UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10- K

For the fiscal year ended December 31, 2004

OR

Commission File Number: 0-21055

TeleTech Holdings, Inc.

9197 South Peoria Street
Englewood, Colorado 80112
(Address of principal executive offices)
Registrant’s telephone number, including area code:  (303) 397-8100

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(Title of Class)

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 checkmark if an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o

As of June 30, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, there were 74,584,463 shares of the registrant’s common stock outstanding. The aggregate market value of the registrant’s voting and non-voting common stock that was held by non-affiliates on such date was $309,078,777 based on the closing sale price of the registrant’s common stock on such date as reported on the NASDAQ National Market.

As of February 23, 2005, there were 75,066,793 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of TeleTech Holdings, Inc.’s definitive proxy statement for its annual meeting of stockholders to be held on May 24, 2005, are incorporated by reference into Part III of this Form 10-K, as indicated.

Table of Contents

PART I

This Form 10-K and the documents incorporated by reference herein contain “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on current expectations and projections. Statements that are not historical facts, including statements about the beliefs and expectations of TeleTech Holdings, Inc., are forward-looking statements. These statements discuss potential risks and uncertainties; and, therefore, actual results may differ materially. We have set forth, beginning on page 6 of this Form 10-K, a detailed discussion of risks and uncertainties relating to our business. We caution investors not to place undue reliance on these forward-looking statements, which speak only as of the date on which they were made. We undertake no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or otherwise, except as required by law.

In various places throughout this Form 10-K we use certain non-GAAP financial measures when describing our performance. We believe such non-GAAP financial measures are informative to the users of our financial information. We discuss non-GAAP financial measures in Item 7 of this Form 10-K under the heading Management’s Discussion and Analysis of Financial Condition and Results of Operations — Presentation of Non-GAAP Measurements.

Item 1. Business.

TeleTech Holdings, Inc., (“TeleTech,” “Management” or the “Company”) is a provider of outsourced customer management services on a global basis. The Company was organized as a Delaware corporation on December 22, 1994 to continue the operations of its predecessor. The Company completed its initial public offering (“IPO”) in 1996. Since its IPO, the Company has grown from 9 customer management centers (“CMCs” or “Centers”) in four countries to 67 locations in 17 countries. We seek to develop strategic relationships with our clients. Our two primary businesses are Customer Management Services and Database Marketing and Consulting. Our Customer Management Services business provides outsourced customer support and marketing services for a variety of industries via CMCs throughout the world (“Customer Care”), while our Database Marketing and Consulting business provides outsourced database management, direct marketing and related customer acquisition and retention services for automotive dealerships and manufacturers in North America.

Our principal executive offices are located at 9197 South Peoria Street, Englewood, Colorado 80112, and the telephone number at that address is (303) 397-8100. Electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K are available free of charge by visiting the “Investors” section of our web site at www.teletech.com. These reports are posted as soon as reasonably practicable after they are electronically filed or furnished with the Securities and Exchange Commission (“SEC”). In addition, we will provide electronic or paper copies of our SEC filings, free of charge, upon request.

TeleTech grew in revenue and profitability from 1998 to 2000, primarily driven by increases in large, global client contracts. Although revenue growth continued from 2000 to 2002, we began to experience losses beginning in 2001, which continued through 2003. Those losses were the result of the following factors:

	•	Sales cycles increasing as a result of the global economic downturn;
	•	Certain client contracts terminating or being scaled back resulting in excess capacity;
	•	Pricing and contract terms experiencing pressure as a result of the maturation of the customer management industry;
	•	International operations experiencing difficulties, including an unsuccessful acquisition in Spain during 2000, excess capacity in the United Kingdom, and excess capacity coupled with certain unprofitable client programs in Latin America;
	•	Decreased profitability of a large North America client program prior to transitioning the work to lower cost locations;
	•	Charges related to workforce reductions, asset impairments and the closure of certain CMCs; and
	•	Increased development costs due to efforts to create new, value-added services and solutions for clients.

Business Turnaround

We are in the process of completing a business turnaround to return the Company to consistent profitability. To achieve this objective we

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have taken the following actions over the last 12 months:

	•	Terminated client contracts that we determined could not be reasonably returned to our desired level of profitability;
	•	Transitioned certain client programs to lower cost locations to improve profitability;
	•	Reduced our global operating costs, including reducing our global workforce and general and administrative expenses;
	•	Appointed new management teams in our North America, Europe, Asia Pacific and Latin America operations;
	•	Implemented a plan to improve workforce utilization and operational efficiencies;
	•	Invested in our sales and account management teams;
	•	Expanded our lower cost, English-speaking services in Argentina, Canada, Mexico, India and the Philippines; and
	•	Established product and sales teams to focus on the development of new products and services.

The results of implementing those measures have been:

	•	Four consecutive quarters of profitability;
	•	Increased cash flows from operations over the prior year; and
	•	Reduced outstanding debt by more than $120.0 million.

Description of Business

We operate two distinct businesses; Customer Management Services and Database Marketing and Consulting. We further classify our Customer Management Services into North American Customer Care (providing customer management services to clients in the United States (“U.S.”) and Canada) and International Customer Care (consisting of clients in all other countries), resulting in three segments, which reflect our management of the Company, our internal financial reporting and our operating focus.

Financial information about our segments and geographic locations, including Revenue, Income (Loss) from Operations and Total Assets, can be found in Note 2 to Consolidated Financial Statements.

One of our strategies is to leverage lower cost labor opportunities offered by certain countries to increase our business with U.S. corporations. We provide services to certain U.S. clients from CMCs in Canada, India, Argentina, Mexico and the Philippines. Under these arrangements, the U.S. subsidiary invoices and collects from the client while entering into a simultaneous contract with the foreign subsidiary. The foreign subsidiary is reimbursed for actual costs plus a reasonable profit margin. As a result, a portion of the profits from these contracts is recorded in the U.S. and a portion is recorded in the foreign locations.

Many of these arrangements are U.S. client contracts being serviced by CMCs in Canada, India and the Philippines. In these circumstances the profits related to such arrangements are recorded in the North American Customer Care segment. If U.S. client contracts are serviced by other countries a portion of the profits are recorded in the International Customer Care segment. At times, a foreign location will contract with other foreign locations to fulfill client contracts. Such situations do not impact segment reporting as the profits are reported in the International Customer Care segment.

Customer Management Services

Our Customer Management Services business manages customer interactions on behalf of our clients via multi-channel CMCs throughout the world, using telephone, e-mail, integrated voice response and web-based services. As approximately 95% of our Customer Management Services revenue comes from inbound customer interactions, restrictions under the Do Not Call registry do not have a material impact on our business.

     Our Customer Management Services business includes:

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Customer Acquisition Services: We provide new account services including processing and fulfilling pre-sale information requests, verifying sales, activating services and directing customers to product or service sources.

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	•	Customer Provisioning Services: We manage front and back-office processes from order to installation.
	•	Customer Support Services: We manage customer support interactions ranging from basic services such as billing support and account maintenance, to complex transactions such as insurance claims processing, technical and help-desk support.
	•	Customer Development Services: We assist our clients with identifying high-value customers and seek to increase clients’ sales through up-selling and cross-selling their products and/or services.
	•	Customer Retention Programs: We work in conjunction with clients to develop targeted customer satisfaction and loyalty programs to help manage customer attrition and/or turnover.
	•	Other Customer-Related Programs: We assist our clients with account collections, collecting market research from customers and performing outbound-call campaigns.

Many clients require a combination of the above services (“customer management solutions”). Additionally, we work to develop new products and services to meet client needs (“solutions”).

We offer clients an alternative to using in-house resources to manage customer relationships. Clients are able to utilize our customer management experience, infrastructure, technology and resources to increase customer satisfaction. Our core competencies include:

	•	Infrastructure deployment, including development of data centers and CMCs;
	•	Workforce development, including recruitment, education and management of client-dedicated customer service representatives (“CSRs”);
	•	Process control implementation, including formulating and engineering quality control systems;
	•	Technology consulting and implementation, including the integration of hardware, software, network and computer-telephony technology; and
	•	Database management, including the accumulation, management and analysis of customer information to aid in the development of marketing strategies.

We offer services under three programs; (i) Fully Outsourced, which are turnkey CMCs leased, equipped and staffed by us, (ii) Facilities Management, which are CMCs owned or leased and equipped by our clients and staffed by us, and (iii) Infrastructure Outsourced, which are CMCs leased and equipped by us and staffed by our clients.

Fully Outsourced CMCs may be dedicated to single client (“Dedicated Centers”) or serve multiple clients (“Multi-client Centers”). As of December 31, 2004, we had 25,005 workstations in 67 CMCs, of which 14 were Dedicated Centers, 35 were Multi-client Centers, and 18 were Managed Centers representing 5,658, 15,357 and 3,990 seats of capacity, respectively.

Markets and Clients. We focus on large global corporations in the following industries: Automotive, Communications and Media, Financial Services, Government, Healthcare, Logistics, Retail, Technology and Travel. The Communications and Media industry comprises approximately 50% of our total revenue and represents the largest portion of our client programs.

Percepta, LLC (“Percepta”) our 55% owned joint venture with Ford Motor Company (“Ford”), provides customer management services to Ford customers and internal Ford organizations.

We had two clients who individually represented more than 10% of 2004 total revenue: Nextel Communications, Inc. (“Nextel”) (the Company contracts with IBM, who contracts with Nextel) and Verizon Communications (“Verizon”), which accounted for 15.7% and 13.3% of total revenue, respectively.

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Certain of our communications clients, which represent approximately one-third of our annual revenue, also provide us telecommunication services. We believe each of these supplier contracts is negotiated on an arms-length basis and may be negotiated at different times and with different legal entities. Expenditures under these supplier contracts represent less than one-percent of total costs.

Sales and Marketing. We typically provide customer management services pursuant to written contracts with terms ranging from one to eight years and our contracts often contain renewal and/or extension options. Under the majority of our significant contracts, we generate revenue based on the amount of time CSRs devote to a client’s program. In addition, clients are typically required to pay fees relating to the implementation of the program including initial education and training of CSRs, setup of the program, and development and integration of computer software and technology. Clients also may be required to pay fees relating to the management of the program and the recruiting, hiring and training of new CSRs to backfill vacant positions. Such fees may be billed as a separate charge upfront, or may be bundled into the production rate over the life of the contract.

Contracts may, depending upon our assessment of the associated risks and opportunities, include provisions such as: (i) performance-based pricing provisions, whereby the client may pay more or we may have to issue a credit, depending upon our ability to meet agreed upon performance metrics, and (ii) a requirement for our clients to pay a fee in the event of early termination.

Most contracts have price adjustment terms allowing for cost of living adjustments and/or market changes in agent labor costs. Additionally, our client contracts generally contain provisions that designate the manner by which we receive payment for our services and allow us or the client to terminate the contract upon the occurrence of certain events.

We employ a team sales approach and seek to hire business development professionals with experience in our targeted industries in order to best negotiate these contracts to fulfill the Company’s operational goals.

Operations. We provide customer management services through the operation of 67 CMCs located in the U.S., Argentina, Australia, Brazil, Canada, China, Germany, India, Korea, Malaysia, Mexico, New Zealand, Northern Ireland, the Philippines, Scotland, Singapore, and Spain.

We apply predetermined site selection criteria to identify locations conducive to operating large-scale customer management facilities in a cost-effective manner. We pursue local government incentives such as tax abatements, cash grants, low-interest loans, training grants and low cost utilities. Following site evaluations and cost analyses, as well as client considerations, a specific site is located and a lease is negotiated and finalized.

Once we take occupancy of a site, we use a standardized development process designed to minimize the time it takes to open a new CMC and control costs. The site is retrofitted to requirements that incorporate engineering, cost control and scheduling concepts while placing emphasis on the quality of the work environment. Upon completion, we integrate the new CMC into our corporate real estate and asset management programs. Generally, we can establish a new, fully operational inbound CMC containing 450 or more workstations within 120 days after a lease is finalized and signed.

We assess the expected long-term capacity utilization of our Centers quarterly. Accordingly, we may consolidate or close under-performing Centers, including those impacted by the loss of a major client program, in order to maintain or improve targeted utilization and margins.

Quality Assurance. We monitor and measure the quality and accuracy of our customer interactions through regional quality assurance departments. These departments evaluate, on a real-time basis, a certain percentage of the customer interactions during a day, across all of the customer interaction mediums utilized within the Center. Each Center has the ability to enable its clients to monitor customer interactions as they occur. Using criteria mutually determined with the client, quality assurance professionals monitor, evaluate, and provide feedback to the representatives on a weekly basis. As appropriate, representatives are recognized for superior performance or scheduled for additional training and coaching.

Technology. Our technology platforms are designed to maximize the utilization of the CMCs and increase the efficiency of the CSRs. We use interaction routing technology designed to expedite response times, and workforce management systems designed to establish CSR staffing levels that most efficiently meet call volume demands. In addition, our technology platform allows for tracking of each customer interaction, filing the information within a relational database and generating reports on demand so that both our clients and our internal operations teams can analyze the performance of the client program and gain information regarding customer behaviors.

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We have invested in designing and developing industry-specific, open-systems software applications and tools and, as a result, maintain a library of reusable software code for use in future developments. We run our application software on an open-system, client-server architecture and use a variety of products developed by third-party vendors. We continue to invest resources into the development and implementation of emerging customer management and technical support technologies.

Human Resources. To sustain an adequate level of service and support for our clients’ customers, our CSRs undergo training before managing customer interactions and for many client programs, receive ongoing training on a regular basis. In addition to learning about the clients’ corporate culture and specific product or service offerings, CSRs receive training in the numerous media we use to execute our clients’ customer management program. We primarily offer full-time positions with competitive salaries and wages and a full range of employee benefits.

Competition. We compete primarily with the in-house customer management operations of our current and potential clients. We also compete with certain companies that provide customer management services on an outsourced basis, including Accenture, Convergys Corporation, EDS, IBM, SITEL Corporation and Sykes Enterprises Incorporated, among others. We may work with some of these companies on a sub-contract basis. We compete primarily on the basis of experience, global locations, quality and scope of services, speed and flexibility of implementation, technological expertise, price and contractual terms. A number of competitors may have greater capabilities and resources than ours. Additionally, niche providers or new entrants could capture a segment of the market by developing new systems or services that could impact our market potential.

International Operations. Our international operations consist of customer management services provided to clients from facilities outside of the U.S., Philippines, India and Canada; including Europe, Latin America and Asia Pacific. Our businesses in these three regions are operated and managed as described above. Outbound programs represent a higher percentage of our client programs internationally than in North America. In Spain, our employees are subject to collective bargaining agreements under national labor laws. Additionally, competition in our international locations includes smaller, local providers of customer management services in addition to the global providers listed above.

Database Marketing and Consulting

Our Database Marketing and Consulting segment provides outsourced database management, direct marketing and related customer acquisition and retention services for automotive dealerships and automobile manufacturers, primarily in North America. The services provided by our Database Marketing and Consulting segment primarily consist of marketing campaigns utilizing direct mail and outbound teleservice to promote automobile service business from a dealership’s own customer base.

Markets and Clients. We provide Database Marketing and Consulting services to automotive dealers and manufacturers in the U.S. and Canada. We have contracts with more than 4,200 automobile dealers representing 21 different brand names. Additionally, we provide services directly to automobile manufacturers primarily related to national sales and service promotions.

A significant number of our clients in this segment are affiliated with Ford, a member of our joint venture, Percepta.

Sales and Marketing. We employ sales professionals located in major markets throughout the U.S. and Canada.

Operations. We have developed expertise in the operational aspects of database management, direct marketing and teleservice. Our core competencies include; (i) developing and installing databases with dealership-specific information; (ii) updating dealership data through our automated computer system; (iii) compiling related data; (iv) maintaining automobile maintenance schedules; and (v) providing systems for customer solicitation using direct mail and outbound teleservice.

Quality Assurance. We are ISO 9000:2000 certified and undergo semi-annual surveillance audits to maintain this certification. We monitor and measure the ongoing quality and accuracy of our processes and systems associated with our products through operating metrics. These metrics are routinely evaluated against the current business environment.

Technology. We have invested significant resources in designing and developing proprietary industry-specific software applications and tools and as a result, maintain a library of reusable software code for use in future developments. We continue to invest resources into the development and implementation of emerging automotive customer services.

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Human Resources. We aim to recruit and hire management who have experience with automotive manufacturers and/or dealerships to enable us to provide our clients with an understanding of dealership operations and processes. Our employees receive training before managing customer interactions and for many client programs, receive ongoing training on a regular basis.

Competition. We compete with a variety of companies, including large national or multi-national companies and smaller regional or local companies. Our two significant national competitors are Reynolds & Reynolds, Co. and Moore Corporation Limited. Smaller competitors include Autobytel, On-line Administrators, and eLeads. In addition, R.L. Polk has offered services that are similar to ours on a limited basis. As the trend toward dealership consolidation continues, dealerships may decide to create internal economies of scale, and could choose to satisfy their database management and direct marketing needs internally.

Joint Ventures

During the first quarter of 2000, the Company and Ford formed Percepta, a joint venture. Percepta was formed to provide global customer management solutions for Ford and other automotive companies. Percepta is currently providing such services in the U.S., Canada, Australia and Scotland. The Company owns 55% and Ford owns 45% and each joint venture partner shares in the profits, dividends and any distributions of assets in accordance with its ownership percentage.

In connection with this formation, the Company issued stock purchase warrants to Ford entitling Ford to purchase 750,000 shares of TeleTech common stock for $12.47 per share. These warrants were valued at $5.1 million using the Black-Scholes Option model. The warrants expire on December 31, 2005.

Ford has the right to earn additional warrants based upon Percepta’s achievement of certain revenue thresholds through 2004. Such thresholds were not achieved for the years 2000 through 2004. The number of warrants to be issued is subject to a formula based upon the profitability of Percepta, among other factors. The exercise price of any warrants issued under the agreement will be at a 5% premium over the Company’s stock price at the date the warrants are issued.

Under the joint venture operating agreement, the Company has the right to require Ford to purchase its interest in Percepta at fair market value at any time after December 31, 2004. Ford also has the right to require the Company to sell its interest in Percepta at fair market value at any time after December 31, 2004. The Company does not intend to require Ford to purchase our interest in Percepta. At the October 8, 2004 Board of Directors meeting of Percepta, Ford reported that it does not intend to call our interest at this time and will not revisit this topic for at least one year. The net book value of Percepta as of December 31, 2004 is approximately $7.6 million. For the year ended December 31, 2004, Percepta reported revenue and income from operations of $83.2 million and $5.9 million, respectively.

In April 2003, we announced a joint venture agreement with Bharti Enterprises Limited (“Bharti”) to provide in-country and offshore customer management solutions in India. Under the terms of the agreement, TeleTech and Bharti participate in a joint venture known as TeleTech Services India Private Limited (“TeleTech India”). Initially, TeleTech and Bharti each had a 50% ownership interest in TeleTech India with TeleTech having the ability to acquire up to 80% of the venture. In February 2004, we acquired an additional 10% interest in TeleTech India, bringing our total ownership interest to 60%.

Employees

As of December 31, 2004, we had over 32,000 employees in 17 countries. Approximately 81% of these employees held full-time positions. Our industry is labor-intensive and traditionally experiences significant personnel turnover. Our employees in Spain are subject to collective bargaining agreements mandated under national labor laws.

Seasonality

Historically we have experienced a seasonal impact in the fourth quarter primarily related to higher volumes from a few clients with seasonality in their business, particularly the package delivery business. Also, we typically experience higher labor related costs during the first quarter due to payroll taxes.

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Working Capital

Information about our liquidity is contained in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”

Risk Factors

You should not construe the following cautionary statements as an exhaustive list. We cannot always predict what factors would cause actual results to differ materially from those indicated in our forward-looking statements. All cautionary statements should be read as being applicable to all forward-looking statements wherever they appear. We do not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed herein might not occur.

Forward-looking information may prove to be inaccurate. Some of the information presented in this Annual Report on Form 10-K constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements that include terms such as “may,” “will,” “intend,” “anticipate,” “estimate,” “expect,” “continue,” “believe,” “plan,” or the like, as well as all statements that are not historical facts. Forward-looking statements are inherently subject to risks and uncertainties that could cause actual results to differ materially from current expectations. Although we believe our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that actual results will not differ materially from expectations. Factors that could cause actual results to differ from expectations or have a material adverse effect upon our business include:

Our revenues are generated from a limited number of clients. We rely on strategic, long-term relationships with large, global companies in targeted industries. As a result, we derive a substantial portion of our revenue from relatively few clients. Additionally, client consolidations could result in a loss of clients. There can be no assurance that we will not become more dependent on a few significant clients, that we will be able to retain any of our largest clients, that the volumes or profit margins of our most significant programs will not be reduced, or that we would be able to replace such clients or programs with clients or programs that generate comparable revenue and profits.

Our business may be affected by the success of our clients. In substantially all of our client programs, we generate revenue based, in large part, on the amount of time our personnel devote to a client’s customers. Consequently, the amount of revenue generated from any particular client program is dependent upon consumers’ interest in, and use of, the client’s products and/or services. There can be no assurance that our clients will continue to market products and services or develop new products and services that require them to use our services.

Our financial results may be adversely impacted by the global economy. Our ability to enter into new multi-year contracts with large clients may be impacted by the general macroeconomic environment in which our clients and their customers operate. Weakening economic conditions, both global and local in nature, could result in increased sales cycles, delays in finalizing new business opportunities, slower growth and reduced revenues from existing contracts. An economic downturn could negatively impact the financial condition of our clients, thereby increasing our risk of not receiving payment for services. There can be no assurance that weakening economic conditions or acts of terrorism throughout the world will not adversely impact our results of operations and/or financial position.

Our business is subject to federal, state and international regulations. Changes in U.S. federal, state and international outsourcing requirements, restrictions and disclosures may affect the sale of our services, including expansion of overseas operations. In the U.S., some of our services must comply with various federal and state requirements and regulations regarding the method and practices of placing outbound telephone calls. There can be no assurance that changes in these regulations and requirements or new restrictive regulations and requirements, will not slow growth of these services or require us to incur substantial costs.

Our success is subject to the terms of our contracts. Most of our contracts do not ensure that we will generate a minimum level of revenue, and the profitability of each client program may fluctuate, sometimes significantly, throughout the various stages of a program. Our objective is to sign multi-year contracts with our clients. However, our contracts generally enable the clients to terminate the contract or reduce customer interaction volumes. Our larger contracts generally require the client to pay a contractually agreed amount in the event of early termination. Additionally, certain contracts have performance-related bonus and/or penalty provisions, whereby the client may pay us a bonus or we may have to issue a credit based upon our ability to meet agreed upon performance metrics. There can be no assurance that we will be able to collect early termination fees, avoid performance penalties or earn performance bonuses.

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Our business may be subject to sales and use tax liabilities. We may be subject to past and future sales or use tax liabilities. Use taxes are generally borne by the Company and are considered a cost of doing business. If we determine that we have significant past or future obligations, it could have an adverse affect on future results of operations. There can be no assurance that we will be successful in passing sales tax through to our clients.

Our business may be affected by our ability to obtain financing. From time to time, we may need to obtain debt or equity financing for capital expenditures, for payment of existing obligations or to replenish cash reserves. Additionally, our existing debt agreements require us to comply with certain financial covenants. There can be no assurance that we will be able to obtain debt or equity financing, or that any such financing would be on terms acceptable to us. There can be no assurance that we will be able to meet the financial covenants under our debt agreements or, in the event of noncompliance, will be able to obtain waivers or amendments from the lenders.

Our business may be affected by risks associated with international operations and expansion. One component of our growth strategy is continued international expansion. There are certain risks inherent with conducting international business including longer payment cycles, difficulties in accounts receivable collections, difficulties in complying with foreign laws, unexpected changes in regulatory requirements, political and social instability and potentially adverse tax consequences. Any one or more of these factors could have a material adverse effect on our international operations and, consequently, on our business, consolidated results of operations or consolidated financial condition. There can be no assurance that we will be able to manage our international operations successfully.

Our financial results maybe impacted by our ability to find new locations. Our future success will be dependent upon being able to find cost effective locations in which to operate, both domestically and internationally. There is no assurance that we will be able to find cost effective locations, obtain favorable lease terms and build or retrofit facilities in a timely or economic manner.

Our financial results may be adversely affected by increases in business costs. Some of our larger contracts allow us to increase our service fees if, and to the extent, certain cost or price indices increase. The majority of our expenses are payroll and payroll-related, which includes healthcare costs. Over the past several years, healthcare costs have increased at a rate much greater than that of general cost or price indices. Increases in our service fees that are based upon increases in cost or price indices may not fully compensate us for increases in labor and other costs incurred in providing services. There can be no assurance that we will be able to recover increases in our costs through increased service fees.

Our financial results depend on our ability to manage capacity utilization. Our profitability is influenced significantly by our CMC capacity utilization. We attempt to maximize utilization; however, because the majority of our business is inbound, we have significantly higher utilization during peak (weekday) periods than during off-peak (night and weekend) periods. We have experienced periods of idle capacity, particularly in our Multi-client CMCs. Historically, we experience idle peak period capacity upon opening a new CMC or termination or completion of a large client program. We assess the expected long-term capacity utilization of our Centers quarterly. We may consolidate or close under-performing centers in order to maintain or improve targeted utilization and margins. In the event we close CMCs in the future, we may be required to record restructuring or impairment charges, which would adversely impact our results of operations. There can be no assurance that we will be able to achieve or maintain optimal CMC capacity utilization.

Our business operates in a highly competitive market. The market in which we operate is fragmented and highly competitive and that competition may intensify in the future. We compete with small firms offering specific applications, divisions of large entities, large independent firms and, most significantly, the in-house operations of clients or potential clients. A number of competitors may develop greater capabilities and resources than ours. Because our primary competitors are the in-house operations of existing or potential clients, our performance and growth could be adversely affected if our existing or potential clients decide to provide in- house customer management services they currently outsource, or retain or increase their in-house customer service and product support capabilities. In addition, competitive pressures from current or future competitors also could cause our services to lose market acceptance or result in significant price erosion, which could have a material adverse effect upon our business, results of operations and financial condition. There can be no assurance that additional competitors, some with greater resources than ours, will not enter our market.

Our future success requires continued growth. Continued future growth will depend on a number of factors, including our ability to; (i) initiate, develop and maintain new client relationships; (ii) expand existing client programs; (iii) rapidly staff and equip suitable CMC facilities; and (iv) develop new solutions and enhance existing solutions we provide to our clients. There can be no assurance that we will be able to effectively manage expanded operations or maintain our profitability.

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Our financial results may be affected by rapidly changing technology. Our business is highly dependent on our computer and telecommunications equipment and software capabilities. Our failure to maintain our technological capabilities or to respond effectively to technological changes could have a material adverse effect on our business, consolidated results of operations or consolidated financial condition. Our continued growth and future profitability will be highly dependent on a number of factors, including our ability to; (i) expand our existing solutions offerings; (ii) achieve cost efficiencies in our existing CMC operations; and (iii) introduce new solutions that leverage and respond to changing technological developments. Our ability to effectively market and implement software solutions developed by our Database Marketing and Consulting segment, including recoverability of capitalized costs based on estimated future cash flows, is a factor in our future success. There can be no assurance that technologies or services developed by our competitors will not render our products or services non-competitive or obsolete, that we can successfully develop and market any new services or products, that any such new services or products will be commercially successful or that the integration of automated customer support capabilities will achieve their intended cost reductions.

Our success depends on key personnel. Our success will depend upon our ability to recruit, hire and retain experienced executive personnel. There can be no assurance that we will be able to hire, motivate and retain highly effective executive employees on economically feasible terms.

Our business is dependent on our ability to maintain our workforce. Our success is largely dependent on our ability to recruit, hire, train and retain qualified employees. Our industry is labor-intensive and experiences high personnel turnover. A significant increase in the employee turnover rate could increase recruiting and training costs, thereby decreasing operating effectiveness and productivity. Also, if we obtain several significant new clients or implement several new, large-scale programs, we may need to recruit, hire and train qualified personnel at an accelerated rate. We may not be able to continue to hire, train and retain sufficient qualified personnel to adequately staff new customer management programs. In addition, certain CMCs are located in geographic areas with relatively low unemployment rates, which could make it more difficult and costly to hire qualified personnel. There can be no assurance that we will be able maintain our workforce at necessary levels.

Our success may be affected by our ability to complete and integrate acquisitions and joint ventures. We may pursue strategic acquisitions of companies with services, technologies, industry specializations or geographic coverage that extend or complement our existing business. We may face increased competition for acquisition opportunities, which may inhibit our ability to complete suitable acquisitions on favorable terms. We may pursue strategic alliances in the form of joint ventures and partnerships, which involve many of the same risks as acquisitions as well as additional risks associated with possible lack of control if we do not have a majority ownership position. There can be no assurance that we will be successful in integrating acquisitions or joint ventures into our existing businesses, or that any acquisition or joint venture will enhance our business, results of operations or financial condition.

Our business depends on uninterrupted service to clients. Our operations are dependent upon our ability to protect our locations’ computer and telecommunications equipment and software systems against damage or interruption from fire, power loss, cyber attacks, telecommunications interruption or failure, natural disaster and other similar events. Our operations may also be adversely affected by damage to our facilities resulting from fire, natural disaster or other events. Additionally, severe weather can cause interruption in our ability to deliver our services, such as when our employees cannot attend work, resulting in a loss of revenue. In the event we experience a temporary or permanent interruption at one or more of our locations (including our corporate headquarters building), through the reasons noted above or otherwise, our business could be materially adversely affected and we may be required to pay contractual damages or face the loss of some clients altogether. We maintain property and business interruption insurance. However, there can be no assurance that such insurance will adequately compensate us for any losses we may incur.

Our financial results may experience variability. We experience quarterly variations in operating results because of a variety of factors, many of which are outside our control. In addition, we make decisions regarding staffing levels, investments and other operating expenditures based on our revenue forecasts. If our revenue is below expectations in any given quarter, our operating results for that quarter would likely be materially adversely affected. There can be no assurance that future quarterly or annual operating results will reflect past operating results.

Our financial results may be impacted by foreign currency exchange risk. We serve an increasing number of our U.S. clients from CMCs in Canada, Argentina, Mexico and the Philippines. Contracts with these clients are typically priced in U.S. dollars while the costs incurred to operate these CMCs are denominated in Canadian dollars or Philippine pesos, which represents a foreign currency exchange risk to us. Although

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we enter into forward financial instruments to manage and reduce the impact of changes in certain foreign currency exchange rates, we do not fully hedge this risk. As the U.S. dollar weakens, the operating expenses of these CMCs, once translated into U.S. dollars, increase in comparison to prior years. If the U.S. dollar does not strengthen, our consolidated financial results may be adversely impacted. While our hedging strategy effectively offset a portion of these price increases during 2004, there can be no assurance that we will continue to successfully hedge this foreign currency exchange risk or that the U.S. dollar will strengthen.

Our financial results may be adversely impacted by our Database Marketing and Consulting segment. Our Database Marketing and Consulting segment has historically experienced higher levels of profitability than it is currently achieving. Our consolidated financial results and consolidated financial position, including our ability to obtain financing, may be adversely impacted if we are unable to return that segment to previous profitability levels.

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Item 2. Properties.

Our corporate headquarters are located in Englewood, Colorado, in approximately 272,000 square feet of office space. In February 2003, we purchased our corporate headquarters building, including furniture and fixtures, for $38.2 million. As of December 31, 2004, we operated 67 CMCs which includes one facility for our Database Marketing and Consulting segment, and are classified as follows:

	•	Dedicated Center — we lease space for these centers and dedicate the entire facility to one client.
	•	Multi-client Center — we lease space for these centers and serve multiple clients in each facility.
	•	Managed Center — these facilities are leased or owned by our clients, and we manage these sites on behalf of our clients in accordance with facility management contracts.

Our Customer Management Services segments include CMCs in the following locations as of December 31, 2004:

In addition, the corporate headquarters for our Database Marketing and Consulting segment leases space in San Diego, California.

We also lease a facility in Livonia, Michigan that is subleased to a third-party. We also lease four small administrative offices occupied by support staff.

The leases for our U.S. based CMCs have terms ranging from three to 20 years and generally contain renewal options. We believe that our existing CMCs are suitable and adequate for our current operations. We target capacity utilization in our fully outsourced centers at 85% to 90% of our available workstations during peak (weekday) periods.

Item 3. Legal Proceedings.

From time to time we may be involved in claims or lawsuits that arise in the ordinary course of business. Accruals for claims or lawsuits have been provided for to the extent that losses are deemed probable and estimable. Although the ultimate outcome of these claims or lawsuits cannot be ascertained, based on the basis of present information and advice received from counsel, it is our opinion that the disposition or ultimate determination of such claims or lawsuits will not have a material adverse effect on the Company.

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Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of the Company’s stockholders during the fourth quarter of our fiscal year ended December 31, 2004.

Item 4A. Executive Officers of TeleTech Holdings, Inc.

The names, positions held by and ages of our executive officers as of December 31, 2004 are as follows:

There are no arrangements or understanding between any executive officer and another person pursuant to which such executive officer was selected as an officer.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company’s common stock is traded on the NASDAQ National Market under the symbol “TTEC.” The following table sets forth the range of the high and low sales prices per share of the common stock for the quarters indicated as reported on the NASDAQ National Market:

As of February 23, 2005, there were 75,066,793 shares of common stock outstanding, held by approximately 106 stockholders of record.

We did not declare or pay any dividends on our common stock during 2004, 2003 or 2002 and we do not expect to do so in the foreseeable future. During December 2004, the Board of Directors authorized a stock repurchase program, authorizing the repurchase of up to $50 million of our common stock at a share price up to $15.00 per share. Previously, the Board of Directors had authorized a stock repurchase program of up to $25 million. The total amount of stock authorized to be repurchased is $75 million, of which $5.3 million was purchased during 2004 at an average share price of $6.44. We purchased an additional 1,435,900 shares at an average share price of $11.08 during the period January 1, 2005 through February 24, 2005.

Issuer Purchases of Equity Securities

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Item 6. Selected Financial Data.

The following selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements and the related notes appearing elsewhere in this report.

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

Executive Overview

We serve our clients through two primary businesses: (i) Customer Management Services, which provides outsourced customer support and marketing services for a variety of industries via call centers (“customer management centers,” or “CMCs”) throughout the world; and (ii) Database Marketing and Consulting. We separate our Customer Management Services business into two segments consistent with our management of the business, which reflects the internal financial reporting structure and operating focus. North American Customer Care consists of customer management services provided to U.S. and Canadian clients while International Customer Care consists of clients in all other countries. Database Marketing and Consulting provides outsourced database management, direct marketing and related customer acquisition and retention services for automobile dealerships and manufacturers. Segment accounting policies are the same as those used in the consolidated financial statements. See Note 2 to the Consolidated Financial Statements for additional discussion regarding our preparation of segment information.

Customer Management Services

The Customer Management Services segment generates revenue based primarily on the amount of time our representatives devote to a client’s program. We primarily focus on large global corporations in the following industries; automotive, communications and media, financial services, government, logistics, retail, technology and travel. Revenue is recognized as services are provided. The majority of our revenue is, and we anticipate that the majority of our future revenue will continue to be, from multi-year contracts. However, we do provide some programs on a short-term basis and our operations outside of North America are characterized by shorter-term contracts. Additionally, we typically experience client attrition of approximately 10% to 15% of our revenue each year. Our invoice terms with customers range from 30 days to 45 days, with longer terms in Europe.

We compete primarily with the in-house customer management operations of our current and potential clients. We also compete with certain companies that provide customer management services on an outsourced basis. In general, over the last several years, the global economy has negatively impacted on the customer care management market. More specifically, sales cycles have lengthened, competition has increased, and contract values have been reduced. We believe, however, that recently the sales cycles have begun shortening.

The short-term focus of management is to increase revenue in this segment by:

	•	Selling new business to existing customers;
	•	Continuing to focus sales efforts on large, complex, multi-center opportunities;
	•	Differentiating our products and services by developing and offering new solutions to clients; and
	•	Exploring merger and acquisition possibilities.

Our ability to enter into new multi-year contracts, particularly large complex opportunities, is dependent upon the macroeconomic environment in general and the specific industry environments in which our customers operate. A weakening of the U.S. and/or the global economy could lengthen sales cycles or cause delays in closing new business opportunities.

Our profitability is significantly influenced by our ability to increase capacity utilization in our CMCs, to increase the number of new or expanded programs during a period and our success at managing personnel turnover and employee costs. Managing our costs is critical

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since we continue to see pricing pressure within our industry. These pricing pressures have been made worse by the rapid growth of offshore labor.

We attempt to minimize the financial impact resulting from idle capacity when planning the development and opening of new CMCs or the expansion of existing CMCs. As such, management considers numerous factors that affect capacity utilization, including anticipated expirations, reductions, terminations or expansions of existing programs, and the potential size and timing of new client contracts that we expect to obtain.

However, to respond more rapidly to changing market demands, to implement new programs and to expand existing programs, we may be required to commit to additional capacity prior to the contracting of additional business, which may result in idle capacity. This is largely due to the significant time required to negotiate and execute a contract as we continue to concentrate our marketing efforts toward obtaining large, complex, customer management programs.

We internally target capacity utilization in our Dedicated and Multi-client Centers at 85 to 90% of our available workstations. As of December 31, 2004, the overall capacity utilization in our Multi-client centers was 62% and our Dedicated Centers was 95% resulting in an overall utilization of 70% (see Financial Comparison for further details).

Our profitability is also influenced by the number of new or expanded client programs. As required by the adoption of EITF 00-21 for contracts entered into after July 1, 2003, in the event that a client may be billed for direct start-up costs, the associated revenue and costs are deferred and recognized straight-line over the life of the contract. In the event that a client cannot be billed for direct start-up costs, then those start-up costs are expensed as incurred. We strive to enter contracts where our clients pay separately for start-up costs as opposed to incorporating them into the ongoing production rate.

Our industry is very labor-intensive and the majority of our operating costs relate to wages, costs of employee benefits and employment taxes. An improvement in the local or global economies where our CMCs are located could lead to increased labor-related costs. In addition, our industry experiences high personnel turnover, and the length of training required to implement new programs continues to increase due to increased complexities of our clients’ businesses. This may create challenges if we obtain several significant new clients or implement several new, large-scale programs, and need to recruit, hire and train qualified personnel at an accelerated rate.

Our success in improving our profitability will depend on successful execution of a comprehensive business plan, including the following broad steps:

	•	Increasing sales to absorb unused capacity in existing global CMCs;
	•	Reducing costs and continued focus on cost controls; and
	•	Managing our workforce in domestic and international CMCs in a cost-effective manner.

Database Marketing and Consulting

Our Database Marketing and Consulting segment has relationships with over 4,200 automobile dealers representing 21 different brand names. These contracts generally have terms ranging from twelve to twenty-four months. For a few major automotive manufacturers, the automotive manufacturer collects from the individual automobile dealers on our behalf. Our average collection period is 30 days.

A majority of the revenue from this segment is generated utilizing a database and contact engine to promote the service business of automobile dealership customers using targeted marketing solutions through the “web,” e-mail, phone or mail. As previously discussed, due to a combination of factors, including a delay in retrofitting software for new client applications, an increase in sales and marketing expenses and a decline in the subscriber base, our income from operations declined 37.5% for 2004 as compared to 2003. We believe this trend will continue into the first quarter of 2005 and we expect approximately breakeven results for the segment for that quarter. We also expect this segment to operate profitably in subsequent quarters due to a recently announced program with Ford and anticipated cost reductions.

     We plan to focus on the following during 2005:

•	Increasing revenue by expanding our offerings;
•	Diversifying our customer base by establishing relations with dealer groups and non-current customer automotive manufacturers;

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•	Continuing to drive cost reductions through a combination of reductions in force and operational effectiveness; and
•	Acquiring business platforms for similar and related services.

Overall

As shown in the “Financial Comparison,” we believe that we have been successful in improving income from operations. The increase reflected is attributable to a variety of factors such as implementing our multi-phased cost reduction plan, transitioning work on certain clients to lower cost operating centers, and taking actions to improve individual client profit margins and/or eliminate unprofitable client programs.

We implemented a $40 million cost reduction plan approximately 18 months ago to address known changes in our business and, in particular, the decline in revenue and operating income due to the declining minimum commitments discussed further in “Client Concentrations.” We believe this plan, among other factors, enabled us to operate profitably during 2004. These improvements were achieved primarily through cost savings in the areas of CMC operations, telecommunications, professional fees, insurance and reduced future interest expense associated with our debt-restructuring plan.

As a result of these initiatives, our operational cash flow improved and that, coupled with tax planning strategies providing repatriation of cash from international subsidiaries to the U.S., has allowed us to repay nearly all of our outstanding debt. As such, we expect lower interest expense in future periods, unless we were to incur additional indebtedness to finance acquisitions or to fund our stock repurchase program.

Critical Accounting Policies

We have identified the policies below as critical to our business and results of operations. For further discussion on the application of these and other accounting policies, see Note 1 to the Consolidated Financial Statements.

Our reported results are impacted by the application of the following accounting policies, certain of which require management to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact quarterly or annual results of operations. Specific risks associated with these critical accounting policies are described in the following paragraphs.

For all of these policies, management cautions that future events rarely develop exactly as expected, and the best estimates routinely require adjustment. Descriptions of these critical accounting policies follow:

Revenue Recognition. We recognize revenue at the time services are performed. Our Customer Management Services business recognizes revenue under production rate and performance-based models, which are:

	Production Rate — Revenue is recognized based on the billable hours or minutes of each CSR, as defined in the client contract. The rate per billable hour or minute is based on a predetermined contractual rate. This contractual rate can fluctuate based on our performance against certain pre-determined criteria related to quality and performance.
	Performance-based — Under performance-based arrangements, we are paid by our customers based on achievement of certain levels of sales or other client-determined criteria specified in the client contract. We recognize performance-based revenue by measuring our actual results against the performance criteria specified in the contracts. Amounts collected from customers prior to the performance of services are recorded as deferred revenue.

Certain client programs provide for adjustments to monthly billings based upon whether we exceed certain performance criteria as set forth in the contract. Increases or decreases to monthly billings arising from such contract terms are reflected in revenue as incurred.

Our Database Marketing and Consulting segment recognizes revenue when services are rendered. Most agreements require the billing of predetermined monthly rates. Where the contractual billing periods do not coincide with the periods over which services are provided, the

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Company recognizes revenue straight-line over the life of the contract (typically six to twenty-four months).

We have certain contracts that are billed in advance. Accordingly, amounts billed and collected but not earned under these contracts are excluded from revenue and included in customer advances and deferred income.

Income Taxes. We account for income taxes under SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), which requires recognition of deferred tax assets and liabilities for the expected future income tax consequences of transactions that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. When circumstances warrant, we assess the likelihood that our net deferred tax assets will more likely than not be recovered from future projected taxable income.

SFAS No. 109 provides for the weighing of positive and negative evidence in determining whether it is more likely than not that a deferred tax asset is recoverable. We prepare a forecast of future taxable income, including domestic and international operating results and the reversal of existing temporary differences between income recognized under accounting principles generally accepted in the U.S. (“GAAP”) and income for federal income tax reporting purposes. Relevant accounting guidance suggests that a recent history of cumulative losses constitutes significant negative evidence, and that future expectations about taxable income are overshadowed by such recent losses. Accordingly, the expectations of future taxable income would generally be limited to no more than two or three years for generating sufficient income to recover deferred tax assets.

Based upon assessments of recoverability of our deferred tax assets, our valuation allowance as of December 31, 2004 is $20 million. This valuation allowance is principally related to deferred tax assets associated with the local operations in the U.S., Spain, Brazil, Argentina, Korea and India. We have approximately $11.2 million of net deferred tax assets as of December 31, 2004 related principally to certain international countries whose recoverability is dependent upon future profitability. The net deferred tax asset for U.S. operations of approximately $0.5 million as of December 31, 2004 relates entirely to deferred tax assets originating during 2004 and is recoverable from current taxable income.

Goodwill. Goodwill is tested for impairment at least annually for reporting units one level below the segment level in accordance with SFAS No. 142. Impairment occurs when the carrying amount of goodwill exceeds its estimated fair value. The impairment, if any, is measured based on the estimated fair value of the reporting unit. Fair value can be determined based on discounted cash flows, comparable sales or valuations of other similar businesses. Our policy is to test goodwill for impairment in the fourth quarter of each year unless an indicator of impairment arises during an intervening period.

The most significant assumptions used in this analysis are those made in estimating future cash flows. In estimating future cash flows, we generally use the financial assumptions in our internal forecasting model such as projected capacity utilization, projected changes in the prices we charge for our services and projected labor costs. We then use a discount rate we consider appropriate for the country where the business unit is providing services. If actual results are less than the assumptions used in performing the impairment test, the fair value of the reporting units may be significantly lower, causing the carrying value to exceed the fair value and indicating an impairment had occurred. Based on the analyses performed in the fourth quarter of 2004, there was no impairment to the December 31, 2004 goodwill balance of $30.6 million. If projected revenue used in the analysis of goodwill was 10% less than forecast (the projections assumed revenue growth rates ranging from -20% to 23% per annum over a three-year period), there would still be no impairment to goodwill.

For the year ended December 31, 2004, one client represents 47% of the revenue in the Asia Pacific region. We anticipate renewal of this contract during 2005. If we are not successful in obtaining a renewal with satisfactory terms, we could incur an impairment of goodwill and, potentially, certain long-lived assets. The goodwill and potential net property and equipment, reported in the accompanying Consolidated Balance Sheets for the Asia Pacific region is $5.4 million and $3.2 million, respectively, as of December 31, 2004.

Restructuring Liability. We routinely assess the profitability and utilization of our CMCs. In some cases, we have chosen to close under-performing centers and make reductions in force to enhance future profitability. In 2001 and 2002, under the previous accounting guidance, we recorded the anticipated charges at the time a plan was approved by management or the Board of Directors. On January 1, 2003, the Company adopted SFAS No. 146, which specifies that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred instead of upon commitment to a plan.

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A significant assumption used in determining the amount of estimated liability for closing CMCs is the estimated liability for future lease payments on vacant centers, which we determine based on a third party broker’s assessment of our ability to successfully negotiate early termination agreements with landlords and/or our ability to sublease the premises. If our assumptions regarding early termination and the timing and amounts of sublease payments prove to be inaccurate, we may be required to record additional losses, or conversely, a future gain, in our Consolidated Statements of Operations.

Impairment of Long-Lived Assets. We evaluate the carrying value of our individual CMCs in accordance with SFAS No. 144 to determine whether future operating results are sufficient to recover the carrying costs of the long-lived assets. When the operating results of a Center have reasonably progressed to a point making it likely that the site will continue to sustain losses in the future, or there is a current expectation that a CMC will be closed or otherwise disposed of before the end of its previously estimated useful life, we select the Center for further review.

For CMCs selected for further review, we estimate the probability-weighted future cash flows from operating the Center over its useful life. Significant judgment is involved in projecting future capacity utilization, pricing, labor costs and the estimated useful life of the Center. We do not subject CMCs that have been operated for less than two years or those centers that have been impaired within the past two years (the “Two Year Rule”) to the same test because we believe sufficient time is necessary to establish market presence and build a customer base for such new or modified Centers in order to adequately assess recoverability. However, these Centers are nonetheless evaluated in case other factors would indicate impairment had occurred. For recently impaired Centers, we write the assets down to estimated fair market value. If the assumptions used in performing the impairment test prove insufficient, the fair value estimate of the CMCs may be significantly lower, thereby causing the carrying value to exceed fair value and indicating an impairment had occurred.

A sensitivity analysis of the impairment evaluation demonstrated that if revenue was 10% less than projected in the probability-weighted projection scenarios (that had annual revenue growth rates ranging from 6% to 49% based on management expectations and available capacity) and the margin held constant, the impairment loss would have been approximately $8.9 million greater.

The following table summarizes the sensitivity analysis we performed during the fourth quarter of 2004 (dollars in thousands):

We also assess the realizable value of capitalized software on a quarterly basis, based upon current estimates of future cash flows from services based on the software, particularly with respect to our Database Marketing and Consulting segment.

Allowance for Doubtful Accounts. We have established an allowance for doubtful accounts to reserve for uncollectible accounts receivable. Each quarter management reviews the receivables on an account-by-account basis and assigns a probability of collection. Management judgment is used in assessing the probability of collection. Factors considered in making this judgment are the age of the identified receivable, client financial wherewithal, previous client history and any recent communications with the client.

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Presentation of Non-GAAP Measurements

Free Cash Flow. Free cash flow is a non-GAAP liquidity measurement. We believe free cash flow is useful to our investors because it measures, during a given period, the amount of cash generated that is available for debt obligations and investments other than purchases of property and equipment. Free cash flow is not a measure determined in accordance with accounting principles generally accepted in the United States (“GAAP”) and should not be considered a substitute for “Operating Income,” “Net Income,” “Net Cash Flows from Operating Activities” or any other measure determined in accordance with GAAP. We believe this non-GAAP liquidity measure is useful in addition to the most directly comparable GAAP measure of “Net Cash Flows from Operating Activities” because free cash flow includes investments in operational assets. Free cash flow does not represent residual cash available for discretionary expenditures, since it includes cash required for debt service. Free cash flow also excludes cash, which may be necessary for acquisitions, investments and other needs that may arise. The following table reconciles free cash flow to “Net Cash Flow from Operating Activities,” the most directly comparable GAAP measure:

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RESULTS OF OPERATIONS

Operating Review

The following tables are presented to facilitate Management’s Discussion and Analysis (dollars in thousands):

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Financial Comparison

The following table is a condensed presentation of the components of the changes in net income (loss) between years and is designed to facilitate the discussion of results in this Form 10-K (all amounts are in thousands):

The table below presents workstation data for Multi-client centers as of December 31, 2004. Dedicated and Managed Centers (10,393 workstations) are excluded from the workstation data, as unused seats in these facilities are not available for sale. Our utilization percentage is defined as the total number of utilized production workstations compared to the total number of available production workstations.

The decline in the utilization percentage shown above is attributable to (i) the opening of new international markets and (ii) a decline in utilization of certain U.S. Centers. As discussed on page 16, an objective of our business plan is to increase sales to absorb capacity in existing global CMCS.

2003 versus 2004

Revenue. The increase in North American Customer Care revenue between periods was driven primarily by new client programs and increases in revenue in certain continuing client programs; partially offset by declining minimum commitments, a decline in revenue at Percepta and the loss of client programs.

Approximately 38% of the increase in International Customer Care revenue between periods is due to changes in foreign currency

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exchange rates. The remaining increase, related principally to Latin America and Europe, is due to new client programs and increases in revenue from an existing client, offset by discontinuation of unprofitable client programs to improve profitability.

Database Marketing and Consulting revenue decreased primarily due to a decrease in the customer base as well as a decrease in billed revenue per client. We believe this circumstance is attributable to our delay in completing certain software modifications to accommodate new programs.

Costs of Services. Costs of services as a percentage of revenue in North American Customer Care decreased mostly due to the successful implementation of our plan to reduce costs and increase client profitability. In addition, as a result of a 32% reduction in U.S. based employee enrollment rates in the Company’s health plan we reduced certain self-insurance accruals, which resulted in a change in estimate of $4.4 million.

The decrease in costs of services as a percentage of revenue in International Customer Care between periods is a result of the termination of several unprofitable contracts, renegotiations of unfavorable contract terms and reductions in force. This was offset by an increase in cost of services as a percentage of revenue in the Asia Pacific region, which was caused by increased costs related to entering new markets in the region and a new client launch. In absolute dollars, 49% of the increase in costs of services in International Customer Care is due to changes in foreign currency exchange rates.

Selling, General and Administrative. Selling, general and administrative expenses increased as a percentage of revenue for North American Customer Care. More than half of the increase related to increases in salaries and related expenses due to headcount additions in sales, marketing and product development personnel to implement our revenue growth strategy. The remaining increase was due to the recording of employee incentive compensation accruals during the current year (none were earned in the prior year), and consulting expense related to implementing the provisions of the Sarbanes-Oxley Act of 2002.

Selling, general and administrative expenses decreased as a percentage of revenue for International Customer Care. This decrease is due to the increase in revenue between periods. A significant amount of selling, general and administrative expenses are fixed in nature and, as a percentage of revenue, vary with changes in revenue volume. In absolute dollars, the increase between periods was due to changes in foreign currency exchange rates and an increase in the corporate allocation. The corporate allocation increased mostly due to increases in headcount as discussed above.

The increase in selling, general and administrative expenses as a percentage of revenue in Database Marketing and Consulting was caused primarily by the decrease in revenue as selling, general and administrative expenses are primarily fixed in nature, partially offset by a change in estimate for potential sales and use tax liabilities of $2.3 million, which increased Net Income. The increase in selling, general and administrative expense excluding the impact of the change in the sales and use tax liability is due to increases in payroll-related expenses due to headcount additions in sales, marketing and product development to implement our revenue growth strategy.

Depreciation and Amortization. In absolute dollars, depreciation and amortization expense in North American Customer Care decreased slightly between the periods due to declines in depreciation and amortization expense due to assets reaching the scheduled end of their depreciable life offset by the depreciation and amortization expense of additions to property and technology equipment made during the year.

The increase in depreciation and amortization expense in International Customer Care was due to depreciation and amortization expense of additions to property and equipment in Brazil as a result of new sites and changes in foreign currency exchange rates offset by a decline in depreciation and amortization expense due to assets reaching the scheduled end of their depreciable lives.

The slight increase in the Database Marketing and Consulting depreciation and amortization expense was due to related depreciation and amortization expense additions of property and technology equipment combined with the commencement of amortizing certain capitalized software costs during 2004.

Restructuring Charges. During the year ended December 31, 2004, we recognized approximately $3.0 million of termination benefits for approximately 630 employees, across all three segments. We also reversed approximately $0.9 million of excess accruals related to 2003 and prior restructurings. Restructuring charges are accrued in accordance with SFAS No. 146. The reversal of excess accruals

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(accruals that are determined, subsequent to establishment, to no longer be our obligation due to a change in circumstances) has been offset against Restructuring Charges, Net in the accompanying Consolidated Statements of Operations.

During the year ended December 31, 2003, the North American Customer Care segment recorded restructuring charges of approximately $1.6 million related to the closure of its Kansas City, Kansas facility being used to serve the United States Postal Service (“USPS”). These charges consisted primarily of the remaining lease liability along with severance payments. In addition, the Company’s North American Customer Care segment recorded a charge of $0.4 million for severance and termination benefits for 591 employees at a Managed Center that was shut down in March 2003. The Company’s North American Customer Care, International Customer Care and Database Marketing and Consulting segments also recorded approximately $1.3 million, $2.2 million, and $0.1 million, respectively, during the year ended December 31, 2003 for other severance and termination benefits related to the termination of 102, 203 and 13 administrative employees, respectively. The Company reversed approximately $1.9 million of excess accruals related to 2002 and prior restructurings. The reversal of excess accruals has been offset against the Restructuring Charges, Net in the accompanying Consolidated Statements of Operations.

Impairment Loss. During 2003, the North American Customer Care segment recorded an impairment loss of approximately $4.0 million to reduce the net book value of the long-lived assets of its Kansas City CMC to its estimated fair market value.

During 2004, the Company determined that its CMC in Glasgow, Scotland would not generate sufficient undiscounted cash flows to recover the net book value of its assets. As a result, the Company’s International Customer Care segment recorded a charge of approximately $2.6 million to reduce the net book value of the long-lived assets at this CMC to their net realizable value.

During 2003, the International Customer Care segment recorded an impairment loss of approximately $3.0 million to reduce the net book value of the long-lived assets of its Mexico City CMC to its estimated fair market value.

Potential future impairments are discussed under Critical Accounting Policies.

Other Income (Expense). Interest expense for the year ended December 31, 2004 includes approximately $1.6 million interest expense estimated to be paid as a result of implementing our tax planning strategies and $6.9 million related to our long-term debt and grant advances. The decrease in interest expense related to long-term debt from the prior year is due to the prepayment of the Senior Notes discussed in Note 4 of the accompanying Consolidated Financial Statements. Included in debt restructuring charge for the year ended December 31, 2004 are $7.6 million of one-time charges related to restructuring of the debt, of which approximately $6.4 million was a cash charge and the remaining $1.2 million was a non-cash charge to write-off previously capitalized debt issuance costs. Additionally, we recorded a one-time charge of $2.8 million related to the termination of an interest rate swap.

Income Taxes. When compared to 2003, income tax expense in 2004 decreased $25.4 million to $9.5 million even though pre-tax book income increased $28.8 million. This is primarily due to the fact that in 2003 we increased our valuation allowance by $25.9 million and wrote-off a $7.2 million deferred tax asset related to the Company’s investment in EHI and did not incur any similar tax charges in 2004. The Company’s return to profitability in 2004 has led to an increase in income tax liabilities in most tax jurisdictions, which is only partially offset by tax planning strategies. Going forward, our effective tax rate will be affected by many factors including; (i) the amount and placement of new business into tax jurisdictions with valuation allowances and those without valuation allowances and (ii) the impact of any tax refunds that we might realize from various tax planning strategies and filing positions we are pursuing. At this time, our estimate of the annual 2005 effective tax rate is approximately 40%, exclusive of any future tax refunds, tax planning strategies and filing positions, or reductions of the U. S. deferred tax valuation allowance arising from future U.S. taxable income.

2002 versus 2003

Revenue. The decrease in North American Customer Care revenue was driven primarily by the loss of the USPS contract during 2003, as well as the loss of other client programs and loss of revenue discussed in “Client Concentrations.” During 2003, performance-based adjustments reduced revenue by $2.5 million.

Approximately 50% of the increase in International Customer Care revenue from 2002 to 2003 is due to changes in foreign currency exchange rates. The remaining increase is primarily due to additional programs from existing and new client programs in Europe and

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Latin America, partially offset by the loss of other client programs.

Database Marketing and Consulting revenue increased primarily due to an increase in its customer base, as well as increased sales to existing customers.

Cost of Services. Costs of services as a percentage of revenue in North American Customer Care is comparable between periods. The costs of services were impacted by the loss of the USPS contract, which was offset by improvement in margins of other programs.

Costs of services as a percentage of revenue in International Customer Care increased between periods. The increase is due to the loss of several profitable programs in our Latin America region and increased costs related to a new client launch and increased costs of entering into a new market in our Asia Pacific region. In absolute dollars, 36% of the increase in costs of services in International Customer Care is due to changes in foreign currency exchange rates.

Costs of services, as a percentage of revenue for Database Marketing and Consulting is comparable between periods.

Selling, General and Administrative. The decrease in selling, general and administrative expenses as a percentage of revenue in North American Customer Care is primarily due to the decrease in revenue between periods as a significant amount of selling, general and administrative expenses are fixed in nature. Also in the first quarter of 2003, we determined that the 2002 bonuses would not be paid in full and accordingly, reversed the bonus accrual of approximately $1.1 million from 2002.

Selling, general and administrative expenses as a percentage of revenue for International Customer Care increased as a percentage of revenue. The increase between the periods was due to changes in foreign currency exchange rates.

The decrease in selling, general and administrative expenses as a percentage of revenue for Database Marketing and Consulting is due to decreases in payroll related expenses.

Depreciation and Amortization. In absolute dollars, depreciation and amortization expense in North American Customer Care decreased between periods mostly due to decreased depreciation and amortization expense following the closure of certain CMCs and the scheduled end of the depreciation period; offset by related depreciation and amortization expense from the purchase of the corporate headquarters building in February 2003.

The decrease in International Customer Care depreciation and amortization expense as a percentage of revenue is the result of higher revenue as well as the impairments recorded during the fourth quarter of 2002 and the second quarter of 2003. In absolute dollars, depreciation and amortization expense was comparable between years.

The increase in Database Marketing and Consulting depreciation and amortization expense was due to related depreciation and amortization expense additions of property and technology equipment combined with the commencement of amortizing certain capitalized software costs during third quarter 2002.

Restructuring Charges. During the year ended December 31, 2003, North American Customer Care segment recorded a restructuring charge of $1.6 million related to the closure of its Kansas City, Kansas facility being used to serve USPS. These charges consisted primarily of the remaining lease liability along with severance payments. In addition, the Company’s North American Customer Care segment recorded a charge of $0.4 million for severance and termination benefits for 591 employees at a Managed Center that was closed in March 2003. The Company’s North American Customer Care, International Customer Care and Database Marketing and Consulting segments also recorded approximately $1.3 million, $2.2 million, and $0.1 million, respectively, during the year ended December 31, 2003 for other severance and termination benefits related to the termination of 102, 203 and 12 administrative employees, respectively. The Company reversed approximately $1.9 million of excess accruals related to 2002 restructurings. The reversal of excess accruals has been offset against the Restructuring Charges, Net in the accompanying Consolidated Statements of Operations.

Impairment losses. During 2003, the North American Customer Care segment recorded an impairment loss of approximately $4.0 million to reduce the net book value of the long-lived assets of its Kansas City CMC to its estimated fair market value.

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During 2003, the International Customer Care segment recorded an impairment loss of approximately $3.0 million to reduce the net book value of the long-lived assets of our Mexico City CMC to its estimated fair market value.

Other Income (Expenses)

The increase in Other Expenses between periods was primarily due to an increase in interest expense as well as foreign currency transaction losses partially offset by a decrease in the equity losses from our investment in EHI during 2002. Interest expense increased as a result of higher long-term debt balances in 2003 compared to 2002 due to borrowings related to the purchase of the corporate headquarters building in February 2003. In addition, the interest rates were increased in August 2003 as a result of amending our long-term debt agreements due to violations of the debt covenants. During 2003, we recorded approximately $2.4 million of foreign currency transaction losses versus the $0.6 million gain in 2002. Foreign currency transaction losses and gains are related to intercompany receivable/payable balances, and while we hedge the foreign currency risks associated with our revenue in Canada, we do not hedge risks associated with the timing of settling intercompany accounts. We began settling these accounts more timely in the third quarter of 2003, which mitigated our future exposure to fluctuation in foreign currency exchange rates.

Income taxes. Income tax expense increased $33.3 million in 2003 from $1.5 million in 2002 primarily due to; (i) the increase in the valuation allowances of $25.9 million principally in the U.S. and Brazil and (ii) the write off of $7.2 million of deferred tax assets related to the Company’s investment in EHI following a statutory merger that resulted in the investment not being recoverable for tax purposes.

Liquidity and Capital Resources

Our primary source of liquidity during 2004 was cash generated from operating activities. We expect that our future working capital, capital expenditure and debt service requirements will be satisfied primarily from existing cash balances and cash generated from operations. Our ability to generate positive future operating and net cash flows is dependent upon, among other things, our ability to sell new business and manage our operating costs efficiently.

The amount of capital required in 2005 will also depend on our levels of investment in infrastructure necessary to maintain, upgrade or replace existing assets. We currently expect that 2005’s capital expenditures will be approximately the same as our 2004 capital expenditures of $38.5 million.

Our capital expenditures will also vary depending on development or retrofit of new or existing CMCs. Our working capital and capital expenditure requirements could increase materially in the event of acquisitions or joint ventures, among other factors. These factors could require that we raise additional capital in the future.

The following discussion highlights our free cash flow and cash flow activities during the years ended December 31, 2004, 2003 and 2002.

Cash and cash equivalents. We consider all liquid investments purchased within 90 days of their maturity to be cash equivalents. Our cash and cash equivalents totaled $75.1 million as of December 31, 2004, compared to $141.7 million as of December 31, 2003.

Free cash flow. Free cash flow was $74.2 million, $(20.0) million and $75.0 million for the years ended December 31, 2004, 2003 and 2002, respectively (see Presentation of Non-GAAP Measurements). The increase from 2003 to 2004 of approximately $94.2 million resulted from an increase in Net Cash Flows from Operating Activities of approximately $53.7 million and a decrease in Purchases of Property and Equipment of approximately $40.5 million. The increase in Net Cash Flows from Operating Activities is primarily attributable to a benefit in deferred income taxes and the company operating profitably for the year ended December 31, 2004 compared to the same period in 2003. The decrease in Purchases of Property and Equipment was primarily attributable to the 2003 including the purchase of the Company’s headquarters building.

The decrease from 2002 to 2003 of approximately $95.0 million resulted primarily from a decrease in Net Cash Flows from Operating Activities of approximately $54.9 million and an increase in Purchases of Property and Equipment of approximately $40.1 million. The decrease in Net Cash Flows from Operating Activities is primarily attributable to an increase in net loss and a decrease in cash flow generated from changes in operating assets and liabilities in 2003 as compared to 2002. Cash flow from changes in operating assets and liabilities was $1.5 million during 2003 compared to $27.8 million during 2002.

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Cash flows from operating activities. We reinvest the cash flow from operating activities in our business or purchases of treasury stock. For the years ended December 31, 2004, 2003 and 2002, we reported net cash flows provided by operating activities of $112.7 million, $59.0 million and $113.9 million, respectively. See discussion of changes in Net Cash Flows from Operating Activities included in the discussion of Free Cash Flow above.

Cash flows from investing activities. We reinvest cash in our business primarily to grow our client base and to expand our infrastructure. For the years ended December 31, 2004, 2003 and 2002, we reported net cash flows used in investing activities of $42.1 million, $87.8 million and $34.6 million, respectively. The decrease from 2003 to 2004 of approximately $45.7 million primarily resulted from lower purchases of property and equipment.

The deterioration from 2002 to 2003 of approximately $53.2 million resulted from increased purchases of property and equipment during 2003. The increase also resulted from payments to minority shareholder, capitalized software costs and a strategic business acquisition.

Cash flows from financing activities. For the years ended December 31, 2004, 2003 and 2002, we reported net cash flows provided by (used in) financing activities of $(123.0) million, $32.1 million and $(28.8) million, respectively. The decrease from 2003 to 2004 of approximately $155.1 million principally resulted from the repayment of our long-term debt and credit facility.

The increase from 2002 to 2003 of approximately $60.8 million principally resulted from proceeds from borrowings against our line of credit coupled with a decrease in the repurchase of common stock.

Obligations and Future Capital Requirements

Future maturities of our outstanding debt and contractual obligations are summarized as follows:

Purchase Obligations. Effective December 2003, we entered into a thirty month initial period contract with a telecommunications company with a minimum purchase commitment of $6.0 million. If we terminate the contract during the initial period, a penalty of up to 50% of the minimum purchase commitment will be assessed. If, during the initial period, the telecommunications company terminates or significantly reduces volumes under a Master Service Agreement signed with us on June 29, 2001, a penalty of 5% of the remaining minimum purchase commitment can be assessed to the client.

From time-to-time we contract with certain of our communications clients (which represent approximately one-third of our annual revenue) to provide us with telecommunication services. We believe these contracts are negotiated on an arms-length basis and may be negotiated at different times and with different legal entities.

Future capital requirements. Our cash requirements include capital expenditures primarily related to ongoing maintenance, upgrades or replacement of existing assets, the development and retrofit of new and/or existing CMCs, possible acquisitions of companies, formations of joint ventures and repurchases of common stock.

We expect total capital expenditures in 2005 to be approximately $40 million. Approximately a third of which is attributable to maintenance capital for existing CMCs, the opening and/or expansion of CMCs and internal technology projects. Such expenditures are financed with operating cash flows, existing cash balances and, to the extent necessary, cash flows from financing activities. The anticipated level of 2005 capital expenditures is primarily dependent upon new client contracts and the corresponding requirement for additional CMC capacity and technological infrastructure.

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We may initiate restructurings, dispositions, mergers, acquisitions and other similar transactions. Such transactions could include the transfer, sale or acquisition of significant assets, businesses or interests, including joint ventures, or the incurrence, assumption or refinancing of indebtedness, and could be material to the consolidated financial condition and consolidated results of operations of the Company. The launch of large client contracts may result in negative working capital because of the time period between incurring the costs for training and launching the program, and the beginning of the accounts receivable collection process. As a result, periodically we may generate negative cash flows from operating activities.

Debt Instruments and Related Covenants

During April 2004, we began to execute a plan, approved by the Board of Directors, to reduce long-term debt and the associated interest costs and improve financial flexibility by re-aligning our capital structure to better support our business plans. Our strategy was to accomplish two objectives; (i) to refinance the then existing revolving line of credit (“Revolver”) with a new revolving credit facility (“Credit Facility”), thereby providing greater financial and operational flexibility and (ii) to de-leverage the Consolidated Balance Sheet by prepaying the high-cost Senior Notes.

On May 5, 2004, we achieved the first objective by structuring a new, secured Credit Facility. Under this Credit Facility, we may borrow up to $100 million with an option to increase the size of the Credit Facility to a maximum of $150 million (subject to approval by the lender) at any time up to 90 days prior to maturity of the Credit Facility.

On June 16, 2004, we achieved the second objective by prepaying the $75.0 million in outstanding obligations under the Senior Notes As part of the early debt retirement we were required to pay $6.4 million under the make-whole provision. We also recorded a $1.2 million non-cash charge for deferred costs related to the former Revolver and Senior Notes.

During 2004, we terminated our interest rate swap associated with the Revolver (the termination was in conjunction with the repayment of the Revolver balance in full), resulting in a $2.8 million pre-tax cash charge.

The cash charge related to the interest rate swap, the make-whole provision of the long-term debt retirement and the non-cash charge were recorded as Debt Restructuring Charges in the accompanying Consolidated Statements of Operations. We estimate that it will result in future pre-tax net interest expense savings of $4.7 million through December 2006.

CLIENT CONCENTRATIONS

Our five largest clients accounted for 53.0%, 51.0% and 52.2% of our revenue for the years ended December 31, 2004, 2003 and 2002, respectively. In addition, these five clients accounted for an even greater proportional share of our consolidated earnings. The profitability of services provided to these clients varies greatly based upon the specific contract terms with any particular client. The relative contribution of any single client to consolidated earnings is not always proportional to the relative revenue contribution on a consolidated basis. The risk of this concentration is mitigated, in part, by the long-term contracts we have with our largest clients. The contracts with these clients expire between 2006 and 2010. Additionally, a particular client can have multiple contracts with different expiration dates. We have historically renewed most of our contracts with our largest customers. However, there is no assurance that future contracts will be renewed, or if renewed, will be on terms as favorable as the existing contracts.

Under the terms of the original contract with Verizon Communications (“Verizon”) relating to its Competitive Local Exchange Carrier (“CLEC”) business, there were certain minimum monthly volume commitments at pre-determined hourly billing rates (“Minimum Commitments”). As previously reported, when the CLEC work was redirected to other Verizon business units during 2001, Verizon continued to honor the contractual terms of its Minimum Commitments. While the terms negotiated by these business units were generally at lower hourly billing rates (“Base Rates”) than the Minimum Commitments, Verizon has continued to meet its financial obligations associated with the Minimum Commitments. In certain instances, the Base Rates exceed current market rates for similar services and upon contract expiration. If the contracts are renewed, we expect the rates we receive for our services in the future to be less than the Base Rates. In other instances, volume associated with new work was also offset against the minimum commitments. In addition, certain remaining Minimum Commitments were bought out with cash and these settlement payments were amortized over the life of such Minimum Commitments. The Minimum Commitments had been satisfied by December 31, 2004. The amount of Minimum Commitments satisfied by Verizon in excess of the Base Rates, together with amortized settlement payments,

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were $8.5 million, $31.5 million and $32.7 million for the years ended December 31, 2004, 2003 and 2002, respectively. These amounts impacted pre-tax earnings by a like amount and, accordingly, the decline had an adverse effect on our operating results in 2004.

RECENT ACCOUNTING PRONOUNCEMENTS

We discuss the potential impact of recent accounting pronouncements in Note 1 to Consolidated Financial Statements.

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Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact the consolidated financial position, consolidated results of operations or consolidated cash flows of the Company due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk in the areas of changes in U.S. interest rates, London Inter Bank Offer Rate (“LIBOR”) and foreign currency exchange rates as measured against the U.S. dollar. These exposures are directly related to our normal operating and funding activities. As of December 31, 2004, we had entered into forward financial instruments with several financial institutions to manage and reduce the impact of changes principally in the U.S./Canadian dollar exchange rates.

Interest Rate Risk

The interest on the Revolver is variable based upon LIBOR and, therefore, is affected by changes in market interest rates. At December 31, 2004, there was no outstanding balance on the Revolver. If LIBOR increased 10%, there would be no impact to the Company.

Foreign Currency Risk

     We have certain wholly owned subsidiaries in Argentina, Australia, Brazil, China, India, Korea, Malaysia, Mexico, New Zealand, Northern Ireland, Singapore, and Spain. Revenue and expenses from these operations are denominated in local currency, thereby creating exposures to changes in exchange rates. The changes in the exchange rate may positively or negatively affect our revenue and net income attributed to these subsidiaries. For the years ended December 31, 2004, 2003 and 2002, revenue from non-U.S. countries represented 53.8%, 43.5% and 34.7% of consolidated revenue, respectively.

     We have contracted with several commercial banks to acquire a total of $165.3 million Canadian dollars through December 2006 at a fixed price in U.S. dollars of $129.4 million via forwards, participating forwards and option contracts. We have derivative assets of $9.8 million associated with foreign exchange contracts, of which approximately $7.0 million relates to Canadian dollar hedge contracts that will settle in 2005. If the U.S./Canadian dollar exchange rate were to increase or decrease 10% from the levels at December 31, 2004, we could incur a material gain or loss in 2005 on the contracts, which is estimated to range from a gain of $15.2 million to a loss of $(3.3) million. However, any gain or loss would be mitigated by corresponding losses or gains in the underlying exposures.

     A business strategy for our North American Customer Care segment is to serve certain U.S. based customers from Canadian CMCs in order to leverage the U.S./Canadian dollar exchange rates. During the year ended December 31, 2004, the Canadian dollar has strengthened against the U.S. dollar by 6.9% in addition to a 17.9% strengthening during 2003. As a result, our costs remain constant in Canadian dollars, whereas our revenue (which is denominated in U.S. dollars) is decreasing for the unhedged portion.

     While our hedging strategy can protect us from changes in the U.S./Canadian dollar exchange rates in the short-term for the majority of its risk, an overall strengthening of the Canadian dollar may adversely impact margins in the North American Customer Care segment over the long-term.

     Other than the transactions hedged as discussed above, the majority of the transactions of our U.S. and foreign operations are denominated in the respective local currency while some transactions are denominated in other currencies. For example, the intercompany transactions that are expected to be settled are denominated in the local currency of the billing company. Since the accounting records of our foreign operations are kept in the respective local currency, any transactions denominated in other currencies are accounted for in the respective local currency at the time of the transaction. Upon settlement of such a transaction, any foreign currency gain or loss results in an adjustment to income. We do not currently engage in hedging activities related to these types of foreign currency risks because we believe them to be insignificant as we settle these accounts on a timely basis.

Fair Value of Debt and Equity Securities

We did not have any investments in debt or equity securities at December 31, 2004.

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Item 8. Financial Statements and Supplementary Data.

The financial statements required by this item are located beginning on page 41 of this report and incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

We have had no changes in or disagreements with our independent auditors regarding accounting or financial disclosure matters.

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Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The Company’s disclosure controls and procedures have also been designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Evaluation of Internal Control Over Financial Reporting

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company has included a report on management’s assessment of the design and effectiveness of its internal control over financial reporting as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2004. The Company’s independent registered public accounting firm also audited, and reported on, management’s assessment of the effectiveness of internal control over financial reporting. Management’s report and the independent registered public accounting firm’s attestation report are included under the captions entitled “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting” in Item 15 of this Annual Report on Form 10-K and are incorporated herein by reference.

Based on their evaluation as of December 31, 2004, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the fourth quarter of 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

As we discussed in Item 9A of our report on Form 10K/A for the year ended December 31, 2003, we amended our previously issued financial statements for adjustments primarily identified during 2003 that related to prior periods. As disclosed in that filing, we accordingly modified our internal procedures. Two of those adjustments involved establishing, for years prior to 2003, a deferred charge for contract acquisition costs and a deferred liability for rent liabilities. The future amortization of those adjustments also impacted our results for the first three quarters of 2004 and, accordingly, we also filed amended financial statements for those quarters.

Item 9B. Other Information

None.

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PART III

Item 10. Directors and Executive Officers of the Registrant.

For a discussion of our executive officers, you should refer to Part I, page 12, after Item 4A Executive Officers of TeleTech Holdings, Inc.

For a discussion of our Directors, you should refer to our definitive Proxy Statement for our 2005 Annual Meeting of Stockholders under the caption “Election of Directors” and “Director Compensation,” which we incorporate by reference into this Form 10-K.

The Company has adopted a Code of Ethical Conduct for Financial Managers, which comprise all worldwide Finance employees at the Director level and above. The Code of Ethical Conduct for Financial Managers is available on the “Corporate Governance” section of our web site at www.teletech.com.

Item 11. Executive Compensation.

We hereby incorporate by reference the information to appear under the captions “Executive Officers—Executive Compensation” in our definitive Proxy Statement for our 2005 Annual Meeting of Stockholders, provided, however, that neither the Report of the Compensation Committee on Executive Compensation nor the Performance Graph set forth therein shall be incorporated by reference herein.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

We hereby incorporate by reference the information to appear under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our definitive Proxy Statement for our 2005 Annual Meeting of Stockholders.

Item 13. Certain Relationships and Related Transactions.

We hereby incorporate by reference the information to appear under the captions “Certain Relationships and Related Party Transactions” in our definitive Proxy Statement for our 2005 Annual Meeting of Stockholders.

Item 14. Principal Accountants Fees and Services.

We hereby incorporate by reference the information to appear under the caption “Independent Audit Fees” in our definitive Proxy Statement for our 2005 Annual Meeting of Stockholders.

PART IV

Item 15. Exhibit and Financial Statement Schedules.

(a)	The following documents are filed as part of this report:

	(1)	Consolidated Financial Statements
		The Index to Consolidated Financial Statements is set forth on page 39 of this report.
	(2)	Financial Statement Schedules
		All schedules for TeleTech have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information is included in the respective Consolidated Financial Statements or notes thereto.

34

(3)

Exhibits

35

36

37

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, on March 8, 2005.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 8, 2005, by the following persons on behalf of the registrant and in the capacities indicated:

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF TELETECH HOLDINGS, INC.

39

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the
Board of Directors of TeleTech Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of TeleTech Holdings, Inc. and subsidiaries as of December 31, 2004 and 2003, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of TeleTech Holdings, Inc.’s management. Our responsibility is to express an opinion on these consolidated 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TeleTech Holdings, Inc. and subsidiaries as of December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” and Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of TeleTech Holdings, Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2005 expressed an unqualified opinion thereon.

Denver, Colorado
March 7, 2005

40

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2004 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2004.

Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Ernst & Young, LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein.

41

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Stockholders and the
Board of Directors of TeleTech Holdings, Inc.:

We have audited management’s assessment, included in the section entitled Management’s Report on Internal Control over Financial Reporting, that TeleTech Holdings, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). TeleTech Holdings, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

In our opinion, management’s assessment that TeleTech Holdings, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, TeleTech Holdings, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of TeleTech Holdings, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004 and our report dated March 7, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Denver, Colorado
March 7, 2005

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)

The accompanying notes are an integral part of these consolidated balance sheets.

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Cont.)
(Amounts in thousands except share amounts)