##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-Q
  (Mark One)þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    September 30, 2006oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF
    THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          
    to   Commission File Number:
    333-115328
      PeopleSupport, Inc.
 (Exact name of Registrant as
    specified in its charter)
  Delaware

95-4695021(State or other jurisdiction
    of incorporation or organization)

(I.R.S. Employer Identification
    No.)   1100 Glendon Ave., Suite 1250, Los Angeles, California
    90024
 (Address and Zip Code of
    principal executive offices)
  (310) 824-6200
 (Registrants telephone
    number, including area code)
      þ o
   Rule 12b-2
  o þ o
  Rule 12b-2 o þ




---



##### 



PEOPLESUPPORT,
    INC.FORM 10-Q
    FOR THE QUARTER ENDED
    September 30, 2006
  INDEX
   PagePART I 
    FINANCIAL INFORMATIONITEM 1.

Financial
    Statements (unaudited)


3Consolidated
    Balance Sheets as of September 30, 2006 and
    December 31, 2005 (unaudited)


3Consolidated
    Statements of Operations and Other Comprehensive Income for the
    three and nine months ended September 30, 2006 and 2005
    (unaudited)


4Consolidated
    Statements of Cash Flows for the nine months ended
    September 30, 2006 and 2005 (unaudited)


5Notes to
    Consolidated Financial Statements (unaudited)


6ITEM 2.

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


17ITEM 3.

Quantitative and
    Qualitative Disclosures about Market Risk


24ITEM 4.

Controls and
    Procedures


25PART II 
    OTHER INFORMATIONITEM 1.

Legal
    Proceedings


26ITEM 1A.

Risk
    Factors


26ITEM 6.

Exhibits


38Signature




39EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2    Forward
    Looking and Cautionary Statements
  This quarterly report on
    Form 10-Q
    contains forward-looking statements within the meaning of the
    federal securities laws that involve material risks and
    uncertainties, including without limitation, statements about
    our expectations regarding our revenue, our clients, our
    expenses, our anticipated cash needs, our estimates regarding
    our capital requirements and our needs for additional financing.
    We generally identify forward-looking statements by using such
    terms as may, will, could,
    should, potential, continue,
    expect, intend, plan,
    estimate, anticipate,
    believe or similar phrases or the negatives of such
    terms. We base these statements on our beliefs as well as
    assumptions we made using information currently available to us.
    These forward-looking statements are subject to risks,
    uncertainties and assumptions, including those identified below
    in Managements Discussion and Analysis of Financial
    Condition and Results of Operations  Risk
    Factors, as well as other matters not yet known to us or
    not currently considered material by us. Should one or more of
    these risks or uncertainties materialize, or should underlying
    assumptions prove incorrect, actual results may vary materially
    from those anticipated, estimated or projected. These risks,
    uncertainties and assumptions include, but are not limited to,
    our dependence on a limited number of clients, negative public
    reaction to offshore outsourcing and the effect of recently
    proposed legislation, competitive conditions in the markets we
    serve, our ability to manage our growth, the risks associated
    with our operations in the Philippines and Costa Rica, and other
    risks discussed in Managements Discussion and
    Analysis of Financial Condition and Results of
    Operations  Risk Factors in this report. These
    forward-looking statements represent our estimates and
    assumptions only as of the date of this report and, unless
    required by law, we undertake no obligation to update or revise
    these forward-looking statements. You should, however, review
    the factors and risks we describe in other reports, including
    our report on
    Form 10-K,
    and registration statements that we file from time to time with
    the Securities and Exchange Commission.
 2




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##### Table of Contents



PART I 
    FINANCIAL INFORMATION  ITEM 1.
    Financial
    Statements  PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS  September 30,


December 31,2006


2005(Unaudited, in thousands, except per share data)ASSETSCurrent assets:Cash and cash equivalents

$
13,379


$
27,760Marketable securities


33,890



23,853Accounts receivable, net of
    allowance for doubtful accounts of $496 and $487, respectively


19,849



8,414Deferred tax assets


4,327



4,226Prepaid expenses and other current
    assets


3,523



2,448Total current assets


74,968



66,701Property and equipment, net


17,969



10,622Deferred management incentive plan
    compensation


342



598Deferred tax assets


13,774



15,051Goodwill and other intangible
    assets


7,406



Other long-term assets


2,295



1,354Total assets

$
116,754


$
94,326LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
5,089


$
2,181Accrued liabilities


7,609



3,912Management incentive plan
    obligation


327



475Deferred revenue


4,102



3,481Current portion of capital lease
    obligations


58



Other current liabilities


60



69Total current liabilities


17,245



10,118Management incentive plan
    obligation


622



474Deferred rent


1,581



978Long-term portion of capital lease
    requirements


25



Other long-term liabilities


726



364Total liabilities


20,199



11,934Stockholders equity:Common stock, $.001 par
    value; authorized 87,000 shares; 18,574 and
    18,306 shares issued and outstanding at September 30,
    2006 and December 31, 2005, respectively


19



18Additional paid-in capital


115,820



113,234Accumulated deficit


(20,019
)


(30,214
)Accumulated other comprehensive
    income


735



342Deferred stock compensation






(988
)Total stockholders equity


96,555



82,392Total liabilities and
    stockholders equity

$
116,754


$
94,326    3




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS

AND OTHER COMPREHENSIVE INCOME  Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005(Unaudited, in thousands, except per share data)Revenue

$
30,117


$
16,317


$
79,111


$
45,112Cost of revenue (exclusive of
    depreciation expense shown below)


19,479



9,450



48,975



25,792Selling, general and administrative


4,789



3,156



14,421



8,957Depreciation and amortization


1,876



1,114



4,796



3,247Income from operations


3,973



2,597



10,919



7,116Net interest income


518



374



1,426



937Other income (expense)


73



(16
)


74



(31
)Income before income taxes


4,564



2,955



12,419



8,022(Provision) benefit for income
    taxes


(1,052
)


2,558



(2,224
)


2,486Net income


3,512



5,513



10,195



10,508Foreign currency translation
    adjustment


375



22



357



26Unrealized gain (loss) on
    marketable securities


100



(85
)


36



(97
)Comprehensive income

$
3,987


$
5,450


$
10,588


$
10,437Basic earnings per share

$
0.19


$
0.30


$
0.55


$
0.58Diluted earnings per share

$
0.18


$
0.29


$
0.54


$
0.56Basic weighted average shares
    outstanding


18,503



18,220



18,408



18,130Diluted weighted average shares
    outstanding


19,052



18,883



18,862



18,913    4




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS  Nine Months EndedSeptember 30,2006


2005(Unaudited, in thousands)OPERATING ACTIVITIESNet income

$
10,195


$
10,508Adjustments to reconcile net
    income to net cash provided by operating activities:Depreciation and amortization


4,796



3,247Provision for (recovery of)
    doubtful accounts


9



(138
)Stock-based compensation


1,875



675Amortization of management
    incentive plan


256



256Deferred income taxes


1,511



(2,583
)Tax benefits from employee stock
    option exercises


(621
)


Gain on disposal of property and
    equipment






(6
)Changes in operating assets and
    liabilities:Accounts receivable


(10,339
)


(1,191
)Prepaid expenses and other assets


68



(2
)Other long-term assets


612



(504
)Accounts payable and accrued
    liabilities


5,951



2,519Deferred rent


150



Deferred revenue


526



1,496Net cash provided by operating
    activities


14,989



14,277INVESTING ACTIVITIESCollections applied to principal
    of receivable portfolios






7Purchases of property and equipment


(11,767
)


(5,805
)Proceeds from sale of property and
    equipment






114Proceeds from called short term
    investments






2,000Purchases of marketable securities


(15,000
)


(28,600
)Maturities of marketable securities


5,000



3,600Restricted cash equivalent






422Acquisitions, net of cash received


(8,968
)


Net cash used in investing
    activities


(30,735
)


(28,262
)FINANCING ACTIVITIESPayments of capital lease
    obligation


(363
)


Tax benefits from employee stock
    option exercises


621



Proceeds from the exercise of
    stock options


1,079



233Net cash provided by financing
    activities


1,337



233Effect of exchange rate changes on
    cash


28



3Net decrease in cash and cash
    equivalents


(14,381
)


(13,749
)Cash and cash equivalents,
    beginning of period


27,760



41,583Cash and cash equivalents, end of
    period

$
13,379


$
27,834NON-CASH INVESTING AND
    FINANCING ACTIVITIESUnrealized holding losses on
    marketable securities

$
(36
)

$
(97
)Construction in progress costs
    incurred but not paid


652



1,231Non-cash tax benefit from
    disqualifying dispositions of stock options


435



SUPPLEMENTAL DISCLOSURES OF
    CASH FLOW INFORMATIONInterest paid for the period

$
7


$
Taxes paid for the period


516



48    5




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (In
    thousands, except per share data)
  Note 1.
    Description
    and History of Business      Note 2.
    Summary
    of Significant Accounting Policies  Basis
    of Presentation
  Form 10-Q Regulation S-X. Form 10-K.
  Use of
    Estimates
    Marketable
    Securities
   6




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Goodwill
    and Other Intangible Assets
  non-amortizable
  Stock-Based
    Compensation Expense
        Recent
    Accounting Pronouncements
    and/or
 7




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Note 3.
    Significant
    Customers    For the Three


For the NineMonths Ended


Months EndedSeptember 30,


September 30,2006


2005


2006


2005% of Revenue


% of RevenueCustomer A


16
%


27
%


18
%


28
%Customer B


15



20



16



20Customer C


14







7



Customer D


12



8



13



8Customer E


8



14



9



13     September 30,


December 31,2006


2005Customer A


9
%


19
%Customer B


16



24Customer C


19



Customer D


7



14Customer E


4



  8




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 4.
    Cash,
    Cash Equivalents and Marketable Securities    Cash
    Equivalents and Marketable Securities
  September 30,


December 31,2006


2005Cash

$
7,899


$
19,785Cash equivalents (government
    sponsored entities)


5,480



7,975Marketable securities (government
    sponsored entities)Adjustable rate


12,000



9,000Fixed rate


21,890



14,853Total

$
47,269


$
51,613Unrealized gains (losses)

$
(117
)

$
(153
)MaturitiesDue in 90 days or less

$
17,480


$
16,9751 year through 2 years


21,890



14,853Total

$
39,370


$
31,828   Note 5.
    Comprehensive
    Income    Foreign


UnrealizedCurrency


Gain/(Loss) onTranslation


Securities


TotalBalance, December 31, 2005

$
495


$
(153
)

$
342Quarterly change


258



(34
)


224Balance, March 31, 2006


753



(187
)


566Quarterly change


(276
)


(30
)


(306
)Balance, June 30, 2006


477



(217
)


260Quarterly change


375



100



475Balance, September 30, 2006

$
852


$
(117
)

$
735   Note 6.
    Income
    Taxes and Deferred Tax Assets  Provision
    for Income Taxes
   9




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Deferred
    Tax Assets
        Note 7.
    Computation
    of Earnings per Share      Three Months


Nine MonthsEnded


EndedSeptember 30,


September 30,2006


2005


2006


2005Options


8



225



58



146Warrants






4



2



65     Three Months Ended September 30,2006


2005Income


Shares


Per Share


Income


Shares


Per Share(Numerator)


(Denominator)


Amount


(Numerator)


(Denominator)


AmountBasic earnings per share:Net income

$
3,512



18,503


$
0.19


$
5,513



18,220


$
0.30Effect of dilutive securities:Options






507











663Restricted stock units






42











Net income

$
3,512



19,052


$
0.18


$
5,513



18,883


$
0.29  10




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Nine Months Ended September 30,2006


2005Income


Shares


Per Share


Income


Shares,


Per Share(Numerator)


(Denominator)


Amount


(Numerator)


(Denominator)


AmountBasic earnings per share:Net income

$
10,195



18,408


$
0.55


$
10,508



18,130


$
0.58Effect of dilutive securities:Options






421











783Restricted stock units






33











Net income

$
10,195



18,862


$
0.54


$
10,508



18,913


$
0.56   Note 8.
    Stock
    Compensation    Stock
    Incentive Plans
       11




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  2004
    Employee Stock Purchase Plan
    Accounting
    for Equity Awards
    Three Months


Nine MonthsEnded


EndedSeptember 30,


September 30,2005


2005Net income as reported

$
5,513


$
10,508Add: Stock  based
    compensation expense included in reported net income, net of
    related tax effects


211



675Deduct: Total stock-based
    compensation expense determined under fair value based methods
    for all awards, net of related tax effects


(441
)


(1,110
)Net income  pro forma

$
5,283


$
10,073Basic earnings per
    share  as reported

$
0.30


$
0.58Diluted earnings per
    share  as reported

$
0.29


$
0.56Basic earnings per
    share  pro forma

$
0.29


$
0.55Diluted earnings per
    share  pro forma

$
0.28


$
0.53     Three Months


Nine MonthsEnded


EndedSeptember 30,


September 30,2005


2005Risk-free interest rate


3.9
%


4.0
%Expected option life (years)


4.4



4.3Volatility


37
%


33
%Dividend rate






      12




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months


Nine MonthsEnded


EndedSeptember 30,


September 30,2006


2006Risk-free interest rate


5.0
%


4.9
%Expected option life (years)


4.5



4.5Volatility


53
%


54
%Dividend rate






       Nine MonthsThree Months Ended


EndedSeptember 30,


September 30,2006


2005


2006


2005Proceeds from stock options
    exercised

$
512


$
52


$
1,079


$
233Tax benefits related to stock
    options exercised


428



70



621



159Intrinsic value of stock options
    exercised


794



279



2,432



1,895     Stock OptionsShares Outstanding


Shares Vested/ExercisableWeighted


Weighted








Weighted


WeightedNumber of


Average


Remaining


Aggregate


Number of


Average


Remaining


AggregateOptions


Exercise


Contractual


Intrinsic


Shares Vested/


Exercise


Contractual


IntrinsicOutstanding


Price


Term


Value


Exercisable


Price


Term


ValueBalance at December 31, 2005


1,699


$
5.58



8.3


$
13,382



474


$
2.98



6.0


$
4,942Granted


351



11.21Forfeited


(168
)


7.17Expired


(12
)


8.65Exercised


(268
)


3.98Balance at September 30, 2006


1,602


$
6.90



8.0


$
18,591



460


$
3.39



5.7


$
6,943    13




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Restricted Stock UnitsWt. Avg.


Weighted


AggregateRestricted Stock


Value of Awards


Remaining


IntrinsicUnits Outstanding


at Grant


Contractual Term


ValueBalance, at December 31, 2005


54


$
7.69



1.8


$
727Granted


62



10.60Canceled


(6
)


7.35Balance at September 30, 2006


110


$
8.85



1.3


$
2,029       Outstanding Weighted Average


ExercisableRemaining





Weighted AverageContractual


Exercise





ExerciseRange of Exercise Prices per Share

Shares


Life (Years)


Price


Shares


Price$ 0.03  0.19


122



2.1


$
0.15



122


$
0.150.41  0.41


239



6.9



0.41



136



0.411.15  6.85


143



6.3



5.87



92



5.507.23  7.23


335



9.1



7.23



24



7.237.69  8.56


163



9.0



8.40



29



8.068.63  9.36


173



9.0



8.78



18



9.229.40  10.80


140



8.8



10.15



32



10.3911.24  11.24


81



9.6



11.24



1



11.2411.91  11.91


183



9.8



11.91







12.17  12.17


23



9.7



12.17



6



12.17Total


1,602



8.0


$
6.90



460


$
3.39     Three Months Ended


Nine Months EndedSeptember 30,


September 30,Stock-Based Compensation Expense

2006


2005


2006


2005Cost of revenue

$
155


$
66


$
412


$
215Selling, general &
    administrative


567



145



1,463



460Total

$
722


$
211


$
1,875


$
675   Note 9.
    Warrants    Note 10.
    Acquisition
    of Rapidtext   14




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Description

ValueNet current assets

$
1,261Property, plant and equipment


195Noncurrent deferred tax
    assets & other assets


263Net current liabilities


(855
)Long term capital leases


(140
)Estimated fair value, net assets
    acquired


724Goodwill


7,406Other intangible assets


860Total purchase price

$
8,990     Intangible Assets

ValueCustomer list

$
500Non-compete agreements


200Software


60Trademarks/Tradenames


100Total

$
860     Pro
    Forma Financial Data
   15




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Pro forma revenue

$
30,117


$
18,754


$
79,369


$
52,392Pro forma net income


3,512


$
5,657



10,197


$
11,054Pro forma basic income per share

$
0.19


$
0.31


$
0.55


$
0.61Pro forma diluted income per share

$
0.18


$
0.30


$
0.54


$
0.58Pro forma basic weighted average
    shares outstanding


18,503



18,220



18,408



18,130Pro forma diluted weighted average
    shares outstanding


19,052



18,883



18,862



18,913   Note 11.
    Commitments
    and Contingencies    Years Ending December 31,

Commitments2006

$
8562007


3,5512008


3,3782009


2,6832010


3,070Thereafter


13,377Total

$
26,915     Note 12.
    Line of
    Credit    Note 13.
    Subsequent
    Event   16




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30, 2006
  ITEM 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations      Overview
  U.S.-based
  U.S.-based e-mails e-mail
  Sources
    of Revenue
    
    Time-delineated or production-based fees, including hourly or
    per minute charges and charges per interaction or transaction,
    and training fees, all of which are separately negotiated on an
    individual client basis; and
    Implementation fees, including revenue associated with the
    installation and integration of new clients into our
    telecommunications, information technology and client reporting
    structures.   17




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
    U.S.-based
      Key
    Expense Categories
  Cost of revenue.
    Selling, general and administrative. U.S.-based
  Critical
    Accounting Policies and Estimates
   18




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
    Revenue
    and Deferred Revenue Recognition
        Stock-Based
    Compensation Expense
        Accounting
    for Income Taxes
   19




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
    Long-lived
    Asset Impairment
    Results
    of Operations
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Revenue


100
%


100
%


100
%


100
%Cost of revenue (exclusive of
    depreciation expense shown below)


65



58



62



57Selling, general, and
    administrative


16



19



18



20Depreciation and amortization


6



7



6



7Income from operations


13



16



14



16Interest income


2



2



2



2Other expense (income)














Income before provision/(benefit)
    for income taxes


15



18



16



18(Provision)/benefit for income
    taxes


(3
)


16



(3
)


5Net income


12
%


34
%


13
%


23
%   Three
    months ended September 30, 2006 compared with three months
    ended September 30, 2005
  Revenue
   20




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
    Cost
    of Revenue
        Selling,
    General, and Administrative
      Income
    Taxes
   21




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
    Nine
    months ended September 30, 2006 compared with nine months
    ended September 30, 2005
  Revenue
    Cost
    of Revenue
        Selling,
    General, and Administrative
   22




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
    Income
    Taxes
  year-to-date
  Liquidity
    and Capital Resources
    Operating
    Activities
        Investing
    Activities
   23




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
        Financing
    Activities
      Off-Balance
    Sheet Arrangements
    ITEM 3.
    Quantitative
    and Qualitative Disclosures about Market Risk  Foreign
    Currency Exchange Risk
   24




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
          Interest
    Rate Sensitivity
    Inflation
    Rate Sensitivity
    ITEM 4.
    Controls
    and Procedures  Evaluation of disclosure controls and
    procedures. Rule 13a-15(e)
 25




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##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
  Rules 13a-15(e) 15d-15(e)
  Changes in internal control over financial
    reporting. Rule 13a-15(f) Form 10-Q
 PART II 
    OTHER INFORMATION  ITEM 1.
    Legal
    Proceedings    ITEM 1A.
    Risk
    Factors  Form 10-Q Form 10-Q.
  Risks
    Related to Our Business
  Our
    revenues are highly dependent upon several major clients, and
    any loss of business from our major clients would reduce our
    revenues and seriously harm us.
    Our
    revenues are highly dependent on a few industries and any
    decrease in demand for outsourced services in these industries
    would likely reduce our revenues and seriously harm our
    business.
   26




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
    A
    reversal of industry trends toward offshore outsourcing due to
    negative public reaction in the United States would harm
    our ability to compete effectively with competitors that operate
    facilities located in the United States.
    We
    serve markets that are highly competitive, and increased
    competition, our inability to compete successfully against
    current or future competitors, pricing pressures or loss of
    market share could result in increased costs and reduced
    operating margins.
    Many
    of our contracts can be terminated by our clients on short
    notice and in many cases without penalty. We also generally do
    not have exclusive arrangements with our clients or a minimum
    revenue commitment from our clients, which creates uncertainty
    about the volume of services we will provide and the amount of
    revenues we will generate from any of our clients.
   27




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
  We
    often encounter a long sales and implementation cycle requiring
    significant resource commitments by our clients, which they may
    be unwilling or unable to make.
    We
    have incurred substantial losses in the past and may not be
    profitable in the future.
    We
    have a limited operating history and our business and future
    prospects are difficult to evaluate.
    
    Attract and retain clients;
    Attract and retain key personnel and qualified professionals;
    Generate sufficient revenues and manage costs to maintain
    profitability;
    Integrate acquisitions, adjust to new businesses and develop
    operating procedures for new countries;
    Manage growth in our operations; and
    Access additional capital when required and on reasonable terms.  Our
    operating results may fluctuate significantly and could cause
    the market price of our common stock to fall rapidly and without
    notice.
   28




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
  If we
    fail to manage our growth effectively, the quality of our
    services may decline, our revenue and margins may be reduced and
    we may incur losses.
    We may
    experience significant employee turnover rates in the future and
    we may be unable to hire and retain enough sufficiently trained
    employees to support our operations, which could harm our
    business.
    Our
    senior management team is important to our continued success and
    the loss of members of senior management could negatively affect
    our operations.
  U.S.-based
  Our
    facilities are at risk of damage by earthquakes and other
    natural disasters.
   29




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
  Our
    operations could suffer from telecommunications or technology
    downtime, disruptions or increased costs.
    We
    could cause disruptions to our clients business from
    inadequate service, and our insurance coverage may be inadequate
    to cover this risk.
    Unauthorized
    disclosure of sensitive or confidential client and customer
    data, whether through breach of our computer systems or
    otherwise, could expose us to protracted and costly litigation
    and cause us to lose clients.
    Our
    clients may adopt technologies that decrease the demand for our
    services, which could reduce our revenues and seriously harm our
    business.
   30




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
    Our
    ability to use net operating loss carryforwards in the United
    States may be limited.
    We may
    choose to expand operations to other countries and may not be
    successful.
    We may
    make acquisitions that prove unsuccessful or divert our
    resources.
   31




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
  We are
    subject to extensive laws and regulations that could limit or
    restrict our activities and impose financial requirements or
    limitations on the conduct of our business.
            
    require an offshore call center employee to disclose the
    location of the call center upon request, and in some cases,
    even if no request is made;
    require patients be notified if any individually identifiable
    health information would be transferred off-shore, and in some
    cases, require that the patients consent be obtained; 32




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
   
    prohibit state agencies from entering agreements which would
    result in state service positions being transferred outside of
    the United States;
    require that contractors bidding to perform services for the
    state disclose any portions of the work that will be performed
    from locations outside of the United States;
    require any telephone call center operated on behalf of a state
    agency be physically located within the United States;
    prohibit state agencies from providing economic development
    assistance to companies that transfer work outside of the United
    States;
    impose reporting obligations on employers regarding layoffs or
    separations due to work being moved outside of the United States;
    prohibit the transmission of personally identifiable information
    about U.S. citizens by U.S. businesses to foreign
    affiliates or subcontractors;
    require employees of call centers utilized by
    U.S. companies to affirmatively disclose their location and
    compelling such companies to annually certify their compliance
    to the Federal Trade Commission; or
    prohibit U.S. private sector companies that have federal or
    state government contracts from outsourcing their services to
    offshore service providers.    Our
    ability to raise capital in the future, if and when needed, may
    be limited, and could prevent us from executing our business
    strategy. The sale of additional equity securities would result
    in further dilution to our stockholders.
    Risks
    Related to Doing Business in the Philippines
  We may
    face competition in the Philippines for our professionals, which
    could increase the cost of qualified employees and the amount of
    employee turnover.
   33




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
  The
    Philippines periodically experiences political or economic
    instability, which could disrupt our operations, increase our
    costs and harm our business.
      Currency
    fluctuations in the Philippine peso relative to the
    U.S. dollar has increased and could continue to increase
    our expenses.
    The
    current tax holidays in the Philippines will expire within the
    next few years.
    Terrorist
    attacks could adversely affect the Philippine economy, disrupt
    our operations and cause our business to suffer.
   34




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
  Risks
    Related to Doing Business in Costa Rica
  We
    have limited experience with operations in Costa Rica and are
    subject to particular risks associated with the development of
    operations in Costa Rica.
      
    We may be unable to find, hire or retain, at rates attractive to
    us, a sufficient number of qualified employees;
    Currency fluctuations in the Costa Rican colon relative to the
    U.S. dollar could significantly increase our expenses;
    We are dependent on telecommunications service provided by
    limited available vendors in order to conduct our business, and
    if the telecommunications service were to fail, experience
    problems or be interrupted or unreliable, we may be unable to
    service our client or fulfill our contractual obligations;
    Our facilities are at risk of damage by earthquakes, typhoons
    and other natural disasters; and
    We may have overestimated the demand for Spanish language BPO
    services which may not be sufficient to expand our Costa Rican
    operations.  Our
    Costa Rican operations are dependent on a single client,
    Washington Mutual, which has the option to acquire the
    operations from us and therefore deprive us of our presence in
    Latin America.
    Government
    regulations and various bureaucratic constraints have increased
    and may continue to increase operational costs in Costa Rica
    beyond budgeted expectations.
   35




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
  Other
    Risks Related to Our Stock
  Our
    stock price may be volatile, and you may not be able to resell
    shares of our common stock at or above the price you paid, or at
    all.
    If
    securities or industry analysts cease publishing research or
    reports about our business or if they change negatively their
    recommendations regarding our stock, our stock price and trading
    volume could decline.
    We
    will continue to incur increased costs as a result of being a
    public company.
    Delaware
    law and our amended and restated certificate of incorporation
    and bylaws contain anti-takeover provisions that could delay or
    discourage business combinations and takeover attempts that
    stockholders may consider favorable.
    
    Classify our board of directors into three groups, each of which
    will serve for staggered three-year terms;
    Permit the board of directors to elect a director to fill a
    vacancy created by the expansion of the board of directors;
    Permit stockholders to remove our directors only for cause; 36




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
   
    Permit a special stockholders meeting to be called only by
    our chairman of the board of directors, president, or chief
    executive officer, a majority of our board of directors or
    two-thirds of the independent directors;
    Require stockholders to give us advance notice to nominate
    candidates for election to our board of directors or to make
    stockholder proposals at a stockholders meeting;
    Permit our board of directors to issue, without approval of our
    stockholders, up to 4,000,000 shares of preferred stock
    with terms that our board of directors may determine and that
    may be senior to the terms of our common stock;
    Prohibit cumulative voting in the election of directors that
    would otherwise allow less than a majority of stockholders to
    elect directors;
    Permit the board of directors to alter certain provisions of our
    amended and restated bylaws without obtaining stockholder
    approval;
    Require approval of at least 75% of the shares entitled to vote
    at an election of directors to adopt, amend or repeal our
    amended and restated bylaws or amend or repeal the provisions of
    our amended and restated certificate of incorporation regarding
    the election and removal of directors and the ability of
    stockholders to take action; and
    Eliminate the right of stockholders to call a special meeting of
    stockholders and to take action by written consent    Substantial
    future sales of our common stock in the public market could
    cause our stock price to fall.
  Form S-3
 37




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PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  FORM 10-Q
 FOR THE
    QUARTER ENDED SEPTEMBER 30,
    2006  (Continued)
  Item 6.
    Exhibits  ExhibitNumber10
.1

Contact Services Agreement, dated
    September 29, 2006, by and between Expedia, Inc. and the
    PeopleSupport (Philippines), Inc.31
.1

Rule 13a-14(a)
    Certification of Chief Executive Officer of the Company in
    accordance with Section 302 of the Sarbanes-Oxley Act of
    200231
.2

Rule 13a-14(a)
    Certification of Chief Financial Officer of the Company in
    accordance with Section 302 of the Sarbanes-Oxley Act of
    200232
.1(1)

Section 1350 Certification of
    Chief Executive Officer of the Company in accordance with
    Section 906 of the Sarbanes-Oxley Act of 200232
.2(1)

Section 1350 Certification of
    Chief Financial Officer of the Company in accordance with
    Section 906 of the Sarbanes-Oxley Act of 2002     
    Confidential treatment has been requested for portions of this
    exhibit. These portions have been omitted from the
    Form 10-Q
    and submitted separately to the Securities and Exchange
    Commission.  (1)
    The material contained in this exhibit is not deemed
    filed with the Securities and Exchange Commission
    and is not to be incorporated by reference into any filing of
    the Registrant under the Securities Act of 1933 or the
    Securities Exchange Act of 1934, whether made before or after
    the date hereof and irrespective of any general incorporation
    language contained in such filing, except to the extent that the
    Registrant specifically incorporates it by reference. 38




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SIGNATURE    PeopleSupport, Inc.
  By:
    /s/  Caroline
    Rook     Chief Financial Officer
  (Principal Financial and Accounting Officer)
 39