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

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

(Exact name of Registrant as specified in its charter)

Florida		56-1383460
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

400 North Ashley Drive, Tampa, FL 33602
(Address of principal executive offices) (Zip Code)

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 or a smaller reporting company. See the definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer: o		Accelerated filer: þ		Non-accelerated filer: o		Smaller reporting company: o
				(Do not check if a smaller reporting company)

   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 October 17, 2008, there were 41,255,428 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 September 30, 2008 and December 31, 2007 (Unaudited)			3
		Condensed Consolidated Statements of Operations Three and nine months ended September 30, 2008 and 2007 (Unaudited)			4
		Condensed Consolidated Statements of Changes in Shareholders’ Equity Nine months ended September 30, 2007, three months ended December 31, 2007 and nine months ended September 30, 2008 (Unaudited)			5
		Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2008 and 2007 (Unaudited)			6
		Notes to Condensed Consolidated Financial Statements (Unaudited)			8
		Report of Independent Registered Public Accounting Firm			31
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			44
Item 4.		Controls and Procedures			45
Part II. Other Information
Item 1.		Legal Proceedings			46
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 6.		Exhibits			47
Signature					48
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-10.8
EX-10.9
EX-15
EX-31.1
EX-31.2
EX-32.1
EX-32.2

(Unaudited)

		September 30,				December 31,
(in thousands, except per share data)		2008				2007
Assets
Current assets:
Cash and cash equivalents		$	220,051			$	177,682
Receivables, net			157,641				145,490
Prepaid expenses			10,235				10,905
Other current assets			14,678				19,828
Short-term investments			—				17,827
Total current assets			402,605				371,732
Property and equipment, net			78,909				78,574
Goodwill, net			25,326				22,468
Intangibles, net			5,481				6,646
Deferred charges and other assets			32,810				26,055
		$	545,131			$	505,475
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	22,029			$	21,588
Accrued employee compensation and benefits			48,024				46,245
Income taxes payable			9,492				4,592
Deferred revenue			32,219				31,822
Other accrued expenses and current liabilities			22,320				14,132
Total current liabilities			134,084				118,379
Deferred grants			9,493				10,329
Long-term income tax liabilities			5,126				6,269
Other long-term liabilities			7,942				5,177
Total liabilities			156,645				140,154
Commitments and loss contingency (Note 15)
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; 41,268 and 45,537 shares issued			413				455
Additional paid-in capital			157,022				184,184
Retained earnings			229,558				195,203
Accumulated other comprehensive income			2,117				37,457
Treasury stock at cost: 60 shares and 4,697 shares			(624	)			(51,978	)
Total shareholders’ equity			388,486				365,321
		$	545,131			$	505,475

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in thousands, except for per share data)		2008				2007				2008				2007
Revenues		$	207,066			$	176,122			$	618,416			$	512,407
Operating expenses:
Direct salaries and related costs			130,509				110,774				395,197				327,109
General and administrative			57,304				50,463				171,083				149,369
Total operating expenses			187,813				161,237				566,280				476,478
Income from operations			19,253				14,885				52,136				35,929
Other income (expense):
Interest income			1,274				1,614				4,354				4,408
Interest (expense)			(47	)			(230	)			(274	)			(538	)
Other income (expense)			2,737				(233	)			7,001				(1,190	)
Total other income (expense)			3,964				1,151				11,081				2,680
Income before provision for income taxes			23,217				16,036				63,217				38,609
Provision for income taxes			3,725				3,780				10,286				8,217
Net income		$	19,492			$	12,256			$	52,931			$	30,392
Net income per share:
Basic		$	0.48			$	0.30			$	1.30			$	0.75
Diluted		$	0.47			$	0.30			$	1.29			$	0.75
Weighted average shares:
Basic			40,678				40,432				40,590				40,360
Diluted			41,070				40,697				40,928				40,624

See accompanying notes to condensed consolidated financial statements.

Condensed Consolidated Statements of Changes in Shareholders’ Equity
Nine Months Ended September 30, 2007, Three Months Ended December 31, 2007 and
Nine Months Ended September 30, 2008
(Unaudited)

																		Accumulated
		Common Stock								Additional								Other
		Shares								Paid-in				Retained				Comprehensive				Treasury
(In thousands)		Issued				Amount				Capital				Earnings				Income (Loss)				Stock				Total
Balance at January 1, 2007			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			67				1				450				—				—				—				451
Stock-based compensation expense			—				—				3,301				—				—				—				3,301
Issuance of common stock and restricted stock under equity award plans			195				1				26				—				—				(26	)			1
Issuance of common stock for business acquisition			25				—				468				—				—				—				468
Comprehensive income			—				—				—				30,392				17,975				—				48,367
Balance at September 30, 2007			45,541				455				183,266				185,736				23,844				(51,954	)			341,347
Issuance of common stock			3				—				23				—				—				—				23
Stock-based compensation expense			—				—				870				—				—				—				870
Issuance of common stock and restricted stock under equity award plans			(7	)			—				25				—				—				(24	)			1
Comprehensive income			—				—				—				9,467				13,613				—				23,080
Balance at December 31, 2007			45,537				455				184,184				195,203				37,457				(51,978	)			365,321
Adjustment upon adoption of EITF 06-10			—				—				—				(482	)			—				—				(482	)
Issuance of common stock			105				1				1,173				—				—				—				1,174
Stock-based compensation expense			—				—				3,554				—				—				—				3,554
Issuance of common stock and restricted stock under equity award plans			233				3				93				—				—				(132	)			(36	)
Excess tax benefit from stock- based compensation			—				—				688				—				—				—				688
Retirement of treasury stock			(4,644	)			(46	)			(33,346	)			(18,094	)			—				51,486				—
Issuance of common stock for business acquisition			37				—				676				—				—				—				676
Comprehensive income (loss)			—				—				—				52,931				(35,340	)			—				17,591
Balance at September 30, 2008			41,268			$	413			$	157,022			$	229,558			$	2,117			$	(624	)		$	388,486

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

(in thousands)		2008				2007
Cash flows from operating activities:
Net income		$	52,931			$	30,392
Depreciation and amortization			21,125				18,315
Release of valuation allowance on deferred tax assets			(6,121	)			—
Unrealized foreign currency transaction gains, net			(6,524	)			—
Stock compensation expense			3,554				3,301
Excess tax benefit from stock-based compensation			(688	)			—
Deferred income tax provision (benefit)			219				(761	)
Reversals of termination costs associated with exit activities			—				(60	)
Foreign exchange loss (gain) on liquidation of foreign entities			3				(10	)
Bad debt expense			939				137
Unrealized loss (gain) on financial instruments, net			1,108				(48	)
Amortization of discount on short-term investments			(173	)			—
Amortization of actuarial gains on pension			(49	)			—
Changes in assets and liabilities:
Receivables			(17,679	)			(12,241	)
Prepaid expenses			(2,455	)			(3,552	)
Other current assets			369				(3,381	)
Deferred charges and other assets			(759	)			982
Accounts payable			1,789				508
Income taxes receivable/payable			1,600				710
Accrued employee compensation and benefits			3,984				2,644
Other accrued expenses and current liabilities			128				(598	)
Deferred revenue			2,379				(2,001	)
Other long-term liabilities			750				876
Net cash provided by operating activities			56,430				35,213
Cash flows from investing activities:
Capital expenditures			(25,730	)			(22,761	)
Proceeds from sale of property and equipment			167				80
Proceeds from release of restricted cash			855				1,600
Sale (purchase) of short-term investments			17,535				(17,535	)
Purchase of long-term investments			(997	)			—
Investment in restricted cash			—				(393	)
Cash paid for business acquisition			(2,400	)			(1,600	)
Other			(130	)			(130	)
Net cash used for investing activities			(10,700	)			(40,739	)
Cash flows from financing activities:
Proceeds from issuance of stock			1,174				451
Excess tax benefit from stock-based compensation			688				—
Net cash provided by financing activities			1,862				451
Effects of exchange rates on cash			(5,223)				13,521

Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2008 and 2007
(Unaudited)

(continued)

		2008				2007
Net increase in cash and cash equivalents			42,369				8,446
Cash and cash equivalents – beginning			177,682				158,580
Cash and cash equivalents – ending		$	220,051			$	167,026

Supplemental disclosures of cash flow information:
Cash paid during period for interest		$	277			$	184
Cash paid during period for income taxes		$	13,702			$	8,909
Non-cash transactions:
Property and equipment additions included in accounts payable		$	2,562			$	2,178

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 clients’ 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 nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2008. 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, 2007, as filed with the Securities and Exchange Commission (“SEC”).

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. The Company determined that its property and equipment was not impaired as of September 30, 2008.

Short-Term Investments – Short-term investments are investments that are highly liquid, held to maturity according to the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, and have terms greater than three months, but less than one year, at the time of acquisition. As of December 31, 2007, the Company had short-term investments of $17.8 million in commercial paper (none as of September 30, 2008) with a remaining maturity of less than one year. Short-term investments are carried at amortized cost which approximates fair value. Therefore, there were no significant unrecognized holding gains or losses at December 31, 2007 or September 30, 2008.

Goodwill — The Company accounts for goodwill and other intangible assets under SFAS No. 142 (SFAS 142), “Goodwill and Other Intangible Assets.” Goodwill and other intangible assets with indefinite lives are not subject to amortization, but instead 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

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2008 and 2007
(Unaudited)

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

Goodwill – (continued)

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 completed its annual goodwill impairment test during the third quarter of 2008, which included the consideration of recent economic developments and determined that the carrying amount of goodwill was not impaired. 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. Fair value for intangible assets is based on discounted cash flows, market multiples and/or appraised values as appropriate. The Company does not have intangible assets with indefinite lives.

Value Added Tax Receivables — Our Philippine operations are subject to Value Added Tax, or VAT, which is usually applied to all goods and services purchased throughout the Philippines. Upon validation and certification of the VAT receivables by the Philippine government, the VAT receivables are held for sale through third-party brokers. This process through collection typically takes three to five years. The VAT receivable is approximately $7.2 million and $8.3 million as of September 30, 2008 and December 31, 2007, respectively, net of a valuation allowance of $2.1 million and $2.7 million, respectively. As of September 30, 2008 and December 31, 2007, the VAT receivables, net of the valuation allowance, of $5.5 million and $6.4 million, respectively, is included in “Deferred Charges and Other Assets”, $1.7 million and $0.0 million, respectively, is included in “Other Current Assets” and $0.0 million and $1.9 million, respectively, is included in “Receivables” in the accompanying Condensed Consolidated Financial Statements. We review our VAT receivable balance for impairment whenever events or changes in circumstances indicate the carrying amount might not be recoverable. During the three and nine months ended September 30, 2008, the Company determined that a portion of the VAT receivable balance was not recoverable and wrote down the balance by $0.1 million and $0.5 million, respectively. During the comparable 2007 periods, the Company wrote down the balance by $1.1 million and $1.3 million, respectively.

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 13. 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.

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

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2008 and 2007
(Unaudited)

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

Foreign Currency Translation – (continued)

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. 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”. Cash flows from the derivative contracts are classified within “Cash flows from operating activities” in the accompanying Condensed Consolidated Statements of Cash Flows. Ineffectiveness is measured based on the change in fair value of the forward contracts and the fair value of the hypothetical derivatives with terms that match the critical terms of the risk being hedged. 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 September 30, 2008, 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 “Revenues”. See Note 4 for further information on financial derivative instruments.

Fair Value Measurements - Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157 (SFAS 157), “Fair Value Measurements” and SFAS No. 159 (SFAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment to FASB Statement No. 115”. SFAS 157, 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 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

SFAS 159 permits an entity to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. During the nine months ended September 30, 2008, the Company has not elected to use the fair value option permitted under SFAS 159 for any of its financial assets and financial liabilities that are not already recorded at fair value.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2008 and 2007
(Unaudited)

A description of the Company’s policies regarding fair value measurement is summarized below.

Fair Value Hierarchy - SFAS 157 requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These two types of inputs have created the following fair-value hierarchy:

•		Level 1 – Quoted prices for identical instruments in active markets.
•		Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
•		Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Determination of Fair Value - The Company generally uses quoted market prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access to determine fair value, and classifies such items in Level 1. Fair values determined by Level 2 inputs utilize inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted market prices in active markets for similar assets or liabilities, and inputs other than quoted market prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters, such as interest rates, currency rates, etc. Assets or liabilities valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable.

The following section describes the valuation methodologies used by the Company to measure fair value, including an indication of the level in the fair value hierarchy in which each asset or liability is generally classified.

Money Market and Open-end Mutual Funds — The Company uses quoted market prices in active markets to determine the fair value of money market and open-end mutual funds, which are classified in Level 1 of the fair value hierarchy.

Foreign Currency Forward Contracts — The Company enters into foreign currency forward contracts over the counter and values such contracts using a discounted cash flows model. The key inputs include forward foreign currency exchange rates and interest rates. The item is classified in Level 2 of the fair value hierarchy.

Investments Held in Rabbi Trust — The Company maintains a non-qualified deferred compensation plan structured as a rabbi trust for certain eligible employees. The investment assets of the rabbi trust are valued using quoted market prices multiplied by the number of shares held in the trust, which are classified in Level 1 of the fair value hierarchy. For additional information about our deferred compensation plan, refer to Notes 5 and 13.

Guaranteed Investment Certificates — The Company’s guaranteed investment certificates have a variable interest rate linked to the prime rate and approximates fair value due to the automatic ability to reprice with changes in the market; such items are classified in Level 2 of the fair value hierarchy.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2008 and 2007
(Unaudited)

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

Fair Value Measurements – (continued)

Value Added Tax Receivable- The value added tax “VAT” receivable is recorded at carrying value (net of valuation allowances), which approximates fair value. The Company recognizes a valuation allowance based on such factors as historical sales experience and current market demand. Such items are classified in Level 3 of the fair value hierarchy.

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.

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. The Company adopted the provisions of SFAS 157 on January 1, 2008. The adoption of this standard did not have a material impact on the Company’s financial condition, results of operations or cash flows. See Note 2 – Fair Value for further information.

In March 2007, the EITF reached a consensus 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 Company adopted the provisions of EITF 06-10 on January 1, 2008. As a result of the implementation of EITF 06-10, the Company recognized a $0.5 million liability for a postretirement benefit obligation related to a split dollar arrangement on behalf of its founder and former Chairman and Chief Executive Officer which was accounted for as a reduction to the January 1, 2008 balance of retained earnings. See Note 14 – Pension Plan and Post-Retirement Benefits for further information.

In December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS 141R), “Business Combinations” and SFAS No. 160 (SFAS 160), “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51”. SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of shareholders’ equity. SFAS 141R and SFAS 160 are effective for fiscal years beginning after December 15, 2008 and should be applied prospectively for all business combinations entered into after the date of adoption. However, the presentation and disclosure requirements of SFAS 160 will be applied retrospectively for all periods presented. The Company is currently evaluating the impact of adopting the presentation and disclosure provisions of SFAS 160 on its financial condition, results of operations and cash flows.

In March 2008, the FASB issued SFAS No. 161 (SFAS 161), “Disclosures About Derivative Instruments and Hedging Activities”, which amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, by requiring increased qualitative, quantitative, and credit-risk disclosures about an entity’s derivative instruments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. 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
Nine months ended September 30, 2008 and 2007
(Unaudited)

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3 (FSP 142-3), “Determination of the Useful Life of Intangible Assets”.  FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets”.  This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for fiscal years and interim periods beginning after December 15, 2008.  The Company is currently evaluating the impact that FSP 142-3 will have on its financial condition, results of operations and cash flows.

In May 2008, the FASB issued SFAS No. 162 (SFAS 162), “The Hierarchy of Generally Accepted Accounting Principles”, which reorganizes the generally accepted accounting principles (GAAP) hierarchy. SFAS 162 is intended to improve financial reporting by providing a consistent framework for determining what accounting principles should be used in preparing U.S. GAAP financial statements. With the issuance of SFAS 162, the FASB concluded that the GAAP hierarchy should be directed toward the entity and not its auditor, and reside in the accounting literature established by the FASB as opposed to the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. SFAS 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles” and is not expected to have any impact on the Company’s financial condition, results of operations and cash flows.

The Company’s assets and liabilities measured at fair value on a recurring basis subject to the requirements of SFAS 157 consist of the following (in thousands):

						Fair Value Measurements at September 30, 2008 Using:
										Quoted Prices in
										Active Markets				Significant Other				Significant
										For Identical				Observable				Unobservable
						Balance at				Assets				Inputs				Inputs
						September 30, 2008				(Level 1)				(Level 2)				(Level 3)
Assets:
Money Market and Open–end Mutual Funds			(1	)		$	66,002			$	66,002			$	—			$	—
Investments Held in Rabbi Trust for the Deferred Compensation Plan			(2	)			1,571				1,571				—				—
Guaranteed Investment Certificates			(3	)			995				—				995				—
Value Added Tax Receivables			(4	)			7,150				—				—				7,150
Total Assets						$	75,718			$	67,573			$	995			$	7,150
Liabilities:
Foreign Currency Forward Contracts			(5	)		$	13,888			$	—			$	13,888			$	—
Total Liabilities						$	13,888			$	—			$	13,888			$	—

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2008 and 2007
(Unaudited)

Note 2 – Fair Value – (continued)

The following table presents a reconciliation of the beginning and ending balances for the Company’s value added tax receivables measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and nine months ended September 30, 2008:

Description		Amount
Balance, July 1, 2008		$	7,238
Included in earnings1			(121	)
Purchases, issuances and settlements			33
Balance, September 30, 2008		$	7,150
Balance, January 1, 2008		$	8,247
Included in earnings1			(482	)
Purchases, issuances and settlements			(615	)
Balance, September 30, 2008		$	7,150
Unrealized Gains (Losses) Included in Earnings Above
For the three months ended September 30, 2008		$	—
For the nine months ended September 30, 2008		$	—

At September 30, 2008, the Company also had assets that under certain conditions would be subject to measurement at fair value on a non-recurring basis, like those associated with acquired businesses, including goodwill and other intangible assets, and other long-lived assets. For these assets, measurement at fair value in periods subsequent to their initial recognition would be applicable if one or more of these assets was determined to be impaired; however, no impairment losses have occurred relative to any of these assets during the nine months ended September 30, 2008. When and if recognition of these assets at their fair value is necessary, such measurements would be determined utilizing Level 3 inputs.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2008 and 2007
(Unaudited)

The following table presents the Company’s purchased intangible assets (in thousands) as of September 30, 2008:

														Weighted
														Average
		Gross				Accumulated				Net				Amortization
		Intangibles				Amortization				Intangibles				Period (years)
Customer relationships		$	7,473			$	2,573			$	4,900				7
Trade Name			984				443				541				5
Non-compete agreements			691				691				—				2
Other			264				224				40				3
		$	9,412			$	3,931			$	5,481				6

The following table presents the Company’s purchased intangible assets (in thousands) as of December 31, 2007:

														Weighted
														Average
		Gross				Accumulated				Net				Amortization
		Intangibles				Amortization				Intangibles				Period (years)
Customer relationships		$	7,589			$	1,762			$	5,827				8
Trade Name			979				293				686				5
Non-compete agreements			724				675				49				2
Other			270				186				84				3
		$	9,562			$	2,916			$	6,646				7

Amortization expense, related to the purchased intangible assets resulting from acquisitions (other than goodwill), of $0.4 million and $1.1 million for the three and nine months ended September 30, 2008, respectively, is included in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations. In the comparable 2007 periods, the Company recognized amortization expense of $0.4 million and $1.1 million, respectively.

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

Periods Ending December 31,		Amount
2008 (remaining three months)		$	385
2009		$	1,515
2010		$	1,488
2011		$	1,390
2012		$	703

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

		Amount
Balance at December 31, 2006		$	20,422
Contingent payment for Apex acquisition			2,068
Foreign currency translation			(22	)
Balance at December 31, 2007			22,468
Contingent payment for Apex acquisition			3,076
Foreign currency translation			(218	)
Balance at September 30, 2008		$	25,326

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2008 and 2007
(Unaudited)

Note 3 – Goodwill and Intangible Assets — (continued)

In July 2008, the Company settled the contingency related to the holdback of a portion of the purchase price in the Apex transaction related to representations and warranties. This settlement resulted in a payout of $2.4 million in cash and $0.7 million in common stock from the escrow account and an increase in the recorded amount of goodwill of $3.1 million.

During the three months ended September 30, 2008, in accordance with SFAS 142, the Company evaluated the remaining useful lives of its intangible assets that are being amortized to determine whether a revision to the remaining period of amortization was appropriate. As a result of its evaluation, effective July 1, 2008, the Company changed the estimated useful life of the customer relationships acquired in the acquisition of Kelly, Luttmer & Associates, from 15 years to nine years. The remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. The effect of this change in the estimated remaining useful life was an increase in amortization expense of $0.1 million during the three months ended September 30, 2008.

Note 4 – Forward Contracts

The Company had derivative assets and liabilities relating to outstanding forward contracts, designated as cash flow hedges, maturing within 15 months, consisting of Philippine peso contracts with a notional value of $140.6 million as of September 30, 2008. These derivative instruments are classified as “Other current assets” of $0.0 million and $8.4 million; “Other accrued expenses and current liabilities” of $11.5 million and $0.1 million; and “Other long–term liabilities” of $2.4 million and $0.0 million as of September 30, 2008 and December 31, 2007, respectively, in the accompanying Condensed Consolidated Balance Sheets.

The Company had deferred tax assets (liabilities) of $4.7 million and $(2.7) million related to these derivative instruments as of September 30, 2008 and December 31, 2007, respectively. A total of $(9.0) million and $5.0 million of deferred gains (losses), net of tax, on these derivative instruments as of September 30, 2008 and December 31, 2007, respectively, were recorded in “Accumulated other comprehensive income (loss)” in the accompanying Condensed Consolidated Balance Sheets. The deferred loss expected to be reclassified to “Revenues” from “Accumulated other comprehensive income (loss)” during the next twelve months is $11.2 million. However this amount and other future reclassifications from “Accumulated other comprehensive income (loss)” will fluctuate with movements in the underlying market price of the forward contracts.

During the three and nine months ended September 30, 2008, the Company recognized losses related to hedge ineffectiveness of $0.0 million and $0.5 million, respectively which were reclassified from “Accumulated other comprehensive income (loss)” to “Revenues”. In the comparable 2007 period, gains of $1.3 million and $1.2 million, respectively, were reclassified to “Revenues”. In addition, during the three and nine months ended September 30, 2007, the Company recognized in “Revenues” losses of $0.5 million and $1.1 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.

Net gains (losses) of $(1.6) million and $1.8 million from settled hedge contracts were reclassified from “Accumulated other comprehensive income (loss)” to “Revenues” during the three and nine months ended September 30, 2008, respectively. Net gains of $0.9 million and $1.6 million were reclassified in the comparable 2007 periods, respectively, in the accompanying Condensed Consolidated Statements of Operations.

During the nine months ended September 30, 2008, the Company settled forward contracts to purchase CAD 0.9 million at fixed prices of $0.9 million. Since these contracts were not designated as accounting hedges, they were accounted for on a mark-to-market basis, with realized and unrealized gains or losses recognized in the current period. As a result, the Company recognized losses of $0.1 million related to these contracts, which are included in “Revenues” in the accompanying Condensed Consolidated Statement of Operations for the nine months ended September 30, 2008. During the nine months ended September 30, 2007, the Company recognized an immaterial loss in “Revenues” related to changes in the fair value of derivative instruments not designated as accounting hedges.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2008 and 2007
(Unaudited)

Note 5 – Investments Held in Rabbi Trust

The Company’s Investments Held in Rabbi Trust, classified as trading securities and included in “Other current assets” at fair value in the accompanying Condensed Consolidated Balance Sheets consist of the following (in thousands):

		September 30, 2008								December 31, 2007
		Cost				Fair Value				Cost				Fair Value
Mutual funds		$	1,710			$	1,571			$	1,196			$	1,405

     Investments Held in Rabbi Trust were comprised of mutual funds, 76% of which are equity-based and 24% were debt-based at September 30, 2008. Investment income, included in “Other income (expense)” in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007 consists of the following (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Gross realized gains from sale of trading securities		$	—			$	—			$	1			$	—
Gross realized losses from sale of trading securities			(7	)			(2	)			(9	)			(2	)
Dividend and interest income			5				4				18				12
Net unrealized holding gains (losses)			(209	)			4				(359	)			73
Net investment income (losses)		$	(211	)		$	6			$	(349	)		$	83

Note 6 – Deferred Revenue

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

		September 30,				December 31,
		2008				2007
Future service		$	27,722			$	28,571
Estimated penalties and holdbacks			4,497				3,251
		$	32,219			$	31,822

Note 7 – 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 (SFAS 130), “Reporting Comprehensive Income”. 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
Nine months ended September 30, 2008 and 2007
(Unaudited)

Note 7 – Accumulated Other Comprehensive Income (Loss) – (continued)

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

		Foreign				Unrealized				Unrealized Gain
		Currency				Actuarial Gain				(Loss) on Cash
		Translation				(Loss) Related to				Flow Hedging
		Adjustment				Pension Liability				Instruments				Total
Balance at January 1, 2007		$	6,913			$	(1,044	)		$	—			$	5,869
Pre tax amount			23,195				4,166				13,821				41,182
Tax provision			—				(803	)			(2,693	)			(3,496	)
Reclassification to net income			(13	)			43				(6,128	)			(6,098	)
Foreign currency translation			197				(197	)			—				—
Balance at December 31, 2007			30,292				2,165				5,000				37,457
Pre tax amount			(21,389	)			—				(20,016	)			(41,405	)
Tax benefit			—				—				7,480				7,480
Reclassification to net income			(13	)			(49	)			(1,353	)			(1,415	)
Foreign currency translation			388				(265	)			(123	)			—
Balance at September 30, 2008		$	9,278			$	1,851			$	(9,012	)		$	2,117

Note 8 – 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 generated annual revenues of approximately $12.0 million. The Company substantially completed the Plan by the end of the third quarter of 2007. Total charges related to the Plan were $1.4 million. These charges include approximately $1.2 million for severance and related costs and $0.2 million for other exit costs. Cash payments totaled $1.2 million. 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. 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 nine months ended September 30, 2007 due to a change in estimate. Cash payments related to termination costs made totaled $0.5 million for the nine months ended September 30, 2007.

Note 9 – 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 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%. 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

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2008 and 2007
(Unaudited)

Note 9 – Borrowings – (continued)

1.25%. In addition, a commitment fee of up to 0.25% 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 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 nine months ended September 30, 2008 and 2007, and no outstanding balances as of September 30, 2008 and December 31, 2007, with $50.0 million availability on the Credit Facility.

Note 10 – Income Taxes

The Company’s effective tax rate was 16.3% and 21.3% for the nine months ended September 30, 2008 and 2007, respectively. The decrease in the effective tax rate of 5.0% resulted from a shift in our mix of earnings and the effects of permanent differences, valuation allowances, foreign withholding taxes, state income taxes, foreign income tax rate differentials (including tax holiday jurisdictions) and recognition of income tax benefits of $1.3 million, including interest and penalties of $0.8 million, relating to transfer pricing as a result of a favorable tax audit determination in March, 2008.

The differences in the Company’s effective tax rate of 16.3% as compared to the U.S. statutory federal income tax rate of 35.0% were primarily due to tax benefits resulting from additional income earned in certain tax holiday jurisdictions; recognition of income tax benefits relating to the transfer pricing mentioned above; accompanied by the effects of valuation allowances, permanent differences, losses in jurisdictions for which tax benefits can be recognized, foreign withholding and other taxes, accrued interest and penalties and foreign income tax rate differentials.

The Company establishes a valuation allowance to reduce the deferred tax assets if, based on the weight of the available evidence, both positive and negative, for each respective tax jurisdiction, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In September, 2008, the Company determined that its profitability and expectations of future profitability of certain foreign subsidiaries indicated that it was “more likely than not” that portions of the deferred tax assets would be realized. Accordingly, in the third quarter of 2008, the Company recognized an increase in its deferred tax assets of $6.1 million through a partial reversal of the valuation allowance. The reversal of the valuation allowance of $6.1 million reduced the provision for income taxes in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008.

During the three months ended September 30, 2008, the Company determined to distribute in the fourth quarter of 2008 approximately $60.0 million in earnings from its Philippine operations to its foreign parent in the Netherlands to take advantage of the expiring tax provisions of IRC section 954( c)( 6). These tax provisions permit continued tax deferral on such distributions that would otherwise be taxable immediately in the United States. While the distribution is not taxable in the United States, it is subject to a withholding tax of $6.1 million, which is included in the provision for income taxes in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008. A provision for income taxes has not been provided on the remaining undistributed earnings of the Company’s foreign subsidiaries because these earnings have been deemed to be permanently reinvested.

As of September 30, 2008, the Company had $4.8 million of unrecognized tax benefits, a net decrease of $0.6 million from $5.4 million as of December 31, 2007. This decrease, which relates primarily to the recognition of tax benefits relating to transfer pricing mentioned above, had a favorable impact on the effective tax rate for the nine months ended September 30, 2008.

If the Company recognized its remaining unrecognized tax benefits at September 30, 2008, approximately $4.5 million and related interest and penalties would favorably impact the effective tax rate. The Company believes it is reasonably possible that its unrecognized tax benefits will decrease or be recognized in the next twelve months by

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2008 and 2007
(Unaudited)

up to $1.5 million due to transfer pricing and the classification of tax attributes related to intercompany accounts that will be resolved under audit or appeal in various tax jurisdictions.

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company had $2.4 million and $3.0 million accrued for interest and penalties as of September 30, 2008 and December 31, 2007, respectively. Of the accrued interest and penalties at September 30, 2008 and December 31, 2007, $1.6 million and $2.2 million, respectively, relate to statutory penalties. The amount of interest and penalties recognized in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 was $0.1 million and $0.3 million, respectively. In the comparable periods of 2007, the Company recognized interest and penalties of $0.1 million and $0.4 million, respectively.

The Company is currently under examination by the U.S. Internal Revenue Service for certain tax years. An examination of the Company’s U.S. tax returns through July 31, 2002 was concluded with a “no change” result. The field work has been completed for tax years ended July 31, 2003, December 31, 2003 and December 31, 2004 and the Company is not aware of any proposed changes for any year. The Company’s tax examinations in Germany have concluded for tax periods covering 1996-2003, with the exception of items under appeal from prior examination results by the German tax authorities for periods covering 1996 through 2000. Additionally, certain Canadian subsidiaries are under examination by Canadian tax authorities for the tax years covering 2002 through 2003 and a Philippine subsidiary is being audited by the Philippine tax authorities for tax years 2004 through 2007. The Company’s Scotland subsidiaries are under audit for the tax year 2005. The Indian tax authorities previously issued an assessment for the tax year ended March 31, 2004, which was reduced as a result of a favorable tax audit determination in March, 2008. This revised assessment is currently on appeal with the Indian tax authorities. In addition, the Company is currently under examination in India for tax years ended March 31, 2006 and 2005.

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 nine month periods ended September 30, 2008, the impact of outstanding options to purchase shares of common stock and stock appreciation rights of 0.1 million and 0.2 million, respectively, and 0.1 million and 0.1 million for the comparable 2007 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								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Basic:
Weighted average common shares outstanding			40,678				40,432				40,590				40,360
Diluted:
Dilutive effect of stock options, stock appreciation rights, restricted stock, common stock units and shares held in a rabbi trust			392				265				338				264
Total weighted average diluted shares outstanding			41,070				40,697				40,928				40,624

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
Nine months ended September 30, 2008 and 2007
(Unaudited)

Note 11 – 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 nine months ended September 30, 2008 and 2007, the Company made no purchases under the 2002 repurchase program.

During the nine months ended September 30, 2008, the Company cancelled 4.6 million shares of its Treasury stock and recorded reductions of $0.1 million to “Common stock”, $33.3 million to “Additional paid-in capital”, $51.5 million to “Treasury stock” and $18.1 million to “Retained earnings”.

Note 12 – Segments and Geographic Information

The Company operates within two regions, the “Americas” and “EMEA” which represented 66.9% and 33.1%, respectively, of the Company’s consolidated revenues for the three months ended September 30, 2008, and 66.9% and 33.1%, respectively, of the Company’s consolidated revenues for the nine months ended September 30, 2008. In the comparable 2007 periods, the Americas and the EMEA region represented 68.5% and 31.5%, respectively, of the Company’s consolidated revenues for the three months ended September 30, 2007, and 67.9% and 32.1%, respectively, of the Company’s consolidated revenues for the nine months ended September 30, 2007. 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 nine months ended September 30, 2008 compared to the corresponding prior year period, is as follows (in thousands):

														Consolidated
		Americas				EMEA				Other(1)				Total
Three Months Ended September 30, 2008:
Revenues		$	138,573			$	68,493							$	207,066
Depreciation and amortization		$	5,609			$	1,320							$	6,929
Income (loss) from operations		$	22,237			$	7,079			$	(10,063	)		$	19,253
Other income, net											3,964				3,964
Provision for income taxes											(3,725	)			(3,725	)
Net income														$	19,492
Three Months Ended September 30, 2007:
Revenues		$	120,592			$	55,530							$	176,122
Depreciation and amortization		$	5,178			$	1,105							$	6,283
Income (loss) from operations		$	19,369			$	4,671			$	(9,155	)		$	14,885
Other income, net											1,151				1,151
Provision for income taxes											(3,780	)			(3,780	)
Net income														$	12,256

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2008 and 2007
(Unaudited)

Note 12 – Segments and Geographic Information – (continued)

														Consolidated
		Americas				EMEA				Other(1)				Total
Nine Months Ended September 30, 2008:
Revenues		$	413,469			$	204,947							$	618,416
Depreciation and amortization		$	17,205			$	3,920							$	21,125
Income (loss) from operations		$	66,178			$	15,764			$	(29,806	)		$	52,136
Other income, net											11,081				11,081
Provision for income taxes											(10,286	)			(10,286	)
Net income														$	52,931
Nine Months Ended September 30, 2007:
Revenues		$	347,797			$	164,610							$	512,407
Depreciation and amortization		$	15,019			$	3,296							$	18,315
Income (loss) from operations		$	54,940			$	9,731			$	(28,742	)		$	35,929
Other income, net											2,680				2,680
Provision for income taxes											(8,217	)			(8,217	)
Net income														$	30,392

During the nine months ended September 30, 2008 and 2007, the Company had no clients that exceeded ten percent of consolidated revenues.

Note 13 – 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 $1.2 million and $3.6 million for the three and nine months ended September 30, 2008, respectively, and $0.9 million and $3.3 million for the comparable 2007 periods, respectively. The Company recognized income tax benefits of $0.5 million and $1.4 million in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008, respectively, and $0.3 million and $1.3 million for the comparable 2007 periods, respectively. The Company recognized benefits of tax deductions in excess of recognized tax benefits from the exercise of stock options in the amounts of $0.1 million and $0.7 million, for the three and nine months ended September 30, 2008, respectively (none in 2007). There were no capitalized stock-based compensation costs at September 30, 2008 or December 31, 2007.

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.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2008 and 2007
(Unaudited)

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 nine months ended September 30, 2008 and 2007.

The following table summarizes stock option activity under the Plan as of September 30, 2008, and changes during the nine 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, 2008			484			$	13.49
Granted			—				—
Exercised			(105	)			11.20
Forfeited or expired			(21	)			20.07
Outstanding at September 30, 2008			358			$	13.78				2.31			$	3,018
Vested or expected to vest at September 30, 2008			358			$	13.78				2.31			$	3,018
Exercisable at September 30, 2008			358			$	13.78				2.31			$	3,018

Options exercised during the three and nine months ended September 30, 2008 had an intrinsic value of $0.3 million and $0.8 million, respectively. Options exercised in the comparable periods of 2007 had an intrinsic value of $0.0 million and $0.8 million, respectively. All options were fully vested as of December 31, 2006 and there is no unrecognized compensation cost as of September 30, 2008 related to these options granted under the Plan (the effect of estimated forfeitures is not material).

Cash received from stock options exercised under this Plan for the nine months ended September 30, 2008 and 2007, was $1.2 million and $0.5 million, respectively.

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.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2008 and 2007
(Unaudited)

Note 13 – Stock-Based Compensation – (continued)

Stock Appreciation Rights – (continued)

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 nine months ended September 30, 2008 and 2007:

		Nine Months Ended
		September 30,
		2008				2007
Expected volatility			47	%			53	%
Weighted-average volatility			47	%			53	%
Expected dividends			—				—
Expected term (in years)			4.0				3.9
Risk-free rate			3.1	%			4.5	%

The following table summarizes SARs activity under the Plan as of September 30, 2008, and changes during the nine months then ended:

										Weighted
						Weighted-				Average				Aggregate
						Average				Remaining				Intrinsic
		Shares				Exercise				Contractual				Value
Stock Appreciation Rights		(000s)				Price				Term (in years)				(000s)
Outstanding at January 1, 2008			243			$	—
Granted			133				—
Exercised			(9	)			—
Forfeited or expired			—				—
Outstanding at September 30, 2008			367			$	—				8.5			$	1,897
Vested or expected to vest at September 30, 2008			367			$	—				8.5			$	1,897
Exercisable at September 30, 2008			112			$	—				7.5			$	832