##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 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: 001-33679
 PeopleSupport, Inc.
 (Exact name of Registrant as specified in its charter)
 Delaware(State or other jurisdiction of 
incorporation or organization)
    
    95-4695021(I.R.S. Employer
Identification No.)
 1100 Glendon Ave., Suite 1250, Los Angeles, California 90024  (Address of principal executive offices)
 (310) 824-6200  (Registrants telephone number, including area code)
 
 þ o
  Large accelerated filero
    
    Accelerated Filerþ
    
    Non-accelerated filer o
    
    Smaller reporting companyo(Do not check if a smaller reporting company)
 o þ




---



##### 



PEOPLESUPPORT, INC.
FORM 10-Q
FOR THE QUARTER ENDED
June 30, 2008
 INDEX
 PagePART I  FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31,
2007 (unaudited)
    
    
    1Consolidated Statements of Operations and Other Comprehensive Income for the
three and six month periods ended June 30, 2008 (unaudited) and 2007 (unaudited)
    
    
    2Consolidated Statements of Cash Flows for the six months ended June 30, 2008
(unaudited) and 2007 (unaudited)
    
    
    3Notes to Consolidated Financial Statements (unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    31PART II  OTHER INFORMATION
    
    
    31Item 1. Legal Proceedings
    
    
    31Item 1A. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    34Item 6. Exhibits
    
    
    34Signature
    
    
    35Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 PEOPLESUPPORT, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)
 June 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    84,269
    
    
    $
    78,403Marketable securities
    
    
    5,813
    
    
    
    19,996Accounts receivable, net of allowance for doubtful accounts of $375 and $329
    
    
    18,446
    
    
    
    19,206Land held for sale
    
    
    6,948
    
    
    
    Prepaid expenses and other current assets
    
    
    4,417
    
    
    
    17,149Total current assets
    
    
    119,893
    
    
    
    134,754Property and equipment, net
    
    
    24,085
    
    
    
    33,761Marketable securities
    
    
    24,028
    
    
    
    23,326Deferred tax assets
    
    
    3,292
    
    
    
    23,366Goodwill and other intangible assets, net
    
    
    8,182
    
    
    
    8,267Other non-current assets
    
    
    2,425
    
    
    
    9,736Total assets
    
    $
    181,905
    
    
    $
    233,210LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,933
    
    
    $
    2,446Accrued compensation
    
    
    5,128
    
    
    
    4,218Accrued liabilities
    
    
    5,626
    
    
    
    6,965Deferred revenue
    
    
    2,797
    
    
    
    5,252Deferred tax liabilities
    
    
    850
    
    
    
    4,205Derivative liabilities
    
    
    4,647
    
    
    
    Other current liabilities
    
    
    23
    
    
    
    66Total current liabilities
    
    
    21,004
    
    
    
    23,152Deferred rent
    
    
    3,028
    
    
    
    2,580Other non-current liabilities
    
    
    38
    
    
    
    47Total liabilities
    
    
    24,070
    
    
    
    25,779Commitments and contingenciesStockholders equity:Common stock; $0.001 par value; authorized 87,000 shares; 19,034 and
21,599 shares issued and outstanding at June 30, 2008 and
December 31, 2007, respectively
    
    
    19
    
    
    
    22Additional paid-in capital
    
    
    175,031
    
    
    
    195,472Retained (deficit) earnings
    
    
    (13,433
    )
    
    
    10,700Accumulated other comprehensive (loss) income
    
    
    (3,782
    )
    
    
    1,237Total stockholders equity
    
    
    157,835
    
    
    
    207,431Total liabilities and stockholders equity
    
    $
    181,905
    
    
    $
    233,210
   1




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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    36,375
    
    
    $
    34,328
    
    
    $
    72,095
    
    
    $
    67,925Cost of revenues
    
    
    25,269
    
    
    
    23,985
    
    
    
    49,103
    
    
    
    45,679Selling, general and administrative
    
    
    9,234
    
    
    
    7,491
    
    
    
    17,599
    
    
    
    15,849Depreciation and amortization
    
    
    2,582
    
    
    
    2,334
    
    
    
    5,197
    
    
    
    4,795(Loss) income from operations
    
    
    (710
    )
    
    
    518
    
    
    
    196
    
    
    
    1,602Interest income, net
    
    
    881
    
    
    
    1,530
    
    
    
    2,113
    
    
    
    3,003Other (expense) income
    
    
    (1,239
    )
    
    
    2,115
    
    
    
    (7,701
    )
    
    
    3,238(Loss) income before provision for income taxes
    
    
    (1,068
    )
    
    
    4,163
    
    
    
    (5,392
    )
    
    
    7,843Income tax provision
    
    
    (203
    )
    
    
    (256
    )
    
    
    (17,712
    )
    
    
    (72
    )Net (loss) income
    
    $
    (1,271
    )
    
    $
    3,907
    
    
    $
    (23,104
    )
    
    $
    7,771Basic (loss) earnings per share
    
    $
    (0.06
    )
    
    $
    0.17
    
    
    $
    (1.11
    )
    
    $
    0.33Diluted (loss) earnings per share
    
    $
    (0.06
    )
    
    $
    0.16
    
    
    $
    (1.11
    )
    
    $
    0.32Basic weighted average shares outstanding
    
    
    20,219
    
    
    
    23,561
    
    
    
    20,878
    
    
    
    23,531Diluted weighted average shares outstanding
    
    
    20,219
    
    
    
    24,025
    
    
    
    20,878
    
    
    
    24,197
   2




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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 Six Months Ended June 30,2008
    
    
    2007OPERATING ACTIVITIESNet (loss) income
    
    $
    (23,104
    )
    
    $
    7,771Adjustments to reconcile net (loss) income to net cash provided by operating activities:Depreciation and amortization
    
    
    5,197
    
    
    
    4,795Allowance for doubtful accounts
    
    
    27
    
    
    
    588Stock-based compensation expense
    
    
    3,315
    
    
    
    2,515Amortization of deferred compensation costs
    
    
    
    
    
    
    171Unrealized loss on derivatives
    
    
    5,868
    
    
    
    Deferred income taxes
    
    
    16,718
    
    
    
    (612
    )Tax benefits from employee stock option exercises
    
    
    
    
    
    
    (37
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    734
    
    
    
    (2,643
    )Prepaid expenses and other assets
    
    
    13,952
    
    
    
    (1,187
    )Accounts payable and accrued liabilities
    
    
    (1,066
    )
    
    
    (1,352
    )Deferred rent
    
    
    416
    
    
    
    467Deferred revenue
    
    
    (2,462
    )
    
    
    1,623Net cash provided by operating activities
    
    
    19,595
    
    
    
    12,099INVESTING ACTIVITIESProceeds from sale/maturities of marketable securities
    
    
    24,726
    
    
    
    58,951Purchases of marketable securities
    
    
    (11,475
    )
    
    
    (62,411
    )Purchases of property and equipment
    
    
    (2,181
    )
    
    
    (17,434
    )Net cash provided by (used for) investing activities
    
    
    11,070
    
    
    
    (20,894
    )FINANCING ACTIVITIESPayments of capital lease obligation
    
    
    (10
    )
    
    
    (29
    )Tax benefits from employee stock option exercises
    
    
    
    
    
    
    37Proceeds from the exercise of stock options
    
    
    355
    
    
    
    361Repurchase of common stock
    
    
    (25,144
    )
    
    
    Public offering costs
    
    
    
    
    
    
    (168
    )Net cash (used for) provided by financing activities
    
    
    (24,799
    )
    
    
    201Effect of exchange rate changes on cash
    
    
    
    
    
    
    (4
    )Net increase (decrease) in cash and cash equivalents
    
    
    5,866
    
    
    
    (8,598
    )Cash and cash equivalents, beginning of period
    
    
    78,403
    
    
    
    80,880Cash and cash equivalents, end of period
    
    $
    84,269
    
    
    $
    72,282NON-CASH ACTIVITIESUnrealized
holding losses on marketable securities
    
    $
    (230
    )
    
    $
    (525
    )Non-cash
other comprehensive (loss) income adjustment for pension liabilities
    
    
    (163
    )
    
    $
    (26
    )
   3




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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note 1. Description of Business
   Note 2. Basis of Presentation
 Basis of Presentation
  Reclassifications
  Use of Estimates
  Concentrations of Risk
     4




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    As of June 30,% of Revenue
    
    
    % of Revenue
    
    
    % of A/R, netClients
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Client A
    
    
    21
    %
    
    
    25
    %
    
    
    21
    %
    
    
    21
    %
    
    
    7
    %
    
    
    28
    %Client B
    
    
    19
    %
    
    
    14
    %
    
    
    18
    %
    
    
    15
    %
    
    
    25
    %
    
    
    11
    %Client C
    
    
    14
    %
    
    
    7
    %
    
    
    14
    %
    
    
    5
    %
    
    
    12
    %
    
    
    9
    %Client D
    
    
    5
    %
    
    
    15
    %
    
    
    6
    %
    
    
    15
    %
    
    
    6
    %
    
    
    16
    %Client E
    
    
    9
    %
    
    
    9
    %
    
    
    9
    %
    
    
    9
    %
    
    
    13
    %
    
    
    9
    %
 Revenue Recognition
  Cost of Revenues
  Marketable Securities
 Accounting for Certain Investments in Debt and
Equity Securities" The Meaning of Other-Than-Temporary
Impairment and Its Applications to Certain Investments
  5




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Impairment of Long-lived Assets
   Goodwill and Other Intangible Assets
  Share-Based Compensation Expense
  Share-Based Payment
 Derivative Instruments
 Accounting for Derivative Instruments and Hedging Activities
  6




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Fair Value of Financial Instruments
 , Fair Value Measurements" ,
The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of
FASB Statement No. 115"
   Note 3. Marketable Securities
   Amortized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gain (Loss)
    
    
    ValueGovernment bonds
    
    $
    21,627
    
    
    $
    (83
    )
    
    $
    21,544Corporate bonds
    
    
    2,167
    
    
    
    (310
    )
    
    
    1,857Mortgage/asset backed securities
    
    
    4,771
    
    
    
    (247
    )
    
    
    4,524Preferred stock
    
    
    2,675
    
    
    
    (759
    )
    
    
    1,916Total
    
    $
    31,240
    
    
    $
    (1,399
    )
    
    $
    29,841
  7




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##### Table of Contents



Short-Term
    
    
    Long-Term
    
    
    TotalMarketable
    
    
    Marketable
    
    
    MarketableSecurities
    
    
    Securities
    
    
    SecuritiesGovernment bonds
    
    $
    5,482
    
    
    $
    16,062
    
    
    $
    21,544Corporate bonds
    
    
    
    
    
    
    1,857
    
    
    
    1,857Mortgage/asset backed securities
    
    
    331
    
    
    
    4,193
    
    
    
    4,524Preferred stock
    
    
    
    
    
    
    1,916
    
    
    
    1,916Total
    
    $
    5,813
    
    
    $
    24,028
    
    
    $
    29,841
   Mortgage/Asset
    
    
    
    
    
    
    TotalCorporate
    
    
    Government
    
    
    Backed
    
    
    Preferred
    
    
    MarketableMaturities
    
    Bonds
    
    
    Bonds
    
    
    Securities
    
    
    Stock
    
    
    Securities1 year
    
    $
    
    
    
    $
    5,482
    
    
    $
    331
    
    
    $
    
    
    
    $
    5,8131 to 5 years
    
    
    1,220
    
    
    
    15,591
    
    
    
    
    
    
    
    1,916
    
    
    $
    18,7275 to 10 years
    
    
    637
    
    
    
    471
    
    
    
    316
    
    
    
    
    
    
    $
    1,42410+ years
    
    
    
    
    
    
    
    
    
    
    3,877
    
    
    
    
    
    
    $
    3,877Total
    
    $
    1,857
    
    
    $
    21,544
    
    
    $
    4,524
    
    
    $
    1,916
    
    
    $
    29,841
  Amortized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gain (Loss)
    
    
    ValueGovernment bonds
    
    $
    19,102
    
    
    $
    31
    
    
    $
    19,133Corporate bonds
    
    
    3,394
    
    
    
    (367
    )
    
    
    3,027Mortgage/asset backed securities
    
    
    18,656
    
    
    
    (143
    )
    
    
    18,513Preferred stocks
    
    
    3,343
    
    
    
    (694
    )
    
    
    2,649Total
    
    $
    44,495
    
    
    $
    (1,173
    )
    
    $
    43,322
  Short-Term
    
    
    Long-Term
    
    
    TotalMarketable
    
    
    Marketable
    
    
    MarketableSecurities
    
    
    Securities
    
    
    SecuritiesGovernment bonds
    
    $
    18,021
    
    
    $
    1,112
    
    
    $
    19,133Corporate bonds
    
    
    
    
    
    
    3,027
    
    
    
    3,027Mortgage/asset backed securities
    
    
    1,975
    
    
    
    16,538
    
    
    
    18,513Preferred stocks
    
    
    
    
    
    
    2,649
    
    
    
    2,649Total
    
    $
    19,996
    
    
    $
    23,326
    
    
    $
    43,322
  8




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##### Table of Contents



Note 4. Fair Value Disclosures
      Fair Valueas of June 30,Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    2008(In thousands)Marketable securities
 short term
    
    $
    
    
    
    $
    5,813
    
    
    $
    
    
    
    $
    5,813Marketable securities
 long term
    
    
    
    
    
    
    9,028
    
    
    
    15,000
    
    
    
    24,028Total assets
    
    $
    
    
    
    $
    14,841
    
    
    $
    15,000
    
    
    $
    29,841Derivative liabilities
    
    $
    
    
    
    $
    4,647
    
    
    $
    
    
    
    $
    4,647Total liabilities
    
    $
    
    
    
    $
    4,647
    
    
    $
    
    
    
    $
    4,647
     9




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Note 5. Stockholders Equity and Accumulated Comprehensive Income (Loss)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net (loss) income
    
    $
    (1,271
    )
    
    $
    3,907
    
    
    $
    (23,104
    )
    
    $
    7,771Other comprehensive (loss) income:Change in foreign currency translation
adjustment
    
    
    (58
    )
    
    
    5
    
    
    
    (45
    )
    
    
    372Change in
unrealized loss on securities
    
    
    (293
    )
    
    
    (636
    )
    
    
    (230
    )
    
    
    (525
    )Change in minimum pension liability adjustment
    
    
    (80
    )
    
    
    (35
    )
    
    
    (163
    )
    
    
    (26
    )Change in unrealized gain (loss) on
derivative instruments
    
    
    (4,581
    )
    
    
    
    
    
    
    (4,581
    )
    
    
    Total comprehensive (loss) income
    
    $
    (6,283
    )
    
    $
    3,241
    
    
    $
    (28,123
    )
    
    $
    7,592
 Note 6. Computation of Earnings Per Share
   10




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Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net (loss) income available to common stockholders
    
    $
    (1,271
    )
    
    $
    3,907
    
    
    $
    (23,104
    )
    
    $
    7,771Denominator:Denominator
for basic net (loss) income per share  weighted average shares
    
    
    20,219
    
    
    
    23,561
    
    
    
    20,878
    
    
    
    23,531Dilutive common stock options
    
    
    
    
    
    
    425
    
    
    
    
    
    
    
    616Dilutive restricted stock units
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    50Denominator for diluted net (loss) income per share 
adjusted weighted average shares
    
    
    20,219
    
    
    
    24,025
    
    
    
    20,878
    
    
    
    24,197Basic net (loss) income per share
    
    $
    (0.06
    )
    
    $
    0.17
    
    
    $
    (1.11
    )
    
    $
    0.33Diluted net (loss) income per share
    
    $
    (0.06
    )
    
    $
    0.16
    
    
    $
    (1.11
    )
    
    $
    0.32
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Options
    
    
    1,139
    
    
    
    885
    
    
    
    1,035
    
    
    
    531Warrants and restricted stock units
    
    
    80
    
    
    
    119
    
    
    
    76
    
    
    
    33
 Note 7.  Share-based Compensation
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Cost of revenues
    
    $
    219
    
    
    $
    460
    
    
    $
    520
    
    
    $
    862Selling, general & administrative
    
    
    1,404
    
    
    
    898
    
    
    
    2,795
    
    
    
    1,653$
    1,623
    
    
    $
    1,358
    
    
    $
    3,315
    
    
    $
    2,515
 Stock Options
 Share-Based Payment,
  11




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Expected volatility
    
    
    65
    %
    
    
    66
    %
    
    
    65
    %
    
    
    58
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected term
    
    
    3.2
    
    
    
    4.0
    
    
    
    4.1
    
    
    
    4.3Risk free interest rate
    
    
    3.3
    %
    
    
    4.6
    %
    
    
    2.8
    %
    
    
    4.5
    %
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Weighted average fair value
    
    $
    3.97
    
    
    $
    6.62
    
    
    $
    4.46
    
    
    $
    8.08
  Restricted Stock Units
  Note 8.  Pension Plan
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2008Service cost
    
    $
    12
    
    
    $
    24Interest cost
    
    
    2
    
    
    
    5Expected return on plan assets
    
    
    (13
    )
    
    
    (27
    )Amortization of net transition obligation
    
    
    
    
    
    
    1Amortization of net actuarial loss
    
    
    (80
    )
    
    
    (164
    )Net periodic benefit cost
    
    $
    (79
    )
    
    $
    (161
    )
    12




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##### Table of Contents



Note 9. Derivative Instruments
     Note 10.  Income Taxes
   Accounting for Uncertainty in Income Taxes
 Accounting for Uncertainty in Income Taxes  an Interpretation of FASB
Statement No. 109 Accounting for Income Taxes
  13




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Note 11.  Segment and Geographic Information
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue:U.S.
    
    $
    33,411
    
    
    $
    33,186
    
    
    $
    66,679
    
    
    $
    66,660Foreign
    
    
    2,964
    
    
    
    1,142
    
    
    
    5,416
    
    
    
    1,265Total revenue
    
    $
    36,375
    
    
    $
    34,328
    
    
    $
    72,095
    
    
    $
    67,925
 As of
    
    
    As ofJune 30,
    
    
    December 31,2008
    
    
    2007Total assets:U.S.
    
    $
    96,962
    
    
    $
    159,511Philippines
    
    
    81,790
    
    
    
    71,998Costa Rica
    
    
    3,153
    
    
    
    1,701Total assets
    
    $
    181,905
    
    
    $
    233,210
 Note 12.  Contingencies
    14




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##### Table of Contents



Note 13. Commitments
   Note 14.  Property Company
   Note 15.  Line of Credit
  Note 16. New Accounting Pronouncements
 Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities Earnings per Share.
  15




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The Hierarchy of Generally Accepted Accounting
Principles, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting Principles
 Determination of the Useful Life
of Intangible Assets, Goodwill and Other Intangible Assets Business Combinations,
 Disclosures about Derivative Instruments and
Hedging Activities, ,
 Business Combinations Business Combinations Accounting for Income Taxes Goodwill and Other Intangible Assets
  16




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##### Table of Contents



Non-controlling Interests in Consolidated Financial Statements Consolidated Financial Statements
 Note 17. Stock Repurchase Program
   Note 18. Related Party Transactions
  Note 19. Stockholder Rights Plan
  Note 20. Subsequent Event
   17




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##### Table of Contents



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 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 regarding the benefits of our services, our business
model, our competitive strengths, our growth, profitability and
long-term value, our tax incentive in the Philippines, our critical
account policies, recent accounting pronouncements, our expectations
regarding our revenues, clients, expenses,
anticipated cash needs, estimates regarding its capital requirements
and our needs for
additional financing or debt, our forward contracts, our internal
controls, and our legal proceedings. 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 beliefs as well as assumptions we make using
information currently available. 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 or not currently considered material. Should one or more of the
circumstances described in our risk factors 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 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 the
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 do not undertake any 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 it files from time
to time with the SEC.
 All references to PeopleSupport, we, our, or the Company mean PeopleSupport, Inc.
and its subsidiaries, except where it is clear from the context that
such terms mean PeopleSupport, Inc. and excludes subsidiaries.
  Overview
   
    
    we have a low cost offshore delivery model;
    
    we offer industry expertise with a focus on collaborative client relationships;
    
    we offer sales and delivery effort focused on every step of the customer
interaction; and
    
    we provide scalable delivery and technology platform.
  18




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##### Table of Contents




    
    increase organic growth, add new customers and expand geographies;
    
    deliver high quality, value-added multilingual services;
    
    diversify service offerings to leverage existing infrastructure;
    
    expand to additional countries;
    
    pursue selective strategic acquisitions; and
    
    improve operational efficiencies to partly mitigate unfavorable impact of
appreciating foreign currencies.
 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. Such fees represent greater
than 90% of our total revenues.
    
    implementation fees, including revenue associated with the installation and
integration of new clients into the Companys telecommunications, information
technology and client reporting structures.
   Key Expense Categories
 Cost of revenues.
  Selling, general and administrative.
 Depreciation and amortization.
  19




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##### Table of Contents



Recent Transaction
  Critical Accounting Policies and Estimates
  Revenues and Deferred Revenue Recognition
 Revenue Recognition in Financial Statements Revenue Recognition
   Accounting for Share-based Compensation
   Accounting for Income Taxes
 Accounting for Income Taxes.
   20




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##### Table of Contents



Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109, Accounting for Income Taxes
 Marketable Securities
 Accounting for Certain Investments in Debt
and Equity Securities The Meaning of
Other-Than-Temporary Impairment and Its Applications to Certain Investments
    21




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Long-lived Asset Impairment
    Derivative Instruments
 Accounting for Derivative Instruments and Hedging Activities
    Recent Accounting Pronouncements
 Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities Earnings per Share.
  22




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 Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants
 The Hierarchy of Generally Accepted
Accounting Principles, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles
 Determination of the Useful
Life of Intangible Assets, Goodwill and Other Intangible Assets Business Combinations,
 Disclosures about Derivative Instruments
and Hedging Activities, ,
  23




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##### Table of Contents



Business Combinations Business Combinations Accounting for Income Taxes Goodwill and Other Intangible Assets
 Non-controlling Interests in Consolidated Financial Statements Consolidated Financial Statements
 Summary Financial Results
   
    
    An increase in selling, general and administrative expenses of $1.7 million driven by
increases of $0.3 million in payroll related costs due primarily to growth in headcount,
annual merit increases and appreciation in the value of the Philippine peso against the
U.S. dollar, $0.5 million in share-based compensation expense, $0.3 million representing
fees for consulting services provided by independent third party legal firms and $0.4
million in rent expense as a result of the occupation of additional office space in the
Philippines
 
    
    The Philippine peso fluctuation, which appreciated 8.4% compared to a year-ago and
depreciated 5.0% compared to the previous quarter, on average
  24




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##### Table of Contents




    
    A $17.6 million non cash tax expense resulting from the establishment a deferred
income tax valuation allowance net of an additional federal tax benefits reflecting
managements belief that it is more likely than not that the U.S. deferred tax asset will
not be realized.
 
    
    An increase in selling, general and administrative expenses of $1.7 million driven by
increases of $0.3 million in payroll related costs due primarily to growth in headcount,
annual merit increases and fluctuations in the value of the Philippine peso against the
U.S. dollar, $1.1 million in share-based compensation expense and $0.3 million
representing employee travel, relocation and housing fees.
 
    
    A loss of $7.7 million during the six months ended June 30, 2008 primarily due to
the mark-to-market loss of $5.9 million from our Philippine peso forward contracts prior
to their sale at the end of March 2008 and the depreciation of
the Philippine peso.
 Results of Operations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue(Unaudited, dollar amounts in millions)Revenues
    
    $
    36.4
    
    
    
    100.0
    
    
    $
    34.3
    
    
    
    100.0
    
    
    $
    72.1
    
    
    
    100.0
    
    
    $
    67.9
    
    
    
    100.0Cost of revenues
    
    
    25.3
    
    
    
    69.5
    
    
    
    24.0
    
    
    
    70.0
    
    
    
    49.1
    
    
    
    68.1
    
    
    
    45.7
    
    
    
    67.3Selling, general, and administrative
    
    
    9.2
    
    
    
    25.3
    
    
    
    7.5
    
    
    
    21.9
    
    
    
    17.6
    
    
    
    24.4
    
    
    
    15.9
    
    
    
    23.4Depreciation and amortization
    
    
    2.6
    
    
    
    7.1
    
    
    
    2.3
    
    
    
    6.7
    
    
    
    5.2
    
    
    
    7.2
    
    
    
    4.7
    
    
    
    6.9Income (loss) from operations
    
    
    (0.7
    )
    
    
    (1.9
    )
    
    
    0.5
    
    
    
    1.5
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    1.6
    
    
    
    2.4Interest income, net
    
    
    0.9
    
    
    
    2.5
    
    
    
    1.5
    
    
    
    4.4
    
    
    
    2.1
    
    
    
    2.9
    
    
    
    3.0
    
    
    
    4.4Other income (expense)
    
    
    (1.2
    )
    
    
    (3.3
    )
    
    
    2.1
    
    
    
    6.1
    
    
    
    (7.7
    )
    
    
    (10.7
    )
    
    
    3.2
    
    
    
    4.8Income (loss) before provision for
income taxes
    
    
    (1.0
    )
    
    
    (2.7
    )
    
    
    4.1
    
    
    
    12.1
    
    
    
    (5.4
    )
    
    
    (7.5
    )
    
    
    7.8
    
    
    
    11.5Income tax provision
    
    
    0.2
    
    
    
    0.5
    
    
    
    0.3
    
    
    
    0.9
    
    
    
    17.7
    
    
    
    24.5
    
    
    
    0.1
    
    
    
    0.1Net income (loss)
    
    $
    (1.2
    )
    
    
    (3.3
    )
    
    $
    3.8
    
    
    
    11.1
    
    
    $
    (23.1
    )
    
    
    (32.0
    )
    
    $
    7.7
    
    
    
    11.3
 Three Months Ended June 30, 2008 compared with Three Months Ended June 30, 2007
 Revenues
  Three Months Ended June 30,2008
    
    
    2007Time-delineated or production-based fees
    
    $
    34,129
    
    
    $
    31,869Set-up and training fees
    
    
    1,424
    
    
    
    915Other
    
    
    822
    
    
    
    1,544Total
    
    $
    36,375
    
    
    $
    34,328
   25




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Cost of Revenues
   Selling, General and Administrative
   Depreciation and Amortization
  Interest Income
   26




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Other Income (expense)
  Provision for Income Taxes
  Six Months Ended June 30, 2008 compared with Six Months Ended June 30, 2007
 Revenues
  Six Months Ended June 30,2008
    
    
    2007Time-delineated or production-based fees
    
    $
    67,916
    
    
    $
    63,653Set-up and training fees
    
    
    2,850
    
    
    
    2,221Other
    
    
    1,329
    
    
    
    2,051Total
    
    $
    72,095
    
    
    $
    67,925
  Cost of Revenues
   27




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##### Table of Contents



Selling, General and Administrative
  Depreciation and Amortization
  Interest Income
  Other Income (expense)
  Provision for Income Taxes
  Liquidity and Capital Resources
   28




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##### Table of Contents



Operating Activities
  Six Months Ended June 30,Key Drivers of Cash Provided by Operations
    
    2008
    
    
    2007(Unaudited, in thousands)Net (loss) income
    
    $
    (23,104
    )
    
    $
    7,771Deferred income taxes
    
    
    16,718
    
    
    
    (612
    )Liquidation
(acquisition) of prepaid expenses and other assets
    
    
    13,952
    
    
    
    (1,187
    )Unrealized loss on derivatives
    
    
    5,868
    
    
    
    Share-based compensation expense
    
    
    3,315
    
    
    
    2,515Net other activity
    
    
    2,846
    
    
    
    3,612Net cash provided by operating activities
    
    
    19,595
    
    
    
    12,099
    Investing Activities
     29




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##### Table of Contents



Financing Activities
   Off-Balance Sheet Arrangements
 Line of Credit
  Contractual Obligations
   Derivative Instruments
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Exchange Risk
   30




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##### Table of Contents



Interest Rate Sensitivity
   Inflation Rate Sensitivity
  
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
 Changes in internal control over financial reporting.
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   31




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##### Table of Contents



Item 1A. Risk Factors
  Failure to complete, or delays in completing,
the merger with Essar could materially and adversely affect our
results of operations and reduce the price of our stock.
  
    
    We will remain liable for significant transaction costs, including legal, accounting,
financial advisory and other costs relating to the merger;
    
    Under specified circumstances, we may have to pay a termination fee to Essar in the amount of $8,700,000;
    
    The attention of our management and our employees has been and may continue to be diverted
from day-to-day operations;
    
    Our sales may be disrupted by our current and potential clients uncertainty over when or if
the merger will be consummated;
    
    Our current and potential clients may decide not to purchase services from us or may defer
purchasing decisions indefinitely; and
    
    Our ability to attract new employees and retain existing employees may be difficult as a
result of the uncertainty about their future roles within PeopleSupport as an acquired business and
other uncertainties associated with the merger.
  Our revenues are highly dependent on three major clients that collectively accounted for
53% of our revenues for the six months ended June 30, 2008, and any loss of business from our
major clients would reduce our revenues and seriously harm us.
  Our investments in marketable securities are subject to risks which may cause losses.
    32




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##### Table of Contents



Our current tax holidays in the Philippines may not be extended.
  Inability to maintain effective hedges may expose us to significant foreign currency
risk.
  Substantial future sales of our common stock in the public market could cause our stock
price to fall. The sale of additional equity securities by us would result in further dilution
to our stockholders.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    None(b)
    
    None(c)
    
    On March 5, 2008, the Board of Directors authorized a stock repurchase program
to repurchase up to $25 million of the Companys outstanding shares of common stock on
the open market over a two-year period that will end on March 4, 2010. The program was
completed in June 2008.
 Average
    
    
    
    
    
    
    Dollar Value ofPrice Per
    
    
    
    
    
    
    Remaining SharesNumber of
    
    
    Share
    
    
    
    
    
    
    That May Yet BeShares
    
    
    (Excluding
    
    
    
    
    
    
    Purchased Under(In thousands, except per share data)
    
    Purchased
    
    
    Commissions)
    
    
    Purchase Price
    
    
    The PlanRepurchased shares March 1  March 31,
2008
    
    
    370
    
    
    $
    8.75
    
    
    $
    3,241
    
    
    $
    21,759Repurchased shares April 1  April 30,
2008
    
    
    516
    
    
    $
    10.13
    
    
    $
    5,228
    
    
    $
    16,531Repurchased shares May 1  May 31, 2008
    
    
    976
    
    
    $
    9.55
    
    
    $
    9,327
    
    
    $
    7,204Repurchased shares June 1  June 30, 2008
    
    
    776
    
    
    $
    9.29
    
    
    $
    7,204
    
    
    $
    Total
    
    
    2,638
    
    
    $
    9.47
    
    
    $
    25,000
    
    
    $
    
  33




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  
 Number of SharesVoted For
    
    
    Voted Against
    
    
    Withheld
    
    
    Non Votes1. To elect the
Class I directors
to hold office
until 2011 and
until their
respective
successors are
elected and
qualified 
Frank Perna
    
    
    8,468,288
    
    
    
    
    
    
    
    6,278,620
    
    
    
    Joe Rose
    
    
    8,394,285
    
    
    
    
    
    
    
    6,352,623
    
    
    
    2. To ratify the
appointment of
independent
registered public
accounting firm
    
    
    14,700,736
    
    
    
    37,917
    
    
    
    8,255
    
    
    
    3. To approve the
amendment and
restatement of the
Companys 2004
Stock Incentive
Plan, including
annual equity grant
limits to enable
the Company to
continue to deduct
the value of
certain grants from
the Companys
taxable income
    
    
    9,162,245
    
    
    
    1,117,344
    
    
    
    10,771
    
    
    
    4,456,548
 
 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.  34




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##### Table of Contents



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




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##### Table of Contents



EXHIBIT INDEX
 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.  36