AEGIS COMMUNICATIONS GROUP INC, 10-K, 2000-03-30

AEGIS COMMUNICATIONS GROUP INC
10-K, 2000-03-30
BUSINESS SERVICES, NEC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

(MARK ONE)

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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1999.
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<TABLE>
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE
TRANSITION PERIOD FROM TO
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Commission file number: 0-14315

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AEGIS COMMUNICATIONS GROUP, INC.

(Exact name of registrant as specified in its charter)

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DELAWARE 75-2050538
(State of Incorporation) (I.R.S. Employer Identification No.)
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7880 BENT BRANCH DRIVE, SUITE 150, IRVING, TEXAS 75063
(Address of principal executive offices, Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$.01 PAR VALUE

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes / / No /X/

The aggregate market value of the Company's Common Stock held by
non-affiliates of the Registrant as of March 24, 2000 was approximately
$44.1 million.

As of March 24, 2000, 51,799,616 shares of Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the 2000 Annual Meeting of
Stockholders are incorporated by reference in Part III of this report.

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PART I

ITEM 1. BUSINESS

INTRODUCTION

Aegis Communications Group, Inc. (referred to as "Aegis", "we", "our, "us"
or the "Company") is an integrated customer solutions provider offering
multi-channel support (customer interaction support across multiple
communications channels including the Internet, e-mail and the telephone),
database management, analytical services and marketing research to Fortune 500
corporations as well as emerging e-commerce companies. We develop and implement
customized multi-channel contact programs designed to strengthen our clients'
relationships with their customers. We provide services through our two
operating segments, customer solutions and marketing research. For a discussion
of the financial results of these two segments please see "Notes to Consolidated
Financial Statements--Segments." Our offerings include: web-enabled and
telephone-based customer service, help desk, and customer acquisition and
retention; multilingual communications programs; client service center
facilities management; order provisioning, which is the transferring of data
into our clients' billing systems and customer records; and database management.
Our web-enabled customer care ("e-care") capabilities include online customer-
initiated call back, web call-through (or "Voice over Internet Protocol", or
"VoIP"), automated e-mail response, live web text chat, pushed content web
sessions (in which we send, or "push", web pages to the customer from anywhere
on the Internet), click-stream analysis, web self-service, fax/email on demand
and online management reporting. Our database service offerings include
profiling and data overlay, segmentation, modeling, survey results analysis,
financial analysis and customer lifecycle analysis. Our Elrick & Lavidge
marketing research division ("E&L") provides research clients, representing a
broad range of industries, with customized marketing research including customer
satisfaction studies, quantitative and qualitative research, new product
development and data management. E&L also offers a series of information-based
syndicated research products called "HOW AMERICA SHOPS-REGISTERED TRADEMARK-",
which feature the role of e-commerce in both business and consumer purchasing.

Aegis specializes in the execution and management of large volume customer
contact programs through multiple methods of contact for major U.S. corporations
in a variety of industries. Aegis' operations are technology driven through our
advanced data and communications systems, which permit real-time interface with
our clients' host systems via the Internet or dedicated networks. Aegis believes
it competes on the basis of four primary differentiators:

- consistency and quality of service;

- the ability to implement advanced technology including e-care
capabilities, predictive dialing, call blending and proprietary front-end
interfaces which enable real-time access to clients' host data;

- responsiveness to changing client needs and adaptability to unique client
requirements; and

- cost effectiveness.

Aegis is a Delaware corporation, which was previously known as ATC
Communications Group, Inc. ("ATC"). On July 9, 1998, ATC completed the
acquisition of IQI, Inc., a New York corporation ("IQI"). The acquisition was
effected through the merger (the "Merger") of a wholly-owned subsidiary of ATC
with and into IQI pursuant to an Agreement and Plan of Merger, dated as of
April 7, 1998 (the "Merger Agreement"). Effective upon the Merger, the Company
formally changed its name to Aegis Communications Group, Inc. and its trading
symbol to "AGIS".

Our headquarters are located at 7880 Bent Branch Drive, Suite 150, Irving,
Texas 75063. Our telephone number is (972) 830-1800 and our web-site address is
www.aegiscomgroup.com. Unless the context requires otherwise, references to the
Company in this report include its consolidated subsidiaries.

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RECENT DEVELOPMENTS

Since the end of the fiscal year, we have hired a new President and Chief
Executive Officer, Executive Vice President of Sales and Marketing and Chief
Technology Officer. We expect to hire a new Chief Financial Officer during the
second quarter of 2000. On March 29, 2000, we announced that effective
April 17, 2000, Hugh E. Sawyer will join the Company as President, Chief
Executive Officer and a director of the Company. Mr. Sawyer most recently served
as President of Allied Automotive Group, Inc., a subsidiary of Allied Holdings,
Inc. From 1996 to 1999, Mr. Sawyer served as President and Chief Executive
Officer of National Linen Service, a subsidiary of National Service Industries,
Inc. From 1995 to 1996, he was President of the Cunningham Group. From 1988 to
1995, Mr. Sawyer served as President and Chief Operating Officer of Wells Fargo
Armored Services Corp., a subsidiary of Borg Warner.

On the same date, we announced that Stephen A. McNeely, the Company's
current President and Chief Executive Officer, is resigning effective April 14,
2000 and will continue to serve as a consultant to the Company until
December 31, 2000.

On March 16, 2000, we announced the appointment of Donald L. Jones as the
Company's Executive Vice President of Sales and Marketing. Mr. Jones will be
responsible for directing the Company's sales and marketing efforts, including
the launch of its web-based business initiatives. Mr. Jones most recently served
as Vice President at Cap Gemini America, Inc. where he was responsible for
consulting practices focused on IT business consulting, manufacturing,
telecommunications and electronic commerce. From 1994 to 1996, he was Vice
President of Business Development for Transaction Strategies, Inc. From 1979 to
1994, Mr. Jones served in a variety of management roles with Digital Equipment
Corporation, including U.S. Sales Manager for Small and Mid-Sized Enterprises,
and Director of Sales for the Americas' Components Products Group.

On February 15, 2000, we announced the appointment of Angelo P. Macchia as
the Company's Chief Technology Officer. Mr. Macchia will be responsible for
directing the Company's client service center information systems as well as
managing the applications development, telecommunications, and business
requirements organizations. Mr. Macchia most recently served as Managing Partner
of Guardian Technology and Consulting, an information technology services firm.
From to 1995 to 1997, Mr. Macchia served as a Managing Director of MCI
Systemhouse, from 1988 to 1995 was Chief Information Officer of FMC
Corporation's Defense Division and FMC Europe, and from 1969 to 1988, held
management positions with General Electric Corporation.

SERVICES AND STRATEGY

CUSTOMER SOLUTIONS

We develop and implement customized multi-channel contact programs designed
to strengthen our clients' relationships with their customers. Traditionally,
our customer solutions have consisted of telephone-based marketing and customer
service programs ("teleservices"). We have recently integrated e-care
capabilities, which comprise handling a variety of customer contacts through our
clients' Internet web-sites, with our phone-based customer service offerings.

Aegis designs, manages and conducts large, telecommunications-based
marketing and customer service programs. These programs feature live,
knowledgeable customer service representatives ("CSRs") provided on an
outsourced basis to large U.S. corporations in a wide variety of industries. We
offer both inbound and outbound customer solutions.

Outbound customer solutions involve making outgoing telephone calls, usually
to market a client's products or to acquire new customers. We do not engage in
any form of outbound calling that uses computerized voice presentations or makes
unsolicited financial requests, nor is Aegis engaged in the "900" number
business.

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

e-CARE CAPABILITIES

In March 2000, we introduced the Aegis e.Care.plus(SM) suite of web-enabled
customer care capabilities that will transform a number of our production
workstations into multi-channel capable workstations able to handle a variety of
customer interactions, especially those originating from the Internet. Through
the e.Care.plus(SM) suite of services, Aegis will be able to assist clients
with:

- retaining high-value customers by building their loyalty;

- revealing cross-sell opportunities;

- developing early warnings of customer attrition;

- identifying untapped sources of incremental revenue;

- tailoring promotional offers to maximize response; and

- anticipating buying cycles and responding with targeted programs.

The e.Care.plus( SM) service suite includes the following product offerings:

- e.Decision.plus(SM) provides real-time, web-based data that tracks
customers' interactions with a client's web-site. By linking this analysis
to proprietary databases and statistical analysis software,
e.Decision.plus creates aggregated customer profiles and behavior models
to better focus marketing programs. e.Decision.plus meets clients' needs
for real-time customer segmentation, analysis and trending that once took
days or weeks to produce. As part of e.Decision.plus, Aegis develops,
manages and maintains customer databases. e.Decision.plus builds on
50 years of marketing research in customer acquisition, retention and care
provided by Aegis' marketing research division, Elrick & Lavidge.

- e.Mail.plus(SM) allows us to handle all aspects of responding to customer
e-mail for our clients. This capability will include standardized answers,
automated e-mail response, and live responses from an e.CSR within a
client specified time frame.

- e.Text.plus(SM) launches a secure chat window on a private web-site that
allows an e.CSR to conduct a one-to-one chat with a customer or user.

- e.Push.plus(SM) allows an e.CSR to send, or "push", interactive or
response web pages to a customer from anywhere on the Internet. These
pages may highlight product information, order and shipping information,
technical instructions or the client's latest promotion.

- e.Voice.Plus(SM) initiates a live voice conversation with an e.CSR when a
customer clicks an icon on a client's web-site. The customer can choose to
have a conversation live through the web-site, or a call back at a
scheduled time.

Aegis endeavors to establish long-term relationships with major corporations
and emerging e-commerce companies that utilize telecommunications, including the
Internet, as important, ongoing elements in their core customer relationship
management strategies. These arrangements usually require Aegis to develop and
license unique software systems for the client. By offering high quality,
customized,

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flexible and fully-integrated customer contact management services designed to
improve quality, productivity and effectiveness, Aegis can enhance and add value
to our clients' existing marketing and customer service programs.

MARKETING RESEARCH

Elrick & Lavidge ("E&L") offers several information-based services designed
to assist research clients in more effectively marketing products and services
to their customers.

Included among E&L's custom research offerings are online, in-store, and
on-site behavioral research; comprehensive expertise in customer satisfaction,
customer value analysis (how a client's customers perceive value), and customer
life cycle studies (factors that comprise gaining and retaining customers);
market segmentation; product and concept testing; brand positioning; market
structure and tracking studies; mystery shopping; and focus group research. E&L
also has three information-based syndicated research products in its "HOW
AMERICA SHOPS-REGISTERED TRADEMARK-" series. "RE-TAILING(SM), CHANGING THE
SHOPPING CHANNEL," and "e-COMMERCE BENEFITS MONITOR-TM-"probe the relationships
between online and traditional retail selling options while delivering
information and insights that help subscribers maximize profitable business.
"COBRAND DYNAMICS(SM)" analyzes how and which consumers use which types and
brands of credit cards for the full range of consumer purchases.

Industries on which E&L focuses include consumer goods and services,
financial services, telecommunications, utilities, healthcare, entertainment,
leisure, retail, technology, software, travel, and business services. E&L's data
collection methods include online, in-store, focus group, in-person, one-on-one,
and telephone interviews.

Elements of E&L's growth strategy include applications of advanced
technology, applied marketing sciences, web-centric data management and ongoing
analyses of the growth of online sales or transaction environments for corporate
clients. The company has extended its behavioral research capabilities to
include "HOW AMERICA SHOPS-REGISTERED TRADEMARK-," a series of services defining
how and why people make decisions at the point of purchase whether online or in
traditional environments. These capabilities encompass both business-to-business
and business-to-consumer interactions.

Aegis' objective is to become the premier high-quality, full service
provider of outsourced customer solutions to Fortune 500 corporations and
emerging e-commerce companies. We believe that e-care and the inbound segment of
the customer solutions market possess the greatest long-term growth potential in
our industry so we are concentrating our efforts primarily on those segments. In
order to serve all of our clients' needs, however, we offer outbound services as
well. For the year ended December 31, 1999, approximately 50% of our revenues
were generated by inbound customer solutions, 39% from outbound customer
solutions and 11% from marketing research. In comparison, for the year ended
December 31, 1998, approximately 27% of Aegis' revenues were generated by
inbound customer solutions, 59% by outbound customer solutions and 14% from
marketing research. On a pro forma basis accounting for the Merger as if it had
occurred on January 1, 1998, approximately 36% of Aegis' revenues for the year
ended December 31, 1998 were generated by inbound customer solutions, 52% by
outbound customer solutions and the remaining 12% by marketing research.

OPERATIONS

As of December 31, 1999, Aegis operated or managed approximately 5,600
production workstations in its 21 client service centers and 11 marketing
research facilities. A workstation includes a cubicle, personal computer with
monitor and keyboard, a headset and an automatic call distributor console. All
of our facilities are located in the continental United States except for one
client service center in Canada.

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CUSTOMER SOLUTIONS

Three Lucent Technologies G-3 telecommunications switches, nine Rockwell
Galaxy GVS 3000 Automatic Call Distributors ("ACDs") and one Rockwell Spectrum
ACD interfaced primarily with multiple Data General systems are utilized to
operate Aegis' client service centers. The data system itself is based on an
open architecture design UNIX operating system supported by a sophisticated
relational database. This open architecture design allows us to interface
seamlessly, and in real-time, with our clients' host systems. It also provides
the flexibility that enables Aegis to deliver solutions rapidly to our clients'
marketing and customer service needs. Outbound calling is enhanced through a
Rockwell Predictive Dialing System based on a fault tolerant Tandem Platform.
Aegis also maintains a staff of software engineers who create customized
software applications for our clients and respond to changing client needs. Our
operations are further enhanced by the use of universal workstations that can
automatically handle either inbound or outbound call activity. Such technology
permits Aegis to offer productivity enhancements associated with this "call
blending" ability.

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

MARKETING RESEARCH

As of December 31, 1999, E&L maintained four full-service and four dedicated
client offices in eight major cities throughout the United States. E&L also
staffs three research service centers at separate locations containing, in the
aggregate, 225 computer-assisted telephone interview ("CATI") workstations.

As of December 31, 1999, E&L employed 185 full-time marketing research
professionals. In addition, the firm has a part-time staff of 976 associates in
its field and telephone interviewing centers. Knowing our clients' industries is
important to our success. We have concentrated on developing expertise in
several industries, including telecommunications, consumer packaged goods and
financial services. Consistently updated industry expertise enables us to
provide reliable customer and market information and advisory services to
clients in those industries.

INDUSTRY AND COMPETITION

CUSTOMER SOLUTIONS

We compete in the market that provides large corporations, as well as
emerging e-commerce companies, with outsourced customer solutions across
multiple communications channels including the Internet, e-mail and the
telephone. The customer solutions market is a component of the customer
relationship management ("CRM") industry and is spread among many competitors
including a large number of in-house organizations and numerous independent
providers like Aegis. According to IDC Research, spending on domestic CRM is
expected to grow an average of 40% per year for the next four years due to the
increased use of client service centers for customer care, the trend toward
outsourcing,

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and growth in the use of the Internet for commerce and customer service. The
Gartner Group estimates that approximately 25% of all customer interactions will
happen over the Internet, web-sites or e-mail by 2001. Forrester Research
estimates that by 2001 consumers will send companies approximately 50 million
e-mails per day requesting information or customer service. Aegis believes that
large corporations and emerging e-commerce companies will increasingly outsource
their CRM activities in order to concentrate their internal resources on their
core competencies and to access the quality and cost effectiveness available
from outsourced service providers like Aegis.

The customer solutions market is very competitive. Competitors range from
very small firms offering specialized applications to large, full-service
companies with multiple, high volume client service centers, including APAC
Customer Services, Inc., Convergys Corp., ICT Group, Inc., National
TechTeam, Inc., Precision Response Corp., Quintus Corp., RMH
Teleservices, Inc., Sitel Corp., Sykes Enterprises, Inc., TeleSpectrum
Worldwide, Inc., TeleTech Holdings, Inc. and West TeleServices, Inc. We also
compete against the in-house call center and customer service operations of
clients and prospective clients. We believe we compete primarily on the basis of
(1) consistency and quality of service; (2) the ability to implement advanced
technology including e-care capabilities, predictive dialing, call blending and
proprietary front-end interfaces which enable real-time access to clients' host
data; (3) responsiveness to changing client needs and adaptability to unique
client requirements; and (4) cost effectiveness.

MARKETING RESEARCH

The marketing research industry is highly competitive and is characterized
by a large number of relatively small organizations and a small number of
companies with sizable resources. The 183 research companies in the Council of
American Survey Research Organizations reported total research marketing revenue
of $6.4 billion in 1998. The June 7, 1999 issue of MARKETING NEWS ranked
Elrick & Lavidge as the twenty-eighth largest marketing research company in the
United States.

E&L regularly experiences significant competition from numerous market
participants, including other marketing research firms, marketing and research
departments of various companies, advertising agencies and business consulting
firms. Marketing research firms with which we regularly compete include Maritz
Marketing Research, Inc., Opinion Research Corp., Burke Incorporated, and Market
Facts, Inc., among others. In the emerging online market research sector,
competitors include BizRate.com, Gomez Advisors, Harris Interactive, and
Greenfield Online, among others. We believe that marketing research firms
compete primarily on the basis of: (1) quality of research information; (2) the
ability to rapidly obtain, analyze and communicate marketing research
information; (3) consistency; and (4) cost effectiveness.

MARKETING OF SERVICES

Aegis seeks to differentiate itself from our competitors through our
emphasis on quality and service to the client, our technological capabilities,
our ability to meet and enhance the client's changing requirements and cost
effectiveness. We seek to develop and maintain long-term relationships with our
clients and we focus our marketing efforts on Fortune 500 and emerging
e-commerce companies that utilize integrated customer service and marketing
research as important, ongoing elements in their core marketing strategy. We
believe these corporations present the greatest potential for our recurring
revenue growth and that their customer relationship requirements fit well with
our technology and client support infrastructure. We obtain new business by
responding to requests for proposals, through client and consultant referrals
and by targeting potential new clients. New business is also gained by
identifying additional needs of our existing clients and cross-selling our
services to meet those needs.

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GOVERNMENT REGULATION

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

The Federal Telemarketing and Consumer Fraud and Abuse Protection Act of
1994 broadly authorized the Federal Trade Commission (the "FTC") to issue
regulations prohibiting mis-representation in telephone sales. The FTC then
issued its telemarketing sales rules, which became effective December 31, 1995.
Generally, these rules prohibit abusive telephone solicitation practices and
impose disclosure and record keeping requirements on telemarketers.

In addition to these rules and regulations, bills are frequently introduced
in Congress to regulate the use of credit information. We cannot predict whether
this legislation will be enacted and what effect, if any, it would have on our
industry.

Most states have also enacted or are considering legislation to regulate
telephone solicitations. For example, telephone sales in certain states cannot
be final unless a written contract is delivered to and signed by the buyer and
may be canceled within three business days. At least one state also prohibits
telemarketers from requiring credit card payment, and several other states
require certain telemarketers to obtain licenses and post bonds. For instance,
persons selling insurance products are required to be licensed by various state
insurance commissions and participate in regular continuing education programs.
Some industries we serve are also subject to various state government
regulations with regard to selling practices and consumer disclosure
requirements. We specifically train our representatives to conduct calls in an
approved manner and believe we are in compliance in all material respects with
all federal and state regulations. There can be no assurance, however, that we
may not be subject to regulatory challenge for a violation of federal or state
law by any of our clients.

REVENUES AND SEASONAL NATURE OF BUSINESS

The timing and size of our clients' marketing programs directly affect our
revenues. Our expenses are also directly affected by these factors. We cannot
predict the seasonal variations in our clients' demands for our services.

PERSONNEL AND TRAINING

Our business depends on people. We are constantly trying to hire, train,
retain and manage good people. We try to locate our client service centers where
the cost of living is relatively low and there are many qualified and motivated
workers. We do this to lower our operating costs while maintaining a high
quality workforce with the lowest turnover rate achievable. Still, our attrition
rate is high compared to most other industries and it is difficult and costly to
hire and train new employees.

RELIANCE ON MAJOR CLIENTS

We have historically relied on a few major clients for the bulk of our
revenue. In 1999, AT&T accounted for 24% of our revenues and American Express
for approximately 16%. In 1998, AT&T accounted for approximately 27% of our
revenues and American Express for approximately 11% (approximately 23% and 9%,
respectively, on a pro forma basis for the Merger). From time to time, AT&T
reorganizes or curtails its marketing programs, negotiates price reductions in
certain of its programs and significantly reduces its volumes of business with
its customer solutions vendors, including Aegis, all of

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which negatively affect our revenues. Although we try to build and improve our
customer relationships, we have tried to reduce our dependence on a few major
clients by broadening our customer base because of the detrimental impact their
unilateral decisions can have on our business.

QUALITY ASSURANCE

Because our services involve direct contact with our clients' customers and
sale prospects, we must maintain a reputation for quality service. To that end,
our representatives are monitored to ensure that they comply with the client's
script and deliver quality and efficient service. We regularly measure the
quality of our services by benchmarking factors like sales per hour and level of
customer satisfaction. Our information systems enable us to provide clients with
real time reports regarding the status of an ongoing campaign. We also transmit
summary data and captured information electronically to clients. Access to this
data enables our clients to modify or enhance an ongoing campaign to improve its
effectiveness.

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

EMPLOYEES

As of December 31, 1999, Aegis employed approximately 7,818 persons,
including 6,549 client service representatives. As of February 29, 2000, Aegis
employed approximately 9,224 persons, including 7,804 client service
representatives. We believe our relationship with our employees is good.

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ITEM 2. PROPERTIES

Our principal executive offices and operational and administrative
headquarters are located in a 23,333 square foot leased building in Irving,
Texas. This lease expires on December 31, 2003. Regional headquarters are
located in Los Angeles, California where we lease facilities adjacent to our Los
Angeles client service center operations and occupy approximately 7,000 square
feet, and Tucker, Georgia (a suburb of Atlanta) where we lease facilities
adjacent to one of our marketing research facilities and occupy 2,089 square
feet. Aegis also has a number of administrative personnel in New York, New York
who occupy leased facilities consisting of 13,542 square feet of office space.
The term of this lease expires in October 2003. Aegis also maintains office
space in Dallas, Texas containing approximately 4,170 square feet that is
occupied pursuant to a lease expiring November 30, 2001. All of our facilities
are occupied pursuant to various lease arrangements, except the Browns Valley
and Dalton, Minnesota facilities, which Aegis owns and, three additional
facilities operated by independent third parties ("Managed Centers"). We require
the Managed Centers to have state-of-the-art predictive dialing capabilities,
and we conduct periodic site visits to assess the technological capabilities of
all Managed Centers. We have used Managed Centers historically as a method of
expanding capacity without increasing fixed costs. Aegis believes, however, that
the development of additional Aegis-operated centers should enhance our
long-term profitability. Accordingly, Aegis continues to implement its site
strategy, which focuses on locating client service centers in what we believe
are markets offering lower wage rates, better employee retention and generally
lower operating costs. To that end, in 1999 we closed centers in Addison, Texas
and Euless, Texas, which were located in higher cost, higher turnover markets,
and opened new client service centers in St. Joseph, Missouri and Sierra Vista,
Arizona. As of December 31, 1999, we performed our services in the facilities
listed below:

CLIENT SERVICE CENTERS

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<CAPTION>
DATE LEASE SQUARE PRODUCTION
LOCATION OPENED EXPIRATION DATE FOOTAGE WORKSTATIONS
- - ------------------------ -------------- ------------------ -------- ------------
<S> <C> <C> <C> <C>
Arlington, Texas April 1990 August 31, 2002 11,600 146
Barrie, Canada April 1996 August 31, 2001 8,000 82
Browns Valley, Minnesota January 1996 not applicable 4,000 47
Dalton, Minnesota April 1995 not applicable 4,224 56
Elkins, West Virginia November 1998 October 31, 2008 20,125 204
Fairmont, West Virginia October 1997 February 28, 2009 48,000 437
Hazleton, Pennsylvania April 1996 April 30, 2001 4,700 80
Irving, Texas (2
facilities) September 1985 December 31, 2003 97,126 1,326
Joplin, Missouri February 1998 February 1, 2008 33,055 338
Los Angeles, California October 1985 October 31, 2002 68,700 740
Mesquite, Texas November 1996 September 15, 2000 10,575 168
Newport News, Virginia April 1995 April 30, 2001 10,000 120
Port St. Lucie, Florida September 1997 July 23, 2007 44,000 272
Sierra Vista, AZ February 1999 March 1, 2009 45,000 475
St. Joseph, MO April 1999 June 1, 2004 27,316 324
Tucker, Georgia March 1993 May 31, 2005 43,347 311
Virginia Beach, Virginia March 1989 June 30, 2000 8,037 120
Managed Centers (a) not applicable -- 136
------- -----
487,805 5,382
======= =====
</TABLE>

- - ------------------------

(a) Represents approximate number of workstations in three managed centers
located in Iowa and Minnesota.

10
<PAGE>
MARKETING RESEARCH FACILITIES

<TABLE>
<CAPTION>
DATE LEASE SQUARE PRODUCTION
LOCATION OPENED EXPIRATION DATE FOOTAGE WORKSTATIONS
- - ------------------------- -------- -------------------- -------- ------------
<S> <C> <C> <C> <C>
Chicago, Illinois 1951 January 31, 2004 18,431 56
Cincinnati, Ohio #1 1985 April 30, 2001 7,900 64
Cincinnati, Ohio #2 1985 August 31, 2000 5,853 --
Clarksville, Tennessee 1985 December 31, 2003 7,500 105
Irving, Texas 1992 October 31, 2001 3,246 --
Kansas City, Missouri 1992 May 31, 2003 4,228 --
Los Angeles, California 1999 November 15, 2000 900 --
Orlando, Florida 1998 July 31, 2000 550 --
Paramus, New Jersey 1979 October 31, 2000 12,158 --
San Francisco, California 1985 December 31, 2001 5,180 --
Tucker, Georgia 1979 January 31, 2003 29,325 --
------ ---
95,271 225
====== ===
</TABLE>

Aegis believes it can extend the leases at these locations or relocate the
facilities at terms comparable with its current lease obligations. While our
current capacity is sufficient to handle our current production demands, as our
growth continues, additional client service center facilities may be needed.

ITEM 3. LEGAL PROCEEDINGS

Other than ordinary routine litigation incidental to its businesses, and as
discussed below, neither Aegis nor its subsidiaries are parties to, nor are
their properties the subject of, any material pending legal proceedings. From
time to time, Aegis is involved in litigation incidental to its business. Aegis
believes that such litigation, individually or in the aggregate, is not likely
to have a material adverse effect on our results of operations or financial
condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held a special meeting of stockholders on December 10, 1999, at
which there were 26,993,170 shares of Common Stock present or represented by
proxy, which was equal to approximately 51.26% of the shares of Common Stock
entitled to vote. All of the Series D and E Preferred Shares were present and
the holders of the Series D and E Preferred Shares unanimously approved each of
the proposals. At such meeting, the following matters were approved by the
requisite vote:

(1) A proposal to approve (a) that certain Series F Senior Voting Convertible
Preferred Stock Purchase and Registration Rights Agreement dated as of
August 25, 1999 (as amended, the "Purchase Agreement") by and among the
Company, Questor Partners Fund II, L.P. and certain affiliated investment
funds and Thayer Equity Investors III, L.P. ("Thayer Equity"), certain
affiliated investment funds and certain other existing investors, (b) the
terms of the Company's Series F Senior Voting Convertible Preferred Stock,
par value $0.01 per share (the "Preferred F Shares"), (c) the issuance by
the Company to the Questor Investors pursuant to the terms and subject to
the conditions of the Purchase Agreement of 46,750 Preferred F Shares; and
(d) the issuance by the Company of common stock, par value $0.01 per share
(the "Common Stock") issuable if and when the Preferred F Shares are
converted into Common Stock (collectively, the "Questor Transaction")
(assuming a conversion price of $1.00 and subject to adjustment as provided
in the Certificate of Designation for the Preferred F Shares). This proposal
was approved by the affirmative vote of 26,967,160 shares, with 24,860
shares voting against, 1,144 shares abstaining and no broker non-votes.

(2) A proposal to approve an amendment to the Company's Amended and Restated
Certificate of Incorporation (the "Charter") to increase the number of
authorized shares of the Company's

11
<PAGE>
Common Stock from 100,000,000 to 200,000,000 shares was approved by the
affirmative vote of 26,991,746 shares, with 350 shares voting against, 1,074
shares abstaining and no broker non-votes.

(3) A proposal to approve an amendment to the Charter to increase the number of
authorized shares of the Company's Preferred Stock from 1,000,000 to
2,000,000 was approved by the affirmative vote of 26,991,826 common shares
with 330 common shares voting against, 1,014 common shares abstaining and no
broker non-votes.

(4) A proposal to approve an amendment to the Charter to remove the provision
relating to classification of the Board of Directors into three separate
classes was approved by the affirmative vote of 26,991,826 shares, with 180
shares voting against, 1,164 shares abstaining and no broker non-votes.

(5) The following directors of the Company were elected to serve until each of
their respective successors shall have been duly elected and qualified. The
number of votes cast for and withheld for each director were as follows:

<TABLE>
<CAPTION>
VOTES CAST
---------------------------
NOMINEE FOR WITHHELD
- - ------- ---------- --------
<S> <C> <C>
Dean Anderson.............................. 26,992,910 260

John R. Birk............................... 26,992,910 260

Edward Blank............................... 26,992,910 260

Robert D. Denious.......................... 26,992,910 260

Henry L. Druker............................ 26,992,910 260

Peter D. Fitzsimmons....................... 26,992,910 260

Michael D. Madden.......................... 26,992,910 260

Frederic V. Malek.......................... 26,992,910 260

Stephen A. McNeely......................... 26,992,910 260

Kevin J. Prokop............................ 26,992,910 260

Michael G. Santry.......................... 26,992,910 260

Paul G. Stern.............................. 26,992,910 260
</TABLE>

12
<PAGE>
PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

On September 20, 1999, we received notification from Nasdaq that we no
longer met the minimum requirements for continued listing on the Nasdaq National
Market System and, therefore, the Nasdaq staff determined that our continued
listing was no longer warranted. Accordingly, our common stock, $.01 par value
per share (the "Common Stock"), now trades on the National Association of
Securities Dealers' ("NASD's") Over-the-Counter Electronic Bulletin Board ("OTC
BB") under the symbol "AGIS". As of March 24, 2000, there were approximately
51,799,616 shares of Aegis common stock outstanding held by approximately 819
holders of record.

The table below lists the range of high and low closing prices for our
Common Stock as reported by the Nasdaq National Market System and OTC BB for the
two-year period ended December 31, 1999 and the subsequent interim period.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 HIGH LOW
- - ---------------------------- ----------- -----------
<S> <C> <C>
First Quarter............................................... 2 3/4 1 3/8
Second Quarter.............................................. 3 3/16 1 19/32
Third Quarter............................................... 3 1 7/8
Fourth Quarter.............................................. 1 7/8 25/32
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 HIGH LOW
- - ---------------------------- ----------- -----------
<S> <C> <C>
First Quarter............................................... 1 9/16 27/32
Second Quarter.............................................. 2 3/8 23/32
Third Quarter............................................... 1 5/32 1/2
Fourth Quarter.............................................. 1 13/32 15/32
</TABLE>

<TABLE>
<CAPTION>
INTERIM PERIOD FROM JANUARY 1, 2000 HIGH LOW
- - ----------------------------------- ----------- -----------
<S> <C> <C>
through March 24, 2000...................................... 2 5/16 1 1/32
</TABLE>

DIVIDENDS

To date, we have not declared a cash dividend on our common stock. We intend
to retain any earnings for use in the operation and expansion of our business,
and therefore do not anticipate declaring a cash dividend in the foreseeable
future. We have accrued an annual dividend of $0.36 per share on 29,778
outstanding shares of our Series B Preferred Stock. Our Series D and E Preferred
Stock accrue dividends quarterly at a rate of 15% per annum. Our Series F
Preferred Stock accrues dividends quarterly at a rate of 9.626% per annum. Under
the Credit Agreement, Aegis and its subsidiaries are prohibited from paying
dividends on our Common Stock until all the bank's commitments have terminated
and all of Aegis' and its subsidiaries' obligations under the Credit Agreement
have been satisfied. See "Notes to Consolidated Financial Statements--5. Sale of
Redeemable Convertible Preferred Stock."

PRIVATE PLACEMENTS OF CONVERTIBLE PREFERRED STOCK

13
<PAGE>
share, $100 per share liquidation preference) are convertible into Company
Common Stock at $2.375 per share. Both series earn cumulative dividends
(payable-in-cash or -in-kind in additional shares of the respective series of
Preferred Stock) at the annual rate of 15%, and are non-voting except on
specified matters. In consideration of the conversion of the subordinated debt
into preferred stock, the Company issued the Thayer-led group warrants to
purchase an additional 1,000,000 shares of Company Common Stock at $0.90625 per
share.

In an effort to reduce outstanding debt on our balance sheet, thereby
providing us the needed flexibility to renegotiate our bank revolving credit
agreement (and cure then outstanding defaults), and provide access to working
capital to fund future operations, on December 10, 1999, we completed the sale
of 46,750 shares of newly issued Preferred F senior voting convertible preferred
stock (the "Preferred F Shares") to Questor Partners Fund II, L.P., Questor
Side-by-Side Partners II, L.P., and Questor Side-by-Side Partners II 3(c)(1),
L.P. (the "Questor Investors") for an aggregate purchase price of
$46.75 million The Preferred F Shares are entitled to receive dividends, in
preference to all other capital stock of the Company, except for the Company's
Series B Voting Convertible Preferred Stock, par value $0.01 per share (the
"Preferred B Shares"), at the rate of 9.626% per annum, which will accrue and be
cumulative from their original issue date. The dividends on the Preferred F
Shares accrue on each share from its issuance on a daily basis, whether or not
earned or declared. To the extent that dividends have not been paid on any
March 31, June 30, September 30 or December 31 of any year, all such dividends
are added to the investment value of such share. The Preferred F Shares also
participate, on an as-converted basis, with the Common Stock in any dividends
that may be declared and paid after the payment of preferential dividends. The
Preferred F Shares vote on an as-converted basis. We used the proceeds from the
sale of the Preferred F Shares to pay transaction expenses and repay outstanding
bank debt.

As a result of the sale of the Preferred F Shares, on an as-converted basis,
the Questor Investors collectively own approximately 38% of our Common Stock and
Common Stock equivalents outstanding. The Preferred F Shares vote on an
as-converted basis and represent approximately 47% of our voting equity stock.

The sales and exchanges of the Preferred D, E and F Shares described above
were exempt under Rule 506 of Regulation D under the Securities Act of 1933, as
amended. The Thayer and Questor investors are "accredited investors" as defined
by Regulation D and each of the private placements exceeded $5.0 million in
value.

14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

The table below sets forth certain selected consolidated historical
financial data for Aegis and its subsidiaries for the last five years. This
information should be read in conjunction with Item 7.--"Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and related notes included elsewhere herein.

<TABLE>
<CAPTION>
YEAR ENDED FIVE MONTHS
JULY 31(1) ENDED YEAR ENDED DECEMBER 31,
------------------- DECEMBER 31, ------------------------------
1995 1996 1996(2) 1997(3) 1998 1999
-------- -------- ------------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues:
Teleservices....................................... $56,179 $57,543 $26,756 $115,609 $195,355 $219,066
Marketing research services........................ -- -- -- 18,223 32,683 27,202
------- ------- ------- -------- -------- --------
Total revenues....................................... $56,179 $57,543 $26,756 $133,832 $228,038 $246,268
Gross profit......................................... 18,207 16,834 6,092 45,642 66,677 69,594
SG&A expenses........................................ 16,444 13,588 8,760 36,312 50,510 65,905
Depreciation......................................... 856 1,314 969 4,501 10,018 12,954
Acquisition goodwill amortization.................... -- -- 55 1,592 2,876 2,723
Non-cash asset impairment charge..................... -- -- -- -- -- 20,399
Restructuring and other non-recurring charges........ -- -- -- -- 8,395 541
------- ------- ------- -------- -------- --------
Operating income (loss)(4)........................... 907 1,932 (3,692) 3,237 (5,122) (32,928)
Other income, net.................................... 437 877 648 -- -- --
Interest expense, net................................ 72 190 450 3,626 5,578 7,461
Non-cash interest expense............................ -- -- -- -- 3,092 --
------- ------- ------- -------- -------- --------
Income (loss) before income taxes.................... 1,272 2,619 (3,494) (389) (13,792) (40,389)
Income tax expense (benefit) (1)..................... 314 17 1,794 595 (2,989) (6,213)
------- ------- ------- -------- -------- --------
Net income (loss)(4)................................. 958 2,602 (5,288) (984) (10,803) (34,176)
Preferred stock dividends............................ -- -- -- -- -- 1,208
------- ------- ------- -------- -------- --------
Net income (loss) after preferred stock dividends.... $ 958 $ 2,602 $(5,288) $ (984) $(10,803) $(35,384)
======= ======= ======= ======== ======== ========
Basic and diluted earnings (loss) per share.......... $ 0.04 $ 0.11 $ (0.22) $ (0.04) $ (0.27) $ (0.68)
======= ======= ======= ======== ======== ========
Weighted average number of common and common
equivalent shares outstanding...................... 24,378 24,378 24,417 27,233 40,383 52,043

OPERATING DATA
EBITDA(4)(5)......................................... $ 2,200 $ 4,123 $(2,020) $ 9,330 $ 16,167 $ 3,689
Net cash provided by (used in) operating
activities......................................... $ 368 $ 2,915 $ (139) $ 2,329 $ 7,127 $(12,052)
Net cash provided by (used in) investing
activities......................................... $(1,846) $(5,858) $ 1,596 $(25,794) $(16,213) $(10,180)
Net cash provided by financing activities............ $ 2,113 $ 1,651 $ 665 $ 26,492 $ 14,478 $ 17,520
Client service centers at end of period.............. 19 20 25 21
Teleservices workstations at end of period........... 2,238 2,462 5,658 5,382
Marketing research facilities at end of period....... 10 10 9 11
Marketing research workstations at end of period..... 371 360 225 225
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA
Working capital............................................. $ 17,624 $ 35,881 $ 36,716
Total assets................................................ 101,736 180,544 160,585
Current portions of long-term obligations................... 3,009 2,758 2,243
Long-term obligations, less current portions................ 51,257 79,580 43,689
Total liabilities........................................... 71,163 108,716 112,957
Redeemable convertible preferred stock...................... -- -- 41,970
Shareholders' equity........................................ 30,573 71,828 47,628
</TABLE>

- - ------------------------------

(FOOTNOTES APPEAR ON FOLLOWING PAGE)

15
<PAGE>
(1) Through July 31, 1996, the Company had a fiscal year end of July 31. The
Company operated as a subchapter S-corporation through November 17, 1996, at
which time it became a C-corporation for tax purposes and changed its fiscal
year from July 31 to December 31.

(2) Represents operations of the Company for the period from August 1, 1996 to
December 31, 1996. Amounts include the acquisition of Lexi
International, Inc. ("Lexi") on November 22, 1996.

(3) Includes the acquisition of InterServ Services Corporation ("InterServ") as
of July 12, 1997 (the "InterServ Acquisition").

(4) The historical results of operations include certain non-recurring expenses,
which are summarized in the table below:

<TABLE>
<CAPTION>
YEAR ENDED FIVE MONTHS
JULY 31,(1) ENDED YEAR ENDED DECEMBER 31,
------------------- DECEMBER 31, ------------------------------
1995 1996 1996(2) 1997(3) 1998 1999
-------- -------- ------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Actual officer's salary.................... $7,063 $2,417 $ 116 $ -- $ -- $ --
Lexi and IQI bonuses and compensation,
legal and audit fees, and software
licensing expenses....................... -- 810 2,490 443 -- --
Non-cash asset impairment charge........... -- -- -- -- -- 20,399
Restructuring and other non-recurring
charges.................................. -- -- -- -- 8,395 541
------ ------ ------ ---- ------ -------
Total non-recurring expenses............... $7,063 $3,227 $2,606 $443 $8,395 $20,940
====== ====== ====== ==== ====== =======
</TABLE>

(5) EBITDA is defined as income (loss) from continuing operations before
interest, taxes, depreciation and amortization, and restructuring and other
non-recurring charges. While it should not be considered in isolation or as
a substitute for net income, cash flows from operating activities or other
measures of financial performance and liquidity under generally accepted
accounting principles ("GAAP"), EBITDA is presented here to provide
additional information about the Company's ability to meet its future debt
service, capital expenditure and working capital requirements. EBITDA is not
necessarily comparable to other similarly titled captions of other companies
due to potential inconsistencies in the method of calculation.

16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

On July 9, 1998, Aegis, formerly known as ATC Communications Group, Inc.
("ATC"), completed the acquisition of IQI, Inc., a New York corporation ("IQI").
The acquisition was effected through the merger (the "Merger") of ATC Merger
Sub, Inc. ("Sub"), a New York corporation and wholly-owned subsidiary of ATC,
with and into IQI pursuant to an Agreement and Plan of Merger dated as of
April 7, 1998 (the "Merger Agreement") by and between ATC, Sub and IQI.

The Merger has been accounted for as a reverse purchase, meaning that for
accounting purposes, IQI is the surviving corporation and is treated as having
acquired ATC in a purchase accounting transaction. Reported financial results
reflect the Merger and are those of IQI for the periods ended before the Merger
and of the combined company on a purchase accounting basis for the periods ended
after the Merger. See "Notes to Consolidated Financial Statements--Mergers and
Acquisitions."

RESULTS OF OPERATIONS

The following table sets forth certain statements of operations data as a
percentage of revenues for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues............................................. 100.0% 100.0% 100.0%
Cost of services, excluding depreciation and
amortization shown below........................... 65.9% 70.8% 71.7%
----- ----- -----
Gross profit......................................... 34.1% 29.2% 28.3%
Selling, general and administrative expenses......... 27.1% 22.1% 26.8%
Depreciation......................................... 3.4% 4.4% 5.3%
Acquisition goodwill amortization.................... 1.2% 1.3% 1.1%
Non-cash asset impairment charge..................... -- -- 8.3%
Restructuring and other non-recurring charges........ -- 3.7% 0.2%
----- ----- -----
Total expenses................................... 31.7% 31.5% 41.7%
----- ----- -----
Operating income (loss).............................. 2.4% (2.3)% (13.4)%
Interest expense, net................................ 2.7% 2.4% 3.0%
Non-cash interest expense............................ -- 1.4% --
----- ----- -----
Loss before income taxes............................. (0.3)% (6.1)% (16.4)%
Income tax expense (benefit) (Note 11)............... 0.4% (1.3)% (2.5)%
----- ----- -----
Net loss......................................... (0.7)% (4.8)% (13.9)%
Preferred stock dividends............................ -- -- 0.5%
----- ----- -----
Net loss after preferred stock dividends......... (0.7)% (4.8)% (14.4)%
===== ===== =====
</TABLE>

HISTORICAL YEAR ENDED DECEMBER 31, 1999 VS. HISTORICAL YEAR ENDED DECEMBER 31,
1998

We experienced a net loss after preferred stock dividends of $35.4 million,
or 14.2% of revenues, for the year ended December 31, 1999 as compared to a net
loss of approximately (restated) $10.8 million, or 4.8% of revenues, for the
year ended December 31, 1998. Excluding an approximately $20.4 million non-cash
asset impairment charge and $0.5 million ($0.3 million, net of taxes) of
restructuring and other non-recurring charges, the net loss after preferred
stock dividends was approximately $14.7 million, or 6.0% of revenues, in 1999.
Excluding approximately $8.4 million ($5.1 million, net of taxes) in merger-

17
<PAGE>
related restructuring and other non-recurring charges, we experienced a net loss
of approximately $5.7 million, or 2.5% of revenues, in 1998.

Revenues increased $18.2 million, or 8.0%, to approximately $246.3 million
during 1999 as compared to revenues of $228.0 million in 1998. The increase in
revenues was due primarily to the impact of revenues contributed by ATC after
the Merger. Inbound customer solutions revenues increased approximately
$61.4 million, or 99.7%, in 1999. This increase was somewhat offset by a decline
in outbound customer solutions revenues of approximately $37.7 million, or
28.2%, and a drop in marketing research revenues of approximately $5.5 million,
or 16.8%. For the years ended December 31, 1998 and 1999, our actual mix of
revenues was as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 % 1999 %
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Inbound customer solutions............... $ 61,577 27.0% $122,964 50.0%
Outbound customer solutions.............. 133,778 58.7% 96,102 39.0%
-------- --------
Customer solutions total............. 195,355 85.7% 219,066 89.0%
Marketing research....................... 32,683 14.3% 27,202 11.0%
-------- --------
Total revenues....................... $228,038 100.0% $246,268 100.0%
======== ========
</TABLE>

On a pro forma basis for the Merger, revenues decreased $29.7 million, or
10.8%, from approximately $276.0 million in 1998. This decrease was primarily
the result of the curtailment of certain outbound programs by our largest
telecommunications client and a large financial services client, and a decline
in marketing research revenues. On a pro forma basis for the Merger, outbound
customer solutions revenues in 1999 declined $48.4 million, or 33.5%, from 1998
while marketing research revenues dropped $5.5 million, or 16.8%, from 1998.
These declines were offset somewhat by an approximately $24.2 million, or 24.5%,
increase in inbound customer solutions revenues in 1999. On a pro forma basis
for the Merger as if it had occurred on January 1, 1998, our mix of revenues,
for 1998 and 1999, was as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 % 1999 %
-------- -------- -------- --------
(PRO (DOLLARS IN THOUSANDS)
FORMA)
<S> <C> <C> <C> <C>
Inbound customer solutions............... $ 98,783 35.8% $122,964 50.0%
Outbound customer solutions.............. 144,518 52.4% 96,102 39.0%
-------- --------
Customer solutions total............. 243,301 88.2% 219,066 89.0%
Marketing research....................... 32,683 11.8% 27,202 11.0%
-------- --------
Total revenues....................... $275,984 100.0% $246,268 100.0%
======== ========
</TABLE>

For the year ended December 31, 1999, approximately 24% of our revenues were
generated by our largest telecommunications client and approximately 16% by our
largest financial services client, as compared to approximately 27% and 11% (23%
and 9%, on a pro forma basis for the Merger, respectively), in the year ended
December 31, 1998.

Aegis' objective is to secure recurring revenues from long-term
relationships with targeted, large corporate clients that utilize
telecommunications and marketing research strategies as integral, ongoing
elements in their marketing and customer service programs. In addition to
providing services on an outsourcing basis, in which the Company provides all or
a substantial portion of a client's customer solutions and/or marketing research
needs, the Company also continues to perform project-based services for certain
clients. Project-based services, however, are frequently short-term and there
can be no assurance that these clients will continue existing projects or
provide new ones.

18
<PAGE>
As part of our site migration plan, we closed our Addison, Texas facility in
August 1999. Work being performed at this center was migrated to two new client
service centers in St. Joseph, Missouri and Sierra Vista, Arizona during the
second quarter of 1999. The lease on the Addison client service center expired
on October 31, 1999. Our site strategy and center migration plan focuses on
locating client service centers in what management believes are markets offering
lower wage rates, better employee retention and generally lower operating costs.

During the first quarter of 1999, our largest client, AT&T, reduced its
marketing spending and, as a result, discontinued agreements with Aegis for two
customer acquisition programs under which we were providing both outbound and
inbound services. Subsequent to the end of the quarter, we were notified by our
historically second largest financial services client that the client would
curtail its outbound customer acquisition spending with Aegis beginning in the
second quarter of 1999. During the second quarter of 1999, we expanded our
inbound customer service relationship with our largest client, AT&T. Under this
addition to an existing master agreement, Aegis began performing critical
customer care functions, including the handling of inbound orders and inquiries,
for this client's growing consumer customer base, beginning in the third quarter
of 1999. This new offering requires the use of more than 700 workstations in
Aegis client service centers in Irving and Los Angeles and is in addition to the
inbound customer solutions Aegis provides for this client's small business
customers from our Fairmont, West Virginia facility. We no longer furnish
traditional, hourly-rate outbound telemarketing for this client. As such, all
services now provided to this client are either inbound or pay-for-performance
outbound.

Gross profit increased $2.9 million, or 4.3%, to approximately
$69.6 million in 1999 from approximately $66.7 million in 1998. The increase in
gross profit was due to the increase in revenues over 1998 which was primarily
attributable to the inclusion of ATC-related SG&A revenues for a full year in
1999 versus six months in 1998 following the Merger. Gross profit as a
percentage of revenues ("gross margin") for 1999 was 28.3% as compared to 29.2%
in 1998. The decrease in gross margin was primarily due to a decline in capacity
utilization from the prior year period resulting from lower volumes of business
from our two largest telecommunications clients, a large financial services
client and our marketing research division, several new programs being billed at
training rather than production rates as they were being ramped-up, and
redundant facilities and training costs associated with the Addison, Texas
client service center being open simultaneously with two new replacement centers
in Sierra Vista, Arizona and St. Joseph, Missouri for part of the third quarter.
The Addison facility ceased operations in August 1999 and its lease expired on
October 31, 1999.

Selling, general and administrative ("SG&A") expenses increased
approximately $15.4 million, or 30.5% in 1999. As a percentage of revenues, SG&A
expenses for 1999 were 26.8% versus 22.1% in 1998. The increase in SG&A expenses
is primarily attributable to the inclusion of ATC-related SG&A expenses for a
full year in 1999 versus six months in 1998 following the Merger. The increase
in SG&A expenses as a percentage of revenues is primarily attributable to
expenditures to support anticipated program volumes, which were not realized
during the first six months of 1999.

Depreciation and amortization expenses increased approximately
$2.8 million, or 21.6%, to approximately $15.7 million in 1999 from
approximately $12.9 million in 1998. As a percentage of revenues, depreciation
and amortization expense was 6.4% in 1999 versus 5.7% in 1998. The increases in
depreciation and amortization expense as a percentage of revenues are due to the
addition of ATC's depreciation and amortization expenses subsequent to the
Merger, additional amortization expense resulting from the goodwill recorded in
the Merger, and additional depreciation resulting from investments in the
completion of three new client service centers and the expansion of three
existing centers since the first quarter of 1998.

As a result of the performance of our Elrick & Lavidge ("E&L") marketing
research division since its acquisition by IQI in July 1997, in the first
quarter of 1999 we performed an analysis (based on E&L's estimated future cash
flows undiscounted and without interest) of the carrying value of the goodwill

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associated with the purchase of E&L. As a result of this evaluation, it was
determined that the carrying value of the goodwill associated with the purchase
of E&L had been impaired. Accordingly, in the first quarter of 1999, we adjusted
the carrying value of E&L's long-lived assets to their fair value resulting in a
non-cash asset impairment charge of $20.4 million, which reduced the amount of
goodwill on our balance sheet by a corresponding amount. This reduction is
expected to result in a decrease in Aegis' goodwill amortization expense of
approximately $1.1 million annually.

We recorded pre-tax restructuring charges related to the Merger of
$8.4 million ($5.1 million, net of taxes) in the year ended December 31, 1998
and $0.5 million ($0.3 million, net of taxes) in the first quarter of 1999.
These charges were primarily attributable to one-time write-offs of redundant
hardware and software, severance costs and the consolidation of certain
administrative functions including costs to relocate offices and employees.
Management believes that all Merger-related restructuring efforts have been
completed and all related charges recorded.

Net interest expense increased approximately $1.9 million, or 33.8%, in 1999
versus 1998 due to increased utilization of our revolving line of credit and the
issuance of additional subordinated indebtedness during 1999.

Non-cash interest expense related to the beneficial conversion feature in
the subordinated debt financing provided by the Thayer-led group in July 1998
was recognized in 1998. We determined that a beneficial conversion feature
existed for subordinated debt issued in July 1998 and quantified the amount as
non-cash interest expense of $3.1 million at the issuance date. See "Notes to
Unaudited Consolidated Financial Statements--Effect of Restatement."

Our statutory state and federal income tax benefit rate for 1999 and 1998
was approximately 40.0%. Our effective tax rate on reported taxable income or
loss differs from the statutory rate due primarily to the non-deductibility, for
tax purposes, of our goodwill amortization expense and the asset impairment
charge.

Excluding a non-cash impairment charge of $20.4 million, or $0.39 per share,
and restructuring and other non-recurring charges of $0.5 million
($0.3 million, net of taxes, or $0.01 per share), the Company experienced a net
loss after preferred stock dividends of approximately $14.7 million, or $0.28
per share, for 1999 as compared to a net loss in 1998 of approximately
$5.7 million, or $0.14 per share, excluding restructuring and other
non-recurring charges of approximately $8.4 million ($5.1 million, net of taxes,
or $0.13 per share).

HISTORICAL YEAR ENDED DECEMBER 31, 1998 VS. HISTORICAL YEAR ENDED DECEMBER 31,
1997

The Company experienced a net loss of approximately (restated)
$10.8 million, or 4.7% of revenues, for the year ended December 31, 1998.
Excluding approximately $8.4 million ($5.1 million, net of taxes) in
merger-related restructuring and other non-recurring charges, the Company
experienced a net loss of approximately $5.7 million, or 2.5% of revenues, in
1998 as compared to a net loss of approximately $1.0 million, or 0.7% of
revenues, in 1997.

Revenues generated during the year ended December 31, 1998 increased 70.4%
to $228.0 million from $133.8 million in the year ended December 31, 1997. The
increase in revenues was due primarily to the impact of revenues contributed by
ATC subsequent to the Merger and by InterServ, which was acquired by IQI on
July 12, 1997.

On a pro forma basis for the Merger, revenues grew $27.2 million, or 10.9%,
in 1998 as compared to 1997. The growth in revenues on a pro forma basis for the
Merger was primarily attributable to growth in volumes from certain existing
telecommunications and financial services clients and services performed for new
clients. This growth was somewhat offset by a decrease in service volumes from
the Company's largest client of approximately 13.6% and a decline in marketing
research revenues of approximately 12.0%. See "Notes to Consolidated Financial
Statements--Mergers and Acquisitions."

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<PAGE>
Approximately 27% of the Company's revenues during the year ended
December 31, 1998 were generated by the Company's largest telecommunications
client, AT&T, and approximately 11% by its largest financial services client,
American Express, as compared to approximately 41% and nil, respectively, in the
year ended December 31, 1997. On a pro forma basis for the Merger, approximately
26% of the Company's revenues during 1998 were generated by the Company's
largest telecommunications client and approximately 9% by its largest financial
services client as compared to approximately 33% and 9%, respectively, in 1997.

For the year ended December 31, 1998, gross profit earned on revenues
increased approximately $21.0 million, or 46.1%, from the year ended
December 31, 1997. The increase in gross profit was primarily due to the
addition of ATC's revenues as a result of the Merger. Gross margin for 1998 was
29.2% as compared to 34.1% in 1997. The decrease in gross margin was primarily
due to the impact of the addition of ATC's revenues, which are characterized by
lower gross margins than those of IQI, and a decline in capacity utilization in
the fourth quarter of 1998 resulting from lower volumes of business from the
Company's two largest telecommunications clients.

SG&A expenses increased $14.2 million, or 39.1%, in 1998 versus 1997. The
increase in SG&A expenses was primarily attributable to the Merger with ATC. As
a percentage of revenues, SG&A expenses were 22.1% in 1998 and 27.1% in 1997.
The decrease in SG&A expenses as a percentage of revenues was primarily the
result of efficiencies of scale derived from growth in business volumes.

Depreciation and amortization expenses increased $6.8 million, or 111.6%, in
1998 as compared to 1997. As a percentage of revenues, depreciation and
amortization expense was 5.7% in 1998 versus 4.6% in 1997. The increase in
depreciation and amortization expense as a percentage of revenues was due to
additional depreciation resulting from investments in two new client service
centers, information technology and infrastructure, and additional goodwill
amortization resulting from the goodwill recorded in the Merger and in the
InterServ acquisition.

In connection with the Merger, the Company recorded restructuring and other
non-recurring charges of approximately $8.4 million ($5.1 million, net of taxes)
in the year ended December 31, 1998. These charges are primarily attributable to
one-time write-offs of redundant hardware and software, severance costs and the
consolidation of certain administrative functions including costs to relocate
offices and employees. Management expects the remainder of restructuring efforts
to be completed by March 31, 1999.

Net interest expense increased by approximately $1.9 million, or 53.8%, in
1998 over 1997 due to increased utilization of the Company's revolving line of
credit and the assumption of additional subordinated indebtedness. Non-cash
interest expense related to the beneficial conversion feature in the
subordinated debt financing provided by the Thayer-led group in July 1998 was
recognized in 1998. The Company determined that a beneficial conversion feature
existed for subordinated debt issued in July 1998 and has quantified the amount
as non-cash interest expense of $3.1 million at the issuance date. See "Notes to
Consolidated Financial Statements--Effect of Restatement."

The Company's statutory state and federal income tax benefit rate for 1998
was approximately 40.0%. The Company's effective tax rate on reported taxable
income or loss differs from the statutory rate due primarily to the
non-deductibility, for tax purposes, of the Company's amortization expense of
the cost in excess of net assets required ("goodwill"). The non-deductibility of
such costs resulted in income tax expense in 1997 despite a reported pre-tax
loss.

Due to the factors described above, the net loss increased from
approximately $1.0 million in 1997 to approximately (restated) $10.8 million in
1998.

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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net cash provided by (used in) operating activities.... $ 2,329 $ 7,127 $(12,052)
Net cash used in investing activities.................. (25,794) (16,213) (10,180)
Net cash provided by financing activities.............. 26,492 14,478 17,520
Effect of exchange rates on cash....................... 11 21 54
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... $ 3,038 $ 5,413 $ (4,658)
======== ======== ========
</TABLE>

We have historically utilized cash flow from operations, available borrowing
capacity under our credit facilities, subordinated indebtedness provided by
certain of our shareholders (primarily Thayer Equity) and the issuance of
convertible preferred stock to meet our liquidity needs. Thayer Equity has
previously provided Aegis with financial support through subordinated debt
financing, the conversion of subordinated debt into preferred stock, and
providing loan guarantees; however, there can be no assurance, should we
experience future liquidity issues, that Thayer Equity will continue to provide
such financial support.

During 1999, we used approximately $12.1 million in net cash in our
operating activities primarily due to losses from operations.

Cash used in investing activities during 1999 totaled approximately
$10.2 million, representing a $6.0 million, or 37.2%, decrease from 1998. 1998
included $3.6 million of net acquisition costs in addition to $12.5 million of
capital expenditures. Comparatively, 1999 consisted solely of capital
expenditures of $10.2 million, a $2.3 million, or 18.4% decrease from 1998.
Capital expenditures primarily have consisted of new telecommunications
equipment and information technology hardware and software required in the
maintenance, upgrade and expansion of our operations including the build-out of
two new client service centers in the second quarter of 1999 and the upgrade or
replacement of workstations in our existing facilities. Capital expenditures
during 1999 totaled $10.2 million and were funded primarily with proceeds from
bank borrowings and subordinated indebtedness provided by Thayer Equity.

During 1999, financing activities included the receipt of net proceeds of
approximately $42.0 million from the private placement of redeemable convertible
preferred stock with Questor Partners Fund II, L.P. and related investment
funds, $11.7 million under our credit facility and the receipt of approximately
$7.3 million of additional subordinated indebtedness provided by Thayer Equity.
Cash used in financing activities during 1999 includes $43.0 million in
repayments of long-term debt and capital lease obligations. (See discussion of
the Questor Transaction, our credit facility and subordinated indebtedness
below.)

QUESTOR TRANSACTION

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been paid on any March 31, June 30, September 30 or December 31 of any year, all
such dividends are added to the investment value of such share. The Preferred F
Shares also participate, on an as-converted basis, with the Common Stock in any
dividends that may be declared and paid after the payment of preferential
dividends. The Preferred F Shares vote on an as-converted basis. We used the
proceeds from the sale of the Preferred F Shares to pay transaction expenses and
repay outstanding bank debt.

CREDIT FACILITY

In connection with the Merger, IQI entered into a credit agreement with Bank
of Nova Scotia ("Scotiabank") and Credit Suisse First Boston ("CSFB") (the
"Credit Agreement") whereby Scotiabank and CSFB rolled over and continued their
loan commitments to IQI aggregating $53.0 million and Scotiabank committed to
provide IQI an additional $12.0 million in revolving loans, resulting in a total
facility of $65.0 million. The proceeds of the additional loan were used to
refinance the bank indebtedness of Advanced Telemarketing Corporation, a
wholly-owned subsidiary of ATC ("Advanced"), to pay transaction expenses for the
Merger, and for general corporate and working capital needs of IQI and Advanced.
As part of the amendment of the Credit Agreement, the Company and Advanced
agreed to guarantee the IQI indebtedness and grant blanket security interests in
their assets to secure repayment of the banks' loans. We also pledged our shares
of Advanced common stock to the banks to secure repayment of the banks' loans.

The Credit Agreement contains various covenants that limit, among other
things, the operating subsidiaries' indebtedness, capital expenditures,
investments, payments and dividends to the parent company, Aegis, and requires
the operating subsidiaries to meet certain financial covenants. Similarly, under
the terms of the Company's guaranty of our operating subsidiaries' obligations,
the Company is subject to certain covenants limiting, among other things, our
ability to incur indebtedness, enter into guaranties, and acquire other
companies. The Credit Agreement is secured by liens on the operating
subsidiaries' accounts receivable, furniture and equipment, and is guaranteed by
the Company.

On March 30, 1999, the Company entered into the Third Amendment to the
Credit Agreement (the "Third Amendment") whereby Scotiabank and CSFB waived the
Company's defaults under certain of the covenants at December 31, 1998 and
provided for new levels for existing financial covenants and a new covenant
related to EBITDA.

On August 6, 1999, the Company entered into the Fourth Amendment to our
Credit Agreement (the "Fourth Amendment") with Scotiabank and CSFB whereby
Scotiabank and CSFB committed to provide the Company an additional $7.5 million
in term debt, resulting in a total facility of approximately $68.0 million, and
waived the Company's defaults under certain of the covenants through August 31,
1999. The proceeds of the additional loan were used for the Company's general
corporate and working capital needs. As part of the Fourth Amendment, Thayer
Equity agreed to guarantee the Company's additional $7.5 million of
indebtedness. In consideration of such guarantee, the Company issued Thayer
Equity a warrant to purchase up to 800,000 shares of our Common Stock,
exercisable only if the guarantee was drawn upon. As part of our settlement of
an indemnification claim made by us related to the Merger, Thayer Equity waived
its right to this contingent warrant.

In conjunction with the December 10, 1999 closing of the Questor Transaction
and the associated repayment of bank debt, we entered into the Third Amended and
Restated Credit Agreement with Scotiabank and CSFB, thereby curing all
outstanding defaults through December 31, 1999. Under the amended agreement, our
lenders expanded their aggregate revolving credit facility commitments from
$30.0 million to $45.0 million at closing. We met certain financial targets in
the fourth quarter of 1999,

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<PAGE>
which resulted in a $1.5 million increase in the commitment under the credit
facility. If we meet certain financial targets in the first quarter of 2000,
which we expect to do, the aggregate commitment will increase as much as an
additional $2.0 million, bringing the total revolving facility to
$48.5 million. At February 29, 2000, we estimated our borrowing availability
under the amended agreement at approximately $16.0 million.

SUBORDINATED INDEBTEDNESS

Prior to the Merger, on July 6, 1998, the Company received an additional
financing commitment from Thayer Equity and certain other shareholders of IQI.
Under the commitment, the Thayer-led group agreed to lend the Company, at our
election, up to an additional $4.0 million in subordinated indebtedness at any
time within 90 days after the Merger. As of October 23, 1998, we had drawn the
full commitment amount of $4.0 million. In connection with this commitment and
effective upon the Merger, the Company issued the Thayer-led group additional
warrants to purchase up to 350,000 shares of our Common Stock at an exercise
price of $2.375 per share and provided certain anti-dilution protection. This
indebtedness is convertible into our Common Stock at a conversion price of
$2.375 per share. This debt is in addition to, and on the same basic terms as,
the subordinated debt that Thayer Equity had previously loaned to us.

In connection with the Merger, Thayer Equity provided the Company with
$6.8 million in subordinated indebtedness as well as a guarantee for
$2.0 million in bridge financing to assist in funding the Company's working
capital needs. This subordinated indebtedness is convertible into shares of our
Common Stock at a conversion price of $2.00 per share. In connection with the
guarantee, and for additional consideration of $110,000, the Company issued to
Thayer Equity warrants to purchase 1,100,000 shares of our Common Stock at an
exercise price of $1.96. As discussed in "Notes to Unaudited Consolidated
Financial Statements--Effect of Restatement," we have restated our 1998
financial statements to account for a beneficial conversion feature related to
certain convertible subordinated debt issued in 1998.

On March 30, 1999, Thayer Equity provided the Company with approximately
$5.7 million in additional subordinated indebtedness. Approximately one-half of
the proceeds from this financing were used to pay down bank debt and the
remainder for working capital purposes. The additional indebtedness is
convertible into our Common Stock at a conversion price of $1.15 per share. This
debt is in addition to, and on the same basic terms as, the subordinated debt
that Thayer Equity had previously loaned to us.

In an effort to reduce debt and improve the Company's balance sheet, on
June 30, 1999, a group led by our largest shareholder, Thayer Equity, agreed to
convert approximately $12.1 million of our subordinated debt into two new series
of convertible preferred stock. The 77,300 shares of new Series D Preferred
Stock ($.01 par value per share, $100 per share liquidation preference) are
convertible into Company Common Stock at $2.00 per share, and the 44,018 shares
of new Series E Preferred ($.01 par value per share, $100 per share liquidation
preference) are convertible into Company Common Stock at $2.375 per share. Both
series earn cumulative dividends (payable-in-cash or-in-kind in additional
shares of the respective series of Preferred Stock) at the annual rate of 15%,
and are non-voting except on specified matters. In consideration of the
conversion of the subordinated debt into preferred stock, the Company issued the
Thayer-led group warrants to purchase an additional 1,000,000 shares of Company
Common Stock at $0.90625 per share.

NOTE RECEIVABLE

As of February 29, 2000, Michael G. Santry, one of our directors, owed the
Company approximately $2.0 million, including accrued interest, under a secured
promissory note dated September 16, 1997. As provided for in the Merger
Agreement, Mr. Santry made a principal payment of approximately $1.8 million on
June 30, 1998. The Merger Agreement also provided for an extension of the
maturity date of the balance of the principal and accrued but unpaid interest on
the note to March 31, 1999. The note is

24
<PAGE>
secured by 7,000 shares of Aegis Common Stock and options to purchase 1,750,000
shares of our Common Stock held by Mr. Santry and additional collateral pledged
by Mr. Santry in June 1999 when the maturity date of the note was extended to
March 31, 2000 and the note's annual rate of interest was raised from 6% to 7%.
We currently anticipate extending the term of the loan until March 31, 2001.
Because Mr. Santry is an affiliate of the Company and the amount of the loan has
been outstanding for more than one year, the balance of the note receivable has
been reclassified as a reduction to additional paid in capital in shareholders'
equity in 1999.

GROWTH STRATEGIES

We primarily operate in the customer solutions segment of the CRM industry,
which is a fast-growing, highly competitive industry. As such, we continue to
implement our site strategy and center migration plan, which focuses on locating
client service centers in what we believe are markets offering lower wage rates,
better employee retention and generally lower operating costs. To that end, we
migrated positions from our Addison, Texas facility to new client service
centers in St. Joseph, Missouri and Sierra Vista, Arizona in the second quarter
of 1999 and closed the Addison facility in August 1999. Our growth and continued
implementation of this site strategy may necessitate additional client service
centers and such facilities will have furniture, equipment and technological
requirements consistent with our existing facilities. Any additional client
service centers will require capital expenditures and may require additional
borrowing under the Company's existing credit facility. In addition, expenses
associated with such centers may temporarily dampen operating income.

Although no assurances can be made in this regard, management anticipates
that, based on our ability to secure such financing to date, our current credit
facility and anticipated cash flow from operations, for the foreseeable future,
we should be able to fund our future working capital needs, expenditures
associated with the roll-out of our e-care capabilities, and the capital
equipment requirements of future client service center facilities, which we
anticipate will be needed in 2000 to meet the capacity requirements of
anticipated growth, and potential acquisition opportunities.

YEAR 2000 ISSUE

The inability of software and computers and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 problem. The Year 2000
problem arises from the way dates are recorded and computed in most
applications, operating systems, hardware and embedded chips. If the problem is
not corrected, systems that use a date in its prescribed function may have
failed or produced erroneous results before or on the year 2000 or may fail or
produce erroneous results after the year 2000.

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<PAGE>
All Year 2000 remediation efforts for our business were completed on time
and within budget estimates without any material adverse impact on our
operations. Through December 31, 1999, we incurred and expensed approximately
$2.3 million in remediation costs associated with our Year 2000 compliance
activities. The total cost associated with required modifications to become Year
2000 compliant has not been material to our financial position to date.

Our internal operations and business are also dependent upon the
computer-controlled systems of third parties such as our suppliers, clients and
other service providers. While problems may arise in the future and we cannot
assure you that we will not have a Year 2000 problem, we are unaware of any
material impact on our business caused by a Year 2000 problem either in our
systems or those of third-parties.

The above description of the Year 2000 issue contains forward-looking
statements including, without limitation, statements relating to our
expectations that are made pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Readers are cautioned that
forward-looking statements contained in the Year 2000 Issue should be read in
conjunction with the Company's disclosures under the heading: "CAUTIONARY
STATEMENT FOR THE PURPOSES OF THE 'SAFE HARBOR' PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995" beginning below.

OUTLOOK AND UNCERTAINTIES

CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR' PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

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

CONTROL BY PRINCIPAL SHAREHOLDERS

As a consequence of the Questor Transaction, the Questor Investors (through
their ownership of the Preferred F Shares) collectively own, on an as-converted
basis, approximately 47% of our issued and outstanding common stock
approximately 38% of our Common Stock and Common Stock equivalents outstanding.
The Preferred F Shares vote on an as-converted basis and represent approximately
47% of our voting equity stock.

Thayer Equity and its affiliates (through their ownership of Common Stock,
warrants, convertible subordinated debt and convertible Series D and Series E
Preferred Stock) collectively own approximately 26% of our Common Stock and
Common Stock equivalents outstanding. The Series D and Series E Preferred Stock
are non-voting; therefore, Thayer holds approximately 19% of our voting equity
stock.

Under the terms of a Stockholders Agreement among Questor, Thayer and
certain other stockholders of the Company, each of Questor and Thayer has the
right to nominate six of twelve board members and to approve certain major
decisions (described below). As a result, Questor and Thayer can exercise
significant control over the outcome of substantially all matters that require a
Board of Directors or shareholder vote. This fact may discourage, delay or
prevent a change in control of Aegis. In addition, since our officers serve

26
<PAGE>
at the pleasure of the Board of Directors, the Thayer and Questor investors
exercise significant control over day-to-day operations.

The Stockholders Agreement provides that the parties to the agreement
satisfy a "right of first offer" to the others prior to a transfer of its shares
to a third party. The Stockholders Agreement also provides that the parties
provide each other with certain "tag-along" rights in the event of a sale or
transfer of shares to a third party. The parties are required to use their best
efforts to vote all of their shares to elect and continue in office twelve
directors, six of whom are nominated by Questor and six of whom are nominated by
Thayer. Questor also agreed that from and after the Closing of the Questor
financing, it will use its best efforts to cause its Board designees to abstain
from voting on any Board action in connection with the optional redemption of
the Preferred F Shares. Further, the other parties agreed that from and after
the Closing they will use their best efforts to cause their Board designees to
abstain from voting on any Board action in connection with the repayment of
certain indebtedness owed to Edward Blank and his affiliates, or the redemption
or repurchase of any or all of either the Preferred D Shares or the Preferred E
Shares. Additionally, each committee of the Board will be constituted so that
the number of Questor Designees (as defined in the Stockholders Agreement) and
Existing Stockholder Designees (as defined in the Stockholders' Agreement) on
any such committee is as nearly as possible in the same proportion as the number
of Questor Designees and Existing Stockholder Designees on the entire Board. The
Stockholders Agreement and the Bylaws also provides that certain major decisions
will require the affirmative vote of not less than three-fourths of the
directors of the Board.

The list of major decisions include:

- issuing shares, including any indebtedness convertible into shares, or any
other form of equity in the Company or any subsidiary of the Company other
than a) granting options to directors or employees of the Company pursuant
to any incentive or other benefit plan adopted by the Board, b) issuing
shares of Common Stock pursuant to the exercise of such options and
c) issuing shares of Common Stock or any security, including any debt
convertible into shares of Common Stock, or any other form of equity in
the Company, in one or more offerings, where the aggregate purchase price
for all such issuances does not exceed $500,000.

- Adoption of any stock-based employee benefit plan by the Company.

- Incurring debt or entering into guarantees for borrowed money (excluding
trade payables) in excess of $2,500,000 in a 12 month period, subject to
certain exceptions.

- Selling, leasing, pledging or granting a security interest or encumbrance
in all or substantially all of the Company's or any subsidiary of the
Company's assets, except in connection with the incurrence of indebtedness
for borrowed money that does not involve a major decision under 3 above.

- Acquiring (whether through an asset purchase, merger, equity purchase or
otherwise) any assets (excluding acquisitions of raw materials and
supplies in the ordinary course of business) having a value, individually
or in the aggregate for any series of related transactions, in excess of
$2,000,000.

- Selling or otherwise disposing of any assets (excluding sales or other
dispositions of inventory in the ordinary course of business) having a
value, individually or in the aggregate for any series of related
transactions, in excess of $2,000,000.

- Amending the By-laws or the Certificate of Incorporation of the Company.

- Any Change of Control Transaction.

- Executing or delivering any assignment for the benefit of creditors of the
Company.

- Filing any voluntary petition in bankruptcy or receivership with respect
to the Company.

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<PAGE>
- Taking any action while there is a vacancy on the Board, including without
limitation the filling of such vacancy.

SHARES AVAILABLE FOR FUTURE SALE

Questor, Thayer and their respective affiliates own combined approximately
65% of our Common Stock and Common Stock equivalents outstanding (through their
ownership of Common Stock, warrants, convertible subordinated debt and
convertible preferred stock). Although Questor, Thayer and other affiliates of
Aegis are restricted to some extent from reselling their respective shares of
Aegis Common Stock under applicable securities laws, both possess registration
rights with respect to the shares of capital stock they own that can be
exercised at any time. We cannot predict the effect that future sales of stock,
especially by Questor or Thayer, will have on the market price of Aegis Common
Stock prevailing from time to time. Sales of substantial amounts of Aegis Common
Stock (including shares issued upon the conversion of preferred stock or the
exercise of stock options), and even the perception that such sales could occur,
may adversely affect prevailing market prices for Aegis Common Stock.

NEW MANAGEMENT

Our future success depends in large part on the efforts and abilities of
management. We have a new Chief Executive Officer, new Executive Vice President
of Sales and Marketing, new Chief Technology Officer and expect to hire a new
Chief Financial Officer during the second quarter of 2000. Each new officer will
have to acquaint himself with the operations of Aegis.

In addition, at our special meeting of stockholders held on December 10,
1999, the stockholders elected a new board of directors comprised of six Thayer
nominees and six Questor nominees. Although we expect that our board of
directors will be able to resolve major business issues, we cannot assure you
that deadlocks will not occur.

RELIANCE ON MAJOR CLIENTS

We have historically relied on a few major clients for the bulk of our
revenue. In 1999, AT&T and American Express accounted for approximately 24% and
16% of our revenues, respectively. Relying on one or a few major clients
includes a number of more specific business risks that may adversely impact the
ability of the provider, such as Aegis, to derive revenue from the client,
including:

- the risk that a client unilaterally decides to curtail or terminate
marketing programs;

- the risk that service or billing disputes may adversely impact the
client's desire to utilize the provider's services;

- the risk that the customer may decide to reduce the number of providers of
the subject services or otherwise consolidate its operations;

- the risk that financial, competitive or operational pressure on the client
may inhibit its ability to purchase services from outside providers or
prompt the client to negotiate lower fees for services provided.

For example, from time to time, AT&T reorganizes or curtails its marketing
programs, negotiates price reductions in certain of its programs and
significantly reduces its volume of business with us. Many of our clients are
concentrated in the telecommunications, financial services, insurance and
publishing industries. A significant downturn in any of these industries or a
trend away from their use of telephone-based sales, marketing or customer
management services could materially and adversely affect our business. Although
we believe our relations with our major clients are good, the loss of one or
more of our major clients could have a material adverse effect on our operating
results. See "Item 1. Business--Reliance on Major Clients."

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LEVERAGE; FUTURE CAPITAL REQUIREMENTS

At December 31, 1999, we had borrowed $32.3 million under our revolving line
of credit, had long-term capital leases of approximately $3.8 million and
$9.8 million in subordinated indebtedness at December 31, 1999, which results in
a total debt to total capitalization ratio of approximately 33.9%. Our tangible
net book value (including redeemable convertible preferred stock) was
approximately $41.4 million at December 31, 1999. Although we used the net
proceeds from the $46.75 million Questor transaction to reduce our outstanding
bank debt by approximately $42.0 million, our leverage could still adversely
affect our ability to obtain additional financing for working capital,
acquisitions or other purposes and could make our business more vulnerable to
economic downturns and competitive pressures. Our future capital requirements
and the sufficiency of available funds will depend on numerous factors that are
difficult to predict, including results of operations, the timing and cost of
acquisitions and efforts to expand existing operations. If funds available
through the Credit Agreement and cash flows from operations are insufficient to
meet current or planned operating requirements, we will be required to obtain
additional funds through additional equity or debt financings or from other
sources. Any additional equity financings may be dilutive to our stockholders
and the terms of any debt financings are likely to contain restrictive covenants
that limit our ability to pursue certain courses of action. In addition, the
terms of the Credit Agreement and the Questor financing limit our ability to
incur debt other than pursuant to the existing facilities. We cannot assure you
that additional funding will be available on acceptable terms, if at all. If
adequate funds are not available, we may be required to restructure our existing
indebtedness or forego strategic decisions or delay, scale back or eliminate
operations, which could have a material adverse effect on our business,
financial condition and results of operations.

FACTORS AFFECTING ABILITY TO MANAGE AND SUSTAIN GROWTH

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

POSSIBLE VOLATILITY OF STOCK PRICE

Our stock price can be volatile, in response to:

- sales or proposed sales by Questor, Thayer or other affiliates

- variations in quarterly operating results

- the depth and liquidity of the market for Aegis Common Stock

- investor perception of Aegis and the industry in which it competes

- the gain or loss of significant customer contracts

- changes in management

- changes in or new services by Aegis or competitors

- general trends in the industry

- other events or factors

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In addition, the stock market generally has experienced extreme price and
volume fluctuations, which have particularly affected the market price for many
companies in similar industries and which have often been unrelated to the
operating performance of these companies. These broad market fluctuations may
adversely affect the market price of Aegis Common Stock. Since the Merger, the
market price per share of Aegis Common Stock has ranged from $3.19 to $0.47. On
March 24, 2000, the stock closed at $1.69. In addition, as a consequence of the
Common Stock being delisted as a Nasdaq NMS security, it may be more difficult
to trade the Common Stock.

POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

We could experience quarterly variations in revenues and operating income as
a result of many factors, including:

- the timing of clients' marketing campaigns and customer service programs

- the timing of additional SG&A expenses incurred to acquire and support new
business

- changes in Aegis' revenue mix among its various service offerings

- price competition

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

DEPENDENCE ON KEY PERSONNEL

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

RISKS ASSOCIATED WITH OUR CONTRACTS

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

DEPENDENCE ON OUTSOURCING TREND AND INDUSTRIES SERVED

Our growth depends in part on continued demand for our services prompted by
the outsourcing trend, as well as continued growth in the industries we serve.
If the interest in outsourcing wanes or there is a significant downturn in the
telecommunications, financial services, insurance, entertainment or other
industries, we could be materially and adversely affected.

GOVERNMENT REGULATION

Both Federal and state governments regulate our business and the customer
solutions industry as a whole. In addition to current laws, rules and
regulations that regulate our business, bills are frequently introduced in
Congress to regulate the use of credit information. We cannot predict whether
additional Federal or state legislation will be enacted that regulates our
business. Additional Federal or state

30
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legislation could limit our activities or increase our cost of doing business
which could, in turn, cause our operating results to suffer. See "Item 1.
Business--Government Regulation."

DEPENDENCE ON LABOR FORCE

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

COMPETITION

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

RELIANCE ON TECHNOLOGY; COMPUTER SYSTEMS

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

TELEPHONE SERVICE DEPENDENCE

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

RISK OF BUSINESS INTERRUPTION

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

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REVENUES AND SEASONAL NATURE OF BUSINESS

Our revenues are directly affected by the timing and size of our clients'
marketing programs. Consequently, we experience quarterly variations in revenues
and operating results. See "Item 1. Business--Revenues and Seasonal Nature of
Business."

OTHER UNCERTAINTIES

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have purchased an interest rate collar, which expires March 31, 2000, to
hedge against the risk that our interest rate under our Credit Agreement will
rise beyond a specified level. This collar costs the Company about $75,000 on an
annualized basis. With this exception, we do not use derivative financial
instruments to manage the impact of interest rate changes on our debt
obligations or on our investments.

We invest our cash reserves in high quality short-term liquid money market
instruments with major financial institutions. At December 31, 1999, we had no
cash invested in money market funds. The rate of interest earned on these
investments varies with overall market rates. A hypothetical one hundred basis
point change in the interest rate earned on these investments would not have a
material effect on our income or cash flows.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See pages F-1 through F-33 of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

This information will be contained in the definitive proxy statement of the
Company for the 2000 Annual Meeting of Stockholders under the captions "Election
of Directors" and "Executive Officers" and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

This information will be contained in the definitive proxy statement of the
Company for the 2000 Annual Meeting of Stockholders under the caption
"Compensation of Directors and Executive Officers" and is incorporated herein by
reference. Information in the section entitled "Report of the Compensation
Committee of the Board of Directors" and in the subsection entitled "Performance
Graph" are not incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

This information will be contained in the definitive proxy statement of the
Company for the 2000 Annual Meeting of Stockholders under the caption "Security
Ownership of Certain Beneficial Owners and Management" and is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This information will be contained in the definitive proxy statement of the
Company for the 2000 Annual Meeting of Stockholders under the caption "Certain
Relationships and Related Transactions" and is incorporated herein by reference.

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

FINANCIAL STATEMENTS

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

The following exhibits are filed as a part of this Form 10-K Annual Report:

<TABLE>
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2.1 Agreement and Plan of Merger dated April 7, 1998 between ATC
Communications Group, Inc., ATC Merger Sub, Inc., and IQI,
Inc. (Incorporated by reference to Exhibit 4.6 of the
Company's Form 10-Q Quarterly Report for the quarterly
period ended March 31, 1998).

3.1 Amended and Restated Certificate of Incorporation (filed
herewith).

3.2 Amended and Restated Bylaws (Incorporated by reference to
Exhibit 3.2 of the Company's Form 8-K Current Report filed
on December 20, 1999).

4.1 Specimen of Share Certificate of Company's Common Stock
(Incorporated by reference to Exhibit 4.1 of the Company's
Form 10-Q for the quarterly period ended September 30,
1998).

4.2 Form of Series B Preferred Stock certificate, as amended.
(Incorporated by reference to the Company's Form 10-K Annual
Report for the year ended June 30, 1994).

4.3 Elimination Certificate for Series D Junior Participating
Preferred Stock (Incorporated by reference to Exhibit 4.3 of
the Company's Form 8-K filed on December 20, 1999).

4.4 Series D and E Preferred Stock Certificate of Designation
(Incorporated by reference to Exhibit 4.10 of the Company's
Form 10-Q Quarterly Report for the quarterly period ended
June 30, 1999).

4.5 Amendment of Series D & E Certificate of Designation of the
Company (Incorporated by reference to Exhibit 4.2 of the
Company's Form 8-K filed on December 20, 1999).

4.6 Series F Preferred Stock Certificate of Designation
(Incorporated by reference to the Exhibit 4.1 of the
Company's Form 8-K Current Report filed on December 20,
1999)

4.7 Shareholder Rights Agreement between Aegis Communications
Group, Inc. and Harris Trust and Savings Bank dated
December 16, 1998 (Incorporated by reference to Exhibit 4.1
of the Company's Form 8-K filed with the Securities and
Exchange Commission on December 17, 1998) (Note: this
Agreement was terminated effective December 10, 1999).

4.8 Amendment to Shareholder Rights Agreement dated August 25,
1999 by and between the Company and Harris Trust & Savings
Bank (Incorporated by reference to Exhibit 10.5 to the
Company's Form 8-K Current Report filed on December 20,
1999) (Note: this Agreement was terminated effective
December 10, 1999).

10.1 Securities Purchase and Registration Rights Agreement by and
between ATC Communications Group, Inc. and Thayer Equity
Investors III, L.P. dated April 7, 1998 (Incorporated by
reference to Exhibit 4.7 of the Company's Form 10-Q
Quarterly Report for the quarter ended March 31, 1998).

10.2 Warrant to Purchase Shares of Common Stock of ATC
Communications Group, Inc. issued to Thayer Equity Investors
III, L.P. dated April 7, 1998 (Incorporated by reference to
Exhibit 4.8 of the Company's Form 10-Q Quarterly Report for
the quarter ended March 31, 1998).
</TABLE>

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10.3 Promissory Note by and among Advanced Telemarketing
Corporation, ATC Communications Group, Inc., and Thayer
Equity Investors III, L.P. dated May 4, 1998, (Incorporated
by reference to Exhibit 10.26 of the Company's Form 10-Q
Quarterly Report for the quarterly period ended March 31,
1998).

10.4 Subordination and Intercreditor Agreement between Thayer
Equity Investors III, L.P. and Bank One, Texas, N.A. dated
May 4, 1998, (Incorporated by reference to Exhibit 10.22 of
the Company's Form 10-Q Quarterly Report for the quarterly
period ended March 31, 1998).

10.5 Second Warrant to Purchase Shares of Common Stock of ATC
Communications Group, Inc. dated May 4, 1998, (Incorporated
by reference to Exhibit 10.29 of the Company's Form 10-Q
Quarterly Report for the quarterly period ended March 31,
1998).

10.6 Security Agreement between ATC Communications Group, Inc.
and Thayer Equity Investors III, L.P. dated May 4, 1998
(Incorporated by reference to Exhibit 10.27 of the Company's
Form 10-Q Quarterly Report for the quarterly period ended
March 31, 1998).

10.7 Pledge Agreement between ATC Communications Group, Inc. and
Thayer Equity Investors III, L.P. dated May 4, 1998,
(Incorporated by reference to Exhibit 10.28 of the Company's
Form 10-Q Quarterly Report for the quarterly period ended
March 31, 1998).

10.8 Registration Rights Agreement between ATC Communications
Group, Inc. and Thayer Equity Investors III, L.P. dated
May 4, 1998, (Incorporated by reference to Exhibit 10.30 of
the Company's Form 10-Q Quarterly Report for the quarterly
period ended March 31, 1998).

10.9 Reimbursement and Indemnification Agreement by and among
Advanced Telemarketing Corporation, ATC Communications
Group, Inc., and Thayer Equity Investors III, L.P. dated
May 4, 1998, (Incorporated by reference to Exhibit 10.25 of
the Company's Form 10-Q Quarterly Report for the quarterly
period ended March 31, 1998).

10.10 Stockholders Agreement dated July 9, 1998 by and among ATC
Communications Group, Inc., Thayer Equity Investors III,
L.P., ITC Services Company, Edward Blank, The Edward Blank
1995 Grantor Retained Annuity Trust, Codinvest Limited,
Michael G. Santry and Darryl D. Pounds (Incorporated by
reference to Exhibit 10.10 of the Company's Form 10-K Annual
Report for the year ended June 30, 1998) (Note: this
Agreement was terminated effective December 10, 1999).

10.11 Escrow Agreement dated July 9, 1998 between ATC
Communications Group, Inc., the representative of the
shareholders of IQI, Inc., and Harris Trust and Savings Bank
(Incorporated by reference to Exhibit 10.11 of the Company's
Form 10-K Annual Report for the year ended June 30, 1998).

10.12 Promissory Note by and between Aegis Communications Group,
Inc. and Thayer Equity Investors III, L.P. dated July 9,
1998 in the original principal amount of $6.8 million
(Incorporated by reference to Exhibit 10.20 of the Company's
Form 10-Q Quarterly Report for the quarterly period ended
September 30, 1998).

10.13 Promissory Note by and between Aegis Communications Group,
Inc. and Thayer Equity Investors III, L.P. dated July 29,
1998 in the original principal amount of $1.9 million
(substantially identical in all material respects, except
for dates and principal amount, to the Promissory Note
referred to in Exhibit 10.21).

10.14 Promissory Note by and between Aegis Communications Group,
Inc. and Thayer Equity Investors III, L.P. dated
October 23, 1998 in the original principal amount of
$2.1 million (substantially identical in all material
respects, except for dates and principal amount, to the
Promissory Note referred to in Exhibit 10.21).
</TABLE>

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10.15 Promissory Note by and between Aegis Communications Group,
Inc. and Thayer Equity Investors III, L.P. dated March 31,
1999 in the original principal amount of $5.7 million
(Incorporated by reference to Exhibit 10.24 of the Company's
Form 10-K Annual Report for the year ended December 31,
1998.

10.16 Securities Exchange Agreement entered into as of June 30,
1999 by and among Aegis Communications Group, Inc., Thayer
Equity Investors III, L.P., Edward Blank, The Edward Blank
1995 Grantor Retained Annuity Trust and ITC Service Company
(Incorporated by reference to Exhibit 10.25t of the
Company's Form 10-Q Quarterly Report for the quarterly
period ended June 30, 1999).

10.17 Amendment, dated as of June 30, 1999, to the Registration
Rights Agreement, dated as of July 9, 1998, by and among
Aegis Communications Group, Inc., Thayer Equity Investors
III, L.P., Edward Blank, The Edward Blank 1995 Grantor
Retained Annuity Trust and ITC Service Company (Incorporated
by reference to the Exhibit 10.26 of the Company's
Form 10-Q Quarterly Report for the quarterly period ended
June 30, 1999).

10.18 Series Four Warrant to Purchase Shares of Common Stock of
Aegis Communications Group, Inc. issued to Thayer Equity
Investors III, L.P., Edward Blank, The Edward Blank 1995
Grantor Retained Annuity Trust and ITC Service Company dated
June 30, 1999 (Incorporated by reference to Exhibit 10.27 of
the Company's Form 10-Q Quarterly Report for the quarterly
period ended June 30, 1999).

10.19 Series Five Warrant to Purchase Shares of Common Stock of
Aegis Communications Group, Inc. issued to Thayer Equity
Investors III, L.P. dated June 30, 1999 (Incorporated by
reference to Exhibit 10.28 of the Company's Form 10-Q
Quarterly Report for the quarterly period ended June 30,
1999).

10.20 Second Amended and Restated Credit Agreement dated as of
July 9, 1998 by and among IQI, Inc., Aegis Communications
Group, Inc. as guarantor, the various financial institutions
parties thereto, the Bank of Nova Scotia, as documentation
agent and administrative agent for the lenders, and Credit
Suisse First Boston, as syndication agent for the lenders
(Incorporated by reference to Exhibit 10.1 of the Company's
Form 8-K Current Report dated July 24, 1998).

10.21 First Amendment to the Second Amended and Restated Credit
Agreement dated as of March 31, 1999 by and among IQI, Inc.,
Aegis Communications Group, Inc. as guarantor, the various
financial institutions parties thereto, the Bank of Nova
Scotia, as documentation agent and administrative agent for
the lenders, and Credit Suisse First Boston, as syndication
agent for the lenders (Incorporated by reference to
Exhibit 10.2 of the Company's Form 10-K for the year ended
December 31, 1998).

10.22 Fourth Amendment, dated as of August 6, 1999, to the Second
Amended and Restated Credit Agreement, dated as of July 9,
1998, by and among IQI, Inc., Aegis Communications Group,
Inc. as guarantor, the various financial institutions
parties thereto, the Bank of Nova Scotia, as documentation
agent and administrative agent for the lenders, and Credit
Suisse First Boston, as syndication agent for the lenders
(Incorporated by reference to Exhibit 10.29 of the Company's
Form 10-Q Quarterly Report for the quarterly period ended
June 30, 1999).

10.23 Parent Guaranty, dated as of August 6, 1999, made by Thayer
Equity Investors III, L.P. pursuant to the Fourth Amendment
to the Second Amended and Restated Credit Agreement, in
favor of each of the Bank of Nova Scotia, as documentation
agent and administrative agent for the lenders, and Credit
Suisse First Boston, as syndication agent for the lenders
(Incorporated by reference to Exhibit 10.30 of the Company's
Form 10-Q Quarterly Report for the quarterly period ended
June 30, 1999).
</TABLE>

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10.24 Third Amended and Restated Credit Agreement dated
December 10, 1999 (Incorporated by reference to
Exhibit 10.8 to the Company's Form 8-K Current Report filed
on December 20, 1999).

10.25 Series F Senior Voting Convertible Preferred Stock Purchase
and Registration Rights Agreement dated August 25, 1999 by
and among the Company, Questor Partners Fund II, L.P., a
Delaware limited partnership, Questor Side-by-Side Partners
II, L.P., a Delaware limited partnership, and Questor
Side-by-Side Partners II 3(c)(1), L.P., a Delaware limited
partnership, Thayer Equity Investors III, L.P., a Delaware
limited partnership, TC Co-Investors, LLC, a Delaware
limited liability company, ITC Services Company, Edward
Blank, trusts created by Edward Blank as both grantor and
trustee under Article Fourth of The Edward Blank 1995
Grantor Retained Annuity Trust, dated December 29, 1995, a
trust organized under the laws of New Jersey, and Amendment
Nos. 1 and 2 thereto dated August 26, 1999 and October 22,
1999, respectively (Incorporated by reference to
Exhibit 10.31 of the Company's Form 10-Q Quarterly Report
for the quarterly period ended September 30, 1999).

10.26 Stockholders and Voting Agreement dated as of August 25,
1999 by and among Questor Partners Fund II, L.P., a Delaware
limited partnership, Questor Side-by-Side Partners II, L.P.,
a Delaware limited partnership, and Questor Side-by-Side
Partners II 3(c)(1), L.P., a Delaware limited partnership
and the stockholders listed on Schedule A thereto
(Incorporated by reference to Exhibit 10.34 of the Company's
Form 10-Q Quarterly Report for the quarterly period ended
September 30, 1999).

10.27 Amendment No. 1 to the Series F Senior Voting Convertible
Preferred Stock Purchase and Registration Rights Agreement
Purchase Agreement, dated August 26, 1999 (Incorporated by
reference to Exhibit 10.32 of the Company's Form 10-Q
Quarterly Report for the quarterly period ended
September 30, 1999).

10.28 Amendment No. 2 to the Series F Senior Voting Convertible
Preferred Stock Purchase and Registration Rights Agreement,
dated October 22, 1999 (Incorporated by reference to
Exhibit 10.33 of the Company's Form 10-Q Quarterly Report
for the quarterly period ended September 30, 1999).

10.29 Stockholders Agreement dated December 10, 1999 by and among
the Company, Questor Partners Fund II, L.P., a Delaware
limited Partnership, Questor Side-by-Side Partners II, L.P.,
a Delaware limited partnership, Questor Side-by-Side
Partners II 3(c)(1), L.P., a Delaware limited partnership,
Thayer Equity Investors III, L.P., a Delaware limited
partnership and TC Co-Investors, LLC, a Delaware limited
liability company. (Incorporated by reference to
Exhibit 10.4of the Company's Form 8-K Current Report filed
on December 20, 1999).

10.30 Termination of Registration Rights Agreement dated July 9,
1998 (Incorporated by reference to Exhibit 10.6 to the
Company's Form 8-K Current Report filed on December 20,
1999).

10.31 Termination of Registration Rights Agreement dated May 4,
1998 (Incorporated by reference to Exhibit 10.7 to the
Company's Form 8-K Current Report filed on December 20,
1999).

10.32 Promissory Note dated September 16, 1997 among Michael G.
Santry and ATC Communications Group, Inc. (Incorporated by
reference to Exhibit 10.19 of the Company's Form 10-K Annual
Report for the year ended June 30, 1997).

10.33 Stock Pledge Agreement dated September 16, 1997 among
Codinvest Limited and ATC Communications Group, Inc
(Incorporated by reference to Exhibit 10.20 of the Company's
Form 10-K Annual Report for the year ended June 30, 1997).
</TABLE>

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10.34 Letter of Amendment, dated April 7, 1998, of Promissory Note
by Michael G. Santry in favor of ATC Communications Group,
Inc. (Incorporated by reference to Exhibit 4.12 of the
Company's Form 10-Q Quarterly Report for the quarterly
period ended March 31, 1998).

10.35 Stock Pledge Agreement between Michael G. Santry and ATC
Communications Group, Inc., dated April 7, 1998
(Incorporated by reference to Exhibit 4.13 to the Company's
Form 10-Q Quarterly Report for the quarterly period ended
March 31, 1998).

10.36 1992 Stock Option Plan as amended (Incorporated by reference
to Exhibit 4.1 of the Company's Form S-8 Registration
Statement--File No. 333-01131).

10.37 1996 Stock Option Plan as amended (Incorporated by reference
to Exhibit 4.2 of the Company's Form S-8 Registration
Statement--File No. 333-01131).

10.38 1998 Stock Option Plan (Incorporated by reference to the
Company's Form S-4 Registration Statement--File
No. 333-53887--Appendix D to the Joint Proxy/Prospectus).

10.39 Employment Agreement between Hugh E. Sawyer and the Company
dated March 29, 2000 (filed herewith).

21.1 Subsidiaries of the Registrant (Incorporated by reference
from the Company's Form 10-K Annual Report for the year
ended June 30, 1998).

23.1 Report of PricewaterhouseCoopers LLP, dated March 28, 2000
on the financial statements (filed herewith).

23.2 Consent of PricewaterhouseCoopers LLP, dated March 28, 2000
(filed herewith).

23.3 Report of PricewaterhouseCoopers LLP on the financial
statement schedule dated March 28, 2000 (filed herewith).

27.1 Financial Data Schedule (filed herewith).
</TABLE>

Copies of the above Exhibits are available to stockholders of record at a
charge of $0.50 per page, minimum of $5.00 each. Direct requests to:

Aegis Communications Group, Inc.
Attention: Secretary
7880 Bent Branch Drive, Suite 150
Irving, Texas 75063

REPORTS ON FORM 8-K

On August 26, 1999, we filed a report on Form 8-K reporting, under
"Item 5.--Other Events", that we had entered into an agreement with Questor
Partners Fund II, L.P. whereby Questor Partners Fund II, L.P. and related funds
(the"Questor Investors") agreed to purchase $46.75 million of newly issued
senior voting convertible preferred stock of the Company. We stated that
proceeds from the investment would be used to reduce debt, provide working
capital to fund anticipated growth and possibly to redeem previously issued
preferred stock. We also stated that the transaction was expected to be
completed in the fourth quarter of 1999.

On October 22, 1999, we filed a report on Form 8-K reporting, under
"Item 5.--Other Events", that we had amended our previous agreement with Questor
Partners Fund II, L.P., which was announced August 26, 1999, under which the
Questor Investors had agreed to purchase $46.75 million of newly issued senior
voting convertible preferred stock of the Company. Since the August 26, 1999
announcement, Aegis' financial results were lower than anticipated. As a result,
the Questor Investors and Aegis agreed to set the low end of the conversion
price range at $1.00 versus the $1.35 provided for earlier. In addition, the
Questor Investors' made their commitment contingent on Aegis' achievement of
projected financial

38
<PAGE>
performance for the quarter ended September 30, 1999. The parties also agreed to
extend the termination date of the agreement from December 31, 1999 to
January 31, 2000, although both continued to expect the transaction to be
completed in the fourth quarter of 1999. We stated that proceeds from the
Questor Investors' investment were expected to be used to reduce debt and
provide access to additional working capital through its line of credit.

On December 20, 1999, we filed a report on Form 8-K reporting, under
"Item 1.--Changes in Control of Registrant", that on December 10, 1999, we had
completed the sale of 46,750 shares of newly issued Preferred F senior voting
convertible preferred stock ("Preferred F Shares") to Questor Partners Fund II,
L.P., a Delaware limited partnership ("Fund II"), Questor Side-by-Side Partners
II, L.P., a Delaware limited partnership (the "Side-by-Side Fund"), and Questor
Side-by-Side Partners II 3(c)(1), L.P., a Delaware limited partnership (the
"3(c)(1) Fund" and together with Fund II and the Side-by-Side Fund, the "Questor
Investors") for an aggregate purchase price of $46,750,000. The Questor
Investors obtained the funds used to acquire the Preferred F Shares through
capital contributions by their partners. Aegis used the proceeds from the sale
of the Preferred F Shares to repay outstanding bank debt and pay transaction
expenses.

The Company's December 20, 1999 Form 8-K also reported, under
"Item 5.--Other Events", that in connection with the transaction, the Company
entered into the Third Amended and Restated Credit Agreement dated December 10,
1999 (the "Third Amendment") with the Bank of Nova Scotia and Credit Suisse
First Boston whereby the Company repaid approximately $37.9 million in term
debt, $3.7 million under its revolving credit commitment, $1.1 million in
interest under both the term debt and revolving credit commitment and increased
its revolving credit commitment from $30.0 million to $45.0 million. The Company
also paid approximately $0.3 million in transaction fees relating to the Third
Amendment.

At the special meeting of the Company's shareholders held on December 10,
1999, in addition to approving the Questor transaction and electing twelve
directors, the shareholders approved amendments to the Company's Certificate of
Incorporation to increase the number of authorized shares of common stock from
100,000,000 to 200,000,000, to increase the number of shares of preferred stock
from 1,000,000 to 2,000,000 and to remove the provision relating to
classification of the Board of Directors into three separate classes.

39
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

<TABLE>
<S> <C> <C>
AEGIS COMMUNICATIONS GROUP, INC.
(The Registrant)

Dated: March 30, 2000 By: /s/ STEPHEN A. MCNEELY
-----------------------------------------
Stephen A. McNeely
PRESIDENT AND CHIEF EXECUTIVE OFFICER,
DIRECTOR
</TABLE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.

<TABLE>
<S> <C> <C>
Dated: March 30, 2000 By: /s/ JOHN R. BIRK
-----------------------------------------
John R. Birk, Chairman of the Board,
Director

Dated: March 30, 2000 By: /s/ DEAN ANDERSON
-----------------------------------------
Dean Anderson, Director

Dated: March 30, 2000 By: /s/ EDWARD BLANK
-----------------------------------------
Edward Blank, Director

Dated: March 30, 2000 By: /s/ ROBERT D. DENIOUS
-----------------------------------------
Robert D. Denious, Director

Dated: March 30, 2000 By: /s/ HENRY L. DRUKER
-----------------------------------------
Henry L. Druker, Director

Dated: March 30, 2000 By: /s/ PETER D. FITZSIMMONS
-----------------------------------------
Peter D. Fitzsimmons, Director

Dated: March 30, 2000 By: /s/ MICHAEL D. MADDEN
-----------------------------------------
Michael D. Madden, Director

Dated: March 30, 2000 By: /s/ FREDERIC V. MALEK
-----------------------------------------
Frederic V. Malek, Director

Dated: March 30, 2000 By: /s/ KEVIN J. PROKOP
-----------------------------------------
Kevin J. Prokop, Director

Dated: March 30, 2000 By: /s/ MICHAEL G. SANTRY
-----------------------------------------
Michael G. Santry, Director

Dated: March 30, 2000 By: /s/ PAUL G. STERN
-----------------------------------------
Paul G. Stern, Director
</TABLE>

40
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE (ITEM 14(A))

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-2

Report of Independent Auditors.............................. F-3

Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999.......................... F-4

Consolidated Balance Sheets at December 31, 1998 and 1999... F-5

Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1998 and 1999.............. F-7

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999.......................... F-8

Notes to Consolidated Financial Statements.................. F-10

Report of Independent Accountants on Financial Statement
Schedule.................................................. F-32

Schedule II--Valuation and Qualifying Accounts for the Years
Ended December 31, 1997, 1998 and 1999.................... F-33
</TABLE>

All other schedules are omitted since the required information is not
applicable or is not material or because the information required is included in
the consolidated financial statements and notes thereto.

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and

Shareholders of Aegis Communications Group, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Aegis
Communications Group, Inc. (formerly IQI, Inc.) and its subsidiaries at
December 31, 1999 and December 31, 1998, and the results of their operations and
their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers LLP

Dallas, Texas
March 28, 2000

F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS

Board of Directors
Aegis Communications Group, Inc.

We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Aegis Communications Group, Inc. and
subsidiaries (formerly IQI, Inc.) for the year ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Aegis Communications Group, Inc. (formerly IQI, Inc.) for the year ended
December 31, 1997 in conformity with accounting principles generally accepted in
the United States.

ERNST & YOUNG LLP

Los Angeles, California
April 17, 1998

F-3
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... $133,832 $228,038 $246,268
Cost of services, excluding depreciation and amortization
shown below............................................... 88,190 161,361 176,674
-------- -------- --------
Gross profit................................................ 45,642 66,677 69,594
Selling, general and administrative expenses................ 36,312 50,510 65,905
Depreciation................................................ 4,501 10,018 12,954
Acquisition goodwill amortization........................... 1,592 2,876 2,723
Non-cash asset impairment charge............................ -- -- 20,399
Restructuring and other non-recurring charges (Note 6)...... -- 8,395 541
-------- -------- --------
Total expenses............................................ 42,405 71,799 102,522
-------- -------- --------
Operating income (loss)..................................... 3,237 (5,122) (32,928)
Interest expense, net (Notes 8, 9 and 10)................... 3,626 5,578 7,461
Non-cash interest expense (Note 4).......................... -- 3,092 --
-------- -------- --------
Loss before income taxes.................................... (389) (13,792) (40,389)
Income tax expense (benefit) (Note 13)...................... 595 (2,989) (6,213)
-------- -------- --------
Net loss.................................................. (984) (10,803) (34,176)
Preferred stock dividends................................... -- -- 1,208
-------- -------- --------
Net loss after preferred stock dividends.................. $ (984) $(10,803) $(35,384)
======== ======== ========
Basic and diluted loss per share (Note 12).................. $ (0.04) $ (0.27) $ (0.68)
======== ======== ========
Basic and diluted weighted average shares outstanding
(Note 12):................................................ 27,233 40,383 52,043
</TABLE>

See accompanying notes.

F-4
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1998 AND 1999

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 10,701 $ 6,043
Accounts receivable--trade, less allowance for doubtful
accounts of $1,337 in 1998 and $1,058 in 1999........... 49,585 54,839
Notes receivable--related parties (Note 18)............... 2,185 --
Current deferred tax assets (Note 13)..................... 884 715
Prepaid expenses and other current assets................. 1,662 2,417
-------- --------
Total current assets.................................... 65,017 64,014

Property and equipment (Notes 2 and 10):
Equipment and software.................................... 41,262 49,134
Leasehold improvements.................................... 6,112 6,616
Furniture and fixtures.................................... 7,827 9,913
-------- --------
55,201 65,663
Accumulated depreciation and software amortization........ 19,924 32,175
-------- --------
35,277 33,488
Cost in excess of net assets acquired, net of accumulated
amortization of $4,523 in 1998 and $5,461 in 1999
(Notes 2 and 3)........................................... 71,325 48,203
Deferred tax assets (Note 13)............................... 6,502 12,884
Deferred financing costs, net (Note 2)...................... 2,099 1,762
Other assets................................................ 324 234
-------- --------
$180,544 $160,585
======== ========
</TABLE>

See accompanying notes.

F-5
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1998 AND 1999

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Current portions of long-term obligations................. $ 2,758 $ 2,243
Accounts payable.......................................... 7,059 6,332
Accrued compensation expense and related liabilities...... 6,414 5,629
Accrued interest expense.................................. 1,263 250
Other accrued expenses.................................... 9,417 10,464
Other current liabilities................................. 2,225 2,380
-------- --------
Total current liabilities............................... 29,136 27,298
Revolving line of credit (Note 8)........................... 28,100 32,334
Long-term obligations, net of current portions (Notes 8 and
10)....................................................... 36,829 1,554
Subordinated indebtedness due to affiliates (Note 9)........ 14,651 9,801
Commitments and contingencies (Notes 10 and 14)
Redeemable convertible preferred stock (Note 10) 46,750,
9.626% cumulative Series F shares issued and outstanding
in 1999................................................... -- 41,970
Shareholders' equity (Notes 11 and 16):
Preferred stock, $.01 par value, 1,000,000 shares
authorized; 29,778 convertible, $.36 cumulative
Series B shares issued and outstanding in 1998 and 1999;
83,206, 15% cumulative Series D shares issued and
outstanding in 1999; and, 47,381, 15% cumulative
Series E shares issued and outstanding in 1999.......... 0 2
Common stock, $.01 par value, 100,000,000 shares
authorized; 51,811,450 and 52,492,616 shares issued and
outstanding in 1998 and 1999, respectively.............. 523 525
Additional paid-in capital................................ 81,259 92,882
Treasury shares, at cost.................................. (1,421) (1,918)
Cumulative translation adjustment......................... 34 88
Retained deficit.......................................... (8,567) (43,951)
-------- --------
Total shareholders' equity.............................. 71,828 47,628
-------- --------
$180,544 $160,585
======== ========
</TABLE>

See accompanying notes.

F-6
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------------------------------------------
SERIES B SERIES D SERIES E
------------------- ------------------- -------------------
PAR PAR PAR
SHARES VALUE SHARES VALUE SHARES VALUE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996................... -- $-- -- $-- -- $--
Repurchase of common stock................... -- -- -- -- -- --
Issuance of common stock in connection with
InterServ merger........................... -- -- -- -- -- --
Exercise of stock options.................... -- -- -- -- -- --
Capital contributions........................ -- -- -- -- -- --
Issuance of common stock pursuant to exercise
of warrants................................ -- -- -- -- -- --
Return of capital to shareholder............. -- -- -- -- -- --
Foreign currency translation adjustment...... -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- --
------ --- ------ --- ------ ---
BALANCE AT DECEMBER 31, 1997................... -- $-- -- $-- -- $--
Issuance of stock pursuant to InterServ
earnout.................................... -- -- -- -- -- --
Issuance of stock and adjustment of capital
pursuant to ATC.IQI merger................. 29,778 -- -- --
Exercise of stock options.................... -- -- -- -- -- --
Purchase of subsidiary minority interest..... -- -- -- -- -- --
Foreign currency translation adjustment...... -- -- -- -- -- --
Issuance of convertible subordinated debt
with beneficial conversion feature......... -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- --
------ --- ------ --- ------ ---
BALANCE AT DECEMBER 31, 1998................... 29,778 $-- -- $-- -- $--
------ --- ------ --- ------ ---
Proceeds from conversion of subordinated
debt....................................... -- -- 77,300 1 44,018 1
Settlement of merger escrow shares........... -- -- -- -- -- --
Proceeds from sale of treasuary shares....... -- -- -- -- -- --
Exercise of stock options.................... -- -- -- -- -- --
Purchase of subsidiary minority interest..... -- -- -- -- -- --
Proceeds from issuance of preferred shares
upon conversion of dividends............... -- -- 5,906 -- 3,363 --
Director's note receivable................... -- -- -- -- -- --
Dividends on preferred stock................. -- -- -- -- -- --
Foreign currency translation adjustment...... -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- --
------ --- ------ --- ------ ---
BALANCE AT DECEMBER 31, 1999................... 29,778 $-- 83,206 $ 1 47,381 $ 1
====== === ====== === ====== ===

COMMON STOCK TREASURY STOCK
---------------------- ------------------- ADDITIONAL CUMULATIVE
PAR PAR PAID-IN TRANSLATION
SHARES VALUE SHARES VALUE CAPITAL ADJUSTMENT
----------- -------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996................... 25,422,400 $254 -- $ -- $ 7,074 $ 2
Repurchase of common stock................... (42,993) -- -- -- (90) --
Issuance of common stock in connection with
InterServ merger........................... 3,832,972 39 -- -- 14,754 --
Exercise of stock options.................... 40,858 -- -- -- 5 --
Capital contributions........................ -- -- -- -- 4,475 --
Issuance of common stock pursuant to exercise
of warrants................................ 612,713 6 -- -- 1,994 --
Return of capital to shareholder............. -- -- -- -- (187) --
Foreign currency translation adjustment...... -- -- -- -- -- 11
Net loss..................................... -- -- -- -- -- --
----------- ---- -------- ------- ------- ---
BALANCE AT DECEMBER 31, 1997................... 29,865,950 $299 -- $ -- $28,025 $13
Issuance of stock pursuant to InterServ
earnout.................................... 251,486 2 -- -- -- --
Issuance of stock and adjustment of capital
pursuant to ATC.IQI merger................. 21,839,625 218 361,000 (1,421) 49,876 --
Exercise of stock options.................... 353,055 4 -- -- 266 --
Purchase of subsidiary minority interest..... 1,334 -- -- -- -- --
Foreign currency translation adjustment...... -- -- -- -- -- 21
Issuance of convertible subordinated debt
with beneficial conversion feature......... -- -- -- -- 3,092 --
Net loss..................................... -- -- -- -- -- --
----------- ---- -------- ------- ------- ---
BALANCE AT DECEMBER 31, 1998................... 52,311,450 $523 361,000 $(1,421) $81,259 $34
----------- ---- -------- ------- ------- ---
Proceeds from conversion of subordinated
debt....................................... -- -- -- -- 12,130 --
Settlement of merger escrow shares........... 500,000 (891) 891 --
Proceeds from sale of treasuary shares....... -- -- (100,000) 394 (291) --
Exercise of stock options.................... 179,820 2 -- -- 178 --
Purchase of subsidiary minority interest..... 1,346 -- -- -- -- --
Proceeds from issuance of preferred shares
upon conversion of dividends............... -- -- -- -- 927 --
Director's note receivable................... -- -- -- -- (2,212) --
Dividends on preferred stock................. -- -- -- -- -- --
Foreign currency translation adjustment...... -- -- -- -- -- 54
Net loss..................................... -- -- -- -- -- --
----------- ---- -------- ------- ------- ---
BALANCE AT DECEMBER 31, 1999................... 52,492,616 $525 761,000 $(1,918) $92,882 $88
=========== ==== ======== ======= ======= ===

TOTAL
RETAINED SHARE-
EARNINGS HOLDERS'
(DEFICIT) EQUITY
--------- --------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1996................... $ 3,200 $ 10,500
Repurchase of common stock................... -- $ (90)
Issuance of common stock in connection with
InterServ merger........................... -- $ 14,793
Exercise of stock options.................... -- $ 5
Capital contributions........................ -- $ 4,475
Issuance of common stock pursuant to exercise
of warrants................................ -- $ 2,000
Return of capital to shareholder............. -- $ (187)
Foreign currency translation adjustment...... -- $ 11
Net loss..................................... (984) $ (984)
-------- --------
BALANCE AT DECEMBER 31, 1997................... $ 2,236 $ 30,573
Issuance of stock pursuant to InterServ
earnout.................................... -- $ 2
Issuance of stock and adjustment of capital
pursuant to ATC.IQI merger................. -- $ 48,673
Exercise of stock options.................... -- $ 270
Purchase of subsidiary minority interest..... -- $ --
Foreign currency translation adjustment...... -- $ 21
Issuance of convertible subordinated debt
with beneficial conversion feature......... -- $ 3,092
Net loss..................................... (10,803) $(10,803)
-------- --------
BALANCE AT DECEMBER 31, 1998................... $ (8,567) $ 71,828
-------- --------
Proceeds from conversion of subordinated
debt....................................... -- $ 12,132
Settlement of merger escrow shares........... -- $ --
Proceeds from sale of treasuary shares....... -- $ 103
Exercise of stock options.................... -- $ 180
Purchase of subsidiary minority interest..... -- $ --
Proceeds from issuance of preferred shares
upon conversion of dividends............... -- $ 927
Director's note receivable................... -- $ (2,212)
Dividends on preferred stock................. (1,208) $ (1,208)
Foreign currency translation adjustment...... -- $ 54
Net loss..................................... (34,176) $(34,176)
-------- --------
BALANCE AT DECEMBER 31, 1999................... $(43,951) $ 47,628
======== ========
</TABLE>

F-7
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (984) $(10,803) $(34,176)
Adjustments to reconcile net income to net cash provided
by
(used in) operating activities:
Depreciation and amortization......................... 6,093 12,895 15,677
Assets written-off.................................... -- 5,807 64
Deferred income taxes................................. (796) (2,889) (6,213)
Non-cash asset impairment charge...................... -- -- 20,399
Non-cash interest expense............................. -- 3,092 --
Other................................................. (30) 21 8
Changes in operating assets and liabilities:
Accounts and notes receivable--related parties...... -- 1,958 (27)
Accounts and notes receivable--other................ 818 (3,375) (5,254)
Prepaid and other current assets.................... 1,836 1,127 (755)
Other assets........................................ (138) 306 59
Due to related parties.............................. (249) -- --
Accounts payable and other accrued liabilities...... (2,597) 2,208 (1,989)
Other current liabilities........................... (1,624) (3,220) 155
-------- -------- --------
Net cash provided by (used in) operating
activities........................................ 2,329 7,127 (12,052)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (10,018) (12,520) (10,180)
Acquisition costs, ATC.................................... -- (3,989) --
Net cash acquired from acquisition of ATC................. -- 296 --
Acquisition of InterServ, net of cash acquired............ (15,776) -- --
-------- -------- --------
Net cash used in investing activities............. (25,794) (16,213) (10,180)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable............................... 30,225 4,477 11,734
Proceeds from affiliate debt.............................. -- 13,650 7,282
Principal payments on long-term debt...................... (6,200) (1,572) (40,975)
Payments on capital lease obligations..................... (773) (1,380) (2,813)
Repurchase of common stock................................ (90) -- --
Return of capital to shareholder.......................... (187) -- --
Proceeds from exercise of stock options................... 5 269 179
Deferred financing costs.................................. (650) (966) (189)
Proceeds from issuance of preferred stock................. -- -- 41,699
Proceeds from sale of common stock........................ -- -- 103
Dividends on preferred stock.............................. -- -- (11)
Credit balance in cash account............................ (313) -- 511
Capital contributions..................................... 4,475 -- --
-------- -------- --------
Net cash provided by financing activities......... 26,492 14,478 17,520
Effect of exchange rates on cash............................ 11 21 54
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 3,038 5,413 (4,658)
Cash and cash equivalents at beginning of period............ 2,250 5,288 10,701
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 5,288 $ 10,701 $ 6,043
======== ======== ========
</TABLE>

F-8
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING THE PERIODS FOR:
Interest.................................................. $ 3,046 $ 4,886 $ 6,859
Income taxes.............................................. 1,206 894 --
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of stock to effect acquisition of ATC............ $ -- $ 45,320 $ --
Issuance of stock to effect acquisition of Interserv...... 13,321 -- --
Capital lease obligations entered into.................... 37 1,299 497
Contribution of capital................................... 2,000 -- --
</TABLE>

See accompanying notes.

NON-CASH INVESTING AND FINANCING ACTIVITIES

During 1997, a shareholder forgave $2,000 of subordinated notes payable by
the Company, which was treated as a contribution of capital.

On July 12, 1997, the Company acquired the outstanding stock of InterServ
Services Corporation in exchange for cash of $15,415, common stock valued at
$13,321 and options valued at $1,472. In accordance with the InterServ purchase
agreement, the Company accrued $1,908 as consideration for additional purchase
price of InterServ, which was paid in 1998 in cash and stock in the same
proportion as the initial transaction.

On July 9, 1998, the Company acquired the common stock of ATC Communications
Group, Inc. in exchange for common stock valued at $45,320.

During 1997, 1998 and 1999, the Company purchased equipment and furniture
under financing leases totaling $37, $1,299, and $497, respectively.

During 1999, the Company converted $12,132 in subordinated indebtedness due
to affiliates of the Company into shares of Series D and E convertible preferred
stock.

During 1999, the Company converted $927 in dividends on the Series D and E
convertible preferred stock into additional Series D and E shares.

F-9
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

On July 9, 1998, Aegis Communications Group, Inc. ("Aegis"), formerly known
as ATC Communications Group, Inc. ("ATC"), completed the acquisition of
IQI, Inc., a New York corporation ("IQI"). The acquisition was effected through
the merger (the "Merger") of ATC Merger Sub, Inc. ("Sub"), a New York
corporation and wholly-owned subsidiary of ATC, with and into IQI pursuant to an
Agreement and Plan of Merger dated as of April 7, 1998 (the "Merger Agreement")
by and between ATC, Sub and IQI. The acquisition has been accounted for as a
reverse purchase, meaning that for accounting purposes, IQI is the surviving
corporation and is treated as having acquired ATC in a purchase accounting
transaction. Accordingly, the pre-Merger consolidated financial information
reported is that of IQI. In connection with the Merger, each share of IQI Common
Stock was converted into 9.7513 shares of Common Stock. In order to provide
consistency in reporting, historical share information for periods prior to 1998
was converted on this basis.

The Merger Agreement also contained a provision placing 5% of the shares to
be issued to holders of IQI Common Stock (as a result of the Merger) into an
escrow account pending resolution of any claims brought by ATC against IQI. In
1999, claims were made and settled resulting in the return of 500,000 shares of
the original ATC escrow shares to the Company. The settlement of shares was
treated as a capital contribution from existing shareholders valued at fair
value on the settlement date.

The accompanying consolidated financial statements include the accounts of
Aegis, IQI (formerly Edward Blank Associates), ATC, Lexi International, Inc.
("Lexi") which was acquired on November 22, 1996, and InterServ Services
Corporation ("InterServ") and its subsidiaries, which were acquired on July 12,
1997 (collectively, "Aegis" or the Company). See "Note 3. Mergers and
Acquisitions." All intercompany accounts have been eliminated in consolidation.
The accompanying consolidated financial statements give effect to the
acquisitions of ATC, Lexi and InterServ as of their respective effective
acquisition dates.

The Company provides outsourced telecommunications-based marketing and
customer service to large companies in various industries through strategically
located client service centers throughout the United States and Canada. The
Company also provides, through its InterServ subsidiary, customer service,
client service center management, and marketing research.

At December 31, 1999, Aegis had the following operating subsidiaries:

<TABLE>
<CAPTION>
STATE OF DATE PERCENTAGE
NAME INCORPORATION ACQUIRED OWNERSHIP PRINCIPAL BUSINESS ACTIVITY
- - ------------------------------ ------------- -------- ---------- ------------------------------
<S> <C> <C> <C> <C>
Advanced Telemarketing Nevada Jul-98 98.9% Customer solutions
Corporation (d/b/a ATC
Communications) ("Advanced")

InterServ Services Corporation Delaware Jul-97 100.0% Customer solutions and
marketing research

Lexi International, Inc. California Nov-96 100.0% Customer solutions

IQI, Inc. New York N/A 100.0% Customer solutions

EBA Direct, Inc. Canada N/A 100.0% Customer solutions
</TABLE>

F-10
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of Aegis and its wholly-owned and majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.

(b) REVENUES. Customer solutions revenues earned under contracts based on
hours worked are recognized when the related services are performed at rates
expected to be realized under the contracts. Customer solutions revenues earned
under contracts based on successful sales are recognized on the date such sale
is verified by the customer. Marketing research revenue is recognized when
services are performed in accordance with contract terms. Principally all
clients have the contractual right to, and from time to time do, audit
documentation in support of their respective billings. While management believes
all such billings are proper and accurate, the Company periodically records
reserves against revenues representing management's best estimate of billing
adjustments or concessions that may be made as a result of such audits.

(c) PROPERTY AND EQUIPMENt. Property and equipment are carried at cost.
Depreciation and amortization are calculated using the straight-line method over
the estimated useful lives of the assets. Equipment, furniture and fixtures, and
computer software are depreciated over five-year to eight-year lives. Leasehold
improvements are amortized over the asset life or lease term, whichever is
shorter. Assets acquired under capitalized lease arrangements are recorded at
the present value of the minimum lease payments. Gains and losses from the
retirement or disposition of property and equipment are included in operations
in the period incurred. Maintenance and repairs are charged to operations as
incurred while renewals or improvements to such assets are capitalized.

(d) COST IN EXCESS OF NET ASSETS ACQUIRED. The cost in excess of net
assets acquired recognized is amortized using the straight-line method over
periods of 20 to 25 years.

(e) DEFERRED FINANCING COSTS. Deferred financing costs are amortized over
the term of the related debt using the straight-line method.

(f) DERIVATIVE FINANCIAL INSTRUMENTS. NEW ACCOUNTING PRINCIPLE NOT YET
ADOPTED. The Company will adopt Statement of Financial Accounting Standards
("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
as amended, no later than the first quarter of 2001. Under SFAS No. 133, all
derivatives will be recognized as either assets or liabilities and measured at
fair value. The accounting for changes in fair value of derivatives will depend
upon the intended use of the derivative. The impact of the Company of adopting
SFAS No. 133, if any, has not yet been determined but will be dependent upon the
extent to which the Company is a party to derivative contracts or hedging
activities covered by SFAS No. 133 at the time of adoption, including
derivatives embedded in non-derivative host contracts.

(g) FOREIGN CURRENCY TRANSLATION. The financial position and results of
operations of the Company's Canadian subsidiary ("EBA Direct") are measured
using local currency as the functional currency. Assets and liabilities are
translated using the end of period exchange rates while the statements of
operations are translated at the average exchange rate prevailing during the
period. The translation adjustment arising from the use of different exchange
rates from period to period is a cumulative translation adjustment in
stockholders' equity. Effective January 1, 1998, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). This statement establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. The adoption of
this standard did not

F-11
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
have a material effect on the Company's consolidated results of operations or
financial position. No separate statement of comprehensive income was presented
as the amounts are immaterial for all periods.

(h) INCOME TAXES. Aegis joins with its subsidiaries in filing a
consolidated federal income tax return. Income taxes are presented based on the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS No. 109"). Deferred income taxes are calculated
utilizing an asset and liability approach whereby deferred taxes are provided
for the tax effects of basis differences for assets and liabilities arising from
differing treatments for financial and income reporting purposes. Valuation
allowances are established for deferred tax assets where management believes it
is more likely than not that the deferred tax asset will not be realized.

(i) STATEMENTS OF CASH FLOWS. For the purposes of the statements of cash
flows, the Company considers all highly liquid instruments purchased with
original maturities of three months or less to be cash equivalents.

(j) RECLASSIFICATIONS. Certain prior year balances have been reclassified
to conform to the 1999 presentation.

(k) FAIR VALUE OF FINANCIAL INSTRUMENTS. The fair market value of
financial instruments is determined by reference to various market data and
other valuation techniques as appropriate. The Company believes that the fair
values of financial instruments approximate their recorded values.

(l) CONCENTRATION OF CREDIT RISK. The Company sells to clients in
diversified industries throughout the United States. A large percentage of the
Company's business is currently concentrated in the telecommunications industry.
The Company performs periodic credit evaluations of its clients' financial
conditions and generally does not require collateral. Receivables are generally
due within 30 days. Credit losses from clients have been within management's
expectations. The Company currently has certain clients which each comprise more
than 10% of the Company's revenues. See "Note 15. Major Clients."

(m) IMPAIRMENT OF LONG-LIVED ASSETS. In the event that facts and
circumstances indicate that the value of property and equipment, costs in excess
of net assets acquired or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation were required, the estimated
future undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down to market value or
discounted cash flow is required.

(n) ACCOUNTING FOR STOCK-BASED COMPENSATION. In October 1995, Statement of
Financial Accounting Standards No. 123, "Accounting for Stock based
Compensation" ("SFAS No. 123") was issued. This statement requires the fair
value of stock options and other stock-based compensation issued to employees to
either be included as compensation expense in the income statement or the pro
forma effect on net income and earnings per share of such compensation expense
to be disclosed in the footnotes to the Company's financial statements. The
Company applies SFAS No. 123 on a disclosure basis only. As such, SFAS No. 123
does not impact the Company's consolidated balance sheet or results of
operations.

(o) USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

F-12
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(p) EARNINGS PER SHARE. In February 1997, Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128") was issued.
The Company has adopted SFAS No. 128, which establishes standards for computing
and presenting earnings per share ("EPS"). This statement requires dual
presentation of basic and diluted EPS on the face of the income statement for
entities with complex capital structures and requires a reconciliation of the
numerator and the denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.

Basic and diluted EPS are computed by dividing net income applicable to
common stock by the weighted average number of shares of common stock and common
stock equivalents outstanding during the period. Basic EPS excludes the effect
of potentially dilutive securities while diluted EPS reflects the potential
dilution that would occur if securities or other contracts to issue common stock
were exercised, converted into or resulted in the issuance of common stock.
Common stock equivalents consist of common stock issuable under the assumed
exercise of stock options and warrants, computed based on the treasury stock
method, and the assumed conversion of the Company's issued and outstanding
preferred stock. Common stock equivalents are not included in diluted EPS
calculations to the extent their inclusion would be anti-dilutive.

(q) SEGMENT REPORTING. In December 1997, Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131") was issued. This statement establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements. In fiscal 1998, the Company adopted
SFAS No. 131 and applied the standard to the previous fiscal periods reported.
See "Note 19. Segments".

3. MERGERS AND ACQUISITIONS

INTERSERV SERVICES CORPORATION

Effective July 12, 1997, IQI, certain of its affiliates and ITC Holding
Company (ITC) the former owner of InterServ, entered into a stock purchase
agreement, (the InterServ Agreement), whereby IQI purchased all of the
outstanding common shares of InterServ for a combination of stock and cash,
based on a formula, valued at $32,142, including the assumption of approximately
$6,200 of InterServ indebtedness. Included in the purchase price is additional
performance-based consideration of $1,908 to the former shareholders of
InterServ based on a formula contained in the InterServ Agreement. The
additional consideration was paid in 1998 in cash and stock in the same
proportion as the initial transaction.

THE MERGER OF ATC COMMUNICATIONS GROUP, INC. AND IQI, INC.

Pursuant to the Merger Agreement, each former holder of common stock, $.001
par value, of IQI ("IQI Common Stock") received, in exchange for each such
share, 9.7513 shares of the common stock, par value $0.01 per share, of the
Company ("ATC Common Stock"). As a result of the Merger, ATC issued
approximately 34.2 million shares of ATC Common Stock and Common Stock
equivalents to holders of

F-13
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

3. MERGERS AND ACQUISITIONS (CONTINUED)
IQI Common Stock and IQI stock options and warrants in a tax-free exchange. The
acquisition has been accounted for as a reverse purchase, meaning that for
accounting purposes, IQI is the surviving corporation and is treated as having
acquired ATC in a purchase accounting transaction. Accordingly, the pre-Merger
consolidated financial information reported is that of IQI.

Effective upon the Merger, the Company formally changed its name to Aegis
Communications Group, Inc. and its Nasdaq National Market System symbol to
"AGIS".

The Merger Agreement also contained a provision extending the maturity date
of one-half of the principal amount of the promissory note payable to the
Company by an officer of the Company to March 31, 1999. At December 31, 1999,
the principal and accrued but unpaid interest on the note totaled approximately
$2,000. See "Note 18. Related Party Transactions."

The acquisition of InterServ and the merger of ATC and IQI were accounted
for by the purchase method of accounting, whereby purchase price is allocated to
assets and liabilities assumed based on management's estimate of the relative
fair values of the assets and liabilities assumed at the date of acquisition, as
follows:

<TABLE>
<CAPTION>
INTERSERV ATC
--------- --------
<S> <C> <C>
Purchase Price:
Issuance of common stock................................ $14,793 $45,320
Additional common stock issued in 1998.................. 874 --
Cash purchase price..................................... 15,415 --
Additional cash consideration paid in 1998.............. 1,034 --
Debt assumed............................................ 6,200 --
Other liabilities assumed............................... 4,754 --
Intrinsic value of ATC stock options.................... -- 2,090
Transaction costs....................................... 1,342 4,177
------- -------
44,412 51,587
Fair Market Value of Assets Acquired and Liabilities
Assumed................................................. 14,693 20,966
------- -------
Excess of Purchase Price over Fair Value of Assets
Acquired and Liabilities Assumed ("Goodwill")........... $29,719 $30,621
======= =======
</TABLE>

F-14
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

3. MERGERS AND ACQUISITIONS (CONTINUED)

The following unaudited condensed consolidated pro forma statements of
operations data present the consolidated results of operations of the Company as
if the ATC and InterServ acquisitions had occurred an January 1, 1997 and are
not necessarily indicative of what would have occurred had the acquisitions been
made as of that date or of the results which may occur in the future.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
----------- ----------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Total revenues.............................. $248,763 $275,984 $246,268
Cost of services............................ 170,685 196,066 176,674
-------- -------- --------
Gross profit.............................. 78,078 79,918 69,594
Operating expenses.......................... 81,770 77,970 81,582
Non-cash asset impairment charge............ -- -- 20,399
Restructuring and other non-recurring
charges................................... -- 8,395 541
-------- -------- --------
Operating loss............................ (3,692) (6,447) (32,928)
Interest expense, net....................... 5,786 6,176 7,461
Non-cash interest expense................... -- 3,092 --
Litigation settlement....................... -- 1,900 --
-------- -------- --------
Loss before income taxes.................... (9,478) (17,615) (40,389)
Income tax benefit.......................... (1,473) (4,190) (6,213)
-------- -------- --------
Net loss.................................. (8,005) (13,425) (34,176)
Preferred stock dividends................... -- -- 1,208
-------- -------- --------
Net loss after preferred stock
dividends............................... $ (8,005) $(13,425) $(35,384)
======== ======== ========
Pro forma net loss per share:
Basic and diluted......................... $ (0.16) $ (0.26) $ (0.69)
======== ======== ========
Weighted average shares outstanding (in
thousands)................................ 50,164 51,382 51,614
</TABLE>

4. EFFECT OF RESTATEMENT

The Company has restated its September 30, 1998 through September 30, 1999
financial statements in accordance with Emerging Issues Task Force Topic
No. D-60 to reflect a beneficial conversion feature contained in the
subordinated debt issued to Thayer Equity in July 1998 (see "Note 9.
Subordinated Indebtedness"). This beneficial conversion feature, which was not
originally recognized, resulted in a non-cash interest expense charge of $3,092
at the issuance date of the debt in the September 30, 1998 restated financial
statements.

In connection with the restatement, the Company determined the fair value of
the beneficial conversion feature to be $3,092 based on its fair value at the
issuance date and recorded the discount for the beneficial conversion feature as
paid in capital. As the $8,700 in subordinated debt was immediately convertible
upon issuance, the Company recognized $3,092 in non-cash interest expense in the
quarter ended September 30, 1998. There was no impact to the Company's tax
provision for the quarter ended

F-15
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

4. EFFECT OF RESTATEMENT (CONTINUED)
September 30, 1998 as the beneficial conversion feature represents a permanent
difference for tax purposes.

The restatements of the 1998 financial statements for the matter described
above had no effect on the Company's total assets or total liabilities and
shareholders' equity. The Company's additional-paid in capital, retained
earnings, net loss and basic and diluted loss per common share for the year
ended December 31, 1998, as previously reported and as restated, are as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
-------------
<S> <C>
Net loss--previously reported............................... $ (7,711)
Adjustment related to recalculation of beneficial conversion
feature on convertible subordinated debt.................. (3,092)
--------
Net loss--as restated....................................... $(10,803)
========
Net loss per common share (basic and diluted)--previously
reported.................................................. $ (0.19)
========
Net loss per common share (basic and diluted)--as
restated.................................................. $ (0.27)
========
</TABLE>

<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1998
-------------
<S> <C>
Additional paid-in capital--previously reported............. $78,167
Adjustment related to beneficial conversion feature on
convertible subordinated debt............................. 3,092
-------
As restated................................................. $81,259
-------
</TABLE>

5. SALE OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

On December 10, 1999, the Company completed the sale of 46,750 shares of
newly issued Preferred F senior voting convertible preferred stock to Questor
Partners Fund II, L.P., Questor Side-by-Side Partners II, L.P., and Questor
Side-by-Side Partners II 3(c)(1), L.P. (collectively the "Questor Investors")
for an aggregate purchase price of $46,750. The Questor Investors, obtained the
funds used to acquire the Series F Preferred Stock through capital contributions
by their partners. The Company used the net proceeds from the sale of the
Preferred F Shares to repay outstanding bank debt and pay transaction expenses.
The dividends on the Preferred F Shares, to the extent that dividends have not
been paid, are added to the investment value of such shares. The Preferred F
Shares are convertible into shares of Common Stock on the basis of one share of
Common Stock per $1.00 of investment value of the Preferred F Shares. The
Preferred F Shares have a liquidation preference equal to the investment value
of such shares. As a result of the sale of the Preferred F Shares, on an
as-converted basis, the Questor Investors collectively own approximately 47% of
the Company's issued and outstanding Common Stock and approximately 38% of the
Company's Common Stock and Common Stock equivalents outstanding at December 31,
1999. The Preferred F Shares vote on an as-converted basis and represent
approximately 47% of the voting equity stock. Because the Preferred F Shares are
redeemable at the option of the

F-16
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

5. SALE OF REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
Questor Investors in the event of a change of control, the Series F Preferred
Stock is classified as neither a debt nor an equity instrument on the balance
sheet at December 31, 1999.

6. RESTRUCTURING AND OTHER NON-RECURRING CHARGES

On July 29, 1998, the Company announced that it would record pre-tax
restructuring charges of $13,000 related to the Merger. Current and future
expenses related to the restructuring decision which meet the specific generally
accepted accounting principles ("GAAP") criteria for accrual have been referred
to herein as "restructuring" charges. Expenses related to the restructuring
decision which do not meet the specific GAAP criteria for accrual have been
referred to herein as "other" non-recurring charges. "Other" non-recurring
charges have not been accrued, but are recognized as the related expenses are
incurred. Accordingly, the Company recorded pre-tax charges of approximately
$8,395 ($5,037, net of taxes) in the year ended December 31, 1998 and
approximately $541 ($330, net of taxes) in the quarter ended March 31, 1999, as
a part of the total restructuring. These charges are primarily attributable to
one-time write-offs of redundant hardware and software, severance costs and the
consolidation of certain administrative functions including costs to relocate
offices and employees. The Company does not anticipate recognizing additional
Merger-related restructuring charges and none were recorded after the quarter
ended March 31, 1999.

The following table details the restructuring and other non-recurring
charges related to the Merger for the years ended December 31, 1998 and 1999:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Write-offs of redundant hardware and software............... $4,713 $ --
Severance costs and consolidation of certain administrative
functions................................................. 661 --
Other non-recurring charges................................. 3,021 541
------ ----
Total................................................... $8,395 $541
====== ====
</TABLE>

7. NON-CASH ASSET IMPAIRMENT CHARGE

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"), which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the estimated future
cash flows (undiscounted and without interest charges) estimated to be generated
by those assets are less than the assets' carrying value. SFAS No. 121 also
requires that when a group of assets being tested for impairment was acquired as
part of a business combination that was accounted for using the purchase method
of accounting, any goodwill that arose as part of the transaction must be
included as part of the asset grouping. In accordance with SFAS No. 121, the
Company reviews long-lived assets whenever events or changes in facts and
circumstances indicate that the carrying value of the assets may not be
recoverable. As a result of the performance of the Company's Elrick & Lavidge
("E&L") marketing research division since

F-17
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

7. NON-CASH ASSET IMPAIRMENT CHARGE (CONTINUED)
its acquisition (in a purchase accounting transaction) by IQI in July 1997, in
the first quarter of 1999, the Company performed an analysis (based on E&L's
estimated future cash flows) of the carrying value of the goodwill associated
with the purchase of E&L. As a result of this evaluation, it was determined that
the carrying value of the goodwill associated with the purchase of E&L has been
impaired. Accordingly, in the quarter ended March 31, 1999, the Company adjusted
the carrying value of E&L's long-lived assets to their fair value resulting in a
non-cash asset impairment charge of $20,399, which reduced the amount of
goodwill on the Company's balance sheet. This reduction is expected to result in
a decrease in the Company's goodwill amortization expense of approximately
$1,100 annually.

8. LONG-TERM DEBT

In conjunction with the December 10, 1999 closing of the Questor investment
and the associated repayment of bank debt, the Company entered into the Third
Amended and Restated Credit Agreement with The Bank of Nova Scotia and Credit
Suisse First Boston ("the Lenders"), thereby curing all outstanding defaults
through December 31, 1999. Under the amended agreement, our Lenders expanded
their aggregate revolving credit facility commitments from $30,000 to $45,000.
Certain financial targets were met by the Company in the fourth quarter of 1999,
resulting in a $1,500 commitment increase, to $46,500. If certain financial
targets are met in the first quarter of 2000, the aggregate commitment will
increase as much as an additional $2,000, bringing the total revolving facility
to $48,500. This agreement matures June 30, 2003. Interest related to this
Agreement is determined based upon the funded debt to earnings before interest,
taxes, depreciation and amortization ("EBITDA") ratio. Depending upon this
ratio, the facility bears interest at the LIBOR rate plus an applicable margin
(1.50%-3.50%) or the prime rate plus on applicable margin (0.50%-2.50%). At
December 31, 1999, the LIBOR and prime rates were 5.69% and 8.5% respectively.
Interest payments are due quarterly. At February 29, 2000, estimated available
borrowing capacity under the amended agreement is approximately $16,000.

On August 6, 1999, the Company entered into the Fourth Amendment to its
Second Amended and Restated Credit Agreement (the "Fourth Amendment") with the
Lenders whereby the Lenders committed to provide the Company an additional
$7,500 in term debt, resulting in a total facility of approximately $68,000, and
waived the Company's defaults under certain of the covenants through August 31,
1999. The proceeds of the additional loan were used for the Company's general
corporate and working capital needs. As part of the Fourth Amendment, Thayer
Equity agreed to guarantee the Company's additional $7,500 of indebtedness. For
further discussion see Note 16 "Stock Options and Warrants".

On March 30, 1999, the Company entered into the Third Amendment to its
existing Credit Agreement (the "Third Amendment") with the Lenders whereby the
Lenders waived the Company's defaults under certain of the covenants at
December 31, 1998 and provided for new levels for existing financial covenants
and a new covenant related to earnings before interest, taxes, depreciation and
amortization ("EBITDA").

In connection with the Merger, IQI entered into a credit agreement (the
"Credit Agreement") with (the "Lenders") whereby the Lenders continued their
loan commitments to IQI aggregating $53.0 million and committed to provide IQI
an additional $12.0 million in revolving loans, resulting in a total facility of
$65.0 million. The proceeds of the additional loan were used to refinance the
bank indebtedness of Advanced Telemarketing Corporation, a wholly-owned
subsidiary of ATC ("Advanced"), to pay transaction expenses for the Merger, and
for general corporate and working capital needs of IQI and Advanced. As

F-18
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

8. LONG-TERM DEBT (CONTINUED)
part of the amendment of the Credit Agreement, the Company and Advanced agreed
to guarantee the IQI indebtedness and grant blanket security interests in their
assets to secure repayment of the banks' loans.

The Credit Agreement contains various covenants that limit, among other
things, the operating subsidiaries' indebtedness, capital expenditures,
investments, payments and dividends to the parent company, Aegis, and requires
the operating subsidiaries to meet certain financial covenants. Similarly, under
the terms of the Company's guaranty of our operating subsidiaries' obligations,
the Company is subject to certain covenants limiting, among other things, our
ability to incur indebtedness, enter into guaranties, and acquire other
companies. The Credit Agreement is collateralized by liens on the operating
subsidiaries' accounts receivable, furniture and equipment, and is guaranteed by
us.

The Company has granted to the Lenders a security interest in all of the
assets of the Company including, without limitation, the pledge of all the
capital stock of Lexi, InterServ and Advanced owned by the Company. In addition,
Lexi, InterServ and Advanced have guaranteed the obligations of the Company. The
Bank loan also prohibits the Company from paying dividends on its Common Stock
until all the bank's commitments have been terminated and all of the Company's
obligations under the Bank Loan have been satisfied.

At December 31, 1997, 1998 and 1999, the Company had an interest rate collar
agreement with an original notional principal amount of $19,600 whereby the
Company pays interest at LIBOR rates, subject to a floor of 5.6% and a cap of
8.0%. The agreement terminates on March 31, 2000. The effect of this agreement
on interest expense for the years ended December 31, 1997, 1998 and 1999 was
immaterial.

Long-term debt at December 31, 1998 and 1999, is summarized below:

<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Bank revolving loan....................................... $28,100 $32,334
Bank term loan............................................ 33,475 --
Capital lease obligations (See Note 10)................... 6,112 3,797
Subordinated indebtedness due to affiliates (See Note
9)...................................................... 14,651 9,801
------- -------
82,338 45,932
Less current maturities................................... (2,758) (2,243)
------- -------
$79,580 $43,689
======= =======
</TABLE>

Future maturities of long-term debt at December 31, 1999 are as follows:

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- - -------------------------
<S> <C>
2000........................................................ $ 2,243
2001........................................................ 1,430
2002........................................................ 124
2003........................................................ 42,135
2004 and thereafter......................................... --
-------
$45,932
=======
</TABLE>

F-19
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

9. SUBORDINATED INDEBTEDNESS

In an effort to reduce debt and improve the Company's balance sheet, on
June 30, 1999, a group led by the Company's largest shareholder, Thayer Equity,
(and together the "Thayer-led group"), agreed to convert $6,872 and $4,000
subordinated notes payable due to the Thayer-led group into two new series of
convertible preferred stock. The balance due on the converted subordinated debt
was $12,132, including accrued interest, on the conversion date. The 77,300
shares of new Series D Preferred Stock ($.01 par value per share, $100 per share
liquidation preference) are convertible into Company Common Stock at $2.00 per
share, and the 44,018 shares of new Series E Preferred ($.01 par value per
share, $100 per share liquidation preference) are convertible into Company
Common Stock at $2.375 per share. Both series earn cumulative dividends
(payable-in-cash or -in-kind in additional shares of the respective series of
Preferred Stock) at the annual rate of 15%, and are non-voting except on
specified matters. The Company may, at its option, redeem the Series D and E
Preferred shares in cash or by the issuance of a convertible promissory note
bearing interest at a rate of 12%.

In connection with the Merger, on July 9, 1998, the Company issued a
subordinateed note payable to Thayer of $6,872. Proceeds from the note payable
were used to pay-off certain obligations of ATC and for transaction expenses
related to the Merger. Also in connection with the Merger, the Company obtained
a commitment from Thayer and a Thayer-led group of shareholders to provide up to
$4,000 of additional working capital to the Company. On July 29, 1998 and
October 23, 1998, the Company executed notes payable aggregating $1,900 and
$2,100, respectively, pursuant to this commitment. The notes payable mature on
August 31, 2003. Payments under the note payable are subordinate to the Bank
Loan. Quarterly interest is accrued based on a 12% annual interest rate and is
rolled into the principal balance of the note. The Company recognized $700 and
$555 in interest expense during 1999 and 1998, respectively pursuant to these
notes.

In 1996, IQI issued a subordinated note payable to a shareholder aggregating
$3,000, due November 2003. In December 1997, IQI and the shareholder consummated
an agreement to settle outstanding issues between the shareholder, IQI and
Thayer (IQI's principal shareholder). As part of such settlement, the aggregate
principal balance of the note was reduced to $1,000 and the interest rate
increased from 8% to 12% on the remaining note. The $2,000 reduction to the
shareholder note was treated as a contribution of capital by the shareholder.

In connection with the March 1998 amendment to the Bank Loan, IQI issued a
subordinated note payable to Thayer of $2,000 due August 31, 2003 with interest
payable quarterly at an annual rate of 15%. Proceeds from the note payable were
used for working capital purposes and to pay down $1,000 of the term portion of
the Bank Loan. Payments under the note payable are subordinate to the Bank Loan.
Therefore, quarterly accrued interest is rolled into the principal balance of
the note payable. At December 31, 1999, and 1998 the balance due on the note
payable was approximately $2,582 and $2,224, respectively. The Company
recognized $358 and $224 in interest expense during 1999 and 1998, respectively
pursuant to the note payable.

On March 30, 1999, Thayer Equity provided the Company with $5,667 in
additional subordinated indebtedness. Approximately one-half of the proceeds
from this financing were used to pay down bank debt and the remainder for
working capital purposes. The additional indebtedness is convertible into the
Company's Common Stock at a conversion price of $1.15 per share. The note
payable matures on August 31, 2003 with interest payable at a 12% annual rate.
Payments under the note payable are subordinated to bank debt; therefore,
quarterly accrued interest is rolled into the principal balance of the

F-20
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

9. SUBORDINATED INDEBTEDNESS (CONTINUED)
note payable. At December 31, 1999, the balance due on the note was $6,206 and
the Company recognized $176 in interest expense during 1999 pursuant to the
note.

10. LEASES

The Company has capital leases covering certain equipment. Capital leases
are included in the accompanying consolidated balance sheet under the following
captions at December 31, 1999:

<TABLE>
<S> <C>
Equipment.................................................. $ 9,482
Less accumulated depreciation.............................. (5,317)
-------
$ 4,165
=======
</TABLE>

Future minimum lease payments for all noncancelable leases with initial or
remaining terms of one year or more at December 31, 1999 are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING DECEMBER 31, LEASES LEASES
- - ------------------------- -------- ---------
<S> <C> <C>
2000...................................................... $2,484 $ 5,475
2001...................................................... 1,509 4,461
2002...................................................... 125 3,829
2003...................................................... -- 2,727
2004 and thereafter....................................... -- 5,123
------ -------
Total minimum future lease payments....................... $4,118 $21,615
=======
Less: amounts representing interest....................... (321)
------
Present value of future lease payments.................... $3,797
======
</TABLE>

Rent expense on operating leases for the years ended December 31, 1997, 1998
and 1999 was $3,455, $7,792 and $9,369, respectively.

F-21
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

11. SHAREHOLDERS' EQUITY

As a result of the Merger, each share of IQI Common Stock was converted into
9.7513 shares of the Company's Common Stock. In order to provide consistency in
reporting, historical share information for years prior to 1998 was converted on
this basis. The Merger Agreement also contained a provision placing 5% of the
shares to be issued to holders of IQI Common Stock (as a result of the Merger)
into an escrow account pending resolution of any claims brought by ATC against
IQI. In 1999, claims were made and settled resulting in the return of 500,000
shares of the original ATC escrow shares to the Company. The settlement of
shares was treated as a capital contribution from existing shareholders valued
at fair value on the settlement date.

At December 31, 1999, 29,778 shares of $0.01 par value Series B preferred
stock were issued and outstanding. Such shares were previously issued by ATC,
are convertible into shares of Common Stock at a conversion ratio of one share
of Series B preferred stock for two shares of Common Stock, and pay a cumulative
cash dividend at the annual rate of $0.36 per share.

In an effort to reduce debt and improve the Company's balance sheet, on
June 30, 1999, a group led by the Company's largest shareholder, Thayer Equity
Investors III, L.P. ("Thayer Equity", and together the "Thayer-led group"),
agreed to convert $12,132 of its subordinated debt into two new series of
convertible preferred stock. The 77,300 shares of new Series D Preferred Stock
($.01 par value per share, $100 per share liquidation preference) are
convertible into Company Common Stock at $2.00 per share, and the 44,018 shares
of new Series E Preferred ($.01 par value per share, $100 per share liquidation
preference) are convertible into Company Common Stock at $2.375 per share. Both
series earn cumulative dividends (payable-in-kind in additional shares of the
respective series of Preferred Stock) at the annual rate of 15%, and are
non-voting except on specified matters. The Company may, at its option, redeem
the Series D and E Preferred shares in cash or by the issuance of a convertible
promissory note bearing interest at a rate of 12%. In consideration of the
conversion of the subordinated debt into preferred stock, the Company issued the
Thayer-led group warrants to purchase an additional 1,000,000 shares of Company
Common Stock at $0.90625 per share, the closing price of such stock on the date
the debt was converted into equity. The excess of the fair value of the
convertible subordinated debt extinguished over the fair value of the securities
issued was $6,300 which was recorded as an addition to paid-in capital as a
result of this capital transaction.

12. EARNINGS PER SHARE

Common stock equivalents consist of common stock issuable under the assumed
exercise of stock options and warrants, computed based on the treasury stock
method, and the assumed conversion of the Company's issued and outstanding
preferred stock. Common stock equivalents are not included in diluted EPS
calculations to the extent their inclusion would have an anti-dilutive effect.

F-22
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

12. EARNINGS PER SHARE (CONTINUED)
Basic and diluted weighted average shares outstanding for the years ended
December 31, 1997, 1998 and 1999 were computed as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
BASIC AND DILUTED(1)
Weighted average common shares outstanding.................. 27,233 40,744 52,425
------ ------ ------
27,233 40,744 52,425
Weighted average treasury shares............................ -- (361) (382)
------ ------ ------
Shares used in EPS calculation............................ 27,233 40,383 52,043
====== ====== ======
</TABLE>

- - ------------------------

(1) For the years ended December 31, 1997, 1998 and 1999, common stock
equivalents are not included in diluted EPS calculations because their
inclusion would have an anti-dilutive effect.

13. INCOME TAXES

The components of the income tax expense (benefit) applicable to continuing
operations for the year s ended December 31, 1997, 1998 and 1999 are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current
Federal......................................... $1,175 $ -- $ --
State........................................... 216 -- --
Deferred
Federal......................................... (672) (2,617) (5,361)
State........................................... (124) (372) (852)
------ ------- -------
Total income tax expense (benefit)................ $ 595 $(2,989) $(6,213)
====== ======= =======
</TABLE>

A reconciliation of the expected statutory federal income tax provision
(benefit) to the actual provision (benefit) based on pre-tax income (loss) for
the years ended December 31, 1997, 1998 and 1999 is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Expected federal tax (benefit) at the statutory
rate............................................ $(217) $(3,638) $(14,136)
State taxes, net of federal benefit............... (225) (535) (554)
Goodwill amortization and acquisition costs....... 798 1,151 953
Asset impairment charge........................... -- -- 7,140
Valuation allowance............................... 103 -- --
Other items....................................... 136 33 384
----- ------- --------
$ 595 $(2,989) $ (6,213)
===== ======= ========
</TABLE>

F-23
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

13. INCOME TAXES (CONTINUED)
The components of deferred taxes included in the accompanying consolidated
balance sheets as of December 31, 1998 and 1999 are as follows:

<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Bad debt reserve........................................ $ 674 $ 405
Accrued expenses........................................ 910 960
Net operating loss carryforwards........................ 8,407 13,389
Deferred income......................................... 60 57
Tax credits............................................. 1,142 1,142
Other................................................... 79 12
------- -------
Gross deferred tax assets................................. 11,272 15,965
Deferred tax liabilities:
Effect of cash to accrual accounting change............. (1,502) (718)
Depreciation............................................ (1,550) (939)
Other................................................... (125) --
------- -------
Gross deferred tax liabilities............................ (3,177) (1,657)
Valuation allowance....................................... (709) (709)
------- -------
Net deferred tax asset (liability)........................ $ 7,386 $13,599
======= =======
</TABLE>

At December 31, 1999, the Company had net operating loss carryforwards of
approximately $35,000 and tax credits of approximately $1,142. Due to an
ownership change and the separate return limitation year rules, the utilization
of net operating losses and tax credits may be limited in future years. The net
operating loss carryforwards and tax credits begin to expire in 2013. Management
has established a valuation allowance for deferred taxes where management
believes it is more likely than not that the deferred tax asset will not be
realized.

14. COMMITMENTS AND CONTINGENCIES

As a result of the Merger, the Company assumed certain commitments of ATC
including: (a) Advanced renegotiated the employment agreement with a former
officer of ATC and entered into a consulting agreement with the former officer
through December 1998. The agreement specified a monthly consulting fee of $15,
and (b) ATC entered into a release and separation agreement with an officer of
ATC pursuant to which he continued to receive bimonthly payments based on his
previous annual base salary rate of $400 for a period of one year. These
payments ceased in October 1998.

IQI had employment agreements with seven employees, five of whom were
employed as of December 31, 1997, which provide for, among other matters, annual
base compensation and certain additional compensation upon a change in control
of the Company, as defined. In 1998, the Company incurred $1,162 of additional
compensation related to these agreements, which is included in corporate
selling, general and administrative expenses.

F-24
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In September 1999, the Company entered into a separation agreement with an
officer of the Company whereby the Officer would maintain his position with the
Company through March 31, 2000. The officer is then entitled to receive
severance compensation through December 31, 2000 totaling $169.

The Company is party to certain legal proceedings incidental to its
business. Certain claims arising in the ordinary course of business have been
filed or are pending against the Company. Management believes that the claims
are without merit and that the ultimate resolution of such contingencies, for
which adequate reserves have been made, will not have a material adverse effect
on the financial position or results of operations of the Company.

15. MAJOR CLIENTS

The Company had sales to major clients (those clients representing 10% or
more of consolidated revenues) of the following amounts for the periods
indicated.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
CLIENT 1997 1998 1999
- - ------ -------- -------- --------
<S> <C> <C> <C>
AT&T:
Customer solutions revenues.................... $56,221 $61,242 $58,648
Marketing research revenues.................... 1,327 1,451 1,020
------- ------- -------
Total AT&T revenues.......................... $57,548 $62,693 $59,668
======= ======= =======
American Express:
Customer solutions revenues.................... $ -- $26,071 $38,850
Marketing research revenues.................... -- -- --
------- ------- -------
Total American Express revenues.............. $ -- $26,071 $38,850
======= ======= =======
</TABLE>

16. STOCK OPTIONS AND WARRANTS

In November 1996, IQI established the 1996 Incentive Stock Option Plan (the
"IQI Plan"). The Plan provides for the award of incentive stock options to
directors, officers, key employees and members of Thayer's Advisory Board. The
IQI Plan was administered by a Compensation Committee, as established by IQI's
Board of Directors. These options are intended to qualify as incentive stock
options ("ISOs") under the Internal Revenue Code or non-statutory stock options
("NSOs") which are not intended to qualify. IQI reserved 3,929,774 shares of
common stock for issuance under the IQI Plan.

Prior to the Merger, ATC shareholders approved two stock option plans which
provided for the granting of options to purchase up to 5,000,000 shares of
Common Stock to key employees, officers and directors of ATC and its operating
subsidiary (the "ATC Plans"). At the date of the Merger, options to purchase
4,447,000 shares of Common Stock granted pursuant to the ATC Plans were
outstanding.

F-25
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

16. STOCK OPTIONS AND WARRANTS (CONTINUED)

In September 1998, the Company initiated the Aegis Communications
Group, Inc. 1998 Stock Option and Restricted Stock Plan (the "1998 Plan") which
provides for the granting of options to purchase up to a maximum of 7,500,000
shares of Common Stock to key employees, officers and directors of the Company
and its operating subsidiaries. Options granted pursuant to the 1998 Plan are
exercisable for 10 years from the date of the grant subject to vesting
schedules. The Company may grant additional options at any time prior to
September 2008. As a result of the adoption of the 1998 Plan, the Company will
not grant any future option to purchase shares of Common Stock pursuant to the
IQI Plan and ATC plans.

The following table summarizes certain information related to options for
common stock (information for periods prior to 1998 includes activity for the
IQI Plan only):

<TABLE>
<CAPTION>
IQI PLAN/ATC PLANS 1998 PLAN
------------------------ -----------------------
PRICE PER PRICE PER
SHARES SHARE SHARES SHARE
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1996.............. 1,408,224 $2.09 -- --
Granted..................................... 2,580,886 $0.85-$2.72 -- --
Forfeited................................... (207,527) $2.09 -- --
Exercised................................... (40,858) $0.85-$2.72 -- --
---------- ----------- --------- -----------
Outstanding at December 31, 1997.............. 3,740,725 $0.85-$2.72 -- --
Granted..................................... 134,666 $2.08 1,083,000 $1.25-$2.81
ATC Options................................. 3,384,000 $1.00-$4.00 -- --
Forfeited................................... (248,604) $0.85-$2.72 -- --
Exercised................................... (353,055) $0.85-$1.50 -- --
---------- ----------- --------- -----------
Outstanding at December 31, 1998.............. 6,657,732 $0.85-$4.00 1,083,000 $1.25-$2.81
Granted..................................... -- -- 2,085,838 $0.91-$1.25
Forfeited................................... (1,543,897) $0.85-$3.48 (147,000) $1.06-$1.25
Exercised................................... (174,820) $0.86-$1.50 (5,000) $1.25
---------- ----------- --------- -----------
Outstanding at December 31, 1999.............. 4,939,015 $0.85-$4.00 3,016,838 $1.25-$2.81
========== =========
</TABLE>

Included in options granted in 1997 are 69,915 options granted to certain
former option holders of InterServ which were issued at exercise prices below
the fair market value of IQI common stock. These options were issued as
replacements for similarly valued options held by such option holders prior to
the acquisition of InterServ by IQI. As a result of these arrangements, the
Company recorded additional goodwill of $1,472.

Included in options exercised in 1998 are 255,000 options granted pursuant
to the ATC Plans, which were exercised subsequent to the Merger at prices
ranging from $1.00 to $1.50.

F-26
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

16. STOCK OPTIONS AND WARRANTS (CONTINUED)
Information with respect to stock options outstanding is as follows
(information for periods prior to 1998 includes activity for the IQI Plan only):

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Weighted average exercise price per share... $ 1.96 $ 1.97 $ 1.76
Exercisable options......................... 1,378,005 5,141,003 5,451,960
Options available for future grants......... 143,802 6,437,000 4,478,162
Weighted average remaining contractual
life...................................... 9.0 years 8.3 years 7.0 years
</TABLE>

The fair values of options issued prior and subsequent to the Merger were
estimated on the dates of grant based on the fair value method and the
Black-Sholes option pricing model, respectively, with the following assumptions:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Expected life in years........................ 5.0 years 6.0 years 6.0 years
Risk-free interest rate....................... 6.30% 5.40% 5.55%
Dividend yield................................ -- -- --
Volatility factor............................. -- 63.9% 75.7%
</TABLE>

These option valuation models require input of highly subjective
assumptions. Because the Company's stock options issued prior to the Merger have
characteristics significantly different from those of traded options, and
because change in the subjective input assumptions can materially affect the
fair-value estimate, in management's opinion, the existing model does not
necessarily provide a reliable single measure of the fair value of its stock
options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss, as reported........................... $ (984) $(10,803) $(34,176)
Amortization of stock options' fair value....... 178 695 1,090
------- -------- --------
Pro forma net loss.............................. $(1,162) $(11,498) $(35,266)
======= ======== ========
Pro forma basic and diluted loss per share...... $ (0.04) $ (0.28) $ (0.68)
======= ======== ========
</TABLE>

In April 1993, Advanced initiated the Advanced Telemarketing Corporation
1993 Stock Option Plan which provides for the granting of options to Advanced's
key employees, officers, and directors to purchase shares of Advanced's common
stock ("Advanced Common"). In December 1996, ATC initiated the ATC
Communications Group, Inc. 1996 Stock Exchange Rights Plan (the "Rights Plan")
which provides for holders of options to purchase shares of Advanced Common to
exchange shares of Advanced Common received upon exercise of such options for
shares of Common Stock. The shares exchanged pursuant to the Rights Plan are
exchanged at the ratio of two shares of Common Stock for one share of Advanced

F-27
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

16. STOCK OPTIONS AND WARRANTS (CONTINUED)
Common. At December 31, 1998 and 1999, fully vested options to purchase 11,668
shares of Advanced Common were outstanding. The options to purchase Advanced
Common outstanding at December 31, 1998 and 1999 are subject to the Rights Plan
as discussed above.

In connection with the IQI Agreement, IQI issued warrants to a shareholder
to purchase an aggregate of 919,060 common shares for $3,000. The right to
exercise the warrants expires at the earlier of i) repayment of the subordinated
notes payable--shareholder, ii) the date the Company consummates an underwritten
public offering of common stock, iii) the consummation date of a sale of the
Company, as defined, or iv) November 2003. In December 1997, IQI and the
shareholder settled a dispute whereby the shareholder would purchase two-thirds
of the common shares subject to warrants (612,714 shares) by paying the exercise
price of $2,000. The balance of the warrants remains outstanding and subject to
their original terms.

In connection with the Merger, Thayer provided a guarantee for $2,000 in
bridge financing to assist in funding ATC's working capital needs. In connection
with the guarantee and for additional consideration of $110, the Company issued
to Thayer warrants to purchase 1,100,000 shares of the Company's Common Stock at
an exercise price of $1.96 per share. The warrants were valued at $188.

On July 6, 1998, the Company received an additional financing commitment
from a Thayer-led group to advance to the Company up to an additional $4,000 in
subordinated indebtedness. In connection with this commitment, the Company
issued the Thayer-led group warrants to purchase up to 350,000 shares of the
Company's Common Stock at an exercise price of $2.375 per share. The warrants
were valued at $95. See "Note 9. Subordinated Indebtedness."

In consideration of certain guarantees, the Company issued Thayer Equity a
warrant to purchase up to 800,000 shares of the Company's Common Stock,
exercisable only if the guarantee is drawn upon and at an exercise price based
on the then market price of such stock. As part of its settlement of an
indemnification claim made by the Company related to the Merger, Thayer Equity
waived its right to this contingent warrant.

In consideration of the conversion of the subordinated debt into preferred
stock on June 30, 1999, the Company issued the Thayer-led group warrants to
purchase an additional 1,000,000 shares of Company Common Stock at $0.90625 per
share, the closing price of such stock on the date the debt was converted into
equity.

17. EMPLOYEE BENEFIT PLANS

In 1999, Aegis adopted a defined contribution 401(k) plan (the "Plan")
covering all eligible employees of Aegis. Under the Plan, which replaces the
Advanced Plan and the IQI Plans, the Company contributes up to 3% of eligible
employee salaries at the rate of $0.50 for every dollar the employee
contributes. Contributions to the Plan for the year ended December 31, 1999, was
approximately $138.

During 1991, Advanced adopted a defined contribution 401(k) plan (the
"Advanced Plan") covering all eligible employees, as defined. Eligible employees
could elect to contribute up to 20% of their compensation, not to exceed $10 per
year. The Company could, at its discretion, match employee contributions. There
was no employer matching contribution made in 1998 or 1999.

F-28
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

17. EMPLOYEE BENEFIT PLANS (CONTINUED)
IQI had two qualified defined contribution 401(k) plans (the "IQI Plans")
covering all eligible employees of IQI. Under the IQI Plan which covered EBA and
Lexi employees, IQI contributed up to 4% of eligible employee salaries at the
rate of $0.50 for every dollar the employee contributed. Under the IQI Plan
which covered InterServ employees, IQI contributed amounts on a discretionary
basis equal to a percentage of each eligible employee's salary deferral, subject
to amounts allowed by the Internal Revenue Service. Contributions to the IQI
Plans for the years ended December 31, 1997, 1998 and 1999, were approximately
$231, $84 and $290, respectively.

18. RELATED PARTY TRANSACTIONS

As of December 31, 1999, Michael G. Santry, one of our directors, owed the
Company approximately $2,018 million, including accrued interest, under a
secured promissory note dated September 16, 1997. As provided for in the Merger
Agreement, Mr. Santry made a principal payment of approximately $1,831 million
on June 30, 1998. The Merger Agreement also provided for an extension of the
maturity date of the balance of the principal and accrued but unpaid interest on
the note to March 31, 1999. The note is secured by 7,000 shares of Aegis Common
Stock and options to purchase 1,750,000 shares of our Common Stock held by
Mr. Santry and additional collateral pledged by Mr. Santry in June 1999 when the
maturity date of the note was extended to March 31, 2000 and the note's annual
rate of interest was raised from 6% to 7%. We currently anticipate extending the
term of the loan until March 31, 2001. Because Mr. Santry is an affiliate of the
Company and the amount of the loan has been outstanding for more than one year,
the balance of the note receivable has been reclassified at December 31, 1999 as
a reduction to additional paid in capital in shareholders' equity.

Effective January 1, 1997, IQI entered into an agreement with an affiliate
of Thayer pursuant to which such affiliate provided IQI certain management and
consulting services. As consideration for the management and consulting services
provided, IQI was obligated to pay a quarterly fee of $138, plus certain direct
expenses. Effective with the Merger, this agreement with Thayer was terminated.

During the year ended July 31, 1996, an affiliate of IQI purchased a
building in which the Company is leasing space. Total rent expense relating to
this space and additional space leased from this affiliate amounted to
approximately $300, $395 and $262 for the years ended December 31, 1997, 1998
and 1999, respectively.

On occasion from 1997 through 1999, Thayer and a Thayer-led group have
provided financing and financing assistance to the Company. See further
discussion in "Note 9. Subordinated Indebtedness" and "Note 16. Stock Options
and Warrants."

As previously noted, on December 10, 1999, we completed the sale of 46,750
shares of newly issued Series F Preferred Stock to the Questor Investors for
$46,750 in cash. The Company used this money to repay outstanding bank debt and
pay transaction expenses, including a $1,700 transaction fee to Questor
Management Company. The Series F Preferred Stock votes on an as-converted basis
(1000 votes per share) and represents approximately 47% of our voting equity
stock.

In addition, we granted the Questor Investors certain registration rights
with respect to the shares of Common Stock underlying the Series F Preferred
Stock. We agreed that, upon written request from the holders of more than 50% of
the Series F Preferred Stock, we would file and cause to become effective one
registration on a form other than Form S-3 and up to three registrations on
Form S-3 covering the Common Stock issued or issuable upon exercise or
conversion of the Series F Preferred Stock held by the

F-29
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

18. RELATED PARTY TRANSACTIONS (CONTINUED)
Questor Investors. The Questor Investors may require a "shelf" registration that
would remain effective for at least one year. The Company further agreed to
provide the Questor Investors with certain "incidental", or "piggyback"
registration rights, subject to rights of the Company's underwriters to "cut
back" the number of shares to be included in such registrations. At the same
time the Company granted these rights to the Questor Investors, the Company also
granted the same rights to the Thayer Investors. Previously, the Company had
granted the Thayer Investors certain demand and piggyback registration rights,
but with respect only to certain shares issued in the subordinated debt and
warrant transactions described above. The new grant extends these rights to all
shares of Common Stock held by the Thayer Investors, including shares issued in
connection with the merger with IQI.

19. SEGMENTS

The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The Company classifies its operations into
two segments, customer solutions and marketing research, which are managed
separately because each provides different services. The accounting policies of
the operating segments are the same as described in the summary of significant
accounting policies. See "Note 2. Summary of Significant Accounting Policies."
The customer solutions segment provides large corporations with outsourced
inbound and outbound call handling services including customer service, help
desk, customer acquisition and retention, multilingual communications programs,
facilities management, order provisioning, and database management. The
marketing research segment provides its clients, representing a broad range of
industries, with customized marketing research including customer satisfaction
studies, quantitative and qualitative research, new product development, data
management and field marketing services such as mystery shopping. Business
segment information is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Customer solutions.......................... $115,609 $195,355 $219,066
Marketing research.......................... 18,223 32,683 27,202
-------- -------- --------
Total..................................... $133,832 $228,038 $246,268
======== ======== ========
OPERATING INCOME (LOSS):
Customer solutions.......................... $ 1,160 $ 3,535 $(11,138)
Marketing research.......................... 2,077 (262) (850)
Non-cash asset impairment charge............ -- -- (20,399)
Restructuring and other charges............. -- (8,395) (541)
-------- -------- --------
Total..................................... $ 3,237 $ (5,122) $(32,928)
======== ======== ========
TOTAL ASSETS:
Customer solutions.......................... $ 85,455 $161,699 $142,491
Marketing research.......................... 16,281 18,845 18,094
-------- -------- --------
Total..................................... $101,736 $180,544 $160,585
======== ======== ========
DEPRECIATION AND AMORTIZATION:
Customer solutions.......................... $ 4,092 $ 9,316 $ 12,366
Marketing research.......................... 409 702 588
Acquisition goodwill amortization........... 1,592 2,876 2,723
-------- -------- --------
Total..................................... $ 6,093 $ 12,894 $ 15,677
======== ======== ========
</TABLE>

F-30
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)

20. UNAUDITED QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
---------- --------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues......................................... $ 61,815 $58,024 $61,069 $65,360
Operating loss................................... (23,660) (5,039) (4,207) (22)
Loss before income taxes......................... (25,401) (6,878) (6,118) (1,992)
Net loss......................................... (23,830) (4,467) (4,022) (1,857)
Preferred stock dividends........................ -- 11 455 742
Net loss after preferred stock dividends......... (23,830) (4,478) (4,477) (2,599)
Basic and diluted loss per common share.......... $ (0.46) $ (0.09) $ (0.09) $ (0.05)
Weighted average common shares:
Basic and diluted.............................. 51,950 52,403 52,227 51,949
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
---------- --------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues......................................... $42,213 $46,843 $73,337 $65,645
Operating income (loss).......................... 1,012 1,951 (933) (7,152)
Income (loss) before income taxes................ (204) 738 (5,748) (8,578)
Net income (loss)................................ (464) 341 (5,053) (5,627)
Earnings (loss) per common share:
Basic.......................................... $ (0.02) $ 0.01 $ (0.10) $ (0.11)
Diluted........................................ $ (0.02) $ 0.01 $ (0.10) $ (0.11)
</TABLE>

21. SUBSEQUENT EVENTS (UNAUDITED)

F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders of
Aegis Communications Group, Inc.:

Our audits of the consolidated financial statements referred to in our
report dated March 28, 2000 of Aegis Communications Group, Inc. also included an
audit of the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, the financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.

PricewaterhouseCoopers LLP

Dallas, Texas
March 28, 2000

F-32
<PAGE>
AEGIS COMMUNICATIONS GROUP, INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

(IN THOUSANDS)

<TABLE>
<CAPTION>
CHARGED TO EARNINGS
-------------------------
BALANCE AT BALANCE GENERAL AND BALANCE AT
BEGINNING ACQUIRED ADMINISTRATIVE TAX NET END
DESCRIPTION OF YEAR IN MERGER EXPENSES EXPENSE WRITE-OFF OF YEAR
- - ----------- ---------- --------- -------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful
accounts....................... $ 102 $ -- $486 $ -- $ (38) $ 550
Deferred tax asset valuation
allowance...................... $ -- $ -- $ -- $103 $ -- $ 103

YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful
accounts....................... $ 550 $334 $747 $ -- $(294) $1,337
Deferred tax asset valuation
allowance...................... $ 103 $ -- $ -- $606 $ -- $ 709

YEAR ENDED DECEMBER 31, 1999:
Allowance for doubtful
accounts....................... $1,337 $ -- $697 $ -- $(976) $1,058
Deferred tax asset valuation
allowance...................... $ 709 $ -- $ -- $ -- $ -- $ 709
</TABLE>

F-33

<PAGE>

CERTIFICATE OF INCORPORATION

AEGIS COMMUNICATIONS GROUP, INC.
(RESTATED TO REFLECT ALL AMENDMENTS THROUGH AND INCLUDING DECEMBER 10, 1999)

FIRST: The name of this Corporation is AEGIS COMMUNICATIONS GROUP, INC. (the

"Corporation").

SECOND: The Corporation' s registered office in the State of Delaware is to be

located at 1209 Orange Street, in the City of Wilmington, County of New

Castle, Zip Code 19801, and its registered agent is The Corporation Trust

Company.

THIRD: The purpose of the Corporation is to engage in any lawful act or

activity for which corporations may be organized under the General Corporation

Law of Delaware.

FOURTH: The total number of shares of all classes of stock which the

Corporation shall have authority to issue shall be 202,000,000 shares,

consisting of (a) 200,000,000 shares of common stock, $.01 par value per share

("Common Stock"), and (b) 2,000,000 shares of preferred stock, $.01 par value

per share ("Preferred Stock").

A. Shares of Preferred Stock may be issued from time to time in one or

more series as authorized by the Board of Directors, each such series to have

such designations as may be fixed by the Board of Directors prior to the

issuance of any shares thereof. Each such series shall

<PAGE>

have such voting powers, full or limited, and such designations, preferences

and relative, participating, optional or other special rights, terms,

qualifications, limitations or restrictions thereof, as shall be stated and

expressed in the Certificate of Incorporation or any amendment thereto, or in

the resolution or resolutions providing for the issuance of such stock adopted

by the Board of Directors. The Preferred Stock of any series shall or may be,

without limitation, (a) subject to redemption at such time or times and at

such price or prices; (b) entitled to receive dividends at such rates, on such

conditions and at such times; (c) entitled to such rights upon the dissolution

of, or upon the distribution of the assets of, the Corporation; (d) entitled

to such voting rights; (e) subject to or entitled to such preferences; (f)

subject to or entitled to such sinking fund provisions; and (g) made

convertible into, or exchangeable for, shares of any other class or classes,

or any other series of the same or any other class or classes of stock of the

Corporation at such price or prices or at such rates of exchange and with such

adjustments, as shall or may be provided, stated or expressed in the

resolution or resolutions adopted by the Board of Directors of the Corporation

providing for the issue of such series. Subject to the express terms of any

other series of Preferred Stock outstanding at the time, the Board of

Directors may increase or decrease the number of shares or alter the

designation or classify or reclassify any unissued shares of a particular

series of Preferred Stock by fixing or altering in any one or more respects

from time to time before issuing the shares any terms, rights, restrictions

and qualifications of the shares.

B. The Common Stock of the Corporation shall be subject to the prior

rights of the Preferred Stock as may be set forth in the resolution or

resolutions by the Board of Directors providing for the issuance of the

Preferred Stock. Except for such voting rights as may be provided for in the

resolution or resolutions creating one or more series of Preferred Stock,

<PAGE>

voting rights solely shall be in the Common Stock. Cumulative voting in any

election of directors, regardless of class or series, is hereby expressly

denied.

C. By resolutions duly adopted by the Corporation's Board of Directors,

on or prior to the date hereof, the Corporation has designated the following:

(a) 29,778 shares of Preferred Stock as Series B Preferred Stock; (b) 231,902

shares of Preferred Stock as Series D Preferred Stock; (c) 132,053 shares of

Preferred Stock as Series E Preferred Stock; and (d) 46,750 shares of

Preferred Stock as Series F Preferred Stock.

FIFTH: No stockholder of this Corporation shall by reason of his holding

shares of any class of capital stock have any preemptive or preferential right

to purchase or subscribe to any shares of any class of this Corporation, now

or hereafter to be authorized, or any notes, debentures, bonds or other

securities convertible into or carrying warrants or options to purchase shares

of any class, now or hereafter to be authorized, whether or not the issuance

of any such shares of such notes, debentures, bonds or other securities would

adversely affect the dividend or voting rights of such stockholder other than

such rights, if any, as the Board of Directors, in its discretion, may fix;

and the Board of Directors may issue shares of any class of this Corporation,

or any note, debentures, bonds or other securities of any class of this

Corporation, or any notes, debentures, bonds, or other securities convertible

into or carrying options or warrants to purchase shares of any class, without

offering any such shares of any class, whether in whole or in part, to the

existing stockholders of any class.

SIXTH: NUMBER, ELECTION AND TERMS OF DIRECTORS. Subject to the rights, if any,

of the holders of any series of Preferred Stock to elect additional directors

under circumstances

<PAGE>

specified in a Preferred Stock designation, the number of directors of the

Corporation will not be less than two nor more than twelve and will be fixed

from time to time in the manner described in the bylaws of the Corporation.

Each Director will be elected for a one-year term and until his or her

successor has been duly elected and qualified.

SEVENTH: A. The Corporation shall indemnify any director, officer or employee,

or former director, officer or employee of the Corporation, or any person who

may have served at its request, as a director, officer or employee of another

corporation in which it owns shares of stock, or of which it is a creditor,

against expenses (including attorneys' fees), judgments, fines and amounts

paid in settlement to the full extent permitted by Section 145 of the General

Delaware Corporation Law, including the power to purchase and maintain

insurance, as provided in paragraph (g) of Section 145.

B. A director of the Corporation shall not be personally liable to the

Corporation or its stockholders for monetary damages for breach of fiduciary

duty as a director except for liability (i) for any breach of the director's

duty of loyalty to the Corporation or its stockholders, (ii) for acts or

omissions not in good faith or which involve intentional misconduct or knowing

violation of law, (iii) under Section 174 of the General Corporation Law of

the State of Delaware, or (iv) for any transaction from which the director

derives any improper personal benefit. If the General Corporation Law of the

State of Delaware is amended to authorize the further elimination or

limitation of the liability of the directors, then the liability of a director

to the Corporation shall be eliminated or limited to the fullest extent

authorized by the General Corporation Law of the State of Delaware, as so

amended. Any repeal or modification of this paragraph shall not adversely

affect any right or protection of a director of the Corporation existing

hereunder

<PAGE>

with respect to any act or omission occurring prior to or at the time of such

repeal or modification. The provisions of this paragraph shall not be deemed

to limit or preclude indemnification of a director by the Corporation for any

liability of a director which has not been eliminated by the provision of this

paragraph.

EIGHTH: In furtherance and not in limitation of the powers conferred by

statute, the power to adopt, amend or repeal bylaws of the Corporation is

conferred upon the directors.

NINTH: No contract or transaction between this Corporation and any person,

firm, association, or corporation and no act of this Corporation shall, in the

absence of fraud, be invalidated or in any way affected by the fact that any

of the directors of this Corporation are pecuniarily or otherwise interested,

directly or indirectly, in such contract, transaction or act, or are related

to or interested in, as a director, stockholder, officer, employee, member or

otherwise, such person, firm, association or corporation. Any director so

interested or related who is present at any meeting of the Board of Directors

or committee of directors at which action on any such contract, transaction or

act is taken may be counted in determining the presence of a quorum at such

meeting and may vote thereat with respect to such contract, transaction or act

with like force and effect as if he were not so interested or related. No

director so interested or related shall, because of such interest or

relationship, be disqualified from holding his office or be liable to the

Corporation or to any stockholder or creditor thereof for any loss incurred by

this Corporation under or by reason of such contract, transaction or act, or

be accountable for any gains or profits he may have realized therein.

<PAGE>

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
as of March 29, 2000, to be effective as of April 17, 2000, by and among Aegis
Communications Group, Inc., a Delaware corporation (the "Parent"), Advanced
Telemarketing Corporation, a Nevada corporation ("ATC"), IQI, Inc., a New York
corporation ("IQI") (together, ATC and IQI are referred to as the "Company"),
and Hugh E. Sawyer ("Employee").

R E C I T A L S:

The Company and the Parent desire to employ Employee under the terms
and conditions of this Agreement. Employee represents that Employee is free
from any other obligation of continuing employment with his former employer.

Employee desires employment by the Company and the Parent under the
terms and conditions of this Agreement and further desires to be granted
access to the Company's and the Parent's proprietary information.

NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth in this Agreement, the parties agree as follows:

1. EMPLOYMENT. Subject to the terms and conditions set forth in
this Agreement, each of the Company and the Parent employ Employee, and
Employee accepts such employment by the Company and the Parent.

2. DUTIES OF EMPLOYEE.

(a) Employee will serve in the capacities of President and
Chief Executive Officer of each of the Company and the Parent, subject in each
case to the reasonable supervision of the Board of Directors of such
corporation. In such capacities, Employee will have all necessary powers to
discharge his responsibilities, subject in each case to the respective Board's
supervision and control. Employee will have all the powers granted by the
Bylaws of each of the Company and the Parent to the President and Chief
Executive Officer of such corporation, and Employee will report to the Board
of Directors of such corporation. In addition, Employee will be elected to the
Board of Directors of each of the Company and the Parent.

(b) Commencing April 17, 2000 (the "Effective Date") and
during the remaining term of this Agreement, Employee will devote his full
business time and effort to the performance of his duties and responsibilities
as President and Chief Executive Officer of the Company and the Parent;
provided, however, Employee may continue his service as a director of TWS,
Inc. and Hometown Communities, LLC and other directorships from time to time
to the extent such service does not materially interfere with the performance
of his duties and responsibilities to the Company and the Parent.
Notwithstanding the foregoing, Employee may spend reasonable amounts of time
on his

<PAGE>

personal civic and charitable activities that do not materially interfere with
the performance of his duties and responsibilities to the Company and the
Parent. Employee acknowledges that the Parent's headquarters are currently
located in Irving, Texas and hereby commits that he will perform his duties
and responsibilities by officing in and physically working from these
headquarters on a full-time equivalent basis, except to the extent that
ordinary and necessary business travel obligations require otherwise or to
address family emergencies.

(c) Employee will comply with the written rules and
regulations of the Company and the Parent respecting their businesses and
perform the directives and policies of the Company and the Parent as they may
from time to time be stated to Employee verbally or in writing by the Board of
Directors of each corporation.

(d) Employee will maintain accurate business records as may
from time to time be required by the Company or the Parent. Such records may
be examined by the Company or the Parent, as the case may be, at all
reasonable times after written request is delivered to Employee. Any such
document will be delivered to the Company or the Parent, as the case may be,
promptly upon request.

(e) Employee agrees not to solicit or receive any income or
other compensation from any third party in connection with his employment with
the Company and the Parent. The Employee agrees, upon written request by the
Company or the Parent, to render an accounting of all transactions relating to
his business endeavors during the term of this employment hereunder.

(f) Within ten days of the Effective Date, Employee will
purchase from the Company 83,000 shares of the Company's common stock at a
price per share of $1.812, for a total cash consideration of $150,396.

3. TERM. The term of this Agreement (the "Term") will commence
effective as of April 17, 2000 (the "Effective Date") and continue until
terminated in accordance with Section 8 of this Agreement.

4. SALARY. Commencing on April 17, 2000, the Parent will pay
Employee an annual base salary during the term of this Agreement for his
services as President and Chief Executive Officer of the Parent of $375,000,
which will be payable in accordance with the Parent's standard payroll
practice, but not less than monthly. Such base salary will not include any
benefits made available to Employee or any contributions or payments made on
his behalf pursuant to any employee benefit plan or program of the Parent,
including any health, disability or life insurance plan or program, 401K
plan, cash bonus plan, stock incentive plan, retirement plan or similar plan
or program of any nature. Employee's performance and base salary shall be
reviewed by the Board of Directors annually (at the regularly scheduled board
meeting occurring nearest in time to each anniversary of the Effective Date)
and, in the discretion of the Board of Directors or the compensation committee
thereof, may be increased, but not decreased without

- - ---------- -----------
Employee Parent & Co.

<PAGE>

Employee's consent, by such amount as the Board of Directors or such committee
shall determine. The Company will have no separate salary obligation to
Employee, but shall be jointly and severally liable with Parent for the prompt
payment of the salary obligations set forth herein.

5. BONUS COMPENSATION.

(a) The Parent will pay Employee a signing bonus of $250,000,
$125,000 of which is payable within ten days of the Effective Date and
$125,000 of which is payable by July 31, 2000. If Employee voluntarily
terminates his employment with the Parent or the Company (other than upon an
Employee Termination Event) or is terminated for Cause (as defined in Section
8 of this Agreement) within one year of the Effective Date, Employee agrees to
repay promptly such signing bonus to the Parent. If Employee voluntarily
terminates his employment with the Parent or the Company (other than upon an
Employee Termination Event) or is terminated for Cause within the second year
following the Effective Date, Employee agrees to repay promptly one-half of
the signing bonus. If Employee terminates his employment as a result of the
Employee Termination Event defined in Section 8(ii)(g) below, then the second
installment of the signing bonus (if it has not already been paid) shall be
due and payable to the Employee within ten (10) days following the effective
date of such termination. Provided, however, in the event Employee resigns
from his employment with the Parent and Company for any reason following a
Change in Control, Employee shall have no obligation to repay or refund to the
Parent any portion of the signing bonus. For purposes of this Agreement, a
"Change in Control" will be deemed to occur in the following events:

(i) The acquisition in one or more transactions by any "Person" (as
the term person is used for purposes of Section 13(d) or 14(d)
of the Securities Exchange Act of 1934, as amended (the "1934
Act"), of "Beneficial Ownership" (within the meaning of Rule
13d-3 promulgated under the 1934 Act) of a majority of the
combined voting power of the Corporation's then outstanding
voting securities (the "Voting Securities"), PROVIDED, HOWEVER,
that for purposes of this subsection (i), the Voting Securities
acquired directly from the Corporation by any Person shall be
excluded from the determination of such Person's Beneficial
Ownership of Voting Securities (but such Voting Securities
shall be included in the calculation of the total number of
Voting Securities then outstanding), and PROVIDED FURTHER,
HOWEVER, that for purposes of this subsection (i), Person shall
in no event include Questor Partners Fund II, L.P., Thayer
Equity Investors III, L.P., or any of their affiliates; or

(ii) Approval by stockholders of the Corporation of (A) a merger or
consolidation involving the Corporation if the stockholders of
the Corporation immediately before such merger or consolidation
do not own, directly or indirectly immediately following such
merger or consolidation, at least a majority of the combined
voting power of the outstanding voting

- - ---------- -----------
Employee Parent & Co.

<PAGE>

securities of the corporation resulting from suchmerger or
consolidation in substantially the same proportion as their
ownership of the Voting Securities immediately before such
merger or consolidation or (B) a complete liquidation or
dissolution of the Corporation or an agreement for the sale or
other disposition of all or substantially all of the assets of
the Corporation.

(iii) Notwithstanding the foregoing, a Change in Control shall not be
deemed to occur solely because a majority or more of the then
outstanding Voting Securities is acquired by (i) a trustee or
other fiduciary holding securities under one or more employee
benefit plans maintained by the Corporation or any of its
subsidiaries or (ii) any corporation that, immediately prior to
such acquisition, is owned directly or indirectly by the
stockholders of the Corporation in the same proportion as their
ownership of stock in the Corporation immediately prior to such
acquisition;

(iv) Moreover, notwithstanding the foregoing, a Change in Control
shall not be deemed to occur solely because any Person (the
"Subject Person") acquired Beneficial Ownership of more than
the permitted amount of the outstanding Voting Securities as a
result of the acquisition of Voting Securities by the
Corporation which, by reducing the number of Voting Securities
outstanding, increases the proportional number of shares
Beneficially Owned by the Subject Person, provided that if a
Change in Control would occur (but for the operation of this
sentence) as a result of the acquisition of Voting Securities
by the Corporation, and after such share acquisition by the
Corporation, the Subject Person becomes the Beneficial Owner of
any additional Voting Securities which increases the percentage
of the then outstanding Voting Securities Beneficially Owned by
the Subject Person, then a Change in Control shall occur.

(b) The Parent will also pay Employee annual performance based cash
bonuses in accordance with Exhibit A attached to this Agreement and the bonus
plan adopted by the Board of Directors for each applicable year. As an
example, the Aegis Communications Group, Inc., 2000 Variable Incentive
Compensation ("VIC") Program is attached as part of Exhibit A. The Company
will have no separate bonus obligation to Employee, but shall be jointly and
severally liable with Parent for the prompt payment of the bonus obligations
set forth herein.

6. EMPLOYEE BENEFITS. During the term of this Agreement, the
Parent will provide Employee with all benefits made available from time to
time by the Parent to its employees generally and to Executives who hold
positions similar to that of Employee (including the benefits granted to other
officers of the Parent), such benefits to be in accordance with the Parent's
policies. Specifically, Employee's benefits will include participation in
medical and dental benefit plans or programs (providing coverage for

- - ---------- -----------
Employee Parent & Co.

<PAGE>

Employee's immediate family); disability insurance with premiums paid by the
Company; 401-K plans as soon as Employee is eligible to participate in such
plans; company-paid term life insurance payable to Employee's designated
beneficiary in the amount of $1 million; officer and director liability
insurance; a $600 monthly car allowance; sick leave; and four weeks' paid
vacation. The Company will have no separate obligations to Employee with
respect to employee benefits, but shall be jointly and severally liable with
Parent for the prompt payment of the benefit obligations set forth herein.

7. REIMBURSEMENT OF EXPENSES. The Parent will reimburse Employee,
in accordance with Parent and Company policy, for all expenses actually and
reasonably incurred by him in the business interests of the Parent or the
Company. The Parent will also reimburse Employee for all expenses actually and
reasonably incurred by Employee in relocating his family to the Dallas-Fort
Worth metropolitan area, including reasonable and customary real estate
commissions and closing costs incurred in selling Employee's current principal
place of residence in Atlanta and reasonable and customary closing costs
incurred in buying a principal place of residence in the Dallas-Fort Worth
metropolitan area, exclusive of financing "points". Reimbursement will be made
to Employee upon appropriate documentation of such expenditures in accordance
with the Company's written policies. The Parent will also reimburse Employee
for all expenses actually and reasonably incurred by Employee for temporary
living and commuting costs and expenses for the first 60 (sixty) days
following the Effective Date, and Employee will be responsible for all such
costs and expenses thereafter. Employee agrees to establish a residence in the
Dallas-Fort Worth metropolitan area as soon as practicable, but no later than
60 (sixty) days following the Effective Date, and will maintain such residence
during the term of this Agreement. For purposes of greater clarity, the
parties acknowledge and agree that Employee shall satisfy the foregoing
obligation by securing an apartment or other living arrangements acceptable to
Employee in the Dallas-Fort Worth metropolitan area and that Employee need not
establish a permanent family residence in the area.

8. EARLY TERMINATION. It is the desire and expectation of each
party that the employer-employee relationship will continue as specified
herein and be a pleasant and rewarding experience for the parties hereto. The
Company or the Parent will, however, be entitled to terminate Employee's
employment at any time with or without Cause (as defined in this Section 8).
Likewise, Employee may terminate his employment at any time for any or no
reason. If the Parent or the Company terminate Employee's employment without
Cause or Employee terminates such employment following occurrence of an
Employee Termination Event, however, the Parent will pay Employee twenty-four
months' salary as severance compensation (based on Employee's then current
annual base salary) in accordance with the Parent's standard payroll practice,
but not less than monthly; provided, however, that to the extent Employee is
able to mitigate (provided, Employee shall have no duty to attempt to so
mitigate) the amount of such severance compensation by earning compensation
through other employment during the twenty-four months following such
termination, the Parent's severance payment

- - ---------- -----------
Employee Parent & Co.

<PAGE>

obligation shall be reduced accordingly; provided further, however, that the
Parent will pay Employee at least twelve months' salary as severance
notwithstanding any such mitigation, the "Minimum Severance Amount." The
Company will have no separate obligation to Employee with respect to severance
compensation, but shall be jointly and severally liable with Parent for the
prompt payment of the salary obligations set forth herein.

If Employee dies, is unable to perform his duties and
responsibilities as a result of disability that continues for 120 consecutive
days or more ("Disability"), voluntarily resigns from the Company or the
Parent (other than a termination by Employee following occurrence of an
Employee Termination Event), or is terminated for Cause, the Parent will pay
Employee (or his estate, executor or legal representative, as appropriate) any
salary that has accrued to the date employment ceases, and the Parent's
obligations to pay additional salary or cash compensation or benefits will
terminate as of such date.

(i) "Cause," for the purpose of this Agreement, will mean the
occurrence of any of the following events:

(a) Performance by Employee of any willful misconduct relating to
the activities of the Company or the Parent, or commission by Employee of any
illegal or fraudulent acts or criminal conduct which in the opinion of the
Parent's Board of Directors will have or is reasonably likely to have a
material adverse effect on the profitability, reputation or goodwill of the
Company or Parent;

(b) A conviction of or NOLO CONTENDERE plea by Employee for any
criminal acts involving moral turpitude having or reasonably likely to have a
material adverse effect upon the Company or the Parent, including, without
limitation, upon their profitability, reputation or goodwill;

(c) Willful or grossly negligent failure by Employee to perform his
duties in a manner consistent with the Company's or the Parent's best
interests which he fails to cure within thirty (30) days after receiving
written notice thereof;

(d) Willful refusal by Employee to carry out reasonable
instructions of the Company's or the Parent's Boards of Directors not
inconsistent with the provisions of this Agreement;

(e) Employee's failure to honor his obligations referred to in the
last sentence of Section 2(b) or the last sentence of Section 7;

(f) Violation by Employee of any of Employee's covenants and
agreements contained in Sections 9, 10 or 11 of this Agreement; or

(g) Any other material breach of Employee's obligations hereunder,
which he fails to cure within thirty (30) days after receiving written notice
thereof.

- - ---------- -----------
Employee Parent & Co.

<PAGE>

(ii) "Termination without Cause" shall mean termination by Parent or
the Company for a reason other than "Cause" and "Employee Termination Event"
shall mean termination by Employee, as a consequence of any of the following
events, if such event occurs without Employee's prior consent:

(a) Employee's base salary is reduced or Parent fails to make
available to Employee a performance bonus plan with a target bonus of at least
100% of Employee's base salary based upon full achievement of the goals
established in the plan;

(b) Employee's responsibilities, functions or duties as the Chief
Executive Officer and President of the Corporation are materially reduced;

(d) Employee is forced to transfer his principal place of residence
to or subsequently from the Dallas-Fort Worth area;

(e) Employee is forced to transfer his principal office from the
Dallas-Fort Worth area;

(f) any failure to elect or reelect Employee as a member of the
Board of Directors of Parent and the Company;

(g) (1) the failure of the Parent's shareholders at the May 4, 2000
shareholder meeting to approve the amendment of the Aegis Communications
Group, Inc. 1998 Stock Option Plan ("Plan") to permit the grant of all options
to Employee contemplated by the Nonqualified Stock Option Agreement vesting
upon achieved internal rates of return (the IRR options) executed on even date
herewith under the terms specified therein, or in the event of such failure,
the failure of the Company to provide within forty-five (45) days the
functionally economic equivalent to the grant of such options in a form and
substance mutually agreeable to the parties, or (2) the failure of the Parent
to amend Section 9 of the Plan to permit, under each stock option grant to
Employee, the exercise of options in excess of 299% of the Employee's base
amount as defined in Section 280G(b)(3) of the Internal Revenue Code; or

(h) any other material breach of Parent's or Company's obligations
hereunder, which such party fails to cure within thirty (30) days after
receiving written notice thereof.

9. NON-COMPETITION AGREEMENT. Employee understands that during the
course of his employment by the Company and the Parent, Employee will (i) have
access to and receive the benefit of special training and unique information,
including, but not limited to, research, systems, development, marketing,
management, business development, customer satisfaction methods and
techniques, business process

- - ---------- -----------
Employee Parent & Co.

<PAGE>

improvements and other developments in marketing methods and providing
services to their customers, and (ii) represent the Company and the Parent and
their affiliates and develop contacts and relationships with other persons and
entities on behalf of such entities, including but, not limited to, customers,
potential customers and other employees of such entities. To protect such
entities' interest in this information and in these contacts and
relationships, Employee agrees and covenants that during the term of his
employment by the Company and the Parent, and for a period of two years after
the termination of such employment for any reason, without prior written
approval of the Company and the Parent, Employee will not, in connection with
any business that is engaged in, or is about to be engaged in (as evidenced by
documented business or development plans), by the Company or the Parent, which
includes, but is not limited to, providing to third parties inbound and
outbound telecommunications- or internet-based marketing services and customer
service functions, market research services, and the consulting, design and
implementation of any of these services (the "Business"), directly or
indirectly, either as an individual or as an employee, partner, officer,
director, shareholder, advisor, or consultant or in any other capacity
whatsoever, of any person (other than ownership of less than 5% of the issued
and outstanding voting securities of a publicly held corporations): (a)
recruit, hire, assist others in recruiting or hiring, discuss employment with,
or refer to others for employment any person who is, or within the 12 month
period immediately preceding the date of any such activity was, an employee of
the Company or the Parent or their affiliates; or (b) conduct or assist others
in conducting any business or activity that competes with the Business in the
United States, its territories or possessions.

It is understood and agreed that the scope of the foregoing covenant
is reasonable as to time, area and persons and is necessary to protect the
legitimate business interests of the Company, the Parent and their affiliates.
It is further agreed that such covenant will be regarded as divisible and will
be operative as to time, area and persons to the extent that it may be so
operative, and if any part of such covenant is declared invalid,
unenforceable, or void as to time, area or persons, the validity and
enforceability of the remainder will not be affected.

If Employee violates the restrictive covenants of this Section 9 and
the Company or the Parent brings legal action for injunctive or other relief,
neither the Company nor the Parent will be deprived of the benefit of the full
period of the restrictive covenant, as a result of the time involved in
obtaining the relief. Accordingly, Employee agrees that the restricted period
following the term of employment will have a duration of two years, and the
regularly scheduled expiration date of such covenant will be extended by the
same amount of time that Employee is determined to have violated such covenant.

10. CONFIDENTIALITY. Employee acknowledges that he has learned and
will learn Confidential Information (as defined herein) relating to the
business conducted and to be conducted by the Company, the Parent or their
affiliates. Employee agrees that he will not, except in the normal and proper
course of his duties hereunder, disclose or use or authorize any third party
to disclose or use any such Confidential Information, without

- - ---------- -----------
Employee Parent & Co.

<PAGE>

prior written approval of the Company or the Parent. As used in this Section
10, "Confidential Information" will mean information disclosed to or known to
Employee as a direct or indirect consequence of or through his employment with
the Company or the Parent, about any customer's, supplier's or the Company's
or the Parent's business, methods, business plans, operations, products,
processes, and services, including, but not limited to, information relating
to research, development, inventions, recommendations, programs, systems, and
systems analyses, flow charts, finances, and financial statements, marketing
plans and strategies, merchandising, pricing strategies, merchandise sources,
client sources, system designs, procedure manuals, automated data programs,
financing methods, financial projections, terms and conditions of arrangements
of any business, computer software, terms and conditions of business
arrangements with clients or suppliers, reports, personnel procedures, supply
and services resources, names and addresses of clients, the Company's or the
Parent's contacts, names of professional advisors, and all other information
pertaining to clients and suppliers, including, but not limited to assets,
business interests, personal data and all other information pertaining to the
Company or the Parent, clients or suppliers whatsoever, including all
accompanying documentation therefor. All information disclosed to Employee, or
to which Employee has access during the period of his employment, which is
treated by the Employer as Confidential Information, will be presumed to be
Confidential Information hereunder. Confidential Information will not,
however, include information that (i) is publicly known or becomes publicly
known through no fault of Employee, or (ii) is generally or readily obtainable
by the public, or (iii) constitutes general skills, knowledge and experience
acquired by Employee before and/or during his employment with the Company and
the Parent or (iv) otherwise compelled in order not to violate applicable law
or order of court (provided, however, Employee shall give the Parent or
Company reasonable notice prior to such disclosure in order to give the Parent
or Company an opportunity to object to such order or to assert any applicable
privilege.).

Employee agrees that all documents of any nature pertaining to
activities of the Company, the Parent or their affiliates, or that include any
Confidential Information, in his possession now or at any time during the term
of his employment, including without limitation, memoranda, notebooks, notes,
data sheets, records and computer programs, are and will be the property of
such entity and that all copies thereof will be surrendered to the appropriate
entity upon termination of his employment.

11. INVENTIONS; DEVELOPMENTS. Employee agrees to notify the Company
and the Parent of any discovery, invention, innovation, or improvement which
is related to the Business or to the business of any customer or supplier
(collectively called "Developments") conceived or developed by Employee during
the term of the Employee's employment. Developments will include, without
limitation, developments in computer software, logical systems, algorithms,
and any or all other intellectual properties related to the Business. All
Developments, including but not limited to all written documents pertaining
thereto, will be the exclusive property of the Company or the Parent, as the
case may be, and will be considered Confidential Information subject to the
terms of this Agreement. Employee agrees that when appropriate, and upon
written

- - ---------- -----------
Employee Parent & Co.

<PAGE>

request of the Company or the Parent, as the case may be, the Employee will
acknowledge that Developments are "works for hire" and will file for patents
or copyrights with regard to any or all Developments and will sign
documentation necessary to evidence ownership of Developments in the Company
or the Parent, as the case may be.

12. EXIT INTERVIEW. To insure a clear understanding of this
Agreement, including, but not limited to, the protection of the Company's and
the Parent's business interests, Employee agrees, at no additional expense to
the Company and the Parent, at a mutually acceptable time and place to engage
in an exit interview with the Company and the Parent prior to Employee's
departure from the Company and the Parent.

13. RIGHT OF SETOFF. The Company and the Parent will be entitled,
at their option and not in lieu of any other remedies to which they may be
entitled, to set off any amounts due Employee or any affiliate of Employee
against any amount due and payable by Employee or any affiliate of Employee to
the Company and the Parent ("Set-Offs") pursuant to this Agreement or
otherwise, provided that the Set-Offs are set forth in detail in writing with
supporting evidence to substantiate each Set-Off.

14. MISCELLANEOUS.

(a) Any notice, demand or request required or permitted to
be given or made under this Agreement will be in writing and will be deemed
given or made when delivered in person, when sent by United States registered
or certified mail, or postage prepaid, or when telecopied to a party at its
address or telecopy number specified below:

If to the Parent or the Company:

Aegis Communications Group, Inc.
7880 Bent Branch Drive
Suite 150
Irving, Texas 75063

Telecopy number: (972) 830-1800

With a copy to:

Hughes & Luce, L.L.P.
1717 Main Street
Suite 2800
Dallas, Texas 75201
Attn: Jim Hunter Birch
Telecopy number: (214) 939-6100

- - ---------- -----------
Employee Parent & Co.

<PAGE>

If to Employee:

Hugh E. Sawyer
3800 Falls Landing Drive
Alpharepta, Georgia 30022

With a copy to:

Smith, Gambrell & Russell, L.L.P.
Suite 3100, Promenade II
1230 Peachtree Street, N.E.
Atlanta, Georgia 30309-3592
Attn: John R. Schneider
Telecopy number: (404) 815-3509

The parties to this Agreement may change their addresses for notice
in the manner provided above.

(b) All section titles and captions in this Agreement are
for convenience only, will not be deemed part of this Agreement, and in no way
will define, limit, extend or describe the scope or intent of any provisions
hereof.

(c) Whenever the context may require, any pronoun used in
this Agreement will include the corresponding masculine, feminine or neuter
forms, and the singular form of nouns, pronouns and verbs will include the
plural and vice versa.

(d) The parties will execute all documents, provide all
information and take or refrain from taking all actions as may be reasonably
necessary or appropriate to achieve the purposes of this Agreement.

(e) This Agreement will be binding upon and inure to the
benefit of the parties hereto, their representatives and permitted successors
and assigns. Except for the provisions of Sections 9, 10 and 11 of this
Agreement, which are intended to benefit the Company's and the Parent's
affiliates as third party beneficiaries, or as otherwise expressly provided in
this Agreement, nothing in this Agreement, express or implied, is intended to
confer upon any person other than the parties to this Agreement, their
respective representatives and permitted successors and assigns, any rights,
remedies or obligations under or by reason of this Agreement.

(f) This Agreement, together with option agreements and the
indemnity agreement, constitutes the entire agreement among the parties hereto
pertaining to the specific subject matter hereof and supersedes all prior
agreements and understandings pertaining thereto.

- - ---------- -----------
Employee Parent & Co.

<PAGE>

(g) None of the provisions of this Agreement will be for the
benefit of or enforceable by any creditors of the parties, except as otherwise
expressly provided herein.

(h) No failure by any party to insist upon the strict
performance of any covenant, duty, agreement or condition of this Agreement or
to exercise any right or remedy consequent upon a breach thereof will
constitute waiver of any such breach or any other covenant, duty, agreement or
condition.

(i) This Agreement may be executed in counterparts, all of
which together will constitute one agreement binding on all the parties
hereto, notwithstanding that all such parties are not signatories to the
original or the same counterpart.

(j) THIS AGREEMENT WILL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES
OF CONFLICTS OF LAW. All claims, disputes, and controversies arising out of or
relating to this Agreement or the performance, breach, validity,
interpretation, application or enforcement hereof, including any claims for
equitable relief or claims based on contract, tort, statute, or any alleged
breach, default, or misrepresentation in connection with any of the provisions
hereof, will be resolved by binding arbitration. A party may initiate
arbitration by sending written notice of its intention to arbitrate to the
other party and to the American Arbitration Association ("AAA") office located
in Dallas, Texas (the "Arbitration Notice"). The Arbitration Notice will
contain a description of the dispute and the remedy sought. The arbitration
will be conducted at the offices of the AAA in Dallas, Texas before an
independent and impartial arbitrator who is selected by mutual agreement, or,
in the absence of such agreement, before three independent and impartial
arbitrators, of whom each party will appoint one, with the third being chosen
by the two appointed by the parties. In no event may the demand for
arbitration be made after the date when the institution of a legal or
equitable proceeding based on such claim, dispute, or other matter in question
would be barred by the applicable statute of limitations. The arbitration and
any discovery conducted in connection therewith will be conducted in accordance
with the Commercial Rules of arbitration and procedures established by AAA in
effect at the time of the arbitration, including without limitation the
expedited procedures set forth therein (the "AAA Rules"). The decision of the
arbitrator(s) will be final and binding on all parties and their successors
and permitted assignees. The judgment upon the award rendered by the
arbitrator(s) may be entered by any court having jurisdiction thereof. The
arbitrator(s) will be selected no later than 30 days after the date of the
Arbitration Notice. The arbitration hearing will commence no later than 60
days after the arbitrator(s) is selected. The arbitrator(s) will render a
decision no later than 30 days after the close of the hearing, in accordance
with AAA Rules. The arbitrator's fees and costs will conform to the then
current AAA fee schedule and will be borne equally by the parties.

- - ---------- -----------
Employee Parent & Co.

<PAGE>

(k) If any provision of this Agreement is declared or found
to be illegal, unenforceable, or void, in whole or in part, then the parties
will be relieved of all obligations arising under such provision, but only to
the extent that it is illegal, unenforceable or void, it being the intent and
agreement of the parties that this Agreement will be deemed amended by
modifying such provision to the extent necessary to make it legal and
enforceable while preserving its intent or, if that is not possible, by
substituting therefor another provision that is legal and enforceable and
achieves the same objectives.

(l) No supplement, modification or amendment of this
agreement or waiver of any provision of this Agreement will be binding unless
executed in writing by all parties to this Agreement. No waiver of any of the
provisions of this Agreement will be deemed or will constitute a waiver of any
other provision of this Agreement (regardless of whether similar), nor will
any such waiver constitute a continuing wavier unless otherwise expressly
provided.

(m) Employee acknowledges and agrees that the Company and
the Parent would be irreparably harmed by any violation of Employee's
obligations under Sections 9, 10 and 11 hereof and that, in addition to all
other rights or remedies available at law or in equity, the Company and the
Parent will be entitled to apply for injunctive and other equitable relief to
prevent or enjoin any such violation in a court of competent jurisdiction,
without regard to subparagraph (j) above. The provisions of Sections 9, 10 and
11 hereof will survive any termination of this Agreement, in accordance with
their terms.

(n) No party may assign this Agreement or any rights or
benefits thereunder without the written consent of the other parties to this
Agreement. Provided , however, in the event of a Change of Control, Parent
will use its commercially reasonable best efforts to induce the acquiring
entity or successor to assume this Agreement.

EXECUTED as of the date first above written.

AEGIS COMMUNICATION GROUP,INC.

By:
---------------------------------------
John R. Birk,
Chairman of the Board

- - ---------- -----------
Employee Parent & Co.

<PAGE>

ADVANCED TELEMARKETING CORPORATION

By:
---------------------------------------
John R. Birk,
Chairman of the Board

IQI, INC.

By:
---------------------------------------
John R. Birk,
Chairman of the Board

------------------------------------------
Hugh E. Sawyer

- - ---------- -----------
Employee Parent & Co.

<PAGE>

EXHIBIT A

In each year of the Employment Agreement, Employee will be entitled
to receive a targeted base cash bonus of 100% of his annualized salary
(pro-rated for any partial year of employment in the year 2000) upon the full
attainment by the Parent, the Company and their consolidated subsidiaries of
the annual bonus plan objectives stipulated by the Board of Directors from
year to year. Such annual cash bonus will be payable within 30 (thirty) days
of the completion of the audit for the applicable year. The Year 2000 Variable
Incentive Compensation (VIC) annual bonus plan is attached hereto. As an
example, Employee's Year 2000 VIC Program is based only on EBITDA. For
example, if Parent obtains 100% of EBITDA, Employee's bonus would equal 100%
of annual salary on a pro rated basis. If Parent obtains 120% of EBITDA goal,
Employee's bonus would equal 150% of annual salary on a pro rated basis.
Conversely, under the 2000 VIC Program, if the Parent does not attain 70% of
its EBITDA goal, no bonus would be due.

- - ---------- -----------
Employee Parent & Co.

<PAGE>

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-01131, 333-26451, 333-66339) and Form S-3
(No. 333-15827) of Aegis Communications Group, Inc., of our reports dated
March 28, 2000, relating to the financial statements and the financial
statement schedule which appear in this Form 10-K.

PricewaterhouseCoopers LLP

Dallas, Texas
March 28, 2000

<PAGE>

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
Form S-3 (No. 333-15827) and Form S-8 (Nos. 333-66339; 333-26451; and
333-01131) of Aegis Communications Group, Inc. of our report dated April 17,
1998 with respect to the consolidated statements of operations, shareholders'
equity, and cash flows of Aegis Communications Group, Inc. (formerly IQI,
Inc.) included in this Annual Report (Form 10-K) for the year ended December
31, 1999.

Ernst & Young LLP

Los Angeles, California
March 28, 2000

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,043
<SECURITIES> 0
<RECEIVABLES> 54,839
<ALLOWANCES> 1,058
<INVENTORY> 0
<CURRENT-ASSETS> 64,014
<PP&E> 65,663
<DEPRECIATION> 32,175
<TOTAL-ASSETS> 160,585
<CURRENT-LIABILITIES> 27,298
<BONDS> 43,689
41,970
2
<COMMON> 525
<OTHER-SE> 47,101
<TOTAL-LIABILITY-AND-EQUITY> 160,585
<SALES> 0
<TOTAL-REVENUES> 246,268
<CGS> 176,674
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 102,522
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,461
<INCOME-PRETAX> (40,389)
<INCOME-TAX> (6,213)
<INCOME-CONTINUING> (34,176)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,176)
<EPS-BASIC> 0.68
<EPS-DILUTED> 0.68

</TABLE>