##### 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 March 31, 2006
 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
(State or other jurisdiction
    
    95-4695021(I.R.S. Employer Identification No.)of incorporation or organization)
 1100 Glendon Ave., Suite 1250, Los Angeles, California 90024
 (310) 824-6200
  
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ




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##### 



PEOPLESUPPORT, INC.
FORM 10-Q
FOR THE QUARTER ENDED
March 31, 2006
 INDEX
 PagePART IFINANCIAL INFORMATIONITEM 1. Financial Statements
    
    
    3Consolidated Balance Sheets as of December 31, 2005 and March 31, 2006 (unaudited)
    
    
    3Consolidated Statements of Operations and Other Comprehensive Income for the
three months ended March 31, 2005 (unaudited) and 2006 (unaudited)
    
    
    4Consolidated Statement of Stockholders Equity (unaudited)
    
    
    5Consolidated Statements of Cash Flows for the three months ended March 31, 2005
(unaudited) and 2006 (unaudited)
    
    
    6Notes to Consolidated Financial Statements (unaudited)
    
    
    7ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    20ITEM 4. Controls and Procedures
    
    
    20PART IIOTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    22ITEM 1A. Risk Factors
    
    
    22ITEM 6. Exhibits
    
    
    23Signature
    
    
    23Exhibit 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,
    
    
    March 31,2005
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    27,760
    
    
    $
    17,626Marketable securities
    
    
    23,853
    
    
    
    27,818Accounts
receivable, net of allowance for doubtful accounts of $487 and $495
    
    
    8,414
    
    
    
    12,975Deferred tax assets
    
    
    4,226
    
    
    
    3,378Prepaid expenses and other current assets
    
    
    2,448
    
    
    
    2,828Total current assets
    
    
    66,701
    
    
    
    64,625Property and equipment, net
    
    
    10,622
    
    
    
    12,749Deferred management incentive plan compensation
    
    
    598
    
    
    
    513Deferred tax assets
    
    
    15,051
    
    
    
    15,271Goodwill and other intangible assets
    
    
    
    
    
    
    8,262Other long-term assets
    
    
    1,354
    
    
    
    2,478Total assets
    
    $
    94,326
    
    
    $
    103,898LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,181
    
    
    $
    4,300Accrued liabilities
    
    
    3,912
    
    
    
    5,401Management incentive plan obligation
    
    
    475
    
    
    
    475Deferred revenue
    
    
    3,481
    
    
    
    4,213Current portion of capital lease obligations
    
    
    
    
    
    
    55Other current liabilities
    
    
    69
    
    
    
    78Total current liabilities
    
    
    10,118
    
    
    
    14,522Management incentive plan obligation
    
    
    474
    
    
    
    474Deferred rent
    
    
    978
    
    
    
    1,237Long-term portion of capital lease requirements
    
    
    
    
    
    
    55Other long-term liabilities
    
    
    364
    
    
    
    553Total liabilities
    
    
    11,934
    
    
    
    16,841Stockholders equity:Common stock, $.001 par value; authorized 87,000 shares; 18,306 and
18,460 shares issued and outstanding at December 31, 2005 and March 31,
2006, respectively
    
    
    18
    
    
    
    18Additional paid-in capital
    
    
    113,234
    
    
    
    113,813Accumulated deficit
    
    
    (30,214
    )
    
    
    (27,340
    )Accumulated other comprehensive income
    
    
    342
    
    
    
    566Deferred stock compensation
    
    
    (988
    )
    
    
    Total stockholders equity
    
    
    82,392
    
    
    
    87,057Total liabilities and stockholders equity
    
    $
    94,326
    
    
    $
    103,898
 The accompanying notes are an integral part of these consolidated financial statements
 3




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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 EndedMarch 31,2005
    
    
    2006Revenues
    
    $
    14,056
    
    
    $
    23,047Cost of revenues (exclusive of management incentive plan and depreciation
expense shown below)
    
    
    7,723
    
    
    
    13,414Management incentive plan  cost of revenues
    
    
    68
    
    
    
    68Selling, general and administrative (exclusive of management incentive
plan expense shown below)
    
    
    2,664
    
    
    
    4,909Management incentive plan  selling, general and administrative
    
    
    17
    
    
    
    17Depreciation and amortization
    
    
    1,016
    
    
    
    1,286Income from operations
    
    
    2,568
    
    
    
    3,353Interest expense
    
    
    
    
    
    
    3Interest income
    
    
    (237
    )
    
    
    (422
    )Other expense / (income)
    
    
    10
    
    
    
    (23
    )Income before provision for income taxes
    
    
    2,795
    
    
    
    3,795Provision for income taxes
    
    
    39
    
    
    
    921Net income
    
    
    2,756
    
    
    
    2,874Foreign currency translation adjustment
    
    
    177
    
    
    
    258Unrealized loss on securities:Unrealized holding losses arising during period
    
    
    (22
    )
    
    
    (34
    )Comprehensive income
    
    $
    2,911
    
    
    $
    3,098Basic earnings per share
    
    $
    0.15
    
    
    $
    0.16Diluted earnings per share
    
    $
    0.15
    
    
    $
    0.15Basic weighted average shares outstanding
    
    
    18,027
    
    
    
    18,422Diluted weighted average shares outstanding
    
    
    18,946
    
    
    
    19,154
 The accompanying notes are an integral part of these consolidated financial statements
 4




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Three Months Ended March 31, 2006
(Unaudited, in thousands)
 Accumulated
    
    
    
    
    
    
    TotalAdditional
    
    
    
    
    
    
    Other
    
    
    Deferred
    
    
    StockholdersCommon Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Stock
    
    
    EquityShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    Compensation
    
    
    (Deficit)Balance, at December 31, 2005
    
    
    18,306
    
    
    $
    18
    
    
    $
    113,234
    
    
    $
    (30,214
    )
    
    $
    342
    
    
    $
    (988
    )
    
    $
    82,392Eliminate deferred stock
compensation per SFAS 123(R)
    
    
    
    
    
    
    
    
    
    
    (988
    )
    
    
    
    
    
    
    
    
    
    
    988
    
    
    
    Exercise of stock options
    
    
    41
    
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,874
    
    
    
    224
    
    
    
    
    
    
    
    3,098Amortization of deferred
stock compensation
    
    
    
    
    
    
    
    
    
    
    489
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    489Tax benefit for disqualifying
dispositions of stock options
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16Acquisition of Rapidtext
    
    
    113
    
    
    
    
    
    
    
    966
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    966Balance, at March 31, 2006
    
    
    18,460
    
    
    $
    18
    
    
    $
    113,813
    
    
    $
    (27,340
    )
    
    $
    566
    
    
    $
    
    
    
    $
    87,057
 The accompanying notes are an integral part of these consolidated financial statements
 5




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 Three Months EndedMarch 31,2005
    
    
    2006OPERATING ACTIVITIESNet income
    
    $
    2,756
    
    
    $
    2,874Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    1,016
    
    
    
    1,286Provision for doubtful accounts
    
    
    (249
    )
    
    
    8Stock-based compensation
    
    
    247
    
    
    
    489Amortization of deferred compensation costs
    
    
    85
    
    
    
    85Deferred income taxes
    
    
    
    
    
    
    957Tax benefits from employee stock option exercises
    
    
    
    
    
    
    (16
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (39
    )
    
    
    (3,497
    )Prepaid expenses and other assets
    
    
    (190
    )
    
    
    (208
    )Other long-term assets
    
    
    75
    
    
    
    212Accounts payable and accrued liabilities
    
    
    604
    
    
    
    2,614Management incentive plan
    
    
    
    
    
    
    87Deferred revenue
    
    
    802
    
    
    
    621Net cash provided by operating activities
    
    
    5,107
    
    
    
    5,512INVESTING ACTIVITIESCollections applied to principal of receivable portfolios
    
    
    7
    
    
    
    Purchases of property and equipment
    
    
    (568
    )
    
    
    (2,750
    )Purchases of marketable securities
    
    
    (6,000
    )
    
    
    (4,000
    )Acquisitions, net of cash received
    
    
    
    
    
    
    (8,967
    )Net cash used in investing activities
    
    
    (6,561
    )
    
    
    (15,717
    )FINANCING ACTIVITIESPayments of capital lease obligation
    
    
    
    
    
    
    (57
    )Tax benefits from employee stock option exercises
    
    
    
    
    
    
    16Proceeds from the exercise of stock options
    
    
    39
    
    
    
    96Net cash provided by financing activities
    
    
    39
    
    
    
    55Effect of exchange rate changes on cash
    
    
    15
    
    
    
    16Net decrease in cash and cash equivalents
    
    
    (1,400
    )
    
    
    (10,134
    )Cash and cash equivalents, beginning of period
    
    
    41,583
    
    
    
    27,760Cash and cash equivalents, end of period
    
    $
    40,183
    
    
    $
    17,626NON-CASH INVESTING ACTIVITIESUnrealized holding gains/(losses) on marketable securities
    
    $
    (22
    )
    
    $
    (34
    )Construction in progress costs incurred but not paid
    
    
    818
    
    
    
    893Common stock issued for acquisition
    
    
    
    
    
    
    966Non-cash tax benefit from disqualifying dispositions
    
    
    
    
    
    
    48SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONInterest paid for the period
    
    $
    
    
    
    $
    3Taxes paid for the period
    
    
    
    
    
    
    78
 The accompanying notes are an integral part of these consolidated financial statements
 6




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands)
 Note 1. Description of Business
  Note 2. Summary of Significant Accounting Policies
 Basis of Presentation
  Goodwill and Other Intangible Assets
  Stock-based Compensation Expense
    Recent Accounting Pronouncements
  7




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands)
   Note 3. Significant Customers
  As of and for the Three Months Ended March 31,2005
    
    2006
    
    2005
    
    2006% of Revenue
    
    % of A/R, netCustomer A
    
    
    28
    %
    
    
    20
    %
    
    
    0
    %
    
    
    12
    %Customer B
    
    
    21
    
    
    
    17
    
    
    
    34
    
    
    
    21Customer C
    
    
    8
    
    
    
    14
    
    
    
    13
    
    
    
    19Customer D
    
    
    13
    
    
    
    10
    
    
    
    3
    
    
    
    3
 Note 4. Cash, Cash Equivalents and Marketable Securities
  Cash Equivalents and Marketable Securities
 December 31,
    
    
    March 31,2005
    
    
    2006Cash
    
    $
    19,785
    
    
    $
    6,649Cash equivalents (government sponsored entities)
    
    
    7,975
    
    
    
    10,977Marketable securitiesAdjustable rate preferred bonds
    
    
    9,000
    
    
    
    12,000Government sponsored entities
    
    
    14,853
    
    
    
    15,818Total
    
    $
    51,613
    
    
    $
    45,444Unrealized losses
    
    $
    (146
    )
    
    $
    (179
    )
 8




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands)
 December 31,
    
    
    March 31,Maturities
    
    2005
    
    
    2006Due in 90 days or less
    
    $
    16,975
    
    
    $
    22,9771 year through 2 years
    
    
    14,853
    
    
    
    15,818Total
    
    $
    31,828
    
    
    $
    38,795
 Note 5. Comprehensive Income
  Foreign
    
    
    UnrealizedCurrency
    
    
    Loss onItems
    
    
    Securities
    
    
    TotalBalance, December 31, 2005
    
    $
    495
    
    
    $
    (153
    )
    
    $
    342Quarterly change
    
    
    258
    
    
    
    (34
    )
    
    
    224Balance, March 31, 2006
    
    $
    753
    
    
    $
    (187
    )
    
    $
    566
 Note 6. Realizability of Deferred Tax Assets
  Note 7. Stock Compensation
  2004 Stock Incentive Plan
    9




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands)
  2004 Employee Stock Purchase Plan
  Accounting for Equity Awards
  Three MonthsEnded March 312005Net income as reported
    
    $
    2,756Add: Stock  based compensation expense included in reported net income, net of related tax effects
    
    
    247Deduct: Total stock-based compensation expense determined under fair value based methods for all
awards, net of related tax effects
    
    
    (332
    )Net incomepro forma
    
    $
    2,671Basic earnings per shareas reported
    
    $
    0.15Diluted earnings per shareas reported
    
    $
    0.15Basic earnings per sharepro forma
    
    $
    0.15Diluted earnings per sharepro forma
    
    $
    0.14
  Three monthsEnded March 31,2005Risk-free interest rate
    
    
    4.0
    %Expected option life (years)
    
    
    4.1Volatility
    
    
    30.0
    %Dividend rate
    
    
    0.0
    %
   10




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands)
 Three monthsEnded March 31,2006Risk-free interest rate
    
    
    4.6
    %Expected option life (years)
    
    
    4.5Volatility
    
    
    54.0
    %Dividend rate
    
    
    0.0
    %
   Three Months Ended March 31,2005
    
    2006Proceeds from stock options exercised
    
    $
    39
    
    
    $
    96Tax benefits related to stock options exercised
    
    
    
    
    
    
    16Intrinsic value of stock options exercised
    
    
    347
    
    
    
    288
  Stock OptionsShares Outstanding
    
    Shares ExercisableWeighted
    
    Weighted
    
    
    
    
    
    
    
    Weighted
    
    WeightedNumber of
    
    Average
    
    Remaining
    
    Aggregate
    
    Number
    
    Average
    
    Remaining
    
    AggregateOptions
    
    Exercise
    
    Contractual
    
    Intrinsic
    
    of Shares
    
    Exercise
    
    Contractual
    
    IntrinsicOutstanding
    
    Price
    
    Term
    
    Value
    
    Exercisable
    
    Price
    
    Term
    
    ValueBalance at December 31, 2005
    
    
    1,699
    
    
    $
    5.58
    
    
    
    8.35
    
    
    $
    7,167
    
    
    
    474
    
    
    $
    2.98
    
    
    
    6.04
    
    
    $
    3,232Granted
    
    
    54
    
    
    
    8.39Forfeited
    
    
    (45
    )
    
    
    7.26Expired
    
    
    (4
    )
    
    
    5.89Exercised
    
    
    (41
    )
    
    
    2.43
    
    
    
    
    
    
    
    296Balance at March 31, 2006
    
    
    1,663
    
    
    $
    5.70
    
    
    
    8.15
    
    
    $
    6,822
    
    
    
    509
    
    
    $
    3.21
    
    
    
    6.00
    
    
    $
    3,364
  Restricted Stock UnitsWt. Avg.
    
    WeightedRestricted
    
    Value of
    
    Remaining
    
    AggregateStock Units
    
    Awards
    
    Contractual
    
    IntrinsicOutstanding
    
    at Grant
    
    Term
    
    ValueBalance at December 31, 2005
    
    
    54
    
    
    $
    7.69
    
    
    
    2.88
    
    
    $
    529Granted
    
    
    40
    
    
    
    9.89
    
    
    
    2.97
    
    
    
    392Canceled
    
    
    (2
    )
    
    
    7.79
    
    
    
    2.88
    
    
    
    (14
    )Converted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at March 31, 2006
    
    
    92
    
    
    $
    8.64
    
    
    
    2.88
    
    
    $
    907
   11




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands)
 ExercisableOutstanding Weighted Average
    
    
    Weighted AverageRemainingContractual
    
    
    Exercise
    
    
    
    
    
    
    ExerciseRange of Exercise Prices Per Share
    
    Shares
    
    
    Life (Years)
    
    
    Price
    
    
    Shares
    
    
    Price$0.03
 0.19
    
    
    122
    
    
    
    2.57
    
    
    $
    0.15
    
    
    
    122
    
    
    $
    0.150.41  0.41
    
    
    360
    
    
    
    7.33
    
    
    
    0.41
    
    
    
    168
    
    
    
    0.411.15  6.80
    
    
    177
    
    
    
    6.68
    
    
    
    5.53
    
    
    
    120
    
    
    
    5.346.85  6.85
    
    
    35
    
    
    
    7.97
    
    
    
    6.85
    
    
    
    15
    
    
    
    6.857.23  7.23
    
    
    387
    
    
    
    9.56
    
    
    
    7.23
    
    
    
    1
    
    
    
    7.237.69  8.56
    
    
    192
    
    
    
    9.43
    
    
    
    8.39
    
    
    
    19
    
    
    
    8.118.63  9.09
    
    
    184
    
    
    
    9.43
    
    
    
    8.74
    
    
    
    20
    
    
    
    9.099.36  9.40
    
    
    72
    
    
    
    9.29
    
    
    
    9.39
    
    
    
    10
    
    
    
    9.389.89  9.89
    
    
    44
    
    
    
    9.89
    
    
    
    9.89
    
    
    
    0
    
    
    
    0.0010.80  10.80
    
    
    90
    
    
    
    8.90
    
    
    
    10.80
    
    
    
    34
    
    
    
    10.80Total
    
    
    1,663
    
    
    
    8.15
    
    
    $
    5.70
    
    
    
    509
    
    
    $
    3.21
   Three Months EndedMarch 31,2005
    
    
    2006Cost of revenues
    
    $
    79
    
    
    $
    109Selling, general & administrative
    
    
    168
    
    
    
    380$
    247
    
    
    $
    489
 Note 8. Computation of Earnings Per Share
   Three Months EndedMarch 31,2005
    
    2006Options
    
    
    55
    
    
    
    108Common stock warrants
    
    
    127
    
    
    
    4
  Three Months Ended March 31,2005
    
    
    2006Income
    
    
    Shares
    
    
    Per Share
    
    
    Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic earnings per share:Income to common stockholders
    
    $
    2,756
    
    
    
    18,027
    
    
    $
    0.15
    
    
    $
    2,874
    
    
    
    18,422
    
    
    $
    0.16Effect of dilutive securities:Options
    
    
    
    
    
    
    919
    
    
    
    
    
    
    
    
    
    
    
    656Restricted Stock Units (RSU)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income available to common
stockholders
    
    $
    2,756
    
    
    
    18,946
    
    
    $
    0.15
    
    
    $
    2,874
    
    
    
    19,154
    
    
    $
    0.15
 12




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands)
 Note 9. Acquisition of Rapidtext
   Description
    
    ValueNet current assets
    
    $
    1,261Property, plant and equipment
    
    
    282Noncurrent deferred tax assets & other assets
    
    
    263Net current liabilities
    
    
    (855
    )Long term capital leases
    
    
    (140
    )Estimated fair value, net assets acquired
    
    
    811Goodwill
    
    
    8,262Other intangible assets
    
    
    860Total purchase price
    
    $
    9,933
  Intangible Assets
    
    ValueCustomer list
    
    $
    500Non-compete agreements
    
    
    200Software
    
    
    60Trademarks/Tradenames
    
    
    100Total
    
    $
    860
  13




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands)
 Pro Forma Financial Data
  Three Months EndedMarch 312005 (1)
    
    2006Pro forma revenues
    
    $
    16,343
    
    
    $
    23,305Pro forma net income
    
    
    2,924
    
    
    
    2,876Pro forma basic income per share
    
    
    0.16
    
    
    
    0.16Pro forma diluted income per share
    
    
    0.15
    
    
    
    0.15Pro forma basic weighted average shares outstanding
    
    
    18,150
    
    
    
    18,422Pro forma diluted weighted average shares outstanding
    
    
    19,069
    
    
    
    19,154
 
 (1)
    
    The 2005 pro forma basic weighted shares outstanding include the 113 shares issued to
acquire Rapidtext. In addition, the pro forma diluted weighted average shares outstanding
include the 10 options the Company assumed as a part of the acquisition. 14




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS 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 Costa Rica, and other risks discussed in Managements Discussion and Analysis of
Financial Condition and Results of Operations  Risk Factors in this report and in our latest
report on Form 10-K filed with the Securities and Exchange Commission (SEC). 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 SEC.
 
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
   Sources of Revenues
  
    
    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 revenues associated with the installation and
integration of new clients into our telecommunications, information technology and client
reporting structures.
  15




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 Key Expense Categories
 Cost of revenues.
 Selling, general and administrative.
 Critical Accounting Policies and Estimates
  Revenues and Deferred Revenue Recognition
    Accounting for Stock-based Awards
  16




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 Three Months Ended March 31,2005
    
    
    2006Cost of revenues
    
    $
    79
    
    
    $
    109Selling, general & administrative
    
    
    168
    
    
    
    380$
    247
    
    
    $
    489
  Accounting for Income Taxes
   Long-lived Asset Impairment
  17




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 Results of Operations
  Three Months EndedMarch 31,2005
    
    2006Revenues
    
    
    100
    %
    
    
    100
    %Cost of revenues (exclusive of management incentive plan and
depreciation expense shown below)
    
    
    55
    
    
    
    58Management incentive plan  cost of revenues
    
    
    
    
    
    
    Selling, general, and administrative (exclusive of management
incentive plan expense shown below)
    
    
    19
    
    
    
    21Management incentive plan  selling, general, and administrative
    
    
    
    
    
    
    Depreciation and amortization
    
    
    7
    
    
    
    6Income from operations
    
    
    18
    
    
    
    15Interest (income) net of interest expense
    
    
    (2
    )
    
    
    (2
    )Other expense (income)
    
    
    
    
    
    
    Income before provision for income taxes
    
    
    20
    
    
    
    16Provision for income taxes
    
    
    
    
    
    
    4Net income
    
    
    20
    %
    
    
    13
    %
 Three Months Ended March 31, 2006 compared with Three Months Ended March 31, 2005
 Revenues
  Cost of Revenues
  Selling, General, and Administrative
  Liquidity and Capital Resources
  18




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
  Operating Activities
  Investing Activities
   Financing Activities
   Off-Balance Sheet Arrangements
  19




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER
ENDED MARCH 31, 2006
 
 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
FORM 10-Q FOR THE QUARTER
ENDED MARCH 31, 2006
 Changes in internal control over financial reporting.
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER
ENDED MARCH 31, 2006
 
 PART IIOTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  Our revenues are highly dependent on three
major clients that collectively accounted for 51% of our
revenues for the quarter ended March 31, 2006, and any loss of business from our major clients would
reduce our revenues and seriously harm us.
  Substantial future sales of our common stock in the public market could cause our stock price to
fall.
  We have no prior experience with operations in Costa Rica and will be 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.
    
    Government regulations and bureaucratic constraints may increase the cost of doing
business in Costa Rica or result in delays that preclude us from fulfilling our
contractual obligations.
    
    We are highly dependent on our computer and telecommunications equipment and software
systems in order to conduct our business. If the telecommunications equipment were to fail,
experience problems or if the service is interrupted or unreliable, we may be unable to
service our clients or fulfill our contractual obligations.
    
    Our Costa Rican operations are currently dependent upon an anchor
Fortune 500 client, and if this client cancels
its contract or ceases doing business with us, the company would likely incur losses.
    
    Our facilities are at risk of damage by earthquakes and other natural disasters.
    
    We may have overestimated the demand for Spanish language BPO services which may not be
sufficient to support our Costa Rican operations.
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER
ENDED MARCH 31, 2006
 
 Item 6. Exhibits
 ExhibitNumber31.1
    
    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*
    
    Section 1350 Certification of Chief Executive Officer of the
Company in accordance with Section 906 of the Sarbanes-Oxley Act
of 200232.2*
    
    Section 1350 Certification of Chief Financial Officer of the
Company in accordance with Section 906 of the Sarbanes-Oxley Act
of 2002
 
 *
    
    The material contained in this exhibit is not deemed filed with the SEC 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. 
 SIGNATURE
  PeopleSupport, Inc.By:
    
    /s/ Caroline RookCaroline RookChief Financial Officer(Principal Financial and Accounting Officer)
 23