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Index to Financial Statements

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934.

(Mark One)

OR

Commission file number: 0-14315

AEGIS COMMUNICATIONS GROUP, INC.

(Exact Name of Registrant as Specified in its Charter)

8001 Bent Branch Drive, Irving, Texas 75063

(Address of Principal Executive Offices, Zip Code)

Registrant’s telephone number, including area code: (972) 830-1800

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

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 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. ¨

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of the last day of the registrant’s most recently completed second fiscal quarter was approximately $2.2 million.

As of April 13, 2005, 660,053,022 shares of the registrant’s Common Stock were outstanding, of which 475,600 were held in Treasury.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s 2005 Proxy Statement and Notice of Annual Meeting of Stockholders are incorporated by reference into Part III of this report.

Index to Financial Statements

PART I

GENERAL

Aegis Communications Group, Inc. is a provider of multi-channel customer relationship management, including database management, analytical services and market intelligence to progressive companies. In this report, the terms “Company,” “we,” “us” or “our” mean Aegis Communications Group, Inc. and all subsidiaries included in our consolidated financial statements.

Our primary business is customer relationship management. Our customer relationship management, or CRM service offerings include: web-enabled and telephone-based customer service, help desk, and customer acquisition and retention; multilingual communications programs; client service center facilities management; order provisioning, which is the transferring of data into our clients’ billing systems and customer records; up-selling and cross-selling of products and services; and database management. Our web-enabled customer care capabilities include online customer-initiated call back, automated e-mail response, live web text chat, pushed content web sessions (in which we send, or “push”, web pages to the customer from anywhere on the Internet), web self-service, fax/e-mail on demand and online management reporting.

We are in the planning stages of expanding our primary business model to include business process outsourcing services. We intend to leverage our expertise and capabilities in customer relationship management, analytics and database management as a platform from which to expand into business process outsourcing. In this regard, we intend to make strategic investments in technology and to increase our offshore delivery capabilities, principally in India. We plan to expand our operational capabilities in India, by pursuing strategic partnerships with Essar Group Companies with presence in steel, oil & gas, shipping, logistics and telecommunications services. Essar Global Limited is the majority stockholder of Aegis Communications Group and is providing resources and assistance directly and through their wholly owned subsidiary, Aegis BPO Services Limited. There is no assurance that we will be successful in these plans.

Aegis Communications Group, Inc. is a Delaware corporation originally organized in that state in 1985. Our trading symbol is “AGIS”. Aegis Communications Group, Inc. was formerly known as ATC Communications Group, Inc., or ATC. On July 9, 1998 ATC completed the acquisition of IQI, Inc., a New York corporation, or IQI. Effective upon the merger, we formally changed the company name to Aegis Communications Group, Inc. Our headquarters are located at 8001 Bent Branch Drive, Irving, Texas 75063. Our telephone number is (972) 830-1800 and our web-site address is www.aegiscomgroup.com

SERVICES AND STRATEGY

Our immediate objective is to strengthen our position as a premier high-quality, full service provider of outsourced CRM solutions to progressive companies seeking a high level of customer interaction. We believe that web-enabled services, inbound CRM services and non-voice support programs possess the greatest long-term growth potential in our industry, but that providers demonstrating competence in outbound acquisition services will continue to have growth opportunities. For the year ended December 31, 2004, approximately 76% of our revenues were generated by inbound CRM solutions and non-voice services and 24% from outbound CRM solutions. In comparison, for the year ended December 31, 2003, approximately 74% of our revenues were generated by inbound CRM solutions and non-voice services and 26% by outbound CRM solutions; and for the year ended December 31, 2002, approximately 81% of our revenues were generated by inbound CRM solutions and non-voice services and 19% by outbound CRM solutions.

We develop and implement customized multi-channel contact programs designed to strengthen our clients’ relationships with their customers while reducing or eliminating their costs to serve. Our CRM solutions consist of telephone-based marketing and customer service programs (teleservices) as well as web-based capabilities, which comprise handling a variety of customer contacts through our clients’ Internet web sites, and our phone-based customer service offerings.

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We design, manage and conduct telecommunications-based CRM programs scaled to the client’s needs which feature live, knowledgeable customer service representatives, or CSRs, provided on an outsourced basis to corporations in a wide variety of industries.

Inbound CRM solutions require answering incoming telephone calls or web-initiated queries and responding to customer service requests. To illustrate, when one of our client’s customers requests an interaction (e.g., places a call to a toll-free “800” customer service number, sends an e-mail to our client, or initiates an online call back or text chat at a client’s web-site) it is directed to one of our client service centers and answered by one of our trained CSRs. The CSR is able to handle the customer’s inquiry because, in most instances, the customer’s account information has been transferred, instantaneously, to the CSR’s computer screen via our system’s links to the client’s customer database. At the end of the interaction, the customer’s record is automatically updated in the client’s database with any new information.

Outbound CRM solutions involve making outgoing telephone calls, usually to market a client’s products or to acquire new customers for the client. Our Outbound capabilities include predictive dialing, preview or power dialing and manual dialing. The appropriate technology is utilitized for business-to-business or business-to-consumer engagements. We subscribe and adhere to the federal and state do not call legislation. We are actively involved in industry compliance organizations to maintain current on do not call requirements. We do not engage in any form of outbound calling that uses computerized voice presentations or makes unsolicited financial requests, nor are we engaged in the “900” number business.

Our operations are technology driven through our advanced data and communications systems, which permit real-time interface with our clients’ host systems via the Internet or dedicated networks. We also provide a suite of web-enabled customer care capabilities that includes multi-channel capable workstations able to handle a variety of customer interactions, including those originating from the Internet. Through the web-enabled services, we can assist our clients by providing real-time, web-based data that tracks customers’ interactions with a client’s web-site, allows us to handle all aspects of responding to client e-mail from customers, provides a secure chat window to conduct one-on-one chat with client customers, initiates live voice conversations when a client customer clicks an icon on a client’s web-site, and performs other functions.

We endeavor to establish long-term relationships with clients that utilize telecommunications and/or the Internet as important, ongoing elements in their core CRM strategies. These arrangements usually require us to develop unique software systems for the client. By offering high quality, customized, flexible and fully-integrated customer contact management services designed to improve quality, productivity and effectiveness, we can enhance and add value to our clients’ existing marketing and customer service programs.

BUSINESS OPERATIONS

As of December 31, 2004, we operated or managed approximately 2,700 production workstations in six client service centers. A workstation includes a cubicle, personal computer with monitor and keyboard, a headset and an automatic call distributor console. All of our facilities are located in the continental United States. We also have strategic alliance partners we use to provide services offshore of the continental United States.

Our current technology platform delivers custom CRM solutions based on a browser-based application environment and primarily Avaya Definity telecommunications switches interfaced with multiple servers running on UNIX or Microsoft 2000 Advanced Server platforms. The data system is based on an open architecture design supported by sophisticated relational databases. This open architecture design allows us to interface seamlessly, and in real-time, with our clients’ host systems. It also provides the flexibility that enables us to deliver solutions rapidly to our clients’ marketing and customer service needs. Outbound calling is enhanced through our proprietary dialer technology leveraging the Avaya platform. Our operations are further enhanced by the use of universal workstations that can automatically handle either inbound or outbound call activity. Such technology permits us to offer productivity enhancements associated with this “call blending” activity.

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The quality of our people is critical to our success. Because our customer service representatives deal directly with our clients’ customers and sales prospects, we place a heavy emphasis on their training and the quality control process. Our training facilities are equipped with workstations for live role-playing. We employ a staff of trainers dedicated to teaching the details of client programs to our customer service representatives. The training curriculum includes instruction on the client’s sales or service process, study of the features and benefits of the product and service, intensive role-playing and information about both our and the client’s philosophy and culture. We conduct both initial and follow-up training for all representatives that, depending on the complexity of the client program, can take up to six weeks to complete. Our training curriculum is developed by professional experts in adult learning methods and includes a “hands-on” personal computer lab experience. This attentiveness to training enables our representatives to perform an assortment of duties when handling inbound and outbound calling programs. Along with our clients, we monitor our marketing and customer service representatives to insure strict compliance with the client’s quantitative and qualitative standards. In many instances, quality is evaluated and communicated on a daily basis.

INDUSTRY AND COMPETITION

Several trends continue to shape the teleservices industry. Many U.S.-based companies that have a history of outsourcing customer sales and service are moving certain portions of their business to non-U.S. locations to take advantage of labor arbitrage available in many foreign markets. Additionally, downturns in overall transaction volumes due to general economic conditions and transition of many traditional phone-based activities to the Internet have led many of these same companies to redirect transactions to existing, in-house call centers with excess capacity and away from outsourced CRM providers. We continue to believe, however, that an overall long-term focus on business fundamentals will lead companies to maintain or increase their outsourcing activities, especially when considering the favorable impact on cost structures made by moving to a variable outsourced-cost model from a fixed cost model to providers with expanded services. Client spending on technology has slowed with the economy, and outsourced providers offer a viable alternative, since the significant investment required to automate these transactions has already been made by companies in the outsourced CRM market. We believe clients will require more efficiency from their CRM partners in the form of performance-based pricing that further aligns the interests of the client and of the service provider. In addition, due to excess capacity in the industry, we believe we can continue to expect some firms to offer below market pricing of their services in an attempt to gain market share and utilize excess capacity.

We compete in a market that provides progressive companies the opportunity to take advantage of the latest advances in processes and technology across multiple communications channels to drive more effective and efficient means of customer interaction. Customer contact services are spread across a broad spectrum of competitors, including a client company’s own in-house call center and numerous third-party providers like us. Our market, which is extremely competitive, ranges from very small firms offering specialized applications to larger, full-service companies with multiple, high-volume call centers, including APAC Customer Services, Inc., Convergys Corporation, ICT Group, Inc., RMH Teleservices, Inc., Sitel Corporation, Sykes Enterprises, Inc., Teleperformance USA, Inc., TeleTech Holdings, Inc. and West Corporation.

We believe we compete primarily on the basis of:

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Index to Financial Statements

MARKETING OF SERVICES

We differentiate from our competitors by providing a unique blend of strategic and tactical resources to meet the broad demands of our clients. To reinforce the value of our approach, we place an emphasis on enhancing the results of each engagement we manage on behalf of our clients, which we describe as Customer Value Management, or CVM. We seek to develop and maintain long-term profitable relationships with our clients, whereby we provide as much value to the client as they provide to us. We focus our marketing and sales efforts on progressive companies in growing markets that utilize integrated customer services to more effectively acquire and retain customers. We believe those organizations represent the greatest potential for us to deliver a differentiated service that takes advantage of our total resources, including our skilled employees and technology platform. This approach will ultimately provide the greatest opportunity for stable and recurring revenue growth. We obtain new business through our dedicated sales force, existing relationships with current clients, client referrals and by responding to requests for proposals.

GOVERNMENT REGULATION

Both federal and state governments regulate our business. The Federal Communications Commission (“FCC”), rules under the Federal Telephone Consumer Protection Act of 1991 prohibit telemarketing firms from initiating telephone solicitations to residential telephone subscribers before 8:00 a.m. or after 9:00 p.m., local time, and prohibit the use of automated telephone dialing equipment to call certain telephone numbers. In addition, the FCC rules require telemarketing firms to maintain a list of residential consumers who have stated that they do not want to receive telephone solicitations called Do Not Call lists (“DNC”), and to avoid making calls to such consumers.

The Federal Telemarketing and Consumer Fraud and Abuse Protection Act of 1994 broadly authorized the Federal Trade Commission (“FTC”), to issue regulations prohibiting misrepresentation in telephone sales. The FTC issued its telemarketing sales rules (“TSR”), which became effective December 31, 1995. Generally, these rules prohibit abusive telephone solicitation practices and impose disclosure and record keeping requirements on telemarketers. Both the FCC and the FTC introduced new amendments to their respective Acts during 2003, which placed further restrictions on the use of automated telephone dialing equipment relative to abandoned calls and require enhanced record keeping. These amendments also introduced a national do not call list that became effective in 2003 and require all telemarketing firms to suppress consumer records found on the national list. In January 2004, the requirement to deliver a caller id with name and number became effective. The advent of number portability between landlines and wireless telephone numbers in November 2003 created confusion with reference to the prohibition of telemarketing calls to wireless numbers. No clearinghouse is available to date to provide a suppression list of recently ported numbers, making a good faith effort the only safe harbor available to the telemarketing industry.

In addition to these rules and regulations, bills are frequently introduced in Congress to regulate the use of credit information, as well as new proposals to further refine the DNC and TSR regulations and restrict predictive dialer use. We cannot predict whether this legislation will be enacted and what effect, if any, it would have on our industry.

Most states have also enacted or are considering legislation to regulate telephone solicitations. For example, telephone sales in certain states are not final until a written contract is delivered to and signed by the buyer, and then the contract may be canceled within three business days. At least one state also prohibits telemarketers from requiring credit cards as a method of payment, and several other states require certain telemarketers to obtain licenses and post bonds. For instance, in certain states persons selling insurance products or mortgage services are required to be licensed by various state insurance commissions and participate in regular continuing education programs. Some industries we serve are also subject to various state government regulations with regard to selling practices and consumer disclosure requirements.

We specifically train our representatives to conduct calls in an approved manner and believe we are in compliance in all material respects with all federal and state regulations. There can be no assurance, however, that we may not be subject to regulatory challenge for a violation of federal or state law by any of our clients or other third parties.

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Index to Financial Statements

REVENUES AND SEASONAL NATURE OF BUSINESS

The timing and size of our clients’ marketing programs, which are impacted by unique seasonal situations and subject to variations in underlying economic conditions, directly affect our revenues. Our expenses are also directly affected by these factors. We cannot predict the seasonal variations in our clients’ demands for our services.

PERSONNEL AND TRAINING

Our business depends on people. We place a high priority on hiring, training, retaining and managing good people. We attempt to locate our client service centers where the cost of labor is relatively low and there are sufficient qualified and motivated workers to meet our needs. We do this to maintain lower operating costs while maintaining a high quality workforce generating a manageable turnover rate. Employee turnover rates, while manageable, exceed those experienced in most other industries and the cost of attrition training remains a significant cost of operation. We offer internal educational and professional development opportunities for our supervisors and managers, and have processes that allow associates to self identify next level opportunities as efforts to help mitigate turnover.

RELIANCE ON TECHNOLOGY AND COMPUTER SYSTEMS

We rely on specialized telecommunications and computer technology to meet our clients’ needs. We will need to continue to select, invest in and develop new and enhanced technology to remain competitive. Our future success will also depend on our operational and financial ability to develop information technology solutions that keep pace with evolving industry standards and changing client demands. Our business is highly dependent on our computer and telephone equipment and software systems, the temporary or permanent loss of which could materially and adversely affect our business.

RELIANCE ON MAJOR CLIENTS

Historically a few major clients have accounted for the bulk of our revenue. In 2004, four clients each accounted for over 10% of our revenues. AT&T, our largest telecommunications client, accounted for 26%, and Qwest Communications International (“Qwest”), accounted for approximately 15% of our revenues. Trilegiant, our largest membership services client, accounted for 10%, while American Express, our largest financial services client, was responsible for approximately 11% of our revenues. In 2003, five clients each accounted for over 10% of our revenues. AT&T, our largest telecommunications client, accounted for 26%, and Qwest, accounted for approximately 14% of our revenues. Trilegiant, our largest membership services client, accounted for 15%, while American Express, our largest financial services client, and Cablevision, our largest cable television client, were each responsible for approximately 11% of our revenues. Revenues from AT&T are derived from separate contractual arrangements with several different business units of AT&T. In 2004, AT&T reorganized and curtailed its marketing programs, negotiated price reductions in certain of its programs and significantly reduced its volume of business with its outsourced CRM solutions vendors, including us, all of which negatively affected our revenues. The decline in revenue from Qwest Communications year over year was due to a reduction in the volume of outsourced business by the client. In the third quarter of 2004, AT&T decided to withdraw their marketing efforts in the consumer long distances market. This adversely impacted us, forcing the closure of two centers located in California, as well as taking our New York City center dark. Although we continue to improve and grow our existing customer relationships, it is also our goal to reduce our dependence on a few major clients by broadening our customer base in order to mitigate adverse impacts and business risk that unilateral decisions can have on our business. See Item 7 “Revenue Concentration.”

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Index to Financial Statements

QUALITY ASSURANCE

Aegis maintains a reputation for quality service. This reputation is important because our services involve direct contact with our clients’ customers and sale prospects. To that end, our representatives are monitored to ensure that they comply with the client’s guidelines and deliver quality and efficient service. We regularly measure the quality of our services by benchmarking factors such as customer satisfaction and call handling metrics such as sales per hour, service levels and abandoned calls. Our information systems enable us to provide clients with real time reports regarding the status of an ongoing campaign. We also transmit summary data and captured information electronically to our clients. Access to this data enables our clients to modify or enhance an ongoing campaign to improve its effectiveness.

Our client service representatives deal directly with our clients’ customers and prospects. Thus, Aegis places a heavy emphasis on training and quality control processes. We dedicate a training staff at each facility to conduct both primary and recurrent training for all client service representatives. We employ a quality control staff at each facility that measure quality on both a quantitative and qualitative basis. We believe this attentiveness to training and customer service enables our client service representatives to perform a variety of highly complex and proprietary functions for our clients.

EMPLOYEES

As of December 31, 2004, we employed 2,172 persons, including 1,732 client service representatives. We believe our relationship with our employees is generally good.

Our principal executive offices and operational and administrative headquarters are located in a 52,866 square foot leased building in Irving, Texas. We also lease an additional 1,000 square feet in Tucker, Georgia for fulfillment services. This lease expires on September 30, 2007. All of our facilities are occupied pursuant to various lease arrangements.

In 2004, we closed six call centers, each of which handled a mix of inbound and outbound call operations. Three call center closures (Terra Haute, IN – 3^rd quarter 2004; Los Angeles, CA – 4^th quarter 2004; and St. Joseph, MO – 4^th quarter 2004) involved selling the assets, relocating assets to a remaining call center, or placing the assets in storage. In all these locations the existing lease was terminated. Three other call centers (El Segundo, CA – 4^th quarter 2004; New York, NY – opened 3rd quarter 2004 and closed 4^th quarter 2004; and Rocky Mount, NC – 4^th quarter 2004) were closed but still have all the equipment and furniture, and can be re-opened with little notice. These assets are considered to be operational by management and continue to be depreciated and amortized. The remaining lease obligations with respect to these leases expire as follows – CA in May 2008, NY in July 2011, and NC in October 2007. Additionally, during 2004 an office in Paramus, NJ (2^nd quarter 2004) was closed and all assets sold. The lease expires in October 2005. We are attempting to sublease the locations in El Segundo, CA, New York, NY, Rocky Mount, NC and Paramus, NJ. There can be no assurance that we will be able to sublease those locations. An office in Atlanta, GA (4^th quarter 2004) has been closed and sublet, with the existing lease expiring in October 2005.

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Index to Financial Statements

We believe that our operational facilities are representative of our strategic site selection, which focuses on locating client service centers in markets we believe offer lower wage rates, better employee retention and generally lower operating costs. As of December 31, 2004, we performed our services in the facilities listed below:

We believe we can extend the leases at our operational locations or relocate those facilities on terms comparable with our current lease obligations. While our current capacity is sufficient to handle our current production demands, revenue growth may warrant additional client service center facilities.

In addition to our operational domestic facilities, we are actively evaluating non-U.S. locations as the next phase of the site migration program. We have partnered with a leading business processing outsourcer with extensive operations in India, to offer a full suite of offshore CRM and business process outsourcing, or BPO, services to clients in North America. We began our alliance in 2002 by successfully collaborating on an engagement for a major telecommunications provider. The CRM services are provided by our facilities in North America while the offshore resource provides complex BPO services in its facilities located in India.

We are party to certain legal proceedings incidental to our business. Certain claims arising in the ordinary course of business have been filed or are pending against us. Management believes that the ultimate resolution of such contingencies will not have a material adverse effect on the consolidated financial position or consolidated results of operations of Aegis.

On July 18, 2003, two of our public stockholders, John Beggi and Steven Stremke, filed complaints in the District Court of Dallas County, Texas against the Company and the individual members of its Board of Directors. The complaints alleged, among other things, that the then-proposed acquisition of the Company by AllServe was unfair to our public stockholders and that the defendants breached their fiduciary duties to our public stockholders in connection with the then-proposed acquisition. The plaintiffs are seeking a class action in each complaint and are seeking to enjoin the transaction with AllServe. The parties have executed a settlement agreement and the court has requested a telephonic hearing in April to discuss disposition of the case. If the Settlement Agreement is not finalized we intend to continue to vigorously defend.

Additionally, on November 12, 2003, AllServe and its wholly-owned subsidiary AllServe Systems, Inc. filed suit against us in the Court of Chancery of the State of Delaware. Based on the complaint, the plaintiffs are apparently seeking an injunction to prevent us from closing the transaction with Deutsche Bank and Essar, which in our view has already been closed. The complaint also seeks to specifically enforce our merger agreement with AllServe. Alternatively, the complaint seeks payment of the $1.1 million break-up fee as well as other monetary damages that, according to AllServe, exceed $50 million. We deny that AllServe is entitled to any injunctive relief, payment of the break-up fee or any other damages or payments. The $1.1 million was accrued at December 31, 2003 to a reserve for the benefit of the subordinated debt holders. Payment to the sub debt holders is contingent upon the outcome of the Allserve litigation. If certain fees are paid to Allserve, this will reduce the amount paid to the subordinated debt holders up to $1.1 million. At this time it is not possible to accurately predict the outcome of this lawsuit. We intend to contest this lawsuit vigorously.

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NONE

PART II

MARKET INFORMATION

Our common stock, $.01 par value per share, currently trades on the National Association of Securities Dealers’ Over-the-Counter Electronic Bulletin Board (“NASDAQ OTC BB”) under the symbol “AGIS.” As of December 31, 2004 there were 660,053,022 shares of our common stock outstanding held by approximately 760 holders of record.

The table below lists the range of high and low bid prices for our common stock as reported by the NASDAQ OTC BB for each full quarterly period within the two-year period ended December 31, 2004 and the subsequent interim period. These quotations reflect inter-dealer prices, without retail markup, markdown, or commission, and may not necessarily represent actual transactions.

DIVIDENDS

During the two year period ended December 31, 2004 and the subsequent interim period, we did not declare a cash dividend on our common stock. We have accrued an annual dividend of $0.36 per share on 29,778 outstanding shares of our Series B Preferred Stock. Our Series D and E Preferred Stock accrued dividends quarterly at a rate of 15% per annum. In connection with the Deutsche Bank/Essar transaction on November 5, 2003, all of the outstanding shares of Series D and E Preferred Stock were either converted into Common Stock or cancelled, resulting in no outstanding shares of Series D and E Preferred Stock. Our Series F Preferred Stock accrued dividends daily at a rate of 9.626% per annum. In connection with the Deutsche Bank/Essar transaction on November 5, 2003, the then-outstanding shares of Series F Preferred Stock were converted into Common Stock. Under the terms of the Company’s Secured Promissory notes held by Deutsche Bank and Essar, we are prohibited from paying cash dividends on our common stock and preferred stock until all of the noteholder’s commitments had been met. See “Notes to Consolidated Financial Statements 6. Deutsche Bank/Essar transaction.”

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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

IQI Plan

In November 1996, IQI, Inc. established the 1996 Incentive Stock Option Plan, or the IQI Plan. The IQI Plan provides for the award of incentive stock options to directors, officers, key employees and members of Thayer’s Advisory Board. A Compensation Committee, as established by IQI’s Board of Directors, administered the IQI Plan. These options are intended to qualify as incentive stock options, or ISOs, under the Internal Revenue Code or non-statutory stock options, also referred to as NSOs, which are not intended to qualify. IQI reserved 3,929,774 shares of common stock for issuance under the IQI Plan. Options granted pursuant to the IQI Plan are exercisable for ten years from the date of the grant subject to vesting schedules.

ATC Plans

Prior to the merger with IQI, ATC shareholders approved two stock option plans, known as the ATC Plans, which provided for the granting of options to purchase up to 5,000,000 shares of common stock to key employees, officers and directors of ATC and its operating subsidiary. At the date of the IQI Merger, options to purchase 4,447,000 shares of common stock granted pursuant to the ATC Plans were outstanding. Options granted pursuant to the ATC Plans are exercisable for ten years from the date of the grant subject to vesting schedules.

1998 Plan

In September 1998, we initiated the Aegis Communications Group, Inc. 1998 Stock Option and Restricted Stock Plan, or the 1998 Aegis Communications Group Plan, which provides for the granting of options to purchase up to a maximum of 12,000,000 shares of common stock to key employees, officers and directors of us and our operating subsidiaries. Options granted pursuant to the 1998 Aegis Communications Group Plan are exercisable for ten years from the date of the grant subject to vesting schedules. We may grant additional options under the 1998 Aegis Communications Group Plan at any time prior to September 2008. As a result of the adoption of the 1998 Aegis Communications Group Plan, we will not grant any future options to purchase shares of common stock pursuant to the IQI Plan or the ATC plans.

Effective as of August 21, 2003, in connection with the anticipated AllServe transaction, all outstanding options to purchase capital stock of the Company or its subsidiaries were terminated and released by their holders, with an aggregate cost to the Company for obtaining those releases of $0.05 million. Effective as of November 5, 2003, all warrants to purchase capital stock of the Company that were outstanding prior to the transaction with Deutsche Bank and Essar were terminated and released by their holders. If the Company had elected to recognize compensation cost for the issuance of options to employees of the Company based on the fair value at the grant dates for awards consistent with the method prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123 Accounting for Stock Based Compensation, $1.5 million in unearned stock compensation expense at the date of cancellation would have been recognized.

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The table below sets forth certain of our selected consolidated financial data for the last five years. This information should be read in conjunction with Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes to the consolidated financial statements.

The company manages its operations by driving the metrics on revenue productivity per employee direct margins, billing to payment ratio (indicative of utilization) and capacity utilization at each center. These measurements are further drilled down at the center and client program level to assess and realize yield improvement opportunities.

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RESULTS OF OPERATIONS

The following table contains certain statement of operations data as a percentage of revenues for the periods indicated:

Executive Overview

The Company faced two significant categories of challenges that materially affected our financial results for the year ended December 31, 2004. One of these was “strategic direction,” and the other was “revenue decline.” Management believes that in the course of addressing these challenges, we are in the process of refocusing the Company and executing on a turnaround strategy designed to make the Company profitable and build stockholder value.

Strategic Direction. Our challenges in the area of strategic direction had roots in the Deutsche Bank/Essar transaction that closed on November 5, 2003. As a result of that transaction, which included a Stockholders Agreement executed by our majority stockholders, control of the Company’s Board of Directors shifted to Deutsche Bank and Essar. Within five months of the Deutsche Bank/ Essar transaction, the Company experienced significant turnover in the ranks of senior management, and operated for several months with transitional management. Deutsche Bank and Essar reached an agreement in August of 2004, in which Essar agreed to purchase a substantial portion of Deutsche Bank’s equity and debt positions in the Company, in addition to assuming effective control of our Board. The Company’s Board and its senior management were aligned in October of 2004 with the election of new directors and executive officers, who began moving aggressively to provide the Company with new strategic focus. Because the Company’s renewed strategic focus came late in the 2004 fiscal year, our financial performance for the 2004 fiscal year was impaired by insufficient direction throughout much of the reporting period.

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Declining Revenues. Our financial performance in the 2004 fiscal year was significantly affected by declining revenues, with those declines attributed generally to reduced demand for the Company’s services from a handful of key customers. Some of the reduced demand may be attributable to the failure of the Company’s customers to see clear strategic direction, but more importantly, we believe that the circumstances leading to the most dramatic reductions in revenue in the 2004 fiscal year were functions of the industries we serve, and specific to particular clients in those industries. For example, AT&T, the Company’s largest customer, announced its withdrawal from the consumer long-distance industry segment, leading to a steep decline in AT&T’s demand for the Company’s services beginning in July 2004. In addition, Cablevision, our largest customer in the cable industry, decided in the fourth quarter 2003 to wind down and discontinue its contract call services and utilize their available in-house capacity.

Turnaround Challenges: Revenue Stabilization, Cost Rationalization and Liquidity Management. When coupled with our transitory management situation, our sharp decline in revenues put significant pressure on us to efficiently manage a proportionate reduction in variable overhead expenses while maintaining the quality of client service. Beginning with the realignment of our Board and new senior management team in October 2004, the Company took aggressive steps to stabilize our revenue position by immediately communicating to our clients our new leadership focus and by addressing client concerns in the areas of service quality. Towards this end, in the fourth quarter of 2004 and through the subsequent interim period, our senior management, as well as several members of the our Board, have met with our largest customers to reassure those clients that the Company has new strategic direction and is committed to continue to provide customer service of the highest quality.

In addition to stabilizing its existing client portfolio, management has been aggressively pursuing new business to improve the Company’s revenue situation. In the course of meeting with our key customers, management concluded that the Aegis brand is well-regarded in the markets in which we compete, and that our brand provides a platform from which to rebuild our client portfolio. Management believes that a recent string of successes in developing new business and expanding current client engagements is attributed in part to the Company’s strong brand and reputation for exceptional client service. During 2004 and the subsequent interim quarter, the Company has successfully entered into services contracts with five new customers in the utility, telecommunications and financial services industries. In pursuing these new accounts, management is mindful of the risks in concentrating too may revenue accounts in one industry, and have accordingly sought to diversify the industry sectors of the Company’s new engagements to the greatest extent possible.

While shoring up our client relationships and revenue position, management worked to bring variable costs in line with reduced revenues and deal with the liquidity concerns stemming in part from that mismatch in revenues and expenses. As part of our cost-rationalization effort, we closed six call centers in 2004. Management reviewed and took appropriate actions to mitigate and contain risks in certain outbound programs priced on a pay for performance basis, where our revenue is tied directly to commission-type sales received by our customers. Unprofitable programs were canceled and closed, while profitable programs were consolidated into three centers to provide enhanced management attention to detail and operational scale. We believe that our cost-rationalization efforts will position the Company to achieve a positive cash flow by June 2005.

The Company’s sharp decline in revenues during 2004 also caused serious difficulties in financing ongoing operations. Under our credit facility with Wells Fargo Foothill (“Foothill”), the Company’s borrowing base was determined by the lesser of (i) the sum of a percentage of eligible billed accounts and a percentage of the amount of eligible unbilled accounts or (ii) an amount equal to the collections on accounts receivable for the past 60 days, less the sum of certain reserves established by Foothill. As the Company’s revenues declined, so too did the Company’s accounts receivable, resulting in an acute contraction in credit financing availability under the Foothill credit facility. Furthermore, the Company’s declining revenue situation resulted in its failure to meet covenants regarding earnings before interest, taxes, depreciation and amortization, or EBITDA, that are common to the Wells Fargo Foothill Loan and Security Agreement and the Amended and Restated Promissory Notes held by Deutsche Bank and Essar. The Company failed to meet these EBITDA covenants in the months beginning in February 2004 through September 2004, resulting in defaults under each of these agreements. Although the Company was able to execute waivers and amendments of these agreements for the first, second and third quarters of 2004 and cure all outstanding defaults for each interval, the Company’s inability to meet its EBITDA covenant requirements under those agreements underscores the Company’s tight credit situation during the 2004 fiscal year, continuing into the subsequent interim period. The impact of the Company’s constrained credit availability on our critical liquidity needs was particularly acute in late October of 2004, when the Company was able to turn to Essar for a short term loan in the amount of $1.8 Million, of which $0.8 Million has already been repaid.

13

Index to Financial Statements

To address the Company’s credit financing challenges and related impact on liquidity, the Company’s management has aggressively managed its receivables cycle time, reducing the Company’s average days receivable from 74 days to 50 days. Additionally, the Company has successfully replaced the Foothill credit facility with an alternative credit arrangement through Rockland Credit Finance LLC (“Rockland”). In an effort to improve our balance sheet we are in discussion with Essar regarding a proposed transaction in which the Company will sell additional shares of Common Stock to Essar in exchange for Essar’s cancellation of all of the Company’s current indebtedness to Essar, totaling approximately $17.8 Million dollars. The Company has formed a special committee comprised of independent members of the Board of Directors to consider this transaction, negotiate with Essar, and potentially approve the transaction on terms that are in the best interests of the Company.

Refocus of the Company. After its installation in October 2004, the Company’s new senior management team conducted a thorough review of the Company and our competitive position and determined, with the support of the Company’s Board of Directors, that the Company should be refocused by adjusting our core service offerings and supporting operations. Accordingly, the Company will gradually be refocused from a predominantly domestic provider of call services, customer relationship analytics and database management to a provider of business process outsourcing, including capabilities in call services, customer relationship analytics and database management. In the course of its strategic refocusing, the Company will leverage its brand and expertise in inbound and outbound call management to expand into outsourcing business processes in industries including utilities; telecommunications, logistics, utilities, automotive and financial services. To support its expansion into the business process outsourcing arena, the Company intends to adjust its core operations by establishing significant offshore capabilities in India to take advantage of lower labor costs in that country, in addition to making capital investments in a new state of the art information technology platform designed for maximum scalability and less customization. These plans are still largely in the planning stage, although the Company has taken some affirmative steps forward. For example, effective February 14, 2005, the Company reached an agreement with Aegis BPO Services Limited, a wholly owned subsidiary of Essar, for the provision of call center and business process outsourcing services to be provided in India.

In addition to its plans to enter into the business process outsourcing industry, the Company has developed and begun to implement plans to compete in Spanish-speaking markets. In the fourth quarter of 2004, the Company executed an agreement with Hispanic Global to provide call services capabilities in Argentina. Management believes that by adding Spanish call services capabilities, the Company can immediately begin to compete in Spanish-speaking markets in its core in-bound and out-bound call service businesses and eventually leverage those capabilities to provide business process outsourcing in those markets.

Year Ended December 31, 2004 vs. Year Ended December 31, 2003

We recognized a net loss applicable to common shareholders of $22.2 million or $0.07 per share for the year ended December 31, 2004, versus a net loss applicable to common shareholders of $19.1 million or $0.33 per share in 2003. Excluding net income from discontinued operations, a gain on sale of the related assets, a gain on the early extinguishment of debt and the cumulative effect of a change in accounting for goodwill, we incurred a net loss from continuing operations of $22.2 million or $0.07 per share for the period ended December 31, 2004, as compared to a net loss from continuing operations of $10.9 million or $0.33 per share for the period ended December 31, 2003.

Revenues. For the year ended December 31, 2004, revenues from continuing operations were $94.3 million versus $139.9 million in the prior year, a decrease of $45.6 million, or 32.6%. The decrease in revenues versus the year ended December 31, 2003 resulted from a number of factors. First, an inbound contract with a cable services provider that expired in the fourth quarter of 2003 was not renewed by the client as they made a decision to consolidate their customer service into their available in-house capacity. This expired inbound contract accounted for approximately 33% of the decrease for 2003 vs. 2004. Second, the decision at the end of June 2004 by AT&T to discontinue its outbound acquisition services accounted for a majority of the 26% decrease in revenue billings on their campaigns 2003 vs. 2004. Additionally, another of our telecommunications clients (who is one of our five largest clients) reduced transaction volumes and a client in the membership services industry ramped down a campaign in the first quarter of 2004. Revenues for the third quarter of 2004 were also negatively impacted by the hurricanes experienced in the southeastern part of the country.

14

Index to Financial Statements

Revenue Mix. Inbound CRM and non-voice services continued to be responsible for the majority of our revenues in 2004. Together those two service areas accounted for approximately 75.6% of our revenues, as compared to 74.1% in 2003. Outbound CRM revenue for 2004 accounted for approximately 24.4% as compared to 25.9% in 2003. The decrease in outbound CRM revenues for 2004 is due to reduced volume for existing client programs.

Revenue Concentration. We are dependent on several large clients for a significant portion of our revenues. The loss of one or more of these clients or a significant decline in business with any of these clients individually or as a group, or our inability to collect amounts owed to us by such clients, could have, and have had a material adverse effect on our business. An example of this is the decision by AT&T at the end of June 2004 to discontinue its outbound acquisition services as of August 1, 2004. For the year ended December 31, 2004, four customers each were responsible for at least 10% of our revenues and together accounted for approximately 63% of our revenues as compared to 66% for the prior year comparable period. Our revenue concentration for these four customers for the years ended December 31, 2004 and 2003, plus that of Cablevision, from whom we had no revenue in 2004, was as follows:

Our revenues are also concentrated within the telecommunications industry segment. The telecommunications industry was under significant economic pressures throughout 2003 and continued to be in 2004. That revenue concentration creates an additional level of risk to the Company in terms of the continuity of this revenue and the ultimate collectibility of related accounts receivable.

The Company seeks to secure recurring revenues from long-term relationships with companies that utilize customer contact strategies as integral, ongoing elements in their CRM programs. In addition to providing services on an outsourcing basis, in which we provide all or a substantial portion of a client’s CRM needs, we also continue to perform project-based services for certain clients. Project-based services, however, are frequently short-term and there can be no assurance that these clients will continue existing projects or provide new ones in the future.

In looking to meet the growing demand in the industry for lower cost, offshore-based operations, we have been partnering with WNS North America, Inc., a leading business processing outsourcer with extensive operations in India. However, effective February 14, 2005, we signed an agreement with Aegis BPO Services, Limited, a subsidiary of Essar, to provide additional outsourcing alternatives to our clients for our CRM needs. Offshore capacity provides clients with a highly educated workforce, lower costs and 24-hour coverage. The growth of such offshore-based CRM has outpaced domestic growth in recent years. The Company is attempting to become competitive for this segment of the industry as part of its strategy to increase revenues. However, there can be no assurance that the Company will be successful in competing for this segment of business.

15

Index to Financial Statements

Cost of Services. For the year ended December 31, 2004, cost of services decreased $31.3 million from $99.7 to $68.4 million compared to 2003. As a percentage of sales, cost of services rose slightly over the same period, from 71.2% to 72.3%. The total decrease in cost of sales experienced during the year is due to the reduction in wage expense associated with revenue shortfall for the comparable periods as well as the consolidation and shutting down of call center operations from eleven centers in 2003 to six centers in 2004. The slight increase of cost of services as a percentage of revenue in both periods is a result of revenue declines occurring in advance of, or without a corresponding equal reduction of variable costs.

Selling, General and Administrative Expenses. For the year ended December 31, 2004, selling, general and administrative expenses, SG&A, decreased from $39.9 million to $31.4 million, or from 28.5% of revenues in 2003 to 33.2% of revenues in 2004. The decrease in SG&A is primarily attributable to the elimination of overhead costs due to the reduction in workforce, the closing of client service centers as well as improved management of our self-insured workers compensation plan in this year compared to the comparable period in the prior year. Increases as a percentage of revenue are primarily due to decreases in revenues for 2004 vs. 2003.

Restructuring Charges. We recorded $4.7 million in restructuring charges during the second, third and fourth quarters of 2004 relating to the closure of several call centers and office space located in Terra Haute, IN (3^rd quarter); Los Angeles, CA (4^th quarter); St. Joseph, MO (3^rd quarter); El Segundo, CA (4^th quarter); New York, NY (4^th quarter); Rocky Mount, NC (4^th quarter); Paramus, NJ (2^nd quarter); and Atlanta, GA (3^rd quarter). Included in the restructuring charges was $0.8 million in severance to key executives and $3.2 million for the removal from operations or disposal or both, of certain leasehold improvements, equipment, furniture, and fixtures from the call centers that were closed.

We recorded $1.6 million in restructuring charges during the second, third and fourth quarters of 2003 relating to the closure a call center located in Arlington, TX (May 2003), and the downsizing of the call center located in Irving, TX (December 2003). Included in the restructuring charges was $0.4 million retention bonus and $0.1 million non-cancelable lease costs.

Depreciation and Amortization. For the years ended December 31, 2004 and 2003, respectively, depreciation and amortization expenses were $8.5 million, or 9.1% of revenues and $11.5 million, or 8.2% of revenues. The reduction in depreciation expense is due to the effects of reduced capital spending, disposal of certain assets due to the closing of certain client service centers and a mature asset base becoming fully depreciated.

Interest Expense, net. Net interest expense decreased $1.8 million from $2.4 million in 2003 to $0.6 million in 2004. The decrease in net interest expense for the year is mainly attributable to the $1.0 million fee charged in November 2003 for the pay-off of the Credit Agreement by the Deutsche Bank/Essar transaction.

Non-cash interest expense. Non-cash interest expense increased $1.1 million from $1.6 million in 2003 to $2.7 million in 2004. The increase in Non-cash interest expense is mainly attributable to amortizing $1.3 million of the discount on the Deutsche Bank/Essar note payable after the $9.9 million pay down in the first quarter of 2004. This was offset by the remaining months of reduced bond discount amortization.

Income Tax Provision. We have historically generated net operating losses for income tax purposes. We recognize a deferred tax asset reflecting the future benefits of the resultant net operating loss carry-forward. These future tax benefits expire through 2022. Management regularly evaluates the company’s ability to realize its deferred tax asset, and determined as of June 30, 2002, that more likely than not, the deferred tax asset would not be realized in the near future. We have allocated a valuation allowance representing the amount of the deferred tax asset for which a valuation allowance previously had not been established. The income tax benefit from the operating losses incurred during 2004, 2003 and 2002 were offset by the Company’s valuation allowance since the benefit would exceed the projected realizable deferred tax asset. The Company has entered into transactions which may have an impact as to the ability to absorb Net Operating Losses in the future based on Section 382 income tax rulings.

16

Index to Financial Statements

At December 31, 2004, the Company had net operating loss carry forwards of approximately $86.6 million and unutilized tax credits of approximately $0.8 million. Due to an ownership change and the separate return limitation year rules, the utilization of net operating losses and tax credits may be limited in future years. The net operating loss carry forwards and tax credits begin to expire from 2013 through 2022. Management has established a valuation allowance for deferred taxes where management believes it is more likely than not that the deferred tax asset will not be realized.

Preferred Dividends. Preferred dividends decreased to approximately $0.011 million for the year ended December 31, 2004 from $7.6 million in the prior year. During 2003 dividends on the Series F Preferred Shares were not paid in cash, but were added to the investment value of such shares. Dividends on the Series D and E Preferred Stock were paid in additional shares of Series D and E Preferred Stock, respectively. In connection with the November 5, 2003 Deutsche Bank/Essar transaction, all of the Series D and E Preferred Shares and 23,375 in 2003 and 23,375 in 2004, which represent all of the Series F Preferred Shares were converted to Common Stock. See “Notes to Consolidated Financial Statements-11. Preferred Stock.”

Year Ended December 31, 2003 vs. Year Ended December 31, 2002

We recognized a net loss applicable to common shareholders of $19.1 million or $0.33 per share for the year ended December 31, 2003, versus a net loss applicable to common shareholders of $70.8 million or $1.35 per share in 2002. Excluding net income from discontinued operations, a gain on sale of the related assets, a gain on the early extinguishment of debt and the cumulative effect of a change in accounting for goodwill, we incurred a net loss from continuing operations of $10.9 million or $0.33 per share for the period ended December 31, 2003, as compared to a net loss from continuing operations of $27.0 million or $0.68 per share for the period ended December 31, 2002.

Revenues. For the year ended December 31, 2003, revenues from continuing operations were $139.9 million versus $135.9 million in the prior year, an increase of $4.0 million, or 2.9%. The increase in revenues versus the year ended December 31, 2002 was primarily a result of expansion of work from clients in the cable television and membership services industries partially offset by a decrease in volumes from clients in the telecommunications and financial services industries.

Revenue Mix. Inbound CRM and non-voice services constituted the majority of our revenues in 2003. Together those two service areas accounted for approximately 74.1% of our revenues, as compared to 80.5% in 2002. Outbound CRM revenue for 2003 accounted for approximately 25.9% as compared to 19.5% for 2002. The increase in outbound CRM revenues for 2003 was due to additional volume for an existing client program.

17

Index to Financial Statements

Revenue Concentration. In 2003 we depended on several large clients for a significant portion of our revenues. For the year ended December 31, 2003, five customers each were responsible for at least 10% of our revenues, and together accounted for approximately 77% of our revenues. Our revenue concentration for those five customers for the years ended December 31, 2003 and 2002 was as follows:

Cost of Services. For the year ended December 31, 2003, cost of services increased $6.2 million to $99.7 million compared to 2002. As a percentage of sales, cost of services rose slightly over the same period, from 68.8% to 71.2%. These costs, which consist primarily of direct labor associated with revenue generation, vary substantially with revenue. The increase year over year is primarily due to data and sales lead costs for an enhanced pay for performance project that began in January 2003 and increased telecommunications costs associated with the increase in revenues. Additionally, as a result of expansion of work from existing clients and new campaigns added during the year, we also incurred additional labor costs associated with training employees for the increase in volumes.

Selling, General and Administrative Expenses. For the year ended December 31, 2003, selling, general and administrative expenses or SG&A decreased to $41.5 million, or 29.7% of revenues from $43.1 million, or 31.7% of revenues for the year ended December 31, 2002. The decrease is primarily due to a slight increase in revenue over the same period as well as the result of the Company’s emphasis on controlling overhead costs. The elimination of overhead costs due to the reduction of headcount from 2002 to 2003 were partially offset by $2.1 million in expenses related to the terminated merger agreement with Allserve and the subsequent closing of the Deutsche Bank/Essar transaction.

Depreciation and Amortization. For the years ended December 31, 2003 and 2002, respectively, depreciation and amortization expenses were $11.5 million, or 8.2% of revenues and $13.0 million, or 9.6% of revenues. The reduction in depreciation expense is due to the effects of reduced capital spending coupled with more mature assets becoming fully depreciated.

Gain on Early Extinguishment of Debt. We retired $15.4 million in subordinated debt with the proceeds of the November 5, 2003 Deutsche Bank/Essar transaction. We paid $8.1 million in cash and recorded a $6.2 million gain on early extinguishment of debt. The gain has been reduced by $1.1 million, which, if not owed to Allserve for the breakup fee, will be distributed to the subordinated debt holders, net of certain expenses, as part of the agreement with Deutsche Bank and Essar.

Restructuring Charges. We recorded $1.6 million in restructuring charges during the second, third and fourth quarters of 2003 relating to the closure a call center located in Arlington, TX (May 2003), and the downsizing of the call center located in Irving, TX (December 2003). Included in the restructuring charges was $0.4 million retention bonus and $0.1 million non-cancelable lease costs.

We recorded $0.9 million in restructuring charges in the second quarter of 2002, related to the closing of our Atlanta call center. Included in the restructuring charges was $0.8 million in non-cancelable lease costs, including costs associated with the future payment of an early buy out, as provided in the lease. The remainder of the charges related primarily to the removal from operations or disposal or both, of certain leasehold improvements, equipment, furniture and fixtures.

18

Index to Financial Statements

Interest Expense, net Net interest expense of $2.4 million incurred in 2003 was $1.2 million more than that incurred during the year ended December 31, 2002. The increase in net interest expense for the year ending December 31, 2003 is primarily due to the $1.0 million fee charged for the payoff of the Credit Agreement in November 2003. The outstanding balance on our revolving line of credit at December 31, 2002 was $5.9 million. The revolving line of credit was repaid in the Deutsche Bank/Essar transaction.

Income Tax Provision Our statutory state and federal income tax rate for the years ended December 31, 2003 and 2002 was approximately 40%. Our effective tax rate on reported taxable income or loss differs from the statutory rate due primarily to the write-down of our deferred tax asset, and the non-deductibility, for tax purposes, of the acquisition goodwill impairment in 2002.

We have historically generated net operating losses for income tax purposes. In the past, we recognized a deferred tax asset reflecting the future benefits of the resultant net operating loss carry-forward. These future tax benefits expire through 2022. Management regularly evaluates the company’s ability to realize its deferred tax asset, and determined as of June 30, 2002, that more likely than not, the deferred tax asset would not be realized in the near future. As a result, we increased the valuation allowance approximately $9.8 million (a non-cash charge) representing the amount of the deferred tax asset for which a valuation allowance previously had not been established. At June 30, 2002 the carrying amount of the deferred tax asset was reduced to zero ($16.5 million less a valuation allowance of $16.5 million). We have not provided an income tax benefit to the operating losses incurred during 2003 and 2002; as such benefit would exceed the projected realizable deferred tax asset.

At December 31, 2004, the Company had net operating loss carry forwards of approximately $86.6 million and unutilized tax credits of approximately $0.8 million. Due to an ownership change and the separate return limitation year rules, the utilization of net operating losses and tax credits may be limited in future years. The net operating loss carry forwards and tax credits begin to expire from 2013 through 2022. Management has established a valuation allowance for deferred taxes where management believes it is more likely than not that the deferred tax asset will not be realized.

Income (loss) from Discontinued Operations On April 12, 2002, we completed the sale of assets of Elrick & Lavidge, our marketing research division, to Taylor Nelson Sofres Operations, Inc., a wholly-owned subsidiary of United Kingdom based Taylor Nelson Sofres plc. Initial cash proceeds from the sale were $12.2 million, which was subject to certain post-closing purchase price adjustments. These purchase price adjustments were ultimately completed pursuant to an agreement dated October 7, 2003, which provided for TNS (1) to receive $0.1 million out of a $0.6 million purchase price escrow fund (the balance of which was paid to us), (2) to retain $0.1 million in trade accounts receivable, and (3) to receive a payment from us of $0.02 million. This resulted in a net purchase price increase of $1.1 million, $0.1 million less than our previously projected increase of $1.2 million. As a result, our reserves were increased by $0.1 million, and the gain on the disposal of this segment was reduced by $0.1 million. The reserves included an amount for a lease, assuming that a buy-out agreement would be reached. When the buy-out agreement fell through, the reserves were increased by $0.5 million in the fourth quarter of 2003 to accrue for the remaining lease costs. The assets sold consisted primarily of accounts receivable, property and equipment, and other assets. The buyer assumed no liabilities, except for executory contracts. We recognized a gain on disposal of the segment of $8.3 million in the quarter ended June 30, 2002, which was reduced, in light of the above settlement, by $0.1 million during the quarter ended September 30, 2003. Elrick & Lavidge’s revenues, reported in discontinued operations, for the year 2002 was $6.2 million. For the year ended 2002, no income tax benefit was attributed to the loss from operations of the discontinued segment and no income tax expense was attributed to the gain on the sale of the segment.

Change in Accounting Principle In connection with the adoption of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), we completed the transitional goodwill impairment test during the quarter ended September 30, 2002. We engaged a third party to perform the valuation. As a result of the performance of the impairment test, we concluded that goodwill was fully impaired, and accordingly, recognized a goodwill impairment loss of $43.4 million. The non-cash impairment charge was reported as a cumulative effect of an accounting change retroactive to January 1, 2002, in accordance with the provisions of SFAS 142. The goodwill impaired was related to prior acquisitions for which the perceived incremental value at time of acquisition did not materialize.

19

Index to Financial Statements

Preferred Dividends.    Preferred dividends decreased to approximately $7.6 million for the year ended December 31, 2003 from $8.5 million in the prior year. During 2003, dividends on the Series F Preferred Shares were not paid in cash, but were added to the investment value of such shares. Dividends on the Series D and E Preferred Stock were paid in additional shares of Series D and E Preferred Stock, respectively. In connection with the November 5, 2003 Deutsche Bank/Essar transaction, all of the Series D and E Preferred Shares and half of the Series F Preferred Shares were converted to Common Stock and the holders of the remaining Series F Preferred Stock waived their rights to dividends. See “Notes to Consolidated Financial Statements-11. Preferred Stock.”

LIQUIDITY AND CAPITAL RESOURCES

The following table sets forth certain information from our statements of cash flows for the periods indicated:

We have historically utilized cash flow from operations, available borrowing capacity under a revolving line of credit, subordinated indebtedness provided by certain of our stockholders, and the issuance of convertible preferred stock to meet our liquidity needs. On January 26, 2004, we entered into a Loan Agreement with Wells Fargo Foothill (Foothill) allowing the company to borrow up to $25 million. The maximum amount available to borrow under the Loan Agreement was determined by the lesser of (i) the sum of a percentage of eligible billed accounts and a percentage of the amount of eligible unbilled accounts or (ii) an amount equal to the collections on accounts receivable for the past 60 days, less the sum of certain reserves established by Foothill. The Loan Agreement contains restrictions and covenants limiting among other things, the amount of indebtedness incurred by the Company and its subsidiaries, certain financial targets and capital expenditures. As a result of this agreement, Foothill was granted a continuing security interest in substantially all of our assets. The loan agreement contained restrictions and covenants limiting, among other things, the amount of indebtedness incurred by the Company and its subsidiaries, certain financial targets and capital expenditures. Though we were not in compliance during certain months of the year and the non-compliance also resulted in cross defaults with other lenders, the Company was able to execute amended agreements with revised covenants, receiving waivers from all lenders, including Foothill, from all defaults in the loan agreements and related notes. Effective April 4, 2005, the Company replaced the Foothill Facility with an alternative credit arrangement with Rockland. The Company’s management believes that cash flows from operations and funds available from financing activities should be sufficient to meet our current liquidity requirements.

Cash provided by operating activities was $2.9 million in 2004, as compared to cash used of $7.0 million in 2003. The $2.9 million of operating cash flow in 2004 is mainly provided by proceeds received on accounts receivable of $13.8 million offset by operating losses of $22.2 million, and reduced by adjusted non-cash expenses of $14.8 million and payments on accounts payable and accrued expenses of $4.32 million. Accounts receivable dropped from $23.6 million in 2003 to $9.8 million at the end of 2004, adding $13.8 million of cash flow to our operations in 2004. The decrease in receivables was a result of the decrease in revenue from 2003 to 2004 as well as the net effects of improved management on our receivables balance. Conversely, accounts receivables increased $2.7 million from 2002 to 2003, mainly as a result a new membership services agreements entered into in January 2003. Due to the timing of collections for this agreement, there were approximately $4.5 million in accounts receivable over 90 days for this client at December 31, 2003. Those receivables were collected in the first quarter of 2004.

20

Index to Financial Statements

Cash provided by investing activities was $1.4 million in 2004, as compared to cash used of $5.6 million in 2003. The change is primarily attributable to $4.6 million of restricted cash used as collateral for letters of credits covering our workers compensation insurance policies. Those letters of credit had been absorbed by the Foothill credit facility. Total capital expenditures in 2004 were $2.4 million as compared to $0.9 million in 2003. Our capital expenditures consisted primarily of telecommunications equipment and information technology hardware and software required for the upgrade of our operations and the upgrade or replacement of workstations in our existing facilities. The remaining capital expenditures during 2004 consisted mainly of leasehold improvements to leased facilities and were funded with proceeds from operating cash and bank borrowings under our revolving line of credit and loan agreement with Foothill.

Cash used in financing activities was $5.8 million in 2004, as compared to cash provided of $13.0 million in 2003. The change of $18.8 million in 2004 is primarily due to payments of $10.8 million on the Deutsche Bank/Essar notes and $1.1 million of capital lease obligations offset by proceeds of $5.3 million from Deutsche Bank and Essar for warrants exercised during the 2004 fiscal year.

On August 20, 2004, Deutsche Bank and Essar entered into a Put and Call Agreement under which Deutsche Bank had the right to put 80% of its notes due from the Company’s outstanding indebtedness to Deutsche Bank to Essar, and in which Essar had the right to call 80% of the shares of common stock of the Company owned by Deutsche Bank. Deutsche Bank exercised its put right on December 15, 2004, and Essar exercised its call right on December 28, 2004. The Put and Call Agreement had no net effect on the Company’s balance sheet, but only affected the relative proportions of the debt and equity positions in the Company held by Deutsche Bank and Essar.

Subsequent to December 31, 2004, in an effort to improve its balance sheet and attract alternative lines of credit that would potentially replace the Foothill credit facility, the Company and Essar have been in discussions to consummate a transaction in which the Company would sell additional shares of its common stock to Essar in exchange for Essar’s cancellation of the Company’s approximate $17.8 million indebtedness to Essar. The Company has formed a special committee comprised of independent members of the Board of Directors to consider this transaction, negotiate with Essar, and potentially approve the transaction on terms that are entirely fair and in the best interests of the Company.

Effective as of March 15, 2005, Essar has arranged for the posting of two letters of credit to cover certain bonding requirements and workers compensation contingent liabilities of the Company, a credit extension to the Company in the form of stand-by letters of credit to cover certain bonding requirements in place and is currently working to set up letter of credit to cover the Company’s workers compensation contingent liabilities. Additionally, Essar and Deutsche Bank have collectively agreed to extend the due date of their short-term debt maturities of $3.1 million due 2^nd quarter 2004 to various maturities commencing April 30, 2006 to August 30, 2006. Essar has provided to the Company an expression of intent to convert its funded debt of approximately $17.8 million into common stock of the Company. Effective April 4, 2005, the Company entered into a new financing agreement with Rockland to provide working capital funding to the Company (See Subsequent Events). The Company believes that with the turnaround strategy and business plan initiative put in place by the new management team installed during the 4^th quarter 2004, additional financing by the posting of the letters of credit arranged through Essar, deferment of short-term debt beyond one year of maturity, and by Essar’s expression of intent to convert its funded debt of $17.8 million into common stock, the Company will be able to continue operations and execute on its plan. Essar, as demonstrated in the past through two short-term bridge transactions, is willing to make available additional funding up to a maximum of $3 million to cover short-terms gaps, as necessary.

Restricted Cash

On December 31, 2004 and 2003, the Company had restricted cash balance of $0.966 million and $4,629, respectively. Those two outstanding irrevocable letters of credit were valued at approximately $2.9 million and set to expire between February 6, 2005 and July 13, 2005. Those letters of credit were being maintained as security for the self-insured portion of the Company’s workers compensation insurance program and to support licensing requirements related to certain of the Company’s contractual obligations. Effective on March 15, 2005 described above, Essar arranged for the replacement of those letters of credit with two alternative letters of credits, which have been posted by the Company. As a result, the restricted cash collateral is in the process of being released.

21

Index to Financial Statements

Accounts Receivable

Accounts receivable at December 31, 2004 were $10.0 million, as compared to $23.6 million at December 31, 2003. The Company’s revenues and related accounts receivable are concentrated with clients in the telecommunications industry, an industry that has been under significant economic stress. At December 31, 2004, $44.3 million, or 45.3% of the Company’s net trade accounts receivable balance were concentrated in the telecommunications industry, as compared to $10.0 million, or 41.3% at December 31, 2003. At December 31, 2004, none of the Company’s telecommunications related accounts receivable were over 60 days past due. The reserve was adjusted downward at December 31, 2004 to reflect the over accrual reserve based on a review of balances aged at 60 days that had not been collected by February 28, 2005. At future reporting periods, the Company will consider the need for comparable adjustments to the Accounts Receivable Reserve based on individual client credit worthiness and aged balances.

Related Party Short Term Borrowings

The Company’s sharp decline in revenues during 2004 caused serious difficulties in financing ongoing operations. As the Company’s revenues declined, so too did the Company’s accounts receivable, resulting in an acute contraction in credit financing availability under the Foothill credit facility. Furthermore, the Company’s declining revenue situation resulted in its failure to meet covenants regarding earnings before interest, taxes, depreciation and amortization, or EBITDA, that are common to the Wells Fargo Foothill Loan and Security Agreement and the Amended and Restated Promissory Notes held by Deutsche Bank and Essar. The Company failed to meet these EBITDA covenants in the months beginning in February 2004 through September 2004, resulting in defaults under each of these agreements. Although the Company was able to execute waivers and amendments of these agreements for the first, second and third quarters of 2004 and cure all outstanding defaults for each interval, the Company’s inability to meet its EBITDA covenant requirements under those agreements underscores the Company’s tight credit situation during the 2004 fiscal year, continuing into the subsequent interim period. The impact of the Company’s constrained credit availability on its critical liquidity needs was particularly acute in late October of 2004, when the Company was able to turn to Essar for a short term loan in the amount of $1.8 Million, of which $0.8 Million has already been repaid.

On March 21, 2005, the Company executed a Promissory Note in favor of Essar Global Limited. The promissory note is in the amount of $1.25 Million in favor of Essar Global Limited. The Promissory Note is unsecured and bears interest at a simple rate of 0.50% over LIBOR per annum, with interest payable in arrears in fifteen-day periods beginning from the date of execution. Periodic interest payment are payable in cash, unless Lender agrees that such interest shall be capitalized and added to the principle amount of the Promissory Note. The Promissory Note may be prepaid at any time without penalty.

Contractual Obligations and Commercial Commitments

The following table sets forth certain information concerning the Company’s contractual obligations and commercial commitments at December 31, 2004, and outlines the Company’s expected future payments to be made under such obligations and commitments:

22

Index to Financial Statements

The Company has agreements with certain telephone long distance carriers which currently range from 8 months to 33 months, and which provide for annual minimum usage requirements. During the second quarter of 2002, the Company completed negotiations with one of its carriers to cancel the then remaining minimum usage requirements under the agreement in exchange for entering into a new reduced usage commitment with the carrier under which the Company is committed to usage of $2.2 million over a 36-month period. During the fourth quarter of 2004, the Company reached agreement with its largest carrier to cancel the remaining minimum usage commitment under the then existing agreement in exchange for entering into a reduced usage commitment effective October 1, 2000, under which it is committed to usage of $7.4 million annually for seven years.

At December 31, 2004, the Company accrued $0.29 million related to unused and under accrual usage for the current years commitment of $7.4 million. The contract provides for a “Business Downturn / Network Optimization” clause which in the event of a business downturn beyond the control of us and other issues related to our business, which significantly reduces the volume of services required by us, with the result that we will be unable to meet our revenue and or volume commitments, we and the vendor service provider will cooperate to develop a mutually agreeable alternative agreement, and amend or replace the affected metrics of the contract currently in place. In January 2005, we initiated the downturn clause and will be working with the vendor provider to redraft the contract effective on October 1, 2004, or the beginning of the revised contract year, which contract runs consecutively for three years to completion at September 30, 2007. We believe the contingency could be in the range from $0 to $0.6 million, and management’s best estimate is $0.29 million, which has been accrued for at December 31, 2004.

On December 31, 2004, the Company had two outstanding irrevocable letters of credit. Those letters of credit totaled approximately $2.9 million in value and were set to expire between February 6, 2005 and July 13, 2005. Those letters of credit were being maintained as security for the Company’s self-insured portion of its workers compensation insurance program and to support licensing requirements related to certain of the Company’s contractual obligations. Effective on March 15, 2005, Essar arranged for the replacement of those letters of credits for two alternative letters of credits which have been posted by the Company. As a result, the restricted cash collateral is in the process of being released

In connection with the Deutsche Bank/Essar transaction on November 5, 2003, holders of a majority of the outstanding shares of the Company’s voting stock approved, by written consent, (1) an amendment to the Company’s certificate of incorporation to increase the number of shares of Common Stock the Company is authorized to issue from 200,000,000 to 800,000,000, and (2) an amendment to the Series F Preferred Stock Certificate of Designation to, among other things, increase the number of shares of Common Stock into which the preferred shares of Series F Preferred may be converted, from 34,527,594 to 46,910,503. These amendments took effect after the circulation by the Company of an information statement to its stockholders, in accordance with Section 14(c) of the Securities Exchange Act of 1934, as amended, and Rule 14c-2 promulgated there under. This mailing took place on April 1, 2004, and the amendments became effective immediately upon expiration of the twenty-day waiting period. On April 21, 2004, the remaining 23,375 shares of Series F Preferred Stock were converted into 46,910,503 shares of Common Stock. The transaction was recorded on the accompanying consolidated balance sheet as an increase to common stock and paid-in-capital and a decrease in redeemable convertible preferred stock.

In the comparable prior year period, accrued dividends totaling $2.4 million on the Series D and E Preferred Stock were paid-in-kind and accrued dividends totaling $4.6 million on the Series F Preferred shares were added to the investment value of such shares.

On April 4, 2005, the Company executed a new financing arrangement with Rockland. The agreement provides for a $7.5 million facility based on factored receivables. The cost basis of financing is Wall Street Journal published prime rate plus 2% on funds employed. Management Fees are based on 0.75% of the face value of every invoice purchased for each 30-day period up to 60 days. Thereafter, the fee is 0.45% each 15-day period for an additional 30 days for a total 90-day period. The Company may be required to purchase back outstanding invoices greater than 90 days.

23

Index to Financial Statements

LONG-TERM DEBT

As a condition of obtaining the lender’s consent on the sale of the collateralized assets of Elrick and Lavidge on April 12, 2002, we agreed to reduce the size of the revolving commitment under our then-existing Credit Agreement with Bank of Nova Scotia (“Scotiabank”) and Credit Suisse First Boston (“CSFB”), dated as of December 10, 1999 as amended, to $35.0 million from $49.0 million. During the quarter ended September 30, 2002, in order to reduce costs, we reduced the size of the revolving commitment from $35.0 million to $30.0 million, as we did not believe the loan-borrowing base would necessitate the level of commitment. Upon the sale of Elrick and Lavidge, the margins were fixed at certain levels on LIBOR and prime borrowings until maturity of the agreement.

On April 14, 2003 we entered into the Fourth Amended and Restated Credit Agreement with Scotiabank and Credit Suisse First Boston. Under the amended agreement, the maturity date for the revolving line of credit was extended to April 16, 2004 from June 30, 2003. The amended agreement provided for the waiver of all outstanding defaults through March 31, 2003 and reduced the aggregate revolving commitments under the agreement from $30.0 million to $19.0 million. Additionally, the agreement required that during the term of the credit facility, cash balances above certain levels must be applied to minimize the outstanding balance under the revolving line of credit. Margins under the agreement were fixed at certain levels on prime borrowings until the maturity of the agreement. In exchange for the extension of the line of credit, the lenders required a base fee of $1,000, $200 of which was paid at the time of the extension and the $800 balance of which was to be paid at the earlier of April 16, 2004 or the renegotiation or pay-off of the loan. The line of credit was paid off on November 5, 2003, as a result of the Deutsche Bank/Essar transaction. Based on the trailing twelve-month covenants for the period ended March 31, 2003 the Company was in default of certain covenants under its Third Amended and Restated Credit Agreement with Scotiabank and Credit Suisse First Boston. Such covenants, however, were waived under the Fourth Amended and Restated Credit Agreement.

On November 5, 2003, all amounts owed under the Fourth Amended and Restated Credit Agreement were paid in full using a portion of the proceeds from the Deutsche Bank/Essar transaction, with the exception that the Company has entered into a Cash Collateral Agreement with the lenders that permits the Company to keep in place the letters of credit issued by the lenders. The letters of credit are collateralized by the cash collateral account pursuant to the Cash Collateral Agreement. With the exception of the provisions in the Credit Agreement relating to letters of credit and certain other general obligations thereunder, all liens, covenants and obligations under the Credit Agreement have been released.

As part of the Deutsche Bank/Essar transaction on November 5, 2003, Deutsche Bank and Essar purchased three-year promissory notes in the aggregate principal amount of $28.2 million from the Company. Those notes have a floating interest rate equal to the three-month London Interbank Borrowing Offered Rate plus 0.50%. Interest under the notes is payable quarterly in cash or the Company may, at its option, cause such interest to be capitalized and added to the principal amount of the notes. The principal amount of each note is payable in two installments. On January 28, 2004, $8.0 million of the first required installment of $12.3 million was paid. On March 3, 2004 and March 8, 2004, the Company made payments totaling $2.0 million dollars to Deutsche Bank and Essar. The remaining $2.3 million was amended on March 30, 2004 and extended to January 3, 2005. The second installment of $16.1 million, along with capitalized interest of $0.2 million through March 30, 2004, is due on April 26, 2007. The notes are guaranteed by all of the Company’s subsidiaries.

On January 26, 2004, the Company entered into a Loan Agreement with Foothill allowing the Company to borrow up to $25.0 million with a maturity date of January 26, 2007. Interest rates under the agreement are variable and are tied to the London Interbank Borrowing Offered Rate and the Wells Fargo prime rate. The Loan Agreement contains restrictions and covenants limiting among other things, the amount of indebtedness incurred by the Company and its subsidiaries, certain financial targets and capital expenditures. As a result of the agreement, Foothill has been granted a continuing security interest in substantially all of the Company’s assets.

During the first quarter 2004, the Company failed to meet covenants regarding earnings before interest, taxes, depreciation and amortization that are common to the Loan Agreement and the Notes, dated January 28, 2004, held by Deutsche Bank and Essar in the principal amounts of $10.1 million and $10.1 million. As such, it represented a default under these agreements and additionally, a cross default under the Loan Agreement. Additionally, while the Company made payments of $10.0 million of the required $12.3 million due in 2004, a portion of the amounts coming due were not paid as prescribed thus resulting in a default under the Notes and the Loan Agreement.

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Index to Financial Statements

On March 30, 2004, the Company executed amended agreements with revised covenants and received waivers from the lenders for all defaults in the Loan Agreement and Notes. In addition, the amended Notes included an extension of the due date for the balance of initial installment payments of $2.3 million to January 3, 2005. The principal amounts of the amended Notes were increased to include capitalized interest of $166 thousand through March 30, 2004. At March 31, 2004, the Company was in compliance of the revised covenants for the Loan Agreement and the Amended and Restated Secured Promissory Notes.

The Company was not in compliance with the amended EBITDA covenants common to the Loan Agreement and amended Notes for the periods ending April 30, May 31, and June 30, 2004, resulting in defaults and cross-defaults under those agreements. On August 23, 2004, the Company executed amended agreements with revised EBITDA and capital expenditure covenants and received waivers from Foothill, Deutsche Bank and Essar for all defaults in the Loan Agreement and amended Notes. Without the waivers and amended agreements dated August 23, 2004, the Company would not have been in compliance with the revised EBITDA and capital expenditure covenants for the Loan Agreement and the Notes at July 31, 2004. With the waivers and amended agreements dated August 23, 2004, the Company was in compliance with all covenants.

The Company was not in compliance with the August 23, 2004 EBITDA covenants common to the Loan Agreement and amended Notes for the periods ending September 30, 2004. As such, it represented a default under these agreements and additionally, a cross default under the Loan Agreement. On November 22, 2004, the Company executed amended agreements with revised EBITDA covenants and received waivers from Foothill, Deutsche Bank and Essar for all defaults in the Loan Agreement and amended Notes. Without the waivers and amended agreements dated November 22, 2004, the Company would not have been in compliance with the EBITDA covenants for the Loan Agreement and the Notes at September 30, 2004. With the waivers and amended agreements dated November 22, 2004, the Company was in compliance with all covenants.

At December 31, 2004, the Company was in compliance with all covenants associated with its loan agreements in place immediately prior to the November 5, 2003 Deutsche Bank/Essar transaction.

Subordinated Indebtedness

In accordance with the terms of our then-existing senior and subordinated loans, as well as the terms of our agreement with Deutsche Bank and Essar, we were required to repay or otherwise retire our obligations to various lenders from the proceeds of this transaction (and, to the extent the subordinated debt was not paid off, the holders of the subordinated debt discharged the debt and released us from any further liability under their promissory notes). As a result of the November 5, 2003 Deutsche Bank/Essar transaction, all subordinated indebtedness was repaid and/or forgiven, and all warrants were canceled. The termination of the Company’s agreement to be acquired by AllServe resulted in the possibility of a break-up fee of up to $1.1 million, owed to AllServe. The $1.1 million fee was reserved as a partial reduction of the gain on early extinguishment of debt at December 31, 2003. Any part of the $1.1 million reserved for the break-up fee that is not paid to AllServe will be distributed to the subordinated debtholders, net of certain expenses. See Item 1. Business—Deutsche Bank/Essar Transaction.

Note Receivable

Aegis holds a judgment in the approximate amount of $2.2 million, excluding prejudgment interest, against Michael G. Santry, a former officer and director of Aegis. The judgment arises from a secured promissory note made by Mr. Santry in 1997 and payable to Aegis. Mr. Santry filed a bankruptcy petition in 2004. Aegis continues to pursue an action in Colorado state court to recover a portion of the collateral securing the promissory note. Because Mr. Santry was an affiliate and the amount of the loan had been outstanding for more than one year, the balance of the note receivable was reclassified as a reduction to additional paid-in capital in shareholders’ equity in the fourth quarter of 1999. Any amounts recovered as a result of the judgment will be recorded as capital upon receipt. As of December 31, 2004, no monies had been recovered as a result of the judgment.

25

Index to Financial Statements

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. We believe that our critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies, see the notes to the consolidated financial statements.

Goodwill

In 2002, we changed our method of accounting for certain intangibles, including acquisition goodwill, from an amortization method to an impairment-only approach. Under the provisions of SFAS 142, intangible assets, including acquisition goodwill, that are not subject to amortization are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired, using a two step impairment assessment. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss. As a result of the performance of the impairment test, we concluded that acquisition goodwill was impaired, and accordingly, recognized a goodwill impairment loss of $43.4 million. The non-cash impairment charge was reported as a cumulative effect of an accounting change retroactive to January 1, 2002, in accordance with the provisions of SFAS 142. The goodwill impaired was related to prior acquisitions for which the perceived incremental value at time of acquisition did not materialize. We did not recognize any goodwill impairment for the years ended December 31, 2004 or 2003.

Accounts Receivable

Trade receivables are comprised primarily of amounts owed to Aegis through its CRM services and are presented net of an allowance for doubtful accounts. Contracts with individual clients determine when receivables are due, generally within 30 days, and whether interest is accrued on late payments. The amount of the allowance for doubtful accounts is calculated as follows: Account balances over 90 days past due are specifically identified, reviewed and reserved, based upon management’s best estimate. An additional reserve amount equal to two percent of the remaining accounts receivable balance is added to the amount for which a specific reserve was established based on historical trends. This combined amount comprises the balance in the allowance account. The adequacy of the reserve is periodically reviewed to determine its appropriateness. Receivable accounts are reviewed on a regular basis for collectibility. If collectibility of the account is no longer assured, then the amount is written-off against the allowance account. The reserve was adjusted downward at December 31, 2004 to reflect the over accrual reserve based on a review of balances aged at 60 days that had not been collected by February 28, 2005. At future reporting periods, the Company will consider the need for comparable adjustments to the Accounts Receivable Reserve based on individual client credit worthiness and aged balances.

Revenue recognition

Revenues earned under contracts to provide customer solutions are based on telephone call time incurred per minute and/or on individual customer sales transactions handled and processed. Such revenue is recognized immediately on the completion of the related services that are performed at rates negotiated under client contracts. Revenue earned under contracts that are based on successful sales or pay for performance contract arrangements are recognized on the date the sale is verified by the customer and invoiced accordingly. Clients are provided with the ability to audit documentation in support of their respective billings. While management believes all such billings are proper and accurate, the Company periodically records reserves against revenues representing management’s best estimate of any potential billing adjustments or concessions that may be made as a result of such audits. Please refer below to notation of and compliance with SEC Staff Accounting Bulletin No. 104 “Revenue Recognition”.

26

Index to Financial Statements

In January 2003, the Company entered into a services agreement with Trilegiant Corporation (“Trilegiant”). Under the agreement, the Company, via forwarded call transfers, offers Trilegiant membership services to individuals. The Company is obligated to pay Trilegiant for the call transfers and recognizes this expense as a cost of services. When an individual agrees to enroll in the membership services program, a sale is made and the Company receives a commission from Trilegiant after the trial period is completed and Trilegiant has successfully billed the member. Sold memberships are subject to cancellation by the member with prorated refunds of membership fees.

Because the member can cancel their membership after the date of sale, the Company uses historical cancellation information to record revenue for the period. The estimated amount of revenue recorded under the contract is determined by applying the historical cancellation rates to the gross amount of membership commissions. If the actual cancellation rate for the period is different from that used to determine revenue at the time of sale, a resulting adjustment is made to revenue and accounts receivable.

According to SEC Staff Accounting Bulletin No. 104, “Revenue Recognition”, revenue recognition is appropriate if all of the following are met:

The Company feels that the amount of revenue recognized under this contract for the years ending December 31, 2004 and 2003 is appropriate.

Deutsche Bank/Essar transaction – Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants

On November 5, 2003, the Company signed definitive documents to effect an investment in the Company by Deutsche Bank and Essar. In the transaction, Deutsche Bank and Essar provided approximately equal portions of a $28.2 million investment in the Company in return for three-year secured promissory notes and warrants to purchase up to 80 percent of the Company’s common stock. The Company accounted for the warrants and notes payable issued under the Deutsche Bank and Essar transaction in accordance with APB No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” (“APB 14”). Deutsche Bank and Essar had been issued initial and subsequent warrants to purchase 527,661,932 shares of common stock. APB 14 requires a portion of the proceeds from the issuance of debt securities with detachable stock warrants to be allocated to the warrants and treated as paid-in capital. Any resulting discount or premium on the notes payable should be recorded and amortized over the life of the notes. The Company used the Black-Scholes model to determine the value of the warrants issued to Deutsche Bank and Essar. Under the Black-Scholes model, the value of the warrants are determined by taking the difference between acquiring the stock outright and the present value of paying the exercise price on the expiration day. As a result, the Company valued the initial warrants at $4.4 million. This amount was recorded as paid-in capital and the resulting discount on the notes payable was recorded and is being amortized using the interest method over the life of the notes. As a result of making $10.0 million in principal payments on the Notes during the first quarter of 2004, the Company recognized $1.4 million in accelerated amortization of the discount on notes payable during the period. On July 13, 2004, Essar exercised all 264,358,628 of their warrants in exchange for one share of common stock per warrant. The total amount of consideration given was $2.6 million. These funds were used to reduce outstanding debt under the new line of credit and make capital investments. On August 20, 2004, Deutsche Bank exercised all 263,303,304 of their warrants in exchange for one share of common stock per warrant. The total amount of consideration given was $2.6 million. These funds were used to reduce outstanding debt and make capital investments.

The November 5, 2003 Essar and Deutsche Bank transaction expenses of $0.4 million were treated as debt issuance costs in accordance with APB No. 21, “Interest on Receivables and Payables” and are being amortized over the life of the notes. All other expenses associated with the deal were expensed and recorded in selling, general and administrative expenses.

27

Index to Financial Statements

Gain on early extinguishment of debt

The Company was required, by the existing loan terms, to repay or otherwise retire its existing loan obligations with the proceeds of the Deutsche Bank and Essar transaction. To the extent the subordinated debt was not paid off, the holders of the subordinated debt discharged the debt and released the Company from any further liability under their promissory notes, resulting in a $6.2 million gain on early extinguishment of debt. The termination of the Company’s agreement to be acquired by AllServe resulted in the possibility of a break-up fee of up to $1.1 million, owed to AllServe. Any part of the $1.1 million reserved for the break-up fee that is not paid to AllServe will be distributed to the subordinated debtholders, net of certain expenses. If certain fees are paid to Allserve, this will reduce the amount paid to the subordinated debtholders, up to $1.1 million.

Impairment of long-lived assets

On January 1, 2002, the Company adopted SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). Management periodically evaluates the carrying value of our assets to determine if future operating results are adequate to cover the carrying value of those assets. In the event that facts and circumstances indicate that the value of property and equipment or other long-term assets may be impaired, an evaluation of recoverability is performed. Indicators may include continued future operating losses as well as the disposal of a material asset before the end of its estimated useful life. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if a write-down to fair value is required.

Income taxes

We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between book and tax basis of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

At December 31, 2004, we had deferred tax assets in excess of deferred tax liabilities of $30.8 million. Based upon our estimates of future taxable income and review of available tax planning strategies, we believe that it is more likely than not that any such assets will not be realized, resulting in a valuation allowance of $30.8 million. On a quarterly basis, we evaluate the need for this valuation allowance based on the expected realizability of our deferred tax assets and adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are our latest forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets.

At December 31, 2004, the Company had net operating loss carry forwards of approximately $86.6 million and unutilized tax credits of approximately $0.8 million. Due to an ownership change and the separate return limitation year rules, the utilization of net operating losses and tax credits may be limited in future years. The net operating loss carry forwards and tax credits begin to expire from 2013 through 2022. Management has established a valuation allowance for deferred taxes where management believes it is more likely than not that the deferred tax asset will not be realized.

Accounting for employee benefits

Aegis records an accrued liability for workers compensation based on an estimate of claims incurred but not reported as well as asserted claims at the end of the year. This estimate is derived from analysis performed by actuaries hired by the Company who have expertise in this area. However, although these estimates are generally reliable, changes in the employee mix and unforeseen events could result in an adjustment to these estimates.

Accounting for Contingencies

In the ordinary course of business, Aegis has entered into various contractual relationships with strategic corporate partners, customers, suppliers, vendors and other parties. As such, the Company could be subject to litigation, claims or assessments arising from any or all of these relationships, or from its relationships with its employees. The Company accounts for contingencies such as these in accordance with SFAS No. 5, Accounting for Contingencies (“SFAS 5”). SFAS 5 requires the

28

Index to Financial Statements

Company to record an estimated loss contingency when information available prior to issuance of the Company’s financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. SFAS 5 further states that when there is a range of loss and no amount within that range is a better estimate than any other, that the minimum amount in the ranges shall be accrued. Accounting for contingencies arising from contractual or legal proceedings requires Company management to use its best judgment when estimating an accrual related to such contingencies. As additional information becomes known, the Company’s accrual for a loss contingency could fluctuate, thereby creating variability in the Company’s results of operations from period to period. Likewise, an actual loss arising from a loss contingency which significantly exceeds the amount accrued for in the Company’s financial statements could have a material adverse impact on the Company’s operating results for the period in which such actual loss becomes known. As of December 31, 2004, accruals for loss contingencies, excluding estimated legal fees to defend the Company against currently pending matters, totaled $0.3 million and are included in accrued liabilities in the accompanying consolidated balance sheet. The Company accrued a reserve of $1.1 million for the benefit of the subordinated debtholders at December 31, 2004, pending outcome of the Allserve litigation. If certain fees are paid to Allserve, this will reduce the amount paid to the subordinated debtholders, up to $1.1 million. This amount was not accounted for as a contingency, as it is not possible to accurately predict the outcome of this lawsuit at this time. The managements’ best estimate of future costs to defend the AllServe lawsuit is approximately $0.7 million. This will be offset against settlement to be paid to subordinated debtholders and has not been accrued separately in the balance sheet.

The Company has agreements with certain telephone long distance carriers which currently range from 8 months to 33 months, and which provide for annual minimum usage requirements. During the second quarter of 2002, the Company completed negotiations with one of its carriers to cancel the then remaining minimum usage requirements under the agreement in exchange for entering into a new reduced usage commitment with the carrier under which the Company is committed to usage of $2.2 million over a 36-month period. During the fourth quarter of 2004, the Company reached agreement with its largest carrier to cancel the remaining minimum usage commitment under the then existing agreement in exchange for entering into a reduced usage commitment effective October 1, 2000, under which it is committed to usage of $7.4 million annually for seven years.

At December 31, 2004, the Company accrued $0.29 million related to unused and under accrual usage for the current years commitment of $7.4 million. The contract provides for a “Business Downturn / Network Optimization” clause which in the event of a business downturn beyond the control of us and other issues related to our business, which significantly reduces the volume of services required by us, with the result that we will be unable to meet our revenue and or volume commitments, we and the vendor service provider will cooperate to develop a mutually agreeable alternative agreement, and amend or replace the affected metrics of the contract currently in place. In January 2005, we initiated the downturn clause and will be working with the vendor provider to redraft the contract effective on October 1, 2004 the beginning of the revised contract year, which runs consecutively to September 30, 2007. We believe the contingency could be in the range from $0 to $0.6 million, and management’s best estimate is $0.29 million which has been accrued for at December 31, 2004.

On July 22, 2004, the Company signed an agreement with the New York State Urban Development Corporation giving to us a financial grant of $0.9 million initial disbursement after execution of a lease for 80 Broad Street to expire no earlier than April 1, 2011. We must employ at least 260 full-time permanent employees at the project location by December 31, 2005 or repay the grant. As we had the New York office in operation for a time during 2004 we could be held accountable at December 31, 2005 for approximately 75% (or upto 100% based on special recapture terms) of the grant repayment if we fail to maintain at least 260 full-time permanent employees in place. Accordingly in 2004, the Company has accrued an expense of approximately $0.9 million for potential repayment of the grant to the New York State Urban Development Corporation.

The Company has employment agreements with both Richard Ferry, Chief Executive Officer, and Kannan Ramasamy, Chief Operating Officer. The employment agreements provided for, upon adoption of an employee stock option plan, grants of options to purchase the Company’s common stock of 6.9 million shares for Mr. Ferry, and 3.45 million shares for Mr. Ramasamy. The price of those options is the closing market price of the Company’s common stock on the date of grant, with the options vesting in three equal annual installments and terminating ten years from date of grant.

29

Index to Financial Statements

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued a revised SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which replaces SFAS 123 and supercedes APB Opinion No. 25. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. SFAS 123R is effective for periods beginning after June 15, 2005. The guidance also provides for classifying awards as either liabilities or equity, which impacts when and if the awards must be remeasured to fair value subsequent to the grant date. At the time of adoption, companies can select from three transition methods, two of which would allow for restatement of certain prior periods. Management anticipates selecting the transition method in which prior period financial statements would not be restated. The adoption of SFAS No. 123R is not expected to have a significant effect on our financial statements.

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153, Exchanges of Non-monetary Assets, An Amendment of APB Opinion No. 29 (“SFAS No. 153”). The guidance in APB Opinion No. 29, Accounting for Non-monetary Transactions, is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. The guidance in APB Opinion No. 29, however, included certain exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS No. 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the consolidated financial position or results of operations of the Company.

RISK FACTORS INFLUENCING FUTURE RESULTS

CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain information in this Form 10-K contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new services, any statements regarding future economic conditions or performance and any statement of assumptions underlying any of the foregoing. Terms such as “anticipates”, “believes”, “estimates”, “expects”, “plans”, “predicts”, “may”, “should”, “will”, and “intends,” the negative thereof and similar expressions are intended to identify forward-looking statements. Such statements are by nature subject to uncertainties and risks, including but not limited to those summarized below:

Results of Operations

The Company has historically incurred losses. The Company experienced net losses of $22.2 million, $11.5 million and $62.3 million for the years ended December 31, 2004, 2003 and 2002 respectively. The Company incurred operating losses from continuing operations of $22.2 million, $10.9 million and $27.0 million for the years ended December 31, 2004, 2003 and 2002 respectively. While we believe that we will be able to reduce such losses and become profitable in future periods, there can be no assurance that we will be able to do so.

Control by Principal Shareholders

Essar owns at December 31, 2004, 63% of the voting issued and outstanding Common Stock of the Company.

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Index to Financial Statements

Under the terms of a Stockholders Agreement among Deutsche Bank and Essar, Deutsche Bank and Essar each initially had the right to nominate three of the ten board members. Subsequently, Deutsche Bank assigned its right in this regard to Essar. The President and Chief Executive Officer, along with three independent directors will be the remaining four board members. Any major decision must be approved by at least three-fourths of the directors, which must include at least one Deutsche Bank director and one Essar director. As a result, Deutsche Bank and Essar can exercise significant control over the outcome of substantially all matters that require a Board of Directors or shareholder vote. This fact may discourage, delay or prevent a change in control of Aegis Communications Group, Inc. In addition, since our officers serve at the pleasure of the Board of Directors, Deutsche Bank and Essar may be able to exert influence over day-to-day operations. Additionally, each committee of the Board will be constituted so that the number of Deutsche Bank Designees (as defined in the Stockholders Agreement) and Essar Designees (as defined in the Stockholders’ Agreement) on any such committee is as nearly as possible in the same proportion as the number of Deutsche Bank Designees and Essar Designees on the entire Board.

The Stockholders Agreement provides that the parties to the agreement satisfy a “right of first offer” to the others prior to a transfer of shares to a third party. The Stockholders Agreement also provides that the parties provide each other with certain “tag-along” rights in the event of a sale or transfer of shares to a third party. The Stockholders’ Agreement and the Bylaws also provide that certain major decisions will require the affirmative vote of not less than three-fourths of the directors of the Board and the agreement of at least one Deutsche Bank director and one Essar director. The list of major decisions include:

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Although we expect that our board of directors will be able to resolve major business issues, we cannot assure you that deadlocks will not occur.

Shares Available for Future Sale

Essar and Deutsche Bank own approximately 63% and 17% respectively of the Company’s common stock. Although Essar and Deutsche Bank and other affiliates of Aegis Communications Group, Inc. are restricted to some extent from reselling their respective shares of our common stock under applicable securities laws, both possess registration rights with respect to the shares of capital stock they own that can be exercised at any time. We cannot predict the effect that future sales of stock, especially by Essar and Deutsche Bank, will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of our common stock (including shares issued upon the conversion of preferred stock or the exercise of stock options), and even the perception that such sales could occur, may adversely affect prevailing market prices for our common stock. Essar currently intends to negotiate with the Company to acquire additional shares of the Company’s common stock by excluding the $17.8 million of the Company’s debt currently held by Essar for the Company’s common stock. This will, if and when completed, significantly increase the percentage of the Company’s common stock held by Essar and dilute the percentage holdings of the other stockholders.

Dependence on Key Personnel

Our success depends in large part on the abilities and continued service of our executive officers and other key employees and our ability to hire and retain qualified executive officers and key personnel. We cannot assure you that we will be able to hire or retain these people. Losing one or more of them could materially and adversely affect our results of operations.

Reliance on Major Clients

Historically a few major clients have accounted for the bulk of our revenue. In 2004, four separate clients accounted for approximately 26%, 15%, 11%, and 10% of our revenues. Relying on one or a few major clients includes a number of more specific business risks that may adversely impact our ability to derive revenue from the client, including:

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For example, in the third quarter of 2004, AT&T decided to withdraw their marketing efforts in the consumer long distance market. This impacted us, forcing the closure of two centers located in California as well as taking the New York City center dark. Other customers may do the same. Many of our clients are concentrated in the telecommunications and financial services industries. A significant downturn in any of these industries or a trend away from their use of telephone-based sales or outsourced customer relationship management services could materially and adversely affect our business. Although we believe our relations with our major clients are good, the loss of one or more of our major clients could have a material adverse effect on our operating results. See “Item 1. Business—Reliance on Major Clients.”

Leverage and Future Capital Requirements

At December 31, 2004, we had long-term capital leases of approximately $0.5 million and notes payable of $17.8 million (net of discounts), which results in a total debt to total capitalization ratio of approximately 255.2%. Our tangible net book value was approximately negative $11.9 million at December 31, 2004. Although we used proceeds from the Foothill financing transaction to satisfy some of our debt for the Deutsche Bank/Essar, our leverage could adversely affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions or other purposes and could make our business more vulnerable to economic downturns and competitive pressures. Our future capital requirements and the sufficiency of available funds will depend on numerous factors that are difficult to predict, including results of operations, efforts to expand existing operations and capital expenditures. We entered into an agreement for credit financing with Rockland Credit Finance LLC on April 4, 2005. The credit financing agreement has an initial term of one year, and unless terminated, the credit agreement will automatically renew for subsequent one year periods. By its terms, that credit financing agreement allows us to select, sell and assign certain of our accounts receivable to Rockland from time to time, subject in each case to Rockland’s prior review and acceptance of those selected accounts. The agreement prohibits us from entering into alternative credit financing arrangements without Rockland’s prior written consent, unless Rockland rejects our selection of any particular account for sale and assignment, in which case that rejected account may be sold and assigned or pledged without restriction. We terminated our revolving credit facility with Foothill in order to enter into this agreement for credit financing with Rockland, which we believe this will provide access to a greater amount of available cash than was available under the Foothill credit facility.

Factors Affecting Ability to Manage and Achieve Growth

We anticipate that the trend toward outsourcing of telephone and Internet-based sales, marketing, and customer relationship management activities, as well as increased penetration of new and existing clients and markets, will drive future growth. A number of other factors, including the effective and timely initiation and development of client relationships, the opening of new client service centers, the recruitment, motivation and retention of qualified personnel, the slow recovery of the U.S. economy, our ability to find qualified non-U.S. locations and intensified competition among our telecommunications clients will affect growth. Sustaining growth will also require better and faster systems and additional management, operational and financial resources. We cannot assure you that we will be able to manage expanding operations effectively or maintain or accelerate growth.

Dependence on Outsourcing Trend and Industries Served

Our growth depends in part on continued demand for our services prompted by the outsourcing trend, as well as continued growth in the industries we serve. If the interest in outsourcing declines or there is a significant downturn in the telecommunications, financial services, consumer products, entertainment or other industries, we could be materially and adversely affected. The telecommunications and financial services industries continued to be under significant economic pressure during 2004.

Possible Volatility of Stock Price

Our stock price can be volatile, in response to:

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Index to Financial Statements

In addition, the stock market generally has experienced extreme price and volume fluctuations, which have particularly affected the market price for many companies in similar industries and which have often been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock. Since July 9, 1998, the market price per share of our common stock has ranged from $3.50 to $0.01. On March 31, 2005, the closing price for our stock was $0.15.

Potential Fluctuations in Quarterly Operating Results

We could experience quarterly variations in revenues and operating income due to many factors, including:

In connection with certain contracts, we could incur costs in periods prior to recognizing revenue under those contracts. In addition, we must plan our operating expenditures based on revenue forecasts, and a revenue shortfall below such forecast in any quarter would likely materially and adversely affect our operating results for that quarter.

Risks Associated with Our Contracts

Our contracts generally do not ensure a minimum level of revenue, and the profitability of each client program may fluctuate, sometimes significantly, throughout the various stages of such program. Although we seek to sign long-term contracts with our clients, our contracts generally enable the client to terminate the contract, or terminate or reduce program call volumes, on relatively short notice. Although, certain of such contracts require the client to pay a contractually agreed amount in the event of early termination, others do not, and we cannot assure you that we will be able to collect such amount or that such amount, if received, will sufficiently compensate us for our investment in the canceled program or for the revenues we may lose as a result of early termination.

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Index to Financial Statements

Government Regulation

Both federal and state governments regulate our business. The FCC rules under the Federal Telephone Consumer Protection Act of 1991 prohibit telemarketing firms from initiating telephone solicitations to residential telephone subscribers before 8:00 a.m. or after 9:00 p.m., local time, and prohibit the use of automated telephone dialing equipment to call certain telephone numbers. In addition, the FCC rules require telemarketing firms to maintain a list of residential consumers who have stated that they do not want to receive telephone solicitations called DNC lists and to avoid making calls to such consumers.

The Federal Telemarketing and Consumer Fraud and Abuse Protection Act of 1994 broadly authorized the FTC to issue regulations prohibiting misrepresentation in telephone sales. The FTC issued its TSR, which became effective December 31, 1995. Generally, these rules prohibit abusive telephone solicitation practices and impose disclosure and record keeping requirements on telemarketers. Both the FCC and the FTC introduced new amendments to their respective Acts during 2003, which placed further restrictions on the use of automated telephone dialing equipment relative to abandoned calls and require enhanced record keeping. These amendments also introduced a national do not call list that became effective in 2003 and require all telemarketing firms to suppress consumer records found on the national list. In January 2004, the requirement to deliver a caller id with name and number became effective. The advent of number portability between landlines and wireless telephone numbers in November 2003 created confusion with reference to the prohibition of telemarketing calls to wireless numbers. No clearinghouse is available to date to provide a suppression list of recently ported numbers, making a good faith effort the only safe harbor available to the telemarketing industry.

In addition to these rules and regulations, bills are frequently introduced in Congress to regulate the use of credit information, as well as new proposals to further refine the DNC and TSR regulations and restrict predictive dialer use. We cannot predict whether this legislation will be enacted and what effect, if any, it would have on our industry.

Most states have also enacted or are considering legislation to regulate telephone solicitations. For example, telephone sales in certain states are not final until a written contract is delivered to and signed by the buyer, and then the contract may be canceled within three business days. At least one state also prohibits telemarketers from requiring credit cards as a method of payment, and several other states require certain telemarketers to obtain licenses and post bonds. For instance, in certain states persons selling insurance products or mortgage services are required to be licensed by various state insurance commissions and participate in regular continuing education programs. Some industries we serve are also subject to various state government regulations with regard to selling practices and consumer disclosure requirements.

We specifically train our representatives to conduct calls in an approved manner and believe we are in compliance in all material respects with all federal and state regulations. There can be no assurance, however, that we may not be subject to regulatory challenge for a violation of federal or state law by any of our clients or other third parties.

Dependence on Labor Force

Our business is very labor intensive and characterized by high personnel turnover. Although by industry standards we believe our employees are highly qualified and well trained, many employees receive modest hourly wages and have relatively short tenure with Aegis Communications Group, Inc. A higher turnover rate among our employees would increase our recruiting and training costs and decrease operating efficiencies and productivity. Some of our operations require specially trained employees. Growth in our business will require us to recruit and train qualified personnel at an accelerated rate from time to time. We cannot assure you that we will be able to continue to hire, train and retain a sufficient labor force of qualified employees. A significant portion of our costs consists of wages paid to hourly workers. An increase in hourly wages, costs of employee benefits or employment taxes could materially adversely affect our operating results.

During 2000, the United Steelworkers of America (“USWA”) undertook an effort to organize our call center workforce located in Elkins, West Virginia. We believe that a unionized workforce would be contrary to our best interests, and to our employees’, customers’ and shareholders’ best interests as well, and accordingly, vigorously opposed the unionization effort. Although the USWA ultimately withdrew its election petition in Elkins, there can be no assurances that the USWA or another union will not endeavor to organize our workforce in Elkins or other call center locations. Unionization of our workforce could materially and adversely affect our results of operations.

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Index to Financial Statements

Competition

Our industry is very competitive. We cannot assure you that, as the CRM industry continues to evolve, additional competitors with greater resources than ours will not enter the industry or that our clients will not choose to conduct more of their telephone-based sales or customer relationship management activities internally. Further, the impact of non-U.S. companies entering our industry with lower operating costs, the development of new forms of direct sales and marketing techniques such as interactive home shopping through television, computer networks, including the Internet and other media, could adversely effect the demand for our services. In addition, the increased use of new telephone-based technologies, such as interactive voice response systems, and increased use of the Internet as a tool by our clients could reduce the demand for certain of our offered services. Moreover, the effectiveness of marketing by telephone could also decrease as a result of consumer saturation and increased consumer resistance to this direct marketing tool. Although we attempt to monitor industry trends and respond accordingly, we cannot assure you that we will be able to anticipate and successfully respond to such trends in a timely manner. See “Item 1. Business—Industry and Competition.”

Reliance on Technology and Computer Systems

We rely on specialized telecommunications and computer technology to meet our clients’ needs. We will need to continue to select, invest in and develop new and enhanced technology to remain competitive. Our future success will also depend on our operational and financial ability to develop information technology solutions that keep pace with evolving industry standards and changing client demands. Our business is highly dependent on our computer and telephone equipment and software systems, the temporary or permanent loss of which could materially and adversely affect our business.

Telephone Service Dependence

We depend on service provided by various local and long distance telephone companies. If service is disrupted or telecommunications costs increase significantly and we cannot recover those costs by increasing the price of our services, our operating results will suffer.

Risk of Business Interruption

Our business will suffer if we are unable to protect our client service centers, computer and telecommunications equipment and software systems against damage from fire, power loss, telecommunications interruption or failure, technology failure or sabotage, natural disaster and other similar events. We may incur contractual damages to some clients or allow some clients to terminate or renegotiate their contracts with us if one of these events occurs. We maintain property damage and business interruption insurance, but it may not adequately compensate us for any losses we may incur.

Expansion of Primary Business Model

We are in the planning stages of expanding our primary business model to include business process outsourcing services. This may require strategic investments in technology and the increase of our off-shore delivery capabilities, principally in India and South America. There can be no assurance that we will be successful in this regard.

Other Uncertainties

We discuss other operating, financial or legal risks or uncertainties in this Form 10-K in specific contexts and in our other filings with the SEC. We are also subject to general economic risks, the risk of loss of a major customer and other risks and uncertainties.

We have exposure to market risk associated with the floating rate portion of the interest charged on the Deutsche Bank/Essar note payables. The Deutsche Bank/Essar note payables, which mature on April 26, 2007, bear interest at fluctuating rates based on the prime rate and/or LIBOR. Our exposure to interest rate risk due to changes in the prime rate or LIBOR is not expected to be material and, at December 31, 2004, the fair value of the Loan Agreement approximates its related carrying value because the obligation bears interest at the current market rate.

We invest our cash reserves in high quality short-term liquid money market instruments with major financial institutions. The rate of interest earned on these investments varies with overall market rates. A hypothetical one hundred basis point change in the interest rate earned on these investments would not have a material effect on our income or cash flows.

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Index to Financial Statements

See pages F-1 through F-32 of this Annual Report on Form 10-K.

As required by rule 13a-15(b), Aegis management, including the Chief Executive Officer and the Chief Operating Officer (who currently performs the functions of the Chief Financial Officer), conducted an evaluation as of the end of the period covered by this report, of the effectiveness of Aegis’ disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and the Chief Operating Officer concluded that Aegis’ disclosure controls and procedures were effective as of the end of the period covered by this report.

As required by rule 13a-15(d), Aegis management, including the Chief Executive Officer and the Chief Operating Officer, also conducted an evaluation of Aegis’ internal controls over financial reporting to determine whether any changes occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, Aegis’ internal control over financial reporting. During the preparation of the Company’s financial statements as of and for the year ended December 31, 2004, and in conjunction with management’s assessment of the Company’s internal controls over financial reporting as of that date, the Company has concluded that the current system of disclosure controls and procedures was not effective because of the internal control weaknesses identified below. As a result of this conclusion, the Company has initiated the changes in internal control also described below. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.

Deficiencies and Corrective Actions Relating to the Company’s Internal Controls over Financial Reporting

Lack of Adequate Accounting Staff

During the course of the audit several accounting errors were identified by BDO Seidman LLP (BDO) and researched and appropriately adjusted in the financial statements by management. BDO questions the depth and experience of the accounting staff responsible for preparing and closing the General Ledger for the Company’s 2004 10-K.

The Company was aware of its staffing needs and took steps to address its understaffed Finance and Accounting team. To correct this material weakness, on December 28, 2004, the Company engaged an independent contractor as Vice President of Finance, who is a CPA with extensive CFO-level management and SEC reporting experience in public companies. On January 3, 2005, the Company engaged an independent contractor, who is also a CPA with extensive experience, to lead its Sarbanes-Oxley compliance efforts. On February 16, 2005, the Company hired an Accounting Manager, who is also a CPA with SEC reporting experience. We feel these additions to the Company’s Finance and Accounting team will improve the quality of future period financial reporting.

Revenue Recognition Process enhancements

BDO identified the Company’s reliance on manual calculations and interventions in its revenue recognition process.

To correct this material weakness, the Company intends to use two distinct customer accounts to calculate monthly billings, due to the fact that the Company’s customer contracts vary with respect to when the Company will be paid for its services. The Company is in the process of preparing model billing templates based on the two general methods through which the Company is paid for its services. When those templates are complete, they will be implemented for the Company’s customers accounts and considered for automation.

Other current actions by management to correct this deficiency include a review of all customer contracts to ensure that all customer contract files are up to date. An initial draft of the report that has been prepared in this regard is currently under review and should be complete by the end of April 2005. Effective with the March billings to be prepared in early April, the Company’s accounts receivable specialist will prepare a schedule comparing the actual billings by customer for the month to the monthly revenue estimates derived and reviewed in the Company’s weekly operations meeting. The Company’s Vice

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Index to Financial Statements

President of Finance and the appropriate Vice President responsible for the overall customer relationship will approve this schedule prior to mailing the customer invoices.

Timely Closing of the Books

Management identified a material weakness based on the Company’s delay in closing its books for non-quarter end months during the first quarter 2005.

To correct this material weakness, checklists will be developed delineating tasks, preparation responsibilities, and review responsibilities targeting specific completion dates. The checklist will provide evidentiary support of work performed and reviewed. Specific checklist will be developed for non-quarter end months, quarter end months, and the annual close. These checklists will be developed and implemented March 2005 for the 1st quarter 2005 close process and utilized in the preparation of the 1st quarter 2005 Form 10-Q and subsequent period ends.

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Index to Financial Statements

PART III

This information will be contained in our definitive proxy statement for the 2005 Annual Meeting of Stockholders under the captions “Election of Directors,” “Executive Officers,” “Code of Ethics,” “Audit Committee Financial Expert,” and “Audit Committee” and is incorporated herein by reference.

This information will be contained in our definitive proxy statement for the 2005 Annual Meeting of Stockholders under the caption “Compensation of Directors and Executive Officers” and is incorporated herein by reference. Information in the definitive proxy statement section entitled “Report of the Compensation Committee of the Board of Directors” and in the subsection entitled “Performance Graph” are not incorporated herein by reference.

This information will be contained in our definitive proxy statement for the 2005 Annual Meeting of Stockholders under the caption “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference.

This information will be contained in our definitive proxy statement for the 2005 Annual Meeting of Stockholders under the caption “Certain Relationships and Related Transactions” and is incorporated herein by reference.

This information will be contained in our definitive proxy statement for the 2005 Annual Meeting of Stockholders under the caption “Corporate Governance” and is incorporated herein by reference.

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Index to Financial Statements

PART IV

See “Index to Consolidated Financial Statements” included on page F-1 of this Annual Report on Form 10-K for a listing of the financial statements filed as a part of this Annual Report on Form 10-K.

(2) FINANCIAL STATEMENT SCHEDULES

Aegis Communications Group, Inc.

Schedule II—Valuation and Qualifying Accounts

Years Ended December 31, 2004, 2003 and 2002

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Index to Financial Statements

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Index to Financial Statements

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