ETEL Etelecare Global Solutions ADS (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

OR

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

For the transition period from            to

Commission File Number: 001-33362

eTelecare Global Solutions, Inc.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer   þ		Smaller Reporting Company o

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

     As of June 30, 2007, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $232,000,000, based upon the closing sales price reported by the NASDAQ Global Market on that date.

     As of February 29, 2008, the registrant had outstanding 29,048,218 shares of Common Stock, 2 Philippine Pesos ($0.04 U.S.) par value, of which 9,965,230 common shares were held in the form of 9,965,230 American Depositary Shares, or ADS. Each ADS represents one common share.

 

 

Table of Contents

Part I.
Item 1. Business			3
Item 1A. Risk Factors			15
Item 1B. Unresolved Staff Comments			29
Item 2. Properties			29
Item 3. Legal Proceedings			29
Item 4. Submission of Matters to a Vote of Security Holders			29
Part II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			30
Item 6. Selected Financial Data			32
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			46
Item 8. Financial Statements and Supplemental Data			48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			80
Item 9A(T). Controls and Procedures			80
Item 9B. Other Information			80
Part III.
Item 10. Directors, Executive Officers and Corporate Governance			81
Item 11. Executive Compensation			85
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			96
Item 13. Certain Relationships and Related Transactions and Director Independence			99
Item 14. Principle Accounting Fees and Services			99
Part IV.
Item 15. Exhibits and Financial Statement Schedules			100
Signatures			103
Exhibits			105
EX-10.18
EX-10.19
EX-10.20
EX-10.21
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

This report on Form 10-K contains forward-looking statements. These statements include but are not limited to our expectations that clients are increasingly looking for vendors that provide business process outsourcing, or BPO, services from multiple locations, our anticipated growth in our business, anticipated increase in our selling and administrative expenses, the potential to obtain extensions on Philippine tax holidays, our anticipated capital expenditures in 2008, and our belief regarding the adequacy of our capital resources over the next 12 months. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in these forward-looking statements. These risks and uncertainties include, but are not limited to, our ability to manage growth, intense competition in the industry including those factors which may affect our cost advantage, wage increases, our ability to attract and retain customer service associates and other highly skilled professionals, client concentration, the underlying success of our clients and the resulting impact of any adverse developments in our clients’ business including adverse litigation results. Additional risks and uncertainties include those listed under Item 1A, “Risk Factors.” eTelecare Global Solutions, Inc. expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this report to conform these statements to actual results or changes in our expectations or in events, conditions or circumstances on which any such statement is based. You should not place undue reliance on these forward-looking statements, which apply only as of the date hereof.

The first element of our business model is a focus on the complex, voice and non-voice based segment of the BPO market. Although we provide a wide range of services, we have specialized in more complex voice transactions, many of which require our customer service associates to have specialized skills, training and certifications, such as certification from the United States National Association of Securities Dealers, or the NASD. We provide our services via a multi-shore delivery platform consisting of delivery centers in the Philippines and the United States. We commenced our BPO operations in the Philippines, a former commonwealth of the United States, which we chose as our offshore location to benefit from the population’s excellent American-accented English skills and cultural affinity for, and understanding of, the United States. We believe that our clients’ customers in the United States are comfortable speaking with our Philippine-based customer service associates.

The second element of our business model is our belief that investing in the quality of our people and processes can lead to quantifiably superior results for our clients. We call this investing to outperform. We have high standards for employment and we make significant investments in all areas of our human capital, including training, quality assurance, coaching and our performance management system. We employ a scorecard system that uses objective metrics to review an employee’s performance to provide clarity of purpose and to ensure accountability for individual results. This scorecard system is linked to a compensation structure for our employees that is heavily based on individual performance. As a result of our reliance on objective metrics in our performance management system, we have what we refer to as a metric-driven performance culture among our employees.

The third element of our business model is our approach to clients with metric-driven performance standards that are designed to measure value created per dollar spent. Throughout the sales process, we work closely with our clients to understand what drives economic value for them and then we demonstrate how our performance on their programs will align with that value. After we initiate the client program, we measure our performance each quarter on key metrics that we have agreed upon with the client, such as first-time call resolution, the frequency with which a technician or equipment parts are required to be dispatched to resolve a customer’s technical support issue, the rate at which we are successful in completing a sale on behalf of our client and customer satisfaction, and then convert our performance into quantifiable value. We then share this information with our clients to enable them to compare the quantifiable value we have delivered to the value they have received from their other BPO providers or their in-house operations. We believe that our ability to quantify value based on these key metrics has allowed us in most cases to negotiate fixed pricing with our clients that reflects the greater value created per dollar spent we deliver rather than the cost-based commodity pricing model that we believe is most often emphasized in our industry. In some cases we can earn additional amounts depending on our performance on these key metrics.

We believe that our focus on these three elements of our business model has led to strong relationships with our clients and recognition in our industry.

We have also won numerous industry awards, including the Best Outsourcer at ICCM, the largest contact center convention in the world, for each of the last six years the award was presented; Philippine Cyber Services Pioneer Award in 2006; Employer of the Year in the Philippines in 2005 by the Personnel Management Association of the Philippines, the leading human resources professional organization in the Philippines, the first time a BPO company has won this award; ranked in approximately the top 5% out of approximately 900 outsourcing

companies in the “50 Best Managed Global Outsourcing Vendors” for 2006 by The Black Book of Outsourcing; and recognition in 2006 and 2007 by NeoIT, an offshore outsourcing advisory and management firm, as one of the top ten offshore call center companies and a leader in human capital development. Since 2000, we have won more than 80 industry awards globally.

BPO Service Offering and Client Base

We provide a variety of onshore and offshore services across a range of industries, with particular expertise in communications, technology and financial services. In 2007, our five largest clients collectively represented 83% of our revenue, with AT & T representing 29% of our revenue, Dell representing 22% of our revenue, Sprint representing 14% of our revenue and Vonage representing 13% of our revenue. In 2006, our five largest clients collectively represented 80% of our revenue and our two largest clients, AT & T and Dell, represented 42% and 18% of our revenue, respectively.

Competitive Strengths

We compete based on the three key elements of our business model: a focus on complex, voice and non-voice based services delivered from onshore and offshore locations; investing to outperform in the quality of our people and processes; and quantifying value created per dollar spent by the client.

Complex, Voice and Non-Voice Based Services Delivered from Onshore and Offshore Locations

Voice and Non-Voice Based Services

Based on increasing demand from our clients and prospective clients for outsourced voice and non-voice based services, we have continued to focus primarily on this segment of the BPO market with the aim of delivering superior customer management and client services such as warranty support, sales, financial advisory services and customer retention. Because we predominately serve U.S.-based clients with English-speaking customers, the quality of the English-language services we deliver impacts our clients’ satisfaction with our services. We deliver these services through our delivery centers in the Philippines and the United States. For those clients that want to avail themselves of our offshore delivery capability, we have found that our customer service associates in the Philippines provide us with a competitive advantage because of the population’s excellent American-accented English skills and cultural affinity for and understanding of the United States.

Complex Functions

While we provide a wide range of voice and non-voice based BPO services, we have specialized in complex customer care transactions such as sophisticated financial services, technical support and sales programs. As examples, we perform financial programs with requirements for certification from the NASD, sales programs to process calls initiated by potential customers requiring consultative sales techniques and technical support programs with advanced requirements, including Computing Technology Industry Association A+ certification and Microsoft Desktop Technician certification.

Multi-shore Delivery Platform

We believe that our clients are increasingly looking for a smaller number of vendors to provide BPO services from multiple geographic locations. This allows clients to manage fewer vendors while minimizing geopolitical risk and risk to operations from natural disasters. Moreover, clients ultimately willing to have service operations offshore may not be willing to do so initially or at any time completely. To address this demand and to supplement our offshore delivery, in May 2004, we acquired Phase 2 Solutions, Inc., a BPO company with delivery locations solely in the United States.

An important element of our multi-shore service offering for our clients and our business is our ability to migrate clients offshore over time. Some clients value the ability to gain confidence in the quality of our services before shifting services to our offshore delivery locations. This migration strategy both lowers costs for our clients and improves our financial performance. Starting in 2005, the annual percentage of our revenue that we derived from services that we delivered offshore has continued to increase, driven in part by our onshore clients deciding to migrate their business offshore, rising from 31% in 2005 to 46% in 2006 to 60% in 2007. See the footnotes to the financial statements filed with this report for additional geographical data.

Investing to Outperform

Human Capital Development

We view the departments dedicated to our employee development as contributors to client value rather than merely as cost centers. We target and select high-caliber employees through a rigorous screening and testing process. After we hire an employee, we make significant investments in foundation training, client-specific training and ongoing instruction and coaching. We emphasize small teams, which facilitates significant time for evaluation and coaching of our customer service associates by our team leaders and quality personnel. We were recognized by the Personnel Management Association of the Philippines as the Outstanding Employer of the Year in the Philippines in 2005. We were also recognized in 2007 as one of the largest employers in Arizona by the Phoenix Business Journal and the Arizona Business Gazette .

Consulting Techniques to Optimize Outsourcing Results for Our Clients

We work closely with our clients in order to understand what drives economic value for them, and then refine, or sometimes redesign, and implement business processes and performance metrics to optimize results for our clients. For example, we developed a model for one of our technical support clients to predict customer dissatisfaction based on information such as repeat calls, the need for a part dispatch and the need for an operating system reinstallation. Using this predictive model, we implemented a process to contact these high-risk customers proactively in order to ensure that their issue had been resolved. The result was increased customer satisfaction, which we believe ultimately leads to purchasing of our clients’ products and services by their customers.

Metric-Driven Performance Culture

Our culture is metric-driven and performance-based. We employ a scorecard system for substantially all of our employees that defines specific goals to provide clarity of purpose and to enable objective weekly, monthly and quarterly performance evaluations. We believe that this system, which is linked with a compensation structure that is heavily weighted with performance-based incentives, helps our managers identify and coach low performers, reward high performers and ultimately achieve high levels of quality for our clients.

Value Created per Dollar Spent Sales Proposition to Clients

We provide a sales proposition to a client based on quantifiable value per dollar spent by the client on our services. For example, we work with the client to quantify the costs to the client of activities such as the time it takes to handle a call, repeat calls, parts dispatches and cancelled sales. We similarly work with a client to quantify the value from initial product sales, sales of products complimentary or more expensive than the products in which a customer is originally interested and repeat purchasing based on customer satisfaction. This information on costs and value created is combined to create a value created per dollar spent model on which both the client and we agree in order to set the price for our services in our contract. We then assess our performance against this model on a quarterly basis and share our results measured by these metrics with the client on a quantified quarterly scorecard. This gives the client a means of comparing our value created per dollar spent on us to the same metrics for their internal centers or other outsourcers. We believe that this approach has been crucial to winning and retaining clients and increasing our ability to withstand competitive pricing pressure.

Our Growth Strategy

In order to strengthen our position in the market and continue our growth, we intend to focus on the following strategies:

Further Penetrate Our Existing Client Base

Our existing clients are large companies with diverse BPO needs and we plan to continue our strategy of expanding the scale and scope of the services we provide for these large clients. As a full-service provider of voice services such as care, technical support and sales, plus the non-voice services we now provide such as chat, email, fraud management and other back-office functions, we can provide numerous capabilities to our existing client base. We have specific account plans for all existing clients to expand the capabilities in the existing lines of business we serve and penetrate new lines of business.

Win New Client Relationships

We are targeting new clients in our current key industry verticals, which represent over 60% of the overall outsourced market. We have added three of our seven largest clients in the last two years and have added several new clients in the last six months that we expect to grow in the next eighteen months.

Expand into New Industries

While we continue to target the significant market opportunity still available in our top three target industries of communications, technology and financial services, we are focusing on

further penetrating some of our smaller target industries such as cable and internet. We have also identified the travel and leisure sector as an industry we may enter in 2008.

Expand into New Markets and Delivery Geographies

Building on our core English-language voice services, we intend to explore expanding into other English-speaking markets such as the United Kingdom and Canada. In addition, we plan to sell services during non-U.S. business hours, as well as the English-speaking Australia/New Zealand market, to improve seat utilization and drive new sources of revenue. We also plan to explore expanding our delivery locations into new geographies such as South America and Central America, both for additional offshore delivery in English and to gain access to Spanish-speaking customer service associates to broaden our Spanish/Bi-lingual language capabilities. We currently do not have operations in South America or Central America. We believe that our U.S.-based clients will increasingly demand Spanish language capabilities to service a fast growing segment of their customer base.

Acquisitions

In the third quarter of 2007, we acquired AOL Philippines which allowed us to expand from our traditional complex, voiced-based services into non-voice-based services, such as chat, e-mail, fraud management and website/blog monitoring. We view such acquisitions as a key component of our growth strategy and will continue to seek acquisitions in the future which expand our existing competencies or add to our portfolio of BPO capabilities.

Continue to Invest in Human Capital Development

We plan to continue our focus on, and investment in, human capital. Building on our already strong base of recruiting, training and performance management systems, we plan to expand our efforts in all of these areas to increase our recruiting capacity and maintain our ability to deliver high-quality services.

Expand into New Delivery Capabilities

The acquisition of the AOL Philippines customer care and technical support subsidiary will expand our capabilities to serve the growing email, chat and other non-voice needs of our clients and the market.

Our Service Offerings

We perform the following BPO services for our clients:

•

Customer Care: Our customer care services are initiated primarily by inbound calls from customers on a wide range of topics including billing inquiries, account and service changes, product and service inquiries and warranty support. Our customer care services also include complex financial planning services that require licensing from the NASD, such as conducting research on customers’ accounts, providing information on the types of available funds or brokerage accounts, and providing information on tax consequences and penalties associated with various financial transactions. We also provide customer support services for various financial products including gift cards and travelers checks.

	•		Technical Support: Our technical support services include handling troubleshooting calls initiated by customers regarding hardware and software issues with computer and other consumer electronic products. Our more complex technical support programs require our employees to have the Computing Technology Industry Association A+ certification or Microsoft Desktop Technician certification.
	•		Sales: We handle inbound calls, or calls initiated by customers purchasing products and services from our clients. The inbound sales programs we handle include order handling, customer retention programs, and selling products complementary to or more expensive than the products in which a customer is originally interested in the business-to-business and business-to-consumer markets. Customer retention programs are programs where the customer is calling to cancel service and our customer service associates resolve the customer’s issue and attempt to convince the customer to keep their service. In addition, we initiate sales calls, primarily to existing customers of our clients for retention and loyalty programs, and in some cases unsolicited calling for customer acquisition.

Sales and Marketing

We organize our sales and marketing group around targeted industries, including communications, technology and financial services. The sales team is responsible for obtaining new clients and growing existing clients by identifying additional sales opportunities. The sales team is supported by our sales support team, which responds to requests for proposals and requests for information and prepares the proposals. Our sales support team is also specifically responsible for managing and coordinating visits by clients to our delivery centers. We view these site visits as one of the most important parts of our sales cycle, and we have designed these site visits to allow prospective clients to experience the elements of our business model at work. Finally, our marketing team coordinates industry events, including seminars, conferences, speaking engagements and targeted lead generation efforts aimed at generating additional sales leads and increasing our public exposure. As of December 31, 2007, we had 19 sales, marketing and sales support professionals, with 17 based in the United States and 2 based in the Philippines.

The focus of our sales and marketing efforts is to educate prospective clients on what we believe differentiates us as an outsourced provider in the BPO market. Specifically, our sales effort focuses on our approach of investing to outperform and in delivering greater value per dollar spent. We provide a sales proposition to a prospective client based on quantifiable value per dollar spent by the client on our services. For example, we work with the prospective client to quantify the costs to the client of activities such as the time it takes to handle a call, repeat calls, parts dispatches and cancelled sales. We similarly work with a client to quantify the value from initial product sales, sales of products complementary to or more expensive than the products in which a customer is originally interested and repeat purchasing based on customer satisfaction. This information on costs and value created is combined to create a value created per dollar spent model to which both the client and we agree in order to set the price for our services in our contract. We then assess our performance against this model on a quarterly basis and share our results measured by these metrics with the client on a quantified quarterly scorecard. This gives the client a means of comparing our value created per dollar spent on us to the same metrics for their internal centers or other outsourcers. We believe that this approach has been crucial to winning and retaining clients and increasing our ability to withstand competitive pricing pressure.

Our sales cycle tends to range from six to 12 months. However, for this same reason, our client relationships tend to be long-term given our performance and the scale and complexity of the services we provide coupled with risk and costs to our clients associated with bringing processes in-house or outsourcing them to another provider.

Human Capital

We employ an organizational structure that allows for strong coordination between the different departments contributing to employee development and a performance-based approach where support groups are measured on the same metrics as the operations group.

We have grouped the departments responsible for our employee development into our global shared services group, including recruiting, training, workforce management, quality assurance and performance management and reporting. This enables these departments to work with a unified and coordinated approach to a common set of goals. Because an employee’s development is affected by all of these groups, we believe that it is critical for the groups to work jointly to create and improve our employee selection and development programs. For example, the quality group provides feedback to our employees on how to improve their performance and also to the recruiting and training departments on how better to select and train employees to meet client needs and our performance standards.

We have employed the same performance-based approach with our support groups that we use in our operations groups. We view the departments contributing to our employee development not merely as cost centers, but more appropriately as value drivers. Therefore, we evaluate the performance of groups such as recruiting, training and quality assurance based not on hiring quotas or training test scores, but instead on our employees’ actual operational performance on key client metrics.

We believe that our approach to human capital has led to recognition in the industry. As of December 31, 2007, we had approximately 13,100 employees. Approximately 10,400 of our employees are based in the Philippines and approximately 2,700 are based in the United States. Our employees are not unionized and we have never experienced any work stoppages. We believe that our employee relations are excellent, and we were recognized as the Employer of the Year in the Philippines in 2005 by the Personnel Management Association of the Philippines, the first time this award has been presented to a BPO company. We were also recognized 2007 as one of the largest employers in Arizona by the Phoenix Business Journal and the Arizona Business Gazette .

Recruiting and Retention

Our recruiting efforts are defined by a sourcing strategy and a structured process for evaluating potential employees. Our primary sources for employee recruitment are employee referrals, educational institutions, media, Internet job posting sites, job fairs and recruiting agencies. Our employees receive a bonus for successful referrals. We believe that the success of our employee referral programs illustrates our employees’ job satisfaction.

Before we initiate any recruiting activity, we profile each job position to ensure it both meets the specific objectives of our clients and fits within our performance-based culture. We then use an internally-developed, six-step recruiting process to evaluate potential employees. Specific attributes profiled include communication, problem solving, sales, values, attitude and leadership

potential. The process continues with activities focused on observing and verifying key behaviors that support the specific job profiles, including pre-screening, skills testing, problem solving exercises, interviewing, operations validation and background checks. We are extremely selective in our recruitment.

Training and Development

We invest significant resources in the training and development of our employees. This training occurs in three primary forms: foundation training, which provides a strong base skill set of communication, technology and general customer service skills; client-specific training, which focuses on customized training programs in accordance with the specific needs of the client’s business and the services the client requires; and ongoing supplemental training focused on more advanced skills for tenured customer service associates as well as remedial training for lower-performing customer service associates.

Our training programs are coordinated by our global training group responsible for employees in both the Philippines and the United States, which ensures that all training programs meet overall company standards and employ company-approved training techniques such as role plays and experiential training techniques. Training programs are then administered by trainers who are dedicated to a specific function, such as sales, technical support, financial services and customer care, to allow customer service associates to learn from experts in a given field.

Workforce Management

Optimizing the productivity of our employees is an important element of our financial success, and we have created a centralized workforce management group responsible for this function. This group forecasts call volumes, creates employee schedules and monitors substantially all of our customer service associates for schedule adherence on a real-time basis, 24 hours a day, 7 days a week.

Quality, Performance Management and Scorecards

We use an internally developed performance management process consisting of setting goals, monitoring performance, coaching for improvement and providing rewards and recognition based on performance. Our process is structured around a scorecard system for substantially all of our employees that defines specific metrics and goals and enables objective weekly, monthly and quarterly performance evaluations. We monitor our customer service associates and other employees through a variety of methods, including voice and data recording software technologies, team leader observation and remote observation by our clients. This allows us to analyze employee performance and to identify where improvements are needed. Coaching is performed by team leaders and our quality group to reinforce positive behaviors and address areas for improvement. The system ends with performance-based rewards and recognition. Our compensation structure for customer service associates is heavily weighted with performance-based incentives, which allows us to reward high performers and provides an incentive for all employees to improve their performance.

Information Technology

Information technology, or IT, is a fundamental enabler of our services. Our IT mission is to deploy proven technology that is reliable, scalable and cost effective.

Redundant Network Infrastructure

We have implemented a fault-tolerant infrastructure providing us increased ability to withstand external and internal system failures with minimal service interruptions. Our architecture incorporates geographically diverse data centers in the United States that operate in tandem to ensure a high level of system availability for our clients. These data centers support our delivery centers in both the United States and the Philippines. We have designed and deployed a dedicated communications system that allows us to route communications between our data centers and our delivery centers. Our communications system includes multiple, or redundant, communication routes, with dual paths to all delivery centers to ensure reliability and a Voice-over-Internet Protocol network infrastructure designed to expand its capacity as necessary. We use multiple communications vendors and circuit routes in an effort to optimize network up time.

IT Security

We employ a variety of applications and devices designed to prevent unauthorized access to data residing in our systems. These include firewalls, intrusion detection and prevention software, cryptography and encryption techniques, vulnerability assessments, patch management and the ability to track any unauthorized access and the resulting impact of any unauthorized access. We also deploy personnel and facilities security processes and features, including background checks for all employees and card key access to company facilities.

Delivery Center Platform

We deploy industry recognized delivery center products from vendors such as Avaya Inc., Cisco Systems, Inc., Aspect Software, Inc. and NICE Systems Ltd. These products include features that allow us to route customer calls to the appropriately skilled customer service associate, forecast the volumes of calls to be received, record and playback voice and data, monitor and manage our employees’ schedule adherence, schedule workforce management and monitor calls remotely; allow customers to enter critical account information by speaking or by selecting from option menus using their telephone keypad; and integrate our phone system with our computer systems allowing our customer service associates speedy access to customer information required to handle a call. Our internally developed customer relationship management software can be tailored to each client’s specific data capture and reporting requirements and our delivery centers incorporate industry standard desktop systems.

24x7 Helpdesk Support

We have a centralized helpdesk staffed 24 hours a day, 7 days a week, to provide our employees and clients complete coverage in the event of any system issues. We have established standardized procedures to identify, respond to and track inquiries. We have also deployed a standardized escalation protocol that allows us to escalate issues to the appropriate company and client personnel as the situation warrants.

Competition

Competition in the customer care BPO market is intense and growing. We face competition from onshore and offshore customer care BPO companies and from information technology companies that also offer customer care BPO services. Within these groups, we have competitors with: greater financial, personnel and other resources; longer operating histories; more

technological expertise; more delivery regions and languages and more established relationships in industries that we serve.

We compete primarily with:

	•		offshore-based customer care BPO companies with offshore delivery center services capabilities, such as Ambergris Solutions Inc., ePLDT, Inc., ExlService Holdings, Inc., PeopleSupport, Inc. and Wipro Spectramind Services Private Limited;
	•		U.S. and Europe-based customer care BPO companies with onshore and offshore delivery center services capabilities, such as APAC Customer Services Inc., Convergys Corporation, ICT Group, Inc., Sutherland Global Services, Inc., SITEL Corporation, Sykes Enterprises, Incorporated, Teleperformance, TeleTech Holdings, Inc., Transcom and West Corporation;
	•		broad-based U.S. outsourcing companies such as Accenture Ltd., Affiliated Computer Services, Inc., Electronic Data Systems Corporation and IBM Global Services; and
	•		numerous smaller companies, including 24/7 Customer, SlashSupport and Vision-X, Inc.

In addition to our direct competitors, many companies choose to perform some or all of their customer care processes internally. Their employees provide these services as part of their regular business operations. Some companies have moved portions of their in-house customer management functions offshore, including to offshore affiliates. We believe our key advantage over in-house business processes is that we give companies the opportunity to focus on their core products and services while we focus on the specialized function of managing their customer relationships.

We believe that the primary factors on which companies in our industry compete are value and price. We seek to compete by emphasizing to our clients the value they receive per dollar spent for our services. We do not generally compete in the segment of the customer care BPO market that focuses solely on price. We provide a sales proposition to a client based on quantifiable value per dollar spent by the client on our services. We believe that our ability to quantify value has allowed us to negotiate primarily fixed pricing with our clients that reflects the greater value created per dollar spent we deliver, rather than the cost-based commodity pricing model most often emphasized in our industry.

Government Regulation

Federal and state laws and regulations impose a number of requirements and restrictions on our business. Although the regulation environment in which we operate is complex, we have neither encountered significant issues nor been subject to material penalties to date.

At the federal level, the Telephone Consumer Protection Act of 1991, or the TCPA, enforced by the Federal Communications Commission, or FCC, imposes certain restrictions on unsolicited telephone calls to residential telephone subscribers, such as prohibiting telephone solicitations during restricted hours, and imposes certain requirements on telemarketers, such as the training of its personnel in the TCPA restrictions. The Federal Trade Commission, or FTC, has adopted the Telemarketing Sales Rule which prohibits deceptive, unfair or abusive practices in

telemarketing sales and imposes record keeping and other requirements and limitations on telemarketing activities. In addition, the Do-Not-Call Implementation Act of 2003 led the FCC and the FTC to establish a National Do-Not-Call registry which telemarketers are required to access and use to update their call lists. The Do-Not-Call Implementation Act of 2003 also includes other restrictions on telemarketing activities. In addition to the laws regulating telephone sales activities, there are federal laws governing consumer privacy, such as the Gramm-Leach-Bliley Act. The USA PATRIOT Act also imposes some requirements that affect some of our clients in the financial services sector. Violators of these laws and regulations could be subject to fines and injunctive relief, as well as civil actions by the federal agency, states and private citizens. We have put in place procedures to comply with these laws and regulations, including frequently comparing our contact lists against the National Do-Not-Call Registry, the NeuStar Wireless Do-Not-Call Registry and other state registries.

In addition to federal regulation, various states have enacted laws targeted directly at telemarketing practices or governing consumer privacy. These laws include such provisions as do-not-call restrictions, prohibiting telemarketers from requiring credit card payment and requiring certain telemarketers to obtain licenses, post bonds or submit sales scripts to the state’s attorney general. Depending on the willfulness and severity of the violation, penalties can include imprisonment, fines, civil actions by the affected consumer, and a range of equitable remedies, such as the posting of bonds before continuing in business. We have developed a system to facilitate compliance with these laws.

Certain states currently are considering enacting laws that impact telemarketing practices or govern consumer privacy. We cannot be assured that any such laws, if enacted, will not adversely affect or limit our current or future operations.

Material Agreements

We have a material agreement with AT & T, formerly Cingular Wireless LLC, to provide certain customer care services. There are multiple statements of work governed by this material agreement. Each statement of work has its own varying expiration date. This contract renews automatically and has a 30 day termination for convenience on the part of AT & T. Our agreement with AT & T also provides that our revenue from AT & T may be reduced in periods in which we fail to meet specified performance criteria.

We also have one material agreement with Dell to provide certain customer care services. Our agreement with Dell expired in October 2007 and automatically renews for successive one-year periods unless terminated in accordance with its terms. Under the terms of this agreement, the amount Dell is required to pay for our services may be reduced if we fail to meet specified performance criteria. In addition, Dell has agreed to pay us higher rates if we meet or exceed certain performance criteria.

Proprietary Rights

To establish and protect our intellectual property rights, we rely on common law protection of copyrights, trademarks, and trade secrets, as well as confidentiality agreements used during the course of business. We do not hold any patents and we do not have any registered trademarks or copyrights. We consider our business processes and implementation methodologies confidential, proprietary information constituting trade secrets. Our customers and business partners typically

sign a nondisclosure agreement requiring them to treat our information confidentially. All of our employees are also required to sign confidentiality agreements as a condition to their employment.

Additional Information

Our website is located at: www.etelecare.com; however, the information in, or that can be accessed through, our website is not part of this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, through the “Investors” section of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Item 1A. Risk Factors

Investing in our securities involves a high degree of risk. In addition to the other information contained in this report, you should consider the following risk factors before investing in our securities.

Risks Related to Our Business

If we fail to attract and retain enough sufficiently trained customer service associates and other personnel to support our operations, our business, results of operations and financial condition will be seriously harmed.

We rely on large numbers of customer service associates, and our success depends to a significant extent on our ability to attract, hire, train and retain qualified customer service associates. Companies in the business process outsourcing, or BPO, market, including us, experience high employee attrition. In 2007, our attrition rate for our customer service associates who remained with us following a 45-day training and orientation period was on average approximately 6.3% per month in the United States, a decrease of approximately 0.4% from 2006 and approximately 1.9% per month in the Philippines, an increase of approximately 0.2%. A significant increase in the attrition rate among our customer service associates could decrease our operating efficiency and productivity. There is significant competition in the Philippines and the United States for employees with the skills necessary to perform the services we offer to our clients. Increased competition for these employees, in the BPO market or otherwise, could harm our business. Our failure to attract, train and retain customer service associates with the qualifications necessary to fulfill the needs of our existing and future clients would seriously harm our business, results of operations and financial condition.

A few major clients account for most of our revenue and a loss of business from these clients could reduce our revenue and seriously harm our business.

We have derived and believe that we will continue to derive in the near term most of our revenue from a few major clients. We received an aggregate of approximately 83% of our revenue from our five largest clients for the year ended December 31, 2007. We do not have long term contracts with any of our clients. Our contracts with our clients typically have a term of one year and can be terminated earlier by our clients or us without cause, typically upon 30 to 90 days’ notice. A number of factors could cause us to lose business or revenue from a client, and some of these factors are not predictable and are beyond our control. For example, a client may demand price reductions, change its outsourcing strategy, move work in-house or reduce previously

forecasted demand. In addition, the volume of work we perform for specific clients is likely to vary from year to year, since our contractual commitments only last one year and we usually are not the exclusive outsourced service provider for our clients. In most cases, if a client terminates its contract with us or does not meet its forecasted demand, we have no contractual recourse even if we have hired and trained customer service associates to provide services to the client. Thus, a major client in one period may not provide the same level of revenue in any subsequent period. For example, in the third quarter of 2007, one of our largest clients terminated one of its significant programs with us. The loss of some or all of the business from any large client could harm our business, results of operations and financial condition.

Our operating margin will suffer if we are not able to maintain our pricing, utilize our employees and assets efficiently or maintain and improve the current mix of services that we deliver from our offshore locations.

Our operating income as a percentage of our revenue, which we refer to as our operating margin, is largely a function of the prices that we are able to charge for our services, the efficient use of our assets and the location from which we deliver services. Our business model is predicated on our ability to objectively quantify the value that we provide to our clients. We must also manage our employees and assets efficiently. In addition, we must continue to sell new programs for and migrate existing programs to our offshore delivery locations. If we fail to succeed on any of these objectives, we may not be able to sustain our current operating margin. If a client terminates a program with us we may be unable to re-assign customer service associates who worked on that program in a timely manner, which could harm our operating results.

The rates we are able to recover for our services, our ability to manage our assets efficiently and the location from which we deliver our services are affected by a number of factors, including:

•		our clients’ perceptions of our ability to add value through our services;
•		our ability to objectively differentiate and verify the value we offer to our clients;
•		competition;
•		the introduction of new services or products by us or our competitors;
•		our ability to estimate demand for our services;
•		our ability to control our costs and improve the efficiency of our employees; and
•		general economic and political conditions.

During 2007, our margins declined despite the benefit of a higher mix of lower cost Philippine-generated revenue in 2007 compared to 2006, due to the significant appreciation of the Philippine peso.

Our revenue is highly dependent on a few industries and any decrease in demand for outsourced business processes in these industries could reduce our revenue and seriously harm our business.

Most of our clients are concentrated in the communications and technology services industries. For the years ended December 31 2007 and 2006, we derived 76% and 77%, respectively, of our revenue from clients in these industries. The success of our business largely depends on continued demand for our services from clients in these industries, as well as on trends in these industries to outsource business processes. A downturn in any of our targeted industries, a slowdown or reversal of the trend to outsource business processes in any of these industries or the introduction of regulations that restrict or discourage companies from outsourcing could result in a decrease in the demand for our services, which in turn could harm our business, results of operations and financial condition.

Other developments may also lead to a decline in the demand for our services in these industries. For example, the industries we primarily serve, particularly the communications industry, have experienced a significant level of consolidation in recent years. Consolidation in any of these industries or acquisitions, particularly involving our clients, may decrease the potential number of buyers of our services. Any significant reduction in, or the elimination of, the use of the services we provide within any of these industries would reduce our revenue and harm our business. Our clients may experience rapid changes in their prospects, substantial price competition and pressure on their results of operations. This may result in increasing pressure on us from clients in these key industries to lower our prices, which could negatively affect our business, results of operations and financial condition.

One of our major clients is Vonage, who has been and may in the future be, subject to damaging and disruptive intellectual property litigation that could adversely affect its business and its continued viability, which, in turn, could harm our business, results of operations and financial condition.

For the years ended December 31, 2007 and 2006, we derived 13% and 7% of our revenue from Vonage. Vonage has been named as a defendant in several lawsuits that relate to alleged patent infringement and may be subject to infringement claims in the future. Vonage recently entered into an agreement to settle its patent infringement litigation with each of Sprint, Verizon Services Corp. and AT & T which included aggregate cash payments by Vonage of approximately $240 million over specified terms. The recent agreements to pay up to an aggregate of $240 million combined with the potential impact of future patent litigation could materially and adversely affect Vonage’s business, results of operations and financial condition, as well as the continued viability of Vonage. In addition, Vonage has $253 million in convertible debt which can be put to Vonage in December 2008 if the terms of this debt are not otherwise amended prior to this time. As a result of our significant client relationship with Vonage, any determination against Vonage in patent litigation, the agreement by Vonage to make large settlement payments and the maturity of its outstanding debt obligations could, in turn, harm our business, results of operations and financial condition.

We face competition from onshore and offshore business process outsourcing companies and from information technology companies that also offer business process outsourcing services. Our clients may also choose to run their business processes themselves.

The market for business process outsourcing services is very competitive and we expect competition to intensify and increase from a number of sources. We face significant competition from our clients’ own in-house groups, including, in some cases, in-house departments operating offshore. For example, one of our clients did not renew its contract with us in 2006 as a result of

its decision to move the services we previously provided them to an in-house department. We also face competition from onshore and offshore business process outsourcing and information technology services companies. The trend toward offshore outsourcing, international expansion by foreign and domestic competitors and continuing technological changes will result in new and different competitors entering our markets. These competitors may include entrants from the communications, software and data networking industries or entrants in geographic locations with lower costs than those in which we operate.

Some of these existing and future competitors have greater financial, human and other resources, longer operating histories, greater technological expertise, more recognizable brand names and more established relationships than we do in the industries that we currently serve or may serve in the future. Some of our competitors may enter into strategic or commercial relationships among themselves or with larger, more established companies in order to increase their ability to address client needs. Increased competition, pricing pressure or loss of market share could reduce our operating margin, which could harm our business, results of operations and financial condition.

We may be unable to manage our growth effectively and maintain effective internal processes, which could harm our business, results of operations and financial condition.

Since we were founded in 1999, we have experienced rapid growth and significantly expanded our operations. We have seven delivery centers in the Philippines and six in the United States. The number of our employees has increased from 3,041 as of December 31, 2003 to approximately 13,100 as of December 31, 2007. In 2004, we acquired Phase 2, which contributed significantly to our growth during this period. In 2007, we added approximately 1,100 employees due to our acquisition of AOL Philippines. We have a geographically dispersed workforce with approximately 10,400 employees in the Philippines and approximately 2,700 employees in the United States as of December 31, 2007. We intend to continue expansion to pursue existing and potential market opportunities. Depending on client demand and the speed at which clients migrate our services to offshore locations, we may be required to set up more delivery locations both onshore and offshore.

This rapid growth across international offices places significant demands on our management and operational resources. In order to manage our growth effectively, we must implement and improve operational systems and procedures on a timely basis. If we fail to implement these systems and procedures on a timely basis, we may not be able to service our clients’ needs, hire and retain new employees, pursue new business, complete future acquisitions or operate our business effectively. Failure to transfer new client business to our delivery centers effectively, properly budget transfer costs or accurately estimate operational costs associated with new contracts could result in delays in executing client contracts and reduce our operating margin. Any of these problems associated with expansion could harm our business, results of operations and financial condition.

We may not succeed in identifying suitable acquisition targets or integrating any acquired business into our operations, which could significantly harm our business, results of operations and financial condition.

Our growth strategy involves gaining new clients and expanding our service offerings, both organically and possibly through strategic acquisitions. Historically, we have expanded some of

our service offerings and gained new clients through strategic acquisitions, such as our acquisition of Phase 2 in 2004 and AOL Philippines in 2007. It is possible that in the future we may not succeed in identifying suitable acquisition targets available for sale on reasonable terms, have access to the capital required to finance potential acquisitions or be able to consummate any acquisition. The inability to identify suitable acquisition targets or investments or the inability to complete such transactions may affect our competitiveness and our growth prospects. Our management may not be able to successfully integrate any acquired business into our operations and any acquisition we do complete may not result in long-term benefits to us. For example, if we acquire a company, we could experience difficulties in assimilating that company’s personnel, operations, technology and software. In addition, the key personnel of the acquired company may decide not to work for us. The dilutive nature of any of our acquisitions could significantly harm our operating results. Future acquisitions may also result in our incurrence of indebtedness or our issuance of additional equity securities, which could dilute your investment. Acquisitions also typically involve a number of other risks, including diversion of management’s attention, legal liabilities and the need to amortize acquired intangible assets, any of which could significantly harm our business, results of operations and financial condition.

Our senior management team has worked at the Company for a limited period of time, and the failure of our senior management team to integrate effectively could harm our business, results of operations and financial condition.

Members of our senior management team have worked together for a limited period of time. For example, we appointed our current senior vice president, global operations and our current senior vice president and chief information officer in August 2007. Our success depends to a significant extent on the ability of our executives to function effectively in their roles and to work together successfully. If our executives do not function and work together successfully or if we lose the services of one or more of our executives, our business, results of operations and financial condition could be harmed.

If our clients are not successful, the amount of business that they outsource and the prices that they are willing to pay for our services may diminish, which could harm our business, results of operations and financial condition.

Our revenue depends on the success of our clients. If our clients are not successful, the amount of business that they outsource and the prices that they are willing to pay for our services may diminish. In the past, we have experienced declining business and have faced problems collecting fees from clients for services we already performed as a result of a decline in our client’s business or financial condition. For example, one of our clients declared bankruptcy in 2006, and we recorded a reserve for $212,450 for our services to that client. In substantially all of our client programs, we generate revenue based, in large part, on the amount of time our customer service associates devote to our clients’ customers. Consequently, the amount of revenue generated from any particular client program is dependent upon customers’ interest in, and use of, our clients’ products or services. Our clients’ decisions about how much money to budget for outsourced services is directly impacted by their own financial success and forecasts of their customers’ needs. If our clients’ products or services do not attract sufficient customer attention, our revenue could decline and our results of operations and financial condition could suffer.

We normally encounter a lengthy sales cycle and may not recover the investments we must make in order to obtain a new client.

Our sales cycle typically lasts between six and 12 months and requires us to spend a considerable amount of resources that we may never recover. Potential clients require that we spend substantial time and money educating them as to the value of our services and assessing the feasibility of integrating our systems and processes with theirs. Our pricing structure and the competitive nature of our industry typically precludes us from charging our customers for these initial costs. Decisions relating to outsourcing business processes generally involve the evaluation of our services by our clients’ senior management and a significant number of client personnel in various functional areas, each having specific and often conflicting requirements. We may spend significant funds and management resources during our sales cycle and ultimately the client may not decide to use our services. If we are unsuccessful in closing sales after spending significant funds and management resources, or if we experience delays in our sales cycle, it could harm our business, results of operations and financial condition.

Once we obtain a new client, our implementation cycle is long and may require us to make significant resource commitments.

The implementation of our programs involves significant resource commitments by us and our clients. When we are engaged by a client after the sales cycle, it generally takes us from four to six weeks to integrate the client’s systems with ours and up to three months thereafter to ramp up our services to the client’s initial requirements. Our contracts typically allow our clients to terminate a program without cause upon 30 to 90 days’ notice. If our client terminates a program after we have completed the implementation cycle, we may not be able to recoup the costs we have incurred in connection with that program, which could significantly harm our business, results of operations and financial condition.

Our operating results may differ from period to period, which may make it difficult for us to prepare accurate internal financial forecasts.

Our operating results may differ significantly from period to period due to factors such as:

•		client losses or program terminations;
•		variations in the volume of business from clients resulting from changes in our clients’ operations;
•		significant changes in value of the dollar relative to foreign currencies;
•		delays or difficulties in expanding our operational facilities and infrastructure;
•		changes to our pricing structure or that of our competitors;
•		inaccurate estimates of resources and time required to complete ongoing programs;
•		our ability to successfully open new delivery centers or to expand delivery centers in a timely fashion;

•		the efficiency with which we use our operations to service our clients;
•		the relative mix of services performed by our U.S. and Philippine operations;
•		our sources of pre-tax income, which will impact our overall effective tax rate;
•		ability to hire and train new employees; and
•		seasonal changes in the operations of our clients.

For example, some of our clients experience seasonal changes in their operations in connection with the year-end holiday season and the school year. Transaction volumes can be impacted by market conditions affecting the technology, communications and financial industries, as well as other events such as natural disasters and terrorist attacks. In addition, most of our contracts do not commit our clients to providing us with a specific volume of business. All of these factors make it difficult for us to prepare accurate internal financial forecasts.

We recognize revenue when it is probable that the economic benefits associated with the transactions will flow to us and the amount of revenue can be measured reliably. Accordingly, the financial benefit of our gaining a new client or program may be delayed due to delays in the implementation of our services. Due to these factors, it is possible that in some future quarters our operating results may be significantly below the expectations of the public market, analysts and investors.

Some of our client contracts contain provisions that could reduce our anticipated revenue and harm our business.

The billing structure for some of our largest client contracts includes provisions that vary our billing rates depending on our performance levels. Some of these provisions have the effect of reducing our revenue in periods in which we fail to meet certain performance criteria. Other provisions in some of our contracts require us to give our clients the best price for a particular program that we give to our other clients for similar programs. Any of these provisions could reduce our revenue and could harm our business, results of operations and financial condition.

We have incurred losses in the past and have a limited operating history. We may not be profitable in the future and may not be able to secure additional business.

We incurred net losses of $5.6 million, $1.5 million and $1.8 million in 2001, 2002 and 2005, respectively. In future periods, we expect our selling and administrative expenses to continue to increase. If our revenue does not grow at a faster rate than these expected increases in our expenses, or if our operating expenses are higher than we anticipate, we may incur additional losses. We have a limited operating history in providing the business process outsourcing services we currently provide and continue to explore opportunities to provide other outsourced services that we have never provided. We may not be able to secure additional business or retain current business with our current clients or add new clients in the future who wish to use the services we currently offer or may offer in the future. Additionally, factors outside of our control, such as a significant appreciation of the Philippine peso, may reduce our profitability.

We are liable to our clients for damages caused by unauthorized disclosure of sensitive and confidential information, whether through a breach of our computer systems, our employees or otherwise.

We are typically required to manage, utilize and store sensitive or confidential client data in connection with the services we provide. Some of our clients are subject to U.S. federal and state regulations requiring the protection of sensitive customer information and pending legislation would increase the range of possible penalties for certain entities that fail to protect this information. Under the terms of our client contracts, we are required to keep sensitive customer information strictly confidential. We employ measures to protect sensitive and confidential client data and have not experienced any material breach of confidentiality to date. However, if any person, including any of our employees, penetrates our network security or otherwise mismanages or misappropriates sensitive or confidential client data, we could be subject to significant liability and lawsuits from our clients or their customers for breaching contractual confidentiality provisions or privacy laws. Although we have insurance coverage for mismanagement or misappropriation of this information by our employees, that coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims against us and our insurers may disclaim coverage as to any future claims. Penetration of the network security of our data centers or any failure to protect confidential information could have a negative impact on our reputation, which would harm our business.

Our clients may adopt technologies that decrease the demand for our services, which could harm our business, results of operations and financial condition.

We target clients that need our BPO services and we depend on their continued need of our services. However, over time, our clients may adopt new technologies that decrease the need for live customer interaction, such as interactive voice response, web-based self-help and other technologies used to automate interactions with customers. The adoption of these technologies could reduce the demand for our services, create pricing pressure and harm our business, results of operations and financial condition.

Our business may not develop in ways that we currently anticipate due to negative public reaction to offshore outsourcing and recently proposed legislation.

We have based our growth strategy on certain assumptions regarding our industry, services and future demand in the market for our services. However, the trend to outsource business processes may not continue and could reverse. Offshore outsourcing is a politically sensitive topic in the United States and elsewhere. For example, many organizations and public figures in the United States have publicly expressed concern about a perceived association between offshore outsourcing providers and the loss of jobs in the United States.

There has been recent publicity about some negative experiences that organizations have had with offshore outsourcing, such as theft and misappropriation of sensitive client data. Current or prospective clients may elect to perform such services themselves or may be discouraged from transferring these services from onshore to offshore providers to avoid negative perceptions that may be associated with using an offshore provider. Any slowdown or reversal of existing industry trends towards offshore outsourcing would seriously harm our ability to compete effectively with competitors that operate solely out of facilities located in the United States.

A variety of U.S. federal and state legislation has been proposed that, if enacted, could restrict or discourage U.S. companies from outsourcing services outside the United States. For example, legislation has been proposed that would require offshore providers of services requiring direct interaction with clients’ customers to identify to clients’ customers where the offshore provider is located. Because substantially all of our clients are located in the United States, any expansion of existing laws or the enactment of new legislation restricting offshore outsourcing could harm our business, results of operations and financial condition. It is possible that legislation could be adopted that would restrict U.S. private sector companies that have federal or state government contracts from outsourcing their services to offshore service providers. This would also affect our ability to attract or retain clients that have these contracts.

Our failure to adhere to regulations that govern our business could hinder our ability to effectively perform our services. Our failure to adhere to regulations that govern our clients’ businesses could result in breaches of our contracts with our clients.

Our clients’ business operations are subject to certain rules and regulations in the United States, such as the Gramm-Leach-Bliley Act and the customer privacy provisions of the Communication Act. Our clients may contractually require that we perform our services in a manner that would enable them to comply with such rules and regulations. Failure to perform our services in compliance with these laws could result in breaches of contracts with our clients and, in some limited circumstances, civil fines and criminal penalties for us. Our operations are also subject to various U.S. federal and state regulations. The Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 broadly authorizes the FTC to issue regulations restricting certain telemarketing practices and prohibiting misrepresentations in telephone sales. A portion of our revenue is based on outbound marketing sales, which subjects us to these regulations. In addition, we are required under various Philippine laws to obtain and maintain permits and licenses for the conduct of our business. If we do not maintain our licenses or other qualifications to provide our services, we may not be able to provide services to existing clients or be able to attract new clients and could lose revenue, which could harm our business.

The international nature of our business exposes us to several risks, such as unexpected changes in the regulatory requirements of multiple jurisdictions.

We have operations in the Philippines and United States. Our corporate structure also spans multiple jurisdictions, with our parent company incorporated in the Philippines and operating subsidiaries incorporated in the United States. As a result, we are exposed to risks typically associated with conducting business internationally, many of which are beyond our control. These risks include:

•		legal uncertainty owing to the overlap of different legal regimes, and problems in asserting contractual or other rights across international borders;
•		currency fluctuations, particularly since our revenues and expenses are denominated in only two currencies;
•		potential tariffs and other trade barriers;
•		unexpected changes in regulatory requirements; and

•

the burden and expense of complying with the laws and regulations of various jurisdictions.

The occurrence of any of these events could significantly harm our business, results of operations and financial condition.

We also face challenges in managing a geographically dispersed workforce. As of December 31, 2007, we had approximately 10,400 employees in the Philippines and approximately 2,700 employees in the United States. Our management is often required to manage employees remotely and must take into account diverse local laws and customs. If we are unable to manage our dispersed workforce and other resources effectively, our business, results of operations and financial condition could be significantly harmed.

If the operations of our delivery centers are interrupted, the amount of revenue we receive under our client contracts could decline and our results of operations and financial condition could suffer.

We operate delivery centers in the Philippines and the United States, which requires us to maintain active data and voice communications between our delivery centers and our clients’ offices. Although we maintain redundant facilities and communications links, disruptions could result from, among other things, technical and electricity breakdowns, computer glitches and viruses and adverse weather conditions. For example, in 2006 one of our delivery centers in the Philippines was shut down for several hours as a result of damage to telecommunication lines servicing that delivery center. Our operational facilities and communication hubs may also be damaged in natural disasters such as earthquakes, floods, monsoons, tsunamis and typhoons. For example, in 2003 and 2004, the operations in our Philippine delivery centers were periodically interrupted as a result of heavy rains. Such natural disasters may lead to disruption of information systems and telephone service for sustained periods. Most of our client contracts are structured so that we are paid based on the amount of time our employees dedicate to providing services to our clients. Any significant failure of our equipment or systems, or any major disruption to basic infrastructure like power and telecommunications in the locations in which we operate, could impede our ability to provide services to our clients, have a negative impact on our reputation, cause us to lose clients, reduce our revenue and harm our business.

Governmental authorities may challenge our intercompany pricing policies or may change or seek to apply their laws in a manner that could increase our effective tax rate or otherwise harm our business.

We are a Philippine corporation doing business in the Philippines and, through subsidiaries, in the United States, and are subject to the tax rules of multiple jurisdictions. Our intercompany pricing policies address the pricing of transactions within our multi-entity organization, particularly cross-border transactions, including the transfer of goods and services and intercompany financing. Authorities in the United States and in the Philippines may examine our intercompany pricing policies and other aspects of our operations. As a result of such examinations, our effective tax rate could increase. In addition, it may be asserted that we are a resident for tax purposes of the United States and, as a consequence, subject to U.S. tax on income earned in the Philippines. Legislative proposals in the United States, if enacted, could also bring about this result.

We will incur increased costs as a result of being a public company subject to the Philippine Securities Regulation Code and the Sarbanes-Oxley Act of 2002, and our management faces challenges in implementing those requirements.

We expect to continue to incur additional legal, accounting and other expenses associated with operating as a public company. We must comply with applicable laws, rules and regulations in the Philippines, the country in which we are incorporated, and the United States, where we have publicly listed our ADSs. The Philippine Securities Regulation Code and the U.S. Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the U.S. Securities and Exchange Commission and the NASDAQ Global Market, have imposed increased regulation and required enhanced corporate governance practices of public companies. We are committed to maintaining high standards of corporate governance and public disclosure, and our efforts to comply with evolving laws, regulations and standards in this regard are likely to result in increased selling and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. For example, we are in the process of evaluating and testing our internal financial reporting controls in anticipation of compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and have not yet completed this process. We have formed internal evaluation committees and engaged consultants and expect to upgrade our computer software systems to assist us in such compliance. If we do not implement and comply with the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could harm our business or investors’ confidence in us and could cause our share price to fall.

Future litigation may result in significant costs for defense purposes or for settlement purposes, both of which may or may not be covered by our current insurance policies. Litigation may also divert management focus from our business and could significantly impact our financial results.

From time to time, we are subject to litigation proceedings. For example, we settled a claim in 2006 relating to our acquisition of Phase 2 and we recently settled a litigation claim brought by a former employee. Although this specific litigation was resolved, we cannot predict whether any other material suits, claims or investigations may arise in the future. Irrespective of the outcome of any potential lawsuits or potential actions, claims or investigations, we may incur substantial legal costs and possibly settlement costs, which may or may not be covered by insurance. Litigation may also divert management’s attention from our business, which could also harm our business, results of operations and financial condition.

Our current tax holidays in the Philippines will expire within the next several years.

We currently benefit from income tax holiday incentives in the Philippines pursuant to our registrations with the Philippine Economic Zone Authority, or PEZA, which provide that we pay no income tax in the Philippines for four or six years pursuant to our PEZA registrations. Our current income tax holidays expire at staggered dates through 2012. One of our delivery center sites’ income tax holidays that was set to expire in the second half of 2007 was approved by PEZA in December 2007 for conversion to Pioneer holiday status. This allows for an additional two years of tax holiday for that site with expiration in 2009. We anticipate income tax holidays for two of our delivery center sites to expire in the second half of 2008. We intend to apply for an extension or conversion to Pioneer holiday status prior to expiration.

We believe that as our Philippine tax holidays expire, gross income attributable to activities covered by our PEZA registrations will be taxed at a 5% preferential rate and our Philippine net income attributable to all other activities will be taxed at the regular Philippine corporate income tax rates of 35%. For the year ended December 31, 2007, we had an effective income tax rate of 2.0% for the Philippine portion of our consolidated profit before income taxes. The expiration of our tax holidays will increase our effective income tax rate and may impair our competitive position against BPO companies based outside of the Philippines.

Risks Related to Doing Business in the Philippines

We may face wage inflation in the Philippines and increased competition for our Philippine employees, which could increase our employment costs and our attrition.

We have not historically experienced significant wage inflation with our Philippine employees. We are faced, however, with increasing competition in the Philippines for customer service associates, and we expect this competition will continue to increase as additional outsourcing companies enter the market and expand their operations. In particular, there may be limited availability of qualified middle and upper management candidates. We have benefited from an excess supply of college graduates in the Philippines. If this favorable imbalance changes due to increased competition, it could affect the availability and the cost of customer service associates and increase our attrition rate.

The Philippines has experienced political and economic instability as well as civil unrest and terrorism, which could disrupt our operations and cause our business to suffer.

The Philippines has experienced significant inflation, currency declines and shortages of foreign exchange. We are exposed to the risk of rental and other cost increases due to inflation in the Philippines, which has historically been at a much higher rate than in the United States. The Philippines also periodically experiences civil unrest and terrorism and U.S. companies in particular may experience greater risk. These conditions could disrupt our operations and cause our business to suffer.

Further Strengthening of the Philippine peso relative to the U.S. dollar could increase our expenses.

Substantially all of our revenue is denominated in U.S. dollars, and a significant portion of our costs is incurred and paid in Philippine pesos. We are therefore exposed to the risk of an increase in the value of the Philippine peso relative to the U.S. dollar, which would increase our expenses. We initiated in the third quarter of 2007 a strategy to hedge against short-term foreign currency fluctuations. For 2008, we plan to hedge approximately 90% of our 2008 forecasted Philippine peso-denominated expenses using non-deliverable forward contracts that are designated as cash flow hedges in accordance with the criteria established in Statement of Financial Accounting Standards (“SFAS”) No. 133 “Accounting for Derivative Instruments and Hedging Activities”. While we expect that our derivative instruments will continue to meet the conditions for hedge accounting, if the hedges did not qualify as highly effective or if we did not believe that forecasted transactions would occur, the changes in the fair value of the derivatives used as hedges would be recorded immediately into earnings, which may harm our financial condition. We will continue to reevaluate our hedge strategy and adjust the percentage of expenses hedged depending on certain external economic factors and indicators. Our hedging

strategy, however, may not sufficiently protect us from further strengthening of the Philippine peso, which could increase our expenses and harm our operating results. Additionally, if the U.S. dollar strengthens against the Philippine peso, our hedging strategy could reduce the potential benefits we would otherwise expect from a strengthening U.S. dollar.

It may be difficult for you to effect service of process and enforce legal judgments against us or our affiliates.

We are incorporated in the Philippines. Some of our directors are not residents of the United States and a significant portion of our assets are located outside the United States. As a result, it may not be possible for you to effect service of process within the United States upon some of our directors or us. In addition, you may be unable to enforce judgments obtained in courts of the United States against those persons outside the jurisdiction of their residence, including judgments predicated solely upon the securities laws of the United States.

Our stockholders may have more difficulty protecting their interests than they would as stockholders of a U.S. corporation.

Our corporate affairs are governed by our articles of incorporation and by-laws and by the laws governing corporations incorporated in the Philippines. Legal principles such as a director’s or officer’s duty of care and loyalty, and the fiduciary duties of controlling stockholders exist in the Philippines. However, these principles are relatively untested in Philippine courts, and their application is uncertain, in comparison to their application in U.S. courts. As a result, our U.S and Philippine stockholders may have more difficulty protecting their interests in connection with actions taken by our management, members of our board of directors or our controlling stockholders than they would as stockholders of a corporation incorporated in the United States.

Risks Related to our ADSs and Common Shares

We listed our common shares on the Philippine Stock Exchange, which could increase the volatility of the market price for our ADSs.

We completed the process to list our common shares on the Philippine Stock Exchange, or PSE, in late November 2007. Our outstanding common shares could become more liquid as a result of our listing of our common shares on the PSE. Following our PSE listing, our shareholders may decide to sell their common shares on the PSE for tax or other reasons. Any sales of our common shares on the PSE could increase the volatility of the market price for our ADSs in the United States.

The market price for our ADSs has been volatile.

The market price for our ADSs has been volatile. For example, in the year ended December 31, 2007, the closing price of our ADSs ranged from a low of $7.53 on September 10, 2007 to a high of $17.93 on July 16, 2007. The market price for our ADSs could continue to be subject to wide fluctuations in response to many factors including the following:

•		actual or anticipated fluctuations in our quarterly operating results;
•		changes in financial estimates by securities research analysts;

•		changes in the economic performance or market valuations of our competitors;
•		sales or expected sales of additional common shares or ADSs; and
•		loss of one or more significant clients.

In addition, securities markets generally and from time to time experience significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs.

You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.

We may from time to time distribute rights to our stockholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the Depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or The Philippine Securities Regulation Code, or exempt from registration under the Securities Act or The Philippine Securities Regulation Code with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act or The Philippine Securities Regulation Code. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

Our corporate actions could be substantially influenced by officers, directors, principal stockholders and affiliated entities.

Our directors and executive officers and their affiliated entities beneficially own a substantial amount of our outstanding common shares. These stockholders, if they acted together, could exert substantial influence over matters requiring approval by our stockholders, including electing directors and approving mergers and acquisitions. This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could deprive our stockholders of an opportunity to receive a premium for their ADSs as part of a sale of our company and might reduce the market price for our ADSs. These actions may be taken even if they are opposed by our other stockholders.

You may be subject to limitations on transfer of your ADSs.

ADSs are transferable on the books of the Depositary. However, the Depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the Depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the Depositary are closed, or at any time if we or the Depositary deem it necessary or advisable to do so because of any requirement of law, any government, governmental body or commission or any securities exchange on which our ADSs or our common shares are listed, or under any provision of the deposit agreement or provisions of, or governing, the deposited securities or any meeting of our stockholders, or for any other reason.

Part II.

Our Common Stock began trading on the Philippine Stock Exchange on November 19, 2007. The following table sets for the high and low sales prices at which our Common Stock traded for the fourth quarter of 2007, as reported by the Philippine Stock Exchange (in Philippine Pesos).

		2007
		High				Low
Fourth Quarter			472.50				350.00

Holders

As of February 29, 2008, there were two holders of record of our American Depositary Shares and 692 shareholders of record of our Common Stock.

Dividends

We have never paid dividends on our Common Stock. We intend to apply cash to investment in product development, acquisition or expansion and we do not expect to pay dividends on Common Stock in the foreseeable future.

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth certain information, as of December 31, 2007, concerning outstanding options and rights to purchase Common Stock and ADS granted to participants in all of our equity compensation plans and the number of shares of Common Stock remaining available for issuance under such equity compensation plans.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K . This discussion contains forward-looking statements, which involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors including, but not limited to, those discussed in “Risk Factors” and elsewhere in this Annual Report on Form 10-K .

Introduction

Our Management’s Discussion and Analysis is intended to facilitate an understanding of our business and results of operations and consists of the following sections:

	•		Overview: a summary of our business;
	•		Critical Accounting Policies: a discussion of our critical accounting policies that require the exercise of judgments and estimates;
	•		Results of Operations: a discussion of our operating results;
	•		Liquidity and Capital Resources: an analysis of our cash flows, sources and uses of cash and financial position;
	•		Contractual Obligations; and
	•		Recent Accounting Pronouncements: a discussion of how we are affected by recent pronouncements.

Overview

We are a leading provider of business process outsourcing, or BPO, services focusing on the complex, voice and non-voice based segment of customer care services delivered from both onshore and offshore locations. We provide a range of services including technical support, financial advisory services, warranty support, customer service, sales and customer retention. Our services are delivered from seven delivery centers in the Philippines and six delivery centers in the United States, with approximately 10,400 employees in the Philippines and approximately 2,700 employees in the United States as of December 31, 2007.

We completed our initial public offering in the United States on April 2, 2007 in the form of 5,500,000 American Depositary Shares, or ADSs. Our ADSs are listed on the NASDAQ Global Market. Our initial public offering raised $69.1 million, net of underwriting discounts and commissions and offering costs. On April 5, 2007, we received additional proceeds of $10.3 million, net of underwriting discounts and commissions and offering costs of $844,000, as a result of the exercise by our underwriters of their over-allotment option to purchase an additional 825,000 ADSs from us. In April 2007, we used an aggregate of $36.3 million from

these proceeds to repay outstanding debt. In late November 2007, we completed our listing by way of introduction on the Philippine Stock Exchange. We currently are a foreign private issuer under the applicable rules and regulations in the United States. However, we voluntarily elect to file our periodic and current company reports under the Exchange Act in accordance with the rules and regulations applicable to a U.S. issuer.

In 2007, our revenue was $259.9 million and our operating margin decreased to 9%. Our revenue growth was driven largely by an expansion of work with existing clients delivered from our Philippine operations, which accounted for 60% of our 2007 revenues compared to 46% of our 2006 revenues. The decrease in our operating margin to 9% in 2007 from 10% in 2006 was significantly impacted by the strengthening of the Philippine peso compared to the U.S. dollar. This was partially offset by our operating margins benefiting from the expanded use of our lower cost Philippine operations. We also made significant investments in two primary areas to support our growth: global information technology resources; and site expansion in the Philippines to support our revenue growth. Also, the cost of services for our U.S. operations increased as a percentage of revenue as a result of the combination of increased labor rates and lower utilization rates for our U.S. employees.

Service Revenue. We generate revenue from the customer care and other BPO programs we administer for our clients. We provide our services to clients under contracts that typically consist of a master services agreement, which contains the general terms and conditions of our client relationship, and a statement of work, which describes in detail the terms and conditions of each program we administer for a client. Our contracts with our clients typically have a term of one year and can be terminated earlier by our clients or us without cause, typically upon 30 to 90 days’ notice. Although the contractual commitments from our clients are short, our client relationships tend to be longer-term given the scale and complexity of the services we provide coupled with the risk and costs to our clients associated with bringing business processes in-house or outsourcing them to another provider. For the same reasons, our sales cycle tends to range from six to 12 months.

The outsourcing industry is extremely competitive, and outsourcers have historically competed based on pricing terms. Accordingly, we could be subject to pricing pressure and may experience a decline in our average selling prices for our services. We attempt to mitigate this pricing pressure by differentiating ourselves from our competition based on the value we bring to our clients through the quality of our services and our ability to provide quantifiable results that our clients can measure against our competitors. We provide a sales proposition to a client based on quantifiable value per dollar spent by the client on our services. For example, we work with the client to quantify the costs to the client of activities such as the time it takes to handle a call, repeat calls, parts dispatches and cancelled sales. We similarly work with a client to quantify the value from initial product sales, sales of products complimentary or more expensive than the products in which a customer is originally interested and repeat purchasing based on customer satisfaction. This information on costs and value created is combined to develop a value created per dollar spent model on which both the client and we agree in order to set the price for our services in our contract. We then assess our performance against this model on a quarterly basis and share our results measured by these metrics with our client on a quantified scorecard. This gives our client a means of comparing the value we created per dollar spent on us to the same metrics for our clients’ internal business process centers or other outsourcers. We believe that our ability to quantify value has allowed us in most cases to negotiate fixed pricing with our

clients that reflects the greater value created per dollar spent we deliver, rather than the cost-based commodity pricing model most often emphasized in our industry.

We derive our revenue primarily through time-delineated or session-based fees, including hourly or per-minute charges and charges per interaction, which are separately negotiated on a client-by-client basis. In some contracts, we are paid higher rates if we meet specified performance criteria, which are based on objective performance metrics that our client agrees would add quantifiable value to their operations. These payment arrangements can take many forms, including additional payments to us based on the number of confirmed sale transactions we make on behalf of a client or based on meeting customer satisfaction targets. Bonuses are typically 5% to 10% of revenue for a program. Conversely, some of our contracts include provisions that provide for downward revision of our prices under certain circumstances, such as if the average speed required to answer a call is longer than agreed to with the client. Downward revisions are typically limited to a maximum of 5% of revenue for a program. All of our bonus and downward revision provisions are negotiated at the time that we sign a statement of work with a client and our revenue from our contracts is thus fixed and determinable at the end of each month.

We currently derive substantially all of our revenue from U.S.-based clients. We receive most of our revenue from a small number of clients, with an aggregate of approximately 83% and 80%, respectively, of our revenue from our five largest clients for the years ended December 31, 2007 and 2006. For the year ended December 31, 2007, we had four clients that each contributed more than 10% of our revenue, including AT & T, representing 29% of our revenue, Dell, representing 22% of our revenue, Sprint, representing 14% of our revenue and Vonage representing 13% of our revenue. We often administer multiple programs for a single client with separate contracts or statements of work that sometimes are negotiated with separate parts of the client organization, which we view as being different clients for practical purposes. For example, we perform four separate programs for AT & T for two separate AT & T business units.

Cost of Services. Cost of services consists primarily of the salaries, payroll taxes and employee benefit costs of our customer service associates and other operations personnel. Cost of services also includes direct communications costs, rent expense information technology costs, facilities support and customer management support costs related to the operation of our delivery centers. We expense these costs as incurred.

Our cost of services is most heavily impacted by prevailing salary levels. Although we have not been subject to significant wage inflation in the Philippines or the United States, any significant increase in the market rate for wages could harm our operating results and our operating margin.

We often incur significant costs in the early stages of implementation or in anticipation of meeting a current client’s forecasted demand for our services, with the expectation that these costs will be recouped over the life of the program, thereby enabling us to achieve our targeted returns. Similarly, we may also be required to increase recruiting and training costs to prepare our customer service associates for a specific type of service. If we undertake additional recruiting and training programs and our client terminates a program early or does not meet its forecasted demand, our operating margin could decline.

Our cost of services is also impacted by our ability to manage and employ our customer service associates efficiently. Our workforce management group continuously monitors staffing requirements in an effort to ensure efficient use of these employees. Although we generally have

been able to reallocate our customer service associates as client demand has fluctuated, an unanticipated termination or significant reduction of a program by a major client may cause us to experience a higher-than-expected number of unassigned customer service associates.

Our efficient use of customer service associates is also impacted by seasonal changes in the operations of our clients, which impact the level of services our clients require. For example, the amount of technical support and financial services we provide has traditionally been greater during the fourth quarter of each year driven by increased customer spending during the holiday season. Demand for these same services typically declines significantly during the first quarter of each year. As a result, the fourth quarter of each year is typically our period of highest efficiency, while the first quarter of each year is typically our period of lowest efficiency.

We believe that our clients are increasingly looking for vendors that provide BPO services from multiple geographic locations. This allows clients to manage fewer vendors while minimizing geopolitical risk and risk to operations from natural disasters. Moreover, clients ultimately willing to have service operations offshore may not be willing to do so initially or at any time completely. To address this demand and to supplement our offshore delivery, in May 2004, we acquired Phase 2. An important element of our multi-shore service offering is our ability to migrate clients offshore over time. This allows clients to gain confidence in the quality of our services before shifting services to our offshore delivery locations. This migration strategy both lowers costs for our clients and improves our financial performance. Our costs associated with our U.S. operations are higher than those we experience in the Philippines. If we fail to migrate our clients to our offshore delivery locations or if our offshore growth rates decline compared to our onshore growth rates, our operating margin could decline.

Selling and Administrative. Selling and administrative expenses consist primarily of our sales and administrative employee-related expenses, sales commissions, professional fees, travel costs, marketing programs and other corporate expenses. Substantially all of our share-based compensation expense is included in selling and administrative expenses. We expect selling and administrative expenses to increase as we add personnel and incur additional fees and costs related to the growth of our business and our operation as a publicly traded company in the United States and the Philippines.

Impact of Foreign Currency. As a result of our multi-shore delivery model, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Philippine peso. Substantially all of our revenue is denominated in U.S. dollars, but a significant amount of our expenses is denominated in Philippine pesos. In the years ended December 31, 2007 and 2006, 45% and 35%, respectively, of our cost of services and selling and administrative expenses were denominated in the Philippine peso. As a private company, our outstanding debt agreement included covenants that prohibited us from entering into foreign currency hedging transactions. Upon completion of our initial public offering in the United States, we used a portion of the proceeds to repay our outstanding debt and negotiated terms that allowed foreign currency hedging. As a result, in the third quarter of 2007, we initiated a strategy to hedge against short-term foreign currency fluctuations. This strategy consists of a rolling hedge program that entails contracting with third-party financial institutions to acquire zero cost, non-deliverable forward contracts. Under this strategy, we will hedge approximately 90% of our 2008 forecasted Philippine peso-denominated expenditures at an average rate of 41.5 Philippine pesos to one U.S. dollar.

Depreciation and Amortization. We currently purchase substantially all of our equipment. We record property and equipment at cost and calculate depreciation using the straight-line method over the estimated useful lives of our assets, which generally range from three to five years. We amortize leasehold improvements on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset. If the actual useful life of any asset is less than its estimated depreciable life, we would record additional depreciation expense or a loss on disposal to the extent the net book value of the asset is not recovered upon sale.

Our depreciation is primarily driven by large investments in capital equipment required for our continued expansion, including the build-out of seats, which we define as workstations where customer service associates generate revenue. These expenditures include tenant improvements to new facilities, furniture, information technology infrastructure, computers and software licenses and are usually in the range of $8,000 to $12,000 per seat depending on specific client requirements. These costs are generally depreciated over five years and are substantially the same in the United States and the Philippines. The effect of our depreciation and amortization on our operating margin is impacted by our ability to manage and utilize our seats efficiently. We seek to expand our seat capacity only after receiving contractual commitments from our clients. However, we have in the past increased our seat capacity based on forecasted demand projections from our clients, which are not contractual commitments. This has resulted in a surplus of seats, which has increased our depreciation and, to a limited extent, reduced our operating margin. As a general matter, the efficiency of our use of seats has had less of an impact on our operating margin than the efficiency of our deployment of our customer service associates.

Other Income (Expenses). In May 2004, we acquired Phase 2 for $25.3 million in cash, which we financed exclusively through debt. This debt and borrowings under our revolving line of credit resulted in interest expense and financing charges of $1.9 million in 2007, $5.5 million in 2006 and $4.9 million in 2005. We used a portion of the proceeds of the initial public offering to repay our two term loans and all of the outstanding borrowings under our revolving line of credit in 2007.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of our assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to revenue recognition, income taxes, goodwill, other intangibles and share-based compensation. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making the judgments we make about the carrying values of our assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates.

We believe the following critical accounting policies affect our more significant judgments used in the preparation of our financial statements.

Revenue Recognition. We recognize revenue when it is probable that the economic benefits associated with the transactions will flow to us and the amount of revenue can be measured reliably. This is normally demonstrated when we have: (i) persuasive evidence of an arrangement; (ii) the fee is fixed or determinable; (iii) performance of the service has been delivered; and (iv) collection is reasonably assured. Substantially all of our revenue is billed and collected in U.S. dollars and substantially all of our clients are based in the United States.

Service revenue is recognized as services are performed on a per subscriber, per event, per call, per minute, per participant or flat monthly fee basis using rates that are detailed in the client contract. Supplemental revenue can sometimes be earned depending on service levels or achievement of certain performance measurement targets. We recognize this supplemental revenue only after we have achieved the required measurement targets and, therefore, the amount is known and not subject to adjustment.

Accounting for Income Taxes. In connection with preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves our assessment of our net operating loss carryover, as well as estimating our actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as reserves and accrued liabilities, for tax and accounting purposes. We also have to assess whether any portion of our earnings generated in one taxing jurisdiction might be claimed as earned by income tax authorities in a differing tax jurisdiction. Significant judgment is required in determining our annual tax rate, allocating earnings to various jurisdictions and evaluating our tax positions.

Additionally, we record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carryforwards. We then assess the likelihood that our deferred income tax assets will be realized or recovered from our future taxable income. To the extent we believe that recoverability of our deferred tax assets is not likely, we are required to establish a valuation allowance. Generally accepted accounting principles require companies to weigh both positive and negative evidence in determining the need for a valuation allowance for deferred tax assets. In prior years, the result of cumulative net operating losses in the U.S. required us to record a valuation allowance representing a significant portion of our deferred tax assets. During the fourth quarter of 2007, we reevaluated the recoverability of our deferred tax assets. We describe the reason for changes in our assessment of recoverability in the footnotes to our financial statements.

We operate in and file income tax returns in the United States and Philippine jurisdictions which are subject to examination by tax authorities. The tax returns for open years in all jurisdictions in which we do business are subject to change upon examination. We believe that we have estimated and provided adequate accruals for the probable additional taxes and related interest expense that may ultimately result from such examinations. We believe that any additional taxes or related interest over the amounts accrued will not have a material effect on our financial condition, results of operations or cash flows. However, resolution of these matters involves uncertainties and the outcomes may be favorable or unfavorable. In addition, changes in the mix of income between taxing jurisdictions, expiration of tax holidays, and changes in tax laws and regulations could result in increased effective tax rates in the future.

Share-Based Compensation. We account for stock options granted to employees in accordance with SFAS 123(R), Share-Based Payment, which we adopted using the modified retrospective

application method. We measure the fair value of employee stock options at grant dates using the Black-Scholes valuation model with compensation cost recognized over the vesting period for our estimate of shares expected to vest treating each separately vesting portion of an award as if it was, in substance, a multiple award. We are responsible for determining the fair value assessments of our common shares and have used several factors including estimates of revenue, earnings, assumed market growth rates and, prior to becoming a public company, reports prepared by an unrelated valuation specialist, Duff & Phelps, LLC. We took the fair value assessments prepared by the valuation specialist into account in reaching our conclusion of the fair value of our common shares. We estimated the volatility of our share price using stock volatility of comparable companies within our industry. We must also estimate the forfeiture rate of our unvested shares which we compute using historic experience coupled with recent events that could change our estimates. Our rates are currently 0% for grants to senior executives and board members and 12% for all other grantees.

Goodwill. We have $14.4 million of goodwill recorded as of December 31, 2007. We test our goodwill, which arose from the AOL Philippines and Phase 2 acquisitions, for impairment annually at our year end or when impairment indicators otherwise arise. Our test of goodwill impairment requires judgment, including the identification of reporting units, assigning assets and liabilities, including goodwill, to reporting units and determining the fair value of each reporting unit. We have used an earnings multiple based valuation technique to estimate the fair value of our reporting units, which includes several significant assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit.

Results of Operations

The following table is derived from our selected consolidated financial data and sets forth our historical operating results as a percentage of revenue for the periods indicated:

Comparison of Years Ended December 31, 2007 and 2006

Service revenue. Service revenue was $259.9 million and $195.1 million in 2007 and 2006, respectively, an increase of 33% in 2007 from 2006. Our revenue growth was primarily driven by an expansion of work with existing clients delivered from our Philippine locations which accounted for 60% of our 2007 revenue compared to 46% of our 2006 revenue.

Cost of services. Cost of services was $185.7 million and $135.7 million in 2007 and 2006, respectively. Our cost of services as a percentage of revenue was 71.4% and 69.5% during 2007 and 2006, respectively.

The absolute dollar increase in cost of services in 2007 over 2006 was primarily to support the 33% increase in service revenue in 2007 over 2006. The 2% increase in cost of services as a percentage of revenue was primarily due to the significant strengthening of the Philippine peso compared to the U.S. dollar which resulted in an increase of approximately 4% of our total operating expenses and primarily impacting our cost of services. Because substantially all of our service revenue is denominated in U.S. dollars and 45% of expenses in 2007 compared to 35% of expenses in 2006 were denominated in Philippine pesos, the effective net costs of our services is increased as the peso strengthens against the U. S. dollar. This increase was offset for the most part by the expanded use of our lower-cost Philippine operations, which despite the strengthening peso continues to show significant cost advantages over our U.S. operations. Other increases were as a result of:

•

our investment in our global information technology resources;

•		our site expansion in the Philippines to support our revenue growth; and
•		the cost of services for our U.S. operations increasing as a percentage of revenue as a result of increased labor rates and lower utilization rates of our U.S. employees.

Selling and administrative expenses. Selling and administrative expenses were $36.2 million in 2007 and $30.0 million in 2006, an increase of 21% in 2007 over 2006. Our selling and administrative expenses were 13.9% and 15.4% of revenue in 2007 and 2006, respectively. Share-based compensation included in selling and administrative expenses was $2.4 million and $1.9 million in the years ended December 31, 2007 and 2006, respectively, which represented 1% of revenue in each of 2007 and 2006.

The absolute dollar increase in selling and administrative expenses in 2007 over 2006 was primarily due to additional salaries, wages and benefits, consulting fees and travel expenses. We hired additional personnel to support our growth and to enhance our executive team and professional staff as we expanded our Philippine operations and became a publicly traded company in the United States and the Philippines.

Selling and administrative costs decreased as a percentage of revenue due to general efficiencies gained in our sales and other corporate functions. However, we expect such expenses will increase in 2008 in absolute dollars as we add personnel to support our growth and incur additional costs related to our operation as a publicly traded company in the United States.

Depreciation and amortization. Depreciation and amortization was $15.4 million and $10.2 million in 2007 and 2006, respectively. Our depreciation and amortization expenses were 5.9% and 5.2% of revenue in 2007 and 2006, respectively. The increase in depreciation and amortization was due to continued expansion of our facilities and infrastructure to support the growth of our operations.

Income from operations; operating margin. Our income from operations was $22.6 million and $19.2 million for 2007 and 2006, respectively. Our operating margin was 8.7% and 9.9% for 2007 and 2006, respectively.

The decrease in operating margin in 2007 over 2006 was principally the result of an increase in our cost of services, which increased at a faster rate than did revenues. The operating margin was primarily impacted by the increase in cost of services due to the significant strengthening of the Philippine peso compared to the U.S. dollar. For example, in 2007 the average exchange rate used in the conversion of Philippine peso denominated expenses was 46.1 compared to 51.3 in 2006. Other decreases to the operating margin were due to:

•		our investment in our global information technology resources;
•		our site expansion in the Philippines to support our revenue growth;
•		the cost of services for our U.S. operations increasing as a percentage of revenue as a result of increased labor rates and lower utilization rates of our U.S. employees; and
•		additional salaries, wages and benefits, consulting fees and travel expenses to support our growth.

These decreases to our operating margin were partially offset by the expanded use of our lower-cost Philippine operations, which despite the strengthening peso continues to show significant cost advantages over our U.S. operations.

Interest expense and financing charges. Interest expense and financing charges consist primarily of interest expense on our revolving line of credit and two term loans. Interest expense and financing charges were $1.9 million and $5.5 million in 2007 and 2006, respectively. Interest expense and financing charges decreased significantly in 2007 compared to 2006 because of the payoff of debt from the proceeds of the initial offering.

Foreign exchange (loss) gain. Foreign exchange loss was $0.9 million and $0.7 million in 2007 and 2006 respectively. We are exposed to short-term currency fluctuations with respect to our operating expenses in the Philippines. During 2007, the Philippine peso ranged from P40.47 to P49.08 compared to the U.S. dollar.

Income tax provision (benefit). Our income tax provision (benefit) was $(1.8) million and $0.6 million in 2007 and 2006, respectively. Our 2007 income tax provision included two discrete tax adjustments totaling $3.4 million. The first benefit of $0.4 million resulted from the expiration of statue of limitations on our 2003 tax year. The second tax benefit of $3.0 million resulted from the removal of a valuation allowance on our U.S. deferred tax assets. As part of our regular reevaluation of the recoverability of our deferred tax assets, we determined the valuation allowance on U.S. deferred taxes at the end of 2007 was no longer required.

Comparison of Years Ended December 31, 2006 and 2005

Service revenue. Service revenue was $195.1 million and $152.2 million in 2006 and 2005, respectively, an increase of 28% in 2006 from 2005.

In 2006, our service revenue increased $42.9 million, or 28%, over the prior year. This increase was primarily driven by new service programs with two new and two existing clients and, to a lesser extent, our expansion of existing service programs with four existing clients. These increases were partially offset by the ramping down of service programs or our loss of clients. We declined to reduce our pricing with respect to the two largest clients we lost and another client terminated our services due to a decline in its business.

Cost of services. Cost of services was $135.7 million and $114.0 million in 2006 and 2005, respectively. Our cost of services as a percentage of revenue was 69.5% and 74.9% during 2006 and 2005, respectively.

The absolute dollar increase in cost of services in 2006 over 2005 was primarily to support the 28% increase in service revenue in 2006 over 2005. The 5% improvement in cost of services as a percentage of revenue was primarily due to an increased percentage of revenue provided by our lower-cost Philippine operations. During 2006, we also lowered our communications costs by negotiating better pricing terms with our vendors and restructuring a contract with one of our largest clients to provide for the client to pay the communications costs associated with our services.

Selling and administrative expenses. Selling and administrative expenses were $30.0 million in 2006 and $25.5 million in 2005, an increase of 18% in 2006 over 2005. Our selling and administrative expenses were 15.4% and 16.7% of revenue in 2006 and 2005, respectively.

Share-based compensation included in selling and administrative expenses was $1.9 million and $0.4 million in the years ended December 31, 2006 and 2005, respectively, which represented 1% and less than 1% of revenue in 2006 and 2005, respectively.

The absolute dollar increase in selling and administrative expenses in 2006 over 2005 was primarily due to employees we hired to support our growth and upgrade and supplement our executive team and professional staff as we prepared to become a publicly traded company in the United States. Despite the significant absolute dollar increase in selling and administrative expenses in 2006 over 2005, our selling and administrative expenses as a percentage of revenue declined over the same period primarily due to our growth in revenue outpacing the increase in our selling and administrative expenses.

Depreciation and amortization. Depreciation and amortization was $10.2 million and $8.6 million in 2006 and 2005, respectively. Our depreciation and amortization expenses were 5.2% and 5.7% of revenue in 2006 and 2005, respectively. The increase from 2005 to 2006 was primarily due to expansion of available seat capacity in the Philippines.

Income from operations; operating margin. Our income from operations was $19.2 million and $4.1 million for 2006 and 2005, respectively. Our operating margin was 9.9% and 2.7% for 2006 and 2005, respectively.

The increase in operating income and operating margin in 2006 over 2005 was principally due to a decrease in cost of services as a percentage of our revenue primarily arising from an increased percentage of revenue from our lower-cost Philippine operations. During 2006, we also lowered our communications costs by negotiating better pricing terms with our vendors and restructuring a contract with one of our largest clients to provide for the client to pay the communications costs associated with our services. Our operating income and operating margin also improved in 2006 over 2005 because the growth rate of our service revenue outpaced the growth rate of our selling and administrative expenses despite an absolute dollar increase of $4.5 million in our selling and administrative expenses during this period.

Interest expense and financing charges. Interest expense and financing charges consist primarily of interest expense on our revolving line of credit and two term loans. Interest expense and financing charges were $5.5 million and $4.9 million in 2006 and 2005, respectively. Interest expense and financing charges increased in 2006 compared to 2005 as a result of higher variable interest rates on our revolving line of credit and term loans, which was partially offset by a reduction in average balances.

Foreign exchange (loss) gain. Foreign exchange loss was $0.7 million and $0.6 million in 2006 and 2005, respectively. We are exposed to short-term currency fluctuations with respect to our operating expenses in the Philippines. During 2006, the Philippine peso ranged from P49.01 to P53.58 compared to the U.S. dollar.

Income tax provision. Our income tax provision was $0.6 million and $0.5 million in 2006 and 2005, respectively. Our 2006 income tax provision is comprised primarily of increases in our tax deductible goodwill deferred tax liability that are not eligible to offset the related increase in net operating losses given that our goodwill deferred tax liability has an indefinite life. In 2005, we had an income tax provision despite having an operating loss due to our establishment of a valuation allowance on our deferred tax assets. The valuation allowance was required because

our United States operating results were an overall cumulative loss over the three prior years. The income tax provision in 2006 was significantly lower than the Philippine statutory rate due principally to tax holidays in the Philippines.

Liquidity and Capital Resources

We have financed our operations primarily with cash from operations, proceeds from our initial public offering in the United States, proceeds from our loan agreements and, to a lesser extent, with proceeds from the issuance of our common shares through our employee stock option program.

Net cash provided by our operating activities was $22.8 million, $22.5 million and $5.6 million in 2007, 2006 and 2005, respectively.

Cash flows from our operating activities in 2007 compared to 2006 remained constant. Increases in net income, depreciation and amortization in 2007 were offset by increases in accounts receivable and deferred taxes. The larger increase in accounts receivable was due to our revenue growth. Our depreciation and amortization increased as we continued to increase capacity.

The increase in cash flows from our operating activities in 2006 compared to 2005 was primarily a result of an increase in net income and depreciation. The increase in accounts receivable in 2006 was largely offset by the increase in accounts payable and accrued expenses while a larger increase in accounts receivable versus accounts payable and accrued expenses in 2005 reduced cash provided by operations by $3.4 million.

Net cash used in our investing activities was $38.1 million, $17.6 million and $7.7 million in 2007, 2006 and 2005, respectively. The primary use of cash in our investing activities for each year is for our purchase of property and equipment, including information technology equipment, furniture, fixtures and leasehold improvements for expansion of available seats.

Net cash provided by our financing activities was $49.7 million in 2007. Net cash used by our financing activities was $5.2 million and $0.6 million in 2006 and 2005. The significant increase in cash provided by financing activities in 2007 was primarily due to the proceeds from the public offering. We incurred $0.8 million and $3.2 million of deferred offering expenses in 2007 and 2006, respectively, which were offset against offering proceeds upon closing. In 2005, proceeds from our borrowings were approximately offset by repayments of borrowings.

We paid an aggregate of $188.0 million in cash during the year ended December 31, 2007 to satisfy our contractual obligations. Our current operating lease obligations as of December 31, 2007, which we expect to pay in 2008, consisted primarily of facilities leases and to a lesser extent equipment leases. We expect to incur $30 to $35 million in 2008 for facilities improvements and expansion based on our current estimates of our facilities requirements necessary to support the anticipated growth in our business. We believe that we will be able to finance our working capital needs and currently planned facilities improvements and expansion for at least the next 12 months from cash generated from operations, borrowings under our revolving line of credit.

Our long-term future capital requirements will depend on many factors, including our level of revenue, the timing and extent of our spending to support the maintenance and growth of our

operations, the expansion of our sales and marketing activities and the continued market acceptance of our services. As of December 31, 2007, we had an aggregate of $66.2 million in commitments to settle our contractual obligations in cash for payments due between 2008 and 2012. These long-term contractual obligations consist primarily of an aggregate of $58.3 million of operating lease obligations primarily from facilities leases and to a lesser extent equipment leases. We expect to continue to have significant capital requirements associated with the maintenance and growth of our operations, including the lease and build-out of additional facilities primarily to support an increase in the number of our customer service associates and the purchase of computer equipment and software, telecommunications equipment and furniture, fixtures and office equipment to support our operations. These additional long-term expenses may require us to seek other sources of financing, such as additional borrowings or public or private equity or debt capital. The availability of these other sources of financing will depend upon our financial condition and results of operations as well as prevailing market conditions, and may not be available on terms reasonably acceptable to us or at all.

Long-term Debt and Revolving Line of Credit

During 2007, we repaid all of our outstanding debt and modified the existing credit agreement with Wells Fargo Bank, which will expire in July 2011. Under this modified agreement, Wells Fargo agreed to extend a revolving line of credit to us in the maximum aggregate amount of $25 million, the proceeds of which shall be used to support our working capital. The Wells Fargo revolving line of credit bears interest either (i) at the Prime Rate or (ii) at the fixed rate of Libor plus 1.25%.

This credit agreement contains certain covenants which include, among other terms and conditions, limitations on our ability to create, incur, assume or permit indebtedness, dispose of assets, pay dividends, make guarantees, and acquire, consolidate, or merge with another entity. Additionally, the credit agreement also provides certain financial covenants which require us to maintain: minimum levels of earnings before interest, tax, depreciation, and amortization (EBITDA), a maximum tangible net worth ratio, and maximum capital expenditures determined on a consolidated financial statement basis. The credit agreement also provides for certain events of default, but it does not contain any subjective acceleration features and does not have any required payment or principal reduction schedules. As of December 31, 2007, we were in compliance with these covenants and we have not borrowed against this line of credit.

The credit agreement is collateralized by a continuing security interest on all rights, titles, and interests to all of our currently existing and hereafter acquired cash deposits, trade receivables, property and equipment, investment property and substantially all other assets owned by us.

Off-Balance Sheet Arrangements

As of December 31, 2007, we had no off-balance sheet arrangements as defined in Item 303(a) (4) of Regulation S-K.

Contractual Obligations

The following table describes our commitments to settle contractual obligations in cash as of December 31, 2007:

Recent Accounting Pronouncements

The Financial Accounting Standards Board has issued Statements of Financial Accounting Standard (“SFAS”) and Interpretations (“FIN”) for which the required implementation dates have not yet become effective. A new standard that will likely impact us is discussed below.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”), which replaces FAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141(R) is to be applied prospectively to business combinations for which the acquisition date is on or after an entity’s fiscal year that begins after December 15, 2008. We will assess the impact of SFAS 141(R) if and when a future acquisition occurs.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Philippine peso. During the years ended December 31, 2007 and 2006, approximately 45% and 35%, respectively, of our cost of services and selling and administrative expenses were generated in the Philippines. We bill substantially all of our revenue in U.S. dollars. The average exchange rate to translate pesos to U.S. dollars was 46.1. A 10% increase in the value of the U.S. dollar relative to the Philippine peso would reduce our annual expenses associated with our offshore operations in 2007 by approximately $10 million, whereas a 10% decrease in the relative value of the U.S. dollar would increase the annual cost associated with these operations by approximately $10 million. Expenses relating to our offshore operations increased in 2007 and 2006 due to increased costs associated with a higher percentage revenue generation and customer management services we delivered from our Philippine operations.

Payments for employee-related costs, facilities management, other operational expenses and capital expenditures are incurred in Philippine pesos on a monthly basis. Based upon prior credit

agreements, we were not allowed to enter into hedging contracts. Therefore, when our loans were paid off, we initiated in the third quarter of 2007 a strategy to hedge against short-term foreign currency fluctuations. This strategy consists of a rolling hedge program that entails contracting with third-party financial institutions to acquire zero cost, non-deliverable forward contracts that cover approximately 80% of our Philippine peso-denominated forecasted expenses for the current quarter, 60% of our forecasted peso expenses for the next quarter, 40% of our forecasted peso expenses for two quarters out and 20% of our forecasted peso expenses for three quarters out. For 2008, however, we modified the application of this strategy and have hedged approximately 90% of our forecasted 2008 Philippine peso denominated expenses. We will continue to reevaluate our hedge strategy and adjust the percentage of expenses hedged depending on certain external economic factors and indicators.

Interest Rate Sensitivity

We have no outstanding borrowings under our revolving line of credit, which has variable interest rates. These variable interest rates are affected by changes in short-term interest rates. Assuming the current level of borrowings, a hypothetical one-percentage point increase in interest rates would not increase our annual interest expense as we repaid the entire March 31, 2007 balance of our term loans and line of credit on April 3, 2007 and have not borrowed on our existing line of credit.

Inflation Rate Sensitivity

For the years ended December 31, 2007 and 2006, approximately 45% and 35%, respectively, of our cost of services and selling and administrative expenses were generated in the Philippines. The Philippines has historically experienced periods of high inflation, but the inflation rate has been below 10% since 1999. For the year ended December 31, 2007, inflation averaging 2.8% kept prices generally stable. Inflation in the Philippines has not affected our operating results because the Philippines has historically experienced deflationary pressure on wages due to a fast-growing population and high unemployment. A reversal of these trends, increased wage pressure due to increased competition as our industry expands or higher rates of inflation in the Philippines could result in increased costs and harm our operating results. A number of our leases in the Philippines have escalation clauses triggered by Philippine inflation above negotiated thresholds.

Item 8. Financial Statements and Supplemental Data

The following documents are filed as part of this Annual Report on Form 10-K:

Report of Independent Registered Public Accounting Firm			49
Consolidated Balance Sheets			50
Consolidated Statements of Operations			51
Consolidated Statements of Comprehensive Income (Loss)			52
Consolidated Statements of Changes in Stockholders’ Equity			53
Consolidated Statements of Cash Flows			54
Notes to Consolidated Financial Statements			56

Report of Independent Registered Public Accounting Firm

The Stockholders and the Board of Directors of
eTelecare Global Solutions, Inc.

We have audited the accompanying consolidated balance sheets of eTelecare Global Solutions, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of eTelecare Global Solutions, Inc. and subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with U.S. generally accepted accounting principles.

As discussed in Note 15 to the consolidated financial statements, effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109”.

Phoenix, Arizona
March 14, 2008

eTelecare Global Solutions, Inc. and Subsidiaries

eTelecare Global Solutions, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

See accompanying notes.

eTelecare Global Solutions, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

See accompanying notes.

eTelecare Global Solutions, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except number of shares)

See accompanying notes.

eTelecare Global Solutions, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

eTelecare Global Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)

(In thousands)

See accompanying notes.

eTelecare Global Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except number of shares, per share data and percentages)

1. Corporation Information

eTelecare Global Solutions, Inc., formerly E-Telecare International, Inc. (the “Company”, “eTelecare” or “the Parent Company”), was incorporated in the Philippines and registered with the Philippine Securities and Exchange Commission (“the Philippine SEC”) on February 21, 2000. The Parent Company has been subject to Philippine SEC reporting requirements for listed entities since 2004. The Company voluntarily complies with the United States SEC reporting requirements under the Securities Exchange Act of 1934 applicable to U.S. domestic companies.

The Company is a provider of business process outsourcing services focusing on the complex, voice and non-voice based segment of customer care services. As of December 31, 2007, the Company had seven delivery centers in the Philippines and six delivery centers in the United States.

2. Summary of Significant Accounting Policies

Basis of Preparation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”).

Reclassifications

Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of the Parent Company and its subsidiaries, all of which are wholly owned. All intercompany balances and transactions, including intercompany profits, are eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the Company’s consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

The more significant estimates with regard to these consolidated financial statements relate to the allowance for doubtful accounts, useful lives used for depreciation and amortization of long-lived assets, assumptions used in the determination of capital stock fair value and related stock option valuation, goodwill impairment, asset retirement obligations, and valuation allowances on deferred tax assets.

Business Segment

The Company’s delivery center operations are considered one business segment for financial reporting purposes in accordance with Statement of Financial Accounting Standards (SFAS) 131, Disclosures about Segments of an Enterprise and Related Information . The Company’s Philippine operations and its U.S. operations operate as two separate segments, but given the commonality of the business operations they comprise a single segment for financial reporting purposes.

Under SFAS 131, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles of SFAS 131, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas:

	•		the nature of products and services;
	•		the nature of the production processes;
	•		the type or class of customer for their products and services; and
	•		the methods used to distribute their products or provide their services.

We believe we meet each of the aggregation criteria for the following reasons:

	•		the sale of outsourced delivery center services is the only material source of revenue for each of our operating segments;
	•		the services sold by each of our operating segments use the same standard service model;
	•		the same type or class of customer utilize the services; and
	•		all of our services are sold through a centralized sales force.

Concentrations of Risk

In the normal course of business, the Company is exposed to credit risk. The principal concentrations of credit risk are cash and cash equivalents and accounts receivable. The Company regularly monitors credit risk exposures and takes steps to mitigate the likelihood of these exposures resulting in a loss.

The Company performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended when deemed necessary, but generally does not require collateral. The Company maintains an allowance for doubtful accounts receivable based upon factors surrounding the credit risk of specific clients, historical trends, and other information.

Revenue from significant clients over 10% for the years ended December 31, 2007, 2006 and 2005 accounted for the Company’s total revenue and accounts receivable balances at December 31, 2007 follows:

The Company has significant operations in the Philippines, and is subject to risks associated with operating in the Philippines including political, social and economic instability and increased security concerns, fluctuation in currency exchange rates, and exposure to different legal standards.

Cash and Cash Equivalents

Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments with remaining maturities of three months or less when acquired. Cash and cash equivalents are deposited or managed by major financial institutions and at times are in excess of Federal Deposit Insurance Corporation (FDIC) and Philippine Deposit Insurance Corporation (PDIC) insurance limits.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is maintained at a level considered adequate to provide for uncollectible receivables. The level of allowance is based on historical collections, write-off experience, current economic trends, changes in customer payment terms, and other factors that may affect the ability to collect payments. An evaluation of the receivables, designed to identify changes to the allowance, is performed on a continuing basis during the year using specific identification.

Property and Equipment

Property and equipment are stated at cost or fair value for assets acquired through business combinations, less accumulated depreciation, amortization, and any impairment in value.

Depreciation and amortization are computed using the straight-line method over the following estimated useful lives of the assets:

Asset Retirement Obligations

Under SFAS 143, Accounting for Asset Retirement Obligations , the fair value of legal obligations associated with the retirement of a tangible long-lived asset that resulted from the acquisition, construction or development and the normal operation of a long-lived asset is required to be recognized in the period in which it is incurred. The Company recognizes asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The related asset retirement costs are capitalized as part of the carrying amount of the corresponding long-lived asset.

The Company is required either expressly under various lease agreements or through customary business practices required in certain jurisdictions to dismantle the tenant improvements and restore the leased sites to its original condition at the end of the lease contract term. The Company recognized the fair value of these obligations and capitalized the present value of these costs as part of the balance of the related property and equipment accounts, which are being depreciated on a straight-line basis over the contract periods.

Goodwill and Other Intangible Assets

Goodwill is initially measured at cost which is defined as the excess of the acquisition cost over the fair value of identifiable assets, liabilities, and contingent liabilities. In accordance with the provisions of SFAS 142, Goodwill and Other Intangible Assets , goodwill is not amortized.

Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Company’s goodwill primarily relates to the United States business segment and is evaluated for impairment during the last quarter of each fiscal year end or when indicators of impairment otherwise are presented. In performing its annual assessment management estimates the fair value of this segment of its enterprise which also represents a single reporting unit therein.

Intangible assets arising from business combinations are initially recognized at fair value at the date of acquisition. Where an intangible asset has a finite life, it is amortized over its useful life. The intangible assets with finite useful lives are reviewed whenever events or circumstances arise indicating that an impairment loss may exist. For finite life intangible assets, when the asset’s carrying amount exceeds its respective recoverable amount (based on an undiscounted cash flow analysis), an impairment charge is recorded for the excess of the carrying amount over the fair value of the asset (based on the discounted cash flow analysis).

Intangible assets are being amortized using the straight-line method over the following amortization periods beginning in May 2004:

Debt Issuance Costs

Issuance costs, underwriting fees and related expenses incurred in connection with the issuance of debt instruments are deferred and amortized using the effective interest rate method over the terms of the instruments. Unamortized debt issuance costs are charged to operations when the related debt is extinguished.

Revenue Recognition

Revenue is recognized when it is probable that the economic benefits associated with the transactions will flow to the Company and the amount of revenue can be measured reliably. This is normally demonstrated when: (i) persuasive evidence of an arrangement exists; (ii) the fee is fixed or determinable; (iii) performance of service has been delivered; and (iv) collection is reasonably assured. Almost all of the Company’s revenue are billed and collected in U.S. dollars given that all of its clients are based in the United States.

Service revenue is recognized as services are performed on a per subscriber, per event, per call, per participant or flat monthly fee basis using rates that are detailed in the client contract. Payments received in advance of services performed are recorded as deferred revenue. Certain contracts include performance-based criteria such as confirmed sales transactions or customer satisfaction targets. Revenue is recognized when the performance criteria are met and, therefore, the amount is known and not subject to adjustment.

Cost of Services

Cost of services consists primarily of employee-related costs associated with the services rendered on behalf of a client, as well as communication costs, information technology costs associated with providing services, facilities support, and customer management support costs related to the operation of service centers.

Leases

Leases are classified as either capital or operating in accordance with SFAS 13, Accounting for Leases . Leases which transfer substantially all the benefits and risks of ownership of the property to the Company are accounted for as capital leases. Capital lease obligations reflect the present value of future lease payments, discounted at the appropriate interest rate. All other leases are accounted for as operating leases which rental payments are expensed on a straight-line basis over the lease term.

Stock Option Plan

The Company accounts for stock options granted to employees in accordance with SFAS 123(R), Share-Based Payment , using the modified retrospective method. Employee stock options are valued at grant dates using the Black-Scholes valuation model with compensation cost

recognized over the vesting period treating each separately vesting portion of an award as if it was, in substance, a multiple award.

Foreign Currency Transactions and Translation

The Company and all of its subsidiaries have a U.S. dollar functional currency because substantially all of their revenue and a significant portion of their costs are transacted in U.S. dollars. Transactions in foreign currencies are recorded in the functional currency of the Company by applying the exchange rate prevailing at the transaction date to the foreign currency amount. Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at period end using the balance sheet rate in effect with any foreign exchange gains or losses recorded in the consolidated statements of operations.

Advertising Costs

Advertising costs are expensed as incurred and the Company has no direct-response advertising reported as an asset.

Income Taxes

Deferred income tax is accounted for using the liability method in accordance with SFAS 109, Accounting for Income Taxes . Deferred tax assets and liabilities are recognized for the future tax benefits and consequences attributable to temporary differences between the financial reporting bases of assets and liabilities and their related tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be in effect in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for deferred tax assets when it is more likely than not that the related benefits will not be realized.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, trade and other receivables, and current liabilities approximate fair values because of the short-term maturity of these instruments. The carrying amounts of the Company’s refundable deposits, capital leases and long-term debt approximate fair values as management believes they bear market interest rates.

Recently Issued Accounting Standards

The Financial Accounting Standards Board has issued Statements of Financial Accounting Standard (“SFAS”) and Interpretations (“FIN”) for which the required implementation dates have not yet become effective. A new standard that will likely impact us is discussed below.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”), which replaces FAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

FAS 141(R) is to be applied prospectively to business combinations for which the acquisition date is on or after an entity’s fiscal year that begins after December 15, 2008. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs.

3. Trade and Other Receivables

Trade and other receivables consist of the following at December 31:

A summary of additions and reductions related to the allowance for doubtful accounts is as follows:

Trade receivables and the allowance for doubtful accounts include amounts for clients that have filed for bankruptcy.

4. Deferred Offering Costs

The Company paid certain costs during 2006, such as legal and accounting fees, associated with its initial public offering (“IPO”). Upon the completion of the IPO during 2007, these costs were netted against the proceeds in shareholders’ equity.

5. Property and Equipment

Property and equipment consist of the following at December 31:

Telecommunications and computer equipment includes the following amounts under capital leases at December 31:

Amortization expense for assets reported under capital leases amounted to $817, $999 and $671 during the years ended December 31, 2007, 2006 and 2005, respectively.

6. Goodwill and Other Intangible Assets

Other intangible assets consist of the following at December 31:

Amortization expense for the years ended December 31, 2007, December 31, 2006 and December 31, 2005 was $1,437, $1,397 and $1,397, respectively. The estimated future intangible asset amortization expense for the years ended December 31 is as follows:

2008		$	955
2009			184
		$	1,139

Changes in goodwill consist of the following during the years ended December 31: