**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**Form 10-K**

 

**(Mark One)**

 

x       **ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE****SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe fiscal year ended December 31, 2009**

** **

**or**

** **

o          **TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF****THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition 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** | ** ** | **80206**            |
| **Denver, Colorado**                       | * *   | (Zip  code)          |
| (Address  of principal executive offices)  |       |                 |

 

**(303)262-4500**

(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 if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.  Yes o No x

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o No x

 

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 checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check one):

 

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

 

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

 

        As of February 12, 2010, 14,882,990 shares of commonstock were outstanding. The aggregate market value of common stock held bynon-affiliates of the registrant on June 30, 2009 was $94.5 million, basedupon the closing price of the registrant’s common stock as quoted on the NewYork Stock Exchange composite tape on such date. Shares of common stock held byeach executive officer and director and by each person who owned 5% or more ofthe outstanding common stock as of such date have been excluded, as suchpersons may be deemed to be affiliates. This determination of affiliate statusis not necessarily a conclusive determination for other purposes.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Part IIIincorporates certain information by reference from the registrant’s proxystatement to be delivered in connection with its 2010 annual meeting ofstockholders.  With the exception ofcertain portions of the proxy statement specifically incorporated herein byreference, the proxy statement is not deemed to be filed as part of this Form 10-K.

 

 

 

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

This Form 10-Kcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange 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.  Allforward-looking statements herein speak only as of the date hereof, and weundertake no obligation to update any such forward-looking statements.Important factors that could cause actual results to differ materially from ourexpectations and may adversely affect our business and results of operationsinclude, but are not limited to those items set forth in Item 1A. “Risk Factors”appearing in this Form 10-K.

 

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.

 

**Part I**

 

**ITEM 1.BUSINESS**

 

**BUSINESSOVERVIEW**

 

StarTek is aprovider of business process outsourcing services.  We partner with our clients to meet theirbusiness objectives and improve customer retention, increase revenues andreduce 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 and product supportand other industry-specific processes. We operate our business within three reportable segments, based on thegeographic regions in which our services are rendered: (1) the U.S., (2) Canadaand (3) Offshore.  As of December 31,2009, 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.  Financialinformation for each of our reportable segments for the last three fiscal yearsis included in Note 16, “Segment Information,” to our Consolidated FinancialStatements, which are included at Item 8. “Financial Statements andSupplementary Financial Data,” of this Form 10-K.

 

Our business isproviding high-end ***Customer Service Offerings***through the effective deployment of ***People***and ***Technology***.

 

**Customer Service Offerings**

 

We provide ourclients with an outsourced customer care service offering so that they mayfocus on their core business and preserve capital.  Our service offering includes customer care,sales support, complex order processing, accounts receivable management,technical and product support and other industry-specific processes.  We are well positioned to help ourtelecommunications clients implement the convergence of product lines, includingwire-line, wireless, cable and broadband, high technical consumer and insuranceproducts.  Under each service offering,we deliver a transparent extension of our clients’ brands.

 

*CustomerCare Management. *We provide customer care managementthroughout the life cycle of our clients’ customers.  These programs include management of customeracquisition, new account set-up, repair services management, customerinformation verification, loyalty programs, service activation, renewals,account inquiries, complaint resolutions, product information, and billingsupport.  These services are aimed atseamlessly managing the relationships between our clients and their customersin a manner that cultivates customer retention and loyalty.

 

*Technicaland Product Support.**** ***Ourtechnical and product support service offering provides our clients’ customerswith high-end technical support services by telephone, e-mail, facsimile andthe internet, 24 hours per day, seven days per week. Technical support 

 

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inquiries aregenerally driven by a customer’s purchase of a product or service, or by acustomer’s need for ongoing technical assistance.

 

*SalesSupport.* Throughour sales support service we seek to increase the revenue generation of ourclients through cross-selling and up-selling our clients’ products to theircustomers.  We have the ability toincrease customer purchasing levels, implement product promotion programs,introduce our clients’ customers to new products, secure and process additionalcustomer orders, contract renewal programs and handle inquiries related toproduct shipments and billing.

 

*Provisioningand Complex Order Processing.*  Our complexorder processing services provide our clients with large scale projectmanagement and direct relationship management for our clients’ large enterprisecustomers.  This service includes ordermanagement and technical sales support for high-end communications services,such as wire-line, wireless, data and customer premise equipment. In addition,we process order fallout from our clients’ automated systems, complete billingreview and revenue recovery, and perform quality assurance.  Our services enable a client to provide largescale project management and customer relations services to their customers ina more efficient and cost-effective way.

 

*ReceivablesManagement.*  We provide billing, credit card support andfirst party collections through our receivables management services.  These services allow our clients to reducethe risk of non-payment by automatically transferring the calls made bydelinquent customers to us, at which point our representatives encourage thecustomers to pay their bill in order to continue to receive service. Customersmay bring their bill current through credit or debit card payments, electronicchecks or money orders. This service allows us to help our clients reduce theirnumber of days sales outstanding and bad debt write-offs.

 

*Other.* We provide other industry-specific processesincluding technical support, phone number portability and directorymanagement.  We provide numberportability services to facilitate the process when our clients’ customers wishto keep their phone number when changing service providers.  Our phone number portability services, whichinclude both automated and live agent interaction, facilitate pre-portvalidation, data collection, automatic processing of port-out/in requests,direct and automated interface with the service order activation platform,fallout management tool and port request tracking and archiving.  We also provide 411 directory listingmanagement services.

 

**People**

 

Our success isdriven by our people, who we believe are industry trained experts in providingthe communications industry with proven business practices and solutions tohelp our clients achieve their business goals. Many of the members of our management team, in addition to our trainedcustomer service representatives, have a background in the communicationsindustry, and bring deep experience to ensure the delivery of optimal solutionsto our clients.  We believe that thisexpertise in our human capital is what allows us to succeed in providingexcellent account management and tailored solutions in serving thecommunications marketplace.

 

**Technology**

 

Our ability todeliver exceptional service to our clients is enhanced by our technologyinfrastructure, agent performance tools, analytics, self service applicationsand technology professional services. Our technology support services include hosted IT infrastructure andapplication services encompassing interactive voice response (“IVR”), virtualqueuing, IP-PBX (a business telephone system that supports call delivery usingvoice over internet protocol (VoIP)), workforce management, quality assurancemonitoring, disposition tools, business intelligence reporting and eServices,including our e-mail, chat and knowledge base capabilities.  Through our technology, we are able torapidly respond to ever-changing client demands in a tailored, yetcost-effective and efficient manner. We are capable of handling large callvolumes at each of our contact centers through our reliable and scalablecontact center solutions.  We staff ourIT personnel such that we can support our infrastructure and still have thecapability to design programs to meet the specific needs of our clients.

 

**CUSTOMERTRENDS**

 

In collaboratingwith our clients, we have observed a few emerging trends.  Our clients areincreasingly focused on:  (1) improvingcustomer satisfaction and retention; (2) improving the customerexperience; and (3) increasing sales and retention.  We provide some of the industry’s highestcustomer satisfaction evidenced by our clients’ customer service awards and ourclients’ ranking of StarTek relative to other outsourced partners.  We have demonstrated to our clients oursuccess in increasing revenue per subscriber by incorporating up-sell andcross-sell methodologies during customer interactions.  Our clients value a combination of anon-shore, near-shore, offshore and home agent delivery platform.  They realize the value of on-shore callcenters in North America for the cultural and language familiarity available asa way to improve the customer experience particularly in the case ofvoice-enabled services.  A platformconsisting of home agents is also popular due to the high level of qualitygenerally delivered by these agents at a lower cost than traditional callcenter agents, due to the more limited fixed costs for items such as propertyand equipment.  Given this demand, wehave invested in StarTek@Home technologies and plan to grow our number of homeagents during 2010.  Customers also havea desire for near-shore and offshore options in order to reduce theircosts.  In response to this demand for offshoresolutions, we 

 

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opened our firstfacility in the Philippines in 2008, and plan to open a second facility therein 2010.  Also in 2010, we are opening anew facility in Costa Rica which will enable us to provide a near-shoresolution, as well as Spanish speaking capabilities.

 

**KEYCOMPETITIVE DIFFERENTIATORS**

 

We offer a varietyof customer management solutions that provide front to back-office capabilitiesutilizing the StarTek Choice delivery platform. StarTek Choice includesonshore, near shore, offshore, and StarTek@Home sourcing alternatives. We alsooffer multi-channel interactions across voice, chat, email, and IVRchannels.  Our solution configuration is alignedwith our clients’ unique requirements. We are flexible in designing solutions around our clients’ strategicgoals, and we provide experienced management teams that bring together atrained, productive workforce, equipped with the right tools and technology. Webelieve that we are differentiated by our flexibility, people, quality,execution, results and competitive pricing.

 

*Flexibility. *We believe that we provide high quality businessprocess outsourcing (BPO) solutions, and we leverage our expertise in workingwith our clients to design solutions around their goals. We offer customermanagement solutions that help our clients manage customer relationships acrossthe customer lifecycle to improve the customer experience, retention, andsales, and reduce the total cost of customer management. We are able to achievethese results through our people, applied technology, dedication to continuousimprovement, and integrated North American, offshore and home agent deliveryplatform.

 

*People*. Our people are the key to our success.We possess a unique culture where people are dedicated to serving our clientsand their customers.  Whether it be an athome agent or call center representative, we use a screening process to ensurepeople will have the right skills and attitude to thrive in our culture. Weoffer blended classroom and eLearning training, knowledge management systems,and other desktop tools to ensure that our representatives are fully equippedto deliver an outstanding customer experience.

 

*Quality. *Quality delivery is the driving force behind ourculture. We are frequently ranked highly by our clients, but just asimportantly, ranked highly by our clients’ customers. We believe that we are acatalyst enabling our clients to earn the JD Power and other coveted industryquality awards.

 

*Execution*. Our clients’ customer strategies are the driving force behind oursolutions and their delivery. We seek to execute on our clients’ qualitymetrics and rank among the top of all of their outsourced vendors, whilecontinuing to be a cost effective solution. In order to achieve these goals, our program managers find ways tooptimize the effectiveness and efficiency of the delivery of our solutions.

 

*Results*. We manage customer relationships to increase loyalty and profitabilityfor our clients. Loyal customers purchase more frequently, provide higherrevenues per purchase, acquire multiple products or services, refer our clientsto others, and continue to purchase from our clients over long periods of time.Our solutions derive more benefits from customer interactions by deliveringincreased customer satisfaction and revenue, which in turn leads to a higherreturn on our client’s customer investment.

 

**STRATEGY**

 

We seek to becomea market leader in providing high-value services to clients. Our approach is todevelop relationships with our clients that are partnering and collaborative innature and create industry-based solutions to meet our clients’ businessneeds.  To be a leader in the market, ourstrategy is to:

 

·                  grow our existing client base by deepening andbroadening our relationships,

·                  add new clients and continue to diversify our clientbase,

·                  improve the profitability of our business throughoperational improvements and securing higher margin business,

·                  achieve site optimization at our facilities and closefacilities that are not financially viable long-term,

·                  expand our global delivery platform by growingoffshore and near-shore,

·                  invest in our StarTek@Home platform to increase ourpresence of home agents,

·                  broaden our service offerings by providing moretechnology solutions,

·                  enter new vertical markets, including healthcare,insurance and technology to diversify our client base and

·                  make prudent acquisitions to expand our business scaleand service offerings.

 

During2009, we executed on our strategic objective to expand our delivery platformnear-shore by building out a facility in Costa Rica, which will open in thefirst quarter of 2010.  We also enteredinto a lease in January 2010 for our second facility in the Philippines,which will open in the second quarter of 2010. We believe that diversifying our geographic platform will position usfor future growth.  In addition, wecontinued to execute on our site optimization plan by closing an unprofitableCanadian location in February 2009, and we have recently announced threeother North American closures, which will occur in early 2010.  We expect these site closures to improve ourprofitability long-term as these sites contributed negative gross margins in2009, which adverselyaffected our overall results.  Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includedin Item 7 of this Form 10-K for further information.  In 2009, we also added five new clients, launched a number of new programs withexisting clients and made significant investments in new systems, home agentsand employee programs.

 

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**HISTORY OF THE BUSINESS**

 

StarTek wasfounded in 1987.  At that time, ourbusiness was centered on supply chain management services, which includedpackaging, fulfillment, marketing support and logistics services.  On December 16, 2005, we sold our supplychain management services platform.

 

After our initial publicoffering on June 19, 1997, we began operating contact center services,which primarily focused on customer care, and grew to include our current suiteof offerings as described in the “Business Overview” section of this Form 10-K.

 

While our business is notgenerally seasonal, it does fluctuate quarterly based on our clients’ productofferings as well as their customer interaction volume.  See Item 1A. “Risk Factors,” for a morecomplete description of the seasonality of our business.

 

**INDUSTRY**

 

According to a November 2009report published by IDC, a leading provider of industry research and marketintelligence,  it is estimated thatworldwide spending on customer care business process outsourcing services isexpected to grow at a compound annual rate of 6.8% during the period 2005 to2013, with worldwide customer service BPO revenues reaching $76 billion in2013.  The customer interaction segmentof customer care business process outsourcing is currently a $50 billion marketand is expected to grow at a 6.9% compound annual growth rate through2013.  This IDC report also states thatit expects the Asia/Pacific region to experience the strongest growth with a10.1% compound annual growth rate.  It isexpected that EMEA (Europe, Middle East and Africa) will be the slowest, with arate of 5.8%, and that the Americas will grow 6.7% through 2013.

 

Outsourcing of non-coreactivities, such as those we provide, offers companies the ability to focus ontheir core competencies, leverage economies of scale and control variable costsof the business while accessing new technology and trained expertpersonnel.  As the business environmentcontinues to evolve, it has become more difficult and expensive for somecompanies to maintain the necessary personnel and product capabilities in-houseto provide business process services on a cost-effective basis. Accordingly,our anticipation is that outsourced customer care services will growsignificantly in the coming years.  Ingeneral, we believe that industries having higher levels of customer contactand service volume, such as the communications industry, tend to be more likelyto seek outsourced services as a more efficient method for managing theirtechnical support and customer care functions. We believe that outsourcedservice providers, including ourselves, will continue to benefit from theseoutsourcing trends.

 

**COMPETITION**

 

We believe that ourcompetitive differentiators are our flexibility, people, quality, execution andresults.  We compete with a number ofcompanies that provide similar services on an outsourced basis, includingtechnical support and customer care companies such as APAC Customer Services, Inc.;Teleperformance; Convergys Corporation; NCO Group; Aegis PeopleSupport; SitelCorporation; Sykes Enterprises, Incorporated; TeleTech Holdings, Inc.,Stream Global Services, Inc. and West Corporation.  We compete with the aforementioned companiesfor new business, for expansion of existing business, and within the companieswe currently serve.  Many of thesecompetitors are significantly larger than us in revenue, income, number ofcontact centers and customer agents, number of product offerings, and marketcapitalization.  We believe that whilesmaller than many of our competitors, we are able to compete because of ourflexibility and ability to react quickly and efficiently to integrate clienttechnology into our contact centers.  Webelieve our success is contingent more on our quality of service than ouroverall size.  We also compete within-house process outsourcing operations of our current and potentialclients.  Such in-house operationsinclude customer care, technical support, internet operations and e-commercesupport.  As noted in our industrydiscussion, it is believed that many outsourced services will continue tomigrate to other countries with lower wages than those prevailing in the U.S.Accordingly, our strategic objectives include expanding our geographic platformso that we may compete with those companies who have devoted significant timeand money to operating offshore.  Severalof our competitors merged during 2009, which increased the size and reach ofthose competitors, which may affect our competitive position; however, webelieve there are integration challenges involved in consolidations, which mayprovide us an opportunity to deliver superior customer service to ourclients.  Some competitors may offer abroader range of services than we do, which may result in clients and potentialclients consolidating their use of outsourced services with larger competitors,rather than using our services. Therefore, part of our strategy is to expand our service offerings byincreasing our presence offshore, near-shore and with @Home agents, as well asto invest in new technologies which will enhance our competitiveadvantage.  We primarily compete with theaforementioned companies on the basis of price and quality.  As such, our strategy continues to be toexecute on our clients’ quality metrics and rank among the top of all of theiroutsourced vendors, while continuing to be a cost effective solution.  We view our competitive advantage as being alarge enough company to offer the breadth of service offerings that are oftenrequested by our clients, yet being agile enough to quickly respond to our clientsneeds.

 

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**CLIENTS**

 

As mentionedpreviously, we seek to become the expert provider of outsourced customer careand related services for the communications industry and believe that wepossess expertise in servicing clients within that industry.  Accordingly, more than 95% of our revenue isderived from customers within that industry. Our two largest customers, AT&T Inc. (“AT&T”) and T-Mobile USA, Inc.(“T-Mobile”) (a subsidiary of Deutsche Telekom), account for a significantpercentage of our revenue. While we believe that we have good relationshipswith these clients, a loss of one or more of these principal clients, or alarge program from one of these clients, could adversely affect our businessand our results of operations (see Item 1A. “Risk Factors”).  The following table represents revenueconcentration of our principal clients:

 
| ** **                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                               | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| AT&T  Services, Inc. and AT&T Mobility, LLC, subsidiaries of AT&T, Inc. |       | 63.6                                       | %          | 55.0 | % | 50.5 | % |
| T-Mobile  USA, Inc., a subsidiary of Deutsche Telekom                               |       | 21.5                                       | %          | 26.8 | % | 21.9 | % |

 

**GOVERNMENT AND ENVIRONMENTALREGULATION**

 

We are subject tonumerous federal, state, and local laws in the states and territories in whichwe operate, including tax, environmental and other laws that govern the way weconduct our business.  There are risksinherent in conducting business internationally, including significant changesin domestic government programs, policies, regulatory requirements, and taxationwith respect to foreign operations, potentially longer working capital cycles,unexpected changes in foreign government programs, policies, regulatoryrequirements and labor laws, and difficulties in staffing and effectivelymanaging foreign operations.

 

**EMPLOYEESAND TRAINING**

 

Our success inrecruiting, hiring, training, and retaining large numbers of full and part-timeskilled employees, and obtaining large numbers of hourly employees during peakperiods is critical to our ability to provide high quality outsourcedservices.  We compete for labor withfirms offering similar paying jobs in the communities in which we are located,which includes other contact centers. During 2009 and 2008, we experienced difficulties hiring and retainingagents as we faced economic pressures in and around certain of our sitelocations.  Refer to Item 1A. “RiskFactors” for further discussion of risks surrounding our ability to recruit andretain personnel.

 

As of December 31,2009, we employed approximately 8,900 employees. We believe the demographicssurrounding our facilities, and our reputation, stability, and compensationplans should allow us to continue to attract and retain qualified employees.None of our employees were members of a labor union or were covered by acollective bargaining agreement during 2009.

 

**CORPORATEINFORMATION**

 

We were founded in 1987and on June 19, 1997, we completed an initial public offering of ourcommon stock.  We conduct our businessthrough our wholly owned operating subsidiaries, StarTek USA, Inc.,StarTek Canada Services, Ltd and StarTek International, Limited.  We are a Delaware corporation headquarteredin Denver, Colorado. Our principal executive offices are located at 44 CookStreet, 4th Floor, Denver, Colorado 80206. Our telephonenumber is (303) 262-4500. Our website address is *www.startek.com*.   Ourstock currently trades on the New York Stock Exchange under the symbol SRT.

 

**WEB SITEAVAILABILITY OF REPORTS**

 

Copies of our AnnualReport on Form 10-K, Quarterly Reports on Form 10-Q, Current Reportson Form 8-K, and amendments to those reports filed or furnished pursuantto Section 13(a) and 15(d) of the Securities Exchange Act of1934 (the “Exchange Act”) are available free of charge through our web site(www.startek.com) as soon as practicable after we furnish it to the Securitiesand Exchange Commission (“SEC”). We also make available on the “InvestorRelations” page of our corporate website, the charters for theCompensation Committee, Audit Committee and Governance and Nominating Committeeof our Board of Directors, as well as our Corporate Governance Guidelines andour Code of Ethics and Business Conduct.

 

None of the informationon our website or any other website identified herein is part of this report.All website addresses in this report are intended to be inactive textualreferences only.

 

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**ITEM1A.  RISK FACTORS**

 

***Continuing unfavorable economicconditions could have a material adverse effect on our results of operationsand financial condition.***

 

The current economic downturn and disruptions in the capital and creditmarkets in the U.S. and world economies have reduced consumer spending andreduced spending by businesses.  Sinceour revenue is largely concentrated in the telecommunications industry, and themajority of our business involves technical support and customer care servicesinitiated by our clients’ customers, our revenue is dependent on the amount oftelecommunications products and services demanded by our clients’customers.  Consequently, a general reductionin consumer demand for such products and services due to the recession in thedomestic and international economies could reduce the demand for our servicesand have a material adverse effect on our results of operations.

 

In addition, ourexisting clients and a number of clients we are currently targeting have beendecreasing the number of firms they rely on to outsource their business processoutsourced services.  Due to financialuncertainties and the potential reduction in demand for our clients’ productsand services, our clients and prospective clients may decide to furtherconsolidate the number of firms on which they rely for their business processoutsourced services to reduce costs. Under these circumstances, our clients may cancel current contracts withus, or we may fail to attract new clients, which will adversely affect ourfinancial condition.  In addition, theymay seek price reductions on our contracts as means to lower their costs.  If global economic and market conditionsremain uncertain or persist, spread, or deteriorate further, we may experiencematerial impacts on our business, operating results, and financial condition.

 

***Over 80% of our revenue in 2009 and 2008, and over 70% ofour revenue in 2007, has been received from our******two largest clients. The loss or reduction in business fromany of these******clients would adversely affect our business and results of operations.***

 

The following tablerepresents revenue concentration of our principal clients:

 
| ** **                                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| AT&T  Services, Inc. and AT&T Mobility, LLC, subsidiaries of  AT&T, Inc. |       | 63.6                             | %          | 55.0 | % | 50.5 | % |
| T-Mobile  USA, Inc., a subsidiary of Deutsche Telekom                                     |       | 21.5                             | %          | 26.8 | % | 21.9 | % |

 

The loss of a principalclient, a material reduction in the amount of business we receive from aprincipal client, renegotiation of price by a client, or the loss, delay ortermination of a principal client’s product launch or service offering wouldadversely affect our business, revenue and operating results. We may not beable to retain our principal clients or, if we were to lose any of ourprincipal clients, we may not be able to timely replace the revenue generatedby the lost clients. Loss of a principal client could result from many factors,including consolidation or economic downturns in our clients’ industries, asdiscussed further below.

 

Our work for AT&T iscovered by several contracts for a variety of different lines of AT&Tbusiness.  Some of these contracts expirein 2010 and others in 2011.  The initialterm of our master services agreement covering all AT&T work expired in January 2010.  After the initial term, the agreementautomatically renews month-to-month thereafter. We are currently renegotiating the new master services agreement andexpect to execute the agreement during the first half of 2010.  Until the new agreement is signed, ourservices provided to AT&T are covered under the existing master servicesagreement.

 

Our call center servicesagreement with T-Mobile is effective as of October 1, 2007 which had aninitial term of two years.  After theinitial term, the contract automatically renews for one-year periodsthereafter, unless either party provides written notice of termination at least60 days prior to the expiration of the then-current term.  Although the initial term of the contractended on September 30, 2009, the contract automatically renewed for aone-year term which would expire on September 30, 2010.  We are currently negotiating a new contractwith T-Mobile and expect to execute the agreement during the first half of2010.  Until the new agreement is signed,our services provided to T-Mobile are covered under the existing agreementeffective October 1, 2007.

 

We are workingdiligently to complete negotiation of the new agreements.  However, if we fail to do so, it would have amaterial adverse effect on our business, results of operations, and financialcondition.

 

The future revenue wegenerate from our principal clients may decline or grow at a slower rate thanexpected or than it has in the past. In the event we lose any of our principalclients or do not receive call volumes anticipated from these clients, we maysuffer from the costs of underutilized capacity because of our inability toeliminate all of the costs associated with conducting business with thatclient, which could exacerbate the effect that the loss of a principal clientwould have on our operating results and financial condition.  For example, there are no guarantees ofvolume under the current contract with AT&T.  In addition, the current contract withAT&T provides for a tiered incentive pricing structure that provides forlower pricing at higher volumes. Additional productivity gains will benecessary to offset the negative impact that lower per-minute revenue at highervolume levels will have on our margins in future periods.

 

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***We face considerable pricing pressure in our business, andif we are not able******to continuallyincrease productivity, our gross margins and results of******operations may be adverselyaffected.***

 

Our strategydepends in part on our ability to increase productivity.  We face significant price pressure arisingfrom our clients’ desire to decrease their operating costs, and from othercompetitors operating in our targeted markets. Price pressure may be morepronounced during periods of economic uncertainty. In addition, our contractwith our largest customer currently contains a tiered pricing structure, underwhich pricing declines as service volumes increase, creating increased pricingpressures in future years. Accordingly, our ability to maintain our operatingmargins depends on our ability to improve productivity and reduce operatingcosts. If we are not able to achieve sufficient improvements in productivity toadequately compensate for potential price decreases, our results of operationsmay be adversely affected.

 

***Our contracts generally do not contain minimum purchaserequirements and can******generally beterminated by our customers on short notice without penalty.***

 

We enter into writtenagreements with each client for our services. We seek to sign multi-yearcontracts with our clients; however these contracts generally permittermination upon 30 to 90 days notice by our clients; do not designate us asour clients’ exclusive outsourced services provider; do not penalize ourclients for early termination; hold us responsible for work performed that doesnot meet pre-defined specifications; and do not contain minimum purchaserequirements or volume commitments. Accordingly, we face the risk that ourclients may cancel or renegotiate contracts we have with them, which mayadversely affect our results.  Inaddition, some contracts with our two largest clients either expire in 2010 orare currently under negotiation for renewal, and we cannot guarantee that theywill be extended or renewed.  If aprincipal client cancelled or did not renew their contract with us, our resultswould suffer. In addition, because the amount of revenue generated from anyparticular client is generally dependent on the volume and activity of ourclients’ customers, as described above, our business depends in part on thesuccess of our clients’ products. The number of customers who are attracted tothe products of our clients may not be sufficient, or our clients may notcontinue to develop new products that will require our services, in which caseit may be more likely for our clients to terminate their contracts with us.Moreover, clients who may not terminate their contacts with us without causecould generally reduce the volume of services they outsource to us, which wouldhave an adverse effect on our revenue, results of operations, and overallfinancial condition.

 

***Ourclient base is concentrated in the communications industry, which has recentlyexperienced consolidation trends.  As our clients’ businesses change as aresult of merger and acquisition activity, there is no guarantee that the newlyformed companies will continue to use our services.***

 

Consolidation in thecommunications industry may decrease the potential number of buyers for ourservices. Likewise, there is no guarantee that the acquirer of one of ourclients will continue to use our services after the consolidation iscompleted.  We are particularlyvulnerable on this issue given the relatively few significant clients wecurrently serve and the concentration of these clients in thetelecommunications industry. For example, in late 2006, our client, AT&Tacquired another of our clients, Cingular Wireless, LLC (now, AT&T Mobility,LLC), thereby further concentrating our revenue base.  There can be no assurance that AT&TMobility, LLC, AT&T, or other subsidiaries of AT&T will continue to useour services in the future.  If we loseprincipal clients or our service volumes decrease as a result of principalclients being acquired, our business, financial condition and results ofoperations would be adversely affected. We expect to negotiate renewals of our contracts in due course; however,if any of such contracts or any order under such a contract is not ultimatelyrenewed, it would have a material adverse effect on our results of operationsand financial condition.

 

***Our client base is concentrated in the communicationsindustry and our strategy******partiallydepends on a trend of communications companies continuing to outsource******non-core services. Ifthe communications industry suffers a downturn or the trend toward******outsourcing reverses,our business will suffer.***

 

Our current clients arealmost exclusively communications companies, which include companies in thewire-line, wireless, cable and broadband lines of business.  Over 95% of our revenue in 2009 wasconcentrated in the telecommunications industry. Our business and growth islargely dependent on continued demand for our services from clients in thisindustry, and other industries that we may target in the future, and on trendsin those industries to purchase outsourced services. A general and continuingeconomic downturn in the telecommunications industry or in other industriesthat we target, or a slowdown or reversal of the trend in these industries tooutsource services we provide, could adversely affect our business, results ofoperations, growth prospects, and financial condition.  A general and continuing economic downturn inother industries may result in excess capacity of contact center services inthose industries, which could attract clients in the telecommunicationsindustry or in other industries that we target. If this happens, it couldadversely affect our business, results of operations, growth prospects, andfinancial condition.

 

***We have experienced significant management turnover and needto retain key management personnel.***

 

On January 5, 2007,A. Laurence Jones was appointed President, Chief Executive Officer and InterimChief Financial Officer as a successor to our former Chief Executive Officer,Steven D. Butler.  On September 10,2007, we hired David G. Durham as our 

 

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Executive Vice President,Treasurer and Chief Financial Officer. We filled several other key management positions during 2007, 2008 and2009.  In June 2009, we hired a newSenior Vice President, Sales to replace the previous Senior Vice President,Sales who left the Company in September 2008.  High turnover of senior management canadversely impact our our client relationships, stock price, our results ofoperations, and may make recruiting for future management positions moredifficult.  In some cases, we may berequired to pay significant amounts of severance to terminated managementemployees.  In addition, we mustsuccessfully integrate any new management personnel that we hire within ourorganization in order to achieve our operating objectives. Changes in other keymanagement positions may temporarily affect our financial performance andresults of operations as new management becomes familiar with ourbusiness.  Accordingly, our futurefinancial performance will depend to a significant extent on our ability tomotivate and retain key management personnel.

 

***If we are not able to hire and retain qualified employees,our ability to******service our existingcustomers and retain new customers will be adversely******affected.***

 

Our success islargely dependent on our ability to recruit, hire, train, and retain qualifiedemployees. Our business is labor intensive and, as is typical for our industry,continues to experience high personnel turnover. Our operations, especially ourtechnical support and customer care services, generally require speciallytrained employees. During 2009, we continued to experience a high rate ofemployee turnover, which, in turn, requires significant recruiting and trainingcosts. Such turnover adversely affects our operating efficiency, productivityand ability to fully respond to client demand, thereby adversely impacting ourresults of operations.   Some of this turnover can be attributed to thefact that we compete for labor not only with other call centers, but also withother similar-paying jobs, including retail, oil and gas industry labor, foodservice, etc.  As such, improvements in the local economies in which weoperate can adversely affect our ability to recruit agents in those locations. Further increases in employee turnover or failure to effectively address andremedy these high attrition rates would have an adverse effect on our resultsof operations and financial condition.

 

The addition of newclients or implementation of new projects for existing clients may require usto recruit, hire, and train personnel at accelerated rates. We may not be ableto successfully recruit, hire, train, and retain sufficient qualified personnelto adequately staff for existing business or future growth, particularly if weundertake new client relationships in industries in which we have notpreviously provided services. Because a substantial portion of our operatingexpenses consists of labor-related costs, labor shortages or increases in wages(including minimum wages as mandated by the U.S. and Canadian federalgovernments, employee benefit costs, employment tax rates, and other laborrelated expenses) could cause our business, operating profits, and financialcondition to suffer. In the past, some of our Canadian employees have attemptedto organize a labor union and economic and legislative changes in the U.S. mayencourage organizing efforts in the future, which, if successful, could furtherincrease our recruiting and training costs and could decrease our operatingefficiency and productivity.

 

***If we are unable to renew or replace sources of capitalfunding on satisfactory terms, potential growth and results of operations maysuffer.***

 

We have a$15.0 million line of credit, which is scheduled to expire on August 1, 2010(See Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources — Contractual Obligations”).  As of December, 31 2009, there was no balanceoutstanding on the line of credit, and we did not draw on the line during2009.  However, if we are unable to renewthe line of credit or are unable to secure alternative sources of debt orcapital financing under satisfactory terms, or at all, we may lose an importantsource of liquidity and be unable to meet short-term cash needs required forgrowth opportunities.  This may adverselyimpact our financial results.  Inaddition, if we do not meet the debt covenant requirements under the line ofcredit, we could face adverse effects on our financial statements, includingpayments for waivers or higher interest rate obligations.  We believe we will obtain financing toreplace or extend this line of credit that will allow us to meet our short-termcash needs.  However, the weakenedconditions of the U.S. credit markets may adversely impact our ability toobtain financing.

 

***Our operating costs may increase as a result of higher laborcosts.***

 

During the past economicdownturns, we, like a number of companies in our industry, sought to limit ourlabor costs by limiting salary increases and payment of cash bonuses to ouremployees. During 2009, the local economies in some of the locations in whichwe operate experienced growth, which caused us to increase labor rates toremain competitive within the local economies. If these growth trends continue,we may need to further increase salaries or otherwise compensate our employeesat higher levels in order to remain competitive.  Effective July 2009, the U.S. federalminimum wage was increased.  The minimumwage applicable to most of our operations in Canada is rising even more dramaticallythan in the U.S.  Higher salaries orother forms of compensation are likely to increase our cost of operations. Ifsuch increases are not offset by increased revenue, they will negatively impactour financial results. Conversely, if labor rates decrease due to higherunemployment in the current economic downturn, our cost of operations maydecrease.  In the past, some of ourCanadian employees have attempted to organize a labor union and economic andlegislative changes in the U.S. may encourage organizing efforts in the future,which, if successful, could further increase our recruiting and training costsand could decrease our operating efficiency and productivity.

 

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***We may need to add specialized sales personnel in order togrow our business.  We may have difficulty recruiting candidates for thesepositions.***

 

Our future growth dependson our ability to initiate, develop and maintain new client relationships, aswell as our ability to maintain relationships with our existing principalclients. To generate opportunities for new business from existing clients, aswell as obtain new clients, we may need to hire specialized sales and marketingstaff to introduce new products and services. If we are unable to hire sales people with the specialized skills andknowledge needed to attract new business, we will not be able to diversify ourrevenue base and thereby reduce our reliance on our significant customers.

 

***Wemay need to develop new products or services in order to compete for newcustomers or retain our existing customers.***

 

If we are not able todevelop new products or services, we may not be able to provide the same levelof service provided bv our competitors, which could result in the loss of an existingclient or being unable to generate new clients. If we are not able to develop new products and services, we could losemarket share or not be able to grow our business and diversify our revenue baseand thereby reduce our reliance on our significant customers.

 

***Our operating results may be adversely affected if we areunable to maximize******our facilitycapacity utilization.***

 

Our profitability isinfluenced by our facility capacity utilization. The majority of our businessinvolves technical support and customer care services initiated by our clients’customers, and as a result, our capacity utilization varies and demands on ourcapacity are, to some degree, beyond our control. We have experienced, and inthe future may experience, periods of idle capacity from opening new facilitieswhere forecasted volume levels do not materialize. In addition, we haveexperienced, and in the future may experience, idle peak period capacity whenwe open a new facility or terminate or complete a large client program. Theseperiods of idle capacity may be exacerbated if we expand our facilities or opennew facilities in anticipation of new client business because we generally donot have the ability to require a client to enter into a long-term contract, orto require clients to reimburse us for capacity expansion costs if theyterminate their relationship with us or do not provide us with anticipatedservice volumes. From time to time, we assess the expected long-term capacityutilization of our facilities. Accordingly, we may, if deemed necessary,consolidate or close under-performing facilities in order to maintain orimprove targeted utilization and margins. In 2009, we determined it wasnecessary to close a facility in Regina, Saskatchewan, and we have announcedthat we will be closing sites in Victoria, Texas, Laramie, Wyoming and ThunderBay, Ontario during the first quarter of 2010. These closures result in lease termination costs, severance costs orimpairment charges.  During 2009, werecognized $6.4 million in impairment losses and restructuring charges relatedto the Regina and Thunder Bay closures. We may incur further impairment losses and restructuring charges during2010 related to our planned closures. There can be no assurance that we will be able to achieve or maintainoptimal facility capacity utilization.

 

***We generate revenue based on the demand for, and inquiriesgenerated by, our******clients’products and services. If our clients’ products and services are not******successful or do notgenerate the anticipated call volumes, our revenue and******results of operations will beadversely affected.***

 

In substantially all ofour client relationships, we generate revenue based on the amount of productsand services demanded by our clients’ customers.  The amount of our revenue also depends on thenumber and duration of customer inquiries. Consequently, the amount of revenue generated from any particular clientis dependent upon consumers’ interest in and use of that client’s products orservices.  In addition, if thereliability of our clients’ products or services increases as a result oftechnological improvements, the volume of calls that we service may bereduced.  If customer interest in orincreased reliability of any products or services offered by our clients andfor which we provide outsourced services result in reduced service volumes, ourrevenue would be diminished.  We utilizeforecasts made by our clients based on demand from their customers.  If the actual call volumes are materiallydifferent from the forecasted volumes, our financial results could be adverselyaffected.

 

In 2008, we expanded ourcapacity to include four new facilities.  As business associated with these additional facilities ramped, weexperienced excess capacity and incurred additional costs as we worked towardsbringing these facilities to normal operational levels.  In 2008 we closed two facilities, and in 2009we closed one facility as part of our efforts to achieve site optimization atall of our locations.  We have recentlyannounced three more site closures in early 2010, and two new site openings inearly 2010.  If client demand declinesdue to economic conditions, or otherwise, we would not leverage our fixed costsas effectively, which would have a material adverse effect on our results ofoperations and financial condition.

 

***Our existing and potential clients are currently decreasingthe number of******vendors they are usingto outsource their business process services. If we lose******more business than we gain as a result of this vendorconsolidation, our business and******results of operations will be adversely affected.***

 

Our existing clients anda number of clients we are currently targeting have been decreasing the numberof firms they rely on to outsource their business process outsourced services.We believe these clients are taking this action in order to increaseaccountability and decrease their costs, and under current economic conditions,there is an increased risk that our clients will outsource their business

 

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process outsourcedservices to even fewer firms to further reduce costs. If this consolidationresults in us losing one or more of our clients, our business and results ofoperations will be adversely affected. In addition, this consolidation couldmake it more difficult for us to secure new clients, which could limit ourgrowth opportunities.

 

***If we do not effectively manage our growth or control costsrelated to growth,******our results ofoperations will suffer.***

 

We intend to grow ourbusiness by increasing the number of services we provide to existing clients,by expanding our overall client base and, in the future, through merger andacquisition activity. Growth could place significant strain on our management,employees, operations, operating and financial systems, and other resources. Toaccommodate significant growth we would be required to open additionalfacilities, expand and improve our information systems and procedures, andhire, train, motivate, and manage a growing workforce, all of which would increaseour costs. Our systems, facilities, procedures, and personnel may not beadequate to support our future operations. Further, we may not be able tomaintain or accelerate our current growth, effectively manage our expandingoperations, or achieve planned growth on a timely and profitable basis. Duringrecent years, we incurred costs related to excess capacity as we opened newfacilities in anticipation of volume levels that did not materialize.  Asa result, our operating profits declined, and our stock price was adverselyimpacted.  If we are unable to manage ourgrowth efficiently, or if growth does not occur, our business, results ofoperations, and financial condition could suffer.

 

***Unauthorizeddisclosure of sensitive or confidential client and customer data could exposeus to protracted and costly litigation and penalties and may cause us to loseclients.***

 

We are dependent on IT networks and systems to process, transmit andstore electronic information and to communicate among our locations around theworld and with our alliance partners and clients. Security breaches of thisinfrastructure could lead to shutdowns or disruptions of our systems andpotential unauthorized disclosure of confidential information. We are alsorequired at times to manage, utilize and store sensitive or confidential clientor customer data. As a result, we are subject to contractual terms and numerousU.S. and foreign laws and regulations designed to protect thisinformation, such as various U.S. federal and state laws governing theprotection of health or other individually identifiable information. If anyperson, including any of our employees, negligently disregards or intentionallybreaches our established controls with respect to such data or otherwisemismanages or misappropriates that data, we could be subject to monetarydamages, fines and/or criminal prosecution. Unauthorized disclosure ofsensitive or confidential client or customer data, whether through systemsfailure, employee negligence, fraud or misappropriation, could damage ourreputation and cause us to lose clients. Similarly, unauthorized access to orthrough our information systems or those we develop for our clients, whether byour employees or third parties, could result in negative publicity, legal liabilityand damage to our reputation, business, financial condition, results ofoperations and cash flows.

 

***We process, transmit and storepersonally identifiable information and unauthorized access to or theunintended release of this information could result in a claim for damage orloss of business and create unfavorable publicity.***

 

We process, transmit and store personally identifiable information,both in our role as a service provider and as an employer. This information mayinclude social security numbers, financial and health information, as well asother personal information. As a result, we are subject to certain contractualterms, as well as federal, state and foreign laws and regulations designed toprotect personally identifiable information. We take measures to protectagainst unauthorized access and to comply with these laws and regulations. Weuse the internet as a mechanism for delivering our services to clients, whichmay expose us to potential disruptive intrusions. Unauthorized access, systemdenials of service, or failure to comply with data privacy laws and regulationsmay subject us to contractual liability and damages, loss of business, damagesfrom individual claimants, fines, penalties, criminal prosecution and unfavorablepublicity, any of which could negatively affect our operating results andfinancial condition. In addition, third party vendors that we engage to performservices for us may have an unintended release of personally identifiableinformation.

 

***If we fail tointegrate businesses and assets that we may acquire through acquisitions, wemay lose clients, and our liquidity, capital resources and profitability may beadversely affected.***

 

We may pursue strategic acquisitions of companies with services,technologies, industry specializations, or geographic coverage that extend orcomplement our existing business. Acquisitions and joint ventures often involvea number of special risks, including the following:

 

·                  We may encounter difficulties integratingacquired software, operations and personnel and our management’s attentioncould be diverted from other business concerns;

·                  We may not be able to successfully incorporate acquired technology andrights into our service offerings and maintain uniform standards, controls,procedures and policies;

·                  The businesses or assets we acquire may fail to achieve the revenue andearnings we anticipated, causing us to incur additional debt to fund operationsand to write down the value of acquisitions on our financial statements;

·                  We may assume liabilities associated with the sale of the acquiredcompany’s products or services;

 

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·                  Our resources may be diverted in asserting and defending our legalrights and we may ultimately be liable for contingent and other liabilities,not previously disclosed to us, of the companies that we acquire;

·                  Acquisitions may disrupt our ongoing business and dilute our ownershipinterest;

·                  Acquisitions may result in litigation from former employees or third parties; and

·                  Due diligence may fail to identify significant issues with productquality, product architecture, ownership rights and legal contingencies, amongother matters.

 

In addition, negotiation of potential acquisitions and the resultingintegration of acquired businesses, products, or technologies, could divertmanagement’s time and resources. Future acquisitions could cause us to issuedilutive equity or incur debt, contingent liabilities, additional amortizationcharges from intangible assets, asset impairment charges, or write-off chargesfor in-process research and development and other indefinite-lived intangibleassets that could adversely affect our business, financial condition, resultsof operations and cash flows.

 

***Failure to implement technological advancements could makeour services less******competitive.***

 

Technologies that ourclients or competitors already possess, or may in the future develop oracquire, may decrease the cost or increase the efficiency of competingservices. We believe that to remain competitive, we must continue to invest intechnology to be able to compete for new business and maintain service levelsfor clients. We may not be able to develop and market any new services thatuse, or effectively compete with, existing or future technologies, and suchservices may not be commercially successful. Furthermore, our competitors mayhave greater resources to devote to research and development than we do, andaccordingly may have the ability to develop and market new technologies, withwhich we are unable to successfully compete.

 

***Our markets are highly competitive. If we do not competeeffectively, we may******lose ourexisting business or fail to gain new business.***

 

The markets in which weoperate are highly competitive, and we expect competition to persist andintensify in the future. We view in-house operations of our existing andpotential clients to be a significant competitive threat. Many of our clientsor potential clients have in-house capabilities, enabling them to perform some orall of the services that we provide. Our performance and growth could beimpeded if clients, or potential clients, decide to shift in-house, operationsservices currently outsourced, or if potential clients retain or increase theirin-house capabilities.

 

We anticipate thatcompetition from low-cost, offshore providers of outsourced services willcontinue to increase in the future and that such providers will remain animportant competitive threat. A number of our competitors have, or may develop,greater name recognition or financial and other resources than we have. Inaddition, new competitors with greater name recognition and resources maydecide to enter the markets in which we operate. Some competitors may offer abroader range of services than we do, which may result in clients and potentialclients consolidating their use of outsourced services with larger competitors,rather than using our services. Competitive pressure from current or futurecompetitors could also result in substantial price erosion, as discussed below,which could adversely affect our revenue, margins, and financial condition.

 

***Our operations in Canada, the Philippines and Costa Ricasubject us to the risk of currency exchange******fluctuations.***

 

Because we conduct amaterial portion of our business in Canada, we are exposed to market risk fromchanges in the value of the Canadian dollar. For the smaller portion of ourbusiness that we conduct in the Philippines and will be conducting in CostaRica, we are exposed to market risk from changes in the value of the Philippinepeso and Costa Rican colon.  Materialfluctuations in exchange rates impact our results through translation andconsolidation of the financial results of our foreign operations, and thereforemay negatively impact our results of operations and financial condition. Wehave contracts wherein the revenue we earn is denominated in U.S. dollars, butthe costs we incur to fulfill our obligations under those contracts aredenominated in Canadian dollars and Philippine pesos, and in the future, CostaRican colons.  Therefore, thefluctuations in the U.S. dollar to the Canadian dollar, Philippine peso orCosta Rican colon exchange rates can cause significant fluctuations in ourresults of operations.  During the yearsended December 31, 2009 and 2008, we engaged in hedging activitiesrelating to our exposure to such fluctuations in the value of the Canadiandollar versus the U.S. dollar.  During2009 and 2008, we did not enter into hedging agreements for the Philippine pesoor Costa Rican colon.  We may participatein hedging activities in the future relating to the Canadian dollar, Philippinepeso and Costa Rican colon. However, currency hedges do not, and will not,eliminate our exposure to fluctuations in the currencies.  In the past few years, there have been largefluctuations in the value of the U.S. dollar against the value of the Canadiandollar.  If the U.S. dollar weakensagainst the value of the Canadian dollar, it would increase our costs andadversely affect our results from operations. Likewise, increases in the value of the Philippine peso or Costa Ricancolon, or currencies in other foreign markets in which we may operate, inrelation to the value of the U.S. dollar, would further increase our costs andadversely affect our results of operations.

 

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***We face risks inherent in conducting business outside ofNorth America.***

 

Our operations inCanada accounted for 26.4%, 33.4% and 39.2%, of our revenue in 2009, 2008, and2007, respectively.  Our operations inthe Philippines accounted for 4.1%, 0.2% and 0% of our revenue in 2009, 2008and 2007, respectively.  We have alsosigned a lease on a new facility in Costa Rica which we expect to open in thefirst quarter of 2010, and for another facility in the Philippines which weexpect to open in the second quarter of 2010. An important component of our growth strategy is continued internationalexpansion.  There are risks inherent inconducting business internationally, including but not limited to:

 

·                  Competition from local businesses or established multinationalcompanies, who may have firmly established operations in particular foreignmarkets.  This may give these firms anadvantage regarding labor and material costs;

·                  Significant changes in U.S. government programs,policies and regulatory requirements with respect to foreign operations ormultinational companies;

·                  Potentially adverse U.S. or foreign tax consequenceswith respect to foreign operations;

·                  Potentially longer working capital cycles;

·                  Unexpected changes in foreign government programs orpolicies;

·                  Regulatory requirements and labor laws;

·                  Difficulties in staffing and effectively managingforeign operations;

·                  Political and social instability; and

·                  Reluctance of our current or potential new clients tohave us provide services to them from a location outside of North America.

 

One or more of thesefactors may have an impact on our international operations. Our lack ofsignificant international operating experience may result in any of thesefactors impacting us to a greater degree than they impact our competitors. Tothe extent one or more of these factors impact our international operations itcould adversely affect our business, results of operations, growth prospects,and financial condition as a whole.

 

Various other riskfactors described in this Annual Report on Form 10-K may be exacerbatedwith regard to international operations, especially in countries where we donot have well-established operations. Such risks include those related to the need to retain key managementpersonnel, the inability to hire and retain qualified employees, increases inoperating costs, facility capacity utilization, management of growth and costsrelated to growth, geopolitical military conditions, interruptions to ourbusiness, and the quality and cost of telephone and data servicesinfrastructure.

 

***Our lack of a significant international presence outside ofNorth America may******adverselyaffect our ability to serve existing customers or limit our ability******to obtain new customers.***

 

Although we currentlyconduct operations in Canada and the Philippines and will begin operations inCosta Rica, we do not have a significant international presence. Our lack ofsignificant international operations outside of North America could adverselyaffect our business if one or more of our customers decide to move theirexisting business process outsourcing services offshore. Our lack of asignificant international presence outside of North America may also limit ourability to gain new clients who may require business process service providersto have this flexibility.

 

The movement of businessprocess outsourcing services to other countries has been extensively reportedin the press. Most analysts continue to believe that many outsourced serviceswill continue to migrate to other countries with lower wages than thoseprevailing in the U.S. Accordingly, unless and until we continue to developsignificant international operations outside of North America, we may becompetitively disadvantaged compared to a number of our competitors who havealready devoted significant time and money to establishing extensive offshoreoperations.

 

If we decide to openfacilities in, or otherwise expand into, additional countries, we may not be ableto successfully establish operations in the markets that we target.  There are certain risks inherent inconducting business in other countries including, but not limited to, exposureto currency fluctuations, difficulties in complying with foreign laws,unexpected changes in government programs, policies, regulatory requirementsand labor laws, difficulties in staffing and managing foreign operations,political instability, and potentially adverse tax consequences.  There can be no assurance that one or more ofsuch factors will not have a material adverse effect on our business, growthprospects, results of operations, and financial condition.

 

***Our largest stockholder has the ability******to significantly influence corporate actions.***

 

A. Emmet Stephenson, Jr.,one of our co-founders, owned approximately 19.6% of our outstanding commonstock as of February 12, 2010. Mr. Stephenson’s spouse also ownsshares of our common stock. Under an agreement we have entered into with Mr. Stephenson,so long as Mr. Stephenson, together with members of his family,beneficially owns 10% or more but less than 30% of our outstanding commonstock, Mr. Stephenson will be entitled to designate one of our nomineesfor election to the board. In addition, our bylaws allow that any holder of 10%or more of our outstanding common stock may call a special meeting of ourstockholders. The concentration of voting power in Mr. Stephenson’s hands,and the control Mr. Stephenson may exercise over us as described above,may discourage, delay or prevent a change in control that might otherwisebenefit our stockholders.

 

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***Our stock price has been volatile and may declinesignificantly and******unexpectedly.***

 

The market price of ourcommon stock has been volatile, and could be subject to wide fluctuations, inresponse to quarterly variations in our operating results, changes inmanagement, the degree of success in implementing our business and growthstrategies, announcements of new contracts or contract cancellations,announcements of technological innovations or new products and services by usor our competitors, changes in financial estimates by securities analysts, theperception that significant stockholders may sell or intend to sell their shares,or other events or factors we cannot currently foresee. We are also subject tobroad market fluctuations, given the overall volatility of the current U.S. andglobal economies, where the market prices of equity securities of manycompanies experience substantial price and volume fluctuations that have oftenbeen unrelated to the operating performance of such companies. These broadmarket fluctuations may adversely affect the market price of our common stock.Additionally, because our common stock trades at relatively low volume levels,any change in demand for our stock can be expected to substantially influencemarket prices thereof. The trading price of our stock varied from a low of$2.25 to a high of $9.88 during 2009.

 

***If we experience an interruption to our business, ourresults of operations may******suffer.***

 

Our operations depend onour ability to protect our facilities, computer equipment, telecommunicationsequipment, software systems and clients’ products and confidential clientinformation against damage from telecommunications interruption, power loss,fire, natural disaster, theft, unauthorized intrusion, computer viruses,internet interruption, e-commerce interruption, bomb threats, terrorist attacksand other emergencies. Our location in the Philippines is exposed to a higherrisk of weather related interruptions (including typhoon, flood and hurricane)than our North American operations.  Wemaintain procedures and contingency plans to minimize the detrimental impact ofadverse events, but if such an event occurs, our procedures and plans may notbe successful in protecting us from losses or interruptions. In the event weexperience temporary or permanent interruptions or other emergencies at one ormore of our facilities, our business could suffer and we may be required to paycontractual damages to our clients, or allow our clients to terminate orrenegotiate their arrangements with us. Although we maintain property andbusiness interruption insurance, such insurance may not adequately or timely compensateus for all losses we may incur. Further, our telecommunication systems andnetworks, and our ability to timely and consistently access and use telephone,internet, e-commerce, e-mail, facsimile connections, and other forms ofcommunication, are substantially dependent upon telephone companies, internetservice providers, and various telecommunication infrastructures. If suchcommunications are interrupted on a short- or long-term basis, our serviceswould be similarly interrupted and delayed.

 

***Increases in the cost of telephone and data services orsignificant******interruptions in such services couldadversely affect our business.***

 

We depend on telephoneand data service provided by various local and long distance telephonecompanies. Because of this dependence, any change to the telecommunicationsmarket that would disrupt these services or limit our ability to obtainservices at favorable rates could affect our business. We have taken steps tomitigate our exposure to the risks associated with rate fluctuations andservice disruption by entering into long-term contracts with various providersfor telephone and data services and investing in redundant circuits.  There is no obligation, however, for thevendors to renew their contracts with us, or to offer the same or lower ratesin the future, and such contracts are subject to termination or modificationfor various reasons outside of our control. In addition, there is no assurancethat a redundant circuit would not also be disrupted.  A significant increase in the cost oftelephone services that is not recoverable through an increase in the price ofour services, or any significant interruption in telephone services, couldadversely affect our business.

 

***Compliance with SEC rules requiring that we and******our independent auditors assess the effectiveness of ourinternal controls over******financial reporting may have adverse consequences.***

 

Section 404 of theSarbanes-Oxley Act of 2002 (“Section 404”) requires our management, on anannual basis, to assess the effectiveness of our internal control overfinancial reporting. We have completed the process of documenting and testingour internal control over financial reporting in order to satisfy therequirements of Section 404, and the reports of our management and our independentauditors relating to our internal control over financial reporting are includedelsewhere in this Form 10-K. We constantly test and improve our controlsas we identify certain deficiencies that we believe require remediation, andthis requires additional management time and other resources.  If we incur significant expense relating tofuture compliance with Section 404, our operating results will beadversely impacted.

 

In addition, as ourbusiness develops and grows, we will be required to adapt our internal controlsystems and procedures to conform to our current business, and we will continueto work to improve our controls and procedures and to educate our employees inan effort to maintain an effective internal control environment. However, ifinternal control deficiencies arise in the future, we may not be able toremediate such deficiencies in a timely manner. As a consequence, we may haveto disclose in future filings with the SEC any 

 

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material weaknesses ininternal controls over our financial reporting system. Disclosures of this typecould cause investors to lose confidence in our financial reporting, and maynegatively affect our stock price. Moreover, effective internal controls are necessaryto produce reliable financial reports and to prevent fraud. If we havedeficiencies in our internal controls over financial reporting, it maynegatively impact our business and operations.

 

***Our quarterly operating results have historically varied,and may not be a good******indicator offuture performance.***

 

We have experienced, andexpect to continue to experience, quarterly variations in revenue and operatingresults, as a result of a variety of factors, many of which are outside ourcontrol.  These factors include, changesin the amount and growth rate of revenue generated from our principal clients;the timing of receipt of payments from our clients; the timing of existing andfuture client product launches or service offerings; unanticipated volume fluctuations;expiration or termination of client projects; timing and amount of costsincurred to expand capacity in order to provide for further revenue growth fromexisting and future clients; and the seasonal nature of some clients’businesses.

 

***If the value of our portfolio of investment securitiesdeclines, our results of******operationswill suffer.***

 

Approximately0.3%, 5.7% and 10.5%, of our total assets as of December 31, 2009, 2008and 2007, respectively, consisted of investment securities. During 2009, wemade investments in corporate debt. We periodically review investmentsavailable for sale for other-than-temporary declines in fair value.  We recorded no other-than-temporaryimpairments on our investments during 2009. During the year ended December 31, 2008, we recognized a losstotaling $0.5 million (representing the entire basis amount) on a LehmanBrothers corporate debt security that was determined to beother-than-temporarily impaired due to their bankruptcy announcement.  Future adverse changes in market conditions,or poor operating results of companies in which we have invested, could resultin losses.

 

**ITEM1B.  UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM2.  PROPERTIES**

 

As of December 31,2009, we owned or leased the following facilities, containing in the aggregateapproximately 1.1 million square feet:

 

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| **Properties**            | ** ** | **Year Opened** | ** ** | **Approximate   Square Feet** | ** ** | **Leased or Owned** |
|---------------------------|------------|-----------------|------------|-------------------------------|------------|---------------------|
| *U.S.  Facilities*        |       |            |       |                          |       |                |
| Greeley,  Colorado        |       | 1998            |       | 35,000                        |       | Company Owned       |
| Laramie,  Wyoming         |       | 1998            |       | 22,000                        |       | Company Owned (d)   |
| Grand  Junction, Colorado |       | 1999            |       | 46,350                        |       | Leased              |
| Greeley,  Colorado        |       | 1999            |       | 88,000                        |       | Company Owned       |
| Enid,  Oklahoma           |       | 2000            |       | 47,500                        |       | Company Owned       |
| Grand  Junction, Colorado |       | 2000            |       | 54,500                        |       | Leased              |
| Decatur,  Illinois        |       | 2003            |       | 37,500                        |       | Leased              |
| Alexandria,  Louisiana    |       | 2003            |       | 40,000                        |       | Leased              |
| Lynchburg,  Virginia      |       | 2004            |       | 38,600                        |       | Leased              |
| Collinsville,  Virginia   |       | 2004            |       | 49,250                        |       | Leased              |
| Denver,  Colorado         |       | 2004            |       | 23,000                        |       | Leased (a)          |
| Victoria,  Texas          |       | 2008            |       | 54,100                        |       | Leased (e)          |
| Mansfield,  Ohio          |       | 2008            |       | 31,000                        |       | Leased              |
| Jonesboro,  Arkansas      |       | 2008            |       | 65,400                        |       | Leased              |
| *Canadian  Facilities*    |       |            |       |                          |       |                |
| Kingston,  Ontario        |       | 2001            |       | 49,000                        |       | Company Owned       |
| Kingston,  Ontario        |       | 2001            |       | 20,000                        |       | Leased              |
| Cornwall,  Ontario        |       | 2001            |       | 73,800                        |       | Leased              |
| Regina,  Saskatchewan     |       | 2003            |       | 62,000                        |       | Leased (c)          |
| Sarnia,  Ontario          |       | 2003            |       | 37,200                        |       | Leased              |
| Thunder  Bay, Ontario     |       | 2006            |       | 33,000                        |       | Leased (f)          |
| Hawkesbury,  Ontario      |       | 2006            |       | 41,000                        |       | Leased (b)          |
| *Philippine  Facilities*  |       |            |       |                          |       |                |
| Makati  City, Philippines |       | 2008            |       | 78,000                        |       | Leased              |
| *Costa  Rica Facility*    |       |            |       |                          |       |                |
| Heredia,  Costa Rica      |       | 2009            |       | 37,000                        |       | Leased              |

 

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(a) Company headquarters, which houses executive and administrative employees.

 

(b) Our Hawkesbury, Ontario facility ceased operations in August 2007.

 

(c) Our Regina, Saskatchewan facility ceased operations in February 2009.

 

(d) Our Laramie, Wyoming facility ceased operations in January 2010.

 

(e) Our Victoria, Texas facility ceased operations in January 2010.

 

(f) Our Thunder Bay, Ontario facility is expected to cease operations in March 2010.

 

Substantially all of ourfacility space can be used to support any of our business process outsourcedservices. We believe our existing facilities are adequate for our currentoperations. We intend to maintain efficient levels of excess capacity to enableus to readily provide for needs of new clients and increasing needs of existingclients.  We hold unencumbered, feesimple title to our company-owned facilities.

 

**ITEM3.  LEGAL PROCEEDINGS**

 

We and six of our formerdirectors and officers were named as defendants in *West Palm Beach Firefighters’ Pension Fund v. StarTek, Inc.*,Civil Action No. 05-cv-01265-WDM-MEH (the “Litigation”).   The consolidated action was a purportedclass action brought on behalf of all persons (except defendants) who purchasedshares of our common stock in a****secondaryoffering by certain of our stockholders in June 2004,****andin the open market between February 26, 2003 and May 5, 2005 (the “Class Period”).  The consolidated complaint alleged that thedefendants made false and misleading public statements about us and ourbusiness and prospects in the prospectus for the secondary offering, as well asin filings with the SEC and in press releases issued during the Class Period,and that as a result, the market price of our common stock was artificiallyinflated.  The complaints alleged claimsunder Sections 11 and 15 of the Securities Act of 1933 and under Sections 10(b) and20(a) of the Securities Exchange Act of 1934.  The 

 

16

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plaintiffs in both casessought compensatory damages on behalf of the alleged class and award ofattorneys’ fees and costs of litigation.

 

On July 20, 2009, weexecuted a Stipulation of Settlement (“Stipulation”) with lead plaintiffs tosettle the Litigation.  Under the termsof the Stipulation, defendants agreed to $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.  Our primary insurance carrier contributed$6.9 million and we contributed $0.6 million to the Settlement Fund (as definedin the Stipulation).  The United StatesDistrict Court for the District of Colorado (the “Court”) granted preliminaryapproval for the settlement on October 8, 2009.  The final hearing was held on December 17,2009, at which time the Stipulation received final approval by the Court. Our portion of the settlement due, or $0.6 million, was recorded in ourConsolidated Statement of Operations during the year ended December 31,2009.

 

We have been involved from time to time in otherlitigation arising in the normal course of business, none of which is expectedby management to have a material adverse effect on our business, financialcondition or results of operations.

 

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

 

No matters were submittedto a vote of security holders during the fourth quarter of 2009.

 

**Part II**

 

**ITEM5.  MARKET FOR THE REGISTRANT’S COMMONSTOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

**MARKETFOR COMMON STOCK**

 

Our common stock has beenlisted on the New York Stock Exchange under the symbol “SRT” since theeffective date of our initial public offering on June 19, 1997. Thefollowing table shows the high and low closing sales prices for our commonstock on the New York Stock Exchange for the periods shown:

 
| ** **      | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
| 2009            |       |     |       |    |       |
| First  Quarter  |       | $        | 4.78       |    | $          | 2.25 |   |
| Second  Quarter |       | $        | 8.60       |    | $          | 3.15 |   |
| Third  Quarter  |       | $        | 9.88       |    | $          | 6.87 |   |
| Fourth  Quarter |       | $        | 8.34       |    | $          | 5.76 |   |
| 2008            |       |     |       |    |       |
| First  Quarter  |       | $        | 9.43       |    | $          | 8.03 |   |
| Second  Quarter |       | $        | 9.68       |    | $          | 8.10 |   |
| Third  Quarter  |       | $        | 9.47       |    | $          | 6.23 |   |
| Fourth  Quarter |       | $        | 6.90       |    | $          | 2.05 |   |

 

**HOLDERSOF COMMON STOCK**

 

As of February 12,2010, there were 51 stockholders of record and 14,882,990 shares of commonstock outstanding.  See Item 1A.  “Risk Factors,” set forth in this Form 10-K for a discussion of risks related tocontrol that may be exercised over us by our principal stockholders.

 

**DIVIDENDPOLICY**

 

On January 22, 2007,our board of directors announced it would not declare a quarterly dividend onour common stock in the first quarter of 2007, and did not expect to declaredividends in the near future, making the dividend paid in November 2006the last quarterly dividend that will be paid in the foreseeable future.  We plan to invest in growth initiatives inlieu of paying dividends.  We had beenpaying quarterly dividends since August of 2003.

 

**STOCKREPURCHASE PROGRAM**

 

EffectiveNovember 4,2004, our board of directors authorized repurchases of up to $25 million of ourcommon stock. The repurchase program will remain in effect until terminated bythe board of directors, and will allow us to repurchase shares of our

 

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common stock from time totime on the open market, in block trades and in privately-negotiatedtransactions. 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 repurchased shares will beheld as treasury stock, and will be available for general corporate purposes.Any repurchases will be made in accordance with SEC rules. As of the date ofthis filing, no shares have been repurchased under this program.

 

**STOCKPERFORMANCE GRAPH**

 

The graph below comparesthe cumulative total stockholder return on our common stock over the past fiveyears with the cumulative total return of the New York Stock Exchange CompositeIndex (“NYSE Composite”) and of the Russell 2000 Index (“Russell 2000”) overthe same period.  We do not believe stockprice performance shown on the graph is necessarily indicative of future priceperformance.

 

 

The information set forthunder the heading “Stock Performance Graph” is not deemed to be “solicitingmaterial” or to be “filed” with the SEC or subject to the SEC’s proxy rules orto the liabilities of Section 18 of the Exchange Act, and the graph shallnot be deemed to be incorporated by reference into any of our prior orsubsequent filings under the Securities Act or the Exchange Act.

 

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**ITEM6.  SELECTED FINANCIAL DATA**

 

Thefollowing selectedfinancial data should be read in conjunction with the Consolidated FinancialStatements and Notes thereto which are included in Item 8. “FinancialStatements and Supplementary Financial Data,” of this Form 10-K.Additionally, the following selected financial data should be read inconjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” which is included in Item7.

 

Due to the February 2009sale of our subsidiary, Domain.com and the 2005 sale of our supply chainmanagement services platform, the results of operations related to these linesof business have been reported as discontinued operations for all periodspresented below.

 
| ** **                                                      | ** ** | **Year Ended December 31,**          | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                      | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Statement of Operations Data:**                  | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                         |       | $                                         | 288,980    |   | $ | 272,338 |   | $ | 244,615 |   | $ | 237,115 |   | $ | 215,973 |   |
| Cost  of services                                               |       | 239,879                                   |       | 238,346 |   | 205,920 |   | 201,310 |   | 167,143 |   |
| Gross  profit                                                   |       | 49,101                                    |       | 33,992 |   | 38,695 |   | 35,805 |   | 48,830 |   |
| Selling,  general and administrative expenses                   |       | 43,196                                    |       | 40,814 |   | 38,991 |   | 30,247 |   | 28,435 |   |
| Impairment  losses and restructuring charges                    |       | 6,437                                     |       | 9,225 |   | 4,325 |   | — |   | — |   |
| Operating  (loss) income                                        |       | (532                                      | )          | (16,047 | ) | (4,621 | ) | 5,558 |   | 20,395 |   |
| Net  interest and other (expense) income                        |       | (210                                      | )          | 55 |   | 745 |   | 2,126 |   | 1,479 |   |
| (Loss)  income from continuing operations before income taxes   |       | (742                                      | )          | (15,992 | ) | (3,876 | ) | 7,684 |   | 21,874 |   |
| Income  tax (benefit) expense                                   |       | (751                                      | )          | (6,301 | ) | (719 | ) | 2,159 |   | 8,058 |   |
| Income  (loss) from continuing operations                       |       | 9                                         |       | (9,691 | ) | (3,157 | ) | 5,525 |   | 13,816 |   |
| Income  (loss) from discontinued operations, net of tax         |       | 4,640                                     |       | (210 | ) | 326 |   | 239 |   | (956 | ) |
| Net  income (loss)                                              |       | $                                         | 4,649      |   | $ | (9,901 | ) | $ | (2,831 | ) | $ | 5,764 |   | $ | 12,860 |   |
|                                                            |       |                                      |       |   |   |   |   |   |   |   |   |
| Net  income (loss) per share from continuing operations:        |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                           |       | $                                         | 0.00       |   | $ | (0.66 | ) | $ | (0.21 | ) | $ | 0.38 |   | $ | 0.94 |   |
| Diluted                                                         |       | $                                         | 0.00       |   | $ | (0.66 | ) | $ | (0.21 | ) | $ | 0.38 |   | $ | 0.94 |   |
|                                                            |       |                                      |       |   |   |   |   |   |   |   |   |
| Net  income (loss) per share including discontinued operations: |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                           |       | $                                         | 0.31       |   | $ | (0.67 | ) | $ | (0.19 | ) | $ | 0.39 |   | $ | 0.88 |   |
| Diluted                                                         |       | $                                         | 0.31       |   | $ | (0.67 | ) | $ | (0.19 | ) | $ | 0.39 |   | $ | 0.88 |   |
|                                                            |       |                                      |       |   |   |   |   |   |   |   |   |
| Weighted  average shares outstanding:                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                           |       | 14,792                                    |       | 14,713 |   | 14,696 |   | 14,680 |   | 14,629 |   |
| Diluted                                                         |       | 14,837                                    |       | 14,713 |   | 14,696 |   | 14,714 |   | 14,681 |   |
|                                                            |       |                                      |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                                         |       |                                      |       |   |   |   |   |   |   |   |   |
| Total  assets                                                   |       | $                                         | 149,068    |   | $ | 146,864 |   | $ | 155,458 |   | $ | 155,735 |   | $ | 153,914 |   |
| Total  debt                                                     |       | $                                         | —     |   | $ | 6,494 |   | $ | 11,355 |   | $ | 15,968 |   | $ | 5,650 |   |
| Total  stockholders’ equity                                |       | $                                         | 116,716    |   | $ | 107,019 |   | $ | 118,214 |   | $ | 118,382 |   | $ | 128,164 |   |
|                                                            |       |                                      |       |   |   |   |   |   |   |   |   |
| **Other Selected Financial Data:**                              |       |                                      |       |   |   |   |   |   |   |   |   |
| Capital  expenditures, net of proceeds                          |       | $                                         | 14,683     |   | $ | 27,979 |   | $ | 15,207 |   | $ | 19,767 |   | $ | 9,379 |   |
| Depreciation                                                    |       | $                                         | 15,977     |   | $ | 17,803 |   | $ | 17,092 |   | $ | 16,758 |   | $ | 13,364 |   |
| Cash  dividends declared per common share                       |       | $                                         | —     |   | $ | — |   | $ | — |   | $ | 1.11 |   | $ | 1.50 |   |

 

**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussionand analysis of the results of operations and financial condition should beread in conjunction with the accompanying Consolidated Financial Statementsincluded elsewhere in this annual report.

 

**OVERVIEW**

 

StarTek is aprovider of business process outsourcing services.  We partner with our clients to meet theirbusiness objectives and improve customer retention, increase revenues andreduce costs through an improved customer experience.  Our solutions leverage industry knowledge,best business practices, skilled agents, proven operational excellence and 

 

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flexibletechnology.  The StarTek comprehensiveservice suite includes customer care, sales support, complex order processing,accounts receivable management, technical and product 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) Offshore.  As of December 31, 2009, our U.S.segment included the operations of our thirteen facilities in the U.S.; ourCanada segment included the operations of our five facilities in Canada; andour Offshore segment included the operations of our facility in Makati City,Philippines.  As of December 31,2008, there were thirteen, six and one operating centers in the U.S., Canada,and 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 operating facilities by routinelyevaluating site performance.  If localeconomic conditions, prevailing wage rates, or other factors negatively impactthe long-term financial viability of a facility, management will from time totime make 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 facilities ineconomically viable geographic markets in order to improve profitability andgrow the business.

 

We invoice our clientsmonthly in arrears and recognize revenue for such services when completed.Substantially all of our contractual arrangements are based either on aproduction rate, meaning that we recognize revenue based on the billable hoursor minutes of each call center agent, or on a rate per transaction basis.  These rates could be based on the number ofpaid hours the agent works, the number of minutes the agent is available toanswer calls, or the number of minutes the agent is actually handling calls forthe client, depending on the client contract. Production rates vary by client contract and can fluctuate based on ourperformance against certain pre-determined criteria related to quality andperformance.

 

Overall economicconditions have impacted the telecommunications industry and our clients, asthe growth in wireless subscribers appears to be slowing.  In addition, the telecommunications spacecontinues to shift away from traditional “wireline”, or land telephoneservices, to wireless as many consumers disconnect their home telephone linesin place of using wireless devices. These industry trends could adversely impact our financial results in2010; however, we have also observed that our customers are increasinglyshifting away from in-house call centers and toward outsourced providers as ameans of cutting costs.  This trend couldpositively impact our business in 2010. Our strategy includes expanding into other vertical markets, includinghealthcare, insurance and technology, to diversify our client base and reduceour exposure to the telecommunications industry.  Finally, we have seen a shift toward offshoreservices as another avenue to cut costs. In response to this trend, part of our strategy involves expanding ouroffshore platform, as described in Item 1. “Business”.

 

**SIGNIFICANTDEVELOPMENTS DURING THE YEAR ENDED DECEMBER 31, 2009**

 

***NewFacilities***

 

In July 2009,we entered into a lease agreement for the rental of a facility in Heredia,Costa Rica.  The lease has an initialterm of five years with a tenant option for an additional five years.  The facility is approximately 37,000 squarefeet and we expect to open the facility for operations during the first quarterof 2010.  Total lease commitments for therental of this facility are approximately $4.5 million over the term of thelease.

 

***SiteClosures***

 

In February 2009, weclosed our facility in Regina, Saskatchewan. The closure of our Regina facility was driven by market conditions,namely recruiting challenges in this location, which impacted the profitabilityof the site.  Management determined thatit was in our long-term interest to close the location.   This closure resulted in approximately $9.7million less revenue during 2009, and increased gross profit by $0.9 million,compared to 2008 due to negative gross profit at this facility in 2008.  We also incurred restructuring charges ofapproximately $4.4 million during the year ended December 31, 2009 relatedto the closure, which is discussed in further detail below.

 

InFebruary 2009, weentered into an agreement with the landlord at our closed facility in BigSpring, Texas to buy-out the remaining lease obligation.  We closed the facility in August 2008and recorded restructuring costs associated with the remaining leaseobligations at the facility.  Theoriginal lease was due to expire in 2011. The buy-out was $0.2 million dollars, which was paid in February 2009.  There was no material impact on ourConsolidated Statements of Operations during the period related to the buy-outand we do not expect to incur any additional charges related to the Big Springclosure.

 

InAugust 2009, weentered into an agreement with the landlord at our closed facility inPetersburg, Virginia to buy-out the remaining lease obligation.  We closed the facility in December 2008and recorded restructuring costs associated with the remaining leaseobligations at the facility.  Theoriginal lease was due to expire in 2013. The buy-out was $0.8 million dollars, which was paid in August 2009.  There was no material impact on ourConsolidated Statements of Operations during the period related to the buy-outand we do not expect to incur any additional charges related to the Petersburgclosure.

 

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In October 2009, weentered into an agreement with the landlord at our closed facility inHawkesbury, Ontario, Canada to buy-out the remaining lease obligation.  We closed the facility in August 2007and recorded restructuring costs associated with the remaining leaseobligations at the facility.  Theoriginal lease was due to expire in 2012. The buy-out was 1.1 million Canadian dollars, which was paid in October 2009.  There was no material impact on ourConsolidated Statements of Operations during the period related to the buy-outand we do not expect to incur any additional charges related to the Hawkesburyclosure.

 

***Other Events***

 

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 $7.1 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 $7.1 millionand 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.  The results ofoperations and cash flows of Domain.com have been reported as discontinuedoperations.

 

On July 20, 2009, weexecuted a Stipulation of Settlement with lead plaintiffs to settle a pendingsecurities lawsuit.  Refer to Item 3, “LegalProceedings,” for further information on the lawsuit. Under the terms of theStipulation, defendants paid $7.5 million to completely resolve the Litigation,in exchange for a release of all claims by lead plaintiffs and class membersand a dismissal of the Litigation with prejudice.  Our primary insurance carrier contributed$6.9 million and we contributed $0.6 million to the Settlement Fund (as definedin the Stipulation).  The Court grantedpreliminary approval for the settlement on October 8, 2009.  The final hearing was held on December 17,2009, at which time the Stipulation received final approval by the Court. Our portion of the settlement due, or $0.6 million, was recorded in ourConsolidated Statement of Operations during the year ended December 31,2009.

 

**SUBSEQUENT EVENTS**

 

In January 2010,we entered into a lease agreement for the rental of a facility in Ortigas,Philippines.  The lease has an initial term of five years with a tenantoption for an additional five years.  The facility is approximately158,500 square feet and we expect to open the facility for operations duringthe second quarter of 2010.  Total lease commitments for the rental ofthis facility are approximately $5.8 million over the initial term of thelease.

 

In January 2010, we closed our facilities inLaramie, Wyoming and Victoria, Texas.  The facility in Laramie was closedbecause this work was transitioned either to StarTek’s @Home platform, wherebyagents work from their homes, or our Greeley, Colorado facility.  Weclosed our site in Victoria due to the loss of a client program, and we arecurrently evaluating the space to determine if we will utilize it for otherprograms or sublease to another tenant.

 

In January 2010, we announced the closure of ourThunder Bay, Ontario, Canada location which we expect to close in March 2010. The closure in Thunder Bay was driven by market conditions, namely recruitingchallenges in this location, which negatively impacted the profitability of thelocation and management determined it was in our long-term interest to closethe location.  We recorded approximately $1.7 million in impairment lossesduring 2009 related to assets held at this facility because the carrying valueof those assets was not recoverable.

 

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**RESULTSOF OPERATIONS — YEARS ENDED DECEMBER 31, 2009 AND DECEMBER 31, 2008**

 

Due to the February 2009,sale of our subsidiary, Domain.com, the results of operations related to thisline of business have been reported as discontinued operations for all periodspresented below.

 

The following table presents selected items from our ConsolidatedStatements of Operations in thousands of dollars and as a percentage of revenuefor the periods indicated:

 
| ** **                                              | ** ** | **Year Ended  December 31, 2009** | ** **    | **% of  Revenue** | ** ** | **Year Ended  December 31, 2008** | ** ** | **% of   Revenue** | ** ** | **% change   2008 to   2009** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------|---------------|-------------------|------------|----------------------------------------|------------|--------------------|------------|-------------------------------|------------|
| Revenue                                                 |       | $                                      |  288,980 |              | 100.0      | %                                      | $          |  272,338      |       | 100.0                         | %          | 6.1 | % |
| Cost  of services                                       |       | 239,879                                |          | 83.0              | %          | 238,346                                |       | 87.5               | %          | 0.6                           | %          |
| Gross  profit                                           |       | 49,101                                 |          | 17.0              | %          | 33,992                                 |       | 12.5               | %          | 44.4                          | %          |
| Selling,  general and administrative expenses           |       | 43,196                                 |          | 14.9              | %          | 40,814                                 |       | 15.0               | %          | 5.8                           | %          |
| Impairment  losses and restructuring charges            |       | 6,437                                  |          | 2.3               | %          | 9,225                                  |       | 3.4                | %          | -30.2                         | %          |
| Operating  loss                                         |       | (532                                   | )             | -0.2              | %          | (16,047                                | )          | -5.9               | %          | NM                            |       |
| Net  interest and other (expense) income                |       | (210                                   | )             | -0.1              | %          | 55                                     |       | 0.0                | %          | NM                            |       |
| Loss  from continuing operations before income taxes    |       | (742                                   | )             | -0.3              | %          | (15,992                                | )          | -5.9               | %          | NM                            |       |
| Income  tax benefit                                     |       | (751                                   | )             | -0.3              | %          | (6,301                                 | )          | -2.3               | %          | NM                            |       |
| Income  (loss) from continuing operations               |       | 9                                      |          | 0.0               | %          | (9,691                                 | )          | -3.6               | %          | NM                            |       |
| Income  (loss) from discontinued operations, net of tax |       | 4,640                                  |          | 1.6               | %          | (210                                   | )          | 0.0                | %          | NM                            |       |
| Net  income (loss)                                      |       | $                                      |   4,649  |              | 1.6        | %                                      | $          |  (9,901       | )          | -3.6                          | %          | NM |   |

 

The followingtable summarizes our revenues and gross profit for the periods indicated, byreporting segment:

 
| ** **         | ** ** | **For the Year Ended December 31,** | ** **    |
|--------------------|------------|------------------------------------------|---------------|
| ** **         | ** ** | **2009**                                 | ** **    | **2008** | ** ** |
| ** **         | ** ** | **(in 000s)**                            | ** **    | **(% of Total)** | ** ** | **(in 000s)** | ** ** | **(% of Total)** | ** ** |
| **United States:** |       |                                     |          |   |   |   |   |   |   |
| Revenue            |       | $                                        |  200,737 |   | 69.5 | % | $ |  180,761 |   | 66.4 | % |
| Cost  of services  |       | 164,472                                  |          | 68.6 | % | 150,302 |   | 63.1 | % |
| Gross  profit      |       | $                                        |  36,265  |   | 73.9 | % | $ |  30,459 |   | 89.6 | % |
| *Gross profit %*   | * *   | *18.1*                                   | *%*           | * * | * * | *16.9* | *%* | * * | * * |
|               |       |                                     |          |   |   |   |   |   |   |
| **Canada:**        |       |                                     |          |   |   |   |   |   |   |
| Revenue            |       | $                                        |  76,307  |   | 26.4 | % | $ |  90,929 |   | 33.4 | % |
| Cost  of services  |       | 64,397                                   |          | 26.8 | % | 86,001 |   | 36.1 | % |
| Gross  profit      |       | $                                        |  11,910  |   | 24.3 | % | $ |  4,928 |   | 14.5 | % |
| *Gross profit %*   | * *   | *15.6*                                   | *%*           | * * | * * | *5.4* | *%* | * * | * * |
|               |       |                                     |          |   |   |   |   |   |   |
| **Offshore:**      |       |                                     |          |   |   |   |   |   |   |
| Revenue            |       | $                                        |  11,936  |   | 4.1 | % | $ |  648 |   | 0.2 | % |
| Cost  of services  |       | 11,010                                   |          | 4.6 | % | 2,043 |   | 0.8 | % |
| Gross  profit      |       | $                                        |  926     |   | 1.8 | % | $ |  (1,395 | ) | -4.1 | % |
| *Gross profit %*   | * *   | *7.8*                                    | *%*           | * * | * * | *-215.3* | *%* | * * | * * |

 

***Revenue***

 

Revenue increased by$16.6 million, or 6.1%, from $272.3 million in 2008 to $289.0 million in2009.  The increase was driven by theU.S. and Offshore segments.  Revenue inthe U.S. segment increased by 11.1%, or $20.0 million, due in part to threesites that were opened in 2008 that contributed a full year of revenue in 2009,compared to only a portion of 2008.  Theincremental revenue in 2009 from these facilities was approximately $26.1million.  U.S. revenue also increased dueto the full ramp of a site which transitioned to a different customer in 2009and contributed approximately $4.6 million of additional revenue in 2009compared to 2008.  These increases toU.S. revenue were partially offset by 1) two U.S. site closures that occurredin 2008, and contributed revenue of $13.2 million that year and 2) a decreaseof $1.7 million due to layoffs and hiring freezes in certain locations in orderto address certain discrepancies in our hiring practices. 

22

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The remaining increase of$4.2 million at the other U.S. facilities was driven by an increase in thenumber of average full-time equivalent agents. Offshore revenue increased $11.3 million from $0.6 million to $11.9million due to the ramp of our facility in Makati City, Philippines whichopened in September 2008.  Averagefull-time equivalent agents increased from 20 in 2008 to 391 in 2009 as newbusiness in the facility was launched. Revenue from Canada decreased by $14.6 million, or 16.1%, due primarilyto the closure of our Regina, Saskatchewan facility in February 2009,which had approximately $9.7 million less revenue during 2009 compared to2008.  In addition, revenue decreased byapproximately $1.1 million due to changes in the foreign exchange rate betweenthe U.S. dollar and Canadian dollar.  Theremainder of the decrease in the Canadian segment was due to a decrease in thenumber of average full-time equivalent agents.

 

***Cost of Services and Gross Profit***

 

Cost of services increased by $1.6 million, or 0.6%, from $238.3million in 2008 to $239.9 million in 2009. Gross profit as a percentage of revenue increased from 12.5% in 2008 to17.0% in 2009.  The increase in grossprofit was primarily due to better utilization in our U.S. and Offshoresegments, and improvement in the U.S. dollar to Canadian dollar foreignexchange rates.  Cost of services in theU.S. increased by approximately $14.2 million, or 9.4%, of which $5.8 millionrelated to the three new sites, net of two closures, year over year asdiscussed above.  Approximately $1.6million of the increase in U.S. cost of services was due to the transition ofsome services from U.S. agents to Offshore agents.  The remainder of the U.S. increase was due tothe increase in other full-time equivalent agents, as described above.  Cost of services increased by $9.0 million in2009 compared to 2008 in the Offshore segment due to the ramp of our Makatisite.  These increases to cost ofservices were offset by lower cost of services in Canada, which decreased byapproximately $21.6 million, or 25.1%. Of this decrease $10.6 million was due to the closure of the Regina location.  Additionally, cost of services decreased by$6.4 million in 2009 compared to 2008 due to a stronger U.S. to Canadian dollarexchange rate.  The remaining decrease inthe Canadian segment was due to fewer agents, as described above.

 

***Selling, Generaland Administrative Expenses***

 

Selling, general andadministrative expenses increased by $2.4 million, or 5.8%, from $40.8 millionin 2008 to $43.2 million in 2009.  As apercentage of revenue, selling, general and administrative expenses decreasedslightly from 15.0% in 2008 to 14.9% in 2009. The increase in selling, general and administrative expenses wasprimarily due to $1.7 million greater payroll expense driven by higher salary,bonus and stock based compensation expense. The additional payroll expense was incurred primarily in the departmentsof information systems, business process improvement, and shared services, allconsidered strategic to support our scaling operations.  In addition, we incurred legal expense of $0.6million in connection with the settlement of the federal securities classaction lawsuit, as well as a $0.5 million increase in hiring expense and $0.5million in travel expense related primarily to the launch of new sites.  These increases were partially offset bydeclines in depreciation expense of $0.6 million and training expense of $0.4million.

 

***ImpairmentLosses and Restructuring Charges***

 

Impairment losses andrestructuring charges totaled $6.4 million and $9.2 million for the years endedDecember 31, 2009 and 2008, respectively. We recorded approximately $1.7 million in impairment losses during 2009in our Canadian segment due to the impairment of certain long-lived assets forwhich the carrying value of those assets is not recoverable.  These assets are located in Thunder Bay,Ontario, a facility that we subsequently decided to close in January 2010.  The long-lived assets include computer andtelephone equipment, furniture and fixtures, leasehold improvements andsoftware.  We recorded $5.9 million inimpairment losses in 2008 due to impairment of certain long-lived assets ($4.1million in the U.S. segment and $1.8 million in the Canadian segment).

 

Restructuring chargestotaled $4.7 million in 2009, related primarily to the February 2009closure of our Regina, Saskatchewan facility. 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 couldnot sublease the vacant facilities for the remainder of the lease term.  In the future, if we are able to sublease thefacility, we may be required to record a gain in our Consolidated Statements ofOperations.  We recorded $3.3 million inrestructuring charges in 2008 related to the closure of our Hawkesbury, Ontariofacility in 2007, our Big Spring, Texas facility in August 2008, and ourPetersburg, Virginia facility in December 2008 ($1.6 million related tothe Canadian segment and $1.7 million related to the U.S. segment).

 

***OperatingLoss***

 

We incurred operatinglosses of approximately $0.5 million and $16.0 million for the years ended December 31,2009 and 2008, respectively.  Thedecrease in the loss period over period was driven by the increase in revenueand fewer impairment losses and restructuring charges, offset by the increasein cost of services and selling, general and administrative expenses, asdiscussed previously.

 

23

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

 

Net interest and otherexpense was approximately $0.2 million in 2009, compared to net interest andother income of $0.1 million in 2008. The change was due primarily to a decrease in interest and investmentincome of approximately $1.1 million in 2009 compared to 2008 due to a declinein our investment balance period over period. This change was partially offset by $0.3 million less of interestexpense due to the pay-off of certain notes payable in 2009 and $0.5 million inexpense for other-than-temporary impairment on investments, which was recordedin 2008 and did not recur in 2009.

 

***IncomeTax Benefit***

 

The effective rate forour tax benefit changed from 39.4% in 2008 to 101.2% in 2009.  The primary reason for the change was theproportionately larger work opportunity credits in relation to our pre-tax lossin 2009.  Included in our income taxbenefit in 2009 was approximately $1.6 million of work opportunity credits,which increased from approximately $1.3 million in 2008, however, as apercentage of our pre-tax loss the effect was 142.6% on the effective rate in2009 compared to 5.3% in 2008.  Otherfactors in the rate included a decrease in the effect of state taxes, a declinein the Canadian statutory rate and a larger amount of operations in countriesin which we have been granted tax holidays, primarily the Philippines.

 

***Lossfrom Discontinued Operations, net of tax***

 

Income from discontinuedoperations was approximately $4.6 million during 2009 and loss fromdiscontinued operations was approximately $0.2 million in 2008.  In February 2009, we sold Domain.com, awholly owned subsidiary, for cash of approximately $7.1 million.  We had a gain on the sale of approximately$6.9 million, less taxes of $2.3 million, resulting in the income of $4.6million.  The loss in 2008 was due to thewrite-off of an asset related to the sale of our supply chain management servicesplatform in December 2005 of $0.5 million, partially offset by $0.3million of income from discontinued operations related to Domian.com.

 

***NetIncome (Loss)***

 

Net income wasapproximately $4.6 million in 2009 and net loss was approximately $9.9 millionin 2008.  The increase in net income wasprimarily due to higher revenue, income from discontinued operations and fewerimpairment and restructuring charges, partially offset by higher cost ofservices and selling, general and administrative expenses and a decrease in theincome tax benefit, as discussed previously.

 

24

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**RESULTSOF OPERATIONS — YEARS ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007**

 

Due to the February 2009,sale of our subsidiary, Domain.com, the results of operations related to thisline of business have been reported as discontinued operations for all periodspresented below.

 

The following table presents selected items from our ConsolidatedStatements of Operations in thousands of dollars and as a percentage of revenuefor the periods indicated:

 
| ** **                                              | ** ** | **Year Ended  December 31, 2008** | ** ** | **% of  Revenue** | ** ** | **Year Ended   December 31, 2007** | ** ** | **% of   Revenue** | ** ** | **% change   2007 to 2008** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------|------------|-------------------|------------|-----------------------------------------|------------|--------------------|------------|-----------------------------|------------|
| Revenue                                                 |       | $                                      | 272,338    |              | 100.0      | %                                       | $          | 244,615            |       | 100.0                       | %          | 11.3 | % |
| Cost  of services                                       |       | 238,346                                |       | 87.5              | %          | 205,920                                 |       | 84.2               | %          | 15.7                        | %          |
| Gross  profit                                           |       | 33,992                                 |       | 12.5              | %          | 38,695                                  |       | 15.8               | %          | -12.2                       | %          |
| Selling,  general and administrative expenses           |       | 40,814                                 |       | 15.0              | %          | 38,991                                  |       | 15.9               | %          | 4.7                         | %          |
| Impairment  losses and restructuring charges            |       | 9,225                                  |       | 3.4               | %          | 4,325                                   |       | 1.8                | %          | 113.3                       | %          |
| Operating  loss                                         |       | (16,047                                | )          | -5.9              | %          | (4,621                                  | )          | -1.9               | %          | NM                          |       |
| Net  interest and other income                          |       | 55                                     |       | 0.0               | %          | 745                                     |       | 0.3                | %          | NM                          |       |
| Loss  from continuing operations before income taxes    |       | (15,992                                | )          | -5.9              | %          | (3,876                                  | )          | -1.6               | %          | NM                          |       |
| Income  tax benefit                                     |       | (6,301                                 | )          | -2.3              | %          | (719                                    | )          | -0.3               | %          | NM                          |       |
| Loss  from continuing operations                        |       | (9,691                                 | )          | -3.6              | %          | (3,157                                  | )          | -1.3               | %          | NM                          |       |
| Loss  (income) from discontinued operations, net of tax |       | (210                                   | )          | 0.0               | %          | 326                                     |       | 0.1                | %          | NM                          |       |
| Net  loss                                               |       | $                                      | (9,901     | )                 | -3.6       | %                                       | $          | (2,831             | )          | -1.2                        | %          | NM |   |

 

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

 
| ** **         | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------|------------|------------------------------------------|------------|
| ** **         | ** ** | **2008**                                 | ** ** | **2007** | ** ** |
| ** **         | ** ** | **(in 000s)**                            | ** ** | **(% of Total)** | ** ** | **(in 000s)** | ** ** | **(% of Total)** | ** ** |
| **United States:** |       |                                     |       |   |   |   |   |   |   |
| Revenue            |       | $                                        | 180,761    |   | 66.4 | % | $ | 148,700 |   | 60.8 | % |
| Cost  of services  |       | 150,302                                  |       | 63.1 | % | 115,820 |   | 56.2 | % |
| Gross  profit      |       | $                                        | 30,459     |   | 89.6 | % | $ | 32,880 |   | 85.0 | % |
| *Gross profit %*   | * *   | *16.9*                                   | *%*        | * * | * * | *22.1* | *%* | * * | * * |
|               |       |                                     |       |   |   |   |   |   |   |
| **Canada:**        |       |                                     |       |   |   |   |   |   |   |
| Revenue            |       | $                                        | 90,929     |   | 33.4 | % | $ | 95,915 |   | 39.2 | % |
| Cost  of services  |       | 86,001                                   |       | 36.1 | % | 90,100 |   | 43.8 | % |
| Gross  profit      |       | $                                        | 4,928      |   | 14.5 | % | $ | 5,815 |   | 15.0 | % |
| *Gross profit %*   | * *   | *5.4*                                    | *%*        | * * | * * | *6.1* | *%* | * * | * * |
|               |       |                                     |       |   |   |   |   |   |   |
| **Offshore:**      |       |                                     |       |   |   |   |   |   |   |
| Revenue            |       | $                                        | 648        |   | 0.2 | % | $ | — |   | 0.0 | % |
| Cost  of services  |       | 2,043                                    |       | 0.8 | % | — |   | 0.0 | % |
| Gross  profit      |       | $                                        | (1,395     | ) | -4.1 | % | $ | — |   | 0.0 | % |
| *Gross profit %*   | * *   | *-215.3*                                 | *%*        | * * | * * | * * | * * | * * | * * |

 

***Revenue***

 

Revenue increased by$27.7 million, or 11.3%, from $244.6 million in 2007 to $272.3 million in2008.  The increase was driven by theU.S. segment in which revenue increased by 21.6%, or $32.1 million, due to theopening of three new facilities during 2008. The Company opened facilities in Victoria, Texas in January 2008,Mansfield, Ohio in March 2008 and Jonesboro, Arkansas in July 2008.  Revenue from these facilities during 2008totaled approximately $31.7 million. Revenue also increased due to improved contract pricing, offset slightlyby the closure of our Big Spring, Texas facility in August 2008, whichresulted in a reduction in revenue of $4.6 million during 2008.  Revenue in the Canada segment decreased by$5.0 million during 2008, of which $3.3 million was 

 

25

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attributable to lostrevenue due to the closure of our Hawkesbury, Ontario site in August 2007.  The Offshore segment generated $0.6 millionin revenue during 2008 from the facility in Makati City, Philippines whichopened in September 2008.

 

***Cost of Services and Gross Profit***

 

Cost of servicesincreased by $32.4 million, from $205.9 million in 2007 to $238.3 million in2008.  Gross profit as a percentage ofrevenue decreased from 15.8% in 2007 to 12.5% in 2008.  The decline in gross profit was primarily dueto the launch and initial ramp of our new facilities and losses on foreigncurrency hedges.  Cost of services in theU.S. segment increased by $34.5 million, from $115.8 million in 2007 to $150.3million in 2008.  Of this increase,approximately $30.0 million was related to the new facilities in Victoria,Mansfield and Jonesboro.  Gross profit inCanada decreased by $0.9 million from $5.8 million in 2007 to $4.9 million in2008.  The decline was primarily due tolower utilization in Canada and a decline in our effective exchange rate, netof hedges.  Our effective exchange rate(CAD to USD), net of hedges, decreased from 1.10 in 2007 to 1.01 in 2008.  The Offshore segment contributed negative$1.4 million to gross profit during 2008 as the Makati City site was launchedin September 2008 and continued to ramp through the remainder of 2008.

 

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

 

Selling, general andadministrative expenses increased by $1.8 million, or 4.7%, from $39.0 millionin 2007 to $40.8 million in 2008.  As apercentage of revenue, selling, general and administrative expenses were 15.9%in 2007 and 15.0% in 2008.  The increasein selling, general and administrative expenses was due to investments incorporate personnel, human resource programs and technology in support of ourlong-term growth plans, as well as incremental SG&A costs associated withthe new sites.

 

***ImpairmentLosses and Restructuring Charges***

 

Impairment losses andrestructuring charges increased from $4.3 million in 2007 to $9.2 million in2008.  During 2008, we recognizedimpairment losses of $5.9 million. Approximately $1.8 million related to the Canada segment, which wascomprised of $1.5 million and $0.3 million related to impairment of leaseholdimprovements, furniture and fixtures and equipment in connection with theclosures of the Regina, Saskatchewan and Hawkesbury, Ontario facilities,respectively.  Approximately $4.1 millionof impairment losses related to the U.S. segment, which comprised of 1) $1.2million related to the write-off of capitalized software costs for informationtechnology infrastructure initiatives which management has decided todiscontinue, 2) $1.1 million of leasehold improvements, furniture and fixturesand equipment in connection with the closure of our Big Spring, Texas facility,and 3) $1.8 million of leasehold improvements, furniture and fixtures andequipment in connection with the closure of our Petersburg, Virginia facility.

 

During 2008, we recognizedrestructuring charges of $3.3 million. The Canada segment recognized $1.6 million of restructuring chargesrelating to the closure of our Hawkesbury facility.  Approximately $1.7 million related to theU.S. segment, of which $0.3 million and $1.4 million were related to theclosures in Big Spring, Texas and Petersburg, Virginia, respectively.

 

During 2007, we incurredapproximately $1.9 million in impairment losses and approximately $0.7 millionin restructuring charges in our Canada segment due to the Hawkesburyclosure.  We recorded $1.7 million inimpairment losses in the U.S. segment due to the write-off of capitalizedsoftware costs in which the projects were not completed and therefore, thecarrying value was not recoverable.

 

***OperatingLoss***

 

We incurred operatinglosses of approximately $16.0 million and $4.6 million for the years ended December 31,2008 and 2007, respectively.  Theincrease in the loss was driven by the decrease in gross margin, the increasein selling, general and administrative expenses, and the increase in impairmentlosses and restructuring charges, discussed previously.

 

***NetInterest and Other Income***

 

Net interest and otherincome was approximately $0.1 million and $0.7 million during the years ended December 31,2008 and 2007, respectively.  The primaryreason for the change was the recognition of a loss of $0.5 million in 2008 onan investment in Lehman Brothers corporate debt securities that was determinedto be other-than-temporarily impaired due to their bankruptcy announcement.

 

***IncomeTax Benefit***

 

The effective tax rateincreased from 18.6% in 2007 to 39.4% in 2008. The primary difference between the periods was the valuation allowancerecorded in 2007 on capital loss carryforwards which management did not believewould be recognized before their expiration. This impact was offset by decreased work opportunity credits during 2008compared to 2007 and the change in the Canadian statutory tax rate during 2008.  Effective January 1, 2008, the generalcorporate income tax rate in Canada was reduced from 

 

26

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22.1% to 19.5% due inpart to the elimination of the corporate surtax on large corporations of1.12%.  The impact was a reduction in ouroverall effective tax rate and a reduction of the value of certain deferred taxassets.

 

***Lossfrom Discontinued Operations, net of tax***

 

During the year ended December 31,2008, we recorded a loss from discontinued operations, net of tax, ofapproximately $0.2 million compared to income from discontinued operations, netof tax, of approximately $0.3 million during 2007.  The change was due to the write-off of anasset related to the sale of our supply chain management services platform in December 2005.  The remainder of the income from discontinuedoperations, net of tax, during both periods was approximately $0.3 million inincome related to Domain.com which was sold in February 2009.

 

***NetLoss***

 

We incurred net losses ofapproximately $9.9 million and $2.8 million for the years ended December 31,2008 and 2007, respectively.  Theincrease in the net loss was driven primarily by decreased gross margin, theincrease in selling, general and administrative expenses, increased impairmentlosses and restructuring charges and loss from discontinued operations,partially offset by higher revenue and an income tax benefit, as discussedpreviously.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

As of December 31,2009, working capital totaled $60.4 million and our current ratio was 3.42:1,compared to working capital of $47.6 million and a current ratio of 2.58:1 at December 31,2008.  

 

We have historicallyfinanced our operations, liquidity requirements, capital expenditures, andcapacity expansion primarily through cash flows from operations, and to alesser degree, through various forms of debt and leasing arrangements. Inaddition to funding basic operations, our primary uses of cash typically relateto capital expenditures to upgrade our existing information technologies andservice offerings and investments in our facilities.  We believe that cash flows from operationsand cash provided by our line of credit will adequately meet our ongoing operatingrequirements. We did not draw on our line of credit during 2009; however, dueto the timing of our collections of large billings with our major customers, wehave historically needed to draw on our line of credit for ongoing operatingactivities. 

 

We expect to be able torenew our existing line of credit or replace it with other financingarrangements when that line of credit expires on August 1, 2010.  If we are unable to renew the line of creditor are unable to secure alternative sources of capital funding undersatisfactory terms, or at all, we may be unable to meet cash needs required forgrowth opportunities.  Any significantfuture expansion of our business may require us to secure additional cashresources.  If we enter into anacquisition, it may require us to use our cash, draw on our line of credit orobtain additional financing, which could decrease cash available foroperations.  The current poor conditionsof the U.S. credit markets may adversely impact our ability to obtain financingand could significantly impact our liquidity. A decrease 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 inItem 1A. “Risk Factors” of this Form 10-K could adversely impact ourliquidity.

 

*(inthousands)*

 
| ** **                                            | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net  cash provided by (used in):                      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating  activities                                 |       | $                                | 15,654     |   | $ | 11,616 |   | $ | 20,647 |   |
| Investing  activities                                 |       | 411                              |       | (20,621 | ) | (25,672 | ) |
| Financing  activities                                 |       | (6,849                           | )          | (3,722 | ) | (5,828 | ) |
| Effect  of foreign exchange rates on cash             |       | 795                              |       | (719 | ) | 442 |   |
| Net  increase (decrease) in cash and cash equivalents |       | $                                | 10,011     |   | $ | (13,446 | ) | $ | (10,411 | ) |

 

Our balance of cash andcash equivalents was $19.6 million at December 31, 2009, compared to abalance of $9.6 million at December 31, 2008.

 

**CASH FLOWS — YEARS ENDED DECEMBER31, 2009 AND DECEMBER 31, 2008**

 

***OperatingActivities. ***Net cash provided by operating activitiesincreased by $4.0 million from $11.6 million in 2008 to $15.7 million in2009.  Net cash provided by operatingactivities from continuing operations was $18.0 million in 2009, representingan increase of $6.2 million from 2008. The increase of $6.2 million in cash provided by operating activitiesfrom continuing operations was driven by the following increases: 1) $14.5million in deferred income taxes, whereby the net deferred income tax assetdeclined by $7.0 million compared to an increase of $7.5 million in 2008because of the utilization of net operating loss carry forwards, 2) $3.7million higher income from continuing operations after impairment losses anddepreciation expense (net income from continuing operations

 

27

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improved by $9.7 million,partially offset by $6.0 million less impairment and depreciation expense) and3) $2.8 million of higher collections of accounts receivable period over perioddue to the timing of collections of large billings.  These increases to cash provided by operatingactivities from continuing operations were partially offset by the followingdecreases: 1) $7.3 million decrease in the change in accrued liabilities year-over-yearresulting from a larger increase in 2008 from restructuring charges and accruedpayroll, 2) $3.2 million in greater income tax receivable due to timing of taxpayments and refunds, 3) $2.6 million greater increase in prepaids and otherassets due primarily to an increase in maintenance contracts and 4) $1.7million in a smaller change in accounts payable due to fewer capitalexpenditures in 2009.

 

***InvestingActivities. ***Net cash provided by investing activitieswas $0.4 million in 2009 compared to cash used in investing activities of $20.6million in 2008.  The increase was due to1) a $13.3 million decrease in purchases of property, plant and equipment dueto no new site openings in 2009 compared to the opening of four new sites in2008, 2) proceeds from the sale of Domain.com of $7.1 million and 3) anincrease in net proceeds from the sale of investments, net of purchases, of$0.6 million.

 

***FinancingActivities. ***Net cash used in financing activitiesincreased by $3.1 million, from $3.7 million in 2008 to $6.8 million in2009.  The increase was due primarily toan increase in payments on long-term debt of $3.0 million resulting from thepay-off of our two equipment loans in the second quarter of 2009, partiallyoffset by savings on principal payments since the pay-off of these loans.

 

**CASH FLOWS — YEARS ENDED DECEMBER31, 2008 AND DECEMBER 31, 2007**

 

***OperatingActivities. ***Net cash provided by operating activitieswas $11.6 million in 2008, compared to $20.6 million in 2007.  The decrease in cash provided by operatingactivities of approximately $9.0 million was primarily due to the larger netloss during the period which increased by $7.1 million.  Cash from operating activities also decreasedby $7.9 million due to the increase in deferred tax assets.  Deferred tax assets increased primarily dueto the net operating loss carry forwards generated during 2008 that did notexist in 2007.  These decreases to cashprovided by operating activities were offset by increases related to 1) $2.4million larger impairment losses due to site closures in 2008 and 2) $3.2million greater accrued liabilities, which was a result of higher accruedpayroll at December 31, 2008 compared to December 31, 2007 because ofthe growth in our number of employees.

 

***InvestingActivities. ***Net cash used in investing activities wasapproximately $20.6 million in 2008, compared to $25.7 million in 2007.  This represents a decrease of approximately$5.1 million, which was due to greater net proceeds from the sale ofinvestments, partially offset by higher capital expenditures.  During 2008, we had $7.4 million in proceedsfrom the sale of investments, net of purchases. During 2007, we had $10.5 million in purchases of investments, net ofproceeds.  This change was due to ourfocus on site expansion during 2008 which also resulted in capital expendituresincreasing from $15.2 million in 2007 to $28.0 million in 2008.  During 2008 we opened four new sites,compared to no site openings in 2007.

 

***FinancingActivities. ***Net cash used in financing activities wasapproximately $3.7 million in 2008, compared to $5.8 million in 2007.  The decrease of $2.1 million was due to $2.0million less in principal payments during 2008 compared to 2007.  This was due in part to the maturity of oursecured equipment loan with Wells Fargo Equipment Finance, Inc. whereby wemade our final principal payment on February 28, 2008.

 

**CONTRACTUALOBLIGATIONS**

 

Other than operatingleases for certain equipment and real estate and commitments to purchase goodsand services in the future, in each case as reflected in the table below, wehave no off-balance sheet transactions, unconditional purchase obligations orsimilar instruments and we are not a guarantor of any other entities’ debt orother financial obligations. The following table presents a summary (inthousands), by period, of our future contractual obligations and payments as ofDecember 31, 2009:

 
| ** **                     | ** ** | **Within** | ** ** | **1 - 2** | ** ** | **2 - 3** | ** ** | **3 - 4** | ** ** | **4 - 5** | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|----------------|------------|------------|------------|
| ** **                     | ** ** | **1 Year** | ** ** | **Years** | ** ** | **Years** | ** ** | **Years** | ** ** | **Years** | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| Operating  leases (1)          |       | $          | 7,527      |      | $          | 6,453     |       | $         | 4,707      |      | $          | 3,782          |       | $          | 3,500      |   | $ | 6,508 |   | $ | 32,477 |   |
| Capital  leases (2)            |       | 146        |       | 87        |       | 95        |       | 18        |       | 7         |       | —         |       | $          | 353        |   |
| Purchase  obligations (3)      |       | 344        |       | —    |       | —    |       | —    |       | —    |       | —         |       | $          | 344        |   |
| Total  contractual obligations |       | $          | 8,017      |      | $          | 6,540     |       | $         | 4,802      |      | $          | 3,800          |       | $          | 3,507      |   | $ | 6,508 |   | $ | 33,174 |   |

 

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(1)          We lease facilities and equipment undervarious non-cancelable operating leases.

(2)          We lease equipment under certain capitallease agreements.

(3)          Purchase obligations include commitmentsto purchase goods and services that in some cases may include provisions forcancellation.

 

***Line of Credit***

 

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 Wells 

 

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FargoBank N.A., which expired by its terms on June 30, 2009.  There was no balance outstanding on the line of creditwith UMB Bank as of December 31, 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, 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 $10million measured on the last day of each fiscal quarter and 4) a cash flowcoverage ratio, as defined in the Agreement, of greater than 1.50 to 1.0measured on the last day of each fiscal quarter for the previous twelvemonths.  As of December 31, 2009, wewere in compliance with our debt covenants.

 

***Other Events***

 

During 2009, we paid the remaining principal balance on the SecuredEquipment Promissory Note between Wells Fargo Equipment Finance, Inc. andStarTek USA, Inc., our wholly owned subsidiary, and the Canadian DollarSecured Equipment Loan between Wells Fargo Equipment Finance Company, Inc.and StarTek Canada Services, Ltd., our wholly owned subsidiary.  The loans had original maturity dates in November 2010.  The total payoff on these loans, includingpre-payment penalties, was approximately $5.7 million.

 

**OTHER FACTORS IMPACTING LIQUIDITY**

 

Effective November 4,2004, our board of directors authorized purchases of up to $25 million of ourcommon stock.  The repurchase programwill remain in effect until terminated by the board of directors and will allowus to repurchase shares of our common stock from time to time on the openmarket, in block trades and in privately-negotiated transactions.  Repurchases will be implemented by the ChiefFinancial Officer consistent with the guidelines adopted by the board ofdirectors from time to time and will depend on market conditions and otherfactors.  Any repurchased shares will bemade in accordance with SEC rules.  Wehave not yet repurchased any shares pursuant to this board authorization.

 

Our business currentlyhas a high concentration on 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 Item 1A. “RiskFactors” and in Note 5, “Principal Clients,” to our Consolidated FinancialStatements, which are included at Item 8. “Financial Statements andSupplementary Financial Data,” of this Form 10-K.  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 December 31,2009.

 

As of December 31,2009, we had approximately $0.5 million invested in corporate debtsecurities.  There is a risk that ifthose companies in which we are invested suffer due to economic conditions orother reasons, we could realize losses on these investments which could impactour 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.

 

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 period is not necessarily indicative of the debtbalance at any other time during that period.

 

Although managementcannot accurately anticipate effects of domestic and foreign inflation on ouroperations, management does not believe inflation has had a material adverseeffect on our results of operations or financial condition.  However, there is a risk that inflation couldoccur in certain countries in which we operate which could have an adverseaffect on our financial results.  Weengage in hedging activities which may reduce this risk; however, currencyhedges do not, and will not, eliminate our exposure to foreign inflation.

 

**VARIABILITY OF OPERATING RESULTS**

 

Our business has beenseasonal only to the extent that our clients’ marketing programs and productlaunches are geared toward the winter holiday buying season.  We have experienced and expect to continue toexperience some quarterly variations in revenue and 

 

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operating results due toa variety of factors, many of which are outside our control, including: (i) timingand amount of costs incurred to expand capacity in order to provide for volumegrowth from existing and future clients; (ii) changes in the volume ofservices provided to principal clients; (iii) expiration or termination ofclient projects or contracts; (iv) timing of existing and future clientproduct launches or service offerings; (v) seasonal nature of certainclients’ businesses; and (vi) variability in demand for our services byour clients depending on demand for their products or services and/or dependingon our performance.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Our discussion andanalysis of financial condition and results of operations are based upon ourConsolidated Financial Statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of our financialstatements require us to make estimates that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosures of contingentassets and liabilities. We base our accounting estimates on historicalexperience and other factors that we believe to be reasonable under thecircumstances. However, actual results may vary from these estimates due tofactors beyond our control or due to changes in these assumptions orconditions. We have discussed the development and selection of criticalaccounting policies and estimates with our Audit Committee. The following is asummary of our critical accounting policies and estimates we make in preparingour Consolidated Financial Statements:

 

***RevenueRecognition***

 

We invoice our businessprocess outsourcing services clients monthly in arrears and recognize revenuefor such services when completed. For substantially all of our contractualarrangements for business process outsourcing services, we recognize revenuebased either on the billable hours or minutes of each customer servicerepresentative, at rates provided in the client contract, or on arate-per-transaction basis. The contractual rates can fluctuate based on ourperformance against certain pre-determined criteria related to quality andperformance. Additionally, some clients are contractually entitled to penaltieswhen we are out of compliance with certain quality and/or performance obligationsdefined in the client contract. Such penalties are recorded as a reduction torevenue as incurred, based on a measurement of the appropriate penalty underthe terms of the client contract.

 

As a general rule, ourcontracts are not multiple element contracts. We provide initial training to customer service representatives uponcommencement of new contracts and recognize revenues for such training as theservices are provided based upon the production rate (i.e., billable hours andrates related to the training services as stipulated in our contractualarrangements). Accordingly, the corresponding training costs, consistingprimarily of labor and related expenses, are recognized as incurred.

 

***FairValue of Financial Instruments***

 

Fair value is the pricethat would be received from selling an asset or paid to transfer a liability inan orderly transaction between market participants at the measurement date.When determining the fair value measurements for assets and liabilities, whichare required to be recorded at fair value, we consider the principal or mostadvantageous market in which we would transact and the market-based riskmeasurements or assumptions that market participants would use in pricing theasset or liability, such as inherent risk, transfer restrictions, and creditrisk.

 

The fair value hierarchyprioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority tounadjusted quoted prices in active markets for identical assets or liabilities(level 1 measurements) and the lowest priority to unobservable inputs (level 3measurements).  The levels of the fairvalue hierarchy 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. |

 

When determining the fairvalue measurements for assets and liabilities required or permitted to berecorded at and/or marked to fair value, we consider the principal or mostadvantageous market in which it would transact and consider assumptions thatmarket participants would use when pricing the asset or liability.  When possible, we look to active andobservable markets to price identical assets or liabilities.  When identical assets and liabilities are nottraded in active markets, we look to market observable data for similar assetsand liabilities.  Nevertheless, ifcertain assets and liabilities are not actively traded in observable markets,we must use

 

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alternative valuationtechniques to derive a fair value measurement. Refer to Note 8, “Fair Value Measurements”, to our ConsolidatedFinancial Statements, included in Item 8, “Financial Statements and SupplementaryFinancial Data.”

 

***Impairment ofLong-Lived Assets***

 

We periodically, on atleast an annual basis, evaluate potential impairments of our long-lived assets.  In our annual evaluation or when we determinethat the carrying value of a long-lived asset may not be recoverable, basedupon the existence of one or more indicators of impairment, we evaluate theprojected undiscounted cash flows related to the assets. If these cash flowsare less than the carrying values of the assets, we measure the impairmentbased on the excess of the carrying value of the long-lived asset over thelong-lived asset’s fair value.  Ourprojections contain assumptions pertaining to anticipated levels of utilizationand revenue that may or may not be under contract but are based on ourexperience and/or projections received from our customers.  We recognized impairment losses ofapproximately $1.8 million, $5.9 million and $3.6 million during the yearsended December 31, 2009, 2008 and 2007, respectively.  The fair value of the long-lived assets afterthe impairment charge in 2009 was $0.2 million. For additional information, see Note 2, “Impairment Losses andRestructuring Charges,” to our Consolidated Financial Statements, included inItem 8. “Financial Statements and Supplementary Financial Data.”

 

***Restructuring Charges***

 

A liability for acost associated with an exit or disposal activity is recognized when theliability is incurred, instead of upon commitment 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.  A significant assumption used in determiningthe amount of the estimated liability for closing a facility is the estimatedliability for future lease payments on vacant facilities, which we determine basedon a third-party broker’s assessment of our ability to successfully negotiateearly termination agreements with landlords and/or to sublease the facility. Ifthe 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 Consolidated Statementsof Operations and Comprehensive Income (Loss). In 2009, we entered intoagreements with the respective landlords at three of our facilities (BigSpring, Texas, Petersburg, Virginia and Hawkesbury, Ontario) to buy-out theremaining lease obligations.  There wasno material impact on our Consolidated Statements of Operations during the periodrelated to the buy-outs.  We recognizedrestructuring charges of approximately $4.7 million, $3.3 million and $0.7million during the years ended December 31, 2009, 2008 and 2007,respectively.   In 2009, $4.4 million ofthe restructuring charges related to the closure of our Regina, Saskatchewanfacility.  These costs were valued usinga discounted cash flow model.  The cashflows consist of the future lease payment obligations required under the leaseagreement.  We assumed that we could 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.  The future cash flows were discounted using arate of 3%.  For additional information, seeNote 2, “Impairment Losses and Restructuring Charges,” to our ConsolidatedFinancial Statements, included in Item 8. “Financial Statements andSupplementary Financial Data.”

 

***Investments***

 

Investments available forsale have historically consisted of debt securities reported at fairvalue.  Under our investment policy, wemay invest in certain U.S. Government and government-sponsored securities,repurchase agreements, investment grade corporate obligations, corporate debtsecurities, municipal securities, money market and mutual funds, subject to theterms of the policy.  When theinvestments held in our portfolio as of December 31, 2009 mature, weintend to revise our investment policy such that we may invest in moreconservative investments, including U.S. treasury securities, federal agencysecurities, repurchase agreements and money market funds.  The Chief Financial Officer is responsiblefor oversight of the investment portfolio.

 

Investments areperiodically evaluated for other-than-temporary impairment whenever the fairvalue falls below our cost basis and we either intend to sell the security orit is more likely than not we will be required to sell the security before itrecovers. We then consider additional factors such as market conditions, the industrysectors in which the issuer of the investment operates, and the viability andprospects of each entity. Other-than-temporary declines in fair value are reflected on thestatement of operations within Net Interest and Other Income.  Original cost of investments available forsale is based on the specific identification method. Other-than-temporaryimpairments and interest income from investments available for sale areincluded in Net Interest and Other Income on our Consolidated Statements of Operationsand Other Comprehensive Income (Loss). Investments available for sale are carried at fair market values.  As of December 31, 2009 and 2008, wewere not invested in any trading securities or held-to-maturity securities.

 

***Derivative Instruments and Hedging Activities***

 

We record derivativeinstruments (including certain derivative instruments embedded in othercontracts) in the Consolidated Balance Sheet as either an asset or liabilitymeasured at its fair value, with changes in the fair value of qualifying hedgesrecorded in other comprehensive income. Changes in a derivative’s fair valueare recognized currently in earnings unless specific hedge accounting criteriaare met. Special accounting for qualifying hedges allows a derivative’s gainsand losses to offset the related results of the 

 

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hedged item and requiresthat we must formally document, designate and assess the effectiveness oftransactions that receive hedge accounting treatment.

 

We are generally able toapply cash flow hedge accounting which associates the results of the hedgeswith forecasted future expenses.  Thecurrent mark-to-market gain or loss is recorded in accumulated othercomprehensive income in the accompanying Consolidated Balance Sheets and willbe re-classified to operations as the forecasted expenses are incurred,typically within one year.  During 2009,2008 and 2007, our cash flow hedges were highly effective and there were no amountscharged to the Consolidated Statements of Operations and Other Comprehensive(Loss) Income for hedge ineffectiveness. While we expect that our derivativeinstruments that have been designated as hedges will continue to meet theconditions for hedge accounting, if hedges do not qualify as highly effectiveor if we do not believe that forecasted transactions will occur, the changes inthe fair value of the derivatives used as hedges will be reflected in earnings.

 

***Income Taxes***

 

We account for incometaxes using the liability method. Deferred income taxes reflect net effects of temporary differencesbetween carrying amounts of assets and liabilities for financial reportingpurposes and amounts used for income tax purposes. We are subject to foreignincome taxes on our foreign operations. We are required to estimate our incometaxes in each jurisdiction in which we operate. This process involvesestimating our actual current tax exposure, together with assessing temporarydifferences resulting from differing treatment of items for tax and financialreporting purposes. The tax effects of these temporary differences are recordedas deferred tax assets or deferred tax liabilities. Deferred tax assetsgenerally represent items that can be used as a tax deduction or credit in ourtax return in future years for which we have already recorded the expense inour financial statements. Deferred tax liabilities generally represent taxitems that have been deducted for tax purposes, but have not yet been recordedas expenses in our financial statements.

 

We evaluate our deferredtax assets quarterly to determine if valuation allowances are required.  We assess whether valuation allowances shouldbe established based on the consideration of all available evidence using a “morelikely than not” standard.  We made thisevaluation as of December 31, 2009 and believe our deferred tax assetsother than those that carry a valuation allowance will primarily be realizedthrough the generation of future taxable income, as well as through thereversal of our existing temporary differences and the execution of availabletax planning strategies. We believe it is “more likely than not” based upon ourcurrent estimates of future taxable income that the deferred tax assets will berecognized.  Additional valuationallowances may be required if we are unable to generate future taxableincome.  Additional tax valuationallowances could have a significant negative impact on future earnings.

 

We record tax benefitswhen they are more likely than not to be realized.  Our policy is to reflect penalties andinterest as part of income tax expense as they become applicable.  We file numerous consolidated and separateincome tax returns in the U.S. federal jurisdiction and in many statejurisdictions, as well as in Canada and the Philippines.  Our U.S. federal returns and most statereturns for tax years 2006 and forward are subject to examination.  Canadian returns for tax years 2005 andforward are subject to examination.  NoU.S. federal or state returns are currently under audit, and no extensions ofstatute of limitations have been granted. As of December 31, 2009 and 2008, there were no unrecognized incometax benefits.

 

***Stock-Based Compensation***

 

We recognize expenserelated to all share-based payments to employees, including grants of employeestock options, in our Consolidated Statements of Operations and OtherComprehensive (Loss) Income based on the share-based payments’ fair valuesamortized straight-line over the period during which the employees are requiredto provide services in exchange for the equity instruments.  We estimate forfeitures when calculatingcompensation expense.  We use theBlack-Scholes method for valuing stock-based awards.  See Note 11, “Share-Based Compensation,” toour Consolidated Financial Statements, included in Item 8. “FinancialStatements and Supplementary Financial Data.”

 

**ITEM7A.  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, equity market prices, and foreigncurrency exchange rates.  We haveestablished an investment portfolio policy which provides for, among otherthings, investment objectives and portfolio allocation guidelines.  All of our investment decisions are currentlysupervised or managed by our Chief Financial Officer.

 

This discussion containsforward-looking statements subject to risks and uncertainties.  Actual results could vary materially as aresult of a number of factors, including but not limited to, changes ininterest and inflation rates or market expectations thereon, equity marketprices, foreign currency exchange rates, and those factors set forth in Item1A. “Risk Factors” of this Form 10-K.

 

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**INTERESTRATE RISK**

 

***Cash and Cash Equivalents***

 

At December 31,2009, we had $19.6 million in cash and cash equivalents.  Cash and cash equivalents are notrestricted.  We consider cash equivalentsto be short-term, highly liquid investments readily convertible to knownamounts of cash, and so near their maturity at purchase that they presentinsignificant risk of changes in value because of changes in interestrates.  We do not expect any substantialloss with respect to our cash and cash equivalents as a result of interest ratechanges, and the estimated fair value of our cash and cash equivalentsapproximates original cost.

 

***Investments***

 

At December 31,2009, we had investments available for sale which, in the aggregate, had a fairmarket value of $0.5 million.  At December 31,2009, investments available for sale consisted entirely of investment-gradecorporate bonds.  Our investmentportfolio is subject to interest and inflation rate risks and will fall invalue if market interest and/or inflation rates or market expectations relatingto these rates increase.

 

The fair market value ofestimated cash flows from our investments in corporate bonds are substantiallydependent upon the credit worthiness of certain corporations expected to repaytheir debts to us.  If such corporations’financial condition and liquidity adversely changes, our investments in thesebonds would be materially and adversely affected.

 

The weighted-averageinterest rate related to our investments available for sale as of December 31,2009 was 2.49%.  All of our investmentsavailable for sale are set to mature within one year.

 

Management believes wehave the ability to hold the foregoing investments until maturity, andtherefore, if held to maturity, we would not expect the future proceeds fromthese investments to be affected, to any significant degree, by the effect of asudden change in market interest rates. Declines in interest rates over timewill, however, reduce our interest income derived from future investments.

 

***Outstanding Debt***

 

We currently have a $15.0million unsecured revolving line of credit. The interest rate on our line of credit is variable based upon the LIBORindex, and therefore, is affected by changes in market interest rates.  As of December 31, 2009, there was noamount outstanding on the line of credit. If the LIBOR increased 100 basis points, there would not be a materialimpact to our Consolidated Financial Statements.

 

**FOREIGN CURRENCY 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 three to nine months, and are principally unsecured foreign exchangecontracts.  The market risk exposure isessentially limited to risk related to currency rate movements.  We operate in Canada and the Philippines andare initiating operations in Costa Rica.  The functional currencies in Canada and thePhilippines are the Canadian dollar and the Philippine peso, which are used topay labor and other operating costs in those countries. However, our clientcontracts generate revenues which are paid to us in U.S. dollars.  In Costa Rica, our functional currency is theU.S. dollar and the majority of our costs are denominated in U.S. dollars.

 

The following tablesummarizes the relative strengthening (weakening) of the local currency againstthe U.S. dollar, average exchange rates and the amount of local currency used inoperations (in 000’s) during the years presented:

 
| ** **                                         | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Canadian dollar vs. U.S. dollar**                | ** ** | ** **                       | ** ** | ** ** | ** ** |   | ** ** |
| Relative strengthening (weakening) during the year |       | 13.6                             | %          | (22.1 | )% | 14.4 | % |
| Average exchange rate                              |       | 1.14                             |       | 1.07 |   | 1.07 |   |
| Amount of local currency used, net of receipts     |       | 66,722                           |       | 86,232 |   | 83,939 |   |
|                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |   | ** ** |
| **Philippine peso vs. U.S. dollar**                | ** ** | ** **                       | ** ** | ** ** | ** ** |   | ** ** |
| Relative strengthening (weakening) during the year |       | 2.6                              | %          | (15.2 | )% | 15.9 | % |
| Average exchange rate                              |       | 47.4                             |       | 45.5 |   | 51.1 |   |
| Amount of local currency used, net of receipts     |       | 572,433                          |       | 122,979 |   | — |   |
|                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |   | ** ** |
| **Costa Rican colon vs. U.S. dollar**              | ** ** | ** **                       | ** ** | ** ** | ** ** |   | ** ** |
| Relative strengthening (weakening) during the year |       | (0.9                             | )%         | (11.5 | )% | 3.7 | % |
| Average exchange rate                              |       | 572                              |       | 523 |   | 516 |   |
| Amount of local currency used, net of receipts     |       | —                           |       | — |   | — |   |

 

The fluctuations in theforeign currency exchange rates for the Philippine peso and Costa Rican colonduring 2009 did not have a material impact on our Consolidated FinancialStatements.  However, we expect our expendituresin these countries to increase in 2010, and as such expect our exposure tocurrency fluctuations to grow, particularly in the Philippines.  Therefore, we may enter into hedgingarrangements in 2010 for these currencies. During 2009, we entered into Canadian dollar forward contracts withWells Fargo Bank and UMB Bank for 44.1 million Canadian dollars to hedge ourforeign currency risk with respect to labor costs in Canada.  As of December 31, 2009, we hadcontracted to purchase 30.6 million Canadian dollars to be delivered periodicallythrough June 2010 at a purchase price of approximately $28.6 million.

 

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**ITEM8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY FINANCIAL DATA**

 

The followingConsolidated Financial Statements should be read in conjunction with Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” ofthis Form 10-K.

 

**StarTek, Inc. and Subsidiaries:**

** **
| Report of Independent Registered Public Accounting  Firm                                                                                |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Statements of Operations and Other  Comprehensive Income (Loss) for the years ended December 31, 2009, 2008 and  2007 |   |
| Consolidated  Balance Sheets as of December 31, 2009 and 2008                                                                      |   |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2009, 2008 and 2007                                        |   |
| Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2009, 2008 and 2007                         |   |
| Notes to Consolidated Financial Statements                                                                                              |   |

 

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**Report of Independent Registered Public AccountingFirm**

 

The Board ofDirectors and Stockholders of StarTek, Inc.

 

We have auditedthe accompanying consolidated balance sheets of StarTek, Inc. andsubsidiaries as of December 31, 2009 and 2008, and the relatedconsolidated statements of operations and other comprehensive income (loss),cash flows and stockholders’ equity for each of the three years in the periodended December 31, 2009. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits.

 

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of StarTek, Inc. andsubsidiaries at December 31, 2009 and 2008, and the consolidated resultsof their operations and their cash flows for each of the three years in theperiod ended December 31, 2009, in conformity with U.S. generally acceptedaccounting principles.

 

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), StarTek, Inc.’s internal control overfinancial reporting as of December 31, 2009, based on criteria establishedin Internal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 25,2010 expressed an unqualified opinion thereon.

 

 
|                    | /s/ Ernst &  Young LLP |
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|                    |                            |
| Denver, Colorado        |                            |
| February 25,  2010 |                            |

 

35

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**STARTEK,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)**

(Dollarsin thousands, except per share data)

 
| ** **                                                            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue                                                               |       | $                                | 288,980    |   | $ | 272,338 |   | $ | 244,615 |   |
| Cost  of services                                                     |       | 239,879                          |       | 238,346 |   | 205,920 |   |
| Gross  profit                                                         |       | 49,101                           |       | 33,992 |   | 38,695 |   |
| Selling,  general and administrative expenses                         |       | 43,196                           |       | 40,814 |   | 38,991 |   |
| Impairment  losses and restructuring charges                          |       | 6,437                            |       | 9,225 |   | 4,325 |   |
| Operating  loss                                                       |       | (532                             | )          | (16,047 | ) | (4,621 | ) |
| Net  interest and other (expense) income                              |       | (210                             | )          | 55 |   | 745 |   |
| Loss  from continuing operations before income taxes                  |       | (742                             | )          | (15,992 | ) | (3,876 | ) |
| Income  tax benefit                                                   |       | (751                             | )          | (6,301 | ) | (719 | ) |
| Income  (loss) from continuing operations                             |       | 9                                |       | (9,691 | ) | (3,157 | ) |
| Income  (loss) from discontinued operations, net of tax               |       | 4,640                            |       | (210 | ) | 326 |   |
| Net  income (loss)                                                    |       | $                                | 4,649      |   | $ | (9,901 | ) | $ | (2,831 | ) |
|                                                                  |       |                             |       |   |   |   |   |
| Other  comprehensive income (loss), net of tax:                       |       |                             |       |   |   |   |   |
| Foreign  currency translation adjustments, net of tax                 |       | 901                              |       | (1,463 | ) | 1,331 |   |
| Unrealized  gain (loss) on investments available for sale, net of tax |       | 49                               |       | (32 | ) | (30 | ) |
| Change  in fair value of derivative instruments, net of tax           |       | 1,838                            |       | (1,464 | ) | 255 |   |
| Comprehensive  income (loss)                                          |       | $                                | 7,437      |   | $ | (12,860 | ) | $ | (1,275 | ) |
|                                                                  |       |                             |       |   |   |   |   |
| Net  income (loss) per share from continuing operations:              |       |                             |       |   |   |   |   |
| Basic                                                                 |       | $                                | 0.00       |   | $ | (0.66 | ) | $ | (0.21 | ) |
| Diluted                                                               |       | $                                | 0.00       |   | $ | (0.66 | ) | $ | (0.21 | ) |
|                                                                  |       |                             |       |   |   |   |   |
| Net  income (loss) per share including discontinued operations:       |       |                             |       |   |   |   |   |
| Basic                                                                 |       | $                                | 0.31       |   | $ | (0.67 | ) | $ | (0.19 | ) |
| Diluted                                                               |       | $                                | 0.31       |   | $ | (0.67 | ) | $ | (0.19 | ) |
|                                                                  |       |                             |       |   |   |   |   |
| Weighted  average shares outstanding                                  |       |                             |       |   |   |   |   |
| Basic                                                                 |       | 14,792                           |       | 14,713 |   | 14,696 |   |
| Diluted                                                               |       | 14,837                           |       | 14,713 |   | 14,696 |   |

 

*See Notes to ConsolidatedFinancial Statements.*

 

36

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**STARTEK,INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

(Dollarsin thousands, except share and per share data)

 
| ** **                                                                                                                                                                                | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| **ASSETS**                                                                                                                                                                                |       |                        |       |   |   |
|                                                                                                                                                                                      |       |                        |       |   |   |
| Current  assets:                                                                                                                                                                          |       |                        |       |   |   |
| Cash  and cash equivalents                                                                                                                                                                |       | $                           | 19,591     |   | $ | 9,580 |   |
| Investments                                                                                                                                                                               |       | 500                         |       | 8,437 |   |
| Trade  accounts receivable, net                                                                                                                                                           |       | 50,521                      |       | 50,829 |   |
| Income  tax receivable                                                                                                                                                                    |       | 6,292                       |       | 2,675 |   |
| Deferred  income tax assets                                                                                                                                                               |       | 511                         |       | 2,185 |   |
| Prepaid  expenses                                                                                                                                                                         |       | 5,979                       |       | 3,273 |   |
| Other  current assets                                                                                                                                                                     |       | 2,012                       |       | 681 |   |
| Total  current assets                                                                                                                                                                     |       | 85,406                      |       | 77,660 |   |
|                                                                                                                                                                                      |       |                        |       |   |   |
| Property,  plant and equipment, net                                                                                                                                                       |       | 58,045                      |       | 59,608 |   |
| Long-term  deferred income tax assets                                                                                                                                                     |       | 4,529                       |       | 8,946 |   |
| Other  assets                                                                                                                                                                             |       | 1,088                       |       | 650 |   |
| Total  assets                                                                                                                                                                             |       | $                           | 149,068    |   | $ | 146,864 |   |
|                                                                                                                                                                                      |       |                        |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                             |       |                        |       |   |   |
|                                                                                                                                                                                      |       |                        |       |   |   |
| Current  liabilities:                                                                                                                                                                     |       |                        |       |   |   |
| Accounts  payable                                                                                                                                                                         |       | $                           | 4,884      |   | $ | 6,193 |   |
| Derivative  liability                                                                                                                                                                     |       | —                      |       | 2,323 |   |
| Accrued  liabilities:                                                                                                                                                                     |       |                        |       |   |   |
| Accrued  payroll                                                                                                                                                                          |       | 9,253                       |       | 9,158 |   |
| Accrued  compensated absences                                                                                                                                                             |       | 4,016                       |       | 4,856 |   |
| Accrued  restructuring costs                                                                                                                                                              |       | 1,317                       |       | 995 |   |
| Other  accrued liabilities                                                                                                                                                                |       | 1,897                       |       | 2,317 |   |
| Current  portion of long-term debt                                                                                                                                                        |       | —                      |       | 3,295 |   |
| Deferred  revenue                                                                                                                                                                         |       | 1,019                       |       | — |   |
| Deferred  income tax liabilities                                                                                                                                                          |       | 1,470                       |       | — |   |
| Other  current liabilities                                                                                                                                                                |       | 1,117                       |       | 954 |   |
| Total  current liabilities                                                                                                                                                                |       | 24,973                      |       | 30,091 |   |
|                                                                                                                                                                                      |       |                        |       |   |   |
| Long-term  debt, less current portion                                                                                                                                                     |       | —                      |       | 3,199 |   |
| Accrued  restructuring charges                                                                                                                                                            |       | 2,663                       |       | 1,714 |   |
| Deferred  rent                                                                                                                                                                            |       | 4,144                       |       | 4,757 |   |
| Other  liabilities                                                                                                                                                                        |       | 572                         |       | 84 |   |
| Total  liabilities                                                                                                                                                                        |       | 32,352                      |       | 39,845 |   |
|                                                                                                                                                                                      |       |                        |       |   |   |
| Commitments  and contingencies                                                                                                                                                            |       |                        |       |   |   |
|                                                                                                                                                                                      |       |                        |       |   |   |
| Stockholders’  equity:                                                                                                                                                               |       |                        |       |   |   |
| Common  stock, 32,000,000 non-convertible shares, $0.01 par value, authorized;  14,882,990 and 14,813,912 shares issued and outstanding at December 31,  2009 and 2008, respectively |       | 149                         |       | 148 |   |
| Additional  paid-in capital                                                                                                                                                               |       | 66,699                      |       | 64,440 |   |
| Accumulated  other comprehensive income (loss)                                                                                                                                            |       | 2,373                       |       | (415 | ) |
| Retained  earnings                                                                                                                                                                        |       | 47,495                      |       | 42,846 |   |
| Total  stockholders’ equity                                                                                                                                                          |       | 116,716                     |       | 107,019 |   |
| Total  liabilities and stockholders’ equity                                                                                                                                          |       | $                           | 149,068    |   | $ | 146,864 |   |

 

*See Notes to ConsolidatedFinancial Statements.*

 

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** **

**STARTEK,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(Dollarsin thousands)

 
| ** **                                                                                | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Operating Activities**                                                                  |       |                             |       |   |   |   |   |
| Net  income (loss)                                                                        |       | $                                | 4,649      |   | $ | (9,901 | ) | $ | (2,831 | ) |
| Income  (loss) from discontinued operations                                               |       | 4,640                            |       | (210 | ) | 326 |   |
| Income  (loss) from continuing operations                                                 |       | 9                                |       | (9,691 | ) | (3,157 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |                             |       |   |   |   |   |
| Depreciation                                                                              |       | 15,977                           |       | 17,803 |   | 17,092 |   |
| Impairment  of property, plant and equipment                                              |       | 1,756                            |       | 5,936 |   | 3,583 |   |
| Non-cash  compensation cost                                                               |       | 1,987                            |       | 1,493 |   | 1,107 |   |
| Deferred  income taxes                                                                    |       | 7,050                            |       | (7,492 | ) | 454 |   |
| Other,  net                                                                               |       | 22                               |       | 538 |   | 60 |   |
| Changes  in operating assets and liabilities:                                             |       |                             |       |   |   |   |   |
| Trade  accounts receivable, net                                                           |       | 108                              |       | (2,683 | ) | (2,367 | ) |
| Prepaid  expenses and other assets                                                        |       | (3,401                           | )          | (767 | ) | 1,004 |   |
| Accounts  payable                                                                         |       | (1,374                           | )          | 292 |   | 230 |   |
| Income  taxes, net                                                                        |       | (3,528                           | )          | (309 | ) | (1,214 | ) |
| Accrued  and other liabilities                                                            |       | (617                             | )          | 6,706 |   | 3,529 |   |
| Net  cash provided by continuing operating activities                                     |       | 17,989                           |       | 11,826 |   | 20,321 |   |
| Cash  (used in) provided by discontinued operating activities                             |       | (2,335                           | )          | (210 | ) | 326 |   |
| Net  cash provided by operating activities                                                |       | 15,654                           |       | 11,616 |   | 20,647 |   |
|                                                                                      |       |                             |       |   |   |   |   |
| **Investing Activities**                                                                  |       |                             |       |   |   |   |   |
| Purchases  of investments available for sale                                              |       | —                           |       | (11,384 | ) | (36,813 | ) |
| Proceeds  from disposition of investments available for sale                              |       | 8,019                            |       | 18,742 |   | 26,348 |   |
| Purchases  of property, plant and equipment                                               |       | (14,683                          | )          | (27,979 | ) | (15,207 | ) |
| Net  cash used in continuing investing activities                                         |       | (6,664                           | )          | (20,621 | ) | (25,672 | ) |
| Cash  provided by discontinued investing activities                                       |       | 7,075                            |       | — |   | — |   |
| Net  cash provided by (used in) investing activities                                      |       | 411                              |       | (20,621 | ) | (25,672 | ) |
|                                                                                      |       |                             |       |   |   |   |   |
| **Financing Activities**                                                                  |       |                             |       |   |   |   |   |
| Proceeds  from stock option exercises                                                     |       | 20                               |       | — |   | — |   |
| Principal  payments on borrowings                                                         |       | (6,855                           | )          | (3,835 | ) | (5,828 | ) |
| Proceeds  from line of credit                                                             |       | 22,236                           |       | 116,886 |   | 56,782 |   |
| Principal  payments on line of credit                                                     |       | (22,236                          | )          | (116,886 | ) | (56,782 | ) |
| Proceeds  from the issuance of common stock                                               |       | 251                              |       | 172 |   | — |   |
| Principal  payments on capital lease obligations                                          |       | (265                             | )          | (59 | ) | — |   |
| Net  cash used in continuing financing activities                                         |       | (6,849                           | )          | (3,722 | ) | (5,828 | ) |
| Cash  provided by discontinued financing activities                                       |       | —                           |       | — |   | — |   |
| Net  cash used in financing activities                                                    |       | (6,849                           | )          | (3,722 | ) | (5,828 | ) |
| Effect  of exchange rate changes on cash                                                  |       | 795                              |       | (719 | ) | 442 |   |
| Net  increase (decrease) in cash and cash equivalents                                     |       | 10,011                           |       | (13,446 | ) | (10,411 | ) |
| Cash  and cash equivalents at beginning of period                                         |       | 9,580                            |       | 23,026 |   | 33,437 |   |
| Cash  and cash equivalents at end of period                                               |       | $                                | 19,591     |   | $ | 9,580 |   | $ | 23,026 |   |
|                                                                                      |       |                             |       |   |   |   |   |
| **Supplemental Disclosure of Cash Flow Information**                                      |       |                             |       |   |   |   |   |
| Cash  paid for interest                                                                   |       | $                                | 166        |   | $ | 660 |   | $ | 772 |   |
| Cash  paid for income taxes                                                               |       | $                                | 750        |   | $ | 2,312 |   | $ | 1,990 |   |
| Property,  plant and equipment acquired or refinanced under long-term debt                |       | $                                | 290        |   | $ | 385 |   | $ | — |   |

 

*See Notes to ConsolidatedFinancial Statements.*

 

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** **

**STARTEK,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

(Dollarsin thousands)

** **
| ** **                                                         | ** ** | ** **       | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** **             | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|------------------|------------|-------------|------------|-------------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                                         | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**    | ** ** | **Other**         | ** ** | ** **             | ** ** | **Total**  | ** ** |
| ** **                                                         | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Comprehensive** | ** ** | **Retained**      | ** ** | **Stockholders’** | ** ** |
| ** **                                                         | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Income (Loss)** | ** ** | **Earnings**           | ** ** | **Equity** | ** ** |
| Balance,  January 1, 2007                                     |       | 14,695,791       |       | $           | 147        |              | $          | 61,669            |       | $                      | 988        |       | $          | 55,578 |   | $ | 118,382 |   |
| Restricted  shares granted                                         |       | 40,000           |       | —      |       | —            |       | —            |       | —                 |       | —     |       |
| Stock-based  compensation expense                                  |       | —           |       | —      |       | 1,107             |       | —            |       | —                 |       | 1,107      |       |
| Net  loss                                                          |       |             |       |        |       |              |       |              |       | (2,831                 | )          | (2,831     | )          |
| Foreign  currency translation adjustments, net of tax              |       | —           |       | —      |       | —            |       | 1,331             |       | —                 |       | 1,331      |       |
| Unrealized  loss on investments available for sale, net of tax     |       | —           |       | —      |       | —            |       | (30               | )          | —                 |       | (30        | )          |
| Change  in fair value of derivative instruments, net of tax        |       | —           |       | —      |       | —            |       | 255               |       | —                 |       | 255        |       |
| Balance,  December 31, 2007                                   |       | 14,735,791       |       | $           | 147        |              | $          | 62,776            |       | $                      | 2,544      |       | $          | 52,747 |   | $ | 118,214 |   |
| Restricted  shares granted                                         |       | 47,800           |       | 1           |       | (1                | )          |              |       | —                 |       | —     |       |
| Restricted  shares forfeited                                       |       | (7,000           | )          | —      |       | —            |       | —            |       | —                 |       | —     |       |
| Issuance  of common stock pursuant to Employee Stock Purchase Plan |       | 37,321           |       | —      |       | 172               |       | —            |       | —                 |       | 172        |       |
| Stock-based  compensation expense                                  |       | —           |       | —      |       | 1,493             |       | —            |       | —                 |       | 1,493      |       |
| Net  loss                                                          |       |             |       |        |       |              |       | —            |       | (9,901                 | )          | (9,901     | )          |
| Foreign  currency translation adjustments, net of tax              |       | —           |       | —      |       | —            |       | (1,463            | )          | —                 |       | (1,463     | )          |
| Unrealized  loss on investments available for sale, net of tax     |       | —           |       | —      |       | —            |       | (32               | )          | —                 |       | (32        | )          |
| Change  in fair value of derivative instruments, net of tax        |       | —           |       | —      |       | —            |       | (1,464            | )          | —                 |       | (1,464     | )          |
| Balance,  December 31, 2008                                   |       | 14,813,912       |       | $           | 148        |              | $          | 64,440            |       | $                      | (415       | )          | $          | 42,846 |   | $ | 107,019 |   |
| Stock  options exercised                                           |       | 5,082            |       | —      |       | 20                |       | —            |       | —                 |       | 20         |       |
| Restricted  shares granted                                         |       | 7,200            |       | —      |       | —            |       | —            |       | —                 |       | —     |       |
| Restricted  shares forfeited                                       |       | (3,249           | )          | —      |       | —            |       | —            |       | —                 |       | —     |       |
| Issuance  of common stock pursuant to Employee Stock Purchase Plan |       | 60,045           |       | 1           |       | 252               |       | —            |       | —                 |       | 253        |       |
| Stock-based  compensation expense                                  |       | —           |       | —      |       | 1,987             |       | —            |       | —                 |       | 1,987      |       |
| Net  income                                                        |       | —           |       | —      |       | —            |       | —            |       | 4,649                  |       | 4,649      |       |
| Foreign  currency translation adjustments, net of tax              |       | —           |       | —      |       | —            |       | 901               |       | —                 |       | 901        |       |
| Unrealized  gain on investments available for sale, net of tax     |       | —           |       | —      |       | —            |       | 49                |       | —                 |       | 49         |       |
| Change  in fair value of derivative instruments, net of tax        |       | —           |       | —      |       | —            |       | 1,838             |       | —                 |       | 1,838      |       |
| Balance,  December 31, 2009                                   |       | 14,882,990       |       | $           | 149        |              | $          | 66,699            |       | $                      | 2,373      |       | $          | 47,495 |   | $ | 116,716 |   |

 

*See Notes to ConsolidatedFinancial Statements.*

 

39

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** **

**STARTEK,INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER31, 2009**

(Inthousands, except share and per share data)

 

**1. BASISOF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

StarTek, Inc.is a provider of business process optimization services for outsourced customerinteractions.  Since 1987, we haveprovided customer experience management solutions that solve strategic businesschallenges so that fast-moving businesses can effectively manage customerrelationships across all contact points including web, voice, email, fax, andvideo. This blended solution helps companies create and maintain customersatisfaction and frees them to focus on preserving capital, while we deliverthe customer experience. Headquartered in Denver, Colorado, we operated 19facilities in the U.S., Canada and the Philippines as of December 31,2009.  We operate within three businesssegments:  the U.S., Canada andOffshore.  We have evaluated allsubsequent events through February 25, 2010, the date the financialstatements were issued.

 

***Consolidation***

 

Our ConsolidatedFinancial Statements include the accounts of all wholly-owned subsidiariesafter elimination of intercompany accounts and transactions.

 

***Reclassifications***

 

Certain reclassificationshave been made to the 2008 and 2007 financial statements to conform to 2009presentation, primarily for the presentation of discontinued operations (SeeNote 3).

 

***Use of Estimates***

 

The preparation ofConsolidated Financial Statements in conformity with U.S. generally acceptedaccounting principles requires our management to make estimates and assumptionsthat affect amounts reported in our Consolidated Financial Statements andaccompanying Notes. Actual results could differ from those estimates.  Estimates and assumptions are reviewedperiodically, and the effects of revisions are reflected in the ConsolidatedFinancial Statements in the period they are determined to be necessary.

 

***Concentration of Credit Risk***

 

We are exposed to credit risk in the normal courseof business, primarily related to accounts receivable and derivativeinstruments.  Historically, the lossesrelated to credit risk have been immaterial. We regularly monitor credit risk to mitigate the possibility of currentand future exposures resulting in a loss. We evaluate the creditworthiness of clients prior to entering into anagreement to provide services and on an on-going basis as part of the processesof revenue recognition and accounts receivable. We do not believe we are exposed to more than a nominal amount of creditrisk in our derivative hedging activities, as the counter parties areestablished, well-capitalized financial institutions.

 

***Foreign Currency Translation***

 

The assets andliabilities of our foreign operations that are recorded in foreign currenciesare translated into U.S. dollars at exchange rates prevailing at the balancesheet date. Revenues and expenses are translated at the weighted-averageexchange rate during the reporting period. Resulting translation adjustments,net of applicable deferred income taxes, are recorded in accumulated othercomprehensive income in the accompanying Consolidated Balance Sheets, which isa separate component of stockholders’ equity. Foreign currency transaction gains and losses are included in theaccompanying Consolidated Statements of Operations and Other ComprehensiveIncome (Loss). Such gains and losses were not material for any periodpresented.

 

***Revenue Recognition***

 

**BusinessProcess Outsourcing Services —**We invoice our clients monthly in arrears andrecognize revenues for such services when completed. Substantially all of ourcontractual arrangements are based either on a production rate, meaning that werecognize revenue based on the billable hours or minutes of each call centeragent, or on a rate per transaction basis. These rates could be based on the number of paid hours the agent works,the number of minutes the agent is available to answer calls, or the number ofminutes the agent is actually handling calls for the client, depending on theclient contract.  Production rates varyby client contract and can fluctuate based on our performance against certainpre-determined criteria related to quality and performance. Additionally, someclients are contractually entitled to penalties when we are out of compliancewith certain quality and/or performance obligations defined in the clientcontract. Such penalties are recorded as a reduction to revenue as incurredbased on a measurement of the

 

40

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appropriate penalty underthe terms of the client contract. Likewise, some client contracts stipulate that we are entitled tobonuses should we meet or exceed these predetermined quality and/or performanceobligations.  These bonuses arerecognized as incremental revenue in the period in which they are earned.

 

As a general rule, ourcontracts do not include multiple elements. We provide initial training to customer service representatives uponcommencement of new contracts and recognize revenues for such training as theservices are provided based upon the production rate (i.e., billable hours andrates related to the training services as stipulated in our contractualarrangements). Accordingly, the corresponding training costs, consistingprimarily of labor and related expenses, are recognized as incurred.

 

***Allowance for Doubtful Accounts***

 

An allowance for doubtfulaccounts is provided for known and estimated potential losses arising fromsales to customers based on a periodic review of these accounts.  The allowance for doubtful accounts was notmaterial as of December 31, 2009 or 2008.

 

***Fair Value of Financial Instruments***

 

Fair value is the pricethat would be received from selling an asset or paid to transfer a liability inan orderly transaction between market participants at the measurement date.When determining the fair value measurements for assets and liabilities, whichare required to be recorded at fair value, we consider the principal or mostadvantageous market in which we would transact and the market-based riskmeasurements or assumptions that market participants would use in pricing theasset or liability, such as inherent risk, transfer restrictions, and creditrisk.

 

Accounting guidance forthe measurement of fair value establishes a hierarchy that prioritizes theinputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority tounadjusted quoted prices in active markets for identical assets or liabilities(level 1 measurements) and the lowest priority to unobservable inputs (level 3measurements).  The levels of the fairvalue hierarchy 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. |

 

When determining the fairvalue measurements for assets and liabilities required or permitted to berecorded at and/or marked to fair value, we consider the principal or mostadvantageous market in which it would transact and consider assumptions thatmarket participants would use when pricing the asset or liability.  When possible, we look to active andobservable markets to price identical assets or liabilities.  When identical assets and liabilities are nottraded in active markets, we look to market observable data for similar assetsand liabilities.  Nevertheless, if certainassets and liabilities are not actively traded in observable markets, we mustuse alternative valuation techniques to derive a fair value measurement.  Refer to Note 8, “Fair Value Measurements,”for additional information on how we determine fair value for our assets andliabilities.

 

***Cash and Cash Equivalents***

 

We consider cash equivalentsto be short-term, highly liquid investments readily convertible to knownamounts of cash and so near their maturity at purchase that they presentinsignificant risk of changes in value because of changes in interest rates.

 

***Investments***

 

Investments available forsale have historically consisted of debt securities reported at fairvalue.  Under our investment policy, wemay invest in certain U.S. Government and government-sponsored securities,repurchase agreements, investment grade corporate obligations, corporate debtsecurities, municipal securities, money market and mutual funds, subject to theterms of the policy.  When theinvestments held in our portfolio as of December 31, 2009 mature, weintend to revise our investment policy such that we may invest in moreconservative investments, including U.S. treasury securities, federal agencysecurities, repurchase agreements and money market funds.  The Chief Financial Officer is responsiblefor oversight of the investment portfolio.

 

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Investments areperiodically evaluated for other-than-temporary impairment whenever the fairvalue falls below our cost basis and we either intend to sell the security orits more likely than not we will be required to sell the security before itrecovers. We then consider additional factors such as market conditions, theindustry sectors in which the issuer of the investment operates, and theviability and prospects of each entity. Other-than-temporary declines in fair value are reflected on theConsolidated Statements of Operations and Other Comprehensive Income (Loss)within Net Interest and Other Income. Original cost of investments available for sale is based on the specificidentification method. Other-than-temporary impairments and interest incomefrom investments available for sale are included in Net Interest and OtherIncome on the accompanying Consolidated Statements of Operations and OtherComprehensive Income (Loss).  Investmentsavailable for sale are carried at fair market values.  As of December 31, 2009 and 2008, wewere not invested in any trading securities or held-to-maturity securities.

 

***Derivative Instruments and Hedging Activities***

 

Our derivativeinstruments (including certain derivative instruments embedded in othercontracts) recorded in the Consolidated Balance Sheets as either an asset orliability measured at its fair value, with changes in the fair value ofqualifying hedges recorded in other comprehensive income.  Changes in a derivative’s fair value arerecognized currently in earnings unless specific hedge accounting criteria aremet. Special accounting for qualifying hedges allows a derivative’s gains andlosses to offset the related results of the hedged item and requires that wemust formally document, designate and assess the effectiveness of transactionsthat receive hedge accounting treatment.

 

We generally are able toapply cash flow hedge accounting which associates the results of the hedgeswith forecasted future expenses.  The currentmark-to-market gain or loss is recorded in accumulated other comprehensiveincome in the accompanying Consolidated Balance Sheets and will bere-classified to operations as the forecasted expenses are incurred, typicallywithin one year.  During 2009, 2008 and2007, our cash flow hedges were highly effective and there were no amountscharged to the Consolidated Statements of Operations and Other ComprehensiveIncome (Loss) for hedge ineffectiveness. While we expect that our derivativeinstruments that have been designated as hedges will continue to meet theconditions for hedge accounting, if hedges do not qualify as highly effectiveor if we do not believe that forecasted transactions will occur, the changes inthe fair value of the derivatives used as hedges will be reflected in earnings.

 

***Legal Proceedings***

 

We reserve for legalcontingencies when a liability for those contingencies has become probable andthe cost is reasonably estimable.  Anysignificant litigation or significant change in our estimates on ouroutstanding litigation could cause us to increase our provision for relatedcosts, which, in turn, could materially affect our financial results.  Any provision made for these anticipatedcosts are expensed to operating expenses in our Consolidated Statements ofOperations and Other Comprehensive Income (Loss).

 

***Property, Plant and Equipment***

 

Property, plant, andequipment are stated at depreciated cost. Additions, improvements, and majorrenewals are capitalized. Maintenance, repairs, and minor renewals are expensedas incurred. Depreciation and amortization is computed using the straight-linemethod based on their estimated useful lives, as follows:

 
| ** **                                        | ** ** | **Estimated Useful Life** | ** ** |
|---------------------------------------------------|------------|---------------------------|------------|
| Buildings  and building improvements              |       | 15-30 years               |       |
| Telephone  and computer equipment                 |       | 3-5 years                 |       |
| Software                                          |       | 3 years                   |       |
| Furniture,  fixtures, and miscellaneous equipment |       | 5-7 years                 |       |

 

We depreciateleasehold improvements associated with operating leases over the shorter of theexpected useful life or remaining life of the lease.  Depreciation for assets obtained under acapital lease is included in depreciation expense.

 

***Impairment of Long-Lived Assets***

 

We periodically, on atleast an annual basis, evaluate potential impairments of our long-livedassets.  In our annual evaluation or whenwe determine that the carrying value of a long-lived asset may not berecoverable, based upon the existence of one or more indicators of impairment,we evaluate the projected undiscounted cash flows related to the assets. Ifthese cash flows are less than the carrying values of the assets, we measurethe impairment based on the excess of the carrying value of the long-livedasset over the long-lived asset’s fair value. Our projections contain assumptions pertaining to anticipated levels ofutilization and revenue that may or may not be under contract but are based onour experience and/or projections received from our customers.

 

42

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***Restructuring Charges***

 

A liability for a cost associated with an exit or disposal activity isrecognized when the liability is incurred, instead of upon commitment to anexit plan. On an ongoing basis, management assesses the profitability andutilization of our facilities and in some cases management has chosen to closefacilities.  A significant assumptionused in determining the amount of the estimated liability for closing afacility is the estimated liability for future lease payments on vacantfacilities, which we determine based on a third-party broker’s assessment ofour ability to successfully negotiate early termination agreements withlandlords and/or to sublease the facility. 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 the Consolidated Statements of Operations and ComprehensiveIncome (Loss).

 

***OperatingLeases***

 

We have negotiatedcertain rent holidays, landlord/tenant incentives and escalations in the base priceof the rent payments over the term of our operating leases. We recognize rentholidays and rent escalations on a straight-line basis over the lease term. Thelandlord/tenant incentives are recorded as deferred rent and amortized on astraight line over the lease term.

 

***Income Taxes***

 

We account for incometaxes using the liability method of accounting. Deferred income taxes reflect net effects of temporary differencesbetween carrying amounts of assets and liabilities for financial reporting purposesand amounts used for income tax purposes. We are subject to foreign incometaxes on our foreign operations.  Weevaluate our deferred tax assets quarterly to determine if valuation allowancesare required.  We assess whethervaluation allowances should be established based on the consideration of allavailable evidence using a “more likely than not” standard.  We made this evaluation as of December 31,2009 and believe our deferred tax assets other than those that carry avaluation allowance will primarily be realized through the generation of futuretaxable income, as well as through the reversal of our existing temporarydifferences. We believe it is “more likely than not” based upon our currentestimates of future taxable income that the deferred tax assets will berecognized.  Additional valuationallowances may be required if we are unable to generate future taxableincome.  Additional tax valuationallowances could have a significant negative impact on future earnings.

 

We record tax benefitswhen they are more likely than not to be realized.  Our policy is to reflect penalties andinterest as part of income tax expense as they become applicable.  We file numerous consolidated and separateincome tax returns in the U.S. federal jurisdiction and in many statejurisdictions, as well as in Canada and the Philippines.  Our U.S. federal returns and most statereturns for tax years 2006 and forward are subject to examination.  Canadian returns for tax years 2005 andforward are subject to examination.  OurPhilippine returns since our commencement of operations in the Philippines in2008 are subject to examination.  No U.S.federal or state returns, Canadian returns or Philippine returns are currentlyunder audit, and no extensions of statute of limitations have beengranted.  As of December 31, 2009and 2008, there were no unrecognized income tax benefits.

 

***Stock-Based Compensation***

 

We recognize expenserelated to all share-based payments to employees, including grants of employeestock options, in our Consolidated Statements of Operations and OtherComprehensive Income (Loss) based on the share-based payments’ fair valuesamortized straight-line over the period during which the employees are requiredto provide services in exchange for the equity instruments.  We include an estimate of forfeitures whencalculating compensation expense.  We usethe Black-Scholes method for valuing stock-based awards.  See Note 11, “Share-Based Compensation,” forfurther information regarding the assumptions used to calculate share-basedpayment expense.

 

***Employee Benefit Plan***

 

We have a safe harbor 401(k) plan that allows participation byemployees who have completed six months of service and are 21 years orolder.  Participants may defer up to 60% of their gross pay, up to amaximum limit determined by U.S. federal law.  Participants receive amatching contribution after one year of service of 100% of the participant’scontribution for the first 3% and 50% of the participant’s contribution for thenext 2%.  Company matching contributions to the 401(k) plan totaled$650, $624 and $459 for the years ended December 31, 2009, 2008 and 2007,respectively.

 

43

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**2.  IMPAIRMENT LOSSES AND RESTRUCTURING CHARGES**

 

***ImpairmentLosses***

 

During the yearended December 31, 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 8, “Fair Value Measurements,”for additional information on the fair value measurements for all assets andliabilities that are measured at fair value in the Consolidated FinancialStatements.

 

During the year ended December 31,2008, we recognized impairment losses of approximately $5,936.  Approximately $1,794 related to the Canadasegment, which was comprised of 1) $1,486 related to impairment of long-livedassets at certain Canadian locations in which the future cash flows were lessthan the carrying value of the assets and 2) $308 of leasehold improvements,furniture and fixtures and equipment in connection with the closure of ourHawkesbury, Ontario, Canada facility. Approximately $4,142 of impairment losses related to the U.S. segment,which comprised of 1) $1,189 related to the write-off of capitalized softwarecosts for information technology infrastructure initiatives which managementdecided to discontinue, 2) $1,087 of leasehold improvements, furniture andfixtures and equipment in connection with the closure of our Big Spring, Texasfacility, and 3) $1,866 of leasehold improvements, furniture and fixtures andequipment in connection with the closure of our Petersburg, Virginia facility.

 

***Restructuring Charges***

 

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 facility closures.  We record expense in addition to theinitially recorded expense when a change in estimate occurs or to accrete adiscounted liability to the amount expected to be paid.  We recognized the liability when it wasincurred, instead of upon commitment to a plan.

 

During the year ended December 31, 2009,we entered into an agreement with the respective landlords at the facilities inBig Spring, Texas, Petersburg, Virginia and Hawkesbury, Ontario to buy-out ourremaining lease obligations for $184 U.S. dollars, $813 U.S. dollars and $1,125Canadian dollars, respectively.  As of December 31,2009, these payments have been made and we do not expect to incur anyadditional charges.  The cumulativeamount paid as of December 31, 2009 related to the closure of the facilityin Regina, Saskatchewan was $1,294, and we expect to incur total restructuringcharges of $5,667 (adjusted for the December 31, 2009 Canadian dollar toU.S. dollar exchange rate).  We expectcompletion of the Regina restructuring plan no later than 2013; however, it maybe earlier depending on our ability to sublease the facility or buy-out thelease.  Refer to Note 8, “Fair ValueMeasurements,” for additional information on the fair value measurements forall assets and liabilities, including restructuring charges, that are measuredat fair value in the Consolidated Financial Statements.

 

A summary of the activity under the restructuring plans as of December 31,2009, and changes during the years ended December 31, 2009, 2008 and 2007are presented below:

 

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| ** **                               | ** ** | **Facility-Related Costs** | ** **   |
|------------------------------------------|------------|----------------------------|--------------|
| ** **                               | ** ** | **Hawkesbury**             | ** **   | **Regina** | ** ** | **Canada  Total** | ** ** | **Big Spring** | ** ** | **Petersburg** | ** ** | **U.S. Total** | ** ** | **Company  Total** | ** ** |
| Balance  as of January 1, 2007      |       | $                          |  — |   | $ |   — |   | $ |   — |   | $ |   — |   | $ |  — |   | $ |  — |   | $ |   — |   |
| Expense                                  |       | 742                        |         | — |   | 742 |   | — |   | — |   | — |   | 742 |   |
| Payments                                 |       | (288                       | )            | — |   | (288 | ) | — |   | — |   | — |   | (288 | ) |
| Reclassification  from other liabilities |       | 48                         |         | — |   | 48 |   | — |   | — |   | — |   | 48 |   |
| Foreign  currency translation adjustment |       | —                     |         | — |   | — |   | — |   | — |   | — |   | — |   |
| Balance  as of December 31, 2007    |       | $                          |  502    |   | $ | — |   | $ | 502 |   | $ |  — |   | $ | — |   | $ | — |   | $ |  502 |   |
| Expense                                  |       | 1,554                      |         | — |   | 1,554 |   | 271 |   | 1,464 |   | 1,735 |   | 3,289 |   |
| Payments                                 |       | (617                       | )            | — |   | (617 | ) | (195 | ) | (158 | ) | (353 | ) | (970 | ) |
| Reclassification  from other liabilities |       | —                     |         | — |   | — |   | 132 |   | 96 |   | 228 |   | 228 |   |
| Foreign  currency translation adjustment |       | (340                       | )            | — |   | (340 | ) | — |   | — |   | — |   | (340 | ) |
| Balance  as of December 31, 2008    |       | $                          | 1,099        |   | $ |   — |   | $ |  1,099 |   | $ | 208 |   | $ | 1,402 |   | $ |  1,610 |   | $ |  2,709 |   |
| Expense                                  |       | 16                         |         | 4,436 |   | 4,452 |   | 31 |   | 198 |   | 229 |   | 4,681 |   |
| Payments                                 |       | (1,582                     | )            | (1,294 | ) | (2,876 | ) | (239 | ) | (1,334 | ) | (1,573 | ) | (4,449 | ) |
| Reclassification  from other liabilities |       | 321                        |         | 118 |   | 439 |   | — |   | (266 | ) | (266 | ) | 173 |   |
| Foreign  currency translation adjustment |       | 146                        |         | 720 |   | 866 |   | — |   | — |   | — |   | 866 |   |
| Balance  as of December 31, 2009    |       | $                          | —       |   | $ |  3,980 |   | $ |  3,980 |   | $ |   — |   | $ |  — |   | $ |   — |   | $ |  3,980 |   |

 

**3.  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 involved a relatedparty, the Audit Committee of our Board of Directors considered and approvedthe transaction.  The results ofoperations and cash flows of Domain.com have been reported in the ConsolidatedStatements of Operations and Other Comprehensive Income (Loss) as discontinuedoperations.

 

During the year ended December 31,2008, we recorded a loss from discontinued operations of $740 due to thewrite-off of an asset related to the sale of our supply chain managementservices platform in December 2005, less a tax benefit of $279.

 

Thefollowing table summarizes the results of discontinued operations:

** **
| ** **                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Operating  income from discontinued operations before income taxes |       | $                                |  27   |   | $ |  402 |   | $ |  522 |   |
| Gain  (loss) on the sale of discontinued operations                |       | 6,937                            |       | (740 | ) | — |   |
| Income  tax (expense) benefit                                      |       | (2,324                           | )          | 128 |   | (196 | ) |
| Income  (loss) from discontinued operations, net of tax            |       | $                                | 4,640      |   | $ |   (210 | ) | $ | 326 |   |

 

**4. NETINCOME (LOSS) PER SHARE**

 

Basic net income (loss)per common share is computed on the basis of our weighted-average number ofcommon shares outstanding.  Dilutedearnings per share is computed on the basis of our weighted average number ofcommon shares outstanding plus the effect of dilutive outstanding stock optionsand non-vested restricted stock using the treasury stock method.  Anti-dilutive securities totaling 1,808 forthe year ended December 31, 2009 were not included in our calculationbecause the stock options’ exercise prices were greater than the average marketprice of the common shares during such period. Anti-dilutive securities totaling 1,690 and 1,660 for the years ended December 31,2008 and 2007, respectively, were not included in our calculation due to ournet loss position.  Our basic and dilutednet income (loss) per common share were as follows:

 

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| ** **                                              | ** ** | **Year Ended December 31,** | ** **                                                                                   |
|---------------------------------------------------------|------------|----------------------------------|----------------------------------------------------------------------------------------------|
| ** **                                              | ** ** | **2009**                         | ** **                                                                                   | **2008** | ** ** | **2007** | ** ** |
|                                                    |       |                             |                                                                                         |   |   |   |   |
| Income  (loss) from continuing operations               |       | $                                |                 9 |   | $ |        (9,691 | ) | $ |       (3,157 | ) |
| Income  (loss) from discontinued operations, net of tax |       | 4,640                            |                                                                                         | (210 | ) | 326 |   |
| Net  income (loss)                                 |       | $                                |          4,649                                       |   | $ |        (9,901 | ) | $ |       (2,831 | ) |
|                                                    |       |                             |                                                                                         |   |   |   |   |
| Weighted  average shares of common stock                |       | 14,792                           |                                                                                         | 14,713 |   | 14,696 |   |
| Dilutive  effect of stock options                       |       | 45                               |                                                                                         | — |   | — |   |
| Common  stock and common stock equivalents              |       | 14,837                           |                                                                                         | 14,713 |   | 14,696 |   |
|                                                    |       |                             |                                                                                         |   |   |   |   |
| Basic  net income (loss) per share from:                |       |                             |                                                                                         |   |   |   |   |
| Continuing  operations                                  |       | $                                |            0.00                            |   | $ |          (0.66 | ) | $ |         (0.21 | ) |
| Discontinued  operations                                |       | 0.31                             |                                                                                         | (0.01 | ) | 0.02 |   |
| Net  income (loss)                                      |       | $                                |            0.31                            |   | $ |          (0.67 | ) | $ |         (0.19 | ) |
|                                                    |       |                             |                                                                                         |   |   |   |   |
| Diluted  net income (loss) per share from:              |       |                             |                                                                                         |   |   |   |   |
| Continuing  operations                                  |       | $                                |            0.00                            |   | $ |          (0.66 | ) | $ |         (0.21 | ) |
| Discontinued  operations                                |       | 0.31                             |                                                                                         | (0.01 | ) | 0.02 |   |
| Net  income (loss)                                      |       | $                                |            0.31                            |   | $ |          (0.67 | ) | $ |         (0.19 | ) |

 

**5.PRINCIPAL CLIENTS**

 

The following tablerepresents revenue concentration of our principal clients.

 
| ** **                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                               | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| AT&T  Services, Inc. and AT&T Mobility, LLC, subsidiaries of AT&T, Inc. |       | 63.6                             | %          | 55.0 | % | 50.5 | % |
| T-Mobile  USA, Inc., a subsidiary of Deutsche Telekom                               |       | 21.5                             | %          | 26.8 | % | 21.9 | % |

 

The revenues fromAT&T and T-Mobile were generated in our U.S. and Canada segments during2009, 2008 and 2007.  During 2008 and2009, a portion of the revenue in our Offshore segment related toAT&T.  The loss of a principal clientand/or changes in timing or termination of a principal client’s product launch,volume delivery or service offering would have a material adverse effect on ourbusiness, revenue, operating results, and financial condition.   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 December 31,2009.

 

Our work for AT&T iscovered by several contracts for a variety of different lines of AT&Tbusiness.  Some of these contracts expirein 2010 and others in 2011.  The initialterm of our master services agreement covering all AT&T work expired in January 2010.  After the initial term, the agreementautomatically renews month-to-month.  Weare currently renegotiating the new master services agreement.  Until the new agreement is signed, ourservices provided to AT&T are covered under the existing master servicesagreement.

 

Our call center servicesagreement with T-Mobile is effective as of October 1, 2007 which had aninitial term of two years.  After theinitial term, the contract automatically renews for one-year periodsthereafter, unless either party provides written notice of termination at least60 days prior to the expiration of the then-current term.  Although the initial term of the contractended on September 30, 2009, the contract automatically renewed for aone-year term which would expire on September 30, 2010.  We are currently negotiating a new contractwith T-Mobile.  Until the new agreementis signed, our services provided to T-Mobile are covered under the existingagreement effective October 1, 2007.

 

We are workingdiligently to complete negotiation of the new agreements.  However, if we fail to do so, it would have amaterial adverse effect on our business, results of operations, and financialcondition.

 

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**6.  INVESTMENTS**

 

As of December 31,2009 and 2008, investments available for sale consisted of:

 
| ** **                     | ** ** | **Basis** | ** **                                                 | **Gross  Unrealized   Gains** | ** ** | **Gross   Unrealized   Losses**                                                  | ** ** | **Fair Value** | ** **                                                                |
|--------------------------------|------------|-----------|------------------------------------------------------------|-------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------|---------------------------------------------------------------------------|
| As  of December 31, 2009: |       |      |                                                       |                          |       |                                                                             |       |           |                                                                      |
| Corporate  debt securities     |       | $         |           499 |                          | $          |               1 |       | $              |             — |   | $ |           500 |   |
|                           |       |      |                                                       |                          |       |                                                                             |       |           |                                                                      |
| As  of December 31, 2008: |       |      |                                                       |                          |       |                                                                             |       |           |                                                                      |
| Corporate  debt securities     |       | $         |        8,513                 |                          | $          |               9 |       | $              |           (85                | ) | $ |        8,437 |   |

 

During the yearended December 31, 2008, we recognized a loss totaling $500 (representingthe entire purchase basis amount) on a Lehman Brothers corporate debt securitythat was determined to be other-than-temporarily impaired due to theirbankruptcy announcement.  The LehmanBrothers corporate debt security was in an unrealized loss position for elevenmonths prior to the recognition of the other-than-temporary impairment.  We did not record any other-than-temporaryimpairments for the years ended December 31, 2009 or 2008.

 

The followingtable summarizes the aggregate fair value of those investments in a grossunrealized loss position:

 
| ** **                                                                       | ** ** | **As of**                  | ** **    |
|----------------------------------------------------------------------------------|------------|----------------------------|---------------|
| ** **                                                                       | ** ** | **December 31, 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 |   |

 

Proceeds from the sale ofinvestment securities available for sale were $8,019, $18,742 and $26,348 in2009, 2008 and 2007, respectively; gross realized gains included in otherincome in 2009, 2008 and 2007 were $5, $1 and $0, respectively; and grossrealized losses included in other income in 2009, 2008 and 2007 were $2, $501and $0, respectively.  As of December 31,2009, all of our investments available for sale are set to mature within oneyear.

 

**7.  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 three to nine months, and are principallyunsecured foreign exchange contracts. The market risk exposure is essentially limited to risk related tocurrency rate movements.  We operate inCanada and the Philippines and are initiating operations in Costa Rica, and thefunctional currencies in those countries are the Canadian dollar, thePhilippine peso, and the Costa Rican colon, respectively, which are used to paylabor and other operating costs in those countries. However, our clientcontracts primarily generate revenues which are paid to us in U.S. dollars.

 

During the years ended December 31,2009, 2008 and 2007, we entered into Canadian dollar forward contracts withWells Fargo Bank and UMB Bank for a notional amount of 44,080, 98,400 and78,700 Canadian dollars, respectively, to hedge our foreign currency risk withrespect to labor costs in Canada.  As of December 31,2009, we have not entered into any arrangements to hedge our exposure tofluctuations in the Philippine peso or Costa Rican colon relative to the U.S.dollar.

 

The following table showsthe notional principal of our derivative instruments as of December 31,2009:

 
| ** **                                    | ** ** | **Currency**    | ** ** | **Notional   Principal** | ** ** |
|-----------------------------------------------|------------|-----------------|------------|--------------------------|------------|
| Instruments  qualifying as accounting hedges: |       |            |       |                     |       |
| Foreign  exchange contracts                   |       | Canadian dollar |       | 30,580                   |       |

 

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The above foreignexchange contracts are to be delivered periodically through June 2010 at apurchase price of approximately $28,579. The estimates of fair value are based on applicable and commonly usedpricing models and prevailing financial market information as of December 31,2009.  Refer to Note 8, “Fair ValueMeasurements,” for additional information on the fair value measurements forall assets and liabilities, including derivative assets and derivativeliabilities, that are measured at fair value in the Consolidated FinancialStatements.

 

The followingtable shows our derivative instruments measured at gross fair value asreflected in the Consolidated Balance Sheet in other current assets and/orderivative liability as of December 31, 2009 and 2008:

 
| ** **                  | ** ** | **As of December 31,** | ** **    |
|-----------------------------|------------|-----------------------------|---------------|
| ** **                  | ** ** | **2009**                    | ** **    | **2008** | ** ** |
| Derivative  assets:         |       |                        |          |   |   |
| Foreign  exchange contracts |       | $                           |  628     |   | $ |  316 |   |
|                        |       |                        |          |   |   |
| Derivative  liabilities:    |       |                        |          |   |   |
| Foreign  exchange contracts |       | $                           |   — |   | $ |  (2,639 | ) |

 

The followingtable shows the effect of our derivative instruments designated as cash flowhedges in the Consolidated Statement of Operations for the years ended December 31,2009 and 2008:

 
| ** **                  | ** ** | **Years Ended**            | ** **         | **Location of Gain**       | ** ** |
|-----------------------------|------------|----------------------------|--------------------|----------------------------|------------|
| ** **                  | ** ** | **December 31, 2009** | ** **         | **December 31, 2008** | ** ** | **(Loss)** | ** ** |
| ** **                  | ** ** | **Gain Recognized**        | ** **         | **Gain Reclassified**      | ** ** | **Loss Recognized** | ** ** | **Loss Reclassified** | ** ** | **Reclassified from** | ** ** |
| ** **                  | ** ** | **in AOCI, net of**        | ** **         | **from AOCI into**         | ** ** | **in AOCI, net of** | ** ** | **from AOCI into** | ** ** | **AOCI into** | ** ** |
| ** **                  | ** ** | **tax**                    | ** **         | **Income**                 | ** ** | **tax** | ** ** | **Income** | ** ** | **Income** | ** ** |
| Cash  flow hedges:          |       |                       |               |                       |       |   |   |   |   |   |   |
| Foreign  exchange contracts |       | $                          |    1,184 |                       | $          |  1,047 |   | $ | 620 |   | $ | 3,445 |   | Cost of services |   |
|                             |            |                            |                    |                            |            |  |  |  |  |  |  |  |  |  |  |

 

**8.  FAIR VALUE MEASUREMENTS**

 

***Investments***

 

As of December 31,2009 and 2008, our investments consisted entirely of corporate debtsecurities.  Our corporate debtsecurities are based on quoted market information.  The inputs to the valuation are generally classifiedas Level 1 given the active market for these securities; however, if an activemarket does not exist, the inputs are recorded at a lower level in the fairvalue hierarchy.

 

***Derivative Instruments and Hedging Activities***

 

The values of ourderivative instruments are derived from pricing models using inputs based uponmarket information, including contractual terms, market prices and yieldcurves.  The inputs to the valuationpricing models are observable in the market, and as such are generally classifiedas Level 2 in the fair value hierarchy.

*** ***

***RestructuringCharges***

 

Accrued restructuring costs were valued using a discounted cash flowmodel.  Significant assumptions used indetermining the amount of the estimated liability for closing a facility arethe estimated liability for future lease payments on vacant facilities, whichwe determine based on a third-party broker’s assessment of our ability tosuccessfully negotiate early termination agreements with landlords and/or tosublease the facility, and the discount rate utilized to determine the presentvalue of the future expected cash flows. 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 the Consolidated Statements of Operations and OtherComprehensive Income (Loss).

 

As described in Note 2, “ImpairmentLosses and Restructuring Charges,” during the year ended December 31,2009, we closed our facility in Regina, Saskatchewan, which resulted in $4,436of accrued restructuring costs for the year then ended.  These costs were valued using a discountedcash flow model.  The cash flows consistof the future lease payment obligations required under the lease agreement.  We assumed that we could not sublease thevacant facility for the remainder of the lease term based on our knowledge ofthe Regina marketplace, as well as our historical inability to sublease ourfacilities 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 Consolidated Statements ofOperations and Other Comprehensive Income (Loss).  Future cash flows also include estimatedproperty taxes through the remainder of the lease 

 

48

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term, which are valuedbased upon historical tax payments.  Thefuture cash flows were discounted using a rate of 3%.  Given that the restructuring charges werevalued using our internal estimates using a discounted cash flow model, we haveclassified the accrued restructuring costs as Level 3 in the fair valuehierarchy.

 

***Impairmentof Long-Lived Assets***

 

As described inNote 2, “Impairment Losses and Restructuring Charges,” during the year ended December 31,2009, we recorded approximately $1,756 of impairment losses in our Canadiansegment, due to the impairment of certain long-lived assets for which thecarrying value of those assets is not recoverable.  The fair value of these long-lived assetsafter the impairment charge was $228. Given that the impairment losses were valued using internal estimates,we have classified the remaining fair value of long-lived assets as Level 3 inthe 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.  Assets and liabilities are classified intheir entirety based on the lowest level of input that is significant to thefair value measurement.

 
| ** **                                                | ** ** | **Assets Measured at Fair Value**                     | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                | ** ** | **on a Recurring Basis as of December 31, 2009** | ** ** |
| ** **                                                | ** ** | **Level 1**                                           | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:                                                   | ** ** | ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Corporate  debt securities                                |       | $                                                     | 500        |   | $ | — |   | $ | — |   | $ | 500 |   |
| Derivative  instruments                                   |       | —                                                |       | 628 |   | — |   | 628 |   |
| Total  fair value of assets measured on a recurring basis |       | $                                                     | 500        |   | $ | 628 |   | $ | — |   | $ | 1,128 |   |

 
| ** **                                                         | ** ** | **Assets and Liabilities Measured at Fair Value on a**                | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Non-Recurring Basis During the Year ended December 31,  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 |   |

 

**9.PROPERTY, PLANT & EQUIPMENT**

 

Our property, plant and equipment as of December 31, 2009 and 2008,consisted of the following, by asset class:

** **
| ** **                                        | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| Land                                              |       | $                           | 1,715      |   | $ | 1,671 |   |
| Buildings  and improvements                       |       | 49,217                      |       | 47,895 |   |
| Telephone  and computer equipment                 |       | 53,052                      |       | 48,092 |   |
| Software                                          |       | 37,353                      |       | 29,937 |   |
| Furniture,  fixtures, and miscellaneous equipment |       | 22,835                      |       | 21,285 |   |
| Construction  in progress                         |       | 4,133                       |       | 3,388 |   |
|                                              |       | 168,305                     |       | 152,268 |   |
| Less  accumulated depreciation                    |       | (110,260                    | )          | (92,660 | ) |
| Total  property, plant and equipment, net         |       | $                           | 58,045     |   | $ | 59,608 |   |

 

49

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**10. DEBT**

 

Asof December 31, 2009 and 2008, respectively, we had the following balancesoutstanding on our long-term debt facilities:

 
| ** **                              | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| Secured  equipment promissory note      |       | $                           | —     |   | $ | 2,484 |   |
| Canadian  dollar secured equipment loan |       | —                      |       | 4,010 |   |
| Total  debt                             |       | —                      |       | 6,494 |   |
| Less  current portion of long-term debt |       | —                      |       | (3,295 | ) |
| Long-term  debt, less current portion   |       | $                           | —     |   | $ | 3,199 |   |

 

***Line of Credit***

 

On June 26, 2009, we entered into a business loan agreement,promissory note and three commercial security agreements (together the “Agreement”)with UMB Bank Colorado, N.A. (“UMB Bank”) for a $15 million secured revolvingline of credit.  The Agreement iseffective July 1, 2009 through August 1, 2010.  This Agreement replaced our $10 millionsecured revolving line of credit with Wells Fargo Bank N.A., which expired byits terms on June 30, 2009.  There was no balance outstanding on theline of credit with UMB Bank as of December 31, 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, 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 $10million measured on the last day of each fiscal quarter and 4) a cash flowcoverage ratio, as defined in the Agreement, of greater than 1.50 to 1.0measured on the last day of each fiscal quarter for the previous twelvemonths.  As of December 31, 2009, wewere in compliance with our debt covenants.

 

***Secured Equipment Promissory Note***

 

On November 17,2006, our subsidiary, StarTek USA, Inc., borrowed approximately $4.9million from Wells Fargo Equipment Finance, Inc.  As of December 31, 2008, we had anoutstanding balance of approximately $2.5 million.  In May 2009, we paid the remainingprincipal balance of approximately $2.1 million.  The original maturity date was in November 2010.

 

***Canadian Dollar Secured Equipment Loan***

 

On November 17,2006, StarTek Canada Services, Ltd., one of our subsidiaries, borrowedapproximately $9.6 million Canadian dollars from Wells Fargo Equipment FinanceCompany, Inc.  As of December 31,2008, we had an outstanding balance of approximately $4.0 million.  In May 2009, we paid the remainingprincipal balance of approximately $3.6 million.  The original maturity date was in November 2010.

 

**11.SHARE-BASED COMPENSATION**

 

On May 5, 2008, ourstockholders approved the StarTek, Inc. 2008 Equity Incentive Plan (the “Plan”).  The Plan replaced the StarTek, Inc.Stock Option Plan and StarTek, Inc. Directors’ Stock Option Plan(together, the “Prior Plans”).  A totalof 900,000 shares were authorized for grant under the Plan.  In addition, a total of 274,298 sharesremaining available for future grants under the Prior Plans were carried overand were made available for grant under the Plan.  As of December 31, 2009, there were590,319 shares available for future grant under our equity compensationplans.  The types of awards that may begranted under the Plan include restricted stock awards, restricted stock unitawards, stock option awards, stock appreciation rights and performanceunits.  The Compensation Committee (the “Committee”)also has the discretion to grant other types of awards, as long as they areconsistent with the terms and purposes of the Plan.  The terms of the awards granted under thePlan will expire no later than ten years from the grant date.  The Committee may determine the vestingconditions of awards; however, subject to certain exceptions, an award that isnot subject to the satisfaction of performance measures may not fully vest orbecome fully exercisable earlier than three years from the grant date, and theperformance period for an award subject to performance measures may not beshorter than one year.

 

50

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Stock options granted toemployees under the Plan vest as to 25% of the shares on the first anniversaryof the date of grant and 2.0833% of the shares each month thereafter for 36months.  Restricted stock awards grantedunder the Plan vest as to one third of the shares on the first anniversary ofthe date of grant and one third of the shares on each of the second and thirdanniversary thereafter.  Stock options orrestricted stock awards granted to our board of directors under the Plan vestas to 25% of the shares after three months from the date of grant, 25% of theshares after six months from the date of grant, 25% of the shares after ninemonths from the date of grant and 25% each three months thereafter until fullyvested.

 

On May 5,2008, our stockholders approved the StarTek, Inc. Employee Stock PurchasePlan (the “ESPP”).  Under the ESPP,participants may purchase our common stock as of the last day of a purchaseperiod at a price, which shall be no less than the lesser of (a) 85% ofthe closing price of a share of common stock on the first day of the purchaseperiod; or (b) 85% of the closing price of a share of common stock on thelast day of the purchase period.  Thepurchase period is defined as each quarterly period commencing January 1and ending March 31, commencing April 1 and ending June 30,commencing July 1 and ending September 30, or commencing October 1and ending December 31, unless otherwise determined by the Committee.  Subject to certain maximum stock ownershiprestrictions, employees are eligible to participate in the ESPP if employed bythe Company for at least six months prior to the start of a Purchase Period andwhose customary employment is at least 20 hours per week.  Participating employees may elect to have upto 10% of their base pay in effect at the commencement of each offering periodwithheld pursuant to the ESPP.

 

The compensation costthat has been charged against income for the Plan, the Prior Plans, the ESPP,and for restricted stock awards granted outside of those plans, as describedbelow (together, the “Plans”), for the years ended December 31, 2009, 2008and 2007 was $1,987, $1,493 and $1,107, respectively, and is included inselling, general and administrative expense. As of December 31, 2009, there was $3,176 of total unrecognizedcompensation cost related to nonvested stock options granted under thePlans.  That cost is expected to berecognized over a weighted-average period of 2.42 years.  As of December 31, 2009, there was $198of total unrecognized compensation cost related to nonvested restricted stockawards granted under the Plans.  Thatcost is expected to be recognized over a weighted-average period of 1.1 years.

 

***StockOptions***

 

A summary of stock optionactivity under the Plans as of December 31, 2009, and changes during theyear ended December 31, 2009 are presented below:

 
| ** **                                                | ** ** | ** ** | ** ** | **Weighted**       | ** **  | **Weighted-Average**          | ** ** | **Aggregate** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|--------------------|-------------|-------------------------------|------------|---------------|------------|
| ** **                                                | ** ** | ** ** | ** ** | **Average**        | ** **  | **Remaining**                 | ** ** | **Intrinsic** | ** ** |
| ** **                                                | ** ** | **Shares** | ** ** | **Exercise Price** | ** **  | **Contractual Term (in yrs)** | ** ** | **Value**     | ** ** |
| Outstanding  as of January 1, 2009                   |       | 1,628,702  |       | $                  |  11.45 |                          |       |          |       |   |
| Granted                                                   |       | 773,500    |       | 4.78               |        |                          |       |          |       |
| Exercised                                                 |       | (5,082     | )          | 3.00               |        |                          |       |          |       |
| Forfeited                                                 |       | (232,292   | )          | 10.29              |        |                          |       |          |       |
| Expired                                                   |       | (24,100    | )          | 33.53              |        |                          |       |          |       |
| Outstanding  as of December 31, 2009                 |       | 2,140,728  |       | $                  |   8.93 |                          | 7.87       |          | $          |       2,190 |   |
| Vested and exercisable  as of December 31, 2009      |       | 852,925    |       | $                  | 12.20       |                          | 6.80       |          | $          | 44 |   |
| Vested  and expected to vest as of December 31, 2009 |       | 1,892,749  |       | $                  |  8.13  |                          | 8.07       |          | $          |       1,872 |   |

 

The weighted-averagegrant date fair value of options granted during the years ended December 31,2009, 2008 and 2007 was $2.42, $3.20 and $4.10, respectively.  The total fair value of shares vested duringthe years ended December 31, 2009, 2008 and 2007 was $1,361, $2,408 and$389, respectively.

 

The assumptions used todetermine the value of our stock-based awards under the Black-Scholes methodare summarized below:

 
| ** **              | ** ** | **2009**         | ** ** | **2008**        | ** ** | **2007**        | ** ** |
|-------------------------|------------|------------------|------------|-----------------|------------|-----------------|------------|
| Risk-free interest rate |       | 0.55% - 2.66%    |       | 1.26% - 3.60%   |       | 3.16% - 4.74%   |       |
| Dividend  yield         |       | 0%               |       | 0%              |       | 0%              |       |
| Expected  volatility    |       | 61.38% - 117.38% |       | 43.81% - 57.62% |       | 43.12% - 50.47% |       |
| Expected  life in years |       | 3.9              |       | 4.1             |       | 4.3             |       |

 

The risk-free interestrate for periods within the contractual life of the option is based on eitherthe four year or seven year U.S. Treasury strip yield in effect at the time ofgrant.  Expected life and volatilitiesare based on historical experience, which we believe will be indicative offuture experience.

 

51

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***RestrictedStock Awards***

 

A summary of restrictedstock award activity under the Plans as of December 31, 2009, and changesduring the years ended December 31, 2009, 2008 and 2007 are presentedbelow:

 
| ** **                                      | ** ** | **Number of**         | ** ** | **Weighted-Average**      | ** **  |
|-------------------------------------------------|------------|-----------------------|------------|---------------------------|-------------|
| ** **                                      | ** ** | **Restricted Shares** | ** ** | **Grant Date Fair Value** | ** **  |
| Nonvested  balance as of January 1, 2009   |       | 62,067                |       | $                         |  10.45 |   |
| Granted                                         |       | 7,200                 |       | 4.76                      |        |
| Vested                                          |       | (21,329               | )          | 8.45                      |        |
| Forfeited                                       |       | (3,000                | )          | 9.01                      |        |
| Nonvested  balance as of December 31, 2009 |       | 44,938                |       | $                         | 10.58       |   |

 

Included in the tableabove are grants of restricted stock awards made outside the Plan or the PriorPlans to A. Laurence Jones and David G. Durham. On January 5, 2007, Mr. A. Laurence Jones was granted 30,000restricted shares pursuant to his appointment as President and Chief ExecutiveOfficer.  These shares vest asfollows:  10,000 shares on January 5,2008 and 20,000 shares on January 5, 2011, provided that the restrictionson the 20,000 share tranche may lapse earlier pursuant to certain performancecriteria.  The performance criteriaspecify that the 20,000 share tranche may vest as to 10,000 shares uponcertification by the Committee that Mr. Jones achieved at least 80%performance of specified criteria for the 2008 fiscal year and 10,000 sharesupon certification by the Committee that Mr. Jones achieved at least 80%performance of specified criteria for the 2009 fiscal year.  The Committee determined that Mr. Jonesdid not achieve the performance criteria for the 2008 fiscal year, and didachieve the performance criteria for the 2009 fiscal year.  As such, 10,000 of such shares vested in February 2010.  On September 10, 2007, Mr. David G.Durham was granted 10,000 restricted shares pursuant to his appointment asExecutive Vice President, Treasurer, and Chief Financial Officer.  These shares vest in the same manner as thoserestricted shares granted under the Plan. The total fair value of restricted stock awards vested during the yearsended December 31, 2009, 2008 and 2007 was $180, $213 and $0,respectively.

 

***EmployeeStock Purchase Plan***

 

The first purchase periodunder the ESPP commenced July 1, 2008. During 2009, we completed four offering periods in which 60,045 shareswere purchased at a weighted-average price of $4.14 per share.  During 2008, we completed two offeringperiods in which 37,321 shares were purchased at a weighted-average price of $4.62per share.  Total expense recognizedrelated to the ESPP during the years ended December 31, 2009 and 2008 was$130 and $68, respectively.  Theassumptions used to value the shares under the ESPP using the Black-Scholesmethod were as follows:

 
| ** **              | ** ** | **2009**         | ** ** | **2008**        | ** ** |
|-------------------------|------------|------------------|------------|-----------------|------------|
| Risk-free interest rate |       | 0.08% - 0.22%    |       | 0.85% - 1.87%   |       |
| Dividend  yield         |       | 0%               |       | 0%              |       |
| Expected  volatility    |       | 75.28% - 160.19% |       | 34.06% - 39.82% |       |
| Expected  life in years |       | 3 months         |       | 3 months        |       |

 

The weighted average grant date fair value of these shares was $2.16and $1.80 per share during the year ended December 31, 2009 and 2008,respectively.

 

**12****. NET INTEREST AND OTHERINCOME**

 

Netinterest and other income for the years ended December 31, 2009, 2008 and2007 were composed of the following:

** **
| ** **                                       | ** ** | **Year Ended December 31,** | ** **                                     |
|--------------------------------------------------|------------|----------------------------------|------------------------------------------------|
| ** **                                       | ** ** | **2009**                         | ** **                                     | **2008** | ** ** | **2007** | ** ** |
| Interest  income                                 |       | $                                |         119 |   | $ |      1,210 |   | $ |      1,579 |   |
| Interest  expense                                |       | (291                             | )                                              | (726 | ) | (854 | ) |
| Realized  loss on investments available for sale |       | —                           |                                           | (500 | ) | — |   |
| Investment  and other loss                       |       | (38                              | )                                              | 71 |   | 20 |   |
| Net  interest and other income                   |       | $                                |       (210            | ) | $ |           55 |   | $ |         745 |   |

 

**13.INCOME TAXES**

 

Pre-tax income fromcontinuing operations before income taxes was:

 

52

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| ** ** | ** ** | **Year Ended December 31,** | ** **                          |
|------------|------------|----------------------------------|-------------------------------------|
| ** ** | ** ** | **2009**                         | ** **                          | **2008** | ** ** | **2007** | ** ** |
| U.S.       |       | $                                |      1,168      |   | $ |  (16,285 | ) | $ | (8,332 | ) |
| Foreign    |       | (1,910                           | )                                   | 293 |   | 4,456 |   |
| Total      |       | $                                |       (742 | ) | $ |  (15,992 | ) | $ | (3,876 | ) |

 

Significantcomponents of the provision for income taxes from continuing operations were:

 
| ** **                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Current:                           |       |                             |       |   |   |   |   |
| Federal                            |       | $                                | (7,408     | ) | $ |  (970 | ) | $ | (2,070 | ) |
| State                              |       | (246                             | )          | (127 | ) | (224 | ) |
| Foreign                            |       | 101                              |       | 1,872 |   | 1,159 |   |
| Total  current (benefit) expense   |       | $                                | (7,553     | ) | $ |  775 |   | $ |  (1,135 | ) |
|                               |       |                             |       |   |   |   |   |
| Deferred:                          |       |                             |       |   |   |   |   |
| Federal                            |       | $                                | 7,402      |   | $ |  (5,241 | ) | $ |  (1,554 | ) |
| State                              |       | 245                              |       | (682 | ) | (169 | ) |
| Foreign                            |       | (845                             | )          | (1,108 | ) | 421 |   |
| Net  change in valuation allowance |       | —                           |       | (45 | ) | 1,718 |   |
| Total  deferred expense (benefit)  |       | $                                | 6,802      |   | $ |  (7,076 | ) | $ |   416 |   |
|                               |       |                             |       |   |   |   |   |
| Income  tax benefit                |       | $                                |  (751 | ) | $ |  (6,301 | ) | $ |  (719 | ) |

 

Significant components ofdeferred tax assets and deferred tax liabilities included in the accompanyingConsolidated Balance Sheets as of December 31, 2009 and 2008 were:

 

53

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| ** **                                                 | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Current  deferred tax assets:                              |       |                             |       |   |   |
| Accrued  liabilities                                       |       | $                                | —     |   | $ | 933 |   |
| Restructuring  costs                                       |       | 401                              |       | 223 |   |
| Impairment  of assets                                      |       | —                           |       | 1,117 |   |
| Unrealized  loss on investments and derivative instruments |       | —                           |       | 916 |   |
| Other                                                      |       | 110                              |       | 201 |   |
| Total  current net deferred tax assets                     |       | $                                | 511        |   | $ | 3,390 |   |
|                                                       |       |                             |       |   |   |
| Current  deferred tax assets (liabilities):                |       |                             |       |   |   |
| Accrued  liabilities                                       |       | $                                | 861        |   | $ | — |   |
| State  NOL carryforward                                    |       | 271                              |       | — |   |
| Unrealized  gain on investments and derivative instruments |       | (230                             | )          |   |   |
| Prepaid  expenses                                          |       | (1,189                           | )          | (542 | ) |
| Cumulative  translation adjustment                         |       | (1,183                           | )          | (663 | ) |
| Total  current net deferred tax liabilities                |       | $                                | (1,470     | ) | $ | (1,205 | ) |
|                                                       |       |                             |       |   |   |
| Long-term  deferred tax assets (liabilities):              |       |                             |       |   |   |
| Depreciation  and amortization                             |       | $                                | (634       | ) | $ | (817 | ) |
| Loss  on impaired investments                              |       | —                           |       | 986 |   |
| Foreign  tax credit carryforward                           |       | 554                              |       | 554 |   |
| Stock-based  compensation                                  |       | 1,410                            |       | 921 |   |
| Work  opportunity credit carryforward                      |       | 2,800                            |       | 3,048 |   |
| Operating  loss caryforward                                |       | —                           |       | 3,823 |   |
| Accrued  restructuring                                     |       | 811                              |       | 538 |   |
| Other                                                      |       | 143                              |       | 737 |   |
| Net  long-term deferred tax assets                         |       | $                                | 5,084      |   | $ | 9,790 |   |
|                                                       |       |                             |       |   |   |
| Subtotal                                                   |       | $                                | 4,125      |   | $ | 11,975 |   |
| Valuation  allowance                                       |       | (555                             | )          | (844 | ) |
|                                                       |       |                             |       |   |   |
| Total  net deferred tax asset                              |       | $                                | 3,570      |   | $ | 11,131 |   |

 

As of December 31,2009, we had net current deferred tax assets in our foreign tax jurisdictionsand net current deferred tax liabilities in the U.S.  As of December 31, 2008, we had netcurrent deferred tax assets in both our foreign tax jurisdictions and in theU.S.

 

Deferred taxes arenot recognized on temporary differences from undistributed earnings of foreignsubsidiaries of approximately $25,000 as these earnings are deemed to bepermanently reinvested.  We have notprovided for U.S. federal income and foreign withholding taxes on undistributedearnings from non-U.S. operations as of December 31, 2009 because weintend to reinvest such earnings indefinitely outside of the U.S.

 

Differences between U.S.federal statutory income tax rates and our effective tax rates for the yearsended December 31, 2009, 2008 and 2007 for continuing operations were:

 

54

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| ** **                                                       | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                       | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| U.S.  statutory tax rate                                         |       | 35.0                             | %          | 35.0 | % | 35.0 | % |
| Effect  of state taxes (net of federal benefit)                  |       | -11.9                            | %          | 2.5 | % | 4.5 | % |
| Effect  of change in Canadian tax rate                           |       | -14.0                            | %          | -2.3 | % | 0.0 | % |
| Capital  loss valuation allowance                                |       | 0.0                              | %          | 0.3 | % | -44.3 | % |
| Work  opportunity tax credits                                    |       | 142.6                            | %          | 5.3 | % | 21.5 | % |
| Other  permanent differences (including meals and entertainment) |       | -21.7                            | %          | -1.0 | % | -2.3 | % |
| Stock  based compensation                                        |       | -19.0                            | %          | 0.0 | % | 0.0 | % |
| Other,  net                                                      |       | -9.8                             | %          | -0.4 | % | 4.2 | % |
| Total                                                            |       | 101.2                            | %          | 39.4 | % | 18.6 | % |

 

Asof December 31, 2009, we had gross foreign tax credit carry forwards of$555, which expire as follows:  $25 in2011, $4 in 2012, and $526 in 2013.  Afull tax-basis valuation allowance was established against these carry forwardsduring 2006 due to the fact that it is more likely than not that these creditswill not be used prior to their expiration date.  As of December 31, 2008, we had grossfederal net operating loss carry forwards of $10,017.  These federal net operating loss carryforwards were utilized during 2009 and no federal net operating loss carryforwards exist as of December 31, 2009.

 

We have been granted “Tax Holidays” as an incentive to attract foreigninvestment by the governments of the Philippines and Costa Rica. Generally, aTax Holiday is an agreement between us and a foreign government under which wereceive certain tax benefits in that country, such as exemption from taxationon profits derived from export-related activities. In the Philippines, we havebeen granted approval for a Tax Holiday, whereby we have an exemption fromincome tax until 2012.  In Costa Rica, wehave been granted approval for an exemption equal to 100% of income tax foreight years beginning with the commencement of operations, which is expected inMarch 2010, and for 50% of income tax for the four years thereafter.     The aggregate effect on income tax expensefor the years ended December 31, 2009, 2008 and 2007 was $216, $0 and $0,respectively, which had a favorable impact on net income of $0.01 per share, $0and $0, respectively.

 

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

 

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

** **
| ** **                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Accumulated  foreign currency translation adjustments:             |       |                             |       |   |   |
| Beginning  balance                                                 |       | $                                | 1,090      |   | $ | 2,553 |   |
| Translation  adjustments                                           |       | 1,420                            |       | (2,057 | ) |
| Taxes  associated with translation adjustments                     |       | (519                             | )          | 594 |   |
| Ending  balance                                                    |       | $                                | 1,991      |   | $ | 1,090 |   |
| Accumulated  unrealized derivative (losses) gains:                 |       |                             |       |   |   |
| Beginning  balance                                                 |       | $                                | (1,444     | ) | $ | 20 |   |
| Gain  (loss) reclassified to earnings, net of tax                  |       | 654                              |       | (2,084 | ) |
| Change  in fair value of cash flow hedges, net of tax              |       | 1,184                            |       | 620 |   |
| Ending  balance                                                    |       | $                                | 394        |   | $ | (1,444 | ) |
| Accumulated  unrealized losses on available for sale securities:   |       |                             |       |   |   |
| Beginning  balance                                                 |       | $                                | (61        | ) | $ | (29 | ) |
| Gain  (loss) reclassified to earnings, net of tax                  |       | 1                                |       | (303 | ) |
| Change  in fair value of available for sale securities, net of tax |       | 48                               |       | 271 |   |
| Ending  balance                                                    |       | $                                | (12        | ) | $ | (61 | ) |

 

**15.  COMMITMENTS AND CONTINGENCIES**

 

***Leases***

 

We lease facilities andequipment under various non-cancelable operating leases.  Some of these leases have renewal clausesthat vary both in length and fee, based on our negotiations with the lessors.Rental expense, including equipment rentals, for 2009, 2008 and 

 

55

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2007 was $7,652, $6,900and $4,602, respectively.  As of December 31,2009, future minimum rental commitments for operating leases were:

 
| ** **                    | ** ** | **Minimum Lease** | ** ** |
|-------------------------------|------------|-------------------|------------|
| ** **                    | ** ** | **Payments**      | ** ** |
| 2010                          |       | $                 | 7,527      |   |
| 2011                          |       | 6,453             |       |
| 2012                          |       | 4,707             |       |
| 2013                          |       | 3,782             |       |
| 2014                          |       | 3,500             |       |
| Thereafter                    |       | 6,508             |       |
| Total  minimum lease payments |       | $                 | 32,477     |   |

 

***Legal Proceedings***

 

We and six of ourformer directors and officers were named as defendants in *West Palm Beach Firefighters’ Pension Fund v. StarTek, Inc.*,Civil Action No. 05-cv-01265-WDM-MEH (the “Litigation”).   The consolidated action was a purportedclass action brought on behalf of all persons (except defendants) who purchasedshares of our common stock in a****secondaryoffering by certain of our stockholders in June 2004,****andin the open market between February 26, 2003 and May 5, 2005 (the “Class Period”).  The consolidated complaint alleged that thedefendants made false and misleading public statements about us and ourbusiness and prospects in the prospectus for the secondary offering, as well asin filings with the SEC and in press releases issued during the Class Period,and that as a result, the market price of our common stock was artificiallyinflated.  The complaints alleged claimsunder Sections 11 and 15 of the Securities Act of 1933 and under Sections 10(b) and20(a) of the Securities Exchange Act of 1934.  The plaintiffs in both cases soughtcompensatory damages on behalf of the alleged class and award of attorneys’fees and costs of litigation.

 

On July 20, 2009, weexecuted a Stipulation of Settlement (“Stipulation”) with lead plaintiffs tosettle the Litigation.  Under the termsof the Stipulation, defendants agreed to $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.  Our primary insurance carrier contributed$6.9 million and we contributed $0.6 million to the Settlement Fund (as definedin the Stipulation).  The United StatesDistrict Court for the District of Colorado (the “Court”) granted preliminaryapproval for the settlement on October 8, 2009.  The final hearing was held on December 17,2009, at which time the Stipulation received final approval by the Court. Our portion of the settlement due, or $0.6 million, was recorded in ourConsolidated Statement of Operations during the year ended December 31,2009.

 

We have been involved from time to time in otherlitigation arising in the normal course of business, none of which is expectedby management to have a material adverse effect on our business, financialcondition or results of operations.

 

**16.  SEGMENT INFORMATION**

 

We operate withinthree business segments, the U.S., Canada and Offshore.  The business segments align with thoseregions in which our services are rendered. As of December 31, 2009, our U.S. segment included the operationsof our thirteen facilities in the U.S.; our Canada segment included theoperations of our five facilities in Canada; and our Offshore segment includedthe operations of our facility in Makati City, Philippines.  As of December 31, 2008, there werethirteen, six and one operating centers in the U.S., Canada, and Offshore,respectively.  We use gross profit as ourmeasure of profit and loss for each business segment and do not allocateselling, general and administrative expenses to our business segments.

 

56

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Information about our reportable segments, which correspond to thegeographic areas in which we operate, for the years ended December 31,2009, 2008 and 2007 is as follows:

 
| ** **                | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------|------------|------------------------------------------|------------|
| ** **                | ** ** | **2009**                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Revenue:**              |       |                                     |       |   |   |   |   |
| United  States            |       | $                                        | 200,737    |   | $ | 180,761 |   | $ | 148,700 |   |
| Canada                    |       | 76,307                                   |       | 90,929 |   | 95,915 |   |
| Offshore                  |       | 11,936                                   |       | 648 |   | — |   |
| Total                     |       | $                                        | 288,980    |   | $ | 272,338 |   | $ | 244,615 |   |
|                      |       |                                     |       |   |   |   |   |
| **Gross profit:**         |       |                                     |       |   |   |   |   |
| United  States            |       | $                                        | 36,265     |   | $ | 30,459 |   | $ | 32,880 |   |
| Canada                    |       | 11,910                                   |       | 4,928 |   | 5,815 |   |
| Offshore                  |       | 926                                      |       | (1,395 | ) | — |   |
| Total                     |       | $                                        | 49,101     |   | $ | 33,992 |   | $ | 38,695 |   |
|                      |       |                                     |       |   |   |   |   |
| **Depreciation:**         |       |                                     |       |   |   |   |   |
| United  States            |       | $                                        | 11,194     |   | $ | 12,526 |   | $ | 11,480 |   |
| Canada                    |       | 3,036                                    |       | 5,040 |   | 5,612 |   |
| Offshore                  |       | 1,747                                    |       | 237 |   | — |   |
| Total                     |       | $                                        | 15,977     |   | $ | 17,803 |   | $ | 17,092 |   |
|                      |       |                                     |       |   |   |   |   |
| **Capital expenditures:** |       |                                     |       |   |   |   |   |
| United  States            |       | $                                        | 10,828     |   | $ | 21,739 |   | $ | 12,883 |   |
| Canada                    |       | 770                                      |       | 1,844 |   | 2,324 |   |
| Offshore                  |       | 3,085                                    |       | 4,396 |   | — |   |
| Total                     |       | $                                        | 14,683     |   | $ | 27,979 |   | $ | 15,207 |   |

 
| ** **                                    | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| **Total property, plant and equipment, net:** |       |                        |       |   |   |
| United  States                                |       | $                           | 43,486     |   | $ | 45,093 |   |
| Canada                                        |       | 7,785                       |       | 10,300 |   |
| Offshore                                      |       | 6,774                       |       | 4,215 |   |
| Total                                         |       | $                           | 58,045     |   | $ | 59,608 |   |
|                                          |       |                        |       |   |   |
| **Total assets:**                             |       |                        |       |   |   |
| United  States                                |       | $                           | 116,108    |   | $ | 123,967 |   |
| Canada                                        |       | 28,049                      |       | 17,099 |   |
| Offshore                                      |       | 4,911                       |       | 5,798 |   |
| Total                                         |       | $                           | 149,068    |   | $ | 146,864 |   |

 

**17.  QUARTERLY FINANCIAL DATA (UNAUDITED)**

 

The following represents selected information from ourunaudited quarterly Statements of Operations for the years ended December 31,2009 and 2008.  Due to the February 2009,sale of our subsidiary, Domain.com, the results of operations related to thisline of business have been reported as discontinued operations for all periodspresented below.

 

57

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| ** **                                    | ** ** | **2009 Quarters Ended** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **March 31**       | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Revenue                                       |       | $                       | 70,711     |   | $ | 73,290 |   | $ | 72,462 |   | $ | 72,517 |   |
| Gross  profit                                 |       | 10,723                  |       | 13,129 |   | 13,474 |   | 11,775 |   |
| Selling,  general and administrative expenses |       | 9,692                   |       | 10,889 |   | 11,084 |   | 11,531 |   |
| Impairment  losses and restructuring charges  |       | 6,437                   |       | — |   | — |   | — |   |
| Operating  (loss) income                      |       | (5,406                  | )          | 2,240 |   | 2,390 |   | 244 |   |
| (Loss)  income from continuing operations     |       | (3,988                  | )          | 1,327 |   | 1,795 |   | 875 |   |
| Income  from discontinued operations          |       | 4,640                   |       | — |   | — |   | — |   |
| Net  income                                   |       | $                       | 652        |   | $ | 1,327 |   | $ | 1,795 |   | $ | 875 |   |
|                                          |       |                    |       |   |   |   |   |   |   |
| Basic  net income (loss) per share from:      |       |                    |       |   |   |   |   |   |   |
| Continuing  operations                        |       | $                       | (0.27      | ) | $ | 0.09 |   | $ | 0.12 |   | $ | 0.06 |   |
| Discontinued  operations                      |       | 0.31                    |       | — |   | — |   | — |   |
| Net  income (loss)                            |       | $                       | 0.04       |   | $ | 0.09 |   | $ | 0.12 |   | $ | 0.06 |   |
|                                          |       |                    |       |   |   |   |   |   |   |
| Diluted  net income (loss) per share from:    |       |                    |       |   |   |   |   |   |   |
| Continuing  operations                        |       | $                       | (0.27      | ) | $ | 0.09 |   | $ | 0.12 |   | $ | 0.06 |   |
| Discontinued  operations                      |       | 0.31                    |       | — |   | — |   | — |   |
| Net  income (loss)                            |       | $                       | 0.04       |   | $ | 0.09 |   | $ | 0.12 |   | $ | 0.06 |   |

 
| ** **                                    | ** ** | **2008 Quarters Ended** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **March 31**       | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Revenue                                       |       | $                       | 64,583     |   | $ | 65,467 |   | $ | 68,937 |   | $ | 73,351 |   |
| Gross  profit                                 |       | 9,467                   |       | 8,304 |   | 8,209 |   | 8,012 |   |
| Selling,  general and administrative expenses |       | 10,090                  |       | 10,227 |   | 10,205 |   | 10,292 |   |
| Impairment  losses and restructuring charges  |       | 108                     |       | 5,500 |   | 346 |   | 3,271 |   |
| Operating  loss                               |       | (731                    | )          | (7,423 | ) | (2,342 | ) | (5,551 | ) |
| Loss  from continuing operations              |       | (403                    | )          | (4,588 | ) | (1,503 | ) | (3,197 | ) |
| Income  (loss) from discontinued operations   |       | 72                      |       | 69 |   | (407 | ) | 56 |   |
| Net  loss                                     |       | $                       | (331       | ) | $ | (4,519 | ) | $ | (1,910 | ) | $ | (3,141 | ) |
|                                          |       |                    |       |   |   |   |   |   |   |
| Basic  net (loss) income per share from:      |       |                    |       |   |   |   |   |   |   |
| Continuing  operations                        |       | $                       | (0.03      | ) | $ | (0.31 | ) | $ | (0.10 | ) | $ | (0.22 | ) |
| Discontinued  operations                      |       | 0.01                    |       | — |   | (0.03 | ) | 0.01 |   |
| Net  loss                                     |       | $                       | (0.02      | ) | $ | (0.31 | ) | $ | (0.13 | ) | $ | (0.21 | ) |
|                                          |       |                    |       |   |   |   |   |   |   |
| Diluted  net (loss) income per share from:    |       |                    |       |   |   |   |   |   |   |
| Continuing  operations                        |       | $                       | (0.03      | ) | $ | (0.31 | ) | $ | (0.10 | ) | $ | (0.22 | ) |
| Discontinued  operations                      |       | 0.01                    |       | — |   | (0.03 | ) | 0.01 |   |
| Net  loss                                     |       | $                       | (0.02      | ) | $ | (0.31 | ) | $ | (0.13 | ) | $ | (0.21 | ) |

 

**18.  SUBSEQUENT EVENTS**

 

In January 2010,we entered into a lease agreement for the rental of a facility in Ortigas,Philippines.  The lease has an initial term of five years with a tenantoption for an additional five years.  The facility is approximately158,500 square feet and we expect to open the facility for operations duringthe second quarter of 2010.  Total lease commitments for the rental ofthis facility are approximately $5.8 million over the initial term of thelease.

 

In January 2010, we closed our facilities inLaramie, Wyoming and Victoria, Texas.  The facility in Laramie was closedbecause this work was transitioned either to StarTek’s @Home platform, wherebyagents work from their homes, or our Greeley, Colorado facility.  Weclosed our site in Victoria due to the loss of a client program, and we arecurrently evaluating the space to determine if we will utilize it for otherprograms or sublease to a tenant.

 

58

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In January 2010, we announced the closure of ourThunder Bay, Ontario, Canada location which we expect to close in March 2010. The closure in Thunder Bay was driven by market conditions, namely recruitingchallenges in this location, which negatively impacted the profitability of thelocation and management determined it was in our long-term interest to closethe location.  We recorded approximately $1.7 million in impairment lossesduring 2009 related to assets held at this facility because the carrying valueof those assets was not recoverable.

 

**ITEM9.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM9A.  CONTROLS AND PROCEDURES**

 

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

 

As of December 31,2009, 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 December 31, 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.

 

**Management’sReport on Internal Control over Financial Reporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and15d-15(f). Under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, we conductedan evaluation of the effectiveness of our internal control over financialreporting as of December 31, 2009, based on the framework in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Based on that evaluation, ourmanagement concluded that our internal control over financial reporting waseffective as of December 31, 2009.

 

Our independentregistered public accounting firm, Ernst & Young LLP, issued a reporton the effectiveness of our internal control over financial reporting as of December 31,2009. Ernst & Young LLP’s report is included in Item 9A. of this Form 10-K.

 

**Changesin Internal Control over Financial Reporting**

 

There were no changes inour internal control over financial reporting that occurred during the quarterended December 31, 2009, that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

59

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** **

**Report of Independent Registered Public AccountingFirm**

** **

**The Board of Directors and Stockholders of**StarTek, Inc.

** **

We have audited StarTek Inc.’s internalcontrol over financial reporting as of December 31, 2009, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). StarTekInc.’s management is responsible for maintaining effective internal controlover financial reporting, and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanyingManagement’s Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit.

 

We conducted our audit in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

A company’s internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

In our opinion,StarTek, Inc. maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2009, based on****theCOSO criteria**.**

 

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidatedbalance sheets of StarTek, Inc. as of December 31, 2009 and 2008, andthe related consolidated statements of operations and other comprehensiveincome (loss), stockholders’ equity, and cash flows for each of the three yearsin the period ended December 31, 2009, and our report dated February 25,2010 expressed an unqualified opinionthereon.

 

 
|                    | /s/  Ernst & Young LLP |
|-------------------------|---------------------------------|
|                    |                            |
| Denver, Colorado        |                            |
| February 25,  2010 |                            |

 

60

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**ITEM9B.  OTHER INFORMATION**

 

None.

 

**Part III**

 

**ITEMS 10THROUGH 14**

 

Information required byItem 10 (Directors, Executive Officers and Corporate Governance), Item 11(Executive Compensation), Item 12 (Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters), Item 13 (CertainRelationships and Related Transactions and Director Independence), and Item 14(Principal Accounting Fees and Services) will be included in our definitiveproxy statement to be delivered in connection with our 2010 annual meeting ofstockholders and is incorporated herein by reference.

 

**Part IV**

 

**ITEM15.  EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

 

(a)                                  The following documents are filed as apart of this Form 10-K:

 

1.     *Consolidated Financial Statements.*    Seethe index to the Consolidated Financial Statements of StarTek, Inc. andits subsidiaries that appears in Item 8 of this Form 10-K.

 

3.     An *Indexof Exhibits*follows the signature pages of this Form 10-K.

 

61

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**SIGNATURES**

 

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

 
| STARTEK, INC.

(REGISTRANT) |                                   |   |
|-----------------------------|----------------------------------------|--------|
|                        |                                   |
|                        |                                   |   |   |
|                        |                                   |   |   |
| By:                         | /s/ A. LAURENCE JONES                  |   | Date: February 25,  2010 |
|                        | A. Laurence Jones                      |   |   |
|                        | President and Chief  Executive Officer |   |   |
|                        | (Principal Executive  Officer)         |   |   |

 

 
| By:    | /s/ DAVID G. DURHAM                           |   | Date: February 25,  2010 |
|--------|-----------------------------------------------|--------|-------------------------------|
|   | David G. Durham                               |   |                          |
|   | Executive Vice  President, Chief              |   |                          |
|   | Financial Officer and  Treasurer              |   |                          |
|   | (Principal Financial  and Accounting Officer) |   |                          |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Form 10-K hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 

 
| /s/ A. LAURENCE JONES |   | President and Chief  Executive Officer     |   | Date: February 25,  2010 |
|-----------------------|--------|--------------------------------------------|--------|-------------------------------|
| A. Laurence Jones     |   |                                       |   |                          |
|                  |   |                                       |   |                          |
|                  |   |                                       |   |                          |
| /s/ DAVID G. DURHAM   |   | Executive Vice  President, Chief Financial |   | Date: February 25,  2010 |
| David G. Durham       |   | Officer and Treasurer                      |   |                          |
|                  |   |                                       |   |                          |
|                  |   |                                       |   |                          |
| /s/ ED ZSCHAU         |   | Chairman of the Board                      |   | Date: February 25,  2010 |
| Ed Zschau             |   |                                       |   |                          |
|                  |   |                                       |   |                          |
| /s/ ALBERT C. YATES   |   | Director                                   |   | Date: February 25,  2010 |
| Albert C. Yates       |   |                                       |   |                          |
|                  |   |                                       |   |                          |
| /s/ P. KAY NORTON     |   | Director                                   |   | Date: February 25,  2010 |
| P. Kay Norton         |   |                                       |   |                          |
|                  |   |                                       |   |                          |
| /s/ HARVEY A. WAGNER  |   | Director                                   |   | Date: February 25,  2010 |
| Harvey A. Wagner      |   |                                       |   |                          |

 

62

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** **

**STARTEK,INC.**

**INDEX OFEXHIBITS**

 
| **Exhibit ** | ** ** | ** **                                                                                                                                                                                    | ** ** | **Incorporated Herein by Reference** |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|
| **No.**           | ** ** | **Exhibit Description**                                                                                                                                                                  | ** ** | **Form**                             | ** ** | **Exhibit** | ** ** | **Filing Date** |
| 3.1               |       | Restated  Certificate of Incorporation of StarTek, Inc..                                                                                                                                 |       | S-1                                  |   | 3.1 |   | 1/29/1997 |
| 3.2               |       | Restated Bylaws  of StarTek, Inc..                                                                                                                                                       |       | 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              |       | Registration  Rights Agreement by and among StarTek, Inc. and A. Emmet  Stephenson, Jr.                                                                                             |       | 10-K                                 |   | 10.47 |   | 3/9/2004 |
| 10.2              |       | Investor Rights  Agreement by and among StarTek, Inc., A. Emmet Stephenson Jr., and Toni  E. Stephenson.                                                                                 |       | 10-K                                 |   | 10.48 |   | 3/9/2004 |
| 10.3†        |       | StarTek, Inc.  Stock Option Plan, as amended.                                                                                                                                            |       | Def 14a                              |   | A |   | 3/27/2007 |
| 10.4†        |       | Form of  Stock Option Agreement.                                                                                                                                                         |       | S-1/A                                |   | 10.2 |   | 3/7/1997 |
| 10.5†        |       | Form of  Option Agreement pursuant to StarTek, Inc. Stock Option Plan (four year  vesting schedule).                                                                                |       | 8-K                                  |   | 10.26 |   | 6/16/2006 |
| 10.6†        |       | StarTek, Inc.  Directors’ Stock Option Plan, as amended.                                                                                                                            |       | Def 14a                              |   | B |   | 3/27/2007 |
| 10.7†        |       | Form of  Option Agreement pursuant to StarTek, Inc. Directors’ Stock Option Plan.                                                                                              |       | 8-K                                  |   | 10.2 |   | 9/9/2004 |
| 10.8†        |       | StarTek, Inc.  Employee Stock Purchase Plan.                                                                                                                                             |       | Def#14a                              |   | A |   | 3/20/2008 |
| 10.9†        |       | StarTek, Inc.  2008 Equity Incentive Plan.                                                                                                                                               |       | Def#14a                              |   | B |   | 3/20/2008 |
| 10.10†       |       | Form of  Non-Statutory Stock Option Agreement (Employee) pursuant to  StarTek, Inc. 2008 Equity Incentive Plan.                                                                     |       | 8-K                                  |   | 10.2 |   | 5/5/2008 |
| 10.11†       |       | Form of  Non-Statutory Stock Option Agreement (Director) pursuant to  StarTek, Inc. 2008 Equity Incentive Plan.                                                                     |       | 8-K                                  |   | 10.3 |   | 5/5/2008 |
| 10.12†       |       | Form of  Incentive Stock Option Agreement pursuant to StarTek, Inc. 2008 Equity  Incentive Plan.                                                                                    |       | 8-K                                  |   | 10.4 |   | 5/5/2008 |
| 10.13†       |       | Form of  Restricted Stock Award Agreement (Employee) pursuant to StarTek, Inc.  2008 Equity Incentive Plan.                                                                         |       | 8-K                                  |   | 10.5 |   | 5/5/2008 |
| 10.14†       |       | Form of  Restricted Stock Award Agreement (Director) pursuant to StarTek, Inc.  2008 Equity Incentive Plan.                                                                         |       | 8-K                                  |   | 10.6 |   | 5/5/2008 |
| 10.15†       |       | Form of  Indemnification Agreement between StarTek, Inc. and its Officers and  Directors.                                                                                           |       | 10-K                                 |   | 10.49 |   | 3/9/2004 |
| 10.16†       |       | Form of  Executive Confidentiality and Non-Competition Agreement.                                                                                                                        |       | 8-K                                  |   | 10.1 |   | 9/14/2004 |
| 10.17†       |       | Form of  Executive Employment Contract.                                                                                                                                                  |       | 8-K                                  |   | 10.115 |   | 8/21/2007 |
| 10.18†       |       | Amendment  No. 1 to Form of Executive Employment Contract.                                                                                                                          |       | 10-K                                 |   | 10.11 |   | 2/29/2008 |
| 10.19†       |       | Employment  Agreement between StarTek, Inc. and A. Laurence Jones.                                                                                                                       |       | 8-K                                  |   | 10.78 |   | 1/08/2007 |
| 10.20†       |       | Amendment to  Employment Agreement of A. Laurence Jones signed July 9, 2007.                                                                                                             |       | 10-Q                                 |   | 10.110 |   | 8/8/2007 |
| 10.21†       |       | Amendment to  Employment Agreement of A. Laurence Jones signed May 23, 2008.                                                                                                             |       | 10-Q                                 |   | 10.9 |   | 8/11/2008 |
| 10.22†       |       | Option Agreement  between StarTek, Inc. and A. Laurence Jones.                                                                                                                           |       | 8-K                                  |   | 10.79 |   | 1/08/2007 |
| 10.23†       |       | Restricted Stock  Agreement between StarTek, Inc. and A. Laurence Jones.                                                                                                                 |       | 8-K                                  |   | 10.80 |   | 1/08/2007 |
| 10.24†       |       | Employment Agreement  (Stock Option and Restricted Stock Agreements are attachments to the  Employment Agreement) between StarTek, Inc. and David G. Durham dated  August 22, 2007. |       | 8-K                                  |   | 10.116 |   | 8/27/2007 |
| 10.25†       |       | Transition  Agreement between StarTek, Inc. and Mr. Michael Griffith effective  September 30, 2008.                                                                            |       | 8-K                                  |   | 10.1 |   | 9/30/2008 |
| 10.26†       |       | 2007 Sales  Commission Plan.                                                                                                                                                                  |       | 10-Q                                 |   | 10.113 |   | 8/8/2007 |
| 10.27†       |       | Sales Commission  Plan (2008 and 2009).                                                                                                                                                       |       | 10-K                                 |   | 10.24 |   | 2/29/2008 |
| 10.28†       |       | Amended Sales  Commission Plan (2008 and 2009).                                                                                                                                               |       | 10-Q                                 |   | 10.1 |   | 10/31/2008 |
| 10.29†       |       | Incentive Bonus  Plan (2008 and 2009).                                                                                                                                                        |       | 10-K                                 |   | 10.25 |   | 2/29/2008 |

 

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| 10.30      |   | Credit Agreement  and $10,000,000 Revolving Line of Credit Note between StarTek, Inc. and  Wells Fargo Bank West, National Association dated June 30, 2003.                                                                               |   | 10-Q |   | 10.32  |   | 8/14/2003  |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|--------|--------|--------|------------|
| 10.31      |   | Renewal and  Amended Credit Agreement by and between StarTek, Inc. and Wells Fargo  NA, dated June 30, 2005.                                                                                                                              |   | 8-K  |   | 10.34  |   | 7/5/2005   |
| 10.32      |   | Third Amendment  to Credit Agreement and $10,000,000 Revolving Line of Credit Note, each  entered into as of June 1, 2007.                                                                                                                     |   | 8-K  |   | 10.88  |   | 7/3/2007   |
| 10.33      |   | Fourth Amendment  to Credit Agreement entered into as of April 30, 2008.                                                                                                                                                                       |   | 10-Q |   | 10.23  |   | 8/11/2008  |
| 10.34      |   | Fifth Amendment  to Credit Agreement, $10,000,000 Revolving Line of Credit Note, and Addendum  to Promissory Note, each entered into as of June 30, 2008.                                                                                      |   | 10-Q |   | 10.24  |   | 8/11/2008  |
| 10.35      |   | Continuing  Security Agreement between StarTek USA, Inc. and Wells Fargo Bank,  National Association, entered into as of June 30, 2008.                                                                                                   |   | 10-Q |   | 10.25  |   | 8/11/2008  |
| 10.36      |   | Continuing  Security Agreement between StarTek, Inc. and Wells Fargo Bank, National  Association, entered into as of June 30, 2008.                                                                                                       |   | 10-Q |   | 10.26  |   | 8/11/2008  |
| 10.37      |   | Promissory Note  to Wells Fargo Equipment Finance, Inc.                                                                                                                                                                                        |   | 10-K |   | 10.50  |   | 3/9/2004   |
| 10.438     |   | Security  Agreement between StarTek Canada Services, Ltd. and Wells Fargo Equipment  Finance Company.                                                                                                                                               |   | 8-K  |   | 10.74  |   | 11/21/2006 |
| 10.439     |   | Form of  Guaranty of StarTek Canada Obligations executed by StarTek, Inc. and StarTek  USA, Inc.                                                                                                                                     |   | 8-K  |   | 10.75  |   | 11/21/2006 |
| 10.40      |   | Promissory Note  between StarTek USA, Inc. and Wells Fargo Equipment Finance, Inc.                                                                                                                                                        |   | 8-K  |   | 10.76  |   | 11/21/2006 |
| 10.41      |   | Form of  Guaranty of StarTek USA Obligations executed by StarTek, Inc. and  StarTek Canada Services, Ltd.                                                                                                                                 |   | 8-K  |   | 10.77  |   | 11/21/2006 |
| 10.42      |   | Share Purchase  Agreement by and among StarTek, Inc., StarTek Europe Ltd. and Taelus  Limited, dated September 30, 2004.                                                                                                                  |   | 8-K  |   | 10.1   |   | 10/6/2004  |
| 10.43      |   | Promissory Note  between StarTek USA, Inc. and DPL Corporation Southeast.                                                                                                                                                                      |   | 8-K  |   | 10.72  |   | 12/21/2005 |
| 10.44#     |   | Services  Agreement and Statement of Work by and between StarTek, Inc. and  T-Mobile USA, Inc. for certain call center services dated effective  October 1, 2007.                                                                    |   | 10-Q |   | 10.120 |   | 11/6/2007  |
| 10.45#     |   | Amendment  No. 1 effective February 24, 2008 to Services Agreement and  Statement of Work by and between StarTek, Inc. and T-Mobile  USA, Inc. for certain call center services dated effective  October 1, 2007.          |   | 10-Q |   | 10.7   |   | 5/6/2008   |
| 10.46#     |   | Master Services  Agreement No. GAMSA-STAR081106-00 effective August 11, 2006 between  StarTek USA, Inc. and Cingular Wireless LLC.                                                                                                   |   | 10-K |   | 10.85  |   | 3/15/2007  |
| 10.47#     |   | Amendment  No. cing7367.A.001 effective December 7, 2007 to Master Services  Agreement No. GAMSA-STAR081106-00 effective August 11, 2006 between  StarTek, Inc. and AT&T Mobility, LLC (f/k/a Cingular Wireless, LLC). |   | 10-K |   | 10.46  |   | 2/29/2008  |
| 10.48#     |   | Statement of  Work GASOW-STAR100606-00 dated December 21, 2006, between StarTek  USA, Inc. and Cingular Wireless, LLC.                                                                                                                    |   | 10-K |   | 10.83  |   | 3/15/2007  |
| 10.49#     |   | Amendment  Cing7866.A.001 effective April 16, 2008 between StarTek USA, Inc.  and AT&T Mobility LLC                                                                                                                                   |   | 10-Q |   | 10.15  |   | 8/11/2008  |
| 10.50      |   | Amendment  No. GASOW-STAR10.0606-00.A.004 effective March 1, 2009 to  GASOW-STAR100606-00 between StarTek USA, Inc. and AT&T Mobility LLC  (successor-in-interest to Cingular Wireless, LLC).                                    |   | 10-K |   | 10.52  |   | 3/3/2009   |
| 10.51#     |   | Work Order  20080122.003.C effective May 1, 2008 between StarTek USA, Inc. and  AT&T Mobility LLC.                                                                                                                                    |   | 10-Q |   | 10.14  |   | 8/11/2008  |
| 10.52& |   | Work Order  GAMSA-STAR081106-00.S.001 effective October 1, 2008, between StarTek  USA, Inc. and AT&T Mobility LLC (f/k/a Cingular Wireless, LLC).                                                                                     |   | 10-K |   | 10.54  |   | 3/3/2009   |
| 10.53& |   | Work Order  GAMSA-STAR081106-00.S.004 effective December 1, 2008, between  StarTek, Inc. and AT&T Mobility LLC (f/k/a Cingular Wireless, LLC).                                                                                        |   | 10-K |   | 10.55  |   | 3/3/2009   |
| 10.54#     |   | Contact Call  Center Agreement No. 20070105.006.C between StarTek, Inc. and  AT&T Services, Inc., effective January 26, 2007.                                                                                               |   | 10-Q |   | 10.90  |   | 5/8/2007   |

 

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| 10.55# |   | Amendment  20070105.006.A.001 effective October 31, 2007 to Master Services  Agreement 20070105.006.C entered on January 26, 2007 between  StarTek, Inc. and AT&T Services, Inc.                                                                                                                                                                                          |   | 10-K |   | 10.50  |   | 2/29/2008 |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|--------|--------|--------|-----------|
| 10.56# |   | Agreement Order  No. 20070105.006.S.002 for  Tier III Service Management by and between StarTek, Inc. and AT&T  Services, Inc., signed May 2, 2007.                                                                                                                                                                                                                       |   | 10-Q |   | 10.105 |   | 8/8/2007  |
| 10.57# |   | Amendment  20070105.006.S.002.A.001 effective June 27, 2008 by and between  StarTek, Inc. and AT&T Services, Inc.                                                                                                                                                                                                                                                              |   | 10-Q |   | 10.16  |   | 8/11/2008 |
| 10.658 |   | Termination of  Agreement Order No. 20070105.006.S.002 effective 12/31/2008.                                                                                                                                                                                                                                                                                                                 |   | 10-K |   | 10.58  |   | 3/3/2009  |
| 10.59# |   | Agreement Order  20070105.006.S.007 for EMBR Program between StarTek, Inc. and AT&T  Corp. signed June 15, 2007.                                                                                                                                                                                                                                                                    |   | 10-Q |   | 10.106 |   | 8/8/2007  |
| 10.60# |   | Amendment  20070105.006.S.007.A.001 effective July 14, 2008 between  StarTek, Inc. and AT&T Corp.                                                                                                                                                                                                                                                                                   |   | 10-Q |   | 10.17  |   | 8/11/2008 |
| 10.61# |   | General  Agreement Order 20070105.006.S.008 effective June 19, 2008 by and  between StarTek, Inc. and AT&T Services, Inc.                                                                                                                                                                                                                                                      |   | 10-Q |   | 10.18  |   | 8/11/2008 |
| 10.62# |   | General  Agreement Order 20070105.006.S.009 effective June 5, 2008 by and between  StarTek, Inc. and AT&T Services, Inc.                                                                                                                                                                                                                                                       |   | 10-Q |   | 10.19  |   | 8/11/2008 |
| 10.63# |   | General  Agreement Order 20070105.006.S.010 effective June 5, 2008 by and between  StarTek, Inc. and AT&T Services, Inc.                                                                                                                                                                                                                                                       |   | 10-Q |   | 10.20  |   | 8/11/2008 |
| 10.64# |   | General  Agreement Order 20070105.006.S.011 effective June 5, 2008 by and between  StarTek, Inc. and AT&T Services, Inc.                                                                                                                                                                                                                                                       |   | 10-Q |   | 10.21  |   | 8/11/2008 |
| 10.65# |   | General  Agreement Order 20070105.006.S.012 effective July 10, 2008 by and  between StarTek, Inc. and AT&T Services, Inc.                                                                                                                                                                                                                                                      |   | 10-Q |   | 10.22  |   | 8/11/2008 |
| 10.66  |   | Asset Purchase  Agreement among StarTek, Inc., Domain.com, Inc. and A. Emmet  Stephenson Jr., Inc effective February 25, 2009. The schedules have been  omitted from this filing pursuant to Item 601(b)(2) of Regulation  S-K.  The registrant agrees to furnish supplementally a copy of any  omitted schedule to the Securities and Exchange Commission upon request. |   | 10-Q |   | 10.1   |   | 5/8/2009  |
| 10.67  |   | Amendment  GASOW-STAR100606-00.A.005 effective April 1, 2009 between  StarTek, Inc. and AT&T Mobility LLC.                                                                                                                                                                                                                                                                          |   | 10-Q |   | 10.2   |   | 5/8/2009  |
| 10.768 |   | Promissory Note,  dated June 26, 2009, between StarTek, Inc., StarTek USA, Inc.,  StarTek Canada Services, Ltd. and UMB Bank Colorado, N.A.                                                                                                                                                                                                                                        |   | 8-K  |   | 10.3   |   | 7/2/2009  |
| 10.769 |   | Business Loan  Agreement, dated June 26, 2009, among StarTek, Inc., StarTek  USA, Inc., StarTek Canada Services, Ltd. and UMB Bank Colorado, N.A.                                                                                                                                                                                                                                  |   | 8-K  |   | 10.4   |   | 7/2/2009  |
| 10.70  |   | Commercial  Security Agreement, dated June 26, 2009, among StarTek, Inc., as  grantor, StarTek, Inc., StarTek USA, Inc., StarTek Canada Services,  Ltd. and UMB Bank Colorado, N.A.                                                                                                                                                                                           |   | 8-K  |   | 10.5   |   | 7/2/2009  |
| 10.71  |   | Commercial  Security Agreement, dated June 26, 2009, among StarTek USA, Inc.,  as grantor, StarTek, Inc., StarTek USA, Inc., StarTek Canada  Services, Ltd. and UMB Bank Colorado, N.A.                                                                                                                                                                                       |   | 8-K  |   | 10.6   |   | 7/2/2009  |
| 10.72  |   | Commercial  Security Agreement, dated June 26, 2009, among StarTek Canada Services,  Ltd., as grantor, StarTek, Inc., StarTek USA, Inc., StarTek Canada  Services, Ltd. and UMB Bank Colorado, N.A.                                                                                                                                                                                |   | 8-K  |   | 10.7   |   | 7/2/2009  |
| 10.73# |   | 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-Q |   | 10.6   |   | 7/31/2009 |
| 10.74# |   | 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-Q |   | 10.7   |   | 7/31/2009 |
| 10.75# |   | Amendment  2007105.006.S.007.A.002 effective June 30, 2009 to Agreement  No. 20070105.006.S.007 between StarTek, Inc. and AT&T  Services, Inc.                                                                                                                                                                                                                            |   | 10-Q |   | 10.8   |   | 7/31/2009 |
| 10.76  |   | Amendment  20070105.006.A.002 effective April 14, 2009 to Agreement  No. 20070105.006.C between StarTek, Inc. and AT&T  Services, Inc.                                                                                                                                                                                                                                    |   | 10-Q |   | 10.9   |   | 7/31/2009 |
| 10.77# |   | Amendment  20070105.006.A.003 effective June 24, 2009 to                                                                                                                                                                                                                                                                                                                                     |   | 10-Q |   | 10.10  |   | 7/31/2009 |

 

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|        |   | Agreement  No. 20070105.006.C between StarTek, Inc. and AT&T  Services, Inc.                                                                                                                                 |   |   |   |   |   |       |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|------------|
| 10.78       |   | 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-Q   |   | 10.11  |   | 7/31/2009  |
| 10.79#      |   | 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.                                                  |   | 10-Q   |   | 10.12  |   | 7/31/2009  |
| 10.80#      |   | Work Order  No. 20070105.006.S.013 effective November 30, 2008 pursuant to  Master Services Agreement No. 20070105.006.C dated January 26, 2007  between StarTek, Inc. and AT&T Services Inc.      |   | 10-Q   |   | 10.1   |   | 10/30/2009 |
| 10.81#      |   | Amendment  2007105.006.S.014.A.001 effective March 1, 2009 to Agreement  No. 20070105.006.S.014 between StarTek, Inc. and AT&T  Services, Inc.                                                          |   | 10-Q   |   | 10.2   |   | 10/30/2009 |
| 10.82*& |   | Amendment  20080122.003.A.001 effective November 13, 2009 between  StarTek, Inc. and AT&T Mobility LLC.                                                                                                           |   |   |   |   |   |       |
| 10.83*& |   | Amendment  GASOW-STAR081106-00.S.001.A.001 effective November 13, 2009 between  StarTek, Inc. and AT&T Mobility LLC.                                                                                              |   |   |   |   |   |       |
| 10.84*& |   | Work Order  No. 20070105.006.S.016 effective December 9, 2009 pursuant to  Master Services Agreement No. 20070105.006.C dated January 26, 2007  between StarTek, Inc. and AT&T Services, Inc. |   |   |   |   |   |       |
| 21.1*       |   | Subsidiaries of  the Registrant.                                                                                                                                                                                                |   |   |   |   |   |       |
| 23.1*       |   | Consent of  Ernst & Young, LLP, Independent Registered Public Accounting Firm.                                                                                                                                         |   |   |   |   |   |       |
| 31.1*       |   | Certification of  A. Laurence Jones pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                            |   |   |   |   |   |       |
| 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.                                                                        |   |   |   |   |   |       |

 

----

| *      |   | Filed with this Form 10-K.                                                                                                                                                                 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| † |   | Management contract or compensatory plan or arrangement.                                                                                                                                        |
| #      |   | The Securities and Exchange Commission has granted our request that  certain material in this agreement be treated as confidential. Such material  has been redacted from the exhibit as filed. |
| &  |   | 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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