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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended December 31, 2003

OR

For the transition period from              to             .

Commission File Number 0-21333

RMH TELESERVICES, INC.

(Exact name of registrant as specified in its charter)

15 Campus Boulevard

Newtown Square, PA 19073

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (610) 325-3100

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  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date: 16,026,830 shares of common stock outstanding as of February 17, 2004.

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RMH TELESERVICES, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RMH TELESERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share amounts)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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RMH TELESERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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RMH TELESERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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RMH TELESERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED DECEMBER 31, 2003

(unaudited)

(in thousands, except share amounts)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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RMH TELESERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(Dollars in thousands, except share and per-share data unless otherwise indicated)

1. Basis of Presentation

The Company (as defined below) is a provider of outsourced customer relationship management (“CRM”) services. Founded in 1983, the Company is headquartered in Newtown Square, Pennsylvania, and as of December 31, 2003, operated over 7,800 workstations within a network of 14 customer interaction centers. The Company has five customer interaction centers located in the United States, eight located in Canada and one in the Philippines. The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows. Operating results for the three months ended December 31, 2003 are not necessarily indicative of the results that may be expected for the full fiscal year. The Company may experience quarterly variations in net revenues and operating income (loss) as a result of the timing of clients’ telemarketing campaigns, the commencement and expiration of contracts, the amount of new business generated, restructuring activities, currency exchange rates between the United States and Canada, selling, general and administrative expenses to acquire and support such new business and changes in the revenue mix among various customers. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules and regulations. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003.

Certain prior year amounts have been reclassified to conform with the current year presentation.

The condensed consolidated financial statements include the accounts of RMH Teleservices, Inc. and its wholly-owned subsidiaries (collectively, the “Subsidiaries”), Teleservices Management Company, Teleservices Technology Company, RMH Teleservices Asia Pacific, Inc., RMH Teleservices International Inc. (“RMH International”) and RMH International’s subsidiaries, 515963 N.B. Inc. and 516131 N.B. Inc. All intercompany transactions have been eliminated in consolidation. References herein to the Company mean RMH Teleservices, Inc. together with the Subsidiaries unless the context requires otherwise.

On November 18, 2003, the Company signed a definitive merger agreement under which the Company agreed to be acquired by NCO Group, Inc. (“NCO”) (the “NCO Transaction”). The definitive merger agreement was subsequently amended on January 22, 2004. NCO is one of the largest providers of accounts receivable collection services in the world. NCO provides services to clients in the financial services, healthcare, retail, commercial, utilities, education, telecommunications and government sectors. Its common stock is traded on The NASDAQ National Market under the symbol “NCOG.” Under the terms of the original definitive merger agreement, the acquisition provided that the Company’s shareholders would receive $5.50 worth of NCO common stock for each share of the Company’s common stock, as long as NCO’s stock price, based on NCO’s twenty day average stock price prior to the closing, was valued between $22.00 and $27.00 per share. Based on the terms of the January 22, 2004 amendment to the definitive merger agreement, the Company’s shareholders will receive 0.2150 shares of NCO common stock for each share of the Company’s common stock, as long as NCO’s stock price, based on NCO’s twenty-day average stock price prior to closing, is valued between $18.75 and $26.75 per share. Within this range, the acquisition will be funded with approximately 3.4 million shares of NCO common stock.

Under the amendment to the definitive merger agreement, the exchange ratio may fluctuate if NCO’s average common stock value is less than $18.75 or more than $26.75 (based upon the average NCO closing price over a 20 day period ending shortly before the effective time of the merger). Once such average common stock value is below $18.75, NCO can elect to either maintain the exchange ratio at 0.2150 or adjust the exchange ratio upward so that each Company share would receive $4.00 worth (calculated using such average value) of NCO common stock in the merger. If NCO does not elect to increase the exchange ratio, the Company has the option to terminate the merger agreement without being required to pay a termination fee. If such average common stock value is above $26.75, the exchange ratio will be reduced so that each Company share would receive $5.75 worth (calculated using such average value) of NCO common stock in the merger.

The NCO Transaction is subject to approval by the Company’s shareholders. NCO has entered into voting agreements with certain of the Company’s shareholders holding approximately 38% of the Company’s outstanding shares pursuant to which such shareholders have agreed to vote their shares in favor of the NCO Transaction. The Company’s board of directors has unanimously voted to approve the transaction and recommend that the Company’s shareholders vote to approve the merger. The NCO Transaction is subject to normal regulatory review and the expiration of applicable waiting periods. If the NCO Transaction is terminated under certain circumstances, the Company is required to pay NCO a termination fee of up to $6,000.

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2. Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company adopted SFAS No. 143 on October 1, 2002, which had no impact on its consolidated financial position, results of operations or disclosures.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The statement retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands the previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. The Company adopted SFAS No. 144 effective October 1, 2002 (see note 7).

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” which applied through December 31, 2002. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than the date of an entity’s commitment to an exit plan. The Company adopted the provisions of SFAS No. 146 for exit or disposal activities initiated after December 31, 2002 (see note 7).

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. This guidance does not apply to certain guarantee contracts, such as those issued by insurance companies or for a lessee’s residual value guarantee embedded in a capital lease. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations would not apply to product warranties or to guarantees accounted for as derivatives. The Company adopted the disclosure requirements of FIN 45 in its quarter ended December 31, 2002, which had no impact on its consolidated financial statements. The Company adopted the initial recognition and initial measurement provisions of FIN 45 in its quarter ended March 31, 2003, which had no impact on its consolidated financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123, Accounting for Stock-Based Compensation.” This Statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for annual periods ending after December 15, 2002 and interim periods beginning after December 15, 2002. The Company has adopted the disclosure-only provisions of SFAS No. 148 and will continue to account for stock-based compensation under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The adoption of SFAS No. 148 had no impact on the Company’s financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”) with the objective of improving financial reporting by companies involved with variable interest entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51 to certain entities, defined as variable interest entities, in which equity investors do not have characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. In December 2003, the FASB issued a revision to FIN 46 (“FIN 46R”) to clarify some of the provisions of FIN 46. FIN 46 has not had an impact on the Company’s financial statements. Furthermore, the Company does not expect the adoption of the remaining provisions of FIN 46R in the quarter ending March 31, 2004 will have an impact on its financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments imbedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except for SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, which should continue to be applied in accordance with their respective effective dates. The Company adopted the provisions of SFAS No. 149 in the fourth quarter of 2003 which had no impact on its financial position, results of operations or disclosures.

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In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which establishes standards of how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) and is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of SFAS No. 150 in the fourth quarter of 2003 which had no impact on its financial position, results of operations or disclosures. The FASB is addressing certain implementation issues associated with the application of SFAS No. 150 including those related to mandatorily redeemable financial instruments representing noncontrolling interests in subsidiaries included in consolidated financial statements. The Company will monitor the actions of the FASB and assess the impact, if any, that these actions may have on its financial statements.

In December 2003, the United States Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 104 (“SAB 104”), which revised or rescinded portions of the interpretive guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The principal revisions relate to the rescission of material no longer necessary because of private sector developments in accounting principles generally accepted in the United States of America. SAB 104 has not changed the Company’s current revenue recognition policies.

3. Operations and Financing

The Company incurred significant losses in fiscal 2003, 2002 and 2001 primarily as a result of bad debt expenses, impairment and restructuring charges, a charge associated with projected minimum purchase requirements under agreements with telephone long distance carriers related to the migration from outbound to inbound CRM services, underutilization of capacity, and unfavorable currency exchange rates between the United States and Canada which have resulted in higher operating costs in Canada to support clients in the United States. The Company incurred a significant loss in the first quarter of fiscal 2004 primarily as a result of a decline in billable hours resulting from the timing of telemarketing campaigns, reductions in outsourcing associated with recent economic conditions, the impact of the Do-Not-Call Implementation Act which has resulted in a continued decline in outbound customer relationship management services, and continued unfavorable currency exchange rates between the United States and Canada. In addition, the Company had a working capital deficit of $17,241 at December 31, 2003. The Company’s ability to meet its financial obligations and make planned capital expenditures will depend on its future operating performance, which will be subject to financial, economic and other factors affecting the business and operations of the Company, including factors beyond its control, and the Company’s ability to remain in compliance with the restrictive covenants under its revolving credit facility. The Company was not in compliance with the minimum EBITDA requirement (as defined) at September 30, 2003 under the Company’s revolving credit facility, the covenants requiring audited financial statements, an independent auditors’ report without a going concern emphasis paragraph, and a debt compliance letter within 90 days of the Company’s fiscal year ended September 30, 2003, the covenant requiring that its Annual Report on Form 10-K be filed in a timely manner, or the covenant requiring that it pledge the stock of certain of its wholly-owned subsidiaries to the lender. The Company received a waiver for these violations in January 2004 and also amended the EBITDA requirement so that its quarterly measurement period, which was previously for a trailing twelve-month period, will be for a trailing three-month period for each quarterly measurement period through the quarter ending September 30, 2004 and a trailing twelve-month period for each quarterly measurement period thereafter. The Company was in compliance with restrictive covenants under the revolving credit facility at December 31, 2003. In the event that there are future violations of restrictive covenants, management will be required to either obtain a waiver or amend the covenant requirement.

In order to improve the Company’s operating performance and to provide for additional liquidity to fund its operations and additional capital expansion, management undertook a number of initiatives in fiscal 2004. While the Company incurred an operating loss of $6,273 in the first quarter of fiscal 2004, the Company’s business plan for fiscal 2004 projects an improvement in operating performance in subsequent quarters that is expected to be the result of the expansion of services provided to existing customers, the negotiation of rate increases with certain customers, and an improvement in the efficiency of the Company’s operations. In addition, there will be a reduction in start-up costs associated with the Company’s Philippine operations in fiscal 2004 when compared with fiscal 2003, which was the first year of operations for that location. On October 3, 2003, the Company raised net proceeds of $6,520 through the sale of common stock in a private placement financing (the “2003 Placement”). The Company issued 2,205,000 shares of its common stock and warrants to purchase an additional 551,250 shares of its common stock pursuant to the 2003 Placement (see note 10). In addition, the revolving credit facility, as amended in October 2003, November 2003 and January 2004, permits the Company to borrow up to $3,000 in excess of the borrowing base through March 1, 2004.

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern with the realization of assets and the settlement of liabilities in the normal course of business. The Company’s ability to

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continue as a going concern is dependent upon, among other things, successful execution of its business plan for 2004, its ability to remain in compliance with restrictive covenants under the revolving credit facility, and its ability to obtain additional financing to fund its operations and capital requirements. There can be no assurance that the Company will be able to successfully execute its business plan for 2004, remain in compliance with restrictive covenants under the revolving credit facility, obtain additional financing, or complete the NCO Transaction, all of which creates substantial doubt about its ability to continue as a going concern through September 30, 2004. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

4. Major Clients and Concentration of Credit Risk

The Company is dependent on several large clients for a significant portion of net revenues. The loss of one or more of these clients, or an inability to collect amounts owed by such clients, could have a material adverse effect on the financial position and results of operations of the Company. The following table summarizes the percent of net revenues from each client that represented at least 10% of net revenues in the first quarter of fiscal 2004 and 2003, and related accounts receivable as of December 31, 2003 and 2002 for those clients that were at least 10% of net revenues in the first quarter of fiscal 2004 and 2003:

The Company provides inbound and outbound CRM services to MCI WORLDCOM Communications, Inc. and MCI WORLDCOM Network Services, Inc. (collectively, “MCI”), a subsidiary of WorldCom, Inc. (“WorldCom”), under several agreements that expire through October 31, 2007. MCI accounted for 32.0% and 32.5 %, respectively, of the Company’s net revenues in the first quarter of fiscal 2004 and 2003, respectively. On July 21, 2002, WorldCom announced that it had filed for voluntary relief under Chapter 11 of the United States Bankruptcy Code.

While the Company has continued to provide services to MCI, these events create uncertainty about the Company’s future business relationship with MCI, which, if not resolved in a manner favorable to the Company, could have a significant adverse impact on the Company’s future operating results and liquidity. In the event that the Company’s business relationship with MCI were to terminate, the Company’s contracts with MCI call for certain wind-down periods and the payment by the Company of certain termination fees, as defined in such contracts, during which time the Company would seek new business volume. However, replacing lost MCI business volume is subject to significant uncertainty, could take substantially longer than the wind-down periods, and would be dependent on a variety of factors which management of the Company cannot predict at this time.

Management believes that it has adequately reserved for all exposure created as a result of the WorldCom bankruptcy, however, there can be no assurance that additional charges will not be required in the future. At December 31, 2003, the Company had $2,991 in accounts receivable from MCI, all of which was for services provided subsequent to the bankruptcy filing. Four of the Company’s customer interaction centers provide all or a significant portion of their services to MCI. While management does not presently believe the property and equipment at these customer interaction centers is impaired, a decline in the level of services being provided to MCI as a result of the WorldCom bankruptcy filing could result in the Company incurring substantial operating costs with no related revenues and a significant charge associated with property and equipment impairment. The carrying value of property and equipment at the four customer interaction centers at December 31, 2003 was $15,669. Future operating lease commitments for the four customer interaction centers was $14,483 at December 31, 2003.

In the first quarter of fiscal 2003, an existing contract with MCI related to the provision of inbound CRM services was modified. Under the original contract, the Company billed MCI a seat utilization charge to cover the costs associated with the customer interaction center where services were provided. The seat utilization charge was subject to scheduled decreases over the term of the contract and was being accounted for on a straight-line basis over the term of the contract. At the date of the contract modification, $1,906 in revenue related to the seat utilization charge had been deferred. Under the modified contract, the Company no longer bills MCI for the seat utilization charge. The $1,906 in revenue deferred under the original contract is being recognized on a straight-line basis through the January 2006 termination date of the modified contract. At December 31, 2003 and September 30, 2003,

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respectively, $1,279 and $1,436 are included in other long-term liabilities related to the seat utilization charge. In addition, the Company received a prepayment in the amount of $2,552 under the original contract that is included in other long-term liabilities at December 31, 2003 and September 30, 2003.

On April 1, 2003, all contracts with MCI for the provision of third party verification services were assigned to an unrelated third party (the “Assignee”) effective April 27, 2003. In the first quarter of fiscal 2003, these contracts accounted for $2,138 of the Company’s consolidated net revenues. The Company entered into an agreement with the Assignee effective April 27, 2003 under which up to 250 seats in one of its customer interaction centers will be subleased to the Assignee (the “Sublease Agreement”) for $95 per month. The Assignee has the option to reduce the number of seats being leased in 50 seat increments by providing 60 days notice. Each 50-seat reduction results in a decrease in the monthly sublease payment of $19 per month. The Sublease Agreement expires on April 27, 2006 and may be terminated by either party with 30 days written notice. Revenue from the Sublease Agreement is being reflected in results of operations as a reduction of operating expenses to the extent of the Company’s related sublease operating expenses with the landlord. Any excess of sublease revenues over sublease expenses resulting from the Sublease Agreement would be included in other income. At December 31, 2003, the Assignee continued to lease 150 seats.

On July 25, 2003, the Company and WorldCom entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”), which was approved by the United States Bankruptcy Court Southern District of New York (the “Bankruptcy Court”) on August 5, 2003, under which:

Based on the settlement, the Company had a net gain of approximately $3,065 resulting from the reversal of the allowance for doubtful accounts on MCI receivables and accruals that were in excess of the agreed upon settlement amounts. Since the New MCI Contract was predicated upon the Settlement Agreement and due to the concurrent execution of these agreements, the gain is being amortized as a reduction to cost of services and general and administrative expense over the two-year term of the New MCI Contract. The remaining unamortized gain of $2,438 and $2,820 is included in other long-term liabilities in the accompanying condensed consolidated balance sheets at December 31, 2003 and September 30, 2003, respectively.

The New MCI Contract, which was executed on July 25, 2003, is for a term of two years and contains a minimum purchase requirement of $1,500 in the first year that may be increased to $1,800 in the second year. Management currently projects that the Company’s call volume will be sufficient to meet the minimum purchase requirements under the New MCI Contract.

Effective October 1, 2003, the Company amended its existing Canadian services agreement with MCI (the “MCI Amendment”). The terms of the MCI Amendment include, but are not limited to the following:

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During the three months ended December 31, 2003, the Company received a settlement of $443 related to the bankruptcy proceedings of Provell, Inc. (“Provell”). The $443 settlement related to certain Provell receivables that had been written off in fiscal year 2002 due to Provell’s May 9, 2002 filing for bankruptcy protection under Chapter 11 of the United States Bankruptcy code. The $443 settlement was recorded as a reduction of bad debt expense for the three months ended December 31, 2003, which is included in general and administrative expense in the accompanying condensed consolidated statement of operations.

5. Supplemental Cash Flow Information

Cash paid for interest and income taxes for the three months ended December 31, 2003 and 2002 was as follows:

The Company entered into capital lease obligations of $415 and $311 during the three months ended December 31, 2003 and 2002, respectively.

6. Property and Equipment

During the three months ended December 31, 2003 and 2002, the Company recorded charges of $6 and $238, respectively, to write off the net book value of software developed for internal use. The software written off was utilized to provide services in connection with certain client relationships that were terminated during the period.

7. Corporate Restructuring

During the quarter ended March 31, 2003, the Company commenced a plan to close three customer interaction centers in the United States due to a decline in outbound CRM services. The restructuring plan was completed in the fourth quarter of fiscal 2003. Asset impairment charges of $1,919 and $8 were recorded in the second and third quarters of fiscal 2003, respectively, for the amount by which the carrying amount of the property and equipment at these customer interaction centers exceeded fair value. In addition, one-time termination benefits, contract termination costs and other associated costs of $349, $203, and $393, respectively, were recorded in fiscal 2003.

In 2002, the Company recorded a $4,035 restructuring charge in connection with a plan designed to reduce its cost structure by closing six customer interaction centers, resulting in the abandonment of fixed assets and a reduction in workforce. No severance was paid to employees in connection with this restructuring. The restructuring costs included customer interaction center closure costs, which are the estimated costs for closing the customer interaction centers, including obligations under signed real estate lease agreements and the write-off of leasehold improvements and the net book value of certain fixed assets. During the three months ended December 31, 2002, the Company closed a quality center and recorded a $30 charge for future payments associated with the termination of the facility lease and related utility costs.

Restructuring activity during the three months ended December 31, 2003 is as follows:

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Restructuring activity during the three months ended December 31, 2002 is as follows:

The $156 other adjustment in 2003 represents a balance sheet reclassification to reduce the carrying value of property and equipment that had been impaired in connection with the June 2002 restructuring.

In the first quarter of fiscal 2004, the Company recorded a $594 charge for severance related to the termination of two employees that were not part of a larger restructuring which is included in general and administrative expense in the accompanying condensed consolidated statement of operations. At December 31, 2003, and September 30, 2003, $665 and $207, respectively, are included in accrued expenses in the accompanying condensed consolidated balance sheets for future severance payments. Severance has been fully paid to all but five employees at December 31, 2003.

8. Accrued Expenses and Other Liabilities

The Company’s accrued expenses and other current liabilities were composed of the following:

The Company has entered into agreements with its telephone long distance carriers that are subject to annual minimum purchase requirements. For certain agreements, the Company projected that it would fail to meet the annual minimum purchase requirements. These projected shortfalls arose during the second quarter of fiscal 2003 primarily as a result of the site closures discussed in note 7, and the decline in the amount of outbound CRM services provided by the Company. The Company recorded accruals of $2,322 and $86 in the second and third quarters of 2003, respectively, for obligations related to total projected shortfalls of $608 with one of its carriers (Carrier A) and $1,800 with MCI.

During the third quarter of fiscal 2003, the Company amended its contract with Carrier A to extend the contract for a period of two years and received a waiver for the $608 volume shortfall under the original contract. The $608 volume shortfall waived is being amortized as a reduction to cost of services over the two-year term of the amended contract. The remaining unamortized credit of $431 and $507 at December 31, 2003 and September 30, 2003, respectively, are included in other long-term liabilities. While this amended contract with Carrier A contains a monthly minimum purchase requirement of $175, management currently projects that its call volume will be sufficient to meet this monthly minimum. To the extent the Company purchases new services in excess of the $175 minimum purchase requirement, 35% of the amount exceeding the minimum must be purchased from Carrier A to the extent Carrier A provides such services at rates that are competitive with the industry.

As further discussed in note 4, on July 25, 2003 the Company executed the New MCI Contract for the provision of telecommunication services to replace the Old MCI Contracts under which a $1,800 shortfall had arisen. In connection with the Settlement Agreement, the Company paid WorldCom the RMH Payment of $3,494, which included $1,800 for the volume shortfalls under the Old MCI Contracts. The New MCI Contract is for a term of two years and contains a minimum purchase requirement of $1,500 in the first year that may be increased to $1,800 in the second year. Management currently projects that the Company’s call volume will be sufficient to meet the minimum purchase requirements under the New MCI Contract.

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The Company’s other long-term liabilities were composed of the following:

9. Indebtedness

On September 4, 2002, the Company entered into a three-year, $25,000 revolving credit facility (the “Revolver”) with Foothill Capital Corporation (“Foothill”), a wholly-owned subsidiary of Wells Fargo & Company. The Company performs services for Wells Fargo & Company which amounted to less than 0.1% of consolidated net revenues for the three months ended December 31, 2003. Proceeds from the Revolver were used to pay down the Company’s credit facility (the “Credit Facility”) with PNC Bank, National Association (“PNC”). Foothill has been granted a continuing security interest in substantially all of the Company’s assets.

The Revolver is subject to a borrowing base (as defined) calculation based on a percentage of eligible accounts receivable (as defined). The Revolver was amended in October 2003 to increase the borrowing base available to the Company. The Revolver was amended in October 2003, November 2003 and January 2004 to permit the Company to borrow up to $3,000 in excess of the borrowing base through March 1, 2004. Based on the Company’s borrowing base and its ability to borrow up to $3,000 in excess of the borrowing base through March 1, 2004, as of December 31, 2003, it could borrow up to an additional $500 under the Revolver.

The Revolver contains certain restrictive covenants including a minimum EBITDA requirement (as defined) and places limits on the amount of capital expenditures that can be made by the Company (excluding capital leases). The Company was not in compliance with the EBITDA requirement at September 30, 2003 or the covenants requiring audited financial statements, an independent auditors’ report without a going concern emphasis paragraph, and a debt compliance letter within 90 days of the Company’s fiscal year ended September 30, 2003, the covenant requiring that its Annual Report on Form 10-K be filed in a timely manner, or the covenant requiring that it pledge the stock of certain of its wholly-owned subsidiaries to the lender. The Company received a waiver for these violations in January 2004 and also amended the EBITDA requirement so that its quarterly measurement period, which was previously for a trailing twelve-month period, will be for a trailing three-month period for each quarterly measurement period through the quarter ending September 30, 2004 and a trailing twelve-month period for each quarterly measurement period thereafter. The Company was in compliance with restrictive covenants under the Revolver at December 31, 2003. In the event that there are future violations of restrictive covenants, management will be required to either obtain a waiver or amend the covenant requirement.

Interest under the Revolver is at Foothill’s prime rate plus 150 basis points (the “Base Rate Margin”) or 5.50% at December 31, 2003 and September 30, 2003. In the event that the Company achieves certain levels of EBITDA (as defined) during its fiscal years, beginning with the fiscal year ended September 30, 2002, the Company is eligible for a reduction in the Base Rate Margin. Where EBITDA for the immediately preceding fiscal year exceeds $25,000, the Company has the option to have interest on all or a portion of the advances under the Revolver charged at a rate of interest equal to LIBOR plus 275 basis points. The Company was not eligible for this option based on its 2002 or 2003 operating results. The Company had $8,905 and $6,030 in outstanding borrowings under the Revolver at December 31, 2003 and September 30, 2003, respectively. Due to Foothill’s ability to suspend advances under the Revolver in the event of a Material Adverse Change (as defined), the outstanding borrowings under the Revolver are classified as a current liability. Letters of credit can be issued under the Revolver up to a maximum of $1.5 million. At December 31, 2003, $1,221 Canadian dollars (approximately $943 U.S. dollars) was outstanding under letters of credit, of which $1,071 Canadian dollars (approximately $828 U.S. dollars) is for a guarantee of rental payments as required under the terms of a customer interaction center lease. The letters of credit were not recorded as a liability on the Company’s balance sheet at December 31, 2003 or September 30, 2003 since no amounts had been drawn against them.

The Company’s Subsidiaries guarantee outstanding borrowings under the Revolver.

The Credit Facility, as amended, expired on September 30, 2002. While there were no outstanding borrowings under the Credit Facility at September 30, 2002, $1,500 Canadian dollars (approximately $950 U.S. dollars) was outstanding under a letter of credit with PNC used as a guarantee for rental payments as required under the terms of a customer interaction center lease. On September 4, 2002, the Company provided $1,000 to PNC as collateral against the outstanding letter of credit. The $1,000 was returned to the Company on October 23, 2002 when the letter of credit with PNC was replaced with a letter of credit under the Revolver.

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In the first quarter of 2003, the Company entered into an unsecured note payable with the landlord of one of its customer interaction centers for $600 Canadian dollars ($463 U.S. dollars at December 31, 2003) to finance leasehold improvements. The note bears interest at 8% and is payable monthly through December 2007. The outstanding balance on the note was $384 and $387 U.S. dollars at December 31, 2003 and September 30, 2003, respectively.

10. Shareholders’ Equity

On October 3, 2003, the Company raised net proceeds of $6,520 through the sale of common stock to a group of unrelated investors in a private placement financing. The Company issued 2,205,000 shares of its common stock at $3.15 per share and warrants to purchase an additional 551,250 shares of its common stock pursuant to the private placement. Additional warrants to purchase 110,250 shares of common stock were also issued to an unrelated third party to cover a portion of the transaction costs. The warrants have an exercise price of $4.00 per share and are exercisable beginning April 3, 2004, and until October 3, 2008. The fair value of the warrants issued was calculated as $1,457 (or $2.20 per warrant) using the Black-Scholes option pricing model based on the following assumptions: weighted-average risk-free interest rate of 3.12%; expected weighted-average life of 5.0 years; dividend yield of zero; and volatility of 74%.

Due to anti-dilution provisions under the terms of 892,482 outstanding warrants issued in 2001 (the “2001 Placement Warrants”), upon the closing of the 2003 Placement, the number of shares issuable upon exercise of the 2001 Placement Warrants was adjusted from 892,482 to 914,326 and the exercise price of the 2001 Placement Warrants was adjusted from $12.00 to $11.71.

In connection with the termination of an employee during the three months ended December 31, 2003, a stock option grant and a restricted stock award were modified. The intrinsic value of the stock options and restricted stock award were measured at the modification date and a charge to earnings of $232 was recorded for the excess of the intrinsic value at the modification date over the intrinsic value at the original grant date.

Had the Company recognized compensation cost for its stock option plan consistent with the provisions of SFAS No. 123, the Company’s net income (loss) and basic and diluted net income (loss) per common share would have been as follows:

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11. Loss per Common Share

The following is a reconciliation of the numerators and denominators of the basic and diluted loss per common share computations (share amounts are in thousands).

The following securities outstanding at December 31, 2003 and 2002 were not included in the computation of diluted (loss) income per share as the effect would have been antidilutive:

12. Foreign Currency Transactions

A significant portion of the Company’s business is performed in Canada, primarily with clients in the United States, which exposes the Company’s earnings, cash flows, and financial position to risk from foreign currency denominated transactions. The Company also commenced operations in the Philippines during 2003, which creates exposure from foreign currency denominated transaction that will increase as these operations grow. Due to the growth of the Canadian operations, a policy was established to minimize cash flow exposure to adverse changes in currency exchange rates by identifying and evaluating the risk that cash flows would be affected due to changes in exchange rates and by determining the appropriate strategies necessary to manage such exposures. The Company’s objective is to maintain economically balanced currency risk management strategies that provide adequate downside protection.

In order to partially hedge cash flow economic exposure in Canada, in November 2001 the Company entered into a collar arrangement with a commercial bank for a series of puts and calls for a fixed amount of Canadian dollars (the “Collar”) for an up-front payment of $335. Under this arrangement the Company had the option to purchase $3,000 Canadian dollars at a fixed rate in two-week intervals covering 52 weeks in the event the exchange rate dropped below a set minimum or “floor” rate. Conversely, the Company was required to sell the same amount of Canadian dollars to the bank if the exchange rate increased above a set maximum or “ceiling” rate. As a result of this arrangement, the Company’s foreign currency risk for the fixed amount outside the collar was eliminated. The Company designated the Collar as a cash flow hedge and recorded it at its estimated fair value. Changes in the time value component of the Collar were excluded from the measurement of hedge effectiveness and were reported directly in earnings.

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The Collar expired in November 2002 at which time the Company entered into a series of call options to buy $2,000 Canadian dollars every two weeks through May 2003 (the “Options”). Under this arrangement the Company had the option to purchase a fixed amount of Canadian dollars at a fixed rate in two-week intervals. The Company made a $162 up-front payment in connection with the Options, which were designated as a cash flow hedge. Changes in the time value component of the Options were excluded from the measurement of hedge effectiveness and were reported directly in earnings.

Upon the expiration of the Options in May 2003, the Company entered into a series of call options with varying expiration dates to acquire $7,000 Canadian dollars on a bi-weekly basis through November 2003 to fund payroll, $1,000 Canadian dollars on a monthly basis to fund customer interaction center rent payments through May 2004, $500 Canadian dollars on a weekly basis to fund accounts payable through May 2004, and $1,100 Canadian dollars on a periodic basis to fund equipment lease payments through May 2004. Since August 2003, the Company has executed a strategy of purchasing call options for its Canadian payroll so that it has the majority of its Canadian Dollar payroll requirements hedged for at least 90 days. These contracts are purchased on a bi-weekly basis, upon the expiration of an existing contract. During the three months ended December 31, 2003, the Company entered into a series of call options with varying expiration dates to acquire $3,000 Canadian dollars on a bi-weekly basis through March 5, 2004 and made up-front payments of $180. Changes in the time value component of the call options are excluded from the measurement of hedge effectiveness and are reported directly in earnings. The carrying value of the call options is $336 and $339 at December 31, 2003 and September 30, 2003, respectively, and is recorded in prepaid expenses and other current assets. The effective portion of the change in the fair value of the call options of $116 and $34 at December 31, 2003 and September 30, 2003, respectively, is included in accumulated other comprehensive loss.

During the three months ended December 31, 2003 and 2002, the Company incurred losses of $265 and $86, respectively, related to the time value of its foreign currency cash flow hedges which are included in other expense in the accompanying condensed consolidated statements of operations.

By exercising certain of its rights under its foreign currency cash flow hedges, the Company was able to purchase Canadian dollars for $474 and $46 less than the market rate in the three months ended December 31, 2003 and 2002, respectively.

13. Business Segments

The Company’s reportable segments, using the “management approach” under SFAS No. 131, “Disclosures About Segments of a Business Enterprise and Related Information,” consist of three operating segments: Inbound, Outbound, and Offshore.

Commencing with an internal reorganization during the fourth quarter of 2002, the Company’s chief operating decision maker began reviewing the results of operations of the business based on these two segments, each of which has a separate management team. While each of the Company’s customer interaction centers is classified as either inbound or outbound based on the type of service that constitutes the majority of its revenues, centers may provide a mix of both inbound and outbound services. Outbound revenues may be classified as part of the inbound division when they are provided by a customer interaction center that is classified as inbound. Similarly, inbound revenues may be classified as part of the outbound division when they are provided by a customer interaction center that is classified as outbound. In the fourth quarter of 2003, the offshore segment was added, which represents the Company’s inbound operations in the Philippines. A summary of net revenues by type of service, rather than by operating segment, is as follows:

Segment operating information is accumulated based on the results of all of the customer interaction centers within the segment plus an allocation for corporate expenses.

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The Company’s net revenues during the three months ended December 31, 2003 and 2002 were generated predominantly from clients within the United States.

14. Related Party and Certain Other Relationships

The Company made full recourse loans to several members of the senior management team to pay the income taxes in connection with an Internal Revenue Code Section 83(b) election (“83(b) Election”) related to restricted stock grants in fiscal year 2001. The outstanding balance under these loans at December 31, 2003 and September 30, 2003 was $508, net of a $90 reserve for amounts not deemed collectible. The majority of the loans are secured by the restricted common stock held by the employees and provide for personal recourse against the assets of each of the employees.

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In connection with a 100,000 share restricted stock grant to the Company’s Chief Executive Officer (“CEO”) in April 1999, the Company loaned the CEO $85 to pay the income taxes in connection with an 83(b) Election. Interest on the loan accrues at an annual rate of 7.5% and is due and payable annually, on January 1 each year, commencing on January 1, 2000. The principal balance of the loan and all accrued and unpaid interest thereon is due and payable in full on the earlier of December 14, 2004, or the date of the CEO’s termination. The loan is secured by the underlying shares of restricted stock.

The Company entered into a business and financial consulting services agreement with Specialized Teleservices, Inc. (“STI”). STI is a telemarketing company that supplies third party verification services exclusively to MCI. The Company provided STI with services such as business consulting, development of internal financial systems, the identification of telemarketing clients, and assistance in reviewing proposed pricing and contract agreements. As compensation for these services, the Company was entitled to receive 10% of STI’s gross revenues on a monthly basis plus any out-of-pocket expenses incurred. On December 28, 2001, the Company agreed to lower its compensation to 3% of STI’s gross revenues. The agreement with STI is for successive one-year periods and automatically renews yearly unless either party gives written notice of termination to the other party at least 60 days prior to any such automatic renewal date. In the three months ended December 31, 2003 and 2002, the Company had no revenues from STI. STI was incorporated on February 28, 2001 and the Company loaned STI approximately $515 for start-up costs. At September 30, 2002, outstanding principal and interest under the STI loan was $923 and was fully-reserved due to significant uncertainties created by the WorldCom bankruptcy filing. In 2003, the remaining outstanding principal and interest under the STI loan was written off. John A. Fellows, the Company’s CEO and a member of the Board of Directors, is a former member of the board of directors of STI.

In June 2003, the Company entered into an agreement with Excell Agent Services, L.L.C. (“Excell”) to provide certain inbound CRM services to Excell for a period of six months (the “Excell Preliminary Agreement”). In August 2003, the Company entered into an agreement with Excell to provide inbound CRM services to Excell for a term ending June 30, 2006 (the “Excell Agreement”). During the three months ended December 31, 2003, the Company recognized $446 in net revenues under the Excell Agreement. The majority shareholder of Excell is a significant shareholder of the Company. The Excell Preliminary Agreement and the Excell Agreement were reviewed by a special committee of disinterested directors of the Company’s Board of Directors (the “Special Committee”).

15. Legal Proceedings

On December 3, 2003 a shareholder class action was filed against the Company and certain of its officers and directors in the Delaware County Court of Common Pleas seeking the recovery of damages and other remedies caused by the alleged violation of fiduciary duty relating to the NCO Transaction. The suit alleges that the defendants favored interests other than those of the Company’s public shareholders and failed to take reasonable steps designed to maximize shareholder value with respect to the NCO Transaction. At this time it is too early to form a definitive opinion concerning the ultimate outcome. Management believes that the case is without merit and plans to vigorously defend itself against this claim.

From time to time, the Company is involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcome of such actions will not have a material adverse effect on the Company’s financial position, results of operations, or liquidity.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

References to a given fiscal year in this Quarterly Report on Form 10-Q are to the fiscal year ending on September 30th of that year. For example, the phrases “fiscal 2004” or “2004 fiscal year” refer to the fiscal year ending September 30, 2004. References to “RMH,” “we,” “us,” and “our” refer to RMH Teleservices, Inc., a Pennsylvania corporation, and, when applicable, its subsidiaries.

Safe Harbor For Forward-Looking Statements

Statements about our outlook and other statements in this Quarterly Report other than historical facts are forward-looking statements. These statements are subject to the risks and uncertainties that may change at any time, and, therefore, actual results may differ materially from expected results. Forward-looking statements include information about possible or assumed future financial results for the Company and usually contains words such as “believes,” “intend,” “expects,” “anticipates,” or similar expressions. The risks and uncertainties that may affect the operations, performance, development and results of our business include, but are not limited to, the following, some of which are described more fully in the Annual Report on Form 10-K filed with the SEC on January 22, 2004 under the caption “Risk Factors”: