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, 2007

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 33602
(Address of principal executive offices) (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 o            Accelerated filer þ            Non-accelerated filer o

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

Yes o           No þ

As of July 20, 2007, there were 40,838,147 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, 2007 and December 31, 2006 (Unaudited)			3
Condensed Consolidated Statements of Operations Three and six months ended June 30, 2007 and 2006 (Unaudited)			4
Condensed Consolidated Statements of Changes in Shareholders’ Equity Six months ended June 30, 2006, six months ended December 31, 2006 and six months ended June 30, 2007 (Unaudited)			5
Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2007 and 2006 (Unaudited)			6
Notes to Condensed Consolidated Financial Statements (Unaudited)			7
Report of Independent Registered Public Accounting Firm			28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3. Quantitative and Qualitative Disclosures About Market Risk			40
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 OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

		June 30,				December 31,
(in thousands, except per share data)		2007				2006
Assets
Current assets:
Cash and cash equivalents		$	173,809			$	158,580
Receivables, net			124,499				115,016
Prepaid expenses and other current assets			21,531				14,666
Assets held for sale			509				509
Total current assets			320,348				288,771
Property and equipment, net			72,138				66,205
Goodwill, net			22,571				20,422
Intangibles, net			7,338				8,004
Deferred charges and other assets			29,957				32,171
		$	452,352			$	415,573
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	23,338			$	19,270
Accrued employee compensation and benefits			40,083				39,549
Deferred grants related to assets held for sale			332				332
Income taxes payable			452				5,445
Deferred revenue			31,683				30,724
Other accrued expenses and current liabilities			9,859				9,555
Total current liabilities			105,747				104,875
Deferred grants			10,325				10,811
Long-term income tax liabilities			6,390				—
Other long-term liabilities			9,318				8,414
Total liabilities			131,780				124,100
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; 45,537 and 45,254 shares issued			455				453
Additional paid-in capital			182,358				179,021
Retained earnings			173,480				158,058
Accumulated other comprehensive income			16,185				5,869
			372,478				343,401
Treasury stock at cost: 4,700 shares and 4,703 shares			(51,906	)			(51,928	)
Total shareholders’ equity			320,572				291,473
		$	452,352			$	415,573

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands, except for per share data)		2007				2006				2007				2006
Revenues		$	168,284			$	135,221			$	336,285			$	266,308
Operating expenses:
Direct salaries and related costs			110,464				86,378				216,335				169,394
General and administrative			50,351				42,338				98,906				83,342
Impairment of long-lived assets			—				—				—				382
Total operating expenses			160,815				128,716				315,241				253,118
Income from operations			7,469				6,505				21,044				13,190
Other income (expense):
Interest income			1,445				2,855				2,794				3,776
Interest expense			(155	)			(183	)			(308	)			(276	)
Income from rental operations, net			—				444				—				954
Other income (expense)			(638	)			154				(957	)			(208	)
Total other income (expense)			652				3,270				1,529				4,246
Income before provision (benefit) for income taxes			8,121				9,775				22,573				17,436
Provision (benefit) for income taxes			1,784				(1,996	)			4,437				(234	)
Net income		$	6,337			$	11,771			$	18,136			$	17,670
Net income per share:
Basic		$	0.16			$	0.30			$	0.45			$	0.45
Diluted		$	0.16			$	0.29			$	0.45			$	0.44
Weighted average shares:
Basic			40,359				39,900				40,331				39,679
Diluted			40,652				40,251				40,585				40,044

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

		Common																Accumulated
		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, 2006			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 and restricted stock under equity award plans			305				3				114				—				—				—				41				158
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
Issuance of common stock			382				5				2,659				—				—				—				—				2,664
Stock-based compensation expense			—				—				1,357				—				—				—				—				1,357
Excess tax benefit from stock- based compensation			—				—				1,699				—				—				—				—				1,699
Issuance of common stock and restricted stock under equity award plans			10				—				—				—				—				—				—				—
Modification of Deferred Compensation Plan			—				—				(102	)			—				—				—				—				(102	)
Issuance of common stock for business acquisition			270				2				4,399				—				—				—				—				4,401
Comprehensive income			—				—				—				24,653				5,138				—				—				29,791
Adjustment upon adoption of SFAS 158, net of tax			—				—				—				—				(1,044	)			—				—				(1,044	)
Balance at December 31, 2006			45,254				453				179,021				158,058				5,869				—				(51,928	)			291,473
Adjustment upon adoption of FIN 48			—				—				—				(2,714	)			—				—				—				(2,714	)
Issuance of common stock			66				1				441				—				—				—				—				442
Stock-based compensation expense			—				—				2,442				—				—				—				—				2,442
Issuance of common stock and restricted stock under equity award plans			192				1				(14	)			—				—				—				22				9
Issuance of common stock for business acquisition			25				—				468				—				—				—				—				468
Comprehensive income			—				—				—				18,136				10,316				—				—				28,452
Balance at June 30, 2007			45,537			$	455			$	182,358			$	173,480			$	16,185			$	—			$	(51,906	)		$	320,572

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

(In thousands)		2007				2006
Cash flows from operating activities:
Net income		$	18,136			$	17,670
Depreciation and amortization			12,033				11,878
Stock compensation expense			2,442				1,103
Deferred income tax benefit			(556	)			(2,135	)
Net (gain) loss on disposal of property and equipment			(31	)			14
(Reversals of) termination costs associated with exit activities			(56	)			789
Foreign exchange gain on liquidation of foreign entities			(4	)			(94	)
Impairment of long-lived assets			—				382
Bad debt expense (reversals)			(97	)			(115	)
Unrealized loss (gain) on financial instruments, net			675				(16	)
Changes in assets and liabilities:
Receivables			(4,309	)			(5,249	)
Prepaid expenses and other current assets			(4,309	)			(2,688	)
Deferred charges and other assets			595				(3,254	)
Accounts payable			1,835				3,926
Income taxes receivable/payable			(1,503	)			(2,964	)
Accrued employee compensation and benefits			(275	)			168
Other accrued expenses and current liabilities			(292	)			(2,040	)
Deferred revenue			(2,371	)			2,900
Other long-term liabilities			680				479
Net cash provided by operating activities			22,593				20,754
Cash flows from investing activities:
Capital expenditures			(14,137	)			(7,801	)
Proceeds from sale of property and equipment			55				105
Proceeds from release of restricted cash			1,600				—
Investment in restricted cash			(945	)			—
Cash paid for business acquisitions			(1,600	)			—
Other			(127	)			(254	)
Net cash used for investing activities			(15,154	)			(7,950	)
Cash flows from financing activities:
Proceeds from issuance of stock			442				1,678
Excess tax benefit from stock-based compensation			—				656
Net cash provided by financing activities			442				2,334
Effects of exchange rates on cash			7,348				3,823
Net increase in cash and cash equivalents			15,229				18,961
Cash and cash equivalents – beginning			158,580				127,612
Cash and cash equivalents – ending		$	173,809			$	146,573
Supplemental disclosures of cash flow information:
Cash paid during period for interest		$	79			$	191
Cash paid during period for income taxes		$	6,585			$	4,667

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, 2007 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2007. 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, 2006, 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 11. 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.

The Company recognizes in its income statement the grant-date fair value of stock options and other equity-based compensation issued to employees and directors. Compensation expense for equity-based awards is 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) is measured to fair-value at each balance sheet date until the award is settled.

Investments Held in Rabbi Trust —As more fully described under “Deferred Compensation Plan” in Note 11, securities held in a rabbi trust for a supplemental nonqualified executive retirement program 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 $1.3 million and $1.0 million at June 30, 2007 and December 31, 2006, respectively, and are included in “Prepaid expenses and other current assets” in the accompanying Condensed Consolidated Balance Sheets. These investments were comprised of 85% equity securities and 15% debt securities at June 30, 2007 and 79% equity securities and 21% debt securities at December 31, 2006.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

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

Investments Held in Rabbi Trust – (continued)

During the six months ended June 30, 2007 and 2006, the Company recorded $0.1 million and $0.1 million, respectively, in compensation expense associated with these investments, which is included in “General and administrative” in the accompanying Condensed Consolidated Statements of Operations.

The Company’s common stock match associated with the Deferred Compensation Plan had a carrying value of $0.4 million and $0.4 million at June 30, 2007 and December 31, 2006, respectively, and is included in “Treasury stock” and “Additional paid-in capital” in the accompanying Condensed Consolidated Balance Sheets.

Goodwill —The Company accounts for goodwill and other intangible assets utilizing SFAS No. 142 (SFAS 142), “Goodwill and Other Intangible Assets.” According to this statement, goodwill and other intangible assets with indefinite lives must be reviewed at least annually, and more frequently in the presence of certain circumstances, for impairment by applying a fair value based test. Fair value for goodwill is based on discounted cash flows, market multiples and/or appraised values as appropriate. Under SFAS 142, the carrying value of assets is calculated at the lowest levels for which there are identifiable cash flows (the “reporting unit”). If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. The Company expects to receive future benefits from previously acquired goodwill over an indefinite period of time.

Intangible Assets — Intangible assets, primarily customer relationships, existing technologies and covenants not to compete, are amortized using the straight-line method over their estimated useful lives. The Company periodically evaluates the recoverability of intangible assets and takes into account events or changes in circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.

Property and Equipment — The carrying value of property and equipment 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 six months ended June 30, 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, as of June 30, 2007, the Company determined that its property and equipment was not impaired, including the idle facility in Perry County, Kentucky, which is being held for future use in the Company’s operations and to meet increased demand for services.

On September 13, 2006, the Company sold its leased U.S. customer contact management centers located in Palatka, Florida, Pikeville, Kentucky, Ada, Oklahoma, and Manhattan, Kansas to an unrelated third party for cash totaling $14.6 million, net of selling costs, resulting in a net gain of $13.9 million. The net book value of the facilities of $6.3 million and other related assets of $0.5 million were offset by the related deferred grants of $6.1 million. The cost of the neighboring vacant land at these locations of $0.5 million, currently held for sale, is classified as “Assets held for sale” in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 and the related deferred grants of $0.3 million are shown in current liabilities.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

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

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 — The Company accounts for financial derivative instruments utilizing SFAS No. 133 (SFAS 133), “Accounting for Derivative Instruments and Hedging Activities”, as amended. The Company generally utilizes non-deliverable forward contracts expiring within one to 24 months to reduce its foreign currency exposure due to exchange rate fluctuations on forecasted cash flows denominated in non-functional foreign currencies. Upon proper qualification, these contracts are accounted for as cash-flow hedges, as defined by SFAS 133. These contracts are entered into to protect against the risk that the eventual cash flows resulting from such transactions will be adversely affected by changes in exchange rates. In using derivative financial instruments to hedge exposures to changes in exchange rates, the Company exposes itself to counterparty credit risk.

All derivatives, including foreign currency forward contracts, are recognized in the balance sheet at fair value. Fair values for the Company’s derivative financial instruments are based on quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current market and model assumptions. On the date the derivative contract is entered into, the Company determines whether the derivative contract should be designated as a cash flow hedge. Changes in the fair value of derivatives that are highly effective and designated as cash flow hedges are recorded in “Accumulated other comprehensive income (loss)”, until the forecasted underlying transactions occur. Any realized gains or losses resulting from the cash flow hedges are recognized together with the hedged transaction within “Revenues”. Changes in the fair value of the forward contracts attributable to the difference in the spot and forward exchange rates are excluded from the assessment of hedge effectiveness and recognized within “Revenues”. Cash flows from the derivative contracts are classified within “Cash flows from operating activities”. Ineffectiveness, if any, is measured based on the change in fair value of the forward contracts due to changes in the spot exchange rate and the present value of expected future cash flows associated with the Company’s forecasted revenues due to the change in the Company’s average foreign currency translation rates. Hedge ineffectiveness is recognized within “Revenues”.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedging activities. This process includes linking all derivatives that are designated as cash flow hedges to forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items on a prospective and retrospective basis. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge or if a forecasted hedge is no longer probable of occurring, the Company discontinues hedge accounting prospectively. At June 30, 2007, all hedges were determined to be highly effective.

The Company also periodically enters into forward contracts that are not designated as hedges. The purpose of these derivative instruments is to reduce the effects on its operating results and cash flows from fluctuations caused by volatility in currency exchange rates. The Company records changes in the fair value of these derivative instruments within “Other income (expense)”. See Note 3 for further information on financial derivative instruments.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

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

Recent Accounting Pronouncements – 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 (SFAS 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. The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $2.7 million liability for unrecognized tax benefits, including interest and penalties, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. See Note 8 – Income Taxes for further information.

In May 2007, the FASB issued FASB Staff Position FIN 48-1 (FSP FIN 48-1), “Definition of Settlement in FASB Interpretation No. 48”. FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on the Company’s financial condition, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157 (SFAS 157), “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years ending on or after November 15, 2007. The Company is currently evaluating the impact of this standard on its financial condition, results of operations and cash flows.

In September 2006, the FASB issued SFAS No. 158 (SFAS 158), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS 158 requires a company to (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year, and (c) recognize changes in the funded status of a defined postretirement plan in the year in which the changes occur (reported in accumulated other comprehensive income). Subsequently, the FASB issued Staff Position No. 158-1, “Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No. 106 and to the Related Staff Implementation Guidance” to amend the illustrations contained in the appendices, of Statements 87, 88, and 106 to require recognition of the funded status of defined benefit postretirement plans in an employer’s statement of financial position. The Company adopted SFAS 158 on December 31, 2006, which resulted in a $1.0 million non-cash charge to equity, net of deferred taxes of $0.6 million and a $1.6 million non-cash increase in total liabilities. See Note 12 – Pension, for further information.

In November 2006, the EITF reached a tentative conclusion on Issue No. 06-10 (EITF 06-10), “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements.” EITF 06-10 provides guidance on the employers’ recognition of assets, liabilities and related compensation costs for collateral assignment split-dollar life insurance arrangements that provide a benefit to an employee that extends into postretirement periods. The effective date of EITF 06-10 is for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact of EITF 06-10 on its financial condition, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159 (SFAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment to FASB Statement No. 115”, which permits an entity to measure certain financial assets and financial liabilities at fair value. Under SFAS 159, entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with few exceptions, as long as it is applied to the instrument in its entirety. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of this standard on its financial condition, results of operations and cash flows.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

Note 2 – Acquisitions and Dispositions

On March 1, 2005, the Company purchased the shares of Kelly, Luttmer & Associates Limited (“KLA”) located in Calgary, Alberta, Canada, which included net assets of approximately $0.2 million. KLA specializes in providing call center services for organizational health, employee assistance, occupational health, and disability management. The Company acquired these operations in an effort to broaden its operations in the healthcare sector, which resulted in the Company paying a premium for KLA resulting in recognition of goodwill. Total cash consideration paid was approximately $3.2 million based on foreign currency rates in effect at the date of the acquisition. The purchase price resulted in a purchase price allocation to net assets of $0.2 million, to purchased intangible assets of $2.3 million (primarily customer relationships) and to goodwill of $0.6 million. Pro-forma results of operations, in respect to this acquisition, have not been presented because the effect of this acquisition was not material.

On July 3, 2006, the Company completed the acquisition of all the outstanding shares of capital stock of 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 results of operations of Apex have been included in the Company’s results of operations for its America’s segment beginning in the third quarter of 2006. 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 to broaden its operations in a growing market in the communications and financial services verticals, which resulted in the Company paying a premium for Apex resulting in recognition of goodwill. 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. 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’ indemnification obligations and to provide for a holdback of the purchase price until amounts billed by Apex to a major client reach established targets. At the end of a two-year escrow period, any portion of the cash and stock not retained to satisfy the holdback provisions of the purchase price will be returned to the sellers. We allocated the net purchase price of $27.0 million less the $5.0 million contingent purchase price held in escrow plus direct acquisition costs of $0.6 million, or $22.6 million, to the tangible assets, liabilities and intangible purchased assets based on their estimated fair values in accordance with SFAS No. 141, Business Combinations. The excess net purchase price over these fair values is recognized as goodwill, which is not expected to be deductible for tax purposes. These fair values are based on management’s estimates and assumptions, including variations of the income approach, the market approach and the cost approach, resulting in a purchase price allocation to net assets of $4.2 million, to goodwill of $14.4 million, to a deferred tax liability of $2.9 million and to purchased intangible assets of $6.9 million as detailed in the following table (in thousands):

						Weighted
						Average
		Amount				Amortization
Purchased Intangible Assets		Assigned				Period (years)
Customer relationships		$	5,500				6
Trade Name			1,000				5
Non-compete agreements			200				2
Other			165				3
Total		$	6,865				6

The purchase price allocation for the Apex acquisition resulted in the following condensed balance sheet as of the acquisition date (in thousands):

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

Note 2 – Acquisitions and Dispositions — (continued)

		Amount
Cash and cash equivalents		$	788
Receivables, net and other current assets			3,546
Total current assets			4,334
Property and equipment, net			4,718
Goodwill			14,392
Intangibles			6,865
Other long-term assets			133
		$	30,442
Current liabilities		$	4,791
Long-term deferred tax liability			2,903
Other long-term liabilities			140
Total liabilities			7,834
Shareholders’ equity			22,608
		$	30,442

In June 2007, the Company settled the contingency related to the holdback of the purchase price as amounts billed by Apex to a major client reached the established targets. This settlement resulted in a payout of $1.6 million in cash and $0.5 million in common stock from the escrow account and an increase in the recorded amount of goodwill of $2.1 million.

The following unaudited pro forma data summarizes the combined results of operations of Sykes and Apex for all periods presented as if the combination had been consummated on January 1, 2006.

		Three Months				Six Months
		Ended				Ended
		June 30, 2006
Revenues		$	142,587			$	280,365
Income before provision for income taxes		$	10,998			$	20,121
Net income		$	12,564			$	19,411
Net income per diluted share		$	0.31			$	0.48

Amortization expense, related to the purchased intangible assets resulting from acquisitions (other than goodwill), of $0.4 million and $0.8 million for the three and six months ended June 30, 2007 respectively, is included in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations. In the comparable periods of 2006, the Company recognized amortization expense of $0.1 million and $0.2 million, respectively. The following table presents the Company’s purchased intangible assets (in thousands) as of June 30, 2007:

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

Note 2 – Acquisitions and Dispositions — (continued)

														Weighted
														Average
		Gross				Accumulated				Net				Amortization
		Intangibles				Amortization				Intangibles				Period (years)
Customer relationships		$	7,546			$	1,235			$	6,311				8
Trade Name			997				199				798				5
Non-compete agreements			693				593				100				2
Other			266				137				129				3
		$	9,502			$	2,164			$	7,338				7

The following table presents the Company’s purchased intangible assets (in thousands) as of December 31, 2006:

														Weighted
														Average
		Gross				Accumulated				Net				Amortization
		Intangibles				Amortization				Intangibles				Period (years)
Customer relationships		$	7,428			$	692			$	6,736				8
Trade Name			1,008				101				907				5
Non-compete agreements			653				464				189				2
Other			259				87				172				3
		$	9,348			$	1,344			$	8,004				7

The Company’s estimated future amortization expense for the five succeeding years is as follows (in thousands):

Periods Ending December 31,		Amount
2007 (remaining six months)		$	946
2008		$	1,361
2009		$	1,279
2010		$	1,251
2011		$	1,150

Changes in goodwill, within the America’s segment, consist of the following (in thousands):

		Amount
Balance at December 31, 2005		$	5,918
Acquisition of Apex			14,392
Foreign currency translation			112
Balance at December 31, 2006			20,422
Contingent payment for Apex acquisition			2,068
Foreign currency translation			81
Balance at June 30, 2007		$	22,571

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

Note 3 – Financial Derivatives

The Company had derivative assets and liabilities related to outstanding forward contracts, designated as cash flow hedges, maturing within 18 months, consisting primarily of Philippine peso contracts with a notional value of $100.4 million at June 30, 2007. As of June 30, 2007, the Company had $1.7 million of these derivative instruments classified as “Receivables, net”, $0.4 million as “Other accrued expenses and current liabilities” and $0.2 million as “Other long-term liabilities”. There was no income tax provision related to these derivatives at June 30, 2007. A total of $1.8 million of deferred gains on the derivative instruments as of June 30, 2007 were included in “Accumulated other comprehensive income (loss)”, a component of shareholders’ equity. Net gains of $0.6 million and $0.6 million from settled derivative instruments for the three and six months ended June 30, 2007, respectively, were reclassified from “Accumulated other comprehensive income (loss)” to “Revenues”. The deferred gain expected to be reclassified to “Revenues” from “Accumulated other comprehensive income (loss)” during the next 12 months is $1.8 million.

During the three and six months ended June 30, 2007, the Company recognized in “Revenues” a loss of $0.7 million and $0.7 million, respectively, related to changes in the fair value of the forward contracts attributable to the difference in the spot and forward exchange rates, which was excluded from the assessment of hedge effectiveness. In addition, during the three and six months ended June 30, 2007, the Company recognized losses related to hedge ineffectiveness of $0.1 million and $0.1 million, respectively which was reclassified from “Accumulated other comprehensive income (loss)” to “Revenues”.

During the six months ended June 30, 2007, the Company recognized in “Other expense” losses of $30 thousand related to changes in the fair value of derivative instruments not designated as hedges.

Note 4 – Deferred Revenue

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

		June 30,				December 31,
		2007				2006
Future service		$	28,622			$	25,403
Estimated penalties and holdbacks			3,061				5,321
		$	31,683			$	30,724

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.

The components of accumulated other comprehensive income (loss) consist of the following (in thousands):

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

Note 5 – Accumulated Other Comprehensive Income (Loss)

		Foreign				Unrealized				Unrealized Gain
		Currency				Actuarial Losses				(Loss) on Cash
		Translation				Related to				Flow Hedging
		Adjustment				Pension Liability				Instruments				Total
Balance at January 1, 2006		$	(3,435	)		$	—			$	—			$	(3,435	)
Pre tax amount			10,396				(1,607	)			—				8,789
Tax benefit			—				563				—				563
Reclassification to net income			(48	)			—				—				(48	)
Balance at December 31, 2006			6,913				(1,044	)			—				5,869
Pre tax amount			8,540				(64	)			2,388				10,864
Reclassification to net income			(4	)			—				(544	)			(548	)
Balance at June 30, 2007		$	15,449			$	(1,108	)		$	1,844			$	16,185

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 2007. The Company estimates total charges related to the Plan of $1.4 million. These charges include approximately $1.2 million for severance and related costs and $0.2 million for other exit costs. The Company ceased using certain property and equipment estimated at $0.2 million, and depreciated these assets over a shortened useful life, which approximated eight months. As a result, the Company recorded additional depreciation of approximately $0.2 million during the six months ended June 30, 2006. The Company reversed previously accrued termination costs of less than $0.1 million in “Direct salaries and related costs” in the accompanying Condensed Consolidated Statement of Operations for the six months ended June 30, 2007 due to a change in estimate. Termination costs of $0.8 million are included in “Direct salaries and related costs” for the six months ended June 30, 2006. Cash payments related to termination costs made totaled $0.4 million and $0.6 million for the six months ended June 30, 2007 and 2006, respectively. Termination costs to date approximate $1.2 million as of June 30, 2007 with cash payments to date of $1.1 million.

Note 7 – Borrowings

The Company’s $50.0 million revolving credit facility with a group of lenders (the “Credit Facility”), which amount is subject to certain borrowing limitations, was executed on March 15, 2004 and amended on May 4, 2007. Pursuant to the amended 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 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, not to exceed a total of $50 million availability under the Credit Facility.

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 amended Credit Facility eliminates covenant requirements for tangible net worth and quick ratio. 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 1.25%, as amended. 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 1.25%. In addition, a commitment fee of up to 0.25%, as amended, 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, 2010, are

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

Note 7 – Borrowings – (continued)

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, 2007 and no outstanding balances as of June 30, 2007 with $50.0 million availability on the Credit Facility.

Note 8 – Income Taxes

The Company adopted the provisions of FIN 48 on January 1, 2007 and recognized a $2.7 million liability for unrecognized tax benefits, including interest and penalties, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. This adjustment to the beginning balance of retained earnings includes $1.3 million related to transfer pricing penalties that may be applicable in connection with an income tax audit of our Indian subsidiary.

As of December 31, 2006 prior to the adoption of FIN 48, the Company had a contingent income tax liability of $4.2 million, consisting of amounts for subsidiaries located in both the Americas and EMEA segments that are accounted for in “Income taxes payable” in the accompanying Condensed Consolidated Balance Sheet.

Upon adoption of FIN 48 as of January 1, 2007, the Company had $9.1 million of unrecognized tax benefits (including $4.6 million benefit of net operating loss carryforwards that were previously recognized as deferred tax assets with a full valuation allowance). If the Company recognized these tax benefits, approximately $4.5 million would favorably impact the effective tax rate, in addition to the related interest and penalties.

As of June 30, 2007, the Company had $9.5 million of unrecognized tax benefits, an increase of $0.4 million from $9.1 million as of January 1, 2007. This increase relates primarily to the impact of foreign currency fluctuations. If the Company recognized these tax benefits, approximately $4.9 million would favorably impact the effective tax rate, in addition to the related interest and penalties. With the exception of amounts that are under examination by income tax authorities, for which an estimate can not be made due to uncertainties, the Company does not believe it is reasonably possible that its unrecognized tax benefits will significantly change within the next twelve months.

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company had $2.7 million and $2.4 million accrued for interest and penalties as of June 30, 2007 and January 1, 2007, the date of adoption of FIN 48, respectively.

The Company files income tax returns in the U.S. and foreign jurisdictions. The following table presents the major tax jurisdictions and tax years that are open as of January 1, 2007 and subject to examination by the respective tax authorities:

Tax Jurisdiction		Tax Year Ended
Canada		2002 to present
Costa Rica		2003 to present
Germany		1996 to present
India		2003 to present
Philippines		2003 to present
Scotland		2001 to present
United States		(1997 to 1999)* and 2002 to present

The Company’s effective tax rate was 19.7% and (1.3)% for the six months ended June 30, 2007 and 2006, respectively. The higher effective tax rate of 19.7% in 2007 was primarily due to FIN 48 adjustments related to interest and penalties, the effects of permanent differences and losses in jurisdictions for which tax benefits cannot

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

Note 8 – Income Taxes – (continued)

be recognized, accompanied by a shift in mix of earnings within tax jurisdictions and the effects of valuation allowances, foreign withholding and other taxes and foreign income tax rate differentials. The lower effective tax rate of (1.3)% in 2006 was primarily due to non-recurring tax benefits resulting from the Canadian tax appeals settlement of $3.0 million received in 2006. The differences in the Company’s effective tax rate of 19.7% as compared to the U.S. statutory federal income tax rate of 35.0% was primarily due to tax benefits resulting from additional income earned in tax holiday jurisdictions; accompanied by the effects of requisite valuation allowances, permanent differences, foreign withholding and other taxes, accrued interest and penalties and foreign income tax rate differentials.

Earnings associated with the Company’s investments in its foreign subsidiaries are considered to be permanently invested and no provision for 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 subsidiaries that are essentially permanent in nature is not practicable.

The Company is currently under examination in the U.S. by the Tennessee Department of Revenue for sales and use taxes and franchise taxes for periods covering 1998 through 2000. 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, December 31, 2003 and December 31, 2004. Certain German subsidiaries of the Company are under examination by the German tax authorities for periods covering 1996 through 2004. Additionally, certain Canadian subsidiaries are under examination by Canadian tax authorities for tax years 2002 through 2003, a Philippine subsidiary is being audited by the Philippine tax authorities for tax years 2003 through 2005, a Netherlands subsidiary has been notified of an impending audit for the tax years 1998 through 2003, Indian tax authorities have issued an assessment for the tax year ended March 31, 2004 and are also examining the tax year ended March 31, 2005 and certain subsidiaries in Scotland are responding to audit inquiries for the 2005 tax year.

Note 9 – 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, stock appreciation rights, restricted stock, common stock units and shares held in a rabbi trust using the treasury stock method. For the three and six month periods ended June 30, 2007, the impact of outstanding options to purchase shares of common stock and stock appreciation rights of 0.1 million and 0.1 million, respectively, and 0.4 million and 0.3 million for the comparable 2006 periods were antidilutive and were excluded from the calculation of diluted earnings per share.

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,
		2007				2006				2007				2006
Basic:
Weighted average common shares outstanding			40,359				39,900				40,331				39,679
Diluted:
Dilutive effect of stock options, stock appreciation rights and common stock units			293				351				254				365
Total weighted average diluted shares outstanding			40,652				40,251				40,585				40,044

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

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

Note 9 – Earnings Per Share-(continued)

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, 2007, the Company made no purchases under the 2002 repurchase program.

Note 10 – 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, 2007 and 67.6% and 32.4%, respectively, of the Company’s consolidated revenues for the six months ended June 30, 2007. In the comparable 2006 periods, the Americas and EMEA regions 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. 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 demands 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.

Information about the Company’s reportable segments for the three and six months ended June 30, 2007 compared to the corresponding prior year periods, is as follows (in thousands):

														Consolidated
		Americas				EMEA				Other (1)				Total
Three Months Ended June 30, 2007:
Revenues		$	113,242			$	55,042							$	168,284
Depreciation and amortization		$	4,930			$	1,123							$	6,053
Income (loss) from operations		$	15,518			$	2,160			$	(10,209	)		$	7,469
Other income											652				652
Provision for income taxes											(1,784	)			(1,784	)
Net income														$	6,337
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

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

Note 10 – Segments and Geographic Information – (continued)

														Consolidated
		Americas				EMEA				Other (1)				Total
Six Months Ended June 30, 2007:
Revenues		$	227,205			$	109,080							$	336,285
Depreciation and amortization		$	9,842			$	2,191							$	12,033
Income (loss) from operations		$	35,571			$	5,060			$	(19,587	)		$	21,044
Other income											1,529				1,529
Provision for income taxes											(4,437	)			(4,437	)
Net income														$	18,136
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

During the three and six months ended June 30, 2007 and 2006, the Company had no clients that exceeded ten percent of consolidated revenues.

Note 11 – 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 $1.4 million and $2.4 million for the three and six months ended June 30, 2007 and $0.7 million and $1.1 million for the comparable 2006 periods, respectively. The related income tax benefits recognized in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2006 were $0.2 million and $0.4 million, respectively (none in the 2007 periods). In addition, the Company realized the benefit of tax deductions in excess of recognized tax benefits of $0.5 million and $0.7 million, respectively, from the exercise of stock options in the three and six months ended June 30, 2006 (not material in the 2007 periods). There were no capitalized stock-based compensation costs at June 30, 2007.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

Note 11 – Stock-Based Compensation – (continued)

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 three and six months ended June 30, 2007 and 2006.

The following table summarizes stock option activity under the Plan as of June 30, 2007, 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, 2007			583			$	13.13
Granted			—				—
Exercised			(66	)			6.67
Forfeited or expired			(24	)			23.33
Outstanding at June 30, 2007			493			$	13.49				3.44			$	3,013
Vested or expected to vest at June 30, 2007			493			$	13.49				3.44			$	3,013
Exercisable at June 30, 2007			493			$	13.49				3.44			$	3,013

There is no intrinsic value for options exercised during the three and six months ended June 30, 2007 and 2006 since the exercise price of the options is the same as the market price of the underlying stock on the date of grant. All options were fully vested as of June 30, 2007 and there is no unrecognized compensation cost related to options granted under the Plan.

The total fair value of stock options vested during the three and six months ended June 30, 2006 was $0.2 million and $0.3 million, respectively, (none in the comparable 2007 periods).

Cash received from stock options exercised under all stock-based compensation plans for the six months ended June 30, 2007 and 2006, was $0.4 million and $1.7 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 2007 period.)

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

Note 11 – Stock-Based Compensation — (continued)

Stock Appreciation Rights — The Company’s Board of Directors, at the recommendation of the Compensation and Human Resource Development Committee (the “Committee”), approves awards of stock-settled stock appreciation rights (“SARs”) for 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 at the time of exercise exceeds the grant price.

The SARs are 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 first three 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 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, 2007 and 2006:

		Six Months Ended
		June 30,
		2007				2006
Expected volatility			53	%			61	%
Weighted-average volatility			53	%			61	%
Expected dividends			—				—
Expected term (in years)			3.9				3.8
Risk-free rate			4.5	%			4.8	%

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

Note 11 – Stock-Based Compensation — (continued)

Stock Appreciation Rights- (continued)

The following table summarizes SARs activity under the Plan as of June 30, 2007, 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, 2007			126			$	—
Granted			121				—
Exercised			—				—
Forfeited or expired			(4	)			—
Outstanding at June 30, 2007			243			$	—				9.4			$	523
Vested or expected to vest at June 30, 2007			243			$	—				9.4			$	523
Exercisable at June 30, 2007			41			$	—				9.0			$	150

The weighted-average grant-date fair value of the SARs granted during the six months ended June 30, 2007 was $7.72. No SARs were exercised during the six months ended June 30, 2007.

The following table summarizes the status of nonvested SARs under the Plan as of June 30, 2007, 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, 2007			126			$	7.28
Granted			121			$	7.72
Vested			(41	)		$	7.28
Forfeited			(4	)		$	7.28
Nonvested at June 30, 2007			202			$	7.54

As of June 30, 2007, there was $1.3 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 2.3 years. During the six months ended June 30, 2007, 41 thousand SARs vested.

Restricted Shares — The Company’s Board of Directors, at the recommendation of the Committee, approves awards of performance and employment-based restricted shares (“Restricted Shares”) for eligible participants. In some instances, where the issuance of Restricted Shares has adverse tax consequences to the recipient, the Board will instead issue restricted stock units (“RSUs”). The Restricted Shares are shares of the Company’s common stock (or in the case of RSUs, represent an equivalent number of 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, as of December 31, 2008 for the 2006-2008 performance period and as of December 31, 2009 for the 2007-2009 performance period. If the performance conditions are met for the 2006-2007 performance period, for the 2006-2008 performance period and for the 2007-2009 performance period, the shares will vest and all restrictions on the transfer of the Restricted Shares will lapse (or in the case of RSUs, an equivalent number of shares of the

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

Note 11 – Stock-Based Compensation — (continued)

Restricted Shares – (continued)

Company’s common stock will be issued to the recipient) on March 29, 2008, March 29, 2009 and March 16, 2010, 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 (and RSUs) on the date of grant ratably over the requisite service period based on the probability of achieving the performance goals. Changes in the probability of achieving the performance goals from period to period will result in corresponding changes in compensation expense. The employment-based restricted shares vest one-third on each of the first thee anniversaries of the date of grant, provided the participant is employed by the Company on such date.

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.

The following table summarizes the status of nonvested Restricted Shares under the Plan as of June 30, 2007, and changes during the six months then ended:

						Weighted
						Average
		Shares				Grant-Date
Nonvested Restricted Shares		(In thousands)				Fair Value
Nonvested at January 1, 2007			308			$	14.92
Granted			228			$	16.93
Vested			—			$	—
Forfeited			(47	)		$	16.64
Nonvested at June 30, 2007			489			$	15.69

As of June 30, 2007, there was $5.3 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 2.1 years. None of the restricted shares vested during the six months ended June 30, 2007 and 2006.

Other Awards — The Company’s Board of Directors, at the recommendation of the Committee, approves awards of Common Stock Units (“CSUs”) for eligible participants. A CSU is a bookkeeping entry on the Company’s books that records the equivalent of one share of common stock. If the performance goals described under Restricted Shares in this Note 11 are met, performance-based CSUs will vest on the third anniversary of the grant date. The Company recognizes compensation cost, net of estimated forfeitures, based on the fair value (which approximates the current market price) of the CSUs on the date of grant ratably over the requisite service period based on the probability of achieving the performance goals. Changes in the probability of achieving the performance goals from period to period will result in corresponding changes in compensation expense. The employment-based CSUs vest one-third on each of the first thee anniversaries of the date of grant, provided the participant is employed by the Company on such date. On the date each CSU vests, the participant will become entitled to receive a share of the Company’s common stock and the CSU will be canceled.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

Note 11 – Stock-Based Compensation – (continued)

Other Awards – (continued)

The following table summarizes the status of the nonvested CSUs under the Plan as of June 30, 2007, 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, 2007			—			$	—
Granted			59			$	16.21
Vested			—			$	—
Forfeited			—			$	—
Nonvested at June 30, 2007			59			$	16.21

As of June 30, 2007, there was $0.5 million of total unrecognized compensation costs, net of estimated forfeitures, related to nonvested CSUs granted under the 2004 Fee Plan. This cost is expected to be recognized over a weighted-average period of 2 years. During the six months ended June 30, 2007 and 2006, no CSUs vested.

Until a CSU vests, the participant has none of the rights of a shareholder with respect to the CSU or the common stock underlying the CSU. CSUs are not transferable.

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 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. Until a CSU vests, the Director has none of the rights of a shareholder with respect to the CSU or the common stock underlying the CSU. CSUs are not transferable. 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 18 thousand and 30 thousand CSUs issued under the 2004 Fee Plan during the six months ended June 30, 2007 and 2006, respectively. During the six months ended June 30, 2007 and 2006, 35 thousand and 46 thousand CSUs vested, respectively.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

Note 11 – Stock-Based Compensation – (continued)

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, 2007, 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, 2007			48			$	12.20
Granted			18			$	19.19
Vested			(35	)		$	10.96
Forfeited			—			$	—
Nonvested at June 30, 2007			31			$	17.69

Compensation expense for CSUs granted after the adoption of SFAS No. 123R, (SFAS 123R), “Share-Based Payment” on January 1, 2006, is recognized immediately on the date of grant since these grants automatically vest upon termination of a Director’s service, whether by death, retirement, resignation, removal or failure to be reelected at the end of his or her term. However, compensation expense for CSUs granted before adoption of SFAS 123R is recognized over the requisite service period, or “nominal” vesting period of two to three years, in accordance with APB No. 25, “Accounting for Stock Issued to Employees”. Compensation expense related to CSUs granted before adoption of SFAS 123R was less than $0.1 million and $0.1 million, respectively, for the three and six months ended June 30, 2007, and $0.1 million and $0.2 million for the comparable 2006 periods. As of June 30, 2007, there was less than $0.1 million of total unrecognized compensation costs, net of estimated forfeitures, which relates to nonvested CSUs granted under the 2004 Fee Plan before adoption of SFAS 123R. This cost is expected to be recognized over a weighted average period of one year.

Deferred Compensation Plan — The Company’s non-qualified Deferred Compensation Plan (the “Deferred Compensation Plan”), which is not shareholder-approved, was adopted by the Board of Directors effective December 17, 1998 and amended on March 29, 2006 and May 23, 2006. It provides certain eligible employees the ability to defer any portion of their compensation until the participant’s retirement, termination, disability or death, or a change in control of the Company. Using the Company’s common stock, the Company matches 50% of the amounts deferred by certain senior management participants on a quarterly basis up to a total of $12,000 per year for the president and senior vice presidents and $7,500 per year for vice presidents (participants below the level of vice president are not eligible to receive matching contributions from the Company). Matching contributions and the associated earnings vest over a seven year service period. Deferred compensation amounts used to pay benefits, which are held in a rabbi trust, include investments in various mutual funds and shares of the Company’s common stock (See Note 1, Summary of Accounting Policies, under Investments Held in Rabbi Trust.) The Deferred Compensation Plan’s assets totaled $1.3 million and $1.0 million at June 30, 2007 and December 31, 2006, respectively, excluding the Company’s common stock match, while liabilities totaled $1.3 million and $1.0 million, respectively. The Company’s common stock match associated with the Deferred Compensation Plan were recorded in “Treasury stock” and “Additional paid-in capital”, as appropriate, and the liabilities of the Deferred Compensation Plan were recorded in “Accrued employee compensation and benefits” in the accompanying Condensed Consolidated Balance Sheets.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2007 and 2006
(Unaudited)

Note 11 – Stock-Based Compensation – (continued)

Deferred Compensation Plan – (continued)

The following table summarizes the status of the nonvested common stock issued under the Deferred Compensation Plan as of June 30, 2007, and changes during the six months then ended:

						Weighted
						Average
		Shares				Grant-Date
Nonvested Common Stock		(In thousands)				Fair Value
Nonvested at January 1, 2007			9			$	9.15
Granted			4			$	18.50
Vested			(6	)		$	12.45
Forfeited			—			$	—
Nonvested at June 30, 2007			7			$	11.29