##### 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 1934
 For the quarterly period ended September 30, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                    to
 Commission File Number: 333-115328
 
 PeopleSupport, Inc.
  Delaware
    
    95-4695021(State or other jurisdiction
    
    (I.R.S. Employer Identification No.)of incorporation or organization)
 1100 Glendon Ave., Suite 1250 Los Angeles, California 90024
 (310) 824-6200
 
 þ o
 o þ
 þ o




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PEOPLESUPPORT, INC.
FORM 10-Q
FOR THE QUARTER ENDED
September 30, 2005
 INDEX
 PagePART IFINANCIAL INFORMATIONITEM 1. Financial Statements (unaudited)
    
    
    3Consolidated Balance Sheets as of December 31, 2004 and September 30, 2005
    
    
    3Consolidated Statements of Operations and Other Comprehensive Income for the three and
nine months ended September 30, 2004 and 2005
    
    
    4Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    32ITEM 4. Controls and Procedures
    
    
    32PART IIOTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    34ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34ITEM 3. Defaults Upon Senior Securities
    
    
    34ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    34ITEM 5. Other Information
    
    
    34ITEM 6. Exhibits
    
    
    34Signature
    
    
    35Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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PART IFINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 PEOPLESUPPORT, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited, in thousands)
 December 31,
    
    
    September 30,2004
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    41,583
    
    
    $
    27,834Restricted short-term cash equivalent
    
    
    422
    
    
    
    Marketable securities
    
    
    
    
    
    
    22,895Accounts receivable, net of allowance for doubtful accounts of $451 and $313
    
    
    5,560
    
    
    
    6,889Investment in receivable portfolios
    
    
    7
    
    
    
    Deferred tax assets
    
    
    668
    
    
    
    3,465Prepaid expenses and other current assets
    
    
    1,633
    
    
    
    1,624Total current assets
    
    
    49,873
    
    
    
    62,707Property and equipment, net
    
    
    7,407
    
    
    
    11,064Deferred management incentive plan compensation
    
    
    940
    
    
    
    685Deferred tax assets
    
    
    6,161
    
    
    
    5,947Other long-term assets
    
    
    699
    
    
    
    1,200Total assets
    
    $
    65,080
    
    
    $
    81,603LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,346
    
    
    $
    2,352Accrued payroll and payroll related
    
    
    1,218
    
    
    
    2,091Accrued liabilities
    
    
    1,309
    
    
    
    2,294Management incentive plan obligation
    
    
    342
    
    
    
    342Deferred revenue
    
    
    1,888
    
    
    
    3,384Other current liabilities
    
    
    106
    
    
    
    65Total current liabilities
    
    
    6,209
    
    
    
    10,528Management incentive plan obligation
    
    
    684
    
    
    
    684Deferred rent
    
    
    117
    
    
    
    830Other long-term liabilities
    
    
    135
    
    
    
    283Total liabilities
    
    
    7,145
    
    
    
    12,325Commitments and contingenciesStockholders equity:Common stock, $.001 par value; authorized 87,000 shares; 18,015 and
18,241 shares issued and outstanding at December 31, 2004 and September 30,
2005, respectively
    
    
    18
    
    
    
    18Additional paid-in capital
    
    
    112,514
    
    
    
    112,624Accumulated deficit
    
    
    (53,043
    )
    
    
    (42,535
    )Accumulated other comprehensive income
    
    
    80
    
    
    
    1Deferred stock compensation
    
    
    (1,634
    )
    
    
    (830
    )Total stockholders equity
    
    
    57,935
    
    
    
    69,278Total liabilities and stockholders equity
    
    $
    65,080
    
    
    $
    81,603
 See accompanying notes to consolidated financial statements.
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
 (Unaudited, in thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Revenues
    
    $
    11,936
    
    
    $
    16,317
    
    
    $
    31,932
    
    
    $
    45,112Cost of revenues (exclusive of management incentive plan and depreciation
expense shown below)
    
    
    6,606
    
    
    
    9,382
    
    
    
    17,155
    
    
    
    25,588Management incentive plan  cost of revenues
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    204Selling, general and administrative (exclusive of management incentive
plan expense shown below)
    
    
    2,306
    
    
    
    3,139
    
    
    
    6,727
    
    
    
    8,905Management incentive plan  selling, general and administrative
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    52Depreciation and amortization
    
    
    1,049
    
    
    
    1,114
    
    
    
    2,893
    
    
    
    3,247Restructuring charges
    
    
    
    
    
    
    
    
    
    
    (22
    )
    
    
    Income from operations
    
    
    1,975
    
    
    
    2,597
    
    
    
    5,179
    
    
    
    7,116Interest income
    
    
    (24
    )
    
    
    (374
    )
    
    
    (57
    )
    
    
    (937
    )Other (income) expense
    
    
    (1
    )
    
    
    16
    
    
    
    4
    
    
    
    31Income before provision (benefit) for income taxes
    
    
    2,000
    
    
    
    2,955
    
    
    
    5,232
    
    
    
    8,022Provision (benefit) for income taxes
    
    
    68
    
    
    
    (2,558
    )
    
    
    171
    
    
    
    (2,486
    )Net income
    
    
    1,932
    
    
    
    5,513
    
    
    
    5,061
    
    
    
    10,508Foreign currency translation adjustment
    
    
    (5
    )
    
    
    22
    
    
    
    1
    
    
    
    26Unrealized loss on securities:Unrealized holding losses arising during period
    
    
    
    
    
    
    (85
    )
    
    
    
    
    
    
    (97
    )Comprehensive income
    
    $
    1,927
    
    
    $
    5,450
    
    
    $
    5,062
    
    
    $
    10,437Basic earnings per share
    
    $
    0.90
    
    
    $
    0.30
    
    
    $
    2.17
    
    
    $
    0.58Diluted earnings per share
    
    $
    0.14
    
    
    $
    0.29
    
    
    $
    0.37
    
    
    $
    0.56Basic weighted average shares outstanding
    
    
    2,136
    
    
    
    18,220
    
    
    
    2,330
    
    
    
    18,130Diluted weighted average shares outstanding
    
    
    13,564
    
    
    
    18,883
    
    
    
    13,854
    
    
    
    18,913
 See accompanying notes to consolidated financial statements.
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited, in thousands)
 Nine Months EndedSeptember 30,2004
    
    
    2005OPERATING ACTIVITIESNet income
    
    $
    5,061
    
    
    $
    10,508Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    2,893
    
    
    
    3,247Provision for doubtful accounts
    
    
    29
    
    
    
    (138
    )Amortization
of deferred stock-based compensation
    
    
    1,367
    
    
    
    675Reduction of excess accrual for restructuring
    
    
    (22
    )
    
    
    Amortization
of deferred management incentive plan costs
    
    
    
    
    
    
    256Gain on disposal of property and equipment
    
    
    
    
    
    
    (6
    )Deferred income tax benefit
    
    
    
    
    
    
    (2,583
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (4,574
    )
    
    
    (1,191
    )Prepaid expenses and other assets
    
    
    281
    
    
    
    (2
    )Other long-term assets
    
    
    (444
    )
    
    
    (504
    )Accounts payable and accrued liabilities
    
    
    1,993
    
    
    
    2,519Deferred revenue
    
    
    648
    
    
    
    1,496Cash payments on restructuring reserve
    
    
    (3
    )
    
    
    Net cash provided by operating activities
    
    
    7,229
    
    
    
    14,277INVESTING ACTIVITIESCollections applied to principal of receivable portfolios
    
    
    495
    
    
    
    7Purchases of property and equipment
    
    
    (6,671
    )
    
    
    (5,805
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    114Proceeds from called short term investments
    
    
    
    
    
    
    2,000Purchases of marketable securities
    
    
    
    
    
    
    (28,600
    )Maturities of marketable securities
    
    
    
    
    
    
    3,600Restricted cash equivalent
    
    
    139
    
    
    
    422Net cash used in investing activities
    
    
    (6,037
    )
    
    
    (28,262
    )FINANCING ACTIVITIESProceeds from the exercise of stock options
    
    
    55
    
    
    
    233Repurchase of common stock
    
    
    (1,350
    )
    
    
    Proceeds from the exercise of warrants to purchase redeemable preferred stock
    
    
    157
    
    
    
    Public offering costs
    
    
    (1,227
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (2,365
    )
    
    
    233Effect of exchange rate changes on cash
    
    
    1
    
    
    
    3Net decrease in cash and cash equivalents
    
    
    (1,172
    )
    
    
    (13,749
    )Cash and cash equivalents, beginning of period
    
    
    12,151
    
    
    
    41,583Cash and cash equivalents, end of period
    
    $
    10,979
    
    
    $
    27,834NON-CASH INVESTING ACTIVITIESUnrealized holding losses on marketable securities
    
    $
    
    
    
    $
    (97
    )Construction in progress costs incurred but not paid
    
    
    
    
    
    
    1,231SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONInterest paid for the period
    
    $
    
    
    
    $
    Taxes paid for the period
    
    
    392
    
    
    
    48
 See accompanying notes to consolidated financial statements.
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share date)
 Note 1. Accounting Policies
 Basis of Presentation
    Marketable Securities
  Stock Compensation
   Three months
    
    
    Nine monthsEnded September 30,
    
    
    Ended September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Risk-free interest rate
    
    
    4.00
    %
    
    
    3.93
    %
    
    
    4.00
    %
    
    
    3.96
    %Expected option life (years)
    
    
    5.0
    
    
    
    4.4
    
    
    
    5.0
    
    
    
    4.3Volatility
    
    
    31.7
    %
    
    
    37.3
    %
    
    
    31.7
    %
    
    
    33.8
    %Dividend rate
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Weighted average fair value
of options granted
    
    $
    0.0
    
    
    $
    3.44
    
    
    $
    8.69
    
    
    $
    3.29
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share date)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Net income as reported
    
    $
    1,932
    
    
    $
    5,513
    
    
    $
    5,061
    
    
    $
    10,508Add: Stock-based compensation
expense included in reported net
income, net of related tax effects
    
    
    457
    
    
    
    211
    
    
    
    1,367
    
    
    
    675Deduct: Total stock-based
compensation expense determined under
fair value based methods for all
awards, net of related tax effects
    
    
    (474
    )
    
    
    (441
    )
    
    
    (1,422
    )
    
    
    (1,110
    )Net income pro forma
    
    $
    1,915
    
    
    $
    5,283
    
    
    $
    5,006
    
    
    $
    10,073Basic earnings per shareas reported
    
    $
    0.90
    
    
    $
    0.30
    
    
    $
    2.17
    
    
    $
    0.58Diluted earnings per shareas reported
    
    $
    0.14
    
    
    $
    0.29
    
    
    $
    0.37
    
    
    $
    0.56Basic earnings per sharepro forma
    
    $
    0.90
    
    
    $
    0.29
    
    
    $
    2.15
    
    
    $
    0.55Diluted earnings per sharepro forma
    
    $
    0.14
    
    
    $
    0.28
    
    
    $
    0.36
    
    
    $
    0.53
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Cost of revenues
    
    $
    145
    
    
    $
    66
    
    
    $
    444
    
    
    $
    215Selling, general & administrative
    
    
    312
    
    
    
    145
    
    
    
    923
    
    
    
    460$
    457
    
    
    $
    211
    
    
    $
    1,367
    
    
    $
    675
 Note 2. Recent Accounting Pronouncements
   1.
    
    A modified prospective method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of SFAS No. 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements of SFAS No.
123 for all awards granted to employees prior to the effective date of
SFAS No. 123(R) that remain unvested on the effective date.2.
    
    A modified retrospective method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of
adoption.
   7




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share date)
        8




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share date)
 Note 3. Significant Customers
  For the Three Months
    
    For the Nine Months
    
    As ofEnded September 30,
    
    Ended September 30,
    
    September 30,2004
    
    2005
    
    2004
    
    2005
    
    2005% of Revenue
    
    % of Revenue
    
    % of A/R, netCustomer A
    
    
    32
    %
    
    
    27
    %
    
    
    33
    %
    
    
    28
    %
    
    
    15
    %Customer B
    
    
    27
    
    
    
    20
    
    
    
    28
    
    
    
    20
    
    
    
    32Customer C
    
    
    10
    
    
    
    2
    
    
    
    11
    
    
    
    3
    
    
    
    4Customer D
    
    
    6
    
    
    
    6
    
    
    
    8
    
    
    
    7
    
    
    
    5Customer E
    
    
    11
    
    
    
    14
    
    
    
    10
    
    
    
    13
    
    
    
    1
 Note 4. Cash, Cash Equivalents and Marketable Securities
  Fair Value
    
    
    Amortized CostDecember 31,
    
    
    September 30,
    
    
    December 31,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Cash, money market and certificates of
deposit
    
    $
    8,612
    
    
    $
    10,865
    
    
    $
    8,612
    
    
    $
    10,865U.S. agency securities
    
    
    20,971
    
    
    
    16,969
    
    
    
    20,975
    
    
    
    16,965Municipal bonds
    
    
    12,000
    
    
    
    
    
    
    
    12,000
    
    
    
    Total cash and cash equivalents
    
    
    41,583
    
    
    
    27,834
    
    
    
    41,587
    
    
    
    27,830Municipal bonds
    
    
    
    
    
    
    9,000
    
    
    
    
    
    
    
    9,000U.S. agency securities
    
    
    
    
    
    
    13,895
    
    
    
    
    
    
    
    14,000Total marketable securities
    
    
    
    
    
    
    22,895
    
    
    
    
    
    
    
    23,000Total cash, cash equivalents,
and marketable securities
    
    $
    41,583
    
    
    $
    50,729
    
    
    $
    41,587
    
    
    $
    50,830
  Unrealized Gains
    
    
    Unrealized LossesDecember 31,
    
    
    September 30,
    
    
    December 31,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005U.S. agency securities
    
    $
    
    
    
    $
    4
    
    
    $
    4
    
    
    $
    105
  Fair
    
    
    AmortizedFixed maturities
    
    Value
    
    
    CostDue in 90 days or less
    
    $
    16,969
    
    
    $
    16,965Due after 1 year through 2 years
    
    
    13,895
    
    
    
    14,000Due after 10 years
    
    
    9,000
    
    
    
    9,000Total
    
    $
    39,864
    
    
    $
    39,965
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share date)
 Note 5. Comprehensive Income
  Foreign
    
    
    UnrealizedCurrency
    
    
    Loss onItems
    
    
    Securities
    
    
    TotalBalance, December 31, 2004
    
    $
    84
    
    
    $
    (4
    )
    
    $
    80Quarterly change
    
    
    177
    
    
    
    (22
    )
    
    
    155Balance, March 31, 2005
    
    
    261
    
    
    
    (26
    )
    
    
    235Quarterly change
    
    
    (181
    )
    
    
    10
    
    
    
    (171
    )Balance, June 30, 2005
    
    
    80
    
    
    
    (16
    )
    
    
    64Quarterly change
    
    
    22
    
    
    
    (85
    )
    
    
    (63
    )Balance, September 30, 2005
    
    $
    102
    
    
    $
    (101
    )
    
    $
    1
 Note 6. Realizability of Deferred Tax Assets
  Note 7. Computation of Earnings Per Share
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Options
    
    
    
    
    
    
    225
    
    
    
    
    
    
    
    146Warrants
    
    
    127
    
    
    
    4
    
    
    
    127
    
    
    
    65
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share date)
  Three Months Ended September 30,2004
    
    
    2005Income
    
    
    Shares
    
    
    Per Share
    
    
    Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic earnings per share:Income to common stockholders
    
    $
    1,932
    
    
    
    2,136
    
    
    $
    0.90
    
    
    $
    5,513
    
    
    
    18,220
    
    
    $
    0.30Effect of dilutive securities:Options
    
    
    
    
    
    
    959
    
    
    
    
    
    
    
    
    
    
    
    663Warrants
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    Convertible preferred stock
    
    
    
    
    
    
    10,461
    
    
    
    
    
    
    
    
    
    
    
    Income available to common
stockholders
    
    $
    1,932
    
    
    
    13,564
    
    
    $
    0.14
    
    
    $
    5,513
    
    
    
    18,883
    
    
    $
    0.29
 Nine Months Ended September 30,2004
    
    
    2005Income
    
    
    Shares
    
    
    Per Share
    
    
    Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic earnings per share:Income to common stockholders
    
    $
    5,061
    
    
    
    2,330
    
    
    $
    2.17
    
    
    $
    10,508
    
    
    
    18,130
    
    
    $
    0.58Effect of dilutive securities:Options
    
    
    
    
    
    
    950
    
    
    
    
    
    
    
    
    
    
    
    783Warrants
    
    
    
    
    
    
    805
    
    
    
    
    
    
    
    
    
    
    
    Convertible preferred stock
    
    
    
    
    
    
    9,769
    
    
    
    
    
    
    
    
    
    
    
    Income available to common
stockholders
    
    $
    5,061
    
    
    
    13,854
    
    
    $
    0.37
    
    
    $
    10,508
    
    
    
    18,913
    
    
    $
    0.56
 Note 8. Stockholders Equity
  Note 9. Warrants
  Note 10. Rescission Offer
  11




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share date)
   12




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 This 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 revenues, 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 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 and registration
statements that we file from time to time with the Securities and Exchange Commission (the SEC)
 
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
   Sources of Revenues
  
    
    Time-delineated or session based fees, which principally include hourly or per minute
charges and charges per interaction, as well as related training fees. All
time-delineated and session based fees are separately priced and negotiated on an
individual, client basis; and
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
 
    
    Implementation fees, which principally include revenues associated with the
installation and integration of new clients into our telecommunications, information
technology and or client reporting structures.
  Key Expense Categories
 Cost of revenues.
 Selling, general and administrative.
 Critical Accounting Policies and Estimates
  Revenues and Deferred Revenue Recognition
   
    
    Customer management fees  as services are performed;
    
    Implementation fees  ratably over the life of a contract; and,
    
    Commission revenues for contingent accounts receivable management contracts  upon receipt of collected funds.
   Accounting
for Stock-Based Awards
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
 Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
   Three Months Ended September 30,
    
    

Nine Months Ended September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Cost of revenues
    
    $
    145
    
    
    $
    66
    
    
    $
    444
    
    
    $
    215Selling, general & administrative
    
    
    312
    
    
    
    145
    
    
    
    923
    
    
    
    460$
    457
    
    
    $
    211
    
    
    $
    1,367
    
    
    $
    675
  Accounting for Income Taxes
  Long-lived Asset Impairment
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
  Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2005
    
    2004
    
    2005Revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenues (exclusive of management
incentive plan and depreciation expense shown
below)
    
    
    55
    
    
    
    58
    
    
    
    54
    
    
    
    57Management incentive plan  cost of revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling, general, and administrative
(exclusive of management incentive plan
expense shown below)
    
    
    19
    
    
    
    19
    
    
    
    21
    
    
    
    20Management incentive plan  selling, general,
and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    9
    
    
    
    7
    
    
    
    9
    
    
    
    7Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income from operations
    
    
    17
    
    
    
    16
    
    
    
    16
    
    
    
    16Interest income
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Other expense (income)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income before provision for income taxes
    
    
    17
    
    
    
    18
    
    
    
    16
    
    
    
    18Provision for income taxes
    
    
    1
    
    
    
    (16
    )
    
    
    1
    
    
    
    (5
    )Net income
    
    
    16
    %
    
    
    34
    %
    
    
    16
    %
    
    
    23
    %
 Three Months Ended September 30, 2005 Compared with Three Months Ended September 30, 2004
 Revenues
  Cost of Revenues
  16




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
 Selling, General and Administrative
  Provision/Benefit for Income Taxes
  Nine Months Ended September 30, 2005 Compared with Nine Months Ended September 30, 2004
 Revenues
  Cost of Revenues
  Selling, General and Administrative
  Provision/Benefit for Income Taxes
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
  Liquidity and Capital Resources
  Operating Activities
  Investing Activities
   Financing Activities
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
   Rescission Offer and Reporting Obligations
    Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
  1.
    
    A modified prospective method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of SFAS No. 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements of SFAS No.
123 for all awards granted to employees prior to the effective date of
SFAS No. 123(R) that remain unvested on the effective date.2.
    
    A modified retrospective method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of
adoption.
      Exchanges of Nonmonetary Assets
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
  RISK FACTORS
 Risks Related to Our Business
 Our revenues are highly dependent on three major clients that collectively accounted for 61% of our
revenues in the first nine months of 2005, and any loss of business from our major clients would
reduce our revenues and seriously harm us.
   Our clients may adopt technologies that decrease the demand for our services, which could reduce
our revenues and seriously harm our business.
  Our revenues are highly dependent on a few industries and any decrease in demand for outsourced
services in these industries could reduce our revenues and seriously harm our business.
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
  We serve markets that are highly competitive and we may be unable to compete with businesses that
have greater resources than we do.
   A reversal of industry trends toward offshore outsourcing due to negative public reaction in the
United States and recently proposed legislation may adversely affect demand for our services.
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 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.
   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.
 The implementation of our customer management service involves significant resource
commitments by us and our clients. Potential clients require that we expend substantial time and
money educating them as to the value of our services and assessing the feasibility of integrating
our systems and processes with theirs. Decisions relating to outsourcing business processes
generally involve the evaluation of the service by our clients senior management and a significant
number of client personnel in various functional areas, each having specific and often conflicting
requirements. We may expend significant funds and management resources during the sales cycle and
ultimately the client may not engage our services. Our sales cycle generally ranges up to six to
twelve months or longer. Our sales cycle for all of our services is subject to significant risks
and delays over which we have little or no control, including:
 
    
    Our clients alternatives to our services, including their willingness to replace their internal solutions or existing vendors;
    
    Our clients budgetary constraints, and the timing of our clients budget cycles and approval process;
    
    Our clients willingness to expend the time and resources necessary to integrate their
systems with our systems and network; and
    
    The timing and expiration of our clients current outsourcing agreements for similar
services.
  We have incurred substantial losses in the past and may not be profitable in the future.
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 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 customer management professionals;
    
    Generate sufficient revenues and manage costs to maintain profitability;
    
    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.
  
    
    The addition or loss of a major client and the volume of services provided to our major
clients;
    
    The extent to which our services achieve or maintain market acceptance, which may be
affected by political and public relations reactions to offshore outsourcing;
    
    Our ability to introduce new or enhanced services to our existing and prospective
clients and to attract and retain new clients;
    
    Long sales cycles and fluctuations in sales cycles;
    
    The extent to which we incur expenses in a given period in anticipation of increased
demand in future periods, and the extent to which that demand materializes;
    
    Changes in our pricing policies or those of our competitors, as well as increased price
competition in general;
    
    Variation in demand for our services and services or products of our major clients,
particularly clients in the travel and hospitality industry; and
    
    The introduction of new or enhanced services by other outsourced service providers.
  If we fail to manage our growth effectively, our business may not succeed.
  
    
    Maintain the hiring, training and management necessary to ensure the quality and
responsiveness of our services;
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
    
    Expand and enhance our administrative and technical infrastructure, facilities, and
capacities to accommodate increased call volume and other customer management demands; and
    
    Continue to improve our management, financial and information systems and controls.
  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.
  Our facilities are at risk of damage by earthquakes and other natural disasters.
  We may make acquisitions that prove unsuccessful or divert our resources.
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 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 ability to use net operating loss carryforwards in the United States may be limited.
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 The current tax holidays in the Philippines will expire within the next several years.
  We may choose to expand operations outside of the Philippines and may not be successful.
  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.
   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.
  
    
    Market acceptance of and demand for our offshore outsourced services which may be
affected by political and public relations reactions to offshore outsourcing;
    
    Access to and availability to sufficient management, technical, marketing, and financial personnel;
    
    The need to enhance our operating infrastructure;
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
    
    The continued development of new or enhanced services and hosted solutions;
    
    The need to adapt to changing technologies and technical requirements;
    
    Increasing costs, particularly in the Philippines;
    
    The existence of opportunities to acquire businesses or technologies, or opportunities for expansion; and
    
    Increased competition and competitive pressures.
  We failed to register our securities under the Securities and Exchange Act of 1934 and, as a
result, we may incur liability to repurchase certain stock options and shares, and may face
potential claims under federal and state securities laws.
     Risks Related to Doing Business in the Philippines
 Currency fluctuations in the Philippine peso relative to the U.S. dollar could increase our
expenses.
  The Philippines may experience economic instability, which could increase our costs and harm our
business
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
  We may face wage inflation and additional competition in the Philippines for our professionals,
which could increase the cost of qualified employees and the amount of employee turnover.
  Terrorist attacks could adversely affect the Philippine economy, disrupt our operations and cause
our business to suffer.
  We benefit from Philippine laws granting preferential tax treatment which, if eliminated, could
result in increased operating expenses.
  Other Risks Related to Us
 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.
  29




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 If securities or industry analysts cease to publish research or reports about our business or if
they change negatively their recommendations regarding our stock, our stock price and trading
volume could decline.
  Substantial future sales of our common stock in the public market could cause our stock price to
fall.
   We are incurring 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, after an initial
transition period, 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;
    
    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;
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
    
    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.
  Our corporate actions are substantially influenced by officers, directors and their affiliated
entities.
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Exchange Risk
   Interest Rate Sensitivity
  Inflation Rate Sensitivity
  
 ITEM 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
   Changes
in internal control over financial reporting.
  33




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
 
 PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 ExhibitNumber31.1
    
    Certification by Chief Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification by Chief Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification by Chief Executive Officer of Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    Certification by Chief Financial Officer of Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
  34




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SIGNATURE
  PeopleSupport, Inc.By:
    
    /s/ Caroline RookCaroline RookChief Financial Officer(Principal Financial and Accounting Officer)
 35