Table of Contents

 

 

 

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**Form 10-Q**

 

**(MarkOne)**

 
| ** ****x**                                        | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                   |                                                                                                    |
| **For  the quarterly period ended June 30, 2009** |
|                                                   |                                                                                                    |
| **or**                                                 |
|                                                   |                                                                                                    |
| ** ****o**                                        | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from               to               **

 

**Commissionfile number 1-12793**

 

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**StarTek, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                | ** ** | **84-1370538**      |
|---------------------------------------------|------------|---------------------|
| (State or other jurisdiction of             |       | (I.R.S. employer    |
| incorporation or organization)              |       | Identification No.) |
|                                        |       |                |
| **44  Cook Street, 4****th**** Floor** | ** ** | ** **          |
| **Denver,  Colorado**                       | * *   | **80206**           |
| (Address of principal executive offices)    |       | (Zip code)          |

 

**(303)399-2400**

(Registrant’s telephone number, including areacode)

 

Securities registered pursuant to Section 12(b) of the Act:

 

| **Title  of Each Class**      | ** ** | **Name of  Each Exchange on Which Registered** |
|-------------------------------|------------|------------------------------------------------|
| Common Stock, $.01 par  value |       | New York Stock  Exchange, Inc.            |

 

Securities registered pursuant to Section 12(g) of the Act:

**None**

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 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 x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes o  No o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer  o                     |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes o  No x

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

Common Stock, $0.01 ParValue – 14,857,654 shares as of July 15, 2009.

 

 

 

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**STARTEK, INC. AND SUBSIDIARIES**

 

**FORM 10-Q**

 

**INDEX**

 
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                       | ** ** |
|-------------------|------------------------------------------------------------------------------------------------------------------|------------|
|              |                                                                                                             |       |
| Item 1.           | Financial  Statements (unaudited):                                                                               |       |
|              |                                                                                                             |       |
|              | Condensed  Consolidated Statements of Operations for the three and six months ended  June 30, 2009 and 2008 |       |
|              |                                                                                                             |       |
|              | Condensed Consolidated Balance Sheets as of  June 30, 2009 and December 31, 2008                       |       |
|              |                                                                                                             |       |
|              | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2009 and 2008            |       |
|              |                                                                                                             |       |
|              | Notes to Condensed Consolidated Financial Statements                                                             |       |
|              |                                                                                                             |       |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                      |       |
|              |                                                                                                             |       |
| Item 3.           | Quantitative  and Qualitative Disclosures About Market Risk                                                      |       |
|              |                                                                                                             |       |
| Item 4.           | Controls and  Procedures                                                                                         |       |
|              |                                                                                                             |       |
| **PART II.** | **OTHER  INFORMATION**                                                                                           | ** ** |
|              |                                                                                                             |       |
| Item 1.           | Legal Proceedings                                                                                                |       |
|              |                                                                                                             |       |
| Item 1A.          | Risk Factors                                                                                                     |       |
|              |                                                                                                             |       |
| Item 4.           | Submission of  Matters to a Vote of Security Holders                                                             |       |
|              |                                                                                                             |       |
| Item 6.           | Exhibits                                                                                                         |       |
|              |                                                                                                             |       |
| SIGNATURES        |                                                                                                             |

 

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

This QuarterlyReport contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, including the following:

 

·                  certain statements, including possible or assumedfuture results of operations, in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations;”

·                  any statements contained herein regarding theprospects for our business or any of our services;

·                  any statements preceded by, followed by or thatinclude the words “may,” “will,” “should,” “seeks,” “believes,” “expects,” “anticipates,”“intends,” “continue,” “estimate,” “plans,” “future,” “targets,” “predicts,” “budgeted,”“projections,” “outlooks,” “attempts,” “is scheduled,” or similar expressions;and

·                  other statements contained herein regarding mattersthat are not historical facts.

 

Our business and resultsof operations are subject to risks and uncertainties, many of which are beyondour ability to control or predict. Because of these risks and uncertainties,actual results may differ materially from those expressed or implied byforward-looking statements, and investors are cautioned not to place unduereliance on such statements, which speak only as of the date thereof.  Important factors that could cause actualresults to differ materially from our expectations and may adversely affect ourbusiness and results of operations, include, but are not limited to those itemsdescribed herein or set forth in Item 1A. “Risk Factors” appearing in ourAnnual Report on Form 10-K for the year ended December 31, 2008.

 

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**Part I.Financial Information**

 

**ITEM1.  FINANCIAL STATEMENTS (UNAUDITED)**

 

**STARTEK, INC. AND SUBSIDIARIES**

CondensedConsolidated Statements of Operations

(Dollars in thousands,except per share data)

(Unaudited)

 
| ** **                                                                                                                             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                             | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenue                                                                                                                                |       | $                                    | 73,290     |                               | $          | 65,467 |   | $ | 144,001 |   | $ | 130,050 |   |
| Cost of services                                                                                                                       |       | 60,161                               |       | 57,163                             |       | 120,149 |   | 112,279 |   |
| Gross profit                                                                                                                           |       | 13,129                               |       | 8,304                              |       | 23,852 |   | 17,771 |   |
| Selling, general and administrative expenses                                                                                           |       | 10,889                               |       | 10,227                             |       | 20,581 |   | 20,317 |   |
| Impairment losses and restructuring charges                                                                                            |       | —                               |       | 5,500                              |       | 6,437 |   | 5,608 |   |
| Operating income (loss)                                                                                                                |       | 2,240                                |       | (7,423                             | )          | (3,166 | ) | (8,154 | ) |
| Net interest and other (expense) income                                                                                                |       | (103                                 | )          | 90                                 |       | (178 | ) | 400 |   |
| Income (loss) from continuing operations before  income taxes                                                                          |       | 2,137                                |       | (7,333                             | )          | (3,344 | ) | (7,754 | ) |
| Income tax expense (benefit)                                                                                                           |       | 810                                  |       | (2,745                             | )          | (683 | ) | (2,763 | ) |
| Net income (loss) from continuing operations                                                                                           |       | 1,327                                |       | (4,588                             | )          | (2,661 | ) | (4,991 | ) |
| Income from discontinued operations, net of tax (including  gain on disposal of $6,937 during the six months ended June 30, 2009) |       | —                               |       | 69                                 |       | 4,640 |   | 141 |   |
| Net income (loss)                                                                                                                      |       | $                                    | 1,327      |                               | $          | (4,519 | ) | $ | 1,979 |   | $ | (4,850 | ) |
|                                                                                                                                   |       |                                 |       |                               |       |   |   |   |   |
| Basic net income (loss) per share from:                                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Continuing operations                                                                                                                  |       | $                                    | 0.09       |                               | $          | (0.31 | ) | $ | (0.18 | ) | $ | (0.34 | ) |
| Discontinued operations                                                                                                                |       | —                               |       | 0.00                               |       | 0.31 |   | 0.01 |   |
| Net income (loss)                                                                                                                      |       | $                                    | 0.09       |                               | $          | (0.31 | ) | $ | 0.13 |   | $ | (0.33 | ) |
|                                                                                                                                   |       |                                 |       |                               |       |   |   |   |   |
| Diluted net income (loss) per share from:                                                                                              |       |                                 |       |                               |       |   |   |   |   |
| Continuing operations                                                                                                                  |       | $                                    | 0.09       |                               | $          | (0.31 | ) | $ | (0.18 | ) | $ | (0.34 | ) |
| Discontinued operations                                                                                                                |       | —                               |       | 0.00                               |       | 0.31 |   | 0.01 |   |
| Net income (loss)                                                                                                                      |       | $                                    | 0.09       |                               | $          | (0.31 | ) | $ | 0.13 |   | $ | (0.33 | ) |

 

*See notes to condensedconsolidated financial statements.*

 

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**STARTEK, INC. AND SUBSIDIARIES**

CondensedConsolidated Balance Sheets

(Dollars in thousands,except share and per share data)

 
| ** **                                                                                                                                                                                              | ** ** | **As of**              | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                              | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
| ** **                                                                                                                                                                                              | ** ** | **(Unaudited)**        | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                                                                                              |       |                   |       |   |   |
| Current assets:                                                                                                                                                                                         |       |                   |       |   |   |
| Cash and cash equivalents                                                                                                                                                                               |       | $                      | 19,827     |   | $ | 9,580 |   |
| Investments                                                                                                                                                                                             |       | 498                    |       | 8,437 |   |
| Trade accounts receivable, less allowance for doubtful  accounts of $32 and $32, respectively                                                                                                           |       | 55,782                 |       | 51,510 |   |
| Income tax receivable                                                                                                                                                                                   |       | 1,550                  |       | 2,675 |   |
| Deferred income tax assets                                                                                                                                                                              |       | 730                    |       | 2,185 |   |
| Derivative asset                                                                                                                                                                                        |       | 996                    |       | — |   |
| Prepaid expenses and other current assets                                                                                                                                                               |       | 3,144                  |       | 3,273 |   |
| Total current assets                                                                                                                                                                                    |       | 82,527                 |       | 77,660 |   |
|                                                                                                                                                                                                    |       |                   |       |   |   |
| Property, plant and equipment, net                                                                                                                                                                      |       | 55,556                 |       | 59,608 |   |
| Long-term deferred income tax assets                                                                                                                                                                    |       | 8,164                  |       | 8,946 |   |
| Other assets                                                                                                                                                                                            |       | 704                    |       | 650 |   |
| Total assets                                                                                                                                                                                            |       | $                      | 146,951    |   | $ | 146,864 |   |
|                                                                                                                                                                                                    |       |                   |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                          |       |                   |       |   |   |
| Current liabilities:                                                                                                                                                                                    |       |                   |       |   |   |
| Accounts payable                                                                                                                                                                                        |       | $                      | 5,406      |   | $ | 6,193 |   |
| Derivative liability                                                                                                                                                                                    |       | 97                     |       | 2,323 |   |
| Accrued liabilities:                                                                                                                                                                                    |       |                   |       |   |   |
| Accrued payroll                                                                                                                                                                                         |       | 8,003                  |       | 9,158 |   |
| Accrued compensated absences                                                                                                                                                                            |       | 4,831                  |       | 4,856 |   |
| Accrued restructuring costs                                                                                                                                                                             |       | 2,032                  |       | 995 |   |
| Other accrued liabilities                                                                                                                                                                               |       | 4,234                  |       | 2,317 |   |
| Current portion of long-term debt                                                                                                                                                                       |       | —                 |       | 3,295 |   |
| Other current liabilities                                                                                                                                                                               |       | 1,146                  |       | 954 |   |
| Total current liabilities                                                                                                                                                                               |       | 25,749                 |       | 30,091 |   |
|                                                                                                                                                                                                    |       |                   |       |   |   |
| Long-term debt, less current portion                                                                                                                                                                    |       | —                 |       | 3,199 |   |
| Accrued restructuring costs                                                                                                                                                                             |       | 4,470                  |       | 1,714 |   |
| Deferred rent liability                                                                                                                                                                                 |       | 4,203                  |       | 4,501 |   |
| Other liabilities                                                                                                                                                                                       |       | 286                    |       | 340 |   |
| Total liabilities                                                                                                                                                                                       |       | 34,708                 |       | 39,845 |   |
|                                                                                                                                                                                                    |       |                   |       |   |   |
| Commitments and contingencies                                                                                                                                                                           |       |                   |       |   |   |
| Stockholders’ equity:                                                                                                                                                                              |       |                   |       |   |   |
| Common stock, 32,000,000 non-convertible shares,  $0.01 par value, authorized; 14,857,654 and 14,813,912 shares issued and outstanding  at March 31, 2009 and December 31, 2008, respectively |       | 149                    |       | 148 |   |
| Additional paid-in capital                                                                                                                                                                              |       | 65,490                 |       | 64,440 |   |
| Accumulated other comprehensive income (loss), net  of tax                                                                                                                                              |       | 1,779                  |       | (415 | ) |
| Retained earnings                                                                                                                                                                                       |       | 44,825                 |       | 42,846 |   |
| Total stockholders’ equity                                                                                                                                                                         |       | 112,243                |       | 107,019 |   |
| Total liabilities and stockholders’ equity                                                                                                                                                         |       | $                      | 146,951    |   | $ | 146,864 |   |

 

*See notes to condensedconsolidated financial statements.*

 

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**STARTEK, INC. AND SUBSIDIARIES**

CondensedConsolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

 
| ** **                                                                      | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                      | ** ** | **June 30,**    | ** ** |
| ** **                                                                      | ** ** | **2009**             | ** ** | **2008** | ** ** |
| **Operating Activities**                                                        | ** ** | ** **           | ** ** | ** ** | ** ** |
| Net  income (loss)                                                              |       | $                    | 1,979      |   | $ | (4,850 | ) |
| Income  from discontinued operations                                            |       | 4,640                |       | 141 |   |
| Loss  from continuing operations                                                |       | (2,661               | )          | (4,991 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities |       |                 |       |   |   |
| Depreciation                                                                    |       | 7,798                |       | 9,085 |   |
| Impairment  of property, plant and equipment                                    |       | 1,756                |       | 4,070 |   |
| Non-cash  compensation cost                                                     |       | 937                  |       | 614 |   |
| Deferred  income taxes                                                          |       | 1,407                |       | (1,612 | ) |
| Other,  net                                                                     |       | (1                   | )          | 16 |   |
| Changes  in operating assets and liabilities:                                   |       |                 |       |   |   |
| Trade  accounts receivable, net                                                 |       | (4,316               | )          | (863 | ) |
| Prepaid  expenses and other assets                                              |       | 81                   |       | 12 |   |
| Accounts  payable                                                               |       | (872                 | )          | 758 |   |
| Income  taxes, net                                                              |       | 1,172                |       | (1,532 | ) |
| Accrued  and other liabilities                                                  |       | 3,558                |       | 3,895 |   |
| Net  cash provided by continuing operating activities                           |       | 8,859                |       | 9,452 |   |
| Cash  (used in) provided by discontinued operating activities                   |       | (2,335               | )          | 141 |   |
| Net  cash provided by operating activities                                      |       | 6,524                |       | 9,593 |   |
|                                                                            |       |                 |       |   |   |
| **Investing Activities**                                                        |       |                 |       |   |   |
| Purchases  of investments available for sale                                    |       | —               |       | (10,899 | ) |
| Proceeds  from disposition of investments available for sale                    |       | 8,021                |       | 9,469 |   |
| Purchases  of property, plant and equipment                                     |       | (5,032               | )          | (12,733 | ) |
| Net  cash provided by (used in) continuing investing activities                 |       | 2,989                |       | (14,163 | ) |
| Cash  provided by discontinued investing activities                             |       | 7,075                |       | — |   |
| Net  cash provided by (used in) investing activities                            |       | 10,064               |       | (14,163 | ) |
|                                                                            |       |                 |       |   |   |
| **Financing Activities**                                                        |       |                 |       |   |   |
| Principal  payments on borrowings                                               |       | (6,855               | )          | (2,179 | ) |
| Principal  payments on line of credit                                           |       | (22,236              | )          | (43,093 | ) |
| Proceeds  from line of credit                                                   |       | 22,236               |       | 43,093 |   |
| Proceeds  from issuance of common stock                                         |       | 112                  |       | — |   |
| Principal  payments on capital lease obligations                                |       | (99                  | )          | (25 | ) |
| Net  cash used in continuing financing activities                               |       | (6,842               | )          | (2,204 | ) |
| Cash  provided by discontinued financing activities                             |       | —               |       | — |   |
| Net  cash used in financing activities                                          |       | (6,842               | )          | (2,204 | ) |
| Effect  of exchange rate changes on cash                                        |       | 501                  |       | (570 | ) |
| Net  increase (decrease) in cash and cash equivalents                           |       | 10,247               |       | (7,344 | ) |
| Cash  and cash equivalents at beginning of period                               |       | 9,580                |       | 23,026 |   |
| Cash  and cash equivalents at end of period                                     |       | $                    | 19,827     |   | $ | 15,682 |   |
|                                                                            |       |                 |       |   |   |
| **Supplemental Disclosure of Cash Flow Information**                            |       |                 |       |   |   |
| Cash  paid for interest                                                         |       | $                    | 141        |   | $ | 348 |   |
| Income  taxes paid                                                              |       | $                    | 644        |   | $ | 1,384 |   |
| Property,  plant and equipment acquired or refinanced under long-term debt      |       | $                    | 257        |   | $ | 385 |   |

 

*See notes to condensedconsolidated financial statements.*

 

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**STARTEK, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(In thousands, except pershare data)

 

**1.  BASIS OF PRESENTATION**

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information and instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes requiredby accounting principles generally accepted in the United States of America forcomplete financial statements.  Thesefinancial statements reflect all adjustments (consisting only of normalrecurring entries, except as noted) which, in the opinion of management, arenecessary for fair presentation. Operating results during the three and six months ended June 30,2009, are not necessarily indicative of operating results that may be expectedduring any other interim period of 2009 or the year ending December 31,2009.  We have evaluated all subsequentevents through July 31, 2009, the date the financial statements wereissued.

 

The consolidated balancesheet as of December 31, 2008, was derived from audited financialstatements at that date, but does not include all information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. For further information, refer to the consolidated financial statementsand footnotes thereto included in the StarTek, Inc. Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

Certain reclassificationshave been made to 2008 information to conform to 2009 presentation due to thepresentation of discontinued operations (see Note 5).

 

Unless otherwise noted inthis report, any description of “us” refers to StarTek, Inc. and oursubsidiaries.  The assets and liabilitiesof our foreign operations that are recorded in foreign currencies aretranslated into U.S. dollars at exchange rates prevailing at the balance sheetdate.  Revenues and expenses aretranslated at the weighted-average exchange rate during the reporting period.

 

***RecentlyAdopted Accounting Pronouncements***

 

Effective January 1,2009, we adopted Statement of Financial Accounting Standards No. 157, “FairValue Measurements” (“SFAS No. 157”), for all non-financial assets andnon-financial liabilities, except for items that are recognized or disclosed atfair value on a recurring basis (at least annually) for which SFAS No. 157was previously adopted.  Refer to Note 9,“Fair Value Measurements,” of this Form 10-Q for additional information onthe adoption of SFAS No. 157.

 

Effective January 1,2009, we adopted Statement of Financial Accounting Standards No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of FASBStatement No. 133” (“SFAS No. 161”). SFAS No. 161requires entities to provide greater transparency through additionaldisclosures about (a) how and why an entity uses derivative instruments, (b) howderivative instruments and related hedged items are accounted for under SFAS No. 133“Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) andits related interpretations, and (c) how derivative instruments andrelated hedged items affect an entity’s financial position, results ofoperations and cash flows. Refer to Note 8, “Derivative Instruments,” of this Form 10-Qfor additional information on the adoption of SFAS No. 161.

 

We adopted Statementof Financial Accounting Standards No. 141(R), “Business Combinations” (“SFAS No. 141(R)”),which significantly changed the accounting for and reporting of businesscombination transactions. This standard was effective for us for businesscombination transactions for which the acquisition date was on or after January 1,2009. No business combination transactions occurred during the six months endedJune 30, 2009.

 

We adopted FASBStaff Position No. 115-2 and SFAS No. 124-2, “Recognition andPresentation of Other-Than-Temporary Impairments” (“FSP No. 115-2 and SFASNo. 124-2”), in the second quarter of 2009.  FSP No. 115-2 and SFAS No. 124-2modifies the other-than-temporary impairment guidance for debt securitiesthrough increased consistency in the timing of impairment recognition andenhanced disclosures related to the credit and noncredit components of impaireddebt securities that are not expected to be sold. In addition, increaseddisclosures are required for both debt and equity securities regarding expectedcash flows, credit losses, and securities with unrealized losses. Refer to Note7, “Investments”, of this Form 10-Q for the relevant disclosures requiredby adoption of FSP No. 115-2 and SFAS No. 124-2.  The adoption of FSP No. 115-2 and SFAS No. 124-2did not have a material impact on our financial statements.

 

We adopted FASB Staff Position No. 107-1 and APBOpinion No. 28-1, “Interim Disclosures about Fair Value of FinancialInstruments” (“FSP No. 107-1 and APB Opinion No. 28-1”), in thesecond quarter of 2009.  FSP No. 107-1and APB Opinion No. 28-

 

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1 requires fair value disclosures for financial instrumentsthat are not reflected in the Condensed Consolidated Balance Sheets at fairvalue.  Prior to the issuance of FSP No. 107-1and APB Opinion No. 28-1, the fair values of those assets and liabilitieswere disclosed only annually.  With theissuance of FSP No. 107-1 and APB Opinion No. 28-1, we are nowrequired to disclose this information on a quarterly basis, providingquantitative and qualitative information about fair value estimates for allfinancial instruments not measured in the Condensed Consolidated Balance Sheetsat fair value.  The adoption of FSP No. 107-1and APB Opinion No. 28-1 did not have a material impact on our financialstatements.

 

We adopted Statementof Financial Accounting Standards No. 165, “Subsequent Events” (“SFAS No. 165”),in the second quarter of 2009.  SFAS No. 165establishes the accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued. It requires the disclosure of the date through which an entityhas evaluated subsequent events and the basis for that date, that is, whetherthat date represents the date the financial statements were issued or wereavailable to be issued.  Refer to thisNote 1, “Basis of Presentation,” for the related disclosures. The adoption ofSFAS No. 165 did not have a material impact on our financial statements.

 

***RecentlyIssued Accounting Pronouncements***

 

In June 2009,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codificationand the Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 168”).  SFASNo. 168 will become the single source of authoritative nongovernmentalU.S. generally accepted accounting principles (“GAAP”), superseding existingFASB, American Institute of Certified Public Accountants (“AICPA”), EmergingIssues Task Force (“EITF”), and related accounting literature.  SFAS No. 168reorganizes the thousands of GAAP pronouncements into roughly 90 accountingtopics and displays them using a consistent structure.  Also includedis relevant Securities and Exchange Commission guidance organized using thesame topical structure in separate sections.  SFAS No. 168 willbe effective for financial statements issued for reporting periods that endafter September 15, 2009.  This will have an impact on ourfinancial statements since all future references to authoritative accountingliterature will be references in accordance with SFAS No. 168.

 

**2.  SEGMENT INFORMATION**

 

We operate withinthree business segments, U.S., Canada and Offshore.  The business segments align with thoseregions in which our services are rendered. As of June 30, 2009, the U.S. segment included the operations ofour thirteen facilities in the U.S., the Canada segment included the operationsof our five facilities in Canada and the Offshore segment included theoperations of our facility in Makati City, Philippines.  We use gross profit as our measure of profitand loss for each business segment and do not allocate selling, general andadministrative expenses to our business segments.

 

Information aboutour reportable segments, which correspond to the geographic areas in which weoperate, is as follows:

 
| ** **        | ** ** | **For the Three Months Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **2009**                                     | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** |   |
| **Revenue:**      |       |                                         |       |                                       |       |   |   |   |   |
| United  States    |       | $                                            | 52,033     |                                       | $          | 41,767 |   | $ | 101,397 |   | $ | 81,725 |   |
| Canada            |       | 19,232                                       |       | 23,700                                     |       | 38,413 |   | 48,325 |   |
| Offshore          |       | 2,025                                        |       | —                                     |       | 4,191 |   | — |   |
| Total             |       | $                                            | 73,290     |                                       | $          | 65,467 |   | $ | 144,001 |   | $ | 130,050 |   |
|              |       |                                         |       |                                       |       |   |   |   |   |
| **Gross profit:** |       |                                         |       |                                       |       |   |   |   |   |
| United  States    |       | $                                            | 10,085     |                                       | $          | 6,239 |   | $ | 18,882 |   | $ | 14,245 |   |
| Canada            |       | 3,268                                        |       | 2,065                                      |       | 5,014 |   | 3,526 |   |
| Offshore          |       | (224                                         | )          | —                                     |       | (44 | ) | — |   |
| Total             |       | $                                            | 13,129     |                                       | $          | 8,304 |   | $ | 23,852 |   | $ | 17,771 |   |

 

**3.  NET INCOME (LOSS) PER SHARE**

 

Basic and diluted netincome (loss) per common share is computed on the basis of our weighted averagenumber of common shares outstanding, as determined by using the calculationsoutlined below:

 

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| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                       | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income  (loss) from continuing operations        |       | $                      | 1,327      |                 | $          | (4,588 | ) | $ | (2,661 | ) | $ | (4,991 | ) |
| Income  from discontinued operations, net of tax |       | —                 |       | 69                   |       | 4,640 |   | 141 |   |
| Net  income (loss)                               |       | $                      | 1,327      |                 | $          | (4,519 | ) | $ | 1,979 |   | $ | (4,850 | ) |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Weighted  average shares of common stock         |       | 14,782                 |       | 14,706               |       | 14,768 |   | 14,706 |   |
| Dilutive  effect of stock options                |       | 30                     |       | —               |       | 11 |   | — |   |
| Common  stock and common stock equivalents       |       | 14,812                 |       | 14,706               |       | 14,779 |   | 14,706 |   |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Basic  net income (loss) per share from:         |       |                   |       |                 |       |   |   |   |   |
| Continuing  operations                           |       | $                      | 0.09       |                 | $          | (0.31 | ) | $ | (0.18 | ) | $ | (0.34 | ) |
| Discontinued  operations                         |       | —                 |       | 0.00                 |       | 0.31 |   | 0.01 |   |
| Net  income (loss)                               |       | $                      | 0.09       |                 | $          | (0.31 | ) | $ | 0.13 |   | $ | (0.33 | ) |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Diluted  net income (loss) per share from:       |       |                   |       |                 |       |   |   |   |   |
| Continuing  operations                           |       | $                      | 0.09       |                 | $          | (0.31 | ) | $ | (0.18 | ) | $ | (0.34 | ) |
| Discontinued  operations                         |       | —                 |       | 0.00                 |       | 0.31 |   | 0.01 |   |
| Net  income (loss)                               |       | $                      | 0.09       |                 | $          | (0.31 | ) | $ | 0.13 |   | $ | (0.33 | ) |

 

Diluted earnings pershare is computed on the basis of our weighted average number of common sharesoutstanding plus the effect of dilutive outstanding stock options andnon-vested restricted stock using the treasury stock method.  Anti-dilutive securities totaling 2,156 and2,993 in the three and six months ended June 30, 2009, respectively, werenot included in our calculation because the stock options’ exercise prices weregreater than the average market price of the common shares during the periodsand anti-dilutive securities totaling 1,867 and 1,624 in the three and sixmonths ended June 30, 2008, respectively, were not included in ourcalculation due to our net loss from continuing operations during thoseperiods.

 

**4.  IMPAIRMENT LOSSES AND RESTRUCTURING CHARGES**

 

***ImpairmentLosses***

 

During the six monthsended June 30, 2009, we incurred $1,756 of impairment losses in ourCanadian segment, due to the impairment of certain long-lived assets for whichthe carrying value of those assets is not recoverable.  These assets are located in a facility forwhich we are uncertain about our ability to generate future cash flows tosupport the carrying value of these assets. The long-lived assets include computer and telephone equipment,furniture and fixtures, leasehold improvements and software.  Refer to Note 9, “Fair Value Measurements,”of this Form 10-Q, for additional information on the fair valuemeasurements for all assets and liabilities that are measured at fair value inthe Condensed Consolidated Financial Statements.

 

***RestructuringCharges***

 

In August 2007, August 2008, December 2008 and February 2009,we closed facilities in Hawkesbury, Ontario, Big Spring, Texas, Petersburg,Virginia and Regina, Saskatchewan, respectively.  We have recorded restructuring chargesrelated to lease costs and other expenses related to the facilityclosures.  In accordance with Statementof Financial Accounting Standards No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities” (“SFAS No. 146”), werecognized the liability when it was incurred, instead of upon commitment to aplan.  A significant assumption used indetermining the amount of estimated liability incurred in closing a facility isthe estimated liability for future lease payments on vacant facilities.  If the assumptions regarding earlytermination and the timing and amounts of sublease payments prove to beinaccurate, we may be required to record additional losses, or conversely, afuture gain, in our Condensed Consolidated Statements of Operations.

 

We expect to incur totalrestructuring charges related to our Canada segment of approximately $6,988($2,312 and $4,676 related to the Hawkesbury and Regina closures,respectively).  We expect to incur totalrestructuring charges related to our U.S. segment of approximately $1,964 ($302and $1,662 related to the Big Spring and Petersburg closures,respectively).  The cumulative amountpaid as of June 30, 2009 related to the closure of Hawkesbury, Regina andPetersburg is $1,123, $513 and $561, respectively.  We expect completion of the Hawkesbury,Petersburg and Regina restructuring plans no later than 2012, 2013 and 2013respectively; however, it may be earlier depending on our ability to subleasethe respective facility or buy-out the applicable lease.  During February 2009, we 

 

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bought out the remainderof the lease at the Big Spring facility for approximately $184 and do notexpect to incur any additional charges. Refer to Note 9, “Fair Value Measurements,” of this Form 10-Q, foradditional information on the fair value measurements for all assets andliabilities, including restructuring charges, that are measured at fair valuein the Condensed Consolidated Financial Statements.

 

A summary of the activity under the restructuring plans as of June 30,2009, and changes during the six months ended June 30, 2009 is presentedbelow:

 
| ** **                              | ** ** | **Facility-Related Costs** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | ** **                 | ** ** | ** ** | ** ** | **Canada** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Company** | ** ** |
| ** **                              | ** ** | **Hawkesbury**             | ** ** | **Regina** | ** ** | **Total** | ** ** | **Big Spring** | ** ** | **Petersburg** | ** ** | **U.S. Total** | ** ** | **Total** | ** ** |
| Balance as of January 1, 2009      |       | $                          | 1,099      |   | $ | — |   | $ | 1,099 |   | $ | 208 |   | $ | 1,402 |   | $ | 1,610 |   | $ | 2,709 |   |
| Expense                                 |       | 16                         |       | 4,436 |   | 4,452 |   | 31 |   | 198 |   | 229 |   | 4,681 |   |
| Payments                                |       | (218                       | )          | (513 | ) | (731 | ) | (239 | ) | (403 | ) | (642 | ) | (1,373 | ) |
| Reclassification of long-term liability |       | —                     |       | 136 |   | 136 |   | — |   | (25 | ) | (25 | ) | 111 |   |
| Foreign currency translation adjustment |       | 44                         |       | 335 |   | 379 |   | — |   | — |   | — |   | 379 |   |
| Balance as of June 30, 2009        |       | $                          | 941        |   | $ | 4,394 |   | $ | 5,335 |   | $ | — |   | $ | 1,172 |   | $ | 1,172 |   | $ | 6,507 |   |

 

**5.  DISCONTINUED OPERATIONS**

 

OnFebruary 25, 2009, we entered into an agreement to sell the assets ofDomain.com, our wholly owned subsidiary, to A. Emmet Stephenson, Jr., Inc.(“Mr. Stephenson”) in exchange for cash of $7,075.  The assets of Domain.com consist of domainnames, trademarks and corporation names. We conducted an auction for the assets and received bids from multipleparties, including Mr. Stephenson.  Mr. Stephensonpresented the highest bid, which represented the selling price, of $7,075 andthe sale was completed effective February 25, 2009.  Mr. Stephenson is one of ourco-founders, has managed the Domain.com subsidiary since 2006 and ownsapproximately 20% of our common shares outstanding.  Because the transaction involves a relatedparty, the Audit Committee of our Board of Directors considered and approvedthe transaction.

 

Theresults of operations and cash flows of Domain.com have been reported in theCondensed Consolidated Statements of Operations as discontinuedoperations.  The following tablesummarizes the results of discontinued operations:

 
| ** **                                                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                         | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Operating income from discontinued operations before  income taxes |       | $                                    | —     |                               | $          | 110 |   | $ | 27 |   | $ | 226 |   |
| Gain on the sale of discontinued operations                        |       | —                               |       | —                             |       | 6,937 |   | — |   |
| Income tax expense                                                 |       | —                               |       | (41                                | )          | (2,324 | ) | (85 | ) |
| Income from discontinued operations, net of tax                    |       | $                                    | —     |                               | $          | 69 |   | $ | 4,640 |   | $ | 141 |   |

 

**6.  PRINCIPAL CLIENTS**

 

The followingtable represents revenue concentration of our principal clients.

 
| ** **                                                                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                     | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                                                     | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| AT&T  Services, Inc. and AT&T Mobility, LLC, subsidiaries of  AT&T, Inc. |       | 64.2                   | %          | 51.7                 | %          | 64.5 | % | 50.6 | % |
| T-Mobile  USA, Inc., a subsidiary of Deutsche Telekom                                     |       | 22.0                   | %          | 28.6                 | %          | 21.4 | % | 28.2 | % |

 

The loss of a principalclient and/or changes in timing or termination of a principal client’s productlaunch, volume delivery or service offering would have a material adverseeffect on our business, revenue, operating results, and financialcondition.  To limit our credit risk,management from time to time will perform credit evaluations of our clients.Although we are directly impacted by the economic conditions in which ourclients operate, management does not believe substantial credit risk existed asof June 30, 2009.

 

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**7.  INVESTMENTS**

 

Investmentsavailable for sale consisted of:

 
| ** **                     | ** ** | **Basis** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|--------------------------------|------------|-----------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
| As  of June 30, 2009:     |       |      |       |                         |       |                          |       |           |       |
| Corporate  debt securities     |       | $         | 493        |                         | $          | 5                             |       | $              | —     |   | $ | 498 |   |
|                           |       |      |       |                         |       |                          |       |           |       |
| As of  December 31, 2008: |       |      |       |                         |       |                          |       |           |       |
| Corporate  debt securities     |       | $         | 8,513      |                         | $          | 9                             |       | $              | (85        | ) | $ | 8,437 |   |

 

As of June 30, 2009,the investments in our portfolio have remaining contractual maturities withinone year.  There are no investments as ofJune 30, 2009 that have carried unrealized losses for longer than twelvemonths.  Refer to Note 9, “Fair ValueMeasurements,” of this Form 10-Q, for additional information on the fairvalue measurements for all assets and liabilities, including investments, thatare measured at fair value in the Condensed Consolidated FinancialStatements.  Proceeds from the sale ofinvestment securities available for sale were $1,491 and $8,021 for the threeand six months ended June 30, 2009, respectively, and $4,515 and $9,469for the three and six months ended June 30, 2008, respectively.  Gross realized gains included in other incomewere $0 and $5 for the three and six months ended June 30, 2009,respectively, and $0 and $0 for the three and six months ended June 30,2008, respectively.  Gross realizedlosses included in other income were $3 and $3 for the three and six monthsended June 30, 2009, respectively, and $0 and $0 for the three and sixmonths ended June 30, 2008, respectively. Original cost of investments available for sale is based on the specificidentification method.

 

The following table summarizes the aggregate fair value of thoseinvestments in a gross unrealized loss position:

 
| ** **                                                                       | ** ** | **As of**              | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                       | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
| Investments  in a continuous unrealized loss position for less than 12 months    |       |                   |       |   |   |
| Aggregate  unrealized losses on corporate debt securities                        |       | $                      | —     |   | $ | (38 | ) |
| Aggregate  fair value of corporate debt securities                               |       | —                 |       | 1,996 |   |
|                                                                             |       |                   |       |   |   |
| Investments  in a continuous unrealized loss position for greater than 12 months |       |                   |       |   |   |
| Aggregate  unrealized losses on corporate debt securities                        |       | $                      | —     |   | $ | (47 | ) |
| Aggregate  fair value of corporate debt securities                               |       | —                 |       | 3,447 |   |

 

**8.  DERIVATIVE INSTRUMENTS**

 

We use derivatives topartially offset our business exposure to foreign currency exchange risk. Weenter into foreign currency exchange contracts to hedge our anticipatedoperating commitments that are denominated in foreign currencies.  The contracts cover periods commensurate withexpected exposure, generally within six months, and are principally unsecuredforeign exchange contracts.  The marketrisk exposure is essentially limited to risk related to currency ratemovements.  Our Canadian and Philippinesubsidiaries’ functional currencies are the Canadian dollar and the Philippinepeso, respectively, which are used to pay labor and other operating costs inthose countries. However, our client contracts primarily generate revenueswhich are paid to us in U.S. dollars.  Wehave elected to follow cash flow hedge accounting under SFAS No. 133 in orderto associate the results of the hedges with forecasted future expenses.  The current mark-to-market gain or loss isrecorded in accumulated other comprehensive income (“AOCI”) as a component ofstockholders’ equity and will be re-classified to operations as the forecastedexpenses are incurred, typically within one year.  During the three and six months ended June 30,2009 and 2008, our cash flow hedges were highly effective and there were noamounts charged to the Condensed Consolidated Statements of Operations forhedge ineffectiveness.

 

During the six monthsended June 30, 2009, we entered into Canadian dollar forward contractswith Wells Fargo Bank for a notional amount of $13,500 Canadian dollars tohedge our foreign currency risk with respect to labor costs in Canada.  As of June 30, 2009, we have not enteredinto any arrangements to hedge our exposure to fluctuations in the Philippinepeso relative to the U.S. dollar.

 

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The following table shows the notional principal of our derivativeinstruments as of June 30, 2009:

 
| ** **                                   | ** ** | ** **       | ** ** | **Notional**  | ** ** |
|----------------------------------------------|------------|------------------|------------|---------------|------------|
| ** **                                   | ** ** | **Currency**     | ** ** | **Principal** | ** ** |
| Instruments qualifying as accounting hedges: |       |             |       |          |       |
| Foreign exchange contracts                   |       | Canadian  dollar |       | CDN  $        | 29,100     |   |
|                                              |            |                  |            |               |            |  |

 

The above foreignexchange contracts are to be delivered periodically through December 2009at a purchase price which is no more than $24,285 and no less than$23,968.  The estimates of fair value arebased on applicable and commonly used pricing models and prevailing financialmarket information as of June 30, 2009. Refer to Note 9, “Fair Value Measurements,” of this Form 10-Q, foradditional information on the fair value measurements for all assets andliabilities, including derivative assets and derivative liabilities, that aremeasured at fair value in the Condensed Consolidated Financial Statements.

 

The followingtable shows our derivative instruments measured at gross fair value as reflectedin the Condensed Consolidated Balance Sheet as of June 30, 2009:

 
| ** **                 | ** ** | **Fair Value of Derivatives** | ** ** |
|----------------------------|------------|-------------------------------|------------|
| ** **                 | ** ** | **Designated as Hedge**       | ** ** |
| ** **                 | ** ** | **Instruments**               | ** ** |
| Derivative assets:         |       |                          |       |
| Foreign exchange contracts |       | $                             | 996        |   |
|                       |       |                          |       |   |
| Derivative liabilities:    |       |                          |       |
| Foreign exchange contracts |       | $                             | (97        | ) |

 

The followingtable shows the effect of our derivative instruments designated as cash flowhedges in the Condensed Consolidated Statement of Operations for the three andsix months ended June 30, 2009:

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | ** **             | ** ** |
|----------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                 | ** ** | **June 30, 2009** | ** ** | **June 30, 2008** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** **             | ** ** | **Gain**               | ** ** | ** ** | ** ** | **Gain** | ** ** | **Location of Gain** | ** ** |
| ** **                 | ** ** | **Gain**               | ** ** | **Reclassified**       | ** ** | **Gain** | ** ** | **Reclassified** | ** ** | **Reclassified from** | ** ** |
| ** **                 | ** ** | **Recognized in**      | ** ** | **from AOCI into**     | ** ** | **Recognized in** | ** ** | **from AOCI into** | ** ** | **AOCI into** | ** ** |
| ** **                 | ** ** | **AOCI**               | ** ** | **Income**             | ** ** | **AOCI** | ** ** | **Income** |   | **Income** |   |
| Cash flow hedges:          |       |                   |       |                   |       |   |   |   |   |   |   |
| Foreign exchange contracts |       | $                      | 1,713      |                   | $          | 23 |   | $ | 71 |   | $ | 26 |   | Cost  of services |   |
|                            |            |                        |            |                        |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                 | ** ** | **Six Months Ended**   | ** ** | ** **             | ** ** |
|----------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                 | ** ** | **June 30, 2009** | ** ** | **June 30, 2008** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** **             | ** ** | **Loss**               | ** ** | ** ** | ** ** | **Loss** | ** ** | **Location of Loss** | ** ** |
| ** **                 | ** ** | **Gain**               | ** ** | **Reclassified**       | ** ** | **Loss** | ** ** | **Reclassified** | ** ** | **Reclassified from** | ** ** |
| ** **                 | ** ** | **Recognized in**      | ** ** | **from AOCI into**     | ** ** | **Recognized in** | ** ** | **from AOCI into** | ** ** | **AOCI into** | ** ** |
| ** **                 | ** ** | **AOCI**               | ** ** | **Income**             | ** ** | **AOCI** | ** ** | **Income** | ** ** | **Income** | ** ** |
| Cash flow hedges:          |       |                   |       |                   |       |   |   |   |   |   |   |
| Foreign exchange contracts |       | $                      | 2,007      |                   | $          | (1,629 | ) | $ | (41 | ) | $ | (182 | ) | Cost of services |   |
|                            |            |                        |            |                        |            |  |  |  |  |  |  |  |  |  |  |

 

**9.  FAIR VALUE MEASUREMENTS**

 

As of January 1,2009, we adopted SFAS No. 157 for all non-financial assets and liabilitiesthat are recognized or disclosed at fair value in the financial statements. Wehad previously adopted SFAS No. 157 for all financial assets andliabilities.  SFAS No. 157 definesfair value as the price that would be received from selling an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date. When determining the fair value measurements for assetsand liabilities, which are required to be recorded at fair value, we considerthe principal or most advantageous market in which we would transact and themarket-based risk measurements or assumptions that market participants woulduse in pricing the asset or liability, such as inherent risk, transferrestrictions, and credit risk.

 

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SFAS No. 157establishes a fair value hierarchy that prioritizes the inputs to valuationtechniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices inactive markets for identical assets or liabilities (level 1 measurements) andthe lowest priority to unobservable inputs (level 3 measurements).  The levels of the fair value hierarchy underSFAS No. 157 are described below:

 
| Level 1 | Valuation is based upon  quoted prices for identical instruments traded in active markets.                                                                                                                                                                                                                                                                                          |
|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                                                                                                                                                                                                                                                |
| Level 2 | Valuation is based upon  quoted prices for similar instruments in active markets, quoted prices for  identical or similar instruments in markets that are not active, and  model-based valuation techniques for which all significant assumptions are  observable in the market.                                                                                                    |
|    |                                                                                                                                                                                                                                                                                                                                                                                |
| Level 3 | Valuation is generated  from model-based techniques that use significant assumptions not observable  in the market. These unobservable assumptions reflect our own estimates of  assumptions that market participants would use in pricing the asset or  liability. Valuation techniques include use of option pricing models,  discounted cash flow models and similar techniques. |

 

***Investments***

 

As of June 30, 2009and December 31, 2008, our investments consisted entirely of corporatedebt securities.  Our corporate debt securitiesare valued using third-party broker statements. The value of the majority of our corporate debt securities is derivedfrom quoted market information.  Theinputs to the valuation are generally classified as Level 1 given the activemarket for these securities, however, if an active market does not exist, theinputs are recorded at a lower level in the fair value hierarchy.

 

***Derivative Instruments and Hedging Activities***

 

Our derivativeinstruments are valued using third-party broker or counterpartystatements.  The value is derived frompricing models using inputs based upon market information, includingcontractual terms, market prices and yield curves.  The inputs to the valuation pricing modelsare observable in the market, and as such are generally classified as Level 2in the fair value hierarchy.

 

***Restructuring Charges***

 

SFAS No. 146specifies that a liability for a cost associated with an exit or disposalactivity be recognized when the liability is incurred, instead of uponcommitment to an exit plan.  On anongoing basis, management assesses the profitability and utilization of ourfacilities and in some cases management has chosen to close facilities.  Accrued restructuring costs were valued usinga discounted cash flow model. Significant assumptions used in determining the amount of the estimatedliability for closing a facility are the estimated liability for future leasepayments on vacant facilities, which we determine based on a third-party broker’sassessment of our ability to successfully negotiate early terminationagreements with landlords and/or to sublease the facility, and the discountrate utilized to determine the present value of the future expected cash flows.If the assumptions regarding early termination and the timing and amounts ofsublease payments prove to be inaccurate, we may be required to recordadditional losses, or conversely, a future gain, in the Condensed ConsolidatedStatements of Operations.

 

As described in Note 4, “ImpairmentLosses and Restructuring Charges,” during the six months ended June 30,2009, we closed our facility in Regina, Saskatchewan, which resulted in $0 and$4,436 of accrued restructuring costs during the three and six months ended June 30,2009.  These costs were valued using adiscounted cash flow model.  The cashflows consist of the future lease payment obligations required under the leaseagreement.  We assumed that we would notsublease the vacant facility for the remainder of the lease term based on ourknowledge of the Regina marketplace, as well as our historical inability tosublease our facilities in other locations in which we operate.  In the future, if we are able to sublease thefacility, we may be required to record a gain in the Condensed ConsolidatedStatements of Operations.  Future cashflows also include estimated property taxes through the remainder of the leaseterm, which are valued based upon historical tax payments.  The future cash flows were discounted using arate of 3%.  Given that the restructuringcharges were valued using our internal estimates using a discounted cash flowmodel, we have classified the accrued restructuring costs as Level 3 in thefair value hierarchy.

 

***Impairmentof Long-Lived Assets***

 

As described inNote 4, “Impairment Losses and Restructuring Charges,” during the three and sixmonths ended June 30, 2009, we recorded approximately $0 and $1,756 ofimpairment losses in our Canadian segment, due to the impairment of certainlong-lived assets for which the carrying value of those assets is not recoverable.  These assets are located in a facility forwhich we do not have long-term customer commitments and therefore, we areuncertain about our ability to generate future cash flows to support thecarrying value of these assets.  Thelong-lived assets include computer and telephone equipment, furniture andfixtures, leasehold improvements and software. For assets which were not recoverable through future cash flows or couldnot be used in another facility, 

 

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we reduced thecarrying value to fair value.  The fairvalue of these long-lived assets after the impairment charge was $228.  Given that the impairment losses were valuedusing internal estimates, we have classified the remaining fair value oflong-lived assets as Level 3 in the fair value hierarchy.

 

***FairValue Hierarchy***

 

The following tables setforth our assets and liabilities measured at fair value on a recurring basisand a non-recurring basis by level within the fair value hierarchy.  As required by SFAS No. 157, assets andliabilities are classified in their entirety based on the lowest level of inputthat is significant to the fair value measurement.

 
| ** **                                                | ** ** | **Assets Measured at Fair Value**                 | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                | ** ** | **on a Recurring Basis as of June 30, 2009** | ** ** |
| ** **                                                | ** ** | **Level 1**                                       | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:                                                   | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Corporate  debt securities                                |       | $                                                 | 498        |   | $ | — |   | $ | — |   | $ | 498 |   |
| Derivative  instruments                                   |       | —                                            |       | 899 |   | — |   | 899 |   |
| Total  fair value of assets measured on a recurring basis |       | $                                                 | 498        |   | $ | 899 |   | $ | — |   | $ | 1,397 |   |

 
| ** **                                                         | ** ** | **Assets and Liabilities Measured at Fair Value on a**                  | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Non-Recurring Basis During the Six Months ended  June 30, 2009** | ** ** |
| ** **                                                         | ** ** | **Level 1**                                                             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:                                                            |       |                                                                    |       |   |   |   |   |   |   |
| Property,  plant and equipment, net                                |       | $                                                                       | —     |   | $ | — |   | $ | 228 |   | $ | 228 |   |
| Total  fair value of assets measured on a non-recurring basis      |       | $                                                                       | —     |   | $ | — |   | $ | 228 |   | $ | 228 |   |
|                                                               |       |                                                                    |       |   |   |   |   |   |   |
| Liabilities:                                                       |       |                                                                    |       |   |   |   |   |   |   |
| Accrued  restructuring costs                                       |       | $                                                                       | —     |   | $ | — |   | $ | 4,436 |   | $ | 4,436 |   |
| Total  fair value of liabilities measured on a non-recurring basis |       | $                                                                       | —     |   | $ | — |   | $ | 4,436 |   | $ | 4,436 |   |

 

**10.  DEBT**

 

OnJune 26, 2009, we entered into a business loan agreement, promissory noteand three commercial security agreements (together the “Agreement”) with UMBBank Colorado, N.A. (“UMB Bank”) for a $15 million secured revolving line ofcredit.  The Agreement is effective July 1,2009 through August 1, 2010.  ThisAgreement replaced our $10 million secured revolving line of credit with WellsFargo Bank N.A., which expired by its terms on June 30, 2009.  There was no balance outstanding on either the line ofcredit with UMB Bank or the previous line of credit with Wells Fargo Bank N.A.as of June 30, 2009.

 

Borrowingsunder the Agreement bear interest, at our option at the time of the borrowing,of the thirty, sixty or ninety day LIBOR index, plus 1.75%.  The interest rate shall never be less than3.25% per annum.  Under the Agreement, wegranted UMB Bank a security interest in all of our present and future accountsreceivable, general intangibles, and owned real property. In addition, underthe Agreement, we are subject to certain financial covenants, which includemaintaining 1) a ratio of total liabilities to tangible net worth of less than1.0 to 1.0, 2) a tangible net worth of at least $105 million, 3) unencumberedliquid assets, defined as cash, certificate of deposits and marketablesecurities, of at least $10 million measured on the last day of each fiscalquarter and 4) a cash flow coverage ratio, as defined in the Agreement, ofgreater than 1.50 to 1.0 measured on the last day of each fiscal quarter forthe previous twelve months.

 

In addition, during the three months ended June 30, 2009, we paidoff the remaining principal balance on the Secured Equipment Promissory Notebetween Wells Fargo Equipment Finance, Inc. and StarTek USA, Inc.,our wholly owned subsidiary, and the Canadian Dollar Secured Equipment Loanbetween Wells Fargo Equipment Finance Company, Inc. and StarTek CanadaServices, Ltd., our wholly owned subsidiary. The loans had original maturities in November 2010.  The total payoff on these loans, includingpre-payment penalties, was $5,688.

 

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**11.  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)**

 

Statement ofFinancial Accounting Standards No. 130, “Reporting Comprehensive Income,”establishes standards for reporting and display of comprehensive income.Comprehensive income is defined essentially as all changes in stockholders’equity, exclusive of transactions with owners. The following represents thecomponents of other comprehensive income (loss):

 
| ** **                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                           | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                           | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  income (loss)                                                   |       | $                      | 1,327      |                 | $          | (4,519 | ) | $ | 1,979 |   | $ | (4,850 | ) |
| Other  comprehensive income (loss):                                  |       |                   |       |                 |       |   |   |   |   |
| Foreign  currency translation adjustments, net of tax                |       | 224                    |       | (78                  | )          | 136 |   | (451 | ) |
| Change  in fair value of derivative instruments, net of tax          |       | 1,713                  |       | 71                   |       | 2,007 |   | (41 | ) |
| Unrealized  gain (loss) on available for sale securities, net of tax |       | 7                      |       | 153                  |       | 51 |   | (67 | ) |
| Comprehensive  income (loss)                                         |       | $                      | 3,271      |                 | $          | (4,373 | ) | $ | 4,173 |   | $ | (5,409 | ) |

 

Accumulated othercomprehensive income (loss) consisted of the following items:

 
| ** **                                                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                         | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Accumulated  foreign currency translation adjustments:             |       |                                 |       |                               |       |   |   |   |   |
| Beginning  balance                                                 |       | $                                    | 1,002      |                               | $          | 2,180 |   | $ | 1,090 |   | $ | 2,553 |   |
| Translation  adjustments, net of tax                               |       | 224                                  |       | (78                                | )          | 136 |   | (451 | ) |
| Ending  balance                                                    |       | $                                    | 1,226      |                               | $          | 2,102 |   | $ | 1,226 |   | $ | 2,102 |   |
| Accumulated  unrealized derivative (losses) gains:                 |       |                                 |       |                               |       |   |   |   |   |
| Beginning  balance                                                 |       | $                                    | (1,150     | )                                  | $          | (92 | ) | $ | (1,444 | ) | $ | 20 |   |
| Gain  (loss) reclassified to earnings, net of tax                  |       | 14                                   |       | 16                                 |       | (1,019 | ) | (114 | ) |
| Change  in fair value of cash flow hedges, net of tax              |       | 1,699                                |       | 55                                 |       | 3,026 |   | 73 |   |
| Ending  balance                                                    |       | $                                    | 563        |                               | $          | (21 | ) | $ | 563 |   | $ | (21 | ) |
| Accumulated  unrealized losses on available for sale securities:   |       |                                 |       |                               |       |   |   |   |   |
| Beginning  balance                                                 |       | $                                    | (17        | )                                  | $          | (249 | ) | $ | (61 | ) | $ | (29 | ) |
| Gain  (loss) reclassified to earnings, net of tax                  |       | 2                                    |       | —                             |       | (1 | ) | — |   |
| Change  in fair value of available for sale securities, net of tax |       | 5                                    |       | 153                                |       | 52 |   | (67 | ) |
| Ending  balance                                                    |       | $                                    | (10        | )                                  | $          | (96 | ) | $ | (10 | ) | $ | (96 | ) |

 

**12.  SHARE-BASED COMPENSATION**

 

Compensation cost thathas been charged against income related to share-based compensation for thethree months ended June 30, 2009 and 2008 was $472 and $241, respectivelyand is included in selling, general and administrative expense.  The compensation cost that has been chargedfor the six months ended June 30, 2009 and 2008 was $937 and $614,respectively.  A summary of activityduring the six months ended June 30, 2009 related to our equity awards ispresented below.

 

***StockOptions***

 

A summary ofoption activity as of June 30, 2009, and changes during the six monthsthen ended is presented below:

 
| ** **                        | ** ** | ** ** | ** ** | **Weighted Average** | ** ** |
|-----------------------------------|------------|------------|------------|----------------------|------------|
| ** **                        | ** ** | **Shares** | ** ** | **Exercise Price**   | ** ** |
| Outstanding as of January 1, 2009 |       | 1,629      |       | $                    | 11.45      |   |
| Granted                           |       | 678        |       | 4.29                 |       |
| Exercised                         |       | —     |       | —               |       |
| Forfeited                         |       | (111       | )          | 8.65                 |       |
| Expired                           |       | (34        | )          | 15.55                |       |
| Outstanding as of June 30, 2009   |       | 2,162      |       | $                    | 9.29       |   |

 

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***RestrictedShares***

 

Restricted share activityduring the six months ended June 30, 2009 was as follows:

 
| ** **                                     | ** ** | **Restricted Shares** | ** ** | **Grant Date Fair Value** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|---------------------------|------------|
| Non-vested  balance as of January 1, 2009 |       | 62                    |       | $                         | 10.45      |   |
| Granted                                        |       | 7                     |       | 4.76                      |       |
| Vested                                         |       | (14                   | )          | 9.01                      |       |
| Forfeited                                      |       | (3                    | )          | 9.01                      |       |
| Non-vested  balance as of June 30, 2009   |       | 52                    |       | $                         | 10.14      |   |

 

**13.  INCOME TAXES**

 

The year-to-date effective tax rate for continuing operations decreasedfrom 35.6% during the six months ended June 30, 2008 to 20.4% during thesix months ended June 30, 2009.  Theprimary difference between the periods is an increase in work opportunitycredits and a larger impact from the change in the Canadian statutorytax rates in 2009 compared to 2008. Effective January 1, 2008, theCanadian statutory rate was reduced from 22.1% to 19.5% for fiscal year 2008and to 19.0% for fiscal year 2009.  Therate will continue to decrease each year until it is 15.0% by 2012.

 

Differences between U.S.statutory income tax rates and our effective tax rates for continuingoperations for the six months ended June 30, 2009 and 2008 were:

 
| ** **                                      | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| U.S.  statutory tax rate                        |       | 35.0                               | %          | 35.0 | % |
| Effect  of state taxes (net of Federal benefit) |       | 4.3                                | %          | 1.6 | % |
| Work  opportunity credits                       |       | (17.2                              | )%         | 7.2 | % |
| Effect  of change in Canadian tax rate          |       | (12.0                              | )%         | (5.4 | )% |
| Meals  and entertainment                        |       | 4.2                                | %          | (1.9 | )% |
| Other,  net                                     |       | 6.1                                | %          | (0.9 | )% |
| Total                                           |       | 20.4                               | %          | 35.6 | % |

 

**14.  LITIGATION**

 

In our Annual Report on Form 10-Kfiled March 3, 2009, we described two material pending litigationmatters:  West Palm Beach Firefighters’Pension Fund v. StarTek, Inc., et al. (U.S. District Court, District ofColorado) filed on July 8, 2005, and John Alden v. StarTek, Inc., etal. (U.S. District Court, District of Colorado) filed on July 20, 2005(the “Litigation”).

 

On July 20, 2009, weexecuted a Stipulation of Settlement (“Stipulation”) with lead plaintiffs tosettle the Litigation.  Under the termsof the Stipulation, defendants will pay $7,500 to completely resolve theLitigation, in exchange for a release of all claims by lead plaintiffs and classmembers and a dismissal of the Litigation with prejudice. StarTek’s primaryinsurance carrier will contribute $6,900 and StarTek will contribute $600 tothe Settlement Fund (as defined in the Stipulation). The settlement as setforth in the Stipulation is subject to various conditions, includingpreliminary approval by the United States District Court for the District ofColorado (the “Court”), notice to the class members, a final hearing, and finalapproval by the Court.  We have accrued for our portion of the settlementdue, or $600 in our Condensed Consolidated Statement of Operations during thethree and six months ended June 30, 2009.

 

We are involved from timeto time in other litigation arising in the normal course of business, none ofwhich is expected by management to have a material adverse effect on ourbusiness, financial condition or results of operations.

 

**15.  SUBSEQUENT EVENT**

 

On July 20, 2009, weexecuted a Stipulation of Settlement with lead plaintiffs to settle two pendinglitigation matters.  Refer to Note 14, “Litigation”,for further information regarding the Stipulation of Settlement.

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The followingdiscussion and analysis should be read in conjunction with our UnauditedConsolidated Financial Statements and related Notes included elsewhere in thisQuarterly Report on Form 10-Q and in our Annual Report on Form 10-Kfor the year ended December 31, 2008, and with the information under theheading “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in our Annual Report on Form 10-K for the yearended December 31, 2008.

 

Unlessotherwise noted in this report, any description of “us” or “we” refers toStarTek, Inc. and our subsidiaries. Financial information in this report is presented in U.S. dollars.

 

**BUSINESS DESCRIPTION AND OVERVIEW**

 

StarTek is aprovider of business process outsourcing services to the communicationsindustry.  We partner with our clients tomeet their business objectives and improve customer retention, increaserevenues and reduce costs through an improved customer experience.  Our solutions leverage industry knowledge,best business practices, skilled agents, proven operational excellence andflexible technology.  The StarTekcomprehensive service suite includes customer care, sales support, complexorder processing, accounts receivable management, technical support and otherindustry-specific processes.  We operateour business within three reportable segments, based on the geographic regionsin which our services are rendered: (1) the U.S., (2) Canada and (3) thePhilippines (“Offshore”).  As of June 30,2009, our U.S. segment included the operations of our thirteen facilities inthe U.S.; our Canada segment included the operations of our five facilities inCanada; and our Offshore segment included the operations of our facility inMakati City, Philippines.  As of June 30,2008, there were fourteen, six and zero operating centers in the U.S., Canadaand Offshore, respectively.  We use grossprofit as our measure of profit and loss for each business segment and do notallocate selling, general and administrative expenses to our business segments.

 

We endeavor toachieve site optimization at all of our locations by routinely evaluating siteperformance.  If local economicconditions, prevailing wage rates, or other factors, negatively impact thelong-term financial viability of a location, management will from time to timemake the decision to close a facility. As a result, we may incur impairment losses or restructuring charges inconnection with the closure.  Likewise,management is continually in pursuit of opportunities to open new locations ineconomically viable geographic markets in order to improve profitability andgrow the business.

 

**SIGNIFICANTDEVELOPMENTS DURING THE THREE AND SIX MONTHS ENDED JUNE 30, 2009**

 

In February 2009, weclosed our facility in Regina, Saskatchewan. The closure of our Regina facility was driven by market conditions, namelyrecruiting challenges in this location, which impacted the profitability of thesite and management determined it was in our long-term interest to close thelocation.   This closure resulted inapproximately $2.9 million and $5.2 million less revenue during the three andsix months ended June 30, 2009 and $0.1 million and $nil less gross profitduring the three and six months ended June 30, 2009 compared to thecomparable periods ended June 30, 2008. We also incurred restructuring charges of approximately $4.4 millionduring the six months ended June 30, 2009 related to the closure, which isdiscussed in further detail below.

 

OnFebruary 25, 2009, we entered into an agreement to sell the assets ofDomain.com, our wholly owned subsidiary, to A. Emmet Stephenson, Jr., Inc.(“Mr. Stephenson”) in exchange for cash of $7.075 million.  The assets of Domain.com consist of domainnames, trademarks and corporation names. We conducted an auction for the assets and received bids from multipleparties, including Mr. Stephenson.  Mr. Stephensonpresented the highest bid, which represented the selling price, of $7.075million and the sale was completed effective February 25, 2009.  Mr. Stephenson is one of ourco-founders, has managed the Domain.com subsidiary since 2006 and ownsapproximately 20% of our common shares outstanding.  Because the transaction involves a relatedparty, the Audit Committee of our Board of Directors considered and approvedthe transaction.

 

Theresults of operations and cash flows of Domain.com have been reported asdiscontinued operations.

 

**RESULTS OF OPERATIONS — THREEMONTHS ENDED JUNE 30, 2009 AND JUNE 30, 2008**

 

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The followingtable presents selected items from our Condensed Consolidated Statements ofOperations in thousands of dollars and as a percentage of revenue for theperiods indicated.

 
| ** **                                                    | ** ** | **Three Months  Ended June 30,  2009** | ** ** | **% of  Revenue** | ** ** | **Three Months  Ended June 30,  2008** | ** ** | **% of  Revenue** | ** ** | **% Change Q2  2008 to Q2  2009** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------|------------|---------------------------------------------|------------|-------------------|------------|-----------------------------------|------------|
| Revenue                                                       |       | $                                           | 73,290     |              | 100.0      | %                                           | $          | 65,467            |       | 100.0                             | %          | 11.9 | % |
| Cost  of services                                             |       | 60,161                                      |       | 82.1              | %          | 57,163                                      |       | 87.3              | %          | 5.2                               | %          |
| Gross  profit                                                 |       | 13,129                                      |       | 17.9              | %          | 8,304                                       |       | 12.7              | %          | 58.1                              | %          |
| Selling,  general and administrative expenses                 |       | 10,889                                      |       | 14.9              | %          | 10,227                                      |       | 15.6              | %          | 6.5                               | %          |
| Impairment  losses and restructuring charges                  |       | —                                      |       | 0.0               | %          | 5,500                                       |       | 8.4               | %          | -100.0                            | %          |
| Operating  income (loss)                                      |       | 2,240                                       |       | 3.0               | %          | (7,423                                      | )          | -11.3             | %          | NM                                |       |
| Net  interest and other (expense) income                      |       | (103                                        | )          | -0.1              | %          | 90                                          |       | 0.1               | %          | NM                                |       |
| Income  (loss) from continuing operations before income taxes |       | 2,137                                       |       | 2.9               | %          | (7,333                                      | )          | -11.2             | %          | NM                                |       |
| Income  tax expense (benefit)                                 |       | 810                                         |       | 1.1               | %          | (2,745                                      | )          | -4.2              | %          | NM                                |       |
| Net  income (loss) from continuing operations                 |       | 1,327                                       |       | 1.8               | %          | (4,588                                      | )          | -7.0              | %          | NM                                |       |
| Income  from discontinued operations, net of tax              |       | —                                      |       | 0.0               | %          | 69                                          |       | 0.1               | %          | -100.0                            | %          |
| Net  income (loss)                                            |       | $                                           | 1,327      |              | 1.8        | %                                           | $          | (4,519            | )          | -6.9                              | %          | NM |   |

 

The following tablesummarizes our revenues and gross profit for the periods indicated, byreporting segment:

 
| ** **         | ** ** | **For the  Three Months Ended June 30,** | ** ** |
|--------------------|------------|-----------------------------------------------|------------|
| ** **         | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| ** **         | ** ** | **(in 000s)**                                 | ** ** | **(% of Total)** | ** ** | **(in 000s)** | ** ** | **(% of Total)** | ** ** |
| **United States:** |       |                                          |       |   |   |   |   |   |   |
| Revenue            |       | $                                             | 52,033     |   | 71.0 | % | $ | 41,767 |   | 63.8 | % |
| Cost  of services  |       | 41,948                                        |       | 69.7 | % | 35,528 |   | 62.2 | % |
| Gross  profit      |       | $                                             | 10,085     |   | 76.8 | % | $ | 6,239 |   | 75.1 | % |
| *Gross profit %*   | * *   | *19.4*                                        | *%*        | * * | * * | *14.9* | *%* | * * | * * |
|               |       |                                          |       |   |   |   |   |   |   |
| **Canada:**        |       |                                          |       |   |   |   |   |   |   |
| Revenue            |       | $                                             | 19,232     |   | 26.2 | % | $ | 23,700 |   | 36.2 | % |
| Cost  of services  |       | 15,964                                        |       | 26.5 | % | 21,635 |   | 37.8 | % |
| Gross  profit      |       | $                                             | 3,268      |   | 24.9 | % | $ | 2,065 |   | 24.9 | % |
| *Gross profit %*   | * *   | *17.0*                                        | *%*        | * * | * * | *8.7* | *%* | * * | * * |
|               |       |                                          |       |   |   |   |   |   |   |
| **Offshore:**      |       |                                          |       |   |   |   |   |   |   |
| Revenue            |       | $                                             | 2,025      |   | 2.8 | % | $ | — |   | 0.0 | % |
| Cost  of services  |       | 2,249                                         |       | 3.7 | % | — |   | 0.0 | % |
| Gross  profit      |       | $                                             | (224       | ) | -1.7 | % | $ | — |   | 0.0 | % |
| *Gross profit %*   | * *   | *-11.1*                                       | *%*        | * * | * * | * * | * * | * * | * * |

 

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***Revenue***

 

Revenue increasedby $7.8 million, or 11.9%, from $65.5 million in the second quarter of 2008 to$73.3 million in the second quarter of 2009. The increase was driven by a $10.3 million increase in revenue in ourU.S. segment. Of this increase, $9.9 million was from two new sites that wereopened in mid-2008 (Mansfield, OH and Jonesboro, AK).  This was partially offset by $3.9 millionless revenue from site closures in Big Spring, TX and Petersburg, VA in August 2008and December 2008, respectively. The remainder of the change was driven by increases in the number ofaverage full-time equivalent agents and utilization at other U.S.locations.  In the second quarter of2009, average full-time equivalent agents increased by 15.7% from the secondquarter of 2008.  This was due in largepart to the full ramp of a site which transitioned to a new customer andcontributed approximately $1.8 million of additional revenue in the second quarterof 2009.  Revenues in our Canadiansegment declined by $4.5 million in the second quarter of 2009 compared to thesame period in 2008.  Of this decrease,$2.9 million was due to the site closure in Regina, Saskatchewan.  The remainder was due to a decline of 11.3%in average full-time equivalent agents at our other Canadian locations.  Revenue from our Offshore segment increasedfrom $0 in the second quarter of 2008 to $2.0 million in the second quarter of2009 because our site in Makati City, Philippines opened in September 2008.

 

***Costof Services and Gross Profit***

 

Cost of servicesincreased by $3.0 million, or 5.2%, from $57.2 million in the second quarter of2008 to $60.2 million in the second quarter of 2009.  Cost of services in the U.S. increased byapproximately $6.4 million, of which $3.0 million was related to the netaddition of new sites, less closures, year over year, as discussed above.  Gross profit as a percentage of revenue inthe U.S. increased from 14.9% in the second quarter of 2008 to 19.4% in thesecond quarter of 2009.  This increasewas driven by higher utilization, which we define as average full-timeequivalent agents divided by available seat capacity, which increased from 63%in the second quarter of 2008 to 82% in the second quarter of 2009.  Cost of services in Canada declined by $5.7million in the second quarter of 2009 from the second quarter of 2008, of which$3.1 million was due to the closure of the facility in Regina, Saskatchewan and$2.0 million was due to improvements in the Canadian to U.S. dollar exchangerate.  The remaining decrease in theCanadian segment was due to fewer agents, as described above.  Cost of services for our Offshore segmentincreased by approximately $2.2 million due to the opening of our Makati City,Philippines location.

 

***Selling,General and Administrative Expenses***

 

Selling, generaland administrative expenses increased by $0.7 million, or 6.5%, from $10.2million in the second quarter of 2008 to $10.9 million in the second quarter of2009.  The increase was due to an increase of $0.6 million in payroll expenses,driven by a $0.4 million increase in bonuses and $0.2 million higher stockbased compensation expense.  In addition,selling, general and administrative expenses increased by $0.6 million due toan accrual for the settlement of our shareholder lawsuit which we entered intoa Stipulation of Settlement for on July 20, 2009.  These increases were partially offset bydecreases of $0.3 million and $0.2 million in depreciation expense and employeetraining expense, respectively.

 

***ImpairmentLosses and Restructuring Charges***

 

Impairment losses andrestructuring charges declined from $5.5 million in the second quarter of 2008to $0 in the second quarter of 2009.  Inthe second quarter of 2008, we recorded $4.1 million in impairment losses dueto impairment of certain long-lived assets ($2.3 million in the U.S. segmentand $1.8 million in the Canadian segment) and $1.4 million in restructuringcharges associated with the closure of our site in Hawkesbury, Ontario,Canada.  We did not incur any impairmentlosses or restructuring charges during the second quarter of 2009.

 

***OperatingIncome (Loss)***

 

We had operating incomeof $2.2 million during the three months ended June 30, 2009 and anoperating loss of $7.4 million during the three months ended June 30,2008.  Operating income (loss) as apercentage of revenue was 3.0% for the three months ended June 30, 2009compared to (11.3%) for the three months ended June 30, 2008.  The increase was a result of lower impairmentand restructuring charges and higher revenue, partially offset by an increasein cost of services and selling, general and administrative expenses, asdiscussed previously.

 

***NetInterest and Other (Expense) Income***

 

Net interest and other expensewas approximately $0.1 million during the second quarter of 2009, compared tonet interest and other income of approximately $0.1 million in the secondquarter of 2008.  The decrease was dueprimarily to $0.3 million less interest and investment income in the secondquarter of 2009, compared to the second quarter of 2008 due to lower cash andinvestments during 

 

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the period.  This decrease to interest income was offsetby a $0.1 million decrease in interest expense due to less interest expenserelated to our equipment loans and line of credit, partially offset by apre-payment penalty on the equipment loans.

 

***IncomeTax***

 

The quarterly effective tax rate for continuing operations remainedconsistent, increasing slightly from 37.4% during the three months ended June 30,2008 to 37.9% during the three months ended June 30, 2009.

 

***NetIncome (Loss)***

 

Net income was $1.3million for the second quarter of 2009 and we had a net loss of approximately$4.5 million during the second quarter of 2008. The increase in net income was primarily due to higher revenue and theabsence of impairment and restructuring charges, partially offset by highercost of services and selling, general and administrative expenses, as discussedpreviously.

 

**RESULTS OF OPERATIONS — SIXMONTHS ENDED JUNE 30, 2009 AND JUNE 30, 2008**

 
| ** **                                           | ** ** | **Six Months Ended  June 30, 2009** | ** ** | **% of  Revenue** | ** ** | **Six Months Ended  June 30, 2008** | ** ** | **% of  Revenue** | ** ** | **% Change  YTD June  30, 2008 to  2009** | ** ** |
|------------------------------------------------------|------------|------------------------------------------|------------|-------------------|------------|------------------------------------------|------------|-------------------|------------|-------------------------------------------|------------|
| Revenue                                              |       | $                                        | 144,001    |              | 100.0      | %                                        | $          | 130,050           |       | 100.0                                     | %          | 10.7 | % |
| Cost  of services                                    |       | 120,149                                  |       | 83.4              | %          | 112,279                                  |       | 86.3              | %          | 7.0                                       | %          |
| Gross  profit                                        |       | 23,852                                   |       | 16.6              | %          | 17,771                                   |       | 13.7              | %          | 34.2                                      | %          |
| Selling,  general and administrative expenses        |       | 20,581                                   |       | 14.3              | %          | 20,317                                   |       | 15.6              | %          | 1.3                                       | %          |
| Impairment  losses and restructuring charges         |       | 6,437                                    |       | 4.5               | %          | 5,608                                    |       | 4.4               | %          | 14.8                                      | %          |
| Operating  loss                                      |       | (3,166                                   | )          | -2.2              | %          | (8,154                                   | )          | -6.3              | %          | NM                                        |       |
| Net  interest and other (expense) income             |       | (178                                     | )          | -0.1              | %          | 400                                      |       | 0.3               | %          | NM                                        |       |
| Loss  from continuing operations before income taxes |       | (3,344                                   | )          | -2.3              | %          | (7,754                                   | )          | -6.0              | %          | NM                                        |       |
| Income  tax benefit                                  |       | (683                                     | )          | -0.5              | %          | (2,763                                   | )          | -2.2              | %          | NM                                        |       |
| Net  loss from continuing operations                 |       | (2,661                                   | )          | -1.8              | %          | (4,991                                   | )          | -3.8              | %          | NM                                        |       |
| Income  from discontinued operations, net of tax     |       | 4,640                                    |       | 3.2               | %          | 141                                      |       | 0.1               | %          | NM                                        |       |
| Net  income (loss)                                   |       | $                                        | 1,979      |              | 1.4        | %                                        | $          | (4,850            | )          | -3.7                                      | %          | NM |   |

 

The following table summarizes our revenues and gross profit for theperiods indicated, by reporting segment:

 
| ** **         | ** ** | **For the  Six Months Ended June 30,** | ** ** |
|--------------------|------------|---------------------------------------------|------------|
| ** **         | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| ** **         | ** ** | **(in 000s)**                               | ** ** | **(% of Total)** | ** ** | **(in 000s)** | ** ** | **(% of Total)** | ** ** |
| **United States:** |       |                                        |       |   |   |   |   |   |   |
| Revenue            |       | $                                           | 101,397    |   | 70.4 | % | $ | 81,725 |   | 62.8 | % |
| Cost  of services  |       | 82,515                                      |       | 68.7 | % | 67,480 |   | 60.1 | % |
| Gross  profit      |       | $                                           | 18,882     |   | 79.2 | % | $ | 14,245 |   | 80.2 | % |
| *Gross profit %*   | * *   | *18.6*                                      | *%*        | * * | * * | *17.4* | *%* | * * | * * |
|               |       |                                        |       |   |   |   |   |   |   |
| **Canada:**        |       |                                        |       |   |   |   |   |   |   |
| Revenue            |       | $                                           | 38,413     |   | 26.7 | % | $ | 48,325 |   | 37.2 | % |
| Cost  of services  |       | 33,399                                      |       | 27.8 | % | 44,799 |   | 39.9 | % |
| Gross  profit      |       | $                                           | 5,014      |   | 21.0 | % | $ | 3,526 |   | 19.8 | % |
| *Gross profit %*   | * *   | *13.1*                                      | *%*        | * * | * * | *7.3* | *%* | * * | * * |
|               |       |                                        |       |   |   |   |   |   |   |
| **Offshore:**      |       |                                        |       |   |   |   |   |   |   |
| Revenue            |       | $                                           | 4,191      |   | 2.9 | % | $ | — |   | 0.0 | % |
| Cost  of services  |       | 4,235                                       |       | 3.5 | % | — |   | 0.0 | % |
| Gross  profit      |       | $                                           | (44        | ) | -0.2 | % | $ | — |   | 0.0 | % |
| *Gross profit %*   | * *   | *-1.0*                                      | *%*        | * * | * * | * * | * * | * * | * * |

 

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***Revenue***

 

Revenue increasedby $14.0 million, or 10.7%, from $130.0 million in the six months ended June 30,2008 to $144.0 million in the six months ended June 30, 2009.  The increase was driven by the U.S. segmentand the Offshore segment which increased by $19.7 million and $4.2 million,respectively.  The increase in U.S.revenue was due to three new U.S. facilities added in 2008, partially offset bythe closure of two U.S. facilities.  Thenet impact of these openings and closures was $11.9 million in additionalrevenue.  U.S. revenue also increased dueto the full ramp of a site which transitioned to a new customer and contributed$3.4 million of additional revenue in the six months ended June 30, 2009compared to the six months ended June 30, 2008.  The remaining increase of $4.4 million at theremaining U.S. facilities was driven by an increase in the number of averagefull-time equivalent agents, which increased approximately 7.9% from the sixmonths ended June 30, 2008 to the six months ended June 30,2009.  The offshore facility in MakatiCity, Philippines opened in September 2008, and as such did not contributerevenue during the first half of 2008 and contributed $4.2 million in the firsthalf of 2009.  Revenue from Canadadecreased by $9.9 million in the first half of 2009 compared to the same periodin 2008 due primarily to the closure of our Regina, Saskatchewan facility in February 2009which had approximately $5.2 million less revenue in the six months of 2009compared to the same period in 2008.  Inaddition, revenue decreased by approximately $0.6 million due to changes in theforeign exchange rate between the U.S. dollar and Canadian dollar.  The remainder of the decrease in the Canadiansegment was due to a decrease in the number of average full-time equivalentagents, which decreased by approximately 13.3% in the first half of 2009 fromthe first half of 2008.

 

***Costof Services and Gross Profit***

 

Cost of servicesincreased by $7.9 million, or 7.0%, from $112.3 million in the six months endedJune 30, 2008 to $120.1 million in the six months ended June 30,2009.  Cost of services in the U.S.increased by approximately $15.0 million, of which $8.0 million related to thenet addition of new sites year over year, as discussed above.  Cost of services at our other U.S. facilitiesalso increased during the first half of 2009 compared to the first half of 2008due to a greater number of agents, as described above.  In addition, cost of services increased byapproximately $4.2 million due to the opening of the Makati City, Philippineslocation.  These increases to cost ofservices were offset by lower cost of services in Canada due in part to theclosure of the Regina location, which accounted for $5.3 million of thedecrease.  Additionally, cost of servicesdecreased by $4.2 million in the first half of 2009 compared to the first halfof 2008 due to a stronger U.S. to Canadian dollar exchange rate.  The remaining decrease in the Canadiansegment was due to fewer agents, as described above.

 

***Selling,General and Administrative Expenses***

 

Selling, general and administrative expenses increased by $0.3 million,or 1.3%, from $20.3 million in the first six months of 2008 to $20.6 million inthe first six months of 2009.  Theincrease was primarily due to $0.6 million in expense associated with thesettlement of our shareholder lawsuit, $0.6 million increase in payrollexpense, $0.2 million increase in other legal expense and $0.2 million increasein relocation expenses.  These increaseswere partially offset by declines in depreciation expense of $0.5 million,hiring expense of $0.2 million, consulting fees of $0.1 million, maintenancecontract expenses of $0.1 million and telephone expenses of $0.1 million.

 

***ImpairmentLosses and Restructuring Charges***

 

Impairment losses andrestructuring charges were $6.4 million and $5.6 million for the six monthsended June 30, 2009 and 2008, respectively.  Restructuring charges were $4.7 millionduring the six months ended June 30, 2009, related primarily to theclosure of our Regina, Saskatchewan facility in February 2009 for which weincurred approximately $4.4 million of charges. The costs relate primarily to the building lease costs through theremainder of the lease term, or July 2013. Accrued restructuring costs were valued using a discounted cash flowmodel and the cash flows consist of the future lease payment obligationsrequired under the lease agreements and property taxes through the remainder ofthe lease term.  We assumed that we wouldnot sublease the vacant facilities for the remainder of the lease term.  In the future, if we are able to sublease thefacilities, we may be required to record a gain in the Condensed ConsolidatedStatements of Operations.  The remainderof the restructuring charges during the first half of 2009 were due toadjustments in our estimated liability for our other restructuring plans.  We recorded $1.5 million in restructuringcharges in the first half of 2008 related to the closure of our Hawkesbury,Ontario facility in 2007.

 

We recorded approximately$1.7 million in impairment losses during the first half of 2009 due to theimpairment of certain long-lived assets for which the carrying value of thoseassets is not recoverable.  These assetsare located in a facility for which we are uncertain about our ability togenerate future cash flows to support the carrying value of these assets.  The long-lived assets include computer andtelephone equipment, furniture and fixtures, leasehold improvements andsoftware.  We recorded $4.1 million inimpairment losses in the first half of 2008 due to impairment of certainlong-lived assets ($2.3 million in the U.S. segment and $1.8 million in theCanadian segment).

 

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***OperatingLoss***

 

We incurredoperating losses of approximately $3.2 million and $8.2 million for the sixmonths ended June 30, 2009 and 2008, respectively.  Operating loss as a percentage of revenue was(2.2%) for the six months ended June 30, 2009 compared to (6.3%) for thesix months ended June 30, 2008.  Thedecline in the loss was driven by an increase in revenue, partially offset byhigher impairment and restructuring charges, cost of services and selling,general and administrative costs, as discussed previously.

 

***NetInterest and Other (Expense) Income***

 

Net interest and otherexpense was approximately $0.2 million during the first half of 2009, comparedto net interest and other income of approximately $0.4 million in the firsthalf of 2008.  The change was dueprimarily to a decrease in interest and investment income of approximately $0.7million in the first half of 2009 compared to the first half of 2008 due to a declinein our investment balance during these periods, partially offset by lessinterest expense, which declined by approximately $0.1 million in the firsthalf of 2009 compared to the first half of 2008.

 

***IncomeTax***

 

The year-to-date effective tax rate for continuing operations decreasedfrom 35.6% during the six months ended June 30, 2008 to 20.4% during thesix months ended June 30, 2009.  Theprimary difference between the periods is an increase in work opportunitycredits and a larger impact from the change in the Canadian statutorytax rates in 2009 compared to 2008.

 

***Incomefrom Discontinued Operations***

 

Income from discontinuedoperations was approximately $4.6 million during the six months ended June 30,2009 and approximately $0.1 million during the six months ended June 30,2008.  In February 2009, we soldDomain.com, a wholly owned subsidiary, for cash of approximately $7.1million.  We had a gain on the sale ofapproximately $6.9 million, less taxes of approximately $2.3 million.

 

***NetIncome (Loss)***

 

Net income was $2.0million during the six months ended June 30, 2009 and net loss wasapproximately $4.9 million during the six months ended June 30, 2008.  The increase in net income was primarily dueto higher revenue and income from discontinued operations, partially offset byhigher cost of services, selling, general and administrative expenses andimpairment and restructuring charges, as discussed previously.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

As of June 30, 2009,working capital totaled $56.8 million and our current ratio was 3.21:1,compared to working capital of $47.6 million and a current ratio of 2.58:1 at December 31,2008.  We have historically financed ouroperations, liquidity requirements, capital expenditures, and capacityexpansion primarily through cash flows from operations, and to a lesser degree,through various forms of debt and leasing arrangements. In addition to fundingbasic operations, our primary uses of cash typically relate to capitalexpenditures to upgrade our existing information technologies and serviceofferings, investments in our facilities. We believe that cash flows from operations and cash provided byshort-term borrowings, when necessary, will adequately meet our ongoing operatingrequirements.  Any significant futureexpansion of our business may require us to secure additional cashresources.  Our liquidity could besignificantly impacted by large cash requirements to expand our business or adecrease in demand for our services, particularly from any of our principalclients, which could arise from a number of factors, including, but not limitedto, competitive pressures, adverse trends in the business process outsourcingmarket, industry consolidation, adverse circumstances with respect to theindustries we service, and any of the other factors we describe more fully inthe “Risk Factors” section in our Annual Report on Form 10-K for the yearended December 31, 2008.

 
| ** **                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------|------------|
| ** **                                 | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| ** **                                 | ** ** | **(in  thousands)**                | ** ** |
| Net  cash provided by (used in):           | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Operating  activities                      |       | $                                  | 6,524      |   | $ | 9,593 |   |
| Investing  activities                      |       | 10,064                             |       | (14,163 | ) |
| Financing  activities                      |       | (6,842                             | )          | (2,204 | ) |
| Effect  of foreign exchange rates on cash  |       | 501                                |       | (570 | ) |
| Net  increase in cash and cash equivalents |       | $                                  | 10,247     |   | $ | (7,344 | ) |

 

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Our balance of cash andcash equivalents was $19.8 million at June 30, 2009, compared to a balanceof $9.6 million at December 31, 2008.

 

***OperatingActivities. ***Net cash provided by operating activitiesdecreased by $3.1 million from $9.6 million for the six months ended June 30,2008 to $6.5 million for the six months ended June 30, 2009.  Net cash provided by operating activitiesfrom continuing operations was $8.9 million, or a decrease of $0.6million.  The slight decline of $0.6million in cash provided by operating activities from continuing operations wasdriven by the following decreases:  1)$3.5 million of lower collections of accounts receivable period over period dueto the timing of collections of large billings, 2) $1.6 million in lessaccounts payable due to timing of payments of purchases and 3) $1.3 million oflower income from continuing operations after impairment losses anddepreciation expense (net loss from continuing operations improved by $2.3million offset by $3.6 million less impairment and depreciation expense).  These decreases to cash provided by operatingactivities from continuing operations were partially offset by the followingincreases:  1) $3.0 million in deferredincome taxes, whereby the deferred income tax asset declined by $1.4 million inthe first six months of 2009 compared to an increase of $1.6 million in thesame period of 2008 because of the utilization of net operating loss carryforwards and less impairment and restructuring charges and 2) $2.7 million inincome taxes receivable which decreased in the first half of 2009 because ofthe collection of a large outstanding income tax receivable in the period.

 

***InvestingActivities. ***Net cash provided by investing activitieswas $10.1 million in the first six months of 2009 compared to cash used ininvesting activities of $14.2 million in the first six months of 2008.  The increase was due to 1) proceeds from thesale of Domain.com of $7.1 million, 2) a $7.7 million decrease in purchases ofproperty, plant and equipment due to no new site openings in the first sixmonths of 2009 compared to the opening of two new sites in the first six monthsof 2008 and 3) an increase in net proceeds from the sale of investments, net ofpurchases, of $9.5 million which was a result of a shift towards moreconservative holdings of cash and cash equivalents.

 

***FinancingActivities. ***Net cash used in financing activitiesincreased by $4.6 million from $2.2 million in the six months ended June 30,2008 to $6.8 million for the six months ended June 30, 2009.  The increase was due primarily to an increasein payments on long-term debt of $4.7 million due to the pay-off of our twoequipment loans in the second quarter of 2009. Refer to “Liquidity and Capital Resources — Contractual Obligations”below for further information on the pay-off of these loans.

 

***Contractual******Obligations.***** **Other thanoperating and capital leases for certain equipment, real estate and leases andcommitments to purchase goods and services in the future, we have nooff-balance sheet transactions, unconditional purchase obligations or similarinstruments and we are not a guarantor of any other entities’ debt or otherfinancial obligations.

 

OnJune 26, 2009, we entered into a business loan agreement, promissory noteand three commercial security agreements (together the “Agreement”) with UMBBank Colorado, N.A. (“UMB Bank”) for a $15 million secured revolving line ofcredit.  The Agreement is effective July 1,2009 through August 1, 2010.  ThisAgreement replaced our $10 million secured revolving line of credit with WellsFargo Bank N.A., which expired by its terms on June 30, 2009.  We use this line of credit to finance regular,short-term operating expenses.  There wasno balance outstanding on either the line of credit with UMB Bank or theprevious line of credit with Wells Fargo Bank N.A. as of June 30,2009.  As of June 30, 2009, we werein compliance with our debt covenants.

 

Borrowingsunder the Agreement bear interest, at our option at the time of the borrowing,of the thirty, sixty or ninety-day LIBOR index, plus 1.75%.  The interest rate shall never be less than3.25% per annum.  Under the Agreement, wegranted UMB Bank a security interest in all of our present and future accountsreceivable, general intangibles, and owned real property.   In addition, under the Agreement, we aresubject to certain financial covenants, which include maintaining 1) a ratio oftotal liabilities to tangible net worth of less than 1.0 to 1.0, 2) a tangiblenet worth of at least $105 million, 3) unencumbered liquid assets, defined ascash, certificate of deposits and marketable securities, of at least $10 millionmeasured on the last day of each fiscal quarter and 4) a cash flow coverageratio, as defined in the Agreement, of greater than 1.50 to 1.0 measured on thelast day of each fiscal quarter for the previous twelve months.

 

In addition, during the second quarter of 2009, we paid off the remainingprincipal balance on the Secured Equipment Promissory Note between Wells FargoEquipment Finance, Inc. and StarTek USA, Inc., our wholly ownedsubsidiary, and the Canadian Dollar Secured Equipment Loan between Wells FargoEquipment Finance Company, Inc. and StarTek Canada Services, Ltd., ourwholly owned subsidiary.  The loans hadoriginal maturities in November 2010. The total payoff on these loans, including pre-payment penalties, wasapproximately $5.7 million.

 

***OtherFactors Impacting Liquidity.*** Effective November 4, 2004, our board ofdirectors authorized purchases of up to $25.0 million of our common stock.  The repurchase program will remain in effectuntil terminated by the board of directors and allows us to repurchase sharesof our common stock from time to time on the open market, in block trades andin privately-negotiated transactions. Repurchases will be implemented by the Chief Financial Officerconsistent with the guidelines adopted by the board of directors and willdepend on market conditions and other factors. Any repurchases of shares will be made in accordance with Securities andExchange Commission rules.  We have not yetrepurchased any shares pursuant to this board authorization.

 

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Our business currentlyhas a high concentration of a few principal clients.  The loss of a principal client and/or changesin timing or termination of a principal client’s product launch or serviceoffering would have a material adverse effect on our business, liquidity,operating results, and financial condition. These client relationships are further discussed in Note 6, “PrincipalClients,” to our Condensed Consolidated Financial Statements, which areincluded at Item 1, “Financial Statements,” of this Form 10-Q.  To limit our credit risk, management fromtime to time will perform credit evaluations of our clients. Although we aredirectly impacted by the economic conditions in which our clients operate,management does not believe substantial credit risk existed as of June 30,2009. Refer to Item 1A. “Risk Factors” appearing in our Annual Report on Form 10-Kfor the year ended December 31, 2008 for further information regardingthese risks.

 

As of June 30, 2009,we had approximately $0.5 million invested in corporate debt securities.  There is a risk that if those companies inwhich we are invested suffer due to economic conditions or other reasons, wecould realize losses on these investments which could impact our liquidity.

 

There is a risk that thecounterparties to our hedging instruments could suffer financial difficultiesdue to economic conditions or other reasons and we could realize losses onthese arrangements which could impact our liquidity.  However, we do not believe we are exposed to more thana nominal amount of credit risk in our derivative hedging activities, as thecounterparties are established, well-capitalized financial institutions.

 

Although managementcannot accurately anticipate the effects of domestic and foreign inflation onour operations, management does not believe inflation has had, or is likely inthe foreseeable future to have, a material adverse effect on our results ofoperations or financial condition.

 

***Variabilityof Operating Results. ***Our business has been seasonal only tothe extent that our clients’ marketing programs and product launches are gearedtoward the winter holiday buying season. We have experienced and expect to continue to experience some quarterlyvariations in revenue and operating results due to a variety of factors, manyof which are outside our control, including: (i) timing and amount ofcosts incurred to expand capacity in order to provide for volume growth fromexisting and future clients; (ii) changes in the volume of servicesprovided to principal clients; (iii) expiration or termination of clientprojects or contracts; (iv) timing of existing and future client productlaunches or service offerings; (v) seasonal nature of certain clients’businesses; and (vi) cyclical nature of certain clients’ businesses.

 

Because we servicerelatively few, large clients, the availability of cash is highly dependent onthe timing of cash receipts from accounts receivable.  As a result, from time to time, we borrowcash from our line of credit to cover short-term cash needs.  These borrowings are typically outstandingfor a short period of time before they are repaid.  However, our debt balance can fluctuatesignificantly during any given quarter as part of our ordinary course ofbusiness.  Accordingly, our debt balanceat the end of any given quarter is not necessarily indicative of the debt balanceat any other time during that period.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

In preparing ourcondensed consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America, management mustundertake decisions that impact the reported amounts and relateddisclosures.  Such decisions include theselection of the appropriate accounting principles to be applied andassumptions upon which accounting estimates are based.  Management applies its best judgment based onits understanding and analysis of the relevant circumstances to reach thesedecisions.  By their nature, thesejudgments are subject to an inherent degree of uncertainty.  Accordingly, actual results may varysignificantly from the estimates we have applied.

 

Our critical accountingpolicies and estimates are consistent with those disclosed in our Annual Reporton Form 10-K for the year ended December 31, 2008.  Please refer to Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” inour Annual Report on Form 10-K for the year ended December 31, 2008,for a complete description of our Critical Accounting Policies and Estimates.

 

***RecentlyAdopted Accounting Pronouncements***

 

Effective January 1,2009, we adopted Statement of Financial Accounting Standards No. 157, “FairValue Measurements” (“SFAS No. 157”), for all non-financial assets andnon-financial liabilities, except for items that are recognized or disclosed atfair value on a recurring basis (at least annually) for which SFAS No. 157was previously adopted.  Refer to Note 9,“Fair Value Measurements,” of this Form 10-Q for additional information onthe adoption of SFAS No. 157.

 

Effective January 1,2009, we adopted FASB No. 161, “Disclosures about Derivative Instrumentsand Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No. 161”).SFAS No. 161 requires entities to provide greater transparencythrough 

 

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additionaldisclosures about (a) how and why an entity uses derivative instruments, (b) howderivative instruments and related hedged items are accounted for under SFAS No. 133“Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) andits related interpretations, and (c) how derivative instruments andrelated hedged items affect an entity’s financial position, results ofoperations and cash flows. Refer to Note 8, “Derivative Instruments,” of this Form 10-Qfor additional information on the adoption of SFAS No. 161.

 

We adopted FASB No. 141(R),“Business Combinations” (“SFAS No. 141(R)”), which significantlychanged the accounting for and reporting of business combination transactions.This standard was effective for us for business combination transactions forwhich the acquisition date was on or after January 1, 2009. No businesscombination transactions occurred during the six months ended June 30,2009.

 

We adopted FASBStaff Position No. 115-2 and SFAS No. 124-2, “Recognition andPresentation of Other-Than-Temporary Impairments” (“FSP No. 115-2 and SFASNo. 124-2”), in the second quarter of 2009.  FSP No. 115-2 and SFAS No. 124-2modifies the other-than-temporary impairment guidance for debt securitiesthrough increased consistency in the timing of impairment recognition andenhanced disclosures related to the credit and noncredit components of impaireddebt securities that are not expected to be sold. In addition, increaseddisclosures are required for both debt and equity securities regarding expectedcash flows, credit losses, and securities with unrealized losses. Refer to Note7, “Investments”, of this Form 10-Q for the relevant disclosures requiredby adoption of FSP No. 115-2 and SFAS No. 124-2.  The adoption of FSP No. 115-2 and SFAS No. 124-2did not have a material impact on our financial statements.

 

We adopted FASB Staff Position No. 107-1 and APBOpinion No. 28-1, “Interim Disclosures about Fair Value of FinancialInstruments” (“FSP No. 107-1 and APB Opinion No. 28-1”), in thesecond quarter of 2009.  FSP No. 107-1and APB Opinion No. 28-1 requires fair value disclosures for financialinstruments that are not reflected in the Condensed Consolidated Balance Sheetsat fair value.  Prior to the issuance ofFSP No. 107-1 and APB Opinion No. 28-1, the fair values of thoseassets and liabilities were disclosed only annually.  With the issuance of FSP No. 107-1 andAPB Opinion No. 28-1, we are now required to disclose this information ona quarterly basis, providing quantitative and qualitative information aboutfair value estimates for all financial instruments not measured in theCondensed Consolidated Balance Sheets at fair value.  The adoption of FSP No. 107-1 and APBOpinion No. 28-1 did not have a material impact on our financialstatements.

 

We adopted SFAS No. 165,“Subsequent Events” (“SFAS No. 165”), in the second quarter of 2009.  SFAS No. 165 establishes the accountingfor and disclosure of events that occur after the balance sheet date but beforefinancial statements are issued or are available to be issued. It requires thedisclosure of the date through which an entity has evaluated subsequent eventsand the basis for that date, that is, whether that date represents the date thefinancial statements were issued or were available to be issued.  Refer to this Note 1, “Basis of Presentation,”for the related disclosures. The adoption of SFAS No. 165 did not have amaterial impact on our financial statements.

 

***RecentlyIssued Accounting Pronouncements***

 

In June 2009,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codificationand the Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 168”).  SFASNo. 168 will become the single source of authoritative nongovernmentalU.S. generally accepted accounting principles (“GAAP”), superseding existingFASB, American Institute of Certified Public Accountants (“AICPA”), EmergingIssues Task Force (“EITF”), and related accounting literature.  SFAS No. 168reorganizes the thousands of GAAP pronouncements into roughly 90 accountingtopics and displays them using a consistent structure.  Also includedis relevant Securities and Exchange Commission guidance organized using thesame topical structure in separate sections.  SFAS No. 168 willbe effective for financial statements issued for reporting periods that endafter September 15, 2009.  This will have an impact on ourfinancial statements since all future references to authoritative accountingliterature will be references in accordance with SFAS No. 168.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

In the normal course ofbusiness, we are exposed to certain market risks related to changes in interestrates and other general market risks, and foreign currency exchange rates.  This information should be read inconjunction with information set forth in Part II, Item 7A in ourAnnual Report on Form 10-K for the year ended December 31, 2008, inaddition to the interim unaudited consolidated financial statements,accompanying notes and management’s discussion and analysis of financialcondition and results of operations presented in Items 1 and 2 of thisQuarterly Report on Form 10-Q.

 

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***InterestRate Risk***

 

We are exposed tointerest rate risk with respect to our cash and cash equivalents, investmentsand debt obligations.  Cash and cashequivalents are not restricted.  Weconsider cash equivalents to be short-term, highly liquid investments readilyconvertible to known amounts of cash, and so near their maturity they presentinsignificant risk of changes in value because of changes in interest rates.  At June 30, 2009, investments availablefor sale consisted of corporate debt securities.  Our investment portfolio is subject tointerest and inflation rate risks and will fall in value if market interestand/or inflation rates or market expectations relating to these ratesincrease.  Management believes we havethe ability to hold the foregoing investments until maturity, and therefore, ifheld to maturity, we would not expect the future proceeds from these investmentsto be affected, to any significant degree, by any sudden changes in marketinterest rates. Declines in interest rates over time will, however, reduce ourinterest income derived from future investments.  In addition, our investments in corporate debtsecurities could be adversely affected by declines in the economic condition ofthose companies in which we are invested.

 

***ForeignCurrency Exchange Risks***

 

We enter into foreigncurrency exchange contracts to hedge our anticipated operating commitments thatare denominated in foreign currencies. The contracts cover periods commensurate with expected exposure,generally within six months, and are principally unsecured foreign exchangecontracts.  The market risk exposure isessentially limited to risk related to currency rate movements.  Our Canadian and Philippine subsidiaries’functional currencies are the Canadian dollar and the Philippine peso,respectively, which are used to pay labor and other operating costs in thosecountries. However, our client contracts generate revenues which are paid to usin U.S. dollars.  During the secondquarter of 2009, we did not enter into any Canadian dollar forward contracts tohedge our foreign currency risk with respect to labor costs in Canada.  As of June 30, 2009, we have not enteredinto any arrangements to hedge our exposure to fluctuations in the Philippinepeso relative to the U.S. dollar.  As of June 30,2009, we had contracted to purchase $29.1 million Canadian dollars to bedelivered periodically through December 2009 at a purchase price which isno more than $24.3 million and no less than $24.0 million.

 

During the three and sixmonths ended June 30, 2009, there were no other material changes in ourmarket risk exposure.  For a completediscussion of our market risk associated with foreign currency and interestrate risk as of December 31, 2008, see Item 7A. “Quantitative andQualitative Disclosures about Market Risk” in our Annual Report on Form 10-Kfor the year ended December 31, 2008. Also, refer to Item 1A. “Risk Factors” appearing in our Annual Report onForm 10-K for the year ended December 31, 2008 for furtherinformation regarding these risks.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

***Evaluationof disclosure controls and procedures.**** *As of June 30,2009, we carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures (as defined in Rules  13a-15(e) and15d-15(e) under the Exchange Act). Based on such evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that, as of June 30, 2009, our disclosurecontrols and procedures were effective and were designed to ensure that allinformation required to be disclosed by us in our reports filed or submittedunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the rules and forms of the SEC, andaccumulated and communicated to our management, including our principalexecutive officer and principal financial officer, to allow timely decisionsregarding required disclosure.

 

***Changesin internal controls over financial reporting.**** *There wasno change in our internal control over financial reporting that occurred duringthe quarter ended June 30, 2009, that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

**Part II.  Other Information**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

In our Annual Report on Form 10-Kfiled March 3, 2009, we described two material pending litigationmatters:  West Palm Beach Firefighters’Pension Fund v. StarTek, Inc., et al. (U.S. District Court, District ofColorado) filed on July 8, 2005, and John Alden v. StarTek, Inc., etal. (U.S. District Court, District of Colorado) filed on July 20, 2005(the “Litigation”).

 

On July 20, 2009, weexecuted a Stipulation of Settlement (“Stipulation”) with lead plaintiffs tosettle the Litigation.  Under the termsof the Stipulation, defendants will pay $7.5 million to completely resolve theLitigation, in exchange for a release of all claims by lead plaintiffs andclass members and a dismissal of the Litigation with prejudice. StarTek’sprimary insurance carrier will contribute $6.9 million and StarTek willcontribute $0.6 million to the Settlement Fund (as defined in the Stipulation).The settlement as set forth in the Stipulation is subject to variousconditions, including preliminary approval by the United States District Courtfor the District of

 

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Colorado (the “Court”),notice to the class members, a final hearing, and final approval by theCourt.  We have accrued for our portion of the settlement due, or $0.6million, in our Condensed Consolidated Statement of Operations during the threeand six months ended June 30, 2009.

 

**ITEM1A.  RISK FACTORS**

 

Therehave been no material changes in our risk factors from those disclosed in our2008 Annual Report on Form 10-K.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

Theannual meeting of stockholders of StarTek, Inc. was held on May 4,2009.  Stockholders were invited to vote,by proxy or in person, on two items.  Theresults of the vote were as follows:

 
| ** **                                                                                                   | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain/  Withhold** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|------------------------|------------|
| **Election of Directors**                                                                                    |       |       |       |        |       |                   |       |
| Ed  Zschau                                                                                                   |       | 12,399,946 |       | —      |       | 1,265,850              |       |
| P.  Kay Norton                                                                                               |       | 13,484,604 |       | —      |       | 181,192                |       |
| Albert  C. Yates                                                                                             |       | 12,411,327 |       | —      |       | 1,254,470              |       |
| A.  Laurence Jones                                                                                           |       | 13,481,063 |       | —      |       | 184,734                |       |
| Harvey  A. Wagner                                                                                            |       | 12,411,398 |       | —      |       | 1,254,398              |       |
|                                                                                                         |       |       |       |        |       |                   |       |
| **Ratify Appointment of Ernst & Young LLP**                                                         |       |       |       |        |       |                   |       |
| as independent  registered public accounting firm of the company for the year ending  December 31, 2009 |       | 10,690,844 |       | 2,958,879   |       | 16,073                 |       |

 

**ITEM 6.EXHIBITS**

 

An *Index ofExhibits* follows the signature page of this Form 10-Q.

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this Form 10-Q to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

STARTEK, INC.

(REGISTRANT)

 

 
| By:    | /s/A. LAURENCE JONES                                              |   | Date: July 31,  2009 |
|--------|-------------------------------------------------------------------|--------|---------------------------|
|   | A. Laurence Jones                                                 |   |                      |
|   | President and Chief  Executive Officer                            |   |                      |
|   | (Principal Executive  Officer)                                    |   |                      |
|   |                                                              |   |                      |
|   |                                                              |   |                      |
| By:    | /s/ DAVID G. DURHAM                                               |   | Date: July 31,  2009 |
|   | David G. Durham                                                   |   |                      |
|   | Executive Vice  President, Chief Financial  Officer and Treasurer |   |                      |
|   | (Principal Financial  and Accounting Officer)                     |   |                      |

 

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**EXHIBITINDEX**

 
|        |       |                                                                                                                                                                                                                     |       | **Incorporated  Herein by Reference** |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                          | ** ** | **Form**                              | ** ** | **Exhibit** | ** ** | **Filing  Date** |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 3.1         |       | Restated  Certificate of Incorporation of the Company.                                                                                                                                                                   |       | S-1                                   |   | 3.1 |   | 1/29/1997 |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 3.2         |       | Restated Bylaws  of the Company.                                                                                                                                                                                         |       | 8-K                                   |   | 3.2 |   | 8/2/2007 |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 3.3         |       | Certificate of  Amendment to the Certificate of Incorporation of StarTek, Inc. filed  with the Delaware Secretary of State on May 21, 1999.                                                                    |       | 10-K                                  |   | 3.3 |   | 3/8/2000 |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 3.4         |       | Certificate of  Amendment to the Certificate of Incorporation of StarTek, Inc. filed  with the Delaware Secretary of State on May 23, 2000.                                                                    |       | 10-Q                                  |   | 3.4 |   | 8/14/2000 |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 4.1         |       | Specimen Common  Stock certificate.                                                                                                                                                                                      |       | 10-Q                                  |   | 4.2 |   | 11/6/2007 |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 10.1        |       | Promissory Note,  dated June 26, 2009, between StarTek, Inc., StarTek USA, Inc.  and StarTek Canada Services, Ltd. And UMB Bank Colorado, N.A.                                                            |       | 8-K                                   |   |   |   | 7/2/2009 |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 10.2        |       | Business Loan  Agreement, dated June 26, 2009, among StarTek, Inc., StarTek  USA, Inc. and StarTek Canada Services, Ltd. And UMB Bank Colorado, N.A.                                                      |       | 8-K                                   |   |   |   | 7/2/2009 |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 10.3        |       | Commercial  Security Agreement, dated June 26, 2009, among StarTek, Inc. as  grantor, and StarTek, Inc., StarTek USA, Inc. and StarTek Canada  Services, Ltd. And UMB Bank Colorado, N.A.            |       | 8-K                                   |   |   |   | 7/2/2009 |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 10.4        |       | Commercial  Security Agreement, dated June 26, 2009, among StarTek USA, Inc. as  grantor, and StarTek, Inc., StarTek USA, Inc. and StarTek Canada  Services, Ltd. And UMB Bank Colorado, N.A.        |       | 8-K                                   |   |   |   | 7/2/2009 |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 10.5        |       | Commercial  Security Agreement, dated June 26, 2009, among StarTek Canada Services,  Ltd. as grantor, and StarTek, Inc., StarTek USA, Inc. and StarTek  Canada Services, Ltd. And UMB Bank Colorado, N.A. |       | 8-K                                   |   |   |   | 7/2/2009 |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 10.6*&  |       | Amendment  No. 20070105.006.S.012.A.001 effective April 10, 2009 to Agreement  No. 20070105.006.S.012 between StarTek, Inc. and AT&T  Services, Inc.                                        |       |                                  |   |   |   |   |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 10.7*&  |       | Work Order  No. 20070105.006.S.014 effective March 1, 2009 pursuant to Master  Services Agreement No. 20070105.006.C dated January 26, 2007  between StarTek, Inc. and AT&T Services Inc.   |       |                                  |   |   |   |   |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 10.8*&  |       | Amendment  2007105.006.S.007.A.002 effective June 30, 2009 between  StarTek, Inc. and AT&T Services, Inc.                                                                                             |       |                                  |   |   |   |   |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 10.9*       |       | Amendment  20070105.006.A.002 effective April 14, 2009 between StarTek, Inc.  and AT&T Services, Inc.                                                                                                 |       |                                  |   |   |   |   |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 10.10*& |       | Amendment  20070105.006.A.003 effective June 24, 2009 between StarTek, Inc.  and AT&T Services, Inc.                                                                                                  |       |                                  |   |   |   |   |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 10.11*      |       | Amendment  GASOW-STAR100606-00.A.006 to Work Order GASOW-STAR100606-00 effective as of  July 1, 2009 between StarTek USA, Inc. and AT&T Mobility LLC.                                                      |       |                                  |   |   |   |   |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 10.12*& |       | Amendment  No. 2 to T-Mobile USA, Inc. Services Agreement Call Center Services  dated April 1, 2009 between T-Mobile USA, Inc. and StarTek  USA, Inc.                                           |       |                                  |   |   |   |   |
|        |       |                                                                                                                                                                                                                     |       |                                  |   |   |   |   |
| 31.1*       |       | Certification of  A. Laurence Jones pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                     |       |                                  |   |   |   |   |

 

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| 31.2*  |   | Certification of  David G. Durham pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                       |   |   |   |   |   |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
|   |   |                                                                                                                                                     |   |   |   |   |   |   |
| 32.1*  |   | Written  Statement of the Chief Executive Officer and Chief Financial Officer  furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |   |   |   |   |   |   |

 

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| *      |   | Filed with this  Form 10-Q.                                                                                                                                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                               |
| &  |   | Certain portions  of this exhibit have been omitted pursuant to a request for confidential  treatment and have been filed separately with the Securities and Exchange  Commission. |

 

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