesting period of the award. Expectedvolatility is based on historical volatility of the Company’s stock. Therisk-free rate for periods within the contractual life of the award is based onthe yield curve of a zero-coupon U.S. Treasury bond on the date the award isgranted with a maturity equal to the expected term of the award. Forfeituresare estimated within the valuation model using historical data. The expectedterm of the stock option awards granted is derived from historical exerciseexperience under the Plan and represents the period of time that stock optionawards granted are expected to be outstanding. 
|                                 | ** ** | ** **         | ** ** | **Weighted-Average**    | ** ** | **Weighted-Average**           | ** ** | ** **               | ** ** |
|---------------------------------|------------|--------------------|------------|-------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** | **Remaining Contractual** | ** ** | **Aggregate**            | ** ** |
| ** **                      | ** ** | **Options**        | ** ** | **per Share**      | ** ** | **Term (in years)**  | ** ** | **Intrinsic Value** | ** ** |
| ** **                      | ** ** | ** **         | ** ** | ** **              | ** ** | ** **                     | ** ** | **(in thousands)**  | ** ** |
|                            |       |               |       |                    |       |                           |       |                     |       |
| Outstanding at  January 1, 2006 |       | 3,738,093          |       | $                       | 3.12       |                           |       |                     |       |   |
| Granted                         |       | —             |       | —                  |       |                           |       |                     |       |
| Exercised                       |       | (80,694            | )          | 2.42                    |       |                           |       |                     |       |
| Canceled                        |       | (125,564           | )          | 3.29                    |       |                           |       |                     |       |
| Outstanding at  March 31, 2006  |       | 3,531,835          |       | $                       | 3.13       |                           | 5.5        |                     | $          | 4,843 |   |
| Exercisable at March  31, 2006  |       | 2,373,904          |       | $                       | 3.40       |                           | 5.0        |                     | $          | 2,966 |   |

 

The followingtable summarizes the status of nonvested stock options under the 1999 Plan,excluding the 2006 Option Grant, as of March 31, 2006, and changes during thethree months then ended:
|                               | ** ** | ** **         | ** ** | **Weighted-Average**       | ** ** |
|-------------------------------|------------|--------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **Number of** | ** ** | **Grant - Date** | ** ** |
| ** **                    | ** ** | **Options**        | ** ** | **Fair Value**        | ** ** |
|                          |       |               |       |                       |       |
| Nonvested at  January 1, 2006 |       | 1,477,550          |       | $                          | 1.29       |   |
| Granted                       |       | —             |       | —                     |       |
| Vested                        |       | (234,220           | )          | 1.57                       |       |
| Forfeited                     |       | (85,399            | )          | 1.30                       |       |
| Nonvested at  March 31, 2006  |       | 1,157,931          |       | $                          | 1.38       |   |

 

As of March 31, 2006,there was $0.8 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 March31, 2006 and 2005, was $0.1 million.

***2006 Option Grant under the 1999 Stock Incentive Plan, as amended (2006Option Grant)***

On February 1, 2006, wegranted 1,463,000 stock options under the 1999 Plan.  Vesting of the options is contingent upon theCompany achieving one of three EPS targets for 2006, 2007 or 2008.  If the lowest target is achieved 50% of theoptions would vest, 80% if the second target is met and 100% if the highest ismet.  If one of the targets is met forthe first year (2006), the employee would be required to remain with theCompany for an additional year until our annual report on Form 10-K is filedfor 2007, at which point the relevant percentage of the options 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.

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The fair value ofoptions granted during the three months ended March 31, 2006, was estimated atthe date of the grant using the Black-Scholes option-pricing model, and thefollowing 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 three months ended March 31, 2005.
|                                 | ** ** | ** **         | ** ** | **Weighted-Average**    | ** ** | **Weighted-Average**           | ** ** | ** **               | ** ** |
|---------------------------------|------------|--------------------|------------|-------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** | **Remaining Contractual** | ** ** | **Aggregate**            | ** ** |
| ** **                      | ** ** | **Options**        | ** ** | **per Share**      | ** ** | **Term (in years)**  | ** ** | **Intrinsic Value** | ** ** |
| ** **                      | ** ** | ** **         | ** ** | ** **              | ** ** | ** **                     | ** ** | **(in thousands)**  | ** ** |
|                            |       |               |       |                    |       |                           |       |                     |       |
| Outstanding at  January 1, 2006 |       | —             |       | $                       | —     |                           |       |                     |       |   |
| Granted                         |       | 1,463,000          |       | 3.41                    |       |                           |       |                     |       |
| Exercised                       |       | —             |       | —                  |       |                           |       |                     |       |
| Canceled                        |       | (28,000            | )          | 3.41                    |       |                           |       |                     |       |
| Outstanding at  March 31, 2006  |       | 1,435,000          |       | $                       | 3.41       |                           | 9.3        |                     | $          | 1,134 |   |
| Exercisable at March  31, 2006  |       | —             |       | $                       | —     |                           | —     |                     | $          | — |   |

 

The following tablesummarizes the status of nonvested stock options under the 2006 Option Grant asof March 31, 2006, and changes during the three 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                     |       | (28,000            | )          | 1.79                       |       |
| Nonvested at  March 31, 2006  |       | 1,435,000          |       | $                          | 1.79       |   |

 

As of March 31, 2006,there was $0.9 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 1.8 years. No stockoptions under the 2006 Option Grant have vested as of March 31, 2006 as the EPStarget is measured on a fiscal year basis.

Cash received from stockoptions exercised under all stock-based compensation plans for the three monthsended March 31, 2006 and 2005, was $0.3 million and $6,000, 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 $19,000 and 4,728 shares forthe three months ended March 31, 2006 and $27,000 and 13,432 shares for thethree months ended March 31, 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 

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claims based on our negligence or willful misconductand (ii) indemnities involving the accuracy of representations and warrantiesin 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 reported about inpast periods as having received letters from time to time containing an offerto license and suggesting that the clients might be infringing certain patentsrelated to computerized telephonic voice response systems without the license.Both clients have indicated that if any infringement occurred the clients wouldseek contractual indemnity from us.  Toour knowledge, the second client has not yet been sued.  We plan to seek contractual indemnity fromcertain of our vendors in connection with the pending lawsuit. Any suchcontractual indemnity we might obtain may not be sufficient to cover all of thecosts of investigating and resolving this matter. We might also seek a licenseof the patents. Any such license may not be available under commerciallyreasonable terms. Any license costs would increase the cost of doing businessin the future and may or may not be fully reflected in our pricing.  To our knowledge, no litigation has beeninitiated against us concerning these matters. At this stage, due to theinherent uncertainties, we are unable to predict whether these matters may havea material adverse effect on our business or on our financial condition orresults of operation.

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

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

**Note 7. Earnings Per Share**

Wecalculate income per common share by dividing our reported net income by theweighted average number of common shares and common equivalent sharesoutstanding during each period. Our reported net income is used in thecomputation of both basic and diluted income per share.

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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 March 31, 2006 and 2005, we had1.6 million and 6.0 million options, respectively, which have been excludedfrom the diluted net income per share computation because their exercise priceexceeds the fair market value.  At March31, 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.  Subsequent Events**

***Brazil Taxes***

During the years 2001through 2005, certain Brazilian municipal and Federal taxes totaling approximately$8.3 million were collected and accrued but not paid. As a result, we incurredaccumulated interest of approximately $2.6 million, plus approximately $1.4million 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 were required to pay for unpaid municipal taxes. Wewill record 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.

***Settlement Agreement***

**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 will record a $6.0 million gain in the second quarter of 2006.**

***Merger Agreement***

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

##### **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,customer care, technical support and risk management services on an outsourcedbasis, as well as operational and information technology professional servicesfor both outsourced and in-house contact centers. We serve clients primarily inthe automotive, consumer,financial services, insurance, technology, telecommunications and ISP, mediaservices, and utilities sectors.

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

As you read this discussion and analysis, refer to our ConsolidatedCondensed Statements of Operations, which present the results of our operationsfor the three-month periods ended March 31, 2006 and 2005, and are summarizedon the following pages. We analyze and explain the differences between periodsfor the components of net income in the following sections. Our analysis isimportant in making decisions about your investment in SITEL Corporation.

***Subsequent Events***

***Brazil Taxes***

During the years 2001through 2005, certain Brazilian municipal and Federal taxes totaling approximately$8.3 million were collected and accrued but not paid. As a result, we incurredaccumulated interest of approximately $2.6 million, plus approximately $1.4million in penalties as of December 31, 2005.

On April 7, 2006, new legislation was enacted in Brazil that resultedin a reduction in the amount of penalties and interest we were required to payfor unpaid municipal taxes. We will record a gain of $1.8 million in the secondquarter of 2006 resulting from a reduction in the tax obligation recorded as ofDecember 31, 2005 for a portion of the cumulative interest and penalties onunpaid municipal taxes for the four years ended December 31, 2004.

***SettlementAgreement***

OnApril 12, 2006, we entered into a settlement agreement with a business partnerover 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 $1.0 million ininstallments during the second half of 2006. As a result of the settlement, we will record a $6.0 million gain in thesecond quarter of 2006.

***MergerAgreement***

OnOctober 13, 2006, the Company and ClientLogic Corporation (ClientLogic)issued a joint press release announcing that the Company and ClientLogic havesigned a definitive merger agreement. Under the terms of the agreement, a newly formed subsidiary ofClientLogic will merge with the Company and pay $4.05 per share in cash for allof the outstanding common stock of the Company. The Board of Directors of eachcompany has unanimously approved the transaction. The transaction is expectedto be completed in the first quarter of 2007 and is subject to customaryclosing conditions, including approval of the Company’s shareholders andregulatory clearances.  The Company’sBoard of Directors has recommended to our shareholders that they vote in favorof the transaction.  Approximately 19.9%of the outstanding common stock of the Company is subject to voting agreementswhich require 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 Business Risks and CriticalAccounting 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 and losses of client contracts and with changes inthe scope of client requirements. Our******top20 clients accounted for 57.9% and 68.9% of our revenue in the three-monthperiods ended March 31, 2006 and 2005, respectively, and include multiple independently managed businessunits within the client’s affiliated group. Hewlett-Packard Company business units were responsible for 10.9%and 12.4% of our revenue for the three-month period ended March 31, 2006 and2005.  General Motors Corporation(General Motors) business units were responsible for 12.2% of our total revenuein the three-month periods ended March 31, 2005.  The primary General Motors contract expiredin December 2005.  The financial failure of any of these clients orthe loss of any or all of their business could have an adverse impact on ouroperating 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**

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

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

***Revenue Recognition***

We recognize revenue in accordance with applicable accountingstandards, including Securities and Exchange Commission Staff AccountingBulletin (SAB) No. 104, *RevenueRecognition*.  We recognizerevenue at the time services are performed based on the rate detailed in theclient contract, such as hourly, monthly, per call or per employee.  A portion of our revenue is often subject toperformance standards, such as sales per hour, average handle time, occupancyrate and abandonment rate.  Our performance against such standards mayresult in incentives or penalties, which are recognized as earned or incurred.In certain circumstances, we receive payment in advance of providing service.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 is calculatedbased upon a percentage of cash collected or other agreed upon contractualparameters.

***Trade Accounts Receivable***

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

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***Property and Equipment***

We record property andequipment at cost, and calculate depreciation using the straight-line methodover the estimated useful lives of the assets, which generally range from 2 to25 years. We amortize leasehold improvements and assets under capitalleases on a straight-line basis over the shorter of the lease term or theestimated useful life of the asset. If the actual useful lives of these assetsare less than the estimated depreciable lives, we would record additionaldepreciation expense or losses on disposal to the extent the net book value ofsuch asset is not recovered upon sale.

***Asset Impairment***

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

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

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

***Goodwill***

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

***Deferred Income Taxes***

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

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

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***Self-Insurance Reserves***

We are self-insured inNorth America for workers’ compensation and health care claims for eligibleparticipating employees, subject to certain deductibles and limitations. Thecosts include an estimate of expected settlements on pending claims and aprovision for claims incurred but not reported. These estimates are based onour assessment of potential liability using an analysis of availableinformation with respect to pending claims, historical experience, and currentcost trends. Actual claims results could differ from these estimates.

***Contingencies***

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

**Resultsof Operations**

##### **For the Three Months Ended March 31, 2006Compared to the Same Period of 2005**

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

**Components of Operations**

The following table summarizes our statement ofoperations data on a percentage-of-revenue basis.
| ** **                                            | ** ** | **Three Months Ended March 31,** | ** **  |
|-------------------------------------------------------|------------|------------------------------------------------------|-------------|
| ** **                                            | ** ** | **2006**                                             | ** **  | **2005** | ** ** |
| ** **                                            | ** ** | **$**                                                | ** **  | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                            | ** ** | **(in thousands)**                              | ** **  |
|                                                  |       |                                                 |        |   |   |   |   |   |   |
| **Revenue**                                           | ** ** | **$**                                                | **275,084** |   | 100.0 | % | $ | 250,892 |   | 100.0 | % |
|                                                  |       |                                                 |        |   |   |   |   |   |   |
| Direct labor and  telecommunications expenses         | ** ** | **171,853**                                          |        | 62.5 | % | 152,450 |   | 60.8 | % |
| Subcontracted and other  services expenses            | ** ** | **8,919**                                            |        | 3.2 | % | 12,880 |   | 5.1 | % |
| Operating, selling and  administrative expenses       | ** ** | **85,254**                                           |        | 31.0 | % | 80,239 |   | 32.0 | % |
| Restructuring expense,  net                           | ** ** | **(358**                                             | **)**       | -0.1 | % | — |   | 0.0 | % |
| **Operating income**                                  | ** ** | **9,416**                                            |        | 3.4 | % | 5,323 |   | 2.1 | % |
|                                                  |       |                                                 |        |   |   |   |   |   |   |
| Interest expense                                      | ** ** | **(3,696**                                           | **)**       | -1.3 | % | (3,162 | ) | -1.3 | % |
| Interest income                                       | ** ** | **79**                                               |        | 0.0 | % | 120 |   | 0.0 | % |
| Equity in earnings  (loss) of affiliates, net         | ** ** | **289**                                              |        | 0.1 | % | (107 | ) | 0.0 | % |
| Other income (expense),  net                          | ** ** | **81**                                               |        | 0.0 | % | (10 | ) | 0.0 | % |
| **Income before income taxes and  minority interest** | ** ** | **6,169**                                            |        | 2.2 | % | 2,164 |   | 0.9 | % |
|                                                  |       |                                                 |        |   |   |   |   |   |   |
| Income tax expense                                    | ** ** | **2,808**                                            |        | 1.0 | % | 1,258 |   | 0.5 | % |
| Minority interest                                     | ** ** | **711**                                              |        | 0.3 | % | 358 |   | 0.1 | % |
|                                                  |       |                                                 |        |   |   |   |   |   |   |
| **Net Income**                                        | ** ** | **$**                                                | **2,650**   |   | 1.0 | % | $ | 548 |   | 0.2 | % |

 

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***Revenue***

Revenue increased $24.2 million, or 9.6%, in the first quarter of 2006compared to the same period of 2005.  Thechanges in revenue by geographic region are shown in the following table:
| Three months             | ** ** | ** **             | ** ** | ** ** | ** ** | **$**      | ** ** | **%**      | ** ** |
|-------------------------------|------------|------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Ended March 31,** | ** ** | **2006**               | ** ** | **2005**   | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                    | ** ** | **(in millions)** | ** ** |
|                          |       |                   |       |       |       |       |       |       |       |
| North America                 | ** ** | **$**                  | **128.0**  |       | $          | 122.9      |       | $          | 5.1        |   | 4.1 | % |
| Europe                        | ** ** | **121.4**              |       | 107.9      |       | 13.5       |       | 12.5       | %          |
| Asia Pacific                  | ** ** | **11.9**               |       | 12.3       |       | (0.4       | )          | -3.3       | %          |
| Latin America                 | ** ** | **13.8**               |       | 7.8        |       | 6.0        |       | 76.9       | %          |
| Totals                        | ** ** | **$**                  | **275.1**  |       | $          | 250.9      |       | $          | 24.2       |   | 9.6 | % |

 

North American revenue increased $5.1 million or4.1% in the first quarter of2006 compared to the same period in 2005. Adecrease of $24.8 million of revenue resulting from the loss of General Motorswas offset by $29.9 million of revenue growth primarily in customer acquisition,technical support and risk management. The weakening of the U.S. dollar versus the Canadian dollar resulted in$0.3 million of the increase.

European revenue increased $13.5 million in the first quarter of 2006 compared to the same period in 2005. Highersales volumes from new and existing clients resulted in an increase in revenueof $24.3 million in the first quarter of 2006 compared to the same period in2005.  The strengthening of the U.S.dollar versus the British pound and Euro partially offset the increase by $10.8million.

Asia Pacific revenue decreased $0.8 million duethe strengthening of the US dollar versus the New Zealand and Australiadollars, which was partially offset by a $0.4 million increase as the result ofhigher sales volumes from new and existing clients.

Latin American revenue increased $4.6 million as a result of highersales volumes from new and existing clients. The remaining increase was due to the weakening of the U.S. dollarversus the Brazilian real.

***Direct Labor and TelecommunicationsExpenses***

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 $19.4 million, or 12.7%, in the first quarter of 2006 compared to thesame period of 2005.  As a percentage ofrevenue, direct labor and telecommunications expenses increased to 62.5%in the first quarter of 2006 compared to 60.8% in same period in 2005. Theincrease was primarily the result of higher direct labor costs, particularly inEurope, associated with the ramp up of new business.

***Subcontracted and Other ServicesExpenses***

Subcontracted and other services expenses includeservices provided to clients through subcontractors and other out-of-pocketexpenses. Subcontracted and other services expenses decreased $4.0 million forthe first quarter of 2006 compared to the same period of 2005 primarily theresult of lower subcontracted IT costs to support client programs partiallyoffset by higher subcontracted services provided by our India joint venture.

Subcontracted expenses for services provided byour India joint venture for the three months ended March 31, 2006 and 2005 were$5.3 million and $4.0 million, respectively.

***Restructuring Expense, net***

As a result of a facility closure in 2005, we were nolonger able to maintain certain minimum employment levels required to retaingovernment grants received and recorded as a reduction of operating expenses inprevious periods. Consequently, we recorded restructuring expense of $3.5million during the year ended December 31, 2005, to establish a 

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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 three months ended March 31, 2006.

There was no restructuring activity duringthe three months ended March 31, 2005.

***Operating, Selling andAdministrative Expenses***

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

Operating, selling and administrative expensesincreased $5.0 million, or 6.3%, in the first quarter of 2006 comparedto the same period of 2005.  As a percentage of revenue, operating,selling and administrative expenses decreased to 31.0% in the first quarter of2006 compared to 32.0% in the first quarter of 2005 primarily the result ofcost reductions and restructuring actions taken at the end of 2004 and during2005.

***Operating Income***

Operating income increased $4.1 million in thefirst quarter of 2006 compared to the same period of 2005. As a percentage of revenue, operating incomeincreased to 3.4% in the first quarter of 2006 compared to 2.1% in the sameperiod of 2005 due to the factors discussed above.

***Interest Expense***

Interest expense increased $0.5 million or 16.9% in the first quarterof 2006 compared to the same period in 2005 primarily as a result of a higheraverage debt balance and amortization of the debt acquisition costs related tothe Credit Facility.

***Interest Income***

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

***Equity in Earnings (Loss) ofAffiliates, net***

Equityin earnings (losses) of affiliates, net increased $0.4 million to earnings of$0.3 million for the first quarter of 2006 compared to a net loss of$0.1 million for the same period in 2005.

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

Other income (expense), net increased $0.1 million in the first quarterof 2006 as compared to the same period in 2005.

***Income Tax Expense***

Incometax expense as a percentage of income before income taxes and minority interestwas 45.5% and 58.1% for the three-months ended March 31, 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.

**Financial Condition andLiquidity**

In this section, wediscuss our financial condition and liquidity and the factors affecting them.We separately discuss cash flows, capital resources, and contractualobligations and commitments. We describe our general business risks, criticalaccounting policies, and estimates that are important to our financialcondition and liquidity earlier in this report. Please refer to that discussionas you read this section.

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# ***Cash Flows***

The following table provides summary cash flow data for the periodsindicated. Please refer to this summary as you read our discussion of thesources and uses of cash in each year.
| Three Months Ended March 31, | ** ** | **2006**                | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| **Net  cash flows from:**                        |       |                    |       |     |       |
| Operating activities                             |       | $                       | (5,059     | )        | $          | (8,936 | ) |
| Investing activities                             |       | (5,594                  | )          | (3,379   | )          |
| Financing activities                             |       | 11,392                  |       | 18,416   |       |
|                                                  |            |                         |            |          |            |  |  |

 

**2006**

In the first quarter of 2006, cash used by operatingactivities resulted primarily from income before depreciation and amortizationand other charges of $11.3 million and a $1.1 million decrease in other assets,which was offset by a $0.4 million increase in trade accounts receivable and a$17.1 million decrease in trade accounts payable and other liabilities.

In the first quarter of 2006, weused cash for investing activities to purchase $5.7 million of property andequipment.  This was partially offset$0.1 million in proceeds from the sale of property and equipment.

In the first quarter of 2006,cash provided by financing activities resulted from $11.9 million in net borrowings.  This was partially offset by cash used torepay borrowings under capital lease obligations of $0.8 million.

**2005**

In the first quarter of 2005, cash used by operatingactivities resulted primarily from income before depreciation and amortizationand other charges of $9.3 million, which was offset by a $7.7 million increasein trade accounts receivable and other assets and a $10.6 million decrease intrade accounts payable and other liabilities.

In the first quarter of 2005, weused cash for investing activities to purchase $6.7 million of property andequipment.  This was partially offset by$3.3 million in proceeds from the cash surrender value of life insurance.

In the first quarter of 2005,cash provided by financing activities resulted from $19.3 million in netborrowings under the revolving credit facility and other short-termborrowings.  This was partially offset bycash used to repay borrowings under capital lease obligations of $0.9 million.

***Capital Resources***

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

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

Borrowings under eachCredit Agreement bear interest, at the Company’s option, at either the PrimeRate plus the Applicable Margins or the LIBOR Rate plus the Applicable Margins(each term as defined in the Credit Agreements). The Term Loan A requiresmonthly principal payments of $0.3 million each, with the balance payable atmaturity.  On March 31, 2006, theweighted average interest rates applicable to the Revolver was 7.13% , TermLoan A was 7.38% and the interest rate applicable to the Term Loan B was11.11%.

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The Credit Agreementsrequire prepayment from excess cash flow and proceeds of certain asset sales,debt issuances, and extraordinary receipts. The Company may prepay the termloans without prepayment premium under certain circumstances.  If the Credit Facility is terminated duringthe first four years, the applicable prepayment premium is 4% in year one onthe maximum Revolver and any remaining principal of Term Loan A, declining byone percent each year thereafter, and 2% on any remaining principal of TermLoan B, declining by one-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 March 31, 2006 andDecember 31, 2005, we had $120.6 million and $110.6 million outstanding underthe Credit Agreements, respectively, of which $3.6 million is included inrevolving credit facility and other current debt in the accompanyingconsolidated condensed balance sheet. The remainder is included in long-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 ofMarch 31, 2006 and December 31, 2005.  We subsequently 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 compliancecertificates due 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 Braziliansubsidiary for working capital; (2) a UK subsidiary using proceeds of anadvance under the WFF Credit Agreement to repay $3.95 million of intercompanydebt to the Company; (3) the Brazilian subsidiary incurring additional securedindebtedness of up to 2 million Brazilian Reais; and (4) excluding theBrazilian subsidiary’s intercompany loans and previously incurred securedindebtedness from the Investment, Indebtedness and Lien basket limitations.

We obtained amendments tothe credit agreements  to, among 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.

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

Under a stock repurchase program that wasauthorized by our Board of Directors in February 2001, we may repurchase up to$10 million of our shares from time to time in the open market or in privatelynegotiated transactions, depending on general 

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business and market conditions. Through the dateof this report, we had repurchased a total of 881,700 shares at a total cost of$1.5 million.

# **Contractual Obligations and Commitments**

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

·            $116.1 million of Long-term Debt as shown in ourconsolidated condensed balance sheet at March 31, 2006,

·            $24.2 million of short-term borrowings debt asshown in our consolidated condensed balance sheet at March 31, 2006,

·            $9.4 million of capital lease obligations as shownin our consolidated condensed balance sheet at March 31, 2006, and

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

**Off-Balance Sheet Arrangements**

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

**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 managementinitiatives and customer acquisition and loyalty campaigns,

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

·                  revenuemix,

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

·                  the timing of recognition of incentive fees.

We experience periodic fluctuations in our results of operationsrelated to both the start-up costs associated with expansion and the implementationof clients’ outsourced customer management activities. In addition, ourbusiness generally tends to be slower in the third quarter due to summerholidays 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 forbusiness and strategic purposes through the purchase of voting common andpreferred stock of companies.  Theseinvestments are included in investments in affiliates in consolidated financialstatements.  As of March 31, 2006 andDecember 31, 2005, the investment in our India joint venture was approximately$3.5 million and $3.4 million, respectively. Subcontracted services provided byour India joint venture for the three months ended March 31, 2006 and 2005 were$5.3 million and $4.0 million, respectively, and are included in subcontractedand other services expenses in the accompanying consolidated statements ofoperations. The Company had payables to our India joint venture of $3.4 millionand $4.8 million at March 31, 2006 and December 31, 2005, respectively, whichare included in trade accounts payable in the consolidated financialstatements.

As of March 31, 2006 andDecember 31, 2005, the investment in certain Latin America affiliates wasapproximately $13.9 million and $13.7 million, respectively. Of the $13.9million investment in certain Latin America affiliates, approximately $7.7million is equity method goodwill. This equity method goodwill is notamortized.  Subcontracted servicesprovided by our Latin America joint ventures for the three months ended March31, 2006 and 2005 were not material.

***Recently IssuedAccounting Pronouncements***

In May 2005, the FASBissued Statement of Financial Accounting Standards (SFAS) Statement No. 154, *Accounting Changes and Error Corrections,*(SFAS 154).  SFAS 154 is a replacement ofAccounting Principles Board Opinion No. 20 (APB 20) and FASB Statement No.3.  SFAS 154 provides guidance on theaccounting for and reporting of accounting changes and error corrections.  It establishes retrospective application, orthe latest practicable date, as the required 

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method for reporting achange in accounting principle and the reporting of a correction of anerror.  SFAS 154 is effective foraccounting changes and corrections of error made in fiscal years beginningafter December 15, 2005 and 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**

***Foreign Currency Risk***

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

Ourfinancial statements are presented in U.S. dollars and can be impacted by foreignexchange fluctuations through both (i) translation risk, which is the riskthat the financial statements for a particular period or as of a certain datedepend on the prevailing exchange rates of the various currencies against theU.S. dollar, and (ii) transaction risk, which is the risk that thecurrency impact of transactions denominated incurrencies other than the business unit’s functional currency may varyaccording to currency fluctuations.

With respect totranslation risk, even though the fluctuations of currencies against the U.S.dollar can be substantial and therefore significantly impact comparisons withprior periods, the translation impact is included in accumulated othercomprehensive income, a component ofstockholders’ equity, and does not affect the underlying results ofoperations. Gains and losses related totransactions denominated in a currency other than the functional currency ofthe countries in which we operate including short-term intercompany accountsare included in the determination of net income.

***Interest Rate Risk***

We are also exposed tochanges in interest rates on our variable rate borrowings. Interest rates onour capital lease obligations are fixed, but rates on borrowings under ourCredit Facility are variable. During the three-month period ended March 31,2006, our average borrowings under our revolving credit facility were $60.1million.  Based on our projected cashneeds for the foreseeable future, we do not expect that our exposure to changesin interest rates for these borrowings will have a material impact on ourinterest expense.

***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.

**Item 4. Controls and Procedures**

*Evaluation of Disclosure Controlsand Procedures*

In the preparation andfiling of this Form 10-Q, we carried out an evaluation as of March 31,2006, under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). Based upon thisevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were not effective as of that date.Disclosure controls and procedures are controls and procedures that aredesigned to ensure that information required to be disclosed in reports filedor submitted by us under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms. 

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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 haveimplemented or continue to implement our remediation activities, we believe itwill take multiple quarters of effective application of the control activities(including adequate testing of such control activities) in order for us torevise our conclusion regarding the effectiveness of our internal controls overfinancial reporting.

*Changes in Internal Control Over FinancialReporting*

There were no changes inthe Company’s internal control over financial reporting (as defined in Rule13a-15(f) under the Exchange Act) during the fiscal quarter endedMarch 31, 2006 that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

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

**PART II – OTHER INFORMATION**

**Item1. Legal Proceedings**

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

From time to time, we are involved in litigationincidental to our business. We cannot predict the ultimate outcome of such litigationwith certainty, but management believes, after consultation with counsel,except for the items discussed below for the reasons mentioned therein, thatthe resolution of such matters will not have a material adverse effect on ourconsolidated 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 

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Company employees, officersand/or directors, the imposition of fines and other penalties, remedies and/orsanctions and/or a referral to other governmental agencies.

One of our clients hasbeen sued on a claim that it is infringing certain patents related tocomputerized telephonic voice response systems. This client has tendered defense of the patent infringement action tomany vendors including us, though because of the number of vendors, weanticipate that the client will retain control of the defense.  Regardless of which company controls thedefense of this matter, we may be required to indemnify our client against itslosses and reasonable attorneys’ fees incurred in connection with thelawsuit.  The client that has been suedis one of two clients that we have reported about in past periods as havingreceived letters from time to time containing an offer to license andsuggesting that the clients might be infringing certain patents related tocomputerized telephonic voice response systems without the license. Bothclients have indicated that if any infringement occurred the clients would seekcontractual indemnity from us.  To ourknowledge, the second client has not yet been sued.  We plan to seek contractual indemnity fromcertain of our vendors in connection with the pending lawsuit. Any suchcontractual indemnity we might obtain may not be sufficient to cover all of thecosts of investigating and resolving this matter. We might also seek a licenseof the patents. Any such license may not be available under commercially reasonableterms. Any license costs would increase the cost of doing business in thefuture 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.

10.1                     Jorge A.Celaya Employment Agreement (see Exhibit 10.17 to the Company’s Form 10-K forthe year ended December 31, 2005)

10.2                     James F.Lynch Employment Agreement (see Exhibit 10.18 to the Company’s Form 10-K forthe year ended December 31, 2005)

10.3                     Robert ScottMoncrieff Employment Agreement (see Exhibit 10.19 to the Company’s Form 10-Kfor the year ended December 31, 2005)

10.4                     Letterregarding Robert Scott Moncrieff stock options (see Exhibit 10.20 to theCompany’s Form 10-K for the year ended December 31, 2005)

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| 10.5 |   | SITEL Corporation 2006 Management Incentive Plan  (see Exhibit 10.23 to the Company’s Form 10-K for the year ended December 31,  2005)                                                                                                                                                                 |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.6 |   | Forms of Stock Option Agreements for February 1,  2006 grants of Incentive Stock Options and Non-Qualified Stock Options to  Jorge A. Celaya for 45,000 options and to Robert Scott Moncrieff for 45,000  options (see Exhibit 10.32 to the Company’s Form 10-K for the year ended  December 31, 2005) |
| 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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**EXHIBITINDEX**

Exhibit No. 
| 10.1   |   | Jorge A. Celaya Employment Agreement (see Exhibit  10.17 to the Company’s Form 10-K for the year ended December 31, 2005)                                                                                                                                                                              |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                        |
| 10.2   |   | James F. Lynch Employment Agreement (see Exhibit  10.18 to the Company’s Form 10-K for the year ended December 31, 2005)                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 10.3   |   | Robert Scott Moncrieff Employment Agreement (see  Exhibit 10.19 to the Company’s Form 10-K for the year ended December 31,  2005)                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 10.4   |   | Letter regarding Robert Scott Moncrieff stock  options (see Exhibit 10.20 to the Company’s Form 10-K for the year ended  December 31, 2005)                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 10.5   |   | SITEL Corporation 2006 Management Incentive Plan  (see Exhibit 10.23 to the Company’s Form 10-K for the year ended December 31,  2005)                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 10.6   |   | Forms of Stock Option Agreements for February 1,  2006 grants of Incentive Stock Options and Non-Qualified Stock Options to  Jorge A. Celaya for 45,000 options and to Robert Scott Moncrieff for 45,000  options (see Exhibit 10.32 to the Company’s Form 10-K for the year ended  December 31, 2005) |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 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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