Overview

We are a leading global provider of outsourced customer management and business process outsourcing solutions. Our primary services include:

• Customer Care Services (including customer care/retention, and technical support);

• Marketing, Technology and Business Process Outsourcing (BPO) Solutions (including database marketing, data entry/management, e-mail response management, remittance processing and other back-office business processing services).

We also continue to provide telesales to our clients. However, as part of a realignment of our services we have limited our North American telesales efforts to accommodate demand from large strategic clients. We have also ceased providing our market research service offerings as part of this realignment.

We provide our services through operations centers located throughout the world, including the U.S., Ireland, the U.K., Canada, Australia, Mexico, the Philippines, Costa Rica, India and Argentina. As of December 31, 2008, we had 41 operating centers from which we support clients primarily in the financial services, healthcare, telecommunications, information technology, business and consumer services, Government and energy services sectors.

Our domestic sales force is organized by specific industry verticals, which enables our sales personnel to develop in-depth industry and product knowledge. We also have sales operations in the U.K., Canada, Mexico, Australia and Argentina.

We invest heavily in systems and software technologies designed to improve productivity in order to lower the effective cost per contact made or received. Our systems and software technologies are also designed to improve our effectiveness by providing our agents with real-time access to customer and product information. We currently offer and/or utilize a comprehensive suite of business process outsourcing (BPO) technologies, available on a hosted basis for use by clients at their own in-house facilities or on a co-sourced basis in conjunction with our fully integrated, Web-enabled centers. Our technologies include automatic call distribution (ACD) voice processing, interactive voice response (IVR), advanced speech recognition (ASR), Voice over Internet Protocol (VoIP), contact management, automated e-mail management and processing, sales force and marketing automation, alert notification and Web self-help.

We believe that we were one of the first fully automated outsourced customer management services companies, and we were among the first such companies to implement predictive dialing technology, provide collaborative Web browsing services and utilize VoIP capabilities. Through our global implementation of VoIP, we have established a redundant voice and data network infrastructure that can seamlessly route voice traffic to our centers worldwide. We do not provide telecommunications or VoIP services to the general public.

Our clients typically enter into multi-year, contractual relationships that may contain provisions for early contract terminations. The pricing component of a contract is often comprised of a base service charge and separate charges for ancillary services. Our services are generally priced based upon per-minute or hourly rates. On occasion, we perform services for which we are paid incentives based on performance. The nature of our business is such that we generally compete with other outsourced service providers as well as the retained in-house operations of our customers. This can create pricing pressures and impact the rates we can charge in our contracts.

Revenue is recognized as the services are performed, and is generally based on hours or minutes of work performed; however, certain types of revenue relating to upfront project set-up costs is deferred and recognized over a period of time, typically the length of the customer contract. The incremental direct cost associated with this revenue is also deferred over the same period of time. Some of our client contracts have performance standards, which can result in service penalties and other adjustments to monthly billings if the standards are not met. Any required adjustments to our monthly billings are reflected in our revenue on an as-incurred basis.

We have begun to refer to our revenue as either Core revenue or Non-Core revenue. Core revenue encompasses customer care, help desk support, technical support, database marketing, lead qualification, technology hosting, data processing, data entry, receivables management and other BPO activities. Non-Core revenue includes financial telesales for North American clients along with market research services. As of December 31, 2008, Management decided no longer to provide market research services.

Results for 2008 reflect the following:

• Continued growth in the Philippines, where production hours increased by 32% compared to 2007 and comprised 43% of worldwide production as compared to 32% in 2007.

• Overall production hours were flat in 2008 compared to 2007 as the declines in North American financial telesales and market research services were offset by the growth of our Core business volume.

• Revenue declined and is partially due to offshore migration and partially due to the overall economic conditions.

• Restructuring

• We recorded restructuring charges in 2008 as we continued to "right-size" the organization to meet our client needs. The charges totaled $8.7 million and were comprised of ongoing lease obligations, severance and asset impairments.

• Income taxes

• Our income tax benefit of $1.9 million reflects the benefit of operating losses in Canada offset by valuation allowances of approximately $600,000 recorded in Canada and Ireland against deferred tax assets that we may not be able to realize as well as $300,000 of additional FIN 48 reserves recorded in Mexico.

• Goodwill and asset Impairments

• We recorded $12.2 million charge to writeoff all of our recorded goodwill.

• In addition to impairment charges associated with our restructuring, we recorded $2.3 million of other assets impairments in the U.K., Ireland and Argentina.

• We reversed approximately $1.2 million of grant income previously recognized against certain Government grants in the U.S. and Canada. We also recognized approximately $820,000 of grant income associated with new government grants we obtained in Canada. Grant income and expense for this grant is recorded through costs of services as a component of direct labor.

• Facility expansion

• During 2008 we opened our sixth and seventh operating centers in the Philippines and our second center in Argentina.

Our future profitability will be impacted by, among other things, our ability to expand our service offerings to existing customers as well as our ability to obtain new customers and grow new vertical markets. Our profitability is also impacted by our ability to manage costs, perform in accordance with contract requirements to avoid service penalties and mitigate the effects of foreign currency exchange risk. Our business is very labor-intensive and consequently, in an effort to reduce costs and be as competitive as possible in the marketplace, we have been moving many of our domestic operations to near-shore and offshore operations centers, which typically have lower labor costs. Our success is dependent upon our ability to perform work in locations where we can find qualified labor at cost-effective rates and effectively manage that labor in the most profitable manner.

Some of these benefits, however, may be offset by the expanded training and associated costs we have incurred in the past and may continue to incur because of our service mix. Many of our customer care services require more complex and costly training processes and to the extent we cannot bill these amounts to our clients, our profitability may be impacted. In addition to the more complex training, the employees who work on our customer care programs are generally paid a higher hourly rate because of the more complex level of services they are providing.

We believe that our 2009 performance will be largely dependent on our ability to continue capturing new business, leveraging the investment we have made in our infrastructure, effectively managing the transition of domestic programs to offshore facilities, and by expanding our business service offerings. We believe that major corporations will continue to leverage the skills of companies like ours and that their outsourcing needs will continue to expand beyond the contact center services that currently comprise the large majority of our business. We plan to leverage our existing strength in the financial services, insurance, telecommunications and healthcare markets and provide additional business services to our customers. To capitalize on these opportunities, we will continue to enhance the technologies we use.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. These generally accepted accounting principles require Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Our significant accounting policies are described in Note 2 to the consolidated financial statements, included in Item 8 of this Form 10-K. The following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results and require Management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. If actual results were to differ significantly from estimates made, the reported results could be materially affected. However, we are not currently aware of any reasonably likely events or circumstances that would result in materially different results. These critical accounting policies and estimates are discussed with our audit committee quarterly.

Revenue Recognition

Revenue is typically calculated based on contracted per-minute or hourly rates with customers. We recognize revenue as services are performed, generally based on billable minutes or hours of work incurred. Some of our client contracts have performance standards, which can result in adjustments to monthly billings if the standards are not met. Any required adjustments to our monthly billings are reflected in our revenue on an as-incurred basis.

In order to provide our business services solutions, we may incur certain upfront project set-up costs specific to each customer contract. In certain instances, we can bill the customer for these costs; however, because the delivered item (project set-up services) does not have stand alone value to the customer, revenue is deferred and recognized as services are provided over the contract term or until contract termination, should that occur prior to the end of the contract term. To the extent we have billed these costs and there are no customer issues with collection, we will defer the project set-up costs and amortize such amounts over the program period, over the remaining contract term or until contract termination. The costs incurred are deferred only to the extent of the amounts billed. Amounts collected from customers prior to the performance of services are also recorded as deferred revenue. Deferred revenue totaled $5.7 million and $5.4 million as of December 31, 2008 and 2007, respectively. The current portion is included in accrued expenses and other liabilities with the non-current portion included in other liabilities in the accompanying consolidated balance sheets. The deferred revenue related to upfront project set-up costs was $5.0 million and $4.3 million as of December 31, 2008 and 2007, respectively. The current portion of the deferred cost associated with this revenue is included in prepaid expenses and other assets with the non-current portion included in other assets in the accompanying consolidated balance sheets. The deferred costs totaled $3.5 million and $2.9 million at December 31, 2008 and 2007, respectively. The balance of the deferred revenue represents customer prepayments as of December 31, 2008.

Our revenue recognition policy is in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition," and Emerging Issues Task Force Issue (EITF) 00-21, "Revenue Arrangements with Multiple Deliverables."

Allowance for Doubtful Accounts

Our accounts receivable balances are net of an estimated allowance for uncollectible accounts. Management continuously monitors collections and payments from customers and maintains an allowance for uncollectible accounts based upon our historical write-off experience and any specific customer collection issues that have been identified. Other items considered in estimating the allowance for uncollectible accounts include the age of the receivables, the financial status of our customers and general economic conditions. Because the allowance for uncollectible accounts is an estimate, it may be necessary to adjust the allowance for doubtful accounts if actual bad debt expense exceeds the estimated reserve. We are subject to concentration risks as certain of our customers, as well as certain of the industries we support, generate a high percentage of our total revenue and corresponding receivables. Accounts receivable, net of the allowance for doubtful accounts, was $65.2 million and $79.8 million as of December 31, 2008 and 2007, respectively, representing approximately 37% and 35% of total assets, respectively. Given the significance of accounts receivable to our consolidated financial statements, the determination of net realizable values is considered to be a critical accounting estimate.

Impairment of Goodwill and Other Intangible Assets

Goodwill and other intangible assets are recorded as a result of business combinations. Prior to impairment, as of December 31, 2007 we had $13.1 million of goodwill. Although goodwill is no longer required to be amortized, we are required to perform an annual impairment review of our goodwill. This impairment review, which is performed in the fourth quarter of each year, is a discounted cash flow analysis using projected cash flows of the Company. On an interim basis, we also evaluate whether any events have occurred or whether any circumstances exist that could indicate an impairment of our goodwill. During the fourth quarter of 2008, we recorded an impairment charge of $12.2 million against our goodwill, which resulted in a full impairment of our goodwill. The primary driver behind this impairment was the significant decline in our market capitalization during the fourth quarter of 2008. The impairment was computed using a valuation of the Company that was performed in the fourth quarter. This valuation was based on a discounted cash flow analysis and resulted in a fair valuation of the Company that was significantly below the book value of our shareholders' equity at December 31, 2008. We also had $765,000 and $1.3 million of other intangible assets, net of amortization, at December 31, 2008 and 2007, respectively. An impairment of these assets could have a significant impact on our results of operations. An impairment exists when events have occurred or circumstances exist that would cause the fair value of these assets to fall below their carrying value. Other intangible assets are evaluated similar to other long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," as discussed below. For the years ended December 31, 2008, 2007 and 2006, there were no impairment charges related other intangible assets.

Impairment of Long-Lived Assets

We continually evaluate whether events or circumstances have occurred that would indicate that the remaining estimated useful lives of our long-lived assets may warrant revision or that the remaining balance may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, an estimate of the related undiscounted cash flows over the remaining life of the long-lived assets is used to measure recoverability. Some of the more important factors we consider include our financial performance relative to our expected and historical performance, significant changes in the way we manage our operations, negative events that have occurred, and negative industry and economic trends. If any impairment is indicated, measurement of the impairment will be based on the difference between the carrying value and fair value of the asset, generally determined based on the present value of expected future cash flows associated with the use of the asset. For the

years ended December 31, 2008, 2007 and 2006, we recorded impairment charges of $3.0 million, $1.1 million and $14,000, respectively. Net property and equipment as of December 31, 2008 and 2007 totaled $57.8 million and $70.7 million, respectively, representing approximately 33% and 31% of total assets, respectively.

Accounting for Income Taxes

As part of the process of preparing our consolidated financial statements, Management is required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as depreciation of property and equipment, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be realized through future taxable income. We also have deferred tax assets relating to net operating loss (NOL) carryforwards for Federal and state tax purposes, foreign NOL carryforwards and Federal tax credit carryforwards. During 2007 it was determined that it was more likely than not the U.S. entity would not generate sufficient taxable income to realize its deferred tax assets. Accordingly, a full valuation allowance was placed against our U.S. deferred tax assets and in 2008 we did not provide income tax benefits on our U.S. operating losses. This will continue until we begin generating taxable income that will allow us to utilize those losses. At December 31, 2008, we have $13.1 million of U.S. NOL carryforwards which have a full valuation allowance recorded against them.

With respect to our state NOLs, we do not believe it is more likely than not that these deferred tax assets will be realized. At December 31, 2008, we have $41.9 million of NOL carryforwards relating to our foreign operations in Australia, Ireland, Argentina and the United Kingdom, resulting in a gross deferred tax asset of $12.6 million. Currently, Management does not expect to be able to utilize these NOLs to offset future taxable income, and therefore these deferred tax assets have a full valuation allowance recorded against them.

The amount of the deferred tax assets considered realizable, however, could be reduced in the near-term if estimates of future taxable income are reduced. We will continue to evaluate and assess the realizability of all deferred tax assets and adjust valuation allowances, if required in the future.

Restructuring Charges

For the years ended December 31, 2008 and 2007, we recorded $8.7 and $7.7 million of restructuring charges, pre-tax, in connection with a plan to reduce our overall cost structure and adapt to changing economic conditions in the current business environment by closing various operating centers prior to the end of their existing lease terms. The restructuring charges in 2008 included severance of $2.2 million, site closure costs totaling $5.9 million, which are primarily ongoing lease and other contractual obligations and the write-off of $693,000 of leasehold improvements and certain fixed assets. The restructuring charges in 2007 included severance of $521,000, site closure costs totaling $6.0 million and the write-off of $1.1 million of leasehold improvements and certain fixed assets.

During 2008 and 2007, we did not enter into any sublease arrangements. The cash payments recorded against the remaining accrual were related to the ongoing lease obligations.

Government Grants

We have historically earned income from Government grants, primarily in the U.S., Ireland and Canada. We recognize the grant income as we incur the related costs, primarily payroll, for which the grant is intended to compensate. Grant income is recorded as a reduction of the related expense in the consolidated statement of operations. If we have already incurred the costs, then we recognize grant income during the period in which the grant becomes a receivable or is collected. If there are additional conditions attached to the grant, we evaluate the conditions and only record income if there is reasonable assurance that we will comply with the conditions.

Many of our grants have conditions relating to the maintenance of specified levels of employees, with which we have the intent and ability to comply. To the extent we are not able to remain in compliance with the terms of certain of the grants, we may have to refund a portion of the grant. Grant receivables are recorded in prepaid expenses and other on our consolidated balance sheet.

During 2008, we reversed $835,000 of grant income previously recognized in 2007 relating to our participation in a grant program in Canada. This reversal reflects a change in estimate brought about by a change in the Canadian Government's interpretation of qualifying services under the program. We initially recognized the grant based on agreement from the Canadian Government that our services qualified and that we would be entitled to claim the benefit as part of our annual income tax return filing. During the fourth quarter of 2008, the governmental department that is overseeing our program changed their interpretation of what type of services qualified and subsequently informed our Management that, pending additional support, they are re-evaluating our ability to secure any grant benefits under this program. While we believe we will be able to provide sufficient evidence that our services do qualify for grant benefits under this program, there can be no assurances that we will be successful in that effort. As a result, we have reversed the $835,000 in 2008.

During 2008, we reversed $400,000 of grant income associated with a U.S. grant that we had recognized in prior periods, but not yet collected due to certain claims not qualifying for the grant.

In 2008, we entered into a new grant in Canada for job creation. We received $1.4 million of grant proceeds, of which $820,000 was recognized as grant income in 2008 based on new jobs created to date. The remaining portion of the grant proceeds will be recognized over future periods based on our ability to maintain the jobs created.

During the fourth quarter of 2007, we reversed $344,000 of grant income recorded previously from a program in which we are participating in Ireland. The reversal was based on reductions in our employee base.

Accounting for Contingencies

In the ordinary course of business, we have entered into various contractual relationships with strategic corporate partners, customers, suppliers, vendors and other parties. As such, we could be subject to litigation, claims or assessments arising from any or all of these relationships, or from our relationships with our employees. Management accounts for contingencies such as these in accordance with SFAS No. 5, "Accounting for Contingencies." SFAS No. 5 requires an estimated loss contingency be recorded when information available prior to the issuance of financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. SFAS No. 5 and its interpretations further state that when there is a range of loss and no amount within that range is a better estimate than any other, that the minimum amount in the range should be accrued. Accounting for contingencies arising from contractual or legal proceedings requires Management to use its best judgment when estimating an accrual related to such contingencies. As additional information becomes known, the accrual for a loss contingency could fluctuate, thereby creating variability in our results of operations from period to period. Likewise, an actual loss arising from a loss contingency which significantly exceeds the amount accrued could have a material adverse impact on our operating results for the period in which such actual loss becomes known.

Share-Based Compensation

We follow SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS No. 123R) which requires that share-based awards be accounted for using a fair value based method. SFAS No. 123R requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award.

We determine the fair value of stock options using the Black-Scholes valuation model. Inherent in this valuation model are various assumptions and estimates, including, but not limited to, stock price volatility, risk-free borrowing rate and employee stock option exercise behaviors. We also utilize incentive compensation plans that have performance conditions, which require Management to estimate the level of performance that will be achieved. The share-based compensation expense recorded is partially based on the estimated achievement level of the performance targets.

Results of Operations

The following is a discussion of the major categories set forth in the consolidated statement of operations.

                                                                            % change           % change
(dollars in thousands)               2008         2007         2006       2008 vs. 2007      2007 vs. 2006
Revenue:                           $ 428,177    $ 453,621    $ 447,912             -5.6 %              1.3 %
Core                                 369,589      361,451      342,037              2.3 %              5.7 %
Non-Core                              58,588       92,170      105,875            -36.4 %            -12.9 %
Average Number of Workstations        13,435       13,020       11,396

We refer to our revenue as either Core revenue or Non-Core revenue. Core revenue encompasses customer care, help desk support, technical support, database marketing, lead qualification, technology hosting, data processing, data entry, receivables management and other BPO activities. Non-Core revenue includes financial telesales for North American clients along with market research . . .