##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-K
   þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period from
    
    to
    .   Commission File Number:
    000-50843
      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(Zip Code)(Address of principal executive
    offices)   Registrants telephone number, including area code
 (310) 824-6200
 Securities registered pursuant to Section 12(b) of the
    Act
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, par value
    $0.001 per share

NASDAQ Global Market   Securities registered pursuant to Section 12(g) of the
    Act:
 None
     o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
   o þ o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K




---



##### 



PeopleSupport,
    Inc. and SubsidiariesFORM 10-K
    For the Fiscal Year Ended December 31, 2006
    INDEX
  
  PART IItem 1.


Business


2Item 1A.


Risk
    Factors


12Item 1B.


Unresolved Staff
    Comments


22Item 2.


Properties


22Item 3.


Legal
    Proceedings


23Item 4.


Submission of
    Matters to a Vote of Security Holders


23PART IIItem 5.


Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


23Item 6.


Selected Financial
    Data


24Item 7.


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


27Item 7A.


Quantitative and
    Qualitative Disclosures about Market Risk


37Item 8.


Financial
    Statements and Supplementary Data


38Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


38Item 9A.


Controls and
    Procedures


38Item 9B.


Other
    Information


39PART IIIItem 10.


Directors,
    Executive Officers and Corporate Governance


40Item 11.


Executive
    Compensation


40Item 12.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


40Item 13.


Certain
    Relationships and Related Transactions, and Director
    Independence


40Item 14.


Principal
    Accountant Fees and Services


40PART IVItem 15.


Exhibits and
    Financial Statement Schedules


40SignaturesEXHIBIT 10.20EXHIBIT 10.21EXHIBIT 12EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 24.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




---



##### Table of Contents



SPECIAL
    NOTE REGARDING FORWARD-LOOKING STATEMENTS
  Form 10-K
     1




---



##### Table of Contents



PART I  Item 1.
    Business  Form 10-K
  Overview
  U.S.-based
  U.S.-based e-mails e-mail
       2




---



##### Table of Contents



Corporate
    Background and History
      The BPO
    Industry  Overview
    Current
    Trends in Customer Management
  e-mail,
    
    significant cost benefits;
    best practices in leveraging learned experiences across multiple
    clients in an efficient and effective manner, particularly
    within the clients specific industries; 3




---



##### Table of Contents




    the importance of professionally managed customer communications
    to retain and grow customer relationships;
    the ability to free available resources and management to focus
    on developing core products and services;
    the use of highly skilled professionals by the outsourcing
    industry;
    the extensive and ongoing staff training and associated costs
    required for maintaining in-house technical support and customer
    service solutions; and
    the ability to avoid capital requirements for the sophisticated
    communications technology needed to provide timely, high quality
    customer service.  Offshore
    Delivery of BPO Services
        Competitive
    Strengths
    Offshore
    Delivery Model
     4




---



##### Table of Contents



Deep
    Industry Expertise with a Focus on Developing Collaborative
    Client Relationships
    Sales
    and Service Delivery Effort Focused on Every Step of the
    Customer Interaction
    Scalable
    Delivery and Technology Platform
    Attractive
    Employment Culture
   5




---



##### Table of Contents



Growth
    Strategy
    Continue
    to Drive Strong Organic Growth
  U.S.-based
  Broaden
    Service Offerings to Leverage Existing
    Infrastructure
    Expand
    to Additional Countries
      Pursue
    Selective Strategic Acquisitions
   6




---



##### Table of Contents



Services
  Customer
    Management Services
    case-by-case per-minute
    
    Customer service.  Our customer service support
    services are initiated by inbound calls and
    e-mail from
    our clients customers and address a wide range of
    questions regarding their account billing, changes in services,
    reservation changes, delivery updates on goods or services,
    complaint and issue resolution and general product or service
    inquiries.
    Inbound sales.  We handle inbound calls from
    customers purchasing products and services from our clients,
    including travel reservations, telecommunications services,
    Internet services and consumer products and services. Our
    professionals are specifically trained to identify opportunities
    to sell other products and services offered by our clients. For
    some clients, an important aspect of our sales activity includes
    seeking to retain customers who are at risk for cancellation or
    defection.
    Technical support.  Our technical support
    services include handling troubleshooting calls, responding to
    software and hardware problems, providing support for Internet
    service problems, managing corporate help desks and providing
    warranty or post-warranty support.
    Direct response sales services.  Our direct
    response services involve handling inbound telephone orders or
    inquiries for clients in the direct marketing industry,
    including those calls received in response to print
    advertisements, infomercials and other electronic media. Our
    professionals answer questions and process orders for the
    purchase of our clients products or services and identify
    opportunities to sell other products and services.
    Accounts Receivable Management Services.  We
    collect consumer receivables in the financial services,
    telecommunications and utilities industries. We manage
    receivables that have already been written off by the creditor
    and also manage receivables that are past due but have not yet
    been written off by our clients.  e-mail
 7




---



##### Table of Contents



Transcription
    and Captioning Services
    Other
    BPO Services
    Clients
      Delivery
    Platform
    
    Hub and spoke architecture.  Our
    data centers located in the United States and the Philippines
    use a technical infrastructure designed to facilitate rapid
    expansion and consistency in delivering services to and from any
    of our outsourcing centers. Our data centers are connected to
    each other using multiple, redundant communication lines, which
    are dedicated International Private Lines (IPLs). Our hub
    and spoke operating model allows us to provide consistent
    and scalable business processes across multiple outsourcing
    centers. Applications and data are stored at our data center
    hubs in the United States and deployed at our
    spokes offshore. This allows us to quickly and
    efficiently handle additional volume and services for our new
    and existing clients and to expand our outsourcing network by
    establishing new spokes virtually anywhere in the
    world that is accessible with a fiber optic network.
    Robust data security.  We use several layers of
    information security protection, including applications and
    devices designed to prevent unauthorized access to data residing
    in our systems and aggressive monitoring of audit trails at
    application and network layers. All outside connections to our
    network must pass through a sophisticated security system that
    is supported by multiple firewalls. Data access to client
    back-end systems is also protected by these security measures.
    We constantly monitor the network for attacks by potential
    hackers. As required by our clients, we apply best practices to
    prevent our professionals from copying or transmitting customer
    data.
    Dedicated telecommunications network.  We have
    designed and deployed a dedicated telecommunications system
    which enables us to securely route multi-channel communications
    between the United States and our 8




---



##### Table of Contents



offshore outsourcing centers. Our system transmits
    communications traffic with minimal latency and high
    transmission quality over a private network leased from major
    telecommunications providers. Our lease agreements with these
    providers generally provide for annual terms and fixed fees
    based on the levels of capacity dedicated to our usage. Customer
    traffic is initially received by one of our U.S. data
    centers where we seamlessly route calls to the optimal location
    in the Philippines or Costa Rica based on our
    professionals skill sets and availability. In most cases,
    these communications between the United States and our offshore
    centers are indistinguishable from domestic communications
    between points within the United States.  
    Integrated customer communications
    channels.  We provide customer management services
    through multiple communications channels, including inbound
    telephone calls,
    e-mail and
    webchats. Our customer management professionals are trained to
    offer services through each of these communications channels.
    Our customer interaction systems are also integrated with our
    workforce management system, which is used to manage optimal
    staffing and service levels. These systems are all linked to a
    proprietary reporting system that is updated hourly for all
    interactions occurring in our outsourcing centers. This provides
    our clients with a single view of all interactions between our
    professionals and their customers. We also offer real-time
    reporting capabilities to our clients.
    Proprietary integrated Intellicenter feedback
    system.  Intellicenter is our proprietary
    reporting and analytical system that generates client-specific
    interaction reports. These reports are accessible to our clients
    on an hourly, daily, weekly and monthly basis. Intellicenter
    also provides access to customer contact transcripts and allows
    our clients to review the customer interaction database of all
    e-mail and
    webchat transcripts. The system provides historical trend
    information to help clients monitor the volume and effectiveness
    of our interactions with customers.
    24/7
    client helpdesk.  We have a helpdesk staffed
    24/7, which
    offers our clients complete coverage in the event of any system
    issues. We have established standardized procedures to identify,
    track, categorize and prioritize inquiries by order of
    importance to our clients. We also operate an information
    technology calling tree which allows us to escalate issues up
    the personnel chain of command as the situation warrants.
    Quality assurance.  Our quality assurance
    analysts use our quality management software to monitor service
    level compliance and randomly sample customer interactions. The
    system is configured for voice, data and computer screen capture
    to record the total customer experience and provide live
    monitoring and playback via a web browser from any location.  Sales and
    Marketing
    Sales
    and Marketing Support
    Client
    Development
    
    develop client relationships;
    help define the scope, deliverables and execution strategies for
    proposals; 9




---



##### Table of Contents




    prepare pricing estimates and margin analysis for proposed
    client contracts;
    finalize sales proposals and assist in the negotiation and
    closing of new client engagements; and
    assist in the negotiation and closing of new client arrangements.    Client
    Services
  day-to-day
  Employees
    Hiring
    and Recruiting
      Competition
    
    provide high quality professionals with strong customer
    interaction skills, including English language fluency with
    minimal accents;
    offer cost-effective pricing of services;
    deliver value-added and reliable solutions to clients;
    provide industry specific knowledge and expertise; 10




---



##### Table of Contents




    generate revenues for clients;
    secure our clients confidential data; and
    provide a technology platform that offers a seamless customer
    experience.  U.S.-based
  U.S.-based
        Proprietary
    Rights
    Regulation
     11




---



##### Table of Contents



and/or and/or
        Available
    Information
  Form 10-K Form 10-K Form 10-K.
  Item 1A.
    Risk
    Factors  Form 10-K Form 10-K.
 12




---



##### Table of Contents



Risks
    Related to Our Business
  Our
    revenues are highly dependent upon several major clients, and
    any loss of business from our major clients would reduce our
    revenues and seriously harm us.
    Our
    revenues are highly dependent on a few industries and any
    decrease in demand for outsourced services in these industries
    would likely reduce our revenues and seriously harm our
    business.
    Our
    operating results may fluctuate significantly and could cause
    the market price of our common stock to fall rapidly and without
    notice.
    A
    reversal of industry trends toward offshore outsourcing due to
    negative public reaction in the United States would harm
    our ability to compete effectively with competitors that operate
    facilities located in the United States.
   13




---



##### Table of Contents



We
    serve markets that are highly competitive, and increased
    competition, our inability to compete successfully against
    current or future competitors, pricing pressures or loss of
    market share could result in increased costs and reduced
    operating margins.
    Many
    of our contracts can be terminated by our clients on short
    notice and in many cases without penalty. We also generally do
    not have exclusive arrangements with our clients or a minimum
    revenue commitment from our clients, which creates uncertainty
    about the volume of services we will provide and the amount of
    revenues we will generate from any of our clients.
    We
    often encounter a long sales and implementation cycle requiring
    significant resource commitments by our clients, which they may
    be unwilling or unable to make.
    We
    have incurred substantial losses in the past and may not be
    profitable in the future.
    We
    have a limited operating history and our business and future
    prospects are difficult to evaluate.
   14




---



##### Table of Contents




    attract and retain clients;
    attract and retain key personnel and qualified professionals;
    generate sufficient revenues and manage costs to maintain
    profitability;
    integrate acquisitions, adjust to new businesses and develop
    operating procedures for new countries;
    manage growth in our operations; and
    access additional capital when required and on reasonable terms.  If we
    fail to manage our growth effectively, the quality of our
    services may decline, our revenue and margins may be reduced and
    we may incur losses.
    We may
    experience significant employee turnover rates in the future and
    we may be unable to hire and retain enough sufficiently trained
    employees to support our operations, which could harm our
    business.
    Our
    senior management team is important to our continued success and
    the loss of members of senior management could negatively affect
    our operations.
  U.S.-based
  Our
    facilities are at risk of damage by earthquake, typhoons,
    tsunamis and other natural disasters.
   15




---



##### Table of Contents



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.
   16




---



##### Table of Contents



Our
    clients may adopt technologies that decrease the demand for our
    services, which could reduce our revenues and seriously harm our
    business.
    Our
    ability to use net operating loss carryforwards in the United
    States may be limited.
    We may
    choose to expand operations to other countries and may not be
    successful.
    We may
    make acquisitions that prove unsuccessful or divert our
    resources.
   17




---



##### Table of Contents



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.
   18




---



##### Table of Contents



Terrorist
    attacks could adversely affect the economy, disrupt our
    operations and cause our business to suffer.
    Risks
    Related to Doing Business in the Philippines
  We may
    face competition in the Philippines for our professionals, which
    could increase the cost of qualified employees and the amount of
    employee turnover.
    The
    Philippines periodically experiences political or economic
    instability, which could disrupt our operations, increase our
    costs and harm our business.
      Currency
    fluctuations in the Philippine peso relative to the
    U.S. dollar has increased and could continue to increase
    our expenses.
      The
    current tax holidays in the Philippines may not be
    extended.
   19




---



##### Table of Contents



Risks
    Related to Doing Business in Costa Rica
  We
    have limited experience with operations in Costa Rica and are
    subject to particular risks associated with the development of
    operations in Costa Rica.
      
    we may be unable to find, hire or retain, at rates attractive to
    us, a sufficient number of qualified employees;
    currency fluctuations in the Costa Rican colon relative to the
    U.S. dollar could significantly increase our expenses;
    we are dependent on telecommunications service provided by a
    limited number of available vendors in order to conduct our
    business, and if the telecommunications service were to fail,
    experience problems or be interrupted or unreliable, we may be
    unable to service our client or fulfill our contractual
    obligations;
    our facilities are at risk of damage by earthquakes, typhoons
    and other natural disasters; and
    we may have overestimated the demand for Spanish language BPO
    services which may not be sufficient to expand our Costa Rican
    operations.  Our
    Costa Rican operations are dependent on a single client,
    Washington Mutual, which has the option to acquire the
    operations from us and therefore deprive us of our presence in
    Latin America.
    Government
    regulations and various bureaucratic constraints have increased
    and may continue to increase operational costs in Costa Rica
    beyond budgeted expectations.
    Risks
    Related to Our Stock
  Our
    stock price may be volatile, and you may not be able to resell
    shares of our common stock at or above the price you paid, or at
    all.
   20




---



##### Table of Contents



If
    securities or industry analysts cease publishing research or
    reports about our business or if they change negatively their
    recommendations regarding our stock, our stock price and trading
    volume could decline.
    We
    will continue to incur increased costs as a result of being a
    public company.
    Delaware
    law and our amended and restated certificate of incorporation
    and bylaws contain anti-takeover provisions that could delay or
    discourage business combinations and takeover attempts that
    stockholders may consider favorable.
    
    classify our board of directors into three groups, each of which
    will serve for staggered three-year terms;
    permit the board of directors to elect a director to fill a
    vacancy created by the expansion of the board of directors;
    permit stockholders to remove our directors only for cause;
    permit a special stockholders meeting to be called only by
    our chairman of the board of directors, president, or chief
    executive officer, a majority of our board of directors or
    two-thirds of the independent directors;
    require stockholders to give us advance notice to nominate
    candidates for election to our board of directors or to make
    stockholder proposals at a stockholders meeting;
    permit our board of directors to issue, without approval of our
    stockholders, up to 4,000,000 shares of preferred stock
    with terms that our board of directors may determine and that
    may be senior to the terms of our common stock;
    prohibit cumulative voting in the election of directors that
    would otherwise allow less than a majority of stockholders to
    elect directors; 21




---



##### Table of Contents




    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.    Future
    sales of our common stock in the public market could cause our
    stock price to fall.
  Form S-3
    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties     22




---



##### Table of Contents



Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    of Matters to a Vote of Security Holders   PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Performance
    Graph
  This graph shall not be deemed incorporated by reference by
    any general statement incorporating by reference this Annual
    Report on
    Form 10-K
    into any filing under the Securities Act of 1933 or under the
    Securities Exchange Act of 1934, except to the extent that the
    Company specifically incorporates this information by reference,
    and shall not otherwise be deemed filed under such Acts.
    
 23




---



##### Table of Contents



ASSUMES
    $100 INVESTED ON OCTOBER 1, 2004
    ASSUMES DIVIDENDS REINVESTD
    Year Ended December 31, 2006
    Total Return Analysis
  10/1/04


12/31/04


3/31/05


6/30/05


9/30/05PeopleSupport, Inc


$
100.00



$
153.38



$
135.38



$
140.31



$
120.77NASDAQ Stock Market Index


$
100.00



$
111.99



$
102.87



$
106.36



$
111.44Computer Programming And
    Data Processing Index


$
100.00



$
112.59



$
101.62



$
106.38



$
111.34   12/31/05


3/31/06


6/30/06


9/30/06


12/31/06PeopleSupport, Inc


$
130.62



$
150.77



$
207.08



$
284.62



$
323.85NASDAQ Stock Market Index


$
114.37



$
124.24



$
115.83



$
120.37



$
128.69Computer Programming And
    Data Processing Index


$
116.40



$
123.10



$
115.34



$
125.71



$
134.47       Price
    Range of Common Stock
    Quarter Ended

High


Low2006Fourth Quarter

$
22.29


$
18.03Third Quarter


18.92



11.05Second Quarter


14.55



9.90First Quarter


10.70



8.602005Fourth Quarter

$
9.00


$
7.16Third Quarter


10.07



7.85Second Quarter


10.50



8.12First Quarter


11.59



8.29     Dividend
    Policy
    Item 6.
    Selected
    Financial Data   24




---



##### Table of Contents



Form 10-K.
  Years Ended December 31,2006 (9)


2005


2004


2003


2002(In thousands, except per share data)Consolidated Statement of
    Operations Data:Revenues

$
110,119


$
62,124


$
44,511


$
30,013


$
19,780Cost of revenues (exclusive of
    depreciation expense shown below)(1)(2)


70,203



35,733



25,271



12,921



11,188Selling, general &
    administrative(1)(2)


20,719



12,554



14,270



6,134



5,587Depreciation and amortization


7,467



4,414



3,927



3,166



4,065Gain on sale of receivable
    portfolios(3)










(172
)






Restructuring charges(4)










(22
)


(345
)


3,824Income (loss) from operations


11,730



9,423



1,237



8,137



(4,884
)Interest expense


8











3



506Interest income


(2,548
)


(1,388
)


(231
)


(75
)


(90
)Gain on the extinguishment of
    debt(5)


















(2,430
)Other (income) expense


212



47



7



(8
)


9Income (loss) before provision
    (benefit) for income taxes


14,058



10,764



1,461



8,217



(2,879
)Provision (benefit) for income
    taxes(6)


(94
)


(12,065
)


(6,863
)


231



13Net income (loss)(7)

$
14,152


$
22,829


$
8,324


$
7,986


$
(2,892
)Net income (loss) per share of
    common stock:Basic(8)

$
0.74


$
1.26


$
1.39


$
3.15


$
(1.14
)Diluted(8)

$
0.72


$
1.21


$
0.55


$
0.64


$
(1.14
)Weighted average number of common
    shares outstanding:Basic(8)


19,088



18,165



5,996



2,533



2,533Diluted(8)


19,621



18,917



15,012



12,560



2,533   As of December 31,Consolidated Balance Sheet
    Data:

2006


2005


2004


2003


2002(In thousands)Cash and cash equivalents

$
80,880


$
27,760


$
41,583


$
12,151


$
5,179Marketable securities


59,653



23,853











Working capital


124,187



56,583



43,664



11,798



4,124Total assets


217,591



94,326



65,080



22,535



15,259Long term liabilities, less
    current portion


3,159



1,816



936



267



176Redeemable convertible preferred
    stock














74,110



74,110Total stockholders equity
    (deficit)

$
192,430


$
82,392


$
57,935


$
(56,611
)

$
(64,714
)  25




---



##### Table of Contents



(1)
    
    Included in expenses above are non-cash stock based compensation
    charges of:  Years Ended December 31,2006


2005


2004


2003


2002(In thousands)Cost of revenues

$
731


$
271


$
566


$
61


$
Selling, general &
    administrative


2,062



611



1,208



58



$
2,794


$
882


$
1,774


$
119


$
   (2)
    
    Under our Management Incentive Plan, we expensed $0.3, $0.3 and
    $5.3 million in years 2006, 2005 and 2004, respectively. We
    did not incur any expenses under the Management Incentive Plan
    in 2003 and 2002. For additional information on the Management
    Incentive Plan, please refer to Footnote 5 of the Financial
    Statements.(3)
    
    Gain on sale of receivable portfolios is the net amount we
    earned on the sale of two accounts receivable portfolios by our
    subsidiary, ProArm Management, Inc., during 2004.(4)
    
    Restructuring charges are comprised of estimated and actual
    obligations for various non-cancelable leases, the write-down of
    abandoned leasehold improvements and fixed assets at customer
    service centers in the United States where we terminated
    operations, and severance and other U.S. employee-related
    costs in connection with the movement of our operations, first
    to St. Louis, and then to the Philippines. We did not use
    the entire estimated amount and reduced the estimated amounts in
    2003 and 2004,(5)
    
    Gain on the extinguishment of debt relates to the extinguishment
    of an equipment loan.(6)
    
    See Managements Discussion and Analysis of Financial
    Condition and Results of Operations  Accounting for
    Income Taxes for additional information.(7)
    
    See Managements Discussion and Analysis of Financial
    Condition and Results of Operations for a comparison of
    net income for 2006, 2005 and 2004.(8)
    
    For information regarding the computation of per share amounts,
    refer to Note 6 to the Consolidated Financial Statements
    included in Item 15 in this Annual Report on
    Form 10-K.
    The basic and diluted share and per share amounts in the
    consolidated statement of operations table above have been
    restated to give retroactive effect to the 1 for 2.74 reverse
    stock split that was effected on August 5, 2004.(9)
    
    The Consolidated Statement of Operations Data for the year ended
    December 31, 2006 and the Consolidated Balance Sheet Data
    as of December 31, 2006, include the effects of the
    Rapidtext acquisition (See Note 13) and the adoption of
    SFAS 123(R) Share Based Payment (See
    Note 6). Therefore, the years presented prior to fiscal
    year 2006 may not be comparable to fiscal year 2006. 26




---



##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Future
    Uncertainties
  Managements Discussion and Analysis of Financial
    Condition and Results of Operations (MD&A) provides
    supplemental information which sets forth the major factors that
    have affected our financial condition and results of operation
    and should be read in conjunction with the consolidated
    financial statements and accompanying notes, which appear
    elsewhere in this Annual Report on
    Form 10-K.
    This section contains forward-looking statements that involve
    risks and uncertainties. Our actual results could differ
    materially from those anticipated in these forward-looking
    statements as a result of various factors, including those
    discussed below and elsewhere in this Annual Report on
    Form 10-K,
    particularly under the heading Risk Factors.
  Overview
    Quarterly
    Results of Operations and Performance Trends
  20061st Qtr.


2nd Qtr.


3rd Qtr.


4th Qtr.(In thousands, except per share data)Revenues

$
23,047


$
25,947


$
30,117


$
31,008Income from operations(1)


3,353



3,594



3,973



810Net income(2)


2,874



3,808



3,512



3,958Basic income per share

$
0.16


$
0.21


$
0.19


$
0.19Diluted income per share

$
0.15


$
0.20


$
0.18


$
0.18   20051st Qtr.


2nd Qtr.


3rd Qtr.


4th Qtr.(In thousands, except per share data)Revenues

$
14,056


$
14,739


$
16,317


$
17,012Income from operations


2,568



1,952



2,597



2,306Net income(3)


2,756



2,239



5,513



12,321Basic income per share

$
0.15


$
0.12


$
0.30


$
0.67Diluted income per share

$
0.15


$
0.12


$
0.29


$
0.65     (1)
    
    The decrease in fourth quarter 2006 income from operations as
    compared to the previous 2006 quarters was primarily due to the
    following items which total approximately
    $2.5 million  increased information technology
    infrastructure costs and various credits associated with our
    contract in Costa Rica with a single anchor client, increased
    depreciation expense due to overall capacity and infrastructure
    build, additional amortization related to our software licenses,
    increased Sarbanes Oxley compliance and audit costs, increased
    non-cash compensation charges and an increase to our allowance
    for doubtful accounts.(2)
    
    During the year ended December 31, 2006, we assessed the
    deferred tax asset valuation allowance each quarter and
    decreased the allowance by $0.5 million and
    $1.0 million in the second and fourth quarters. The
    allowance was increased in the third quarter by
    $0.1 million, for a net tax effect for all of 2006 of
    $1.4 million. 27




---



##### Table of Contents



(3)
    
    During the year ended December 31, 2005, we assessed the
    deferred tax asset valuation allowance each quarter and released
    $0.7 million, $0.4 million, $3.2 million and
    $10.3 million in the first, second, third and fourth
    quarters, respectively.Quarterly and
    year-to-date
    computations of earnings per share amounts are made
    independently, therefore, the sum of the per share amounts for
    the quarters may not agree with the per share amounts for the
    year.  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 revenue associated with the
    installation and integration of new clients into our
    telecommunications, information technology and client reporting
    structures.    U.S.-based
  Revenue
    Trends
        Status
    of Key Revenue Contracts
   28




---



##### Table of Contents



Key
    Expense Categories
  Cost of revenues. U.S.-based
      Selling, general and administrative. U.S.-based
  Depreciation and amortization.
 29




---



##### Table of Contents



Restructuring charges.
  Certain
    Charges and Gains
  Compensation obligations. $
  Critical
    Accounting Policies and Estimates
    Revenues
    and Deferred Revenue Recognition
      
    customer management fees, excluding implementation fees, as
    those services are performed;
    implementation fees ratably over the life of the
    contract; and
    commission revenues for contingent accounts receivable
    management contracts upon receipt of collected funds.       30




---



##### Table of Contents



Accounting
    for Stock based Awards
        Years Ended December 31,2006


2005


2004Risk free interest rate


4.8
%


4.2
%


3.7
%Expected life (years)


4.5



4.4



4.0Dividend yield


0.0
%


0.0
%


0.0
%Expected volatility


53
%


49
%


31
%Fair value


$7.81



$3.67



$5.31     Form 10-K
  Accounting
    for Income Taxes
     31




---



##### Table of Contents



Long-lived
    Asset Impairment
    Results
    of Operations
    Years Ended December 31,2006


2005


2004Consolidated Statements of
    Operations Data:Revenues


100
%


100
%


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


64



58



57Selling, general and administrative


19



20



32Depreciation and amortization


7



7



9Interest income


(2
)


(2
)


(1
)Benefit for income taxes






(19
)


(15
)Net income


13
%


37
%


19
%   Year
    Ended December 31, 2006 Compared with Year Ended
    December 31, 2005
  Revenues
    Cost of
    Revenues
    Selling,
    General and Administrative
   32




---



##### Table of Contents



Depreciation
    and Amortization
  U.S.-based
  Interest
    Income
    Income
    from Operations
    Benefit
    for Income Taxes
    Year
    Ended December 31, 2005 Compared with Year Ended
    December 31, 2004
  Revenues
    Cost of
    Revenues
   33




---



##### Table of Contents



Selling,
    General and Administrative
    Depreciation
    and Amortization
    Interest
    Income
      Income
    from Operations
    Benefit
    for Income Taxes
      Liquidity
    and Capital Resources
   34




---



##### Table of Contents



Year
    ended December 31, 2006
  Operating Activities:
    Investing Activities:
    Financing Activities:
  Year
    ended December 31, 2005
  Operating Activities:
  Investing Activities:
    Financing Activities:
 35




---



##### Table of Contents



Credit
    Agreement
    Contractual
    Obligations, Commitments and Off-balance Sheet
    Arrangements
      Years Ending December 31,

(In thousands)2007

$
3,9192008


3,7722009


2,8992010


3,2472011


3,219Thereafter


10,304Total minimum payments

$
27,360         Recent
    Accounting Pronouncements
   36




---



##### Table of Contents



Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk  Foreign
    Currency Exchange Risk
     37




---



##### Table of Contents



Interest
    Rate Sensitivity
    Inflation
    Rate Sensitivity
    Item 8.
    Financial
    Statements and Supplementary Data    Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Managements Report on Internal Control Over Financial
    Reporting. Rule 13a-15(f)
  
    pertain to the maintenance of records that, in reasonable
    detail, accurately and fairly reflect the transactions and
    dispositions of our assets;
    provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles and
    that our receipts and expenditures are being made only in
    accordance with authorizations of our management and our Board
    of Directors; and
    provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of our
    assets that could have a material effect on our financial
    statements.  Internal Control-Integrated Framework.
 38




---



##### Table of Contents



Rules 13a-15(e) 15d-15(e)
    Form 10-K, page F-2 Form 10-K.
  Changes in internal control over financial
    reporting. Rule 13a-15(f)
  Item 9B.
    Other
    Information   39




---



##### Table of Contents



PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Form 10-K:
  Financial
    Statements
  page F-1
  Consolidated
    Financial Statements of PeopleSupport, Inc.
  Report of BDO
    Seidman, LLP, Independent Registered Public Accounting
    Firm


F-1Report of BDO
    Seidman, LLP, Independent Registered Public Accounting
    Firm


F-2Consolidated
    Balance Sheets at December 31, 2005 and 2006


F-3Consolidated
    Statements of Operations and Comprehensive Income for the years
    ended December 31, 2004, 2005 and 2006


F-4Consolidated
    Statements of Stockholders Equity (Deficit) for the years
    ended December 31, 2004, 2005 and 2006


F-5Consolidated
    Statements of Cash Flows for the years ended December 31,
    2004, 2005 and 2006


F-6Notes to
    Consolidated Financial Statements


F-7  40




---



##### Table of Contents



Financial
    Statement Schedule
  Form 10-K
  Report of
    Independent Registered Public Accounting Firm
      Form 10-K,
    
       Schedule II  Valuation
    and Qualifying Accounts (in thousands)
  Years Ended December 31, 2004, 2005 and 2006Balance at


Charged toBeginning


Costs and





Balance atDescription

of Year


Expenses


Deduction


End of YearValuation allowance for accounts
    receivable 2004:

$
553


$
(51
)

$
(51
)

$
451Valuation allowance for accounts
    receivable 2005:


451



102



(66
)


487Valuation allowance for accounts
    receivable 2006:


487



528



(68
)


947   Balance atBeginning








Balance atof Year


Releases


Increases


End of YearDeferred income tax valuation
    allowance 2004

$
20,640


$
(3,842
)

$



$
16,798Deferred income tax valuation
    allowance 2005


16,798



(14,598
)






2,200Deferred income tax valuation
    allowance 2006


2,200



(2,350
)


150



    41




---



##### Table of Contents



Number

Description3
.1(1)

Amended and Restated Certificate
    of Incorporation3
.2(1)

Amended and Restated Bylaws4
.1(1)

Specimen Common Stock Certificate4
.2(1)

Amended and Restated Investor
    Rights Agreement10
.1*(1)

PeopleSupport, Inc. 1998 Stock
    Incentive Plan10
.2*(1)

Form of PeopleSupport, Inc. Stock
    Option Agreement (no acceleration on change of control)10
.3*(1)

Form of PeopleSupport, Inc. 1998
    Stock Option Agreement (includes acceleration on change of
    control)10
.4*(1)

PeopleSupport, Inc. 2002
    Management Incentive Plan10
.5*(1)

Amendment to PeopleSupport, Inc.
    2002 Management Incentive Plan10
.6(2)

Definitive Contract of Lease with
    Ayala Land, Inc. and PeopleSupport (Philippines), Inc. from
    August 1, 200510
.7*(1)

Letter Agreement, dated
    May 20, 2002, between PeopleSupport, Inc. and Caroline Rook10
.8(1)

Master Services Agreement, dated
    January 2, 2003, between PeopleSupport, Inc. and EarthLink,
    Inc.10
.9*(1)

Form of 2004 Stock Incentive Plan10
.10*(1)

Form of PeopleSupport, Inc. 2004
    Stock Incentive Plan Stock Option Agreement10
.11*(3)

Form of PeopleSupport, Inc. 2004
    Stock Incentive Plan Restricted Stock Units Agreement (for
    Executives)10
.12(5)

Form of PeopleSupport, Inc.
    Restricted Stock Unit Agreement and Stock Option Agreement for
    Non-employee Directors10
.13*(1)

Form of Indemnification Agreement
    between the Registrant and its officers and directors10
.14(2)

Master Services Agreement, dated
    June 11, 2003, between PeopleSupport, Inc. and
    ConsumerInfo.com10
.15(4)

Agreement and plan of Merger,
    among PeopleSupport, Inc., Rapid Text, Inc., and the
    Stockholders of Rapid Text, Inc., dated January 9, 200610
.16(4)

Office Lease, dated
    January 9, 2006 for Burbank facility between PeopleSupport
    as tenant and former stockholders of Rapidtext10
.17(6)

Business Loan Agreement dated
    July 28, 2006, between PeopleSupport, Inc. and Citibank
    (West), FSB10
.18(6)

Continuing Guaranty dated
    July 28, 2006 by each of PeopleSupport (Philippines), Inc.,
    PeopleSupport (Costa Rica), S.R.L., PeopleSupport Rapidtext,
    Inc., The Transcription Company, STC Solutions, Inc. and ProArm
    Management, Inc.10
.19(7)

Contract Center Services Agreement
    dated September 29, 2006, between PeopleSupport, Inc. and
    Expedia, Inc.10
.20

Master Outsourcing Services
    Agreement between Washington Mutual, Inc. and PeopleSupport,
    Inc. dated February 17, 2006 and two Services Agreements
    thereunder10
.21

Deed of Absolute Sale dated
    January 26, 2007, between PeopleSupport Properties
    Philippines Inc. and Fort Bonifacio Development Corporation12


Computation of Ratio of Earnings
    to Fixed Charges21
.1

List of Subsidiaries23
.1

Consent of BDO Seidman, LLP24
.1

Power of Attorney31
.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 2002 42




---



##### Table of Contents



Number

Description32
.1(8)

Certification by Chief Executive
    Officer of Registrant pursuant to Section 906 of the
    Sarbanes-Oxley Act of 200232
.2(8)

Certification by Chief Financial
    Officer of Registrant pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002     *
    
    Indicates management employment contract or compensatory plans
    or arrangements.
    
    Confidential treatment has been requested for portions of this
    exhibit. Portions of this document have been omitted and
    submitted separately to the Securities and Exchange Commission.  (1)
    
    Incorporated by reference to the Registrants Registration
    Statement on
    Form S-1,
    File
    No. 333-115328,
    originally filed with the Securities and Exchange Commission on
    May 10, 2004, as amended.(2)
    
    Incorporated by reference to the Registrants Annual Report
    on
    Form 10-K,
    filed with the Securities and Exchange Commission on
    March 31, 2005.(3)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K,
    filed with the Securities and Exchange Commission on
    October 26, 2005.(4)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    filed with the Securities and Exchange Commission on
    January 12, 2006.(5)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K,
    filed with the Securities and Exchange Commission May 31,
    2006.(6)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K,
    filed with the Securities and Exchange Commission on
    August 2, 2006.(7)
    
    Incorporated by reference to the Registrants Quarterly
    Report on
    Form 10-Q
    filed with the Securities and Exchange Commission on
    November 1, 2006.(8)
    
    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. 43




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   
          Internal Control 
    Integrated Framework
  
      F-1




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  
  Managements Report on Internal Control Over Financial
    Reporting Form 10-K, Internal Control-Integrated Framework
            
      F-2




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    BALANCE SHEETS
 (In thousands, except per share data)
  As of December 31,2006


2005ASSETSCurrent assets:Cash and cash equivalents

$
80,880


$
27,760Marketable securities


39,520



23,853Accounts receivable, net of
    allowance for doubtful accounts of $947 and $487


18,127



8,414Deferred tax assets


1,888



4,226Prepaid expenses and other current
    assets


5,745



2,448Total current assets


146,160



66,701Property and equipment, net


22,080



10,622Marketable securities


20,133



Deferred Management Incentive Plan
    compensation






598Deferred tax assets


18,372



15,051Goodwill


7,311



Other long-term assets


3,535



1,354Total assets

$
217,591


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

$
7,389


$
2,181Accrued liabilities


9,334



3,912Management incentive plan
    obligation


629



475Deferred revenue


4,515



3,481Other current liabilities


47



69Current portion of capital lease
    obligations


59



Total current liabilities


21,973



10,118Management incentive plan
    obligation






474Deferred rent


1,812



978Other long-term liabilities


1,347



364Total liabilities


25,132



11,934Minority interest


29



Commitments and contingencies
    (Note 5)Stockholders equityCommon stock, $.001 par
    value; authorized 87,000 shares; 23,479 and
    18,306 shares issued and outstanding at December 31,
    2006 and 2005, respectively


23



18Additional paid-in capital


208,044



113,234Accumulated deficit


(16,062
)


(30,214
)Accumulated other comprehensive
    income


425



342Deferred stock compensation






(988
)Total stockholders equity


192,430



82,392Total liabilities and
    stockholders equity

$
217,591


$
94,326    F-3




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF OPERATIONS
 AND COMPREHENSIVE INCOME
    (In thousands, except per share data)
  Years Ended December 31,2006


2005


2004Revenues

$
110,119


$
62,124


$
44,511Cost of revenues (exclusive of
    depreciation expense shown below)


70,203



35,733



25,271Selling, general and administrative


20,719



12,554



14,270Depreciation and amortization


7,467



4,414



3,927Gain on sale of receivable
    portfolios










(172
)Restructuring charges reduction










(22
)Income from operations


11,730



9,423



1,237Interest expense


8







Interest income


(2,548
)


(1,388
)


(231
)Other expense


212



47



7Income before benefit for income
    taxes


14,058



10,764



1,461Benefit for income taxes


(94
)


(12,065
)


(6,863
)Net income


14,152



22,829



8,324Foreign currency translation
    adjustments


632



411



(140
)Unrealized gain/(loss) on
    securities


7



(149
)


(4
)Minimum pension liability
    adjustment


(556
)






Comprehensive income

$
14,235


$
23,091


$
8,180Basic earnings per share

$
0.74


$
1.26


$
1.39Diluted earnings per share

$
0.72


$
1.21


$
0.55Basic weighted average shares
    outstanding


19,088



18,165



5,996Diluted weighted average shares
    outstanding


19,621



18,917



15,012    F-4




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF STOCKHOLDERS
    EQUITY (DEFICIT)
 Years Ended December 31, 2004, 2005 and 2006
    (In thousands, except per share data)
  Accumulated





TotalAdditional





Other





StockholdersCommon Stock


Paid-in


Accumulated


Comprehensive


Deferred


EquityShares


Amount


Capital


Deficit


Income


Compensation


(Deficit)Balance, at December 31, 2003


2,536


$
3


$
6,403


$
(61,367
)

$
224


$
(1,874
)

$
(56,611
)Exercise of stock options


209







104















104Initial public offering


5,349



5



31,565















31,570Conversion of preferred shares


10,461



11



74,257















74,268Warrant conversion


7























Repurchase of common stock


(547
)


(1
)


(1,349
)














(1,350
)Comprehensive income (loss)














8,324



(144
)






8,180Deferred stock compensation










1,728











(1,728
)


Amortization of deferred stock
    compensation










(194
)










1,968



1,774Balance, at December 31, 2004


18,015



18



112,514



(53,043
)


80



(1,634
)


57,935Exercise of stock options


291







295















295Comprehensive income














22,829



262







23,091Deferred compensation for
    restricted stock units










414











(388
)


26Amortization of deferred stock
    compensation










(178
)










1,034



856Tax benefit for disqualifying
    dispositions of stock options










189















189Balance, at December 31, 2005


18,306



18



113,234



(30,214
)


342



(988
)


82,392Reclassification of deferred
    compensation related to adoption of SFAS 123R










(988
)










988



Secondary public offering


4,830



5



90,882















90,887Exercise of stock options and
    release of restricted stock units


343







1,375















1,375Tax benefit from employee stock
    option exercises










747















747Stock-based compensation










2,794















2,794Comprehensive income














14,152



83







14,235Balance, at December 31, 2006


23,479


$
23


$
208,044


$
(16,062
)

$
425


$



$
192,430    F-5




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
 CONSOLIDATED
    STATEMENTS OF CASH FLOWS
    (In thousands, except per share data)  Years Ended December 31,2006


2005


2004OPERATING ACTIVITIESNet income

$
14,152


$
22,829


$
8,324Adjustments to reconcile net income
    to net cash provided by operating activities:Depreciation and amortization


7,467



4,414



3,927Provision for doubtful accounts


460



102



(51
)Stock-based compensation


2,794



882



1,774Amortization of deferred
    compensation costs


342



342



85Gain on sale of receivable portfolio










(172
)Reduction of excess accrual for
    restructuring










(22
)Loss on disposal of property and
    equipment


3



64



313Benefit for deferred income taxes


(963
)


(12,269
)


(6,829
)Tax benefits from employee stock
    option exercises


(747
)






Changes in operating assets and
    liabilities:Accounts receivable


(8,949
)


(2,953
)


(3,032
)Prepaid expenses and other assets


(1,422
)


(770
)


(404
)Other long-term assets


(1,297
)


(805
)


(118
)Accounts payable and accrued
    liabilities


10,962



3,225



370Deferred rent


146







Deferred revenue


(421
)


1,606



652Cash payments on restructuring
    reserve










(3
)Net cash provided by operating
    activities


22,527



16,667



4,814INVESTING ACTIVITIESAcquisitions, net of cash acquired


(8,968
)






Collections applied to principal of
    receivable portfolios






7



510Proceeds from sale of receivable
    portfolios










355Purchases of property and equipment


(17,307
)


(7,327
)


(6,950
)Proceeds from sale of property and
    equipment






120



Restricted cash equivalent






422



228Net proceeds from called short term
    investments






2,000



Purchases of marketable securities


(57,800
)


(29,600
)


Maturities of marketable securities


22,000



3,600



Net cash used in investing
    activities


(62,075
)


(30,778
)


(5,857
)FINANCING ACTIVITIESPayments of capital lease obligation


(380
)






Repurchase of common stock










(1,350
)Proceeds from the exercise of
    warrants










157Proceeds from public offerings


96,600







34,820Public offering costs


(5,713
)






(3,250
)Tax benefits from employee stock
    option exercises


747







Proceeds from the exercise of stock
    options


1,375



295



104Net cash provided by financing
    activities


92,629



295



30,481Effect of exchange rate changes on
    cash


39



(7
)


(6
)Net increase (decrease) in cash and
    cash equivalents


53,120



(13,823
)


29,432Cash and cash equivalents,
    beginning of period


27,760



41,583



12,151Cash and cash equivalents, end of
    period

$
80,880


$
27,760


$
41,583SUPPLEMENTAL DISCLOSURES OF CASH
    FLOW INFORMATIONInterest paid for the period

$
8


$



$
Taxes paid for the period


813



48



392NON-CASH INVESTING AND FINANCING
    ACTIVITIESUnrealized holding gains/(losses)
    on marketable securities

$
7


$
(146
)

$
Construction in progress incurred
    but not paid


323



1,329



Conversion of preferred to common
    stock










74,268Non-cash purchases of property and
    equipment


873







Non-cash other comprehensive income
    adjustment for pension liabilities


556







    F-6




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (In
    thousands, except per share data)
  PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
  1  Description
    of the Company
  U.S.-based
  2 
    Summary of Significant Accounting Policies
  Use of
    Estimates
    Concentrations
    of Risk
          As of and for the years ended December 31,2006


2005


2004% of


% of


% of


% of


% of


% ofRevenue


A/R, Net


Revenue


A/R, Net


Revenue


A/R, NetLargest Client


17
%


19
%


27
%


21
%


32
%


19
%Second Largest Client


16



16



20



26



26



31Third Largest Client


13



9



12







12



3Fourth Largest Client


9



8



9



15



10



6    F-7




---



##### Table of Contents



Principles
    of Consolidation
    Cash,
    Cash Equivalents and Marketable Securities
    Property
    and Equipment
    Furniture and fixtures

5 yearsComputer equipment

3 yearsSoftware

1 to 3 years     Impairment
    of Long-lived Assets
    Revenue
    Recognition
     F-8




---



##### Table of Contents



Cost
    of Revenues
    Net
    Income Per Share
      Years Ended December 31,2006


2005


2004Income


Shares


Per Share


Income


Shares


Per Share


Income


Shares


Per Share(Numerator)


(Denominator)


Amount


(Numerator)


(Denominator)


Amount


(Numerator)


(Denominator)


AmountBasic earnings per share:Income to common stockholders

$
14,152



19,088


$
0.74


$
22,829



18,165


$
1.26


$
8,324



5,996


$
1.39Effect of dilutive securities:Options






491











752











945



Restricted stock units






42



























Warrants






























604



Convertible preferred stock






























7,467



Income available to common
    stockholders

$
14,152



19,621


$
0.72


$
22,829



18,917


$
1.21


$
8,324



15,012


$
0.55     Years Ended December 31,2006


2005


2004Options


43



220



15Common stock warrants


2



50



12745



270



142   Segments
    of an Enterprise
   F-9




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
    Income
    Taxes
    Comprehensive
    Income
    MinimumPensionForeign Currency


Unrealized Loss


LiabilityItems


on Securities


Adjustment


TotalBalance, December 31, 2003

$
224


$



$



$
2242004 change


(140
)


(4
)






(144
)Balance, December 31, 2004


84



(4
)






802005 change


411



(149
)






262Balance, December 31, 2005


495



(153
)






3422006 change


632



7



(556
)


83Balance, December 31, 2006

$
1,127


$
(146
)

$
(556
)

$
425   Fair
    Value of Financial Instruments
    Foreign
    Currency
     F-10




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
      Accounting
    for Stock Based Compensation
          Comprehensive
    Income
    Accounting
    for Pension Plans
   F-11




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
    Recent
    Accounting Pronouncements
         F-12




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
  3 
    Cash and Cash Equivalents
      Short Term


Long TermAmortized


Unrealized


Market


Cash &


Marketable


MarketableCost


Losses


Value


Equivalents


Securities


SecuritiesCash and Cash Equivalents

$
80,880


$



$
80,880


$
80,880


$



$
Government Bonds


33,992



(77
)


33,915







24,942



8,973Corporate Bonds


16,184



(9
)


16,175







14,578



1,597Mortgage Backed Securities


9,615



(52
)


9,563











9,563Total

$
140,671


$
(138
)

$
140,533


$
80,880


$
39,520


$
20,133     MortgageCorporate


Government


BackedMaturities

Bonds


Bonds


Securities


Total1 year

$
14,578


$
24,942


$



$
39,5201 to 5 years


1,597



8,729







10,3265 to 10 years






244



715



95910+ years










8,848



8,848Total

$
16,175


$
33,915


$
9,563


$
59,653     Amortized


Unrealized


Market


Cash &


MarketableCost


Losses


Value


Equivalents


SecuritiesCash and Cash Equivalents

$
19,785


$



$
19,785


$
19,785


$
Government Bonds


31,977



(149
)


31,828



7,975



23,853Total

$
51,762


$
(149
)

$
51,613


$
27,760


$
23,853     GovernmentMaturities

Bonds


TotalDue in 90 days or less

$
9,000


$
9,000Due in 90 days to 2 years


14,852



14,852Total Government Bonds

$
23,853


$
23,853    F-13




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
  4 
    Property and Equipment
    2006


2005Furniture and fixtures

$
3,540


$
2,371Computer equipment


23,307



11,298Software


1,964



1,206Leasehold improvements


10,515



5,64539,326



20,520Less: Accumulated depreciation and
    amortization


(17,246
)


(9,898
)Total property and equipment

$
22,080


$
10,622   5 
    Commitments and Contingencies
  Leases
    OperatingYears Ending December 31,

Lease2007

$
3,9192008


3,7722009


2,8992010


3,2472011


3,219Thereafter


10,304Total

$
27,360       Contractual
    Compensation Obligation
   F-14




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
    Litigation
    6 
    Equity and Stock Based Compensation
    Stock-Based
    Compensation Plans
    2004
    Stock Incentive Plan
     F-15




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
       2004
    Employee Stock Purchase Plan
      Accounting
    for Stock Based Compensation
    Years Ended December 31,2005


2004Net income as reported

$
22,829


$
8,324Add: Stock-based compensation
    expense included in reported net income, net of related tax
    effects


882



1,774Deduct: Total stock-based
    compensation expense determined under fair value based methods
    for all awards, net of related tax effects


(2,250
)


(2,153
)Pro forma net income

$
21,461


$
7,945Basic earnings per shareAs reported

$
1.26


$
1.39Pro forma

$
1.18


$
1.33Diluted earnings per shareAs reported

$
1.21


$
0.55Pro forma

$
1.13


$
0.53    F-16




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
    Years Ended December 31,2006


2005


2004Risk free interest rate


4.8
%


4.2
%


3.7
%Expected life (years)


4.5



4.4



4.0Dividend yield


0.0
%


0.0
%


0.0
%Expected volatility


53
%


49
%


31
%Fair value


$7.81



$3.67



$5.31       Options Outstanding


Options ExercisableWeighted


Weighted








Weighted


WeightedAverage


Remaining


Aggregate





Average


Remaining


AggregateNumber of


Exercise


Contractual


Intrinsic


Shares


Exercise


Contractual


IntrinsicOptions


Price


Term


Value


Exercisable


Price


Term


ValueBalance, at December 31, 2003


1,104


$
1.01











495Granted


460



5.59Expired/Canceled


(41
)


4.73Forfeited


(62
)


2.65Exercised


(209
)


0.50Balance, at December 31, 2004


1,252



2.57



8.0


$
9,268



450


$
1.42



6.1


$
3,839Granted


962



8.39Expired/Canceled


(18
)


4.02Forfeited


(205
)


6.96Exercised


(291
)


1.01Balance, at December 31, 2005


1,699



5.58



8.3



5,288



474



2.99



6.0



2,679Granted


787



15.40Acquired via Rapidtext acquisition


10



1.93Expired/Canceled


(13
)


8.74Forfeited


(206
)


7.72Exercised


(329
)


4.37Balance, at December 31, 2006


1,948


$
9.56



8.2


$
22,383



591


$
4.34



6.2


$
9,878  F-17




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
    ExercisableOutstanding Weighted Average


Weighted AverageRemainingContractual


Exercise





ExerciseRange of Exercise Prices

Shares


Life (Year)


Price


Shares


Price$  0.03 - $ 0.19


122



1.82


$
0.15



122


$
0.150.41
    -  0.41


225



6.65



0.41



147



0.411.15
    -  6.85


130



6.16



6.04



89



5.837.23
    -  7.23


318



8.80



7.23



88



7.237.69
    -  8.63


271



8.82



8.50



84



8.369.09
    - 11.24


240



8.73



10.35



50



9.9311.91 - 11.91


180



9.57



11.91



0



0.0012.17 - 12.17


22



9.39



12.17



11



12.1718.35 - 18.35


372



9.82



18.35



0



18.3520.77 - 20.77


66



9.94



20.77



0



0.00Total


1,948



8.24


$
9.56



591


$
4.34     Years Ended December 31,2006


2005


2004Cost of revenues

$
731


$
271


$
566Selling, general &
    administrative


2,062



611



1,208$
2,794


$
882


$
1,774     Wt. Avg.


Wt. Avg.


AggregateNumber


Value at


Time to


Intrinsicof Shares


Grant


Vest


ValueBalance, at December 31, 2004


Awarded


54


$
7.69Forfeited


Released


Balance, at December 31, 2005


54



7.69



1.79



458Awarded


148



15.14Forfeited


(7
)


7.49Released and/or withheld for
    taxes(1)


(17
)


7.67Balance, at December 31, 2006


178


$
13.90


$
1.54


$
3,747     (1)
    PeopleSupport withheld 3 of the 17 restricted stock units that
    vested during the year ended December 31, 2006 to pay
    income taxes owed by the recipients. F-18




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
     2006


2005


2004Proceeds from stock options
    exercised

$
1,375


$
295


$
104Tax benefits related to stock
    options exercised

$
747







Intrinsic value of stock options
    exercised

$
3,337


$
2,376



794   7 
    Pension Plan
      Normal Retirement. th
  Early Retirement.
  Late Retirement. th
  Summary
    of Financial Position
      Summary
    of Membership Data
   F-19




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
    Years Ended December 31,Reconciliation of Liabilities

2006


2005Present value of defined benefit
    obligation at beginning of year

$
402


$
172Effect of exchange rate


34



Interest cost


46



18Current service cost


258



179Curtailment


(345
)


Actuarial loss


841



33Present value of defined benefit
    obligation at end of year

$
1,236


$
402Funded StatusPlan Assets less than pension
    benefit obligations

$
(1,236
)

$
(402
)Unrecognized Net Transition
    Obligation


23



27Unrecognized Net Gains


533



33Net Amount Recognized

$
(680
)

$
(342
)Accumulated Benefit Obligation

$
188


$
52     Non-U.S. Pension PlansAssumptions

2006


2005Discount rate


7.5
%


10.5
%Expected return on assets


n/a



n/aExpected salary increase rate


7.5
%


8.5
%      F-20




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
   8 
    Income Taxes
    Years Ended December 31,2006


2005


2004Current:Federal

$
615


$
137


$
(23
)State


254



67



(11
)869



204



(34
)Deferred:Federal


930



(12,050
)


(6,529
)State


(1,893
)


(219
)


(300
)(963
)


(12,269
)


(6,829
)Total provision (benefit)

$
(94
)

$
(12,065
)

$
(6,863
)     Years Ended December 31,2006


2005


2004Federal statutory rate


35.0
%


35.0
%


35.0
%State taxes net of federal benefit


2.6



(0.9
)


(0.8
)Difference between foreign tax
    rates and U.S. tax rates


(31.6
)


(16.6
)


(86.6
)Other


0.0



(0.8
)


7.6Stock-based compensation from ISOs


3.5



2.9



42.5Change in valuation allowance


(10.2
)


(131.7
)


(467.4
)(0.7
)%


(112.1
)%


(469.7
)%     Years Ended December 31,2006


2005


2004Domestic

$
1,374


$
5,667


$
(2,156
)Foreign


12,684



5,097



3,617Total

$
14,058


$
10,764


$
1,461  F-21




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
    Years EndedDecember 31,2006


2005Net deferred tax asset:Net operating loss and credit
    carryforwards

$
20,253


$
21,693Depreciation/amortization


(38
)


Reserves and allowances


775



181Stock based compensation


327



Other






28Federal effect of state tax


(1,057
)


(425
)Less: valuation allowance






(2,200
)$
20,260


$
19,277           9 
    Public Offerings
   F-22




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
   10 
    Geographic and Segment Information
  U.S.-based
  Years endedDecember 31,2006


2005Revenues:U.S.

$
104,323


$
62,124Philippines


5,796



Costa Rica






Total

$
110,119


$
62,124     As ofDecember 31,2006


2005Long-lived assets:U.SProperty and equipment, net

$
3,701


$
1,312Goodwill


7,311



Intangibles


732



PhilippinesProperty and equipment, net


16,557



9,310Goodwill






Intangibles


112



Costa RicaProperty and equipment, net


1,822



Goodwill






Intangibles






Total

$
30,235


$
10,622   F-23




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
  Years Ended December 31,2006


2005


2004Depreciation and amortization:U.SProperty and equipment, net

$
1,506


$
1,005


$
1,376Goodwill










Intangibles


140







PhilippinesProperty and equipment, net


5,526



3,409



2,551Goodwill










Intangibles


25







Costa RicaProperty and equipment, net


270







Goodwill










Intangibles










Total

$
7,467


$
4,414


$
3,927   11 
    Quarterly Financial Data (Unaudited)
    20061st Qtr.


2nd Qtr.


3rd Qtr.


4th Qtr.Revenues

$
23,047


$
25,947


$
30,117


$
31,008Income from operations


3,353



3,594



3,973



810Net income(1)


2,874



3,808



3,512



3,958Basic income per share

$
0.16


$
0.21


$
0.19


$
0.19Diluted income per share

$
0.15


$
0.20


$
0.18


$
0.18   20051st Qtr.


2nd Qtr.


3rd Qtr.


4th Qtr.Revenues

$
14,056


$
14,739


$
16,317


$
17,012Income from operations


2,568



1,952



2,597



2,306Net income(2)


2,756



2,239



5,513



12,321Basic income per share

$
0.15


$
0.12


$
0.30


$
0.67Diluted income per share

$
0.15


$
0.12


$
0.29


$
0.65     (1)
    
    During the year ended December 31, 2006 we assessed the
    deferred tax asset valuation allowance each quarter and
    decreased the allowance by $0.5 million and
    $1.0 million in the second and fourth quarters. The
    allowance was increased in the third quarter by
    $0.1 million, resulting in a net effect for all of 2006 of
    $1.4 million. F-24




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
  (2)
    
    During the year ended December 31, 2005, we assessed the
    deferred tax asset valuation allowance each quarter and released
    $0.7 million, $0.4 million, $3.2 million and
    $10.3 million in the first, second, third and fourth
    quarters, respectively.  year-to-date
  12 
    Material Fourth Quarter Adjustments
      13 
    Credit Agreements
    14 
    Rapidtext Acquisition
      Description

ValueNet current assets

$
1,261Property, plant and equipment


195Noncurrent other assets


249Net current liabilities


(749
)Long term capital leases


(140
)Estimated fair value, net assets
    acquired


820Goodwill


7,310Other intangible assets


860Total purchase price

$
8,990  F-25




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
    Intangible Assets

ValueCustomer list

$
500Non-compete agreements


200Software


60Trademarks/Tradenames


100Total

$
860     Pro
    Forma Financial Data (unaudited)
    Year EndedDecember 31, 2005Pro forma revenue

$
71,814Pro forma net income

$
23,047Pro forma basic income per share

$
1.27Pro forma diluted income per share

$
1.22Pro forma basic weighted average
    shares outstanding


18,165Pro forma diluted weighted average
    shares outstanding


18,919   15 
    Related Party Transactions
   F-26




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (In
    thousands, except per share data)
   16 
    Subsequent Events
     F-27




---



##### Table of Contents



SIGNATURES      By:
    /s/  LANCE
    ROSENZWEIG   Chief Executive Officer, and
 Chairman of the Board of Directors
    /s/  LANCE
    ROSENZWEIGLance
    Rosenzweig

President, Chief Executive Officer
    (Principal Executive Officer), Secretary and Chairman of the
    Board of Directors

March 16, 2007/s/  CAROLINE
    ROOKCaroline
    Rook

Chief Financial Officer (Principal
    Financial and Accounting Officer)

March 16, 2007/s/  ADAM
    BERGERAdam
    Berger

Director

March 16, 2007/s/  C.
    LARRY
    BRADFORDC.
    Larry Bradford

Director

March 16, 2007/s/  MICHAEL
    EDELLMichael
    Edell

Director

March 16, 2007/s/  GEORGE
    ELLISGeorge
    Ellis

Director

March 16, 2007/s/  FRANK
    PERNAFrank
    Perna

Director

March 16, 2007/s/  JOE
    ROSEJoe
    Rose

Director

March 16, 2007