UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2006

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Sykes Enterprises, Incorporated

(Exact name of Registrant as specified in its charter)

Florida (State or other jurisdiction of incorporation or organization)		56-1383460 (IRS Employer Identification No.)
400 North Ashley Drive, Tampa, FL (Address of principal executive offices)		33602 (Zip Code)

Registrant’s telephone number, including area code: (813) 274-1000

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 at least the past 90 days.

Yes þ No o

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

Large accelerated filer   Accelerated filer þ   Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of July 21, 2006, there were 40,222,613 outstanding shares of common stock.

 

 

Sykes Enterprises, Incorporated and Subsidiaries

INDEX

						Page
						No.
Part I.		Financial Information
		Item 1.		Financial Statements
				Condensed Consolidated Balance Sheets June 30, 2006 and December 31, 2005 (Unaudited)		3
				Condensed Consolidated Statements of Operations Three and six months ended June 30, 2006 and 2005 (Unaudited)		4
				Condensed Consolidated Statements of Changes in Shareholders’ Equity Six months ended June 30, 2005, six months ended December 31, 2005 and six months ended June 30, 2006 (Unaudited)		5
				Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2006 and 2005 (Unaudited)		6
				Notes to Condensed Consolidated Financial Statements (Unaudited)		7
				Report of Independent Registered Public Accounting Firm		30
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk		41
		Item 4.		Controls and Procedures		41
Part II.		Other Information
		Item 1.		Legal Proceedings		42
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		42
		Item 4.		Submission of Matters to a Vote of Security Holders		42
		Item 6.		Exhibits		43
Signature						44
Ex-15 Awareness Letter
Ex-31.1 Section 302 Certification
Ex-31.2 Section 302 Certification
Ex-32.1 Section 906 Certification
Ex-32.1 Section 906 Certification

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

		June 30,				December 31,
(in thousands, except per share data)		2006				2005
Assets
Current assets:
Cash and cash equivalents		$	146,573			$	127,612
Receivables, net			98,482				88,213
Prepaid expenses and other current assets			14,468				10,601
Assets held for sale			7,404				—
Total current assets			266,927				226,426
Property and equipment, net			60,433				72,261
Goodwill, net			6,028				5,918
Intangibles, net			2,000				2,112
Deferred charges and other assets			29,527				24,468
		$	364,915			$	331,185
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	17,082			$	12,990
Accrued employee compensation and benefits			34,417				31,777
Deferred revenue			29,269				25,172
Deferred grants related to assets held for sale			6,514				—
Income taxes payable			1,338				2,220
Other accrued expenses and current liabilities			8,526				10,274
Total current liabilities			97,146				82,433
Deferred grants			10,816				18,107
Other long-term liabilities			4,246				4,555
Total liabilities			112,208				105,095
Shareholders’ equity:
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued and outstanding			—				—
Common stock, $0.01 par value, 200,000 shares authorized; 44,592 and 44,009 shares issued			446				440
Additional paid-in capital			169,009				165,674
Retained earnings			133,405				115,735
Accumulated other comprehensive income (loss)			1,775				(3,435	)
			304,635				278,414
Deferred stock compensation			—				(355	)
Treasury stock at cost: 4,703 shares and 4,712 shares			(51,928	)			(51,969	)
Total shareholders’ equity			252,707				226,090
		$	364,915			$	331,185

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

		Three Months Ended June 30,								Six Months Ended June 30,
(in thousands, except for per share data)		2006				2005				2006				2005
Revenues		$	135,221			$	122,194			$	266,308			$	243,566
Operating expenses:
Direct salaries and related costs			86,378				76,026				169,394				153,455
General and administrative			42,333				41,369				83,328				81,259
Net loss (gain) on disposal of property and equipment			5				(1,627	)			14				(1,696	)
Impairment of long-lived assets			—				—				382				—
Reversal of restructuring and other charges			—				(56	)			—				(314	)
Total operating expenses			128,716				115,712				253,118				232,704
Income from operations			6,505				6,482				13,190				10,862
Other income (expense):
Interest income			2,855				496				3,776				946
Interest expense			(183	)			(385	)			(276	)			(459	)
Income from rental operations, net			444				114				954				10
Other income (expense)			154				704				(208	)			386
Total other income (expense)			3,270				929				4,246				883
Income before (benefit) provision for income taxes			9,775				7,411				17,436				11,745
(Benefit) provision for income taxes			(1,996	)			2,434				(234	)			3,803
Net income		$	11,771			$	4,977			$	17,670			$	7,942
Net income per share:
Basic		$	0.30			$	0.13			$	0.45			$	0.20
Diluted		$	0.29			$	0.13			$	0.44			$	0.20
Weighted average shares:
Basic			39,900				39,289				39,679				39,242
Diluted			40,251				39,445				40,044				39,393

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

																		Accumulated
		Common Stock								Additional								Other				Deferred
		Shares								Paid-in				Retained				Comprehensive				Stock				Treasury
(In thousands)		Issued				Amount				Capital				Earnings				Income (Loss)				Compensation				Stock				Total
Balance at January 1, 2005			43,832			$	438			$	163,885			$	92,327			$	4,871			$	—			$	(51,486	)		$	210,035
Issuance of common stock			89				1				306				—				—				—				—				307
Deferred stock compensation for the issuance of restricted common stock units			—				—				854				—				—				(854	)			—				—
Amortization of deferred stock compensation			—				—				—				—				—				313				—				313
Comprehensive income (loss)			—				—				—				7,942				(9,292	)			—				—				(1,350	)
Balance at June 30, 2005			43,921				439				165,045				100,269				(4,421	)			(541	)			(51,486	)			209,305
Issuance of common stock			77				1				530				—				—				—				—				531
Deferred stock compensation for the issuance of restricted common stock units			—				—				—				—				—				—				—				—
Amortization of deferred stock compensation			—				—				—				—				—				186				—				186
Issuance of common stock under Deferred Compensation Plan and held in rabbi trust			11				—				99				—				—				—				(483	)			(384	)
Comprehensive income			—				—				—				15,466				986				—				—				16,452
Balance at December 31, 2005			44,009				440				165,674				115,735				(3,435	)			(355	)			(51,969	)			226,090
Reclassification of deferred stock compensation balance upon adoption of SFAS 123R			—				—				(355	)			—				—				355				—				—
Issuance of common stock			278				3				1,675				—				—				—				—				1,678
Stock-based compensation expense			—				—				1,103				—				—				—				—				1,103
Excess tax benefit from stock- based compensation			—				—				656				—				—				—				—				656
Issuance of common stock under Deferred Compensation Plan and held in rabbi trust, net of settlements			1				—				70				—				—				—				41				111
Issuance of restricted common stock			290				3				(3	)			—				—				—				—				—
Issuance of common stock to Board of Directors previously deferred under the 1996 Non-employee Director Fee Plan			14				—				47				—				—				—				—				47
Modification of Deferred Compensation Plan			—				—				142				—				—				—				—				142
Comprehensive income			—				—				—				17,670				5,210				—				—				22,880
Balance at June 30, 2006			44,592			$	446			$	169,009			$	133,405			$	1,775			$	—			$	(51,928	)		$	252,707

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

(in thousands)		2006				2005
Cash flows from operating activities:
Net income		$	17,670			$	7,942
Depreciation and amortization			11,878				13,290
Stock compensation expense			1,103				313
Deferred income tax benefit			(2,135	)			—
Net loss (gain) on disposal of property and equipment			14				(1,696	)
Termination costs associated with exit activities			789				186
Foreign exchange gain on liquidation of foreign entities			(94	)			(365	)
Reversal of restructuring and other charges			—				(314	)
Impairment of long-lived assets			382				—
Bad debt expense (reversals)			(115	)			60
Unrealized gain on investments held in rabbi trust			(16	)			—
Changes in assets and liabilities:
Receivables			(5,249	)			4,103
Prepaid expenses and other current assets			(2,688	)			(1,006	)
Deferred charges and other assets			(3,254	)			(2,595	)
Accounts payable			3,926				2,344
Income taxes receivable/payable			(2,964	)			(1,255	)
Accrued employee compensation and benefits			168				(364	)
Other accrued expenses and current liabilities			(2,040	)			3,238
Deferred revenue			2,900				2,388
Other long-term liabilities			479				1
Net cash provided by operating activities			20,754				26,270
Cash flows from investing activities:
Capital expenditures			(7,801	)			(5,653	)
Cash paid for acquisition of Kelly, Luttmer & Assoc. Ltd, net of cash acquired			—				(3,246	)
Proceeds from sale of property and equipment			105				2,486
Other			(254	)			—
Net cash used for investing activities			(7,950	)			(6,413	)
Cash flows from financing activities:
Payments of long-term debt			—				(77	)
Proceeds from issuance of stock			1,678				307
Excess tax benefit from stock-based compensation			656				—
Net cash provided by financing activities			2,334				230
Effects of exchange rates on cash			3,823				(4,841	)
Net increase in cash and cash equivalents			18,961				15,246
Cash and cash equivalents — beginning			127,612				93,868
Cash and cash equivalents — ending		$	146,573			$	109,114
Supplemental disclosures of cash flow information:
Cash paid during period for interest		$	191			$	343
Cash paid during period for income taxes		$	4,667			$	5,143

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

Sykes Enterprises, Incorporated and consolidated subsidiaries (“Sykes” or the “Company”) provides outsourced customer contact management solutions and services in the business process outsourcing arena to companies, primarily within the communications, technology/consumer, financial services, healthcare, and transportation and leisure industries. Sykes provides flexible, high quality outsourced customer contact management services (with an emphasis on inbound technical support and customer service), which includes customer assistance, healthcare and roadside assistance, technical support and product sales to its client’s customers. Utilizing Sykes’ integrated onshore/offshore global delivery model, Sykes provides its services through multiple communications channels encompassing phone, e-mail, Web and chat. Sykes complements its outsourced customer contact management services with various enterprise support services in the United States that encompass services for a company’s internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, Sykes also provides fulfillment services including multilingual sales order processing via the Internet and phone, inventory control, product delivery and product returns handling. The Company has operations in two geographic regions entitled (1) the Americas, which includes the United States, Canada, Latin America, India and the Asia Pacific Rim, in which the client base is primarily companies in the United States that are using the Company’s services to support their customer management needs; and (2) EMEA, which includes Europe, the Middle East, and Africa.

Note 1 – Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2006. For further information, refer to the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission (“SEC”).

Stock-Based Compensation – The Company has three stock-based compensation plans: the 2001 Equity Incentive Plan (for employees and certain non-employees), the 2004 Non-Employee Director Fee Plan (for non-employee directors), both approved by the shareholders, and the Deferred Compensation Plan (for certain eligible employees), which are discussed more fully in Note 12. Stock-based awards under these plans may consist of common stock, common stock units, stock options, cash-settled or stock-settled stock appreciation rights, restricted stock and other stock-based awards. The Company issues common stock to satisfy stock option exercises or vesting of stock awards.

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, (SFAS 123R), “Share-Based Payment”, for its stock-based compensation plans. In conjunction with the adoption of SFAS 123R on January 1, 2006 the Company also adopted the following: Staff Accounting Bulletin (SAB) 107, “Share-Based Payments”, which provides guidance on valuation methods available and other matters; Financial Accounting Standards Board (FASB) Staff Position No. 123 R-2 (SFAS 123R-2), “Practical Accommodation to the Application of Grant Date as Defined in SFAS 123R,” which provides guidance on the application of grant date; and FASB Staff Position SFAS No. 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share Based Payment Awards,” which provides for an elective alternative transition method that establishes a computational component to arrive at the beginning balance of the accumulated paid-in capital pool related to employee compensation and a simplified method to determine the subsequent impact on the accumulated paid-in capital pool of employee awards that are fully vested and outstanding upon the adoption of SFAS 123R. The Company elected to use the alternative transition method in conjunction with the adoption of SFAS 123R. The adoption of SFAS 123R did not have a material effect on the Company’s income before provision for income taxes, net income, cash flows and basic and diluted earnings per share for the three and six months ended June 30, 2006.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 1 – Basis of Presentation and Summary of Significant Accounting Policies –(continued)

Stock-Based Compensation – (continued)

SFAS 123R requires companies to recognize in their income statement the grant-date fair value of stock options and other equity-based compensation issued to employees and directors. The standard requires that compensation expense for most equity-based awards be recognized over the requisite service period, usually the vesting period, while compensation expense for liability-based awards (those usually settled in cash rather than stock) be measured to fair-value at each balance sheet date until the award is settled. Under SFAS 123R, the pro forma disclosures previously permitted are no longer an alternative to financial statement recognition. The Company elected to use the modified prospective method which requires the Company to record compensation expense for the non-vested portion of previously issued awards that remain outstanding at the initial date of adoption of SFAS 123R and to record compensation expense for any awards issued or modified after January 1, 2006. Results for prior periods have not been restated. Upon adoption of SFAS 123R, the deferred stock compensation balance of $0.4 million as of January 1, 2006 was reclassified to additional paid-in capital in the accompanying Condensed Consolidated Statement of Changes in Shareholders’ Equity. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow and a corresponding reduction in operating cash flows, rather than as an operating cash flow as previously required. Accordingly, the excess tax benefit of $0.7 million for the six months ended June 30, 2006 was classified as a financing cash flow and a corresponding reduction in operating cash flows in the accompanying Condensed Consolidated Statement of Cash Flows.

On February 1, 2005, the Compensation Committee of the Board of Directors approved accelerating the vesting of most out-of-the-money, unvested stock options held by current employees, including executive officers and certain employee directors. An option was considered out-of-the-money if the stated option exercise price was greater than the closing price, $7.23, of the Company’s common stock on the day the Compensation Committee approved the acceleration. The aggregate number of shares issuable under the accelerated stock options was 125,550 at a weighted average exercise price of $9.416 as of February 1, 2005.

The Compensation Committee also approved accelerating the vesting of out-of the-money, unvested stock options held by non-employee directors, subject to shareholder approval at the May 2005 Annual Shareholders’ Meeting. Options held by non-employee directors were considered out-of-the-money if the stated option exercise price was greater than the closing price, $8.39, of the Company’s common stock on May 24, 2005. Upon shareholder approval in May 2005, the Company accelerated the vesting of 8,332 unvested stock options at an exercise price of $8.732 on May 24, 2005. There was no additional compensation expense recognized in 2005, or in the amounts in the pro forma stock-based compensation table presented within this Note 1, as a result of accelerating the vesting of the stock options on February 1, 2005 and May 24, 2005.

The decision to accelerate vesting of these options and eliminate future compensation expense was based on a review of the Company’s long-term incentive programs in light of current market conditions and changing accounting rules regarding stock option expensing under SFAS 123R. Excluding holders of foreign stock options that elected to decline the accelerated vesting, it is estimated that the maximum future compensation expense that would have been charged to earnings, absent the acceleration of these options, based on adoption date for SFAS 123R as of January 1, 2006, was less than $0.1 million.

Prior to January 1, 2006, the Company accounted for its stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations and disclosure requirements established by SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). The Company had the option under SFAS 123 to measure compensation costs for stock options using the intrinsic value method prescribed by APB 25. Under APB 25, compensation expense was generally not recognized for stock option grants if the exercise price was the same as the market price and the number of shares to be issued was set on the date the employee stock options were granted. Since the Company granted employee stock options on this basis and the Company elected to use the intrinsic value method, no compensation expense was recognized for stock option grants. For grants of common stock units awarded to non-employee directors, under the 2004 Non-Employee Director Fee Plan, compensation expense was

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 1 – Basis of Presentation and Summary of Significant Accounting Policies – (continued)

Stock-Based Compensation – (continued)

recognized over the requisite service periods based on the fair value of the Company’s stock on the date of grant, which is the same under APB 25 and SFAS 123R.

The following table presents the impact on net income and net income per share as if the Company had elected to recognize compensation expense for the issuance of options to employees of the Company based on the fair value method of accounting prescribed by SFAS 123 prior to the adoption of SFAS 123R:

		Three Months Ended				Six Months Ended
(In thousands except per share amounts)		June 30, 2005				June 30, 2005
Net Income:
Net income as reported		$	4,977			$	7,942
Add: Stock-based compensation included in reported net income, net of tax			313				313
Deduct: Stock-based compensation under the fair value method, net of tax			(336	)			(803	)
Pro forma net income		$	4,954			$	7,452
Net Income Per Share:
Basic, as reported		$	0.13			$	0.20
Basic, pro forma		$	0.13			$	0.19
Diluted, as reported		$	0.13			$	0.20
Diluted, pro forma		$	0.13			$	0.19

The Company has not issued any stock options since January 1, 2004. For options issued before this date, the Company used the Black-Scholes option pricing model to estimate the fair value of each stock option at the date of grant using various assumptions.

Investments Held in Rabbi Trust —Securities held in a rabbi trust for a supplemental nonqualified executive retirement program, as more fully described under “Deferred Compensation Plan” in Note 12, Stock-Based Compensation Plans, include the fair market value of investments in various mutual funds and shares of the Company’s common stock. The fair market value of these investments is determined by quoted market prices and is adjusted to the current market price at the end of each reporting period. The investments held in mutual funds, classified as trading securities, had a fair market value of approximately $0.8 million and $0.7 million at June 30, 2006 and December 31, 2005 and are included in “Prepaid expenses and other current assets” and “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheets, respectively. These investments were comprised of 76% equity securities and 24% debt securities at June 30, 2006 and 55% equity securities and 45% debt securities at December 31, 2005. During the three and six months ended June 30, 2006, the Company recorded less than $0.1 million in unrealized gains from holding these investments which is included in “Other income (expense)” in the accompanying Condensed Consolidated Statements of Operations (none in the comparable 2005 period.)

The investments held in the Company’s common stock had a carrying value of approximately $0.4 million and $0.5 million at June 30, 2006 and December 31, 2005, respectively, and are included in “Treasury Stock” in the accompanying Condensed Consolidated Balance Sheets. During the six months ended June 30, 2006, the

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 1 – Basis of Presentation and Summary of Significant Accounting Policies – (continued)

Investments Held in Rabbi Trust – (continued)

Company recorded approximately $0.1 million in compensation expense associated with these investments, which is included in “General and administrative” in the accompanying Condensed Consolidated Statements of Operations (none in the comparable 2005 period.)

Property and Equipment — The carrying value of property and equipment, including leased assets, to be held and used is evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. An asset is considered to be impaired when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition does not exceed its carrying amount. The amount of the impairment loss, if any, is measured as the amount by which the carrying value of the asset exceeds its estimated fair value, which is generally determined based on appraisals or sales prices of comparable assets. Occasionally, the Company redeploys property and equipment from under-utilized centers to other locations to improve capacity utilization if it is determined that the related undiscounted future cash flows in the under-utilized centers would not be sufficient to recover the carrying amount of these assets. During the three months ended March 31, 2006, based on the Company’s evaluation for impairment, the Company recorded a $0.4 million impairment charge for property and equipment in one of its underutilized European customer contact management centers. This impairment charge represented the amount by which the carrying value of the assets exceeded the estimated fair value of those assets which cannot be redeployed to other locations. Except as noted above, the Company determined that its property and equipment, including the idle facility in Perry County, Kentucky, were not impaired as of June 30, 2006.

The Company leases the land, building and contents of four former U.S. customer contact management centers to unrelated third parties. In June 2006, the Company signed an agreement to sell the four leased properties at a gain. The sale is anticipated to close in September 2006; however, the purchaser has a unilateral right to terminate the agreement before that time. At June 30, 2006, the assets were reclassified from “Property and equipment, net” to “Assets held for sale” and the Company discontinued depreciating these assets and amortizing the related deferred grants. As of June 30, 2006 and December 31, 2005, the leased properties (classified as “Assets held for sale” at June 30, 2006 and “Property and equipment, net” at December 31, 2005) consist of the following (in thousands):

		June 30,				December 31,
		2006				2005
Building and improvements		$	10,460			$	10,460
Equipment, furniture and fixtures			6,305				6,875
			16,765				17,335
Less accumulated depreciation			(9,361	)			(9,678	)
		$	7,404			$	7,657

Related to these assets held for sale are deferred grants of $6.5 million as of June 30, 2006 which are shown in current liabilities in the accompanying Condensed Consolidated Balance Sheet at June 30, 2006.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 1 – Basis of Presentation and Summary of Significant Accounting Policies – (continued)

Property and Equipment – (continued)

Future minimum rental payments, including penalties for failure to renew, to be received on non-cancelable operating leases absent the sale of the leased properties, are contractually due as follows as of June 30, 2006 (in thousands):

		Amount
2006		$	1,105
2007			2,291
2008			1,932
2009			567
2010			448
Thereafter			—
		$	6,343

Foreign Currency Translation - The assets and liabilities of the Company’s foreign subsidiaries, whose functional currency is other than the U.S. Dollar, are translated at the exchange rates in effect on the reporting date, and income and expenses are translated at the weighted average exchange rate during the period. The net effect of translation gains and losses is not included in determining net income, but is included in Accumulated Other Comprehensive Income (Loss), which is reflected as a separate component of shareholders’ equity until the sale or until the complete or substantially complete liquidation of the net investment in the foreign subsidiary. Foreign currency transactional gains and losses are included in other income (expense) in the accompanying Condensed Consolidated Statements of Operations.

Foreign Currency and Derivative Instruments — Periodically, the Company enters into foreign currency contracts with financial institutions to protect against currency exchange risks associated with existing assets and liabilities denominated in a foreign currency. These contracts require the Company to exchange currencies in the future at rates agreed upon at the contract’s inception. The contracts entered into by the Company have been primarily related to the Euro. A foreign currency contract acts as an economic hedge as the gains and losses on these contracts typically offset or partially offset gains and losses on the assets, liabilities, and transactions being hedged. The Company does not designate its foreign currency contracts as accounting hedges and does not hold or issue financial instruments for speculative or trading purposes. Foreign currency contracts are accounted for on a mark-to-market basis, with unrealized gains or losses recognized as a component of other income (expense). There were no realized and unrealized gains or losses related to these contracts for the three and six months ended June 30, 2006 and 2005.

Recent Accounting Pronouncements – In March 2004, the Emerging Issues Task Force (the “EITF”) reached a consensus on Issue No. 03-1 (EITF 03-1), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides guidance on other-than-temporary impairment evaluations for securities accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,” and non-marketable equity securities accounted for under the cost method. The EITF developed a basic three-step test to evaluate whether an investment is other-than-temporarily impaired. In September 2004, the FASB delayed the effective date of the recognition and measurement provisions of EITF 03-1. However, the disclosure provisions were effective for fiscal years ending after June 15, 2004. In November 2005, the FASB issued final FASB Staff Position Nos. SFAS 115-1 and SFAS 124-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” which superseded EITF 03-1 and provided similar guidance. The Company adopted the guidance in these standards on January 1, 2006. The impact of this adoption did not have a material impact on the financial condition, results of operations or cash flows of the Company.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 1 – Basis of Presentation and Summary of Significant Accounting Policies – (continued)

Recent Accounting Pronouncements – (continued)

In May 2005, the FASB issued SFAS No. 154 (SFAS 154), “Accounting Changes and Error Corrections,” which requires retrospective application to prior periods’ financial statements for changes in accounting principle and redefines the term “restatement” as the revising of previously issued financial statements to reflect the correction of an error. Under retrospective application, the new accounting principle is applied as of the beginning of the first period presented as if that principle had always been used. The cumulative effect of the change is reflected in the carrying value of assets and liabilities as of the first period presented and the offsetting adjustments are recorded to opening retained earnings. SFAS 154 is effective for accounting changes and corrections of errors made in the years beginning after December 31, 2005.

In February 2006, the FASB issued SFAS No. 155 (SFAS 155), “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS No. 133 (SFAS 133), “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140 (SFAS 140), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring in fiscal years beginning after September 15, 2006. The Company is currently evaluating the impact of this standard on its financial position, results of operations and cash flows.

In April 2006, the FASB issued FASB Staff Position FIN 46(R)-6 (FIN 46(R)-6), “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)”, that will become effective beginning the first day of the first reporting period after June 15, 2006. FIN 46(R)-6 clarifies that the variability to be considered in applying FASB Interpretation 46(R) shall be based on an analysis of the design of the variable interest entity. The adoption of FIN 46(R)-6 is not expected to have a material impact on the financial condition, results of operations or cash flows of the Company.

In July 2006, the FASB issued FASB Interpretation 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of this standard on the Condensed Consolidated Financial Statements.

Note 2 – Acquisition

On July 3, 2006, the Company completed the acquisition of all the outstanding shares of capital stock Centro Interacción Multimedia, S.A. (“Apex”), an established customer contact management solutions and services provider headquartered in the City of Cordoba, Argentina. Apex serves clients in Argentina, Mexico and the United States. The Company will report Apex in its Americas’ segment. Client programs range from in-bound customer care and help-desk/technical support to out-bound sales and cross selling within the business-to-consumer and certain business-to-business segments for Internet Service Providers, wireless carriers and credit card companies. The Company acquired these operations in an effort to broaden its operations in a growing market in the communications and financial services verticals. The purchase price for the shares was $27.4 million less $0.4 million, representing APEX’s obligations on certain of its capital leases as of the closing date, for a net purchase price of $27.0 million, eighty percent of which ($21.6 million) was paid in cash from offshore operations and twenty percent of which ($5.4 million) was paid by the delivery of 330,992 shares of the common stock of the Company, valued at $16.324 per share, which was the average of the closing sales prices of the common stock for the five trading days of June 26 through June 30, 2006. Of the net purchase price of $27.0 million, $5.0 million was paid to an escrow account (eighty percent in cash and twenty percent in common stock) to secure the Sellers’

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 2 – Acquisition – (continued)

indemnification obligations and to provide for a holdback of the purchase price until amounts billed by Apex to a major client reach established targets. Based on a preliminary third-party valuation, the net purchase price of $27.0 million less the $5.0 million contingent purchase price held in escrow plus estimated direct acquisition costs of $0.5 million, or $22.5 million, is expected to result in a purchase price allocation to net assets of $3.9 million, to purchased intangible assets of $7.4 million (primarily customer relationships, existing technologies and covenants not to compete) and to goodwill of $11.2 million. The purchased intangible assets (other than goodwill) are amortized over a period of two to six years.

On July 3, 2006, after the acquisition of Apex was completed, the Company contributed additional capital of $1.3 million to Apex for working capital support and general corporate purposes.

The following unaudited pro forma data summarizes the combined results of Sykes Enterprises, Incorporated and Apex for all periods presented as if the combination had been consummated on January 1, 2005.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Revenues		$	142,587			$	129,379			$	280,365			$	252,119
Income before (benefit) provision for income taxes		$	10,998			$	8,364			$	20,121			$	12,887
Net income		$	12,564			$	5,593			$	19,411			$	8,680
Net income per diluted share		$	0.31			$	0.14			$	0.48			$	0.22

Estimated future amortization expense for the five succeeding years excluding the effects of the contingent purchase price held in escrow is as follows (in thousands):

Year Ending December 31,		Amount
2006 (remaining six months)		$	678
2007		$	1,355
2008		$	1,305
2009		$	1,228
2010		$	1,200

Note 3 – Intangibles, Net

In connection with a March, 2005 acquisition in Canada, the Company recorded identifiable intangible assets with definite lives, primarily customer relationships, existing technologies and covenants not to compete, that are being amortized using the straight-line method over their estimated period of benefit, generally ranging from two to fifteen years. Amortization expense was $0.1 million and $0.2 million during the three and six months ended June 30, 2006 and $0.1 million and $0.1 million during the comparable 2005 periods, respectively.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 3 – Intangibles, Net – (continued)

The following table presents the purchased intangibles at June 30, 2006 and December 31, 2005 (in thousands):

		June 30,				December 31,
		2006				2005
Gross Carrying Amount		$	2,534			$	2,432
Accumulated Amortization			(534	)			(320	)
Net Carrying Amount		$	2,000			$	2,112

Estimated future amortization expense for the five succeeding years, excluding estimates for the Apex acquisition discussed in Note 2, is as follows (in thousands):

Year Ending December 31,		Amount
2006 (remaining six months)		$	200
2007		$	269
2008		$	135
2009		$	131
2010		$	131

Note 4 – Deferred Revenue

The components of deferred revenue consist of the following (in thousands):

		June 30,				December 31, 2005
		2006				2005
Future service		$	26,873			$	24,247
Penalties and holdbacks			2,396				925
		$	29,269			$	25,172

Note 5 – Accumulated Other Comprehensive Income (Loss)

The Company presents data in the Condensed Consolidated Statements of Changes in Shareholders’ Equity in accordance with SFAS No. 130, “Reporting Comprehensive Income” (“SFAS 130”). SFAS 130 establishes rules for the reporting of comprehensive income (loss) and its components.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 5 – Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) include foreign currency translation adjustments as follows (in thousands):

		Accumulated
		Other
		Comprehensive
		Income (Loss)
Balance at January 1, 2005		$	4,871
Foreign currency translation adjustment			(8,540	)
Less: foreign currency translation loss included in net income (no tax effect)			234
Balance at December 31, 2005			(3,435	)
Foreign currency translation adjustment			5,210
Balance at June 30, 2006		$	1,775

Earnings associated with the Company’s investments in its international subsidiaries are considered to be permanently invested and no provision for United States federal and state income taxes on those earnings or translation adjustments has been provided.

Note 6 – Termination Costs Associated with Exit Activities

On November 3, 2005, the Company committed to a plan (the “Plan”) to reduce its workforce by approximately 200 people in one of its European customer contact management centers in Germany in response to the October 2005 contractual expiration of a technology client program, which previously had generated annual revenues of approximately $12.0 million. The Company expects to complete the Plan by the end of the third quarter of 2006. The Company estimates it will incur total charges related to the Plan of approximately $1.6 million to $1.9 million, an increase of $0.3 million from December 31, 2005. These charges include approximately $1.3 million to $1.5 million for severance and related costs and $0.1 million to $0.2 million for other exit costs. Additionally, upon completion of the Plan, the Company will cease using certain property and equipment estimated at $0.2 million, and has depreciated these assets over the shortened useful life, which approximates eight months. As a result, the Company recorded additional depreciation of approximately $0.2 million during the six months ended June 30, 2006. Termination costs of $0.8 million are included in “Direct salaries and related costs” in the accompanying Condensed Consolidated Statement of Operations for the six months ended June 30, 2006. Cash payments related to termination costs made under the Plan totaled $0.6 million for the six months ended June 30, 2006. Termination costs to date approximate $1.3 million as of June 30, 2006 with cash payments to date of $0.6 million.

On January 19, 2005, the Company announced to its workforce that, as part of its continued efforts to optimize assets and improve operating performance, it would migrate the call volumes of the customer contact management services and related operations from its Bangalore, India facility, a component of the Company’s Americas segment, to other offshore facilities. Before the plan of migration, the Company’s Bangalore facility generated approximately $0.9 million in revenue in the first quarter of 2005, the last full quarter of operations. The Company substantially completed the plan of migration, including the redeployment of site infrastructure and the recruiting, training and ramping-up of agents associated with the migration of Bangalore call volumes to other offshore facilities, in the second quarter of 2005. In connection with this migration, the Company terminated 413 employees and accrued over their remaining service period, an estimated liability for termination costs of $0.2 million based on the fair value as of the termination date, in accordance SFAS No. 146, “Accounting for Costs associated with Exit or Disposal Activities.” These termination costs are included in “Direct salaries and related costs” in the accompanying Consolidated Statement of Operations for the three and six months ended June 30, 2005, respectively. Cash payments related to these termination costs totaled $0.1 million and $0.2 million during the three and six months ended June 30, 2005, respectively.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 7 – Restructuring and Other Charges

2002 Charges

In October 2002, the Company approved a restructuring plan to close and consolidate two U.S. and three European customer contact management centers, to reduce capacity within the European fulfillment operations and to write-off certain specialized e-commerce assets primarily in response to the October 2002 notification of the contractual expiration of two technology client programs in March 2003 with approximate annual revenues of $25.0 million. The restructuring plan was designed to reduce costs and bring the Company’s infrastructure in-line with the current business environment. Related to these actions, the Company recorded restructuring and other charges in the fourth quarter of 2002 of $20.8 million primarily for the write-off of certain assets, lease termination and severance costs. In connection with the 2002 restructuring, the Company reduced the number of employees by 470 during 2002 and by 330 during 2003. The plan was substantially completed by the end of 2003.

In connection with the contractual expiration of the two technology client contracts previously reported, the Company also recorded additional depreciation expense of $1.2 million in the fourth quarter of 2002 and $1.3 million in the first quarter of 2003 primarily related to a specialized technology platform which is no longer utilized upon the expiration of the contracts in March 2003.

The following tables summarize the 2002 plan accrued liability for restructuring and other charges and related activity in 2005 (in thousands) (no activity in 2006):

		Balance at								Other				Balance at
		April 1,				Cash				Non-Cash				June 30,
Three Months ended June 30, 2005:		2005				Outlays				Changes (1)				2005
Severance and related costs		$	75			$	—			$	(41	)		$	34
Other restructuring costs			41				—				(15	)			26
Total		$	116			$	—			$	(56	)		$	60

		Balance at								Other				Balance at
		January 1,				Cash				Non-Cash				June 30,
Six Months ended June 30, 2005:		2005				Outlays				Changes (1)				2005
Severance and related costs		$	106			$	—			$	(72	)		$	34
Other restructuring costs			285				(17	)			(242	)			26
Total		$	391			$	(17	)		$	(314	)		$	60

2000 Charges

The Company recorded restructuring and other charges during the second and fourth quarters of 2000 approximating $30.5 million. The second quarter 2000 restructuring and other charges approximating $9.6 million resulted from the Company’s consolidation of several European and one U.S. fulfillment center and the closing or consolidation of six technical staffing offices. Included in the second quarter 2000 restructuring and other charges was a $3.5 million lease termination payment to the Company’s former chairman (and largest shareholder) related to the termination of a ten-year operating lease agreement for the use of his private jet. As a result of the second quarter 2000 restructuring, the Company reduced the number of employees by 157 during 2000 and satisfied the remaining lease

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 7 – Restructuring and Other Charges –(continued)

2000 Charges – (continued)

obligations related to the closed facilities during 2001.

The Company also announced, after a comprehensive review of operations, its decision to exit certain non-core, lower margin businesses to reduce costs, improve operating efficiencies and focus on its core competencies of technical support, customer service and consulting solutions. As a result, the Company recorded $20.9 million in restructuring and other charges during the fourth quarter of 2000 related to the closure of its U.S. fulfillment operations, the consolidation of its Tampa, Florida technical support center and the exit of its worldwide localization operations. Included in the fourth quarter 2000 restructuring and other charges is a $2.4 million severance payment related to the employment contract of the Company’s former President. In connection with the fourth quarter 2000 restructuring, the Company reduced the number of employees by 245 during the first half of 2001 and satisfied a significant portion of the remaining lease obligations related to the closed facilities during 2001.

The following tables summarize the 2000 plan accrued liability for restructuring and other charges and related activity in 2005 (in thousands) (no activity in 2006):

		Balance at								Other				Balance at
		April 1,				Cash				Non-Cash				June 30,
Three Months ended June 30, 2005:		2005				Outlays				Changes				2005
Severance and related costs		$	—			$	—			$	—			$	—

		Balance at								Other				Balance at
		January 1,				Cash				Non-Cash				June 30,
Six Months ended June 30, 2005:		2005				Outlays				Changes				2005
Severance and related costs		$	87			$	(87	)		$	—			$	—

Note 8 – Borrowings

On March 15, 2004, the Company entered into a $50.0 million revolving credit facility with a group of lenders (the “Credit Facility”), which amount is subject to certain borrowing limitations. Pursuant to the terms of the Credit Facility, the amount of $50.0 million may be increased up to a maximum of $100.0 million with the prior written consent of the lenders. The $50.0 million Credit Facility includes a $10.0 million swingline subfacility, a $15.0 million letter of credit subfacility and a $40.0 million multi-currency subfacility.

The Credit Facility, which includes certain financial covenants, may be used for general corporate purposes including acquisitions, share repurchases, working capital support, and letters of credit, subject to certain limitations. The Credit Facility, including the multi-currency subfacility, accrues interest, at the Company’s option, at (a) the Base Rate (defined as the higher of the lender’s prime rate or the Federal Funds rate plus 0.50%) plus an applicable margin up to 0.50%, or (b) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin up to 2.25%. Borrowings under the swingline subfacility accrue interest at the prime rate plus an applicable margin up to 0.50% and borrowings under the letter of credit subfacility accrue interest at the LIBOR plus an applicable margin up to 2.25%. In addition, a commitment fee of up to 0.50% is charged on the unused portion of the Credit Facility on a quarterly basis. The borrowings under the Credit Facility, which will terminate on March 14, 2008, are secured by a pledge of 65% of the stock of each of the Company’s active direct foreign subsidiaries. The Credit Facility prohibits the Company from incurring additional indebtedness, subject to certain specific exclusions. There were no borrowings during the three and six months ended June 30, 2006 and no outstanding balances as of June 30, 2006 with $50.0 million availability on the Credit Facility.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 9 – Income Taxes

The Company’s effective tax rate was (1.3)% and 32.4% for the six months ended June 30, 2006 and 2005, respectively. The 33.7% decrease in the effective tax rate was primarily due to tax benefits of approximately $3.0 million resulting from the Canadian tax appeals settlement, additional income earned in tax holiday jurisdictions and year-to-date losses in jurisdications for which current tax benefits can be recognized; accompanied by the shift in the mix of earnings within tax jurisdictions and the effects of permanent differences, valuation allowances, foreign withholdings and other taxes, state income taxes and foreign income tax rate differentials. The difference in the Company’s effective tax rate of (1.3)% as compared to the U.S. statutory federal income tax rate of 35.0% was primarily due to tax benefits of approximately $3.0 million resulting from the Canadian tax appeals settlement and additional income earned in tax holiday jurisdictions; accompanied by the effects of requisite valuation allowances, permanent differences, foreign withholding and other taxes, state income taxes and foreign income tax rate differentials.

Earnings associated with the Company’s investments in its international subsidiaries are considered to be permanently invested and no provision for federal and state income taxes on those earnings or translation adjustments has been provided. Determination of any unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries that are essentially permanent in nature is not practicable.

The Company is currently under examination in the U.S. by several states for sales and use taxes and franchise taxes for periods covering 1999 through 2003. The U.S. Internal Revenue Service completed audits of the Company’s U.S. tax returns for tax years through July 31, 1999 and is currently auditing the tax years ended July 31, 2002, July 31, 2003 and December 31, 2003. Certain German subsidiaries of the Company are under examination by the German tax authorities for periods covering 1997 through 2003. Additionally, certain Canadian subsidiaries are under examination by Canadian tax authorities for tax years 1999 through 2003, a Philippine subsidiary is being audited by the Philippine tax authorities for tax years 2003 and 2004, and India’s tax authorities have initiated inquiries with respect to the Company’s operations in India for tax years ended in 2004 and 2005.

As of June 30, 2006 and December 31, 2005, the Company had a contingent income tax liability of $2.4 million and $3.2 million, respectively, consisting of amounts for subsidiaries located in both the Americas and EMEA segments that is included in “Income taxes payable” in the accompanying Condensed Consolidated Balance Sheets. The net decrease of $0.8 million was primarily due to tax benefits resulting from the Canadian tax appeals settlement for tax years 1993 through 1998, partially offset by federal and provincial determinations made by the Canadian tax authorities in the tax examinations for tax years 1999 through 2003. The amount of the contingent liability is based on an estimate of the probable liability in accordance with SFAS 5 “Accounting for Contingencies”, using available evidence, including detailed analyses of the potential income tax issues, income tax assessments and notices of disallowance, consultation with independent outside tax and legal advisors and the Company’s historical experience in settling similar issues without additional income tax liability. Management believes that the $2.4 million contingent income tax liability, a net decrease of $0.8 million from December 31, 2005, is the probable amount that will be paid upon settlement of the related tax audits based on current available evidence and issues and does not believe there would be a material impact on liquidity beyond what has been provided for in “Income taxes payable.”

Note 10 – Earnings Per Share

Basic earnings per share are based on the weighted average number of common shares outstanding during the periods. Diluted earnings per share includes the weighted average number of common shares outstanding during the respective periods and the further dilutive effect, if any, from stock options, common stock units and shares held in a rabbi trust using the treasury stock method. Options to purchase 0.4 million shares and 0.3 million shares of common stock at various prices for the three and six month periods ended June 30, 2006 and 1.4 million shares and 1.8 million shares of common stock for the comparable 2005 periods were antidilutive and were excluded from the calculation of diluted earnings per share.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 10 – Earnings Per Share – (continued)

The numbers of shares used in the earnings per share computations are as follows (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Basic:
Weighted average common shares outstanding			39,900				39,289				39,679				39,242
Diluted:
Dilutive effect of stock options, stock appreciation rights and common stock units			351				156				365				151
Total weighted average diluted shares outstanding			40,251				39,445				40,044				39,393

On August 5, 2002, the Company’s Board of Directors authorized the Company to purchase up to three million shares of its outstanding common stock. A total of 1.6 million shares have been repurchased under this program since inception. The shares are purchased, from time to time, through open market purchases or in negotiated private transactions, and the purchases are based on factors, including but not limited to, the stock price and general market conditions. During the six months ended June 30, 2006, the Company made no purchases under the 2002 repurchase program.

Note 11 – Segments and Geographic Information

The Company operates within two regions, the “Americas” and “EMEA” which represented 67.3% and 32.7%, respectively, of the Company’s consolidated revenues for the three months ended June 30, 2006 and 67.3% and 32.7%, respectively, of the Company’s consolidated revenues for the six months ended June 30, 2006. In the comparable 2005 periods, the Americas and EMEA regions represented 63.3% and 36.7%, respectively, of the Company’s consolidated revenues for the three months ended June 30, 2005 and 62.3% and 37.7%, respectively, of the Company’s consolidated revenues for the six months ended June 30, 2005. Each region represents a reportable segment comprised of aggregated regional operating segments, which portray similar economic characteristics. The Company aligns its business into two segments to effectively manage the business and support the customer care needs of every client and to respond to the demand of the Company’s global customers.

The reportable segments consist of (1) the Americas, which includes the United States, Canada, Latin America, India and the Asia Pacific Rim, and provides outsourced customer contact management solutions (with an emphasis on technical support and customer service) and technical staffing and (2) EMEA, which includes Europe, the Middle East and Africa, and provides outsourced customer contact management solutions (with an emphasis on technical support and customer service) and fulfillment services. The sites within Latin America, India and the Asia Pacific Rim are included in the Americas region given the nature of the business and client profile, which is primarily made up of U.S. based companies that are using the Company’s services in these locations to support their customer contact management needs.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 11 – Segments and Geographic Information – (continued)

Information about the Company’s reportable segments for the three and six months ended June 30, 2006 compared to the corresponding prior year periods, is as follows (in thousands):

														Consolidated
		Americas				EMEA				Other (1)				Total
Three Months Ended June 30, 2006:
Revenues		$	90,937			$	44,284							$	135,221
Depreciation and amortization		$	4,663			$	1,151							$	5,814
Income (loss) from operations		$	13,324			$	1,298			$	(8,117	)		$	6,505
Other income											3,270				3,270
Benefit for income taxes											1,996				1,996
Net income														$	11,771
Three Months Ended June 30, 2005:
Revenues		$	77,306			$	44,888							$	122,194
Depreciation and amortization		$	4,768			$	1,457							$	6,225
Income (loss) from operations before reversal of restructuring and other charges		$	12,723			$	1,625			$	(7,922	)		$	6,426
Reversal of restructuring and other charges											56				56
Income from operations															6,482
Other income											929				929
Provision for income taxes											(2,434	)			(2,434	)
Net income														$	4,977
Six Months Ended June 30, 2006:
Revenues		$	179,209			$	87,099							$	266,308
Depreciation and amortization		$	9,525			$	2,353							$	11,878
Income (loss) from operations before impairment of long-lived assets		$	27,176			$	2,374			$	(15,978	)		$	13,572
Impairment of long-lived assets											(382	)			(382	)
Income from operations															13,190
Other income											4,246				4,246
Benefit for income taxes											234				234
Net income														$	17,670
Six Months Ended June 30, 2005:
Revenues		$	151,670			$	91,896							$	243,566
Depreciation and amortization		$	10,179			$	3,111							$	13,290
Income (loss) from operations before reversal of restructuring and other charges		$	22,223			$	3,635			$	(15,310	)		$	10,548
Reversal of restructuring and other charges											314				314
Income from operations															10,862
Other income											883				883
Provision for income taxes											(3,803	)			(3,803	)
Net income														$	7,942

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 11 – Segments and Geographic Information – (continued)

⁽¹⁾ Other items (including corporate costs, restructuring and impairment costs, other income and expense, and income taxes) are shown for purposes of reconciling to the Company’s consolidated totals as shown in the table above for the three and six months ended June 30, 2006 and 2005. The accounting policies of the reportable segments are the same as those described in Note 1 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2005. Inter-segment revenues are not material to the Americas and EMEA segment results. The Company evaluates the performance of its geographic segments based on revenue and income (loss) from operations, and does not include segment assets or other income and expense items for management reporting purposes.

During the three and six months ended June 30, 2006 and 2005, the Company had no clients that exceeded ten percent of consolidated revenues.

Note 12 – Stock-Based Compensation

A detailed description of each of the Company’s stock-based compensation plans is provided below, including the 2001 Equity Incentive Plan, the 2004 Non-Employee Director Fee Plan and the Deferred Compensation Plan. Stock-based compensation expense related to these plans, which is included in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations, was $0.7 million and $1.1 million for the three and six months ended June 30, 2006. The costs for the comparable 2005 periods was $0.3 million and $0.3 million. The related income tax benefits recognized in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2006 was $0.2 million and $0.4 million, respectively. In addition, the Company realized the benefit of tax deductions in excess of recognized tax benefits of $0.5 million and $0.7 million from the exercise of stock options in the three and six months ended June 30, 2006, respectively. There were no capitalized stock-based compensation costs at June 30, 2006.

2001 Equity Incentive Plan — The Company’s 2001 Equity Incentive Plan (the “Plan”), which is shareholder-approved, permits the grant of stock options, stock appreciation rights, restricted stock and other stock-based awards to certain employees of the Company, and certain non-employees who provide services to the Company, for up to 7.0 million shares of common stock in order to encourage them to remain in the employment of or to diligently provide services to the Company and to increase their interest in the Company’s success.

Stock Options — Options are granted at fair market value on the date of the grant and generally vest over one to four years. All options granted under the Plan expire if not exercised by the tenth anniversary of their grant date. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model that uses various assumptions. The fair value of the stock option awards is expensed on a straight-line basis over the vesting period of the award. Expected volatility is based on historical volatility of the Company’s stock. The risk-free rate for periods within the contractual life of the award is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. Exercises and forfeitures are estimated within the valuation model using employee termination and other historical data. The expected term of the stock option awards granted is derived from historical exercise experience under the Plan and represents the period of time that stock option awards granted are expected to be outstanding. No stock options were granted during the six months ended June 30, 2006 and 2005.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 12 – Stock-Based Compensation (continued)

Stock Options — (continued)

The following table summarizes stock option activity under the Plan as of June 30, 2006, and changes during the six months then ended:

										Weighted
										Average
						Weighted-				Remaining				Aggregate
						Average				Contractual				Intrinsic
		Shares				Exercise				Term				Value
Stock Options		(000s)				Price				(in years)				(000s)
Outstanding at January 1, 2006			1,213			$	10.03
Granted			—				—
Exercised			(233	)			7.20
Forfeited or expired			(15	)			11.32
Outstanding at June 30, 2006			965			$	10.69				4.75			$	—
Vested or expected to vest at June 30, 2006			921			$	10.94				4.66			$	—
Exercisable at June 30, 2006			921			$	10.94				4.66			$	—

There is no intrinsic value for options exercised during the three and six months ended June 30, 2006 and 2005 since the exercise price of the options is the same as the market price of the underlying stock on the date of grant.

The following table summarizes the status of nonvested stock options under the Plan as of June 30, 2006, and changes during the six months then ended:

						Weighted
						Average
		Shares				Grant-Date
Nonvested Stock Options		(In thousands)				Fair Value
Nonvested at January 1, 2006			93			$	7.63
Granted			—			$	—
Vested			(49	)		$	9.61
Forfeited			—			$	—
Nonvested at June 30, 2006			44			$	5.40

As of June 30, 2006, there was $30 thousand of total unrecognized compensation cost related to the nonvested stock options granted under the Plan (the effect of estimated forfeitures is not material.) This cost is expected to be recognized over a weighted-average period of six months. The total fair value of stock options vested during the six months ended June 30, 2006 and 2005, was $0.3 million and $0.2 million, respectively.

Cash received from stock options exercised under all stock-based compensation plans for the six months ended June 30, 2006 and 2005, was $1.7 million and $0.3 million, respectively. The actual tax benefit realized for the tax deductions from these stock option exercises totaled $0.7 million for the six months ended June 30, 2006 (not material in the comparable 2005 period.)

Stock Appreciation Rights — On March 29, 2006, the Company’s Board of Directors, at the recommendation of the Compensation and Human Resource Development Committee (the “Committee”), approved awards of stock-settled stock appreciation rights (“SARs”), for a number of eligible participants. SARs represent the right to receive, without payment to the Company, a certain number of shares of common stock, as determined by the Committee, equal to the amount by which the fair market value of a share of common stock exceeds the grant price at the time of exercise.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 12 – Stock-Based Compensation (continued)

Stock Appreciation Rights — (continued)

The SARs were granted at fair market value of the Company’s common stock on the date of the grant and vest one-third on each of the anniversaries of the date of grant, provided the participant is employed by the Company on such date. The SARs have a term of 10 years from the date of grant. In the event of a change in control, the SARs will vest on the date of the change in control, provided that the participant is employed by the Company on the date of the change in control.

The SARs are exercisable only within three months after the death, disability, retirement or termination of the participant’s employment with the Company, if and to the extent the SARs were exercisable immediately prior to such termination. If the participant’s employment is terminated for cause, or the participant terminates his or her own employment with the Company, any portion of the SARs not yet exercised (whether or not vested) terminates immediately on the date of termination of employment.

The fair value of each SAR is estimated on the date of grant using the Black-Scholes valuation model that uses various assumptions. The fair value of the SARs is expensed on a straight-line basis over the requisite service period. Expected volatility is based on historical volatility of the Company’s stock. The risk-free rate for periods within the contractual life of the award is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. Exercises and forfeitures are estimated within the valuation model using employee termination and other historical data. The expected term of the SARs granted represents the period of time the SARs are expected to be outstanding.

The following table summarizes the assumptions used to estimate the fair value of SARs granted during the six months ended June 30, 2006 (no SARs were granted in the comparable 2005 period):

		Six Months
		Ended June 30,
		2006
Expected volatility			61	%
Weighted-average volatility			61	%
Expected dividends			—
Expected term (in years)			3.8
Risk-free rate			4.8	%

The following table summarizes SARs activity under the Plan as of June 30, 2006, and changes during the six months then ended:

										Weighted
										Average
						Weighted-				Remaining				Aggregate
						Average				Contractual				Intrinsic
		Shares				Exercise				Term				Value
Stock Appreciation Rights		(000s)				Price				(in years)				(000s)
Outstanding at January 1, 2006			—			$	—
Granted			126				—
Exercised			—				—
Forfeited or expired			—				—
Outstanding at June 30, 2006			126			$	—				9.75			$	—
Vested or expected to vest at June 30, 2006			—			$	—				—			$	—
Exercisable at June 30, 2006			—			$	—				—			$	—

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 12 – Stock-Based Compensation (continued)

Stock Appreciation Rights — (continued)

The weighted-average grant-date fair value of the SARs granted during the six months ended June 30, 2006 was $7.28. No SARs were exercised during the six months ended June 30, 2006.

The following table summarizes the status of nonvested SARs under the Plan as of June 30, 2006, and changes during the six months then ended:

						Weighted
						Average
		Shares				Grant-Date
Nonvested Stock Appreciation Rights		(In thousands)				Fair Value
Nonvested at January 1, 2006			—			$	—
Granted			126			$	7.28
Vested			—			$	—
Forfeited			—			$	—
Nonvested at June 30, 2006			126			$	7.28

As of June 30, 2006, there was $0.8 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock appreciation rights granted under the Plan. This cost is expected to be recognized over a weighted-average period of 2.8 years. None of the SARs vested during the six months ended June 30, 2006.

Restricted Shares — On March 29, 2006 and on May 24, 2006, the Company’s Board of Directors, at the recommendation of the Committee, approved awards of performance-based restricted shares (“Restricted Shares”), for a number of eligible participants. The Restricted Shares represent shares of the Company’s common stock which are issued to the participant subject to (a) restrictions on transfer for a period of time and (b) forfeiture under certain conditions. The performance goals, including revenue growth and income from operations targets, provide a range of vesting possibilities from 0% to 100% and will be measured as of December 31, 2007 for the 2006-2007 performance period and as of December 31, 2008 for the 2006-2008 performance period. If the performance conditions are met for the 2006-2007 performance period and for the 2006-2008 performance period, the shares will vest and all restrictions on the transfer of the restricted shares will lapse on March 29, 2008 and March 29, 2009, respectively. The Company recognizes compensation cost, net of estimated forfeitures, based on the fair value (which approximates the current market price) of the Restricted Shares on the date of grant ratably over the requisite service period based on the probability of achieving the performance goals, as determined in accordance with SFAS 5, “Accounting for Contingencies.” Changes in the probability of achieving the performance goals from period to period will result in corresponding changes in compensation expense.

In the event of a change in control (as defined in the Plan) prior to the date the restricted shares vest, all of the restricted shares will vest and the restrictions on transfer will lapse with respect to such vested shares on the date of the change in control, provided that participant is employed by the Company on the date of the change in control.

If the participant’s employment with the Company is terminated for any reason, either by the Company or participant, prior to the date on which the restricted shares have vested and the restrictions have lapsed with respect to such vested shares, any restricted shares remaining subject to the restrictions (together with any dividends paid thereon) will be forfeited, unless there has been a change in control prior to such date.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 12 – Stock-Based Compensation (continued)

Restricted Shares — (continued)

The following table summarizes the status of nonvested restricted shares under the Plan as of June 30, 2006, and changes during the six months then ended:

						Weighted
						Average
		Shares				Grant-Date
Nonvested Restricted Shares		(In thousands)				Fair Value
Nonvested at January 1, 2006			—			$	—
Granted			290			$	14.83
Vested			—			$	—
Forfeited			—			$	—
Nonvested at June 30, 2006			290			$	14.83

As of June 30, 2006, based on the probability of achieving the performance goals, there was $3.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested restricted shares granted under the Plan. This cost is expected to be recognized over a weighted-average period of 2.5 years. None of the restricted shares vested during the six months ended June 30, 2006.

2004 Non-Employee Director Fee Plan — The Company’s 2004 Non-Employee Director Fee Plan (the “2004 Fee Plan”), which is shareholder-approved, replaced and superseded the 1996 Non-Employee Director Fee Plan (the “1996 Fee Plan”) and was used in lieu of the 2004 Nonemployee Director Stock Option Plan (the “2004 Stock Option Plan”). The 2004 Fee Plan provides that all new non-employee Directors joining the Board receive an initial grant of common stock units (“CSUs”) on the date the new Director is appointed or elected, the number of which will be determined by dividing a dollar amount to be determined from time to time by the Board (currently set at $30,000) by an amount equal to 110% of the average closing prices of the Company’s common stock for the five trading days prior to the date the new Director is appointed or elected. The initial grant of CSUs will vest in three equal installments, one-third on the date of each of the following three annual shareholders’ meetings. A CSU is a bookkeeping entry on the Company’s books that records the equivalent of one share of common stock. On the date each CSU vests, the Director will become entitled to receive a share of the Company’s common stock and the CSU will be canceled. For federal income tax purposes, the Director will not be deemed to have received income with respect to the CSUs until the CSUs vest. No options were awarded under the 2004 Stock Option Plan and none will be awarded. The number of shares remaining available for issuance under the 2004 Fee Plan cannot exceed 378 thousand.

Additionally, the 2004 Fee Plan provides that each non-employee Director receives on the day after the annual shareholders’ meeting, an annual retainer for service as a non-employee Director, the amount of which shall be determined from time to time by the Board (currently set at $50,000) to be paid 75% in CSUs and 25% in cash. The number of CSUs to be granted under the 2004 Fee Plan will be determined by dividing the amount of the annual retainer by an amount equal to 105% of the average of the closing prices for the Company’s common stock on the five trading days preceding the award date (the day after the annual meeting). The annual grant of CSUs will vest in two equal installments, one-half on the date of each of the following two annual shareholders’ meetings. There were grants of 30 thousand and 0.1 million CSUs issued under the 2004 Fee Plan during the six months ended June 30, 2006 and 2005, respectively.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2006 and 2005
(Unaudited)

Note 12 – Stock-Based Compensation (continued)

2004 Non-Employee Director Fee Plan — (continued)

The following table summarizes the status of the nonvested CSUs under the 2004 Fee Plan as of June 30, 2006, and changes during the six months then ended:

						Weighted
						Average
		Shares				Grant-Date
Nonvested Common Stock Units		(In thousands)				Fair Value
Nonvested at January 1, 2006			72			$	8.26
Granted			30			$	17.04
Vested			(46	)		$	8.25
Forfeited			—			$	—
Nonvested at June 30, 2006			56			$	12.89