##### 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, 2005ORo

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

95-4695021(I.R.S. Employer
    Identification No.)1100 Glendon Ave.,
    Suite 1250
    Los Angeles, California(Address of principal
    executive offices)

90024(Zip Code)   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 National 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
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K




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##### 



PeopleSupport,
    Inc. and Subsidiaries
  FORM 10-K
 For the
    Fiscal Year Ended December 31, 2005
  INDEX
  PART IItem 1.

Business


1Item 1A.

Risk Factors


14Item 1B.

Unresolved Staff
    Comments


22Item 2.

Properties


22Item 3.

Legal
    Proceedings


22Item 4.

Submission of
    Matters to a Vote of Security Holders


22PART IIItem 5.

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


23Item 6.

Selected Financial
    Data


25Item 7.

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


27Item 7A.

Quantitative and
    Qualitative Disclosures about Market Risk


40Item 8.

Financial
    Statements and Supplementary Data


41Item 9.

Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


41Item 9A.

Controls and
    Procedures


41Item 9B.

Other
    Information


42PART IIIItem 10.

Directors and
    Executive Officers of the Registrant


42Item 11.

Executive
    Compensation


43Item 12.

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


43Item 13.

Certain
    Relationships and Related Transactions


43Item 14.

Principal
    Accountant Fees and Services


43PART IVItem 15.

Exhibits and
    Financial Statement Schedules


43SignaturesEX-21.1EX-23.2EX-31.1EX-31.2EX-32.1EX-32.2




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SPECIAL
    NOTE REGARDING FORWARD-LOOKING STATEMENTS
  Form 10-K
     Part I  Item 1.
    Business  Form 10-K
  Overview
  U.S.-based e-mails e-mails,
     1




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Corporate
    Background and History
   2




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Industry
    Background
  Overview
      Current
    Trends in Customer Management Services
  e-mail,
    
    significant cost benefits;
    best practices in leveraging learned experiences across multiple
    clients in an efficient and effective manner;
    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; 3




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
    the avoidance of increasing capital requirements of the
    sophisticated communications technology needed to provide timely
    technical support and customer care; and
    extensive and ongoing staff training and associated costs
    required for maintaining in-house technical support and customer
    care solutions.    Trend
    Toward Offshore Delivery of BPO Services
      Our
    Competitive Strengths
    Philippine-Based
    Delivery Model
    Strong
    Industry Expertise
   4




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Collaborative
    Client Relationships
    Sales
    Centric Focus
    Attractive
    Employment Culture
    Our
    Growth Strategy
    Continue
    to Attract Additional Large Customer Management and Accounts
    Receivable Management Services Clients
  U.S.-based
  Expand
    Transcription and Captioning Services
   5




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Broaden
    Service Offerings
      Continue
    to Attract and Retain Top Professional Talent
    Expand
    to Additional Countries
      Pursue
    Selective Strategic Acquisitions
     6




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Our
    Services
    Customer
    Management Services
    case-by-case
  e-mail,
  
    Customer care.  Our customer care services are
    initiated by inbound calls and
    e-mail from
    customers with 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 services 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 call to cancel our clients
    services.
    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.
    Hosting.  On a limited basis, we host and
    maintain the customer interaction section of our clients
    websites, including
    e-mail, live
    web chat and Internet self-help applications.   7




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e-mail
  Transcription
    and Captioning Services
    Accounts
    Receivable Management Services
    Our
    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. 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
    redundant hub in Los Angeles and deployed at our
    spokes in the Philippines. 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 by fiber optic networks.
    Dedicated telecommunications network.  We have
    designed and deployed a secure, dedicated telecommunications
    system that allows us to securely route multi-channel
    communications between the United States and our
    outsourcing centers in the Philippines and, when completed, our
    outsourcing centers in Costa Rica. Our system, which is
    redundant and highly scalable, transmits communications traffic
    with minimal delay 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 our redundant data center in Los Angeles where we apply voice
    compression technologies and then seamlessly route calls to the
    optimal location in the Philippines based on our
    professionals skill sets and availability. In most cases,
    these 8




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communications between the United States and the Philippines are
    indistinguishable from domestic communications between points
    within the United States and we expect to achieve the same
    communications clarity at our new centers in Costa Rica.  
    Integrated customer communications
    channels.  We provide customer management services
    through multiple communications channels, including telephone,
    e-mail, live
    web chat and Internet self-help applications. Our customer
    management professionals are trained to offer services in 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 also integrated with a proprietary
    reporting system that is populated daily 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.
    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 prevent our
    professionals from copying or transmitting customer data.
    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
    web chat 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 and track inquiries, and we 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.  Our
    Clients
         9




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Employees
    Hiring
    and Recruiting
      Workforce
    Management
    
    full integration with our voice,
    e-mail and
    live web chat systems;
    analytics and scenario-based forecasting and scheduling;
    schedule adherence and event monitoring;
    real-time reporting; and
    online work schedule management.  Competition
    
    provide high quality professionals with strong customer
    interaction skills, including English language fluency with
    minimal accents; 10




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
    offer cost-effective pricing of services;
    deliver value-added and reliable solutions to clients;
    provide industry specific knowledge and expertise;
    generate revenues for clients; and
    provide a technology platform that offers a seamless customer
    experience.  U.S.-based
  U.S.-based
  
    There are numerous BPO companies based in offshore locations
    such as India, the Philippines, China, Latin America, the
    Caribbean, Africa and Eastern Europe. Some of these companies
    offer services such as data entry, transcription and
    e-mail
    response that require minimal customer interaction by voice and
    therefore reduce the importance of English language skills and
    U.S. cultural affinity. These companies also may have
    greater financial, personnel and other resources, longer
    operating histories, more recognizable brand names and more
    established client relationships. Most of these companies
    compete with us primarily on price and are often able to offer
    lower costs to potential clients. We seek to position ourselves
    as a service-focused company, with a workforce attuned to
    U.S. culture and a focus on revenue generation for our
    clients.
    We compete with several broad-based domestic outsourcing
    companies. These companies often have greater financial,
    personnel and other resources, longer operating histories, more
    recognizable brand names and more established client
    relationships. Although many of these companies have
    established, or are establishing, offshore operations, they
    generally have a large base of higher cost domestic operations.
    We position ourselves as a Philippine-based outsourcing
    provider, with high quality service offerings and a college
    educated workforce. We also emphasize our significantly lower
    cost structure and our focus on client revenue generation.      Sales and
    Marketing
   11




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Sales
    and Marketing Support
    Client
    Development
    
    develop client relationships;
    finalize sales proposals and assist in the negotiation and
    closing of new client engagements; and
    develop and deliver pricing estimates for proposed client
    contracts.    Client
    Services
  day-to-day
  Proprietary
    Rights
    Regulation
   12




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and/or and/or
        Available
    Information
  Form 10-K Form 10-K Form 10-K.
 13




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1-800-SEC-0330
  Item 1A.
    Risk
    Factors  Form 10-K Form 10-K.
  Risks
    Related to Our Business
  Our
    revenues are highly dependent on three major clients that
    collectively accounted for 59% of our revenues in 2005, 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
    could reduce our revenues and seriously harm our
    business.
    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, which could harm our business, operating
    results, financial condition, and future
    prospects.
    A
    reversal of industry trends toward offshore outsourcing due to
    negative public reaction in the
    United States.
  Form 10-K
 14




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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.
    
    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. 15




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Our
    operating results may fluctuate significantly and could cause
    the market price of our common stock to fall rapidly and without
    notice.
    If we
    fail to manage our growth effectively, our business may not
    succeed.
    We may
    experience significant employee turnover rates in the future and
    we may be unable to hire and retain enough sufficiently trained
    employees to support our operations, which could harm our
    business.
    Our
    senior management team is important to our continued success and
    the loss of members of senior management could negatively affect
    our operations.
  U.S.-based
  Our
    facilities are at risk of damage by earthquakes and other
    natural disasters.
   16




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Our
    operations could suffer from telecommunications or technology
    downtime, disruptions or increased costs.
    We
    could cause disruptions to our clients business from
    inadequate service, and our insurance coverage may be inadequate
    to cover this risk.
    Unauthorized
    disclosure of sensitive or confidential client and customer
    data, whether through breach of our computer systems or
    otherwise, could expose us to protracted and costly litigation
    and cause us to lose clients.
    Our
    clients may adopt technologies that decrease the demand for our
    services, which could reduce our revenues and seriously harm our
    business.
    Our
    ability to use net operating loss carryforwards in the United
    States may be limited.
   17




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The
    current tax holidays in the Philippines will expire within the
    next few years.
    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.
    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.
   18




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Our
    ability to raise capital in the future, if and when needed, may
    be limited, and could prevent us from executing our business
    strategy. The sale of additional equity securities would result
    in further dilution to our stockholders.
    Risks
    Related to Doing Business in the Philippines
  We may
    face wage inflation and additional competition in the
    Philippines for our professionals, which could increase the cost
    of qualified employees and the amount of employee
    turnover.
   19




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The
    Philippines periodically experiences political or economic
    instability, which could disrupt our operations, increase our
    costs and harm our business.
    and/or
  Currency
    fluctuations in the Philippine peso relative to the
    U.S. dollar could increase our expenses.
    Terrorist
    attacks could adversely affect the Philippine economy, disrupt
    our operations and cause our business to suffer.
    Risks
    Related to Doing Business in Costa Rica
  We
    have no prior experience with operations in Costa Rica and will
    be subject to particular risks associated with the development
    of operations in Costa Rica.
    
    We may be unable to find or hire, at rates attractive to us, a
    sufficient number of qualified employees.
    Costa Rica may experience economic or political instability
    which could increase our costs and harm our business.
    Currency fluctuations in the Costa Rican colon relative to the
    U.S. dollar could increase our expenses.  Other
    Risks Related to Us
  Our
    stock price may be volatile, and you may not be able to resell
    shares of our common stock at or above the price you paid, or at
    all.
   20




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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.
    Substantial
    future sales of our common stock in the public market could
    cause our stock price to fall.
    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, after an initial transition period, will serve for
    staggered three-year terms;
    Permit the board of directors to elect a director to fill a
    vacancy created by the expansion of the board of directors;
    Permit stockholders to remove our directors only for cause;
    Permit a special stockholders meeting to be called only by
    our chairman of the board of directors, president, or chief
    executive officer, a majority of our board of directors or
    two-thirds of the independent directors; 21




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
    Require stockholders to give us advance notice to nominate
    candidates for election to our board of directors or to make
    stockholder proposals at a stockholders meeting;
    Permit our board of directors to issue, without approval of our
    stockholders, up to 4,000,000 shares of preferred stock
    with terms that our board of directors may determine and that
    may be senior to the terms of our common stock;
    Prohibit cumulative voting in the election of directors that
    would otherwise allow less than a majority of stockholders to
    elect directors;
    Permit the board of directors to alter certain provisions of our
    amended and restated bylaws without obtaining stockholder
    approval;
    Require approval of at least 75% of the shares entitled to vote
    at an election of directors to adopt, amend or repeal our
    amended and restated bylaws or amend or repeal the provisions of
    our amended and restated certificate of incorporation regarding
    the election and removal of directors and the ability of
    stockholders to take action; and
    Eliminate the right of stockholders to call a special meeting of
    stockholders and to take action by written consent.    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties      Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    of Matters to a Vote of Security Holders   22




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Part II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Price
    Range of Common Stock
    Quarter Ended

Low


HighDecember 31, 2004

$
6.50


$
10.15March 31, 2005


8.29



11.59June 30, 2005


8.12



10.50September 30, 2005


7.85



10.07December 30, 2005


7.16



9.00     Dividend
    Policy
    Sales of
    Unregistered Securities
  non-U.S. non-U.S.
     23




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Repurchase
    of Securities
  (a)


(b)


(c)


(d)Total Number ofShares Purchased as


Maximum Number ofPart of Publicly


Shares that May YetTotal Number of


Average Price


Announced Plans or


be Purchased UnderPeriod

Shares Purchased


Paid per Share


Programs (1)


Plans or ProgramsApril 2004


547,445


$
2.47







     (1)
    
    In April 2004, the Board of Directors approved the repurchase of
    547,445 shares from David Nash, one of our founders, for
    $1.35 million. No other shares were approved by the Board
    of Directors for repurchase during 2004. 24




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Item 6.
    Selected
    Financial Data  Form 10-K.
  Years Ended
    December 31,2001


2002


2003


2004


2005(In thousands, except per share
    data)Consolidated Statements of
    Operations Data:Revenues

$
19,733


$
19,780


$
30,013


$
44,511


$
62,124Cost of revenues (exclusive of
    management incentive plan and depreciation expense shown
    below)(1)


12,573



11,188



12,921



24,483



35,460Management incentive
    plan  cost of revenues(2)














788



273Selling, general &
    administrative (exclusive of management incentive plan expense
    shown below)(1)


15,128



5,587



6,134



9,721



12,485Management incentive
    plan  selling, general &
    administrative(2)














4,549



69Depreciation and amortization


3,795



4,065



3,166



3,927



4,414Gain on sale of receivable
    portfolios(3)














(172
)


Restructuring charges(4)






3,824



(345
)


(22
)


Income (loss) from operations


(11,763
)


(4,884
)


8,137



1,237



9,423Interest expense


790



506



3







Interest (income)


(895
)


(90
)


(75
)


(231
)


(1,388
)Gain on the extinguishment of
    debt(5)






(2,430
)










Other (income) expense


(1
)


9



(8
)


7



47Income (loss) before provision
    (benefit) for income taxes


(11,657
)


(2,879
)


8,217



1,461



10,764Provision (benefit) for income
    taxes(6)


13



13



231



(6,863
)


(12,065
)Net income (loss)(7)

$
(11,670
)

$
(2,892
)

$
7,986


$
8,324


$
22,829Net income (loss) per share of
    common stock:Basic(8)

$
(4.65
)

$
(1.14
)

$
3.15


$
1.39


$
1.26Diluted(8)

$
(4.65
)

$
(1.14
)

$
0.64


$
0.55


$
1.21Weighted average number of common
    shares outstanding:Basic(8)


2,512



2,533



2,533



5,996



18,165Diluted(8)


2,512



2,533



12,560



15,012



18,917   25




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##### Table of Contents



As of
    December 31,2001


2002


2003


2004


2005(In thousands)Consolidated Balance Sheet
    Data:Cash, cash equivalents and
    short-term investments

$
8,613


$
5,179


$
12,151


$
41,583


$
27,760Marketable securities


















23,853Working capital


5,179



4,124



11,798



43,664



56,583Total assets


22,715



15,259



22,535



65,080



94,326Long term liabilities, less
    current portion


3,011



176



267



936



1,816Redeemable convertible preferred
    stock


74,110



74,110



74,110







Total stockholders equity
    (deficit)

$
(61,777
)

$
(64,714
)

$
(56,611
)

$
57,935


$
82,392     (1)
    
    Included in expenses above are non-cash stock based compensation
    charges of:  Years Ended
    December 31,2001


2002


2003


2004


2005(In thousands)Cost of revenues

$
25


$



$
61


$
566


$
271Selling, general &
    administrative


633







58



1,208



611$
658


$



$
119


$
1,774


$
882   (2)
    
    Under our management incentive compensation plan, we made
    payments of $4.8 million to senior management and key
    employees based on a formula calculated as a fraction of the net
    proceeds received by us and selling stockholders upon completion
    of our initial public offering. These payments resulted in a
    charge to earnings in the fourth quarter ended December 31,
    2004. Under the terms of our management incentive compensation
    plan, we also are obligated to make payments of
    $0.8 million to key employees and personnel based on
    continued service or other performance criteria. This amount was
    recorded as deferred compensation expense in the fourth quarter
    ended December 31, 2004 and is being amortized over future
    periods. In addition, under the terms of our management
    incentive compensation plan, we made a further payment of
    $0.5 million in connection with the sale of 603,000
    additional shares on October 25, 2004, pursuant to the
    exercise of an over-allotment option granted to the underwriters
    of our initial public offering. These payments also resulted in
    a charge to earnings in the fourth quarter ended
    December 31, 2004. In connection with the sale of these
    shares, we also are obligated to make payments of
    $0.2 million to key employees and personnel based on
    continued service or other performance criteria. This amount was
    recorded as deferred compensation expense in the fourth quarter
    ended December 31, 2004. In 2005, we amortized and expensed
    $0.3 million and paid $0.1 million under these
    obligations. As of December 31, 2005, the remaining
    obligation was $0.9 million, split between short and long
    term liabilities.(3)
    
    Gain on sale of receivable portfolios is the net amount the
    Company earned on the sale of two accounts receivable portfolios
    by its ProArm subsidiary 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
    care 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.(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 2004 and 2005. 26




---



##### Table of Contents



(8)
    
    For information regarding the computation of per share amounts,
    refer to Note 2 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.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Future
    Uncertainties
  The following discussion should be read in conjunction with
    the consolidated financial statements and accompanying notes,
    which appear elsewhere in this Annual Report on
    Form 10-K.
    It 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
  U.S.-based
      Quarterly
    Results of Operations and Performance Trends
  20041st Qtr.


2nd Qtr.


3rd Qtr.(2)


4th Qtr.(3)(In thousands, except per share
    data)Revenues

$
9,551


$
10,445


$
11,936


$
12,579Income from operations


1,881



1,323



1,975



(3,942
)Net income


1,839



1,290



1,932



3,263Basic income per share(1)

$
0.71


$
0.57


$
0.90


$
0.19Diluted income per share(1)

$
0.13


$
0.09


$
0.14


$
0.18   27




---



##### Table of Contents



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(4)


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 basic and diluted per share amounts have been restated to
    give retroactive effect to a 1 for 2.74 reverse stock split of
    our stock that occurred on August 5, 2004.(2)
    
    On February 25, 2005, the Company restated its results for
    the three and nine months ended September 30, 2004 to
    exclude a charge related to payment obligations of
    $4.8 million under the management incentive plan in
    connection with the Companys initial public offering and
    to make other adjustments related to obligations under the plan.
    During the initial preparation of the Companys financial
    statements for the quarter ended September 30, 2004, the
    $4.8 million paid under the incentive plan was recorded as
    of September 30 because by September 30 the
    registration statement for the offering had been declared
    effective by the SEC, the offering had priced and the management
    payments were highly probable. Subsequently, the Company
    concluded that the event triggering the payment obligations was
    the closing of, and the receipt of funds from, the offering, and
    the charge should have been recorded at that time. As a result
    of the adjustments, the restated results of operations for the
    quarter ended September 30, 2004 were as follows:  For the Quarter EndedSeptember 30,
    2004As Reported


As RestatedRevenues

$
11,936


$
11,936Income (loss) from operations


(2,811
)


1,975Net income (loss)


(2,730
)


1,932Basic income (loss) per share(3)

$
(1.28
)

$
0.90Diluted income (loss) per share(3)

$
(1.28
)

$
0.14   The restatement did not have any effect on the results for the
    year.(3)
    
    In the quarter ended December 31, 2004, the Company
    recorded a charge of $5.3 million related to the management
    incentive plan. In addition, the Company released a portion of
    the deferred tax valuation allowances in the amount of
    $6.8 million, as the Company determined that it is more
    likely than not that a portion of the deferred tax assets will
    be realizable (see Note 10 to the Consolidated Financial
    Statements included in Item 15 in this Annual Report on
    Form 10-K).(4)
    
    During the year ended December 31, 2005, the Company
    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. For the year ending
    December 31, 2005, $2.1 million of the release of the
    deferred tax valuation is related to current utilization of
    deferred tax assets and the remaining amount is related to
    expected future utilization. In addition, the Company recorded a
    charge of approximately $0.09 million each quarter in 2005
    related to the management incentive plan.  year-to-date
 28




---



##### Table of Contents



Sources
    of Revenues
    
    time-delineated or session based fees, including hourly or per
    minute charges and charges per interaction, which are separately
    negotiated on an individual client basis; and
    implementation fees, including revenues associated with the
    installation and integration of new clients into our
    telecommunications, information technology and client reporting
    structures.    U.S.-based
  Key
    Expense Categories
  Cost of revenues. higher-than-expected
     29




---



##### Table of Contents



Selling, general and administrative. U.S.-based
  Depreciation and amortization.
  Restructuring charges.
          Certain
    Charges and Gains
  Compensation obligations. $
 30




---



##### Table of Contents



Critical
    Accounting Policies and Estimates
  Form 10-K,
  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.      Accounting
    for Stock-based Awards
  Accounting for Stock-Based Compensation. Accounting for Stock Issued to Employees Form 10-K.
   31




---



##### Table of Contents



Accounting
    for Income Taxes
       32




---



##### Table of Contents



Restructuring
    Charges and Exit Costs
  Liability Recognition
    for Costs to Exit an Activity (Including Certain Costs Incurred
    in a Restructuring), EITF 94-3 Accounting for Costs Associated
    with Exit or Disposal Activities, 94-3.
  Long-lived
    Asset Impairment
   33




---



##### Table of Contents



Results
    of Operations
    Years Ended
    December 31,2003


2004


2005Consolidated Statements of
    Operations Data:Revenues


100
%


100
%


100
%Cost of revenues (exclusive of
    management incentive plan and depreciation expense shown below)


43



55



57Management incentive
    plan  cost of revenues






2



1Selling, general and
    administrative (exclusive of management incentive plan expense
    shown below)


20



22



20Management incentive
    plan  selling, general and administrative






10



Depreciation and amortization


11



9



7Gain on sale of receivable
    portfolios










Restructuring charges


(1
)






Income from operations


27



3



15Interest income






1



2(Benefit) for income taxes






(15
)


(19
)Net income


27
%


19
%


37
%   Year
    Ended December 31, 2004 Compared with Year Ended
    December 31, 2005
  Revenues
    Cost
    of Revenues
   34




---



##### Table of Contents



Selling,
    General and Administrative
    Depreciation
    and Amortization
    Interest
    Income
      Income
    from Operations
    Benefit
    for Income Taxes
   35




---



##### Table of Contents



Year
    Ended December 31, 2003 Compared with Year Ended
    December 31, 2004
  Revenues
    Cost
    of Revenues
      Selling,
    General and Administrative
    Depreciation
    and Amortization
   36




---



##### Table of Contents



Restructuring
    Charges
    Interest
    Income (Expense)
      Provision
    (Benefit) for Income Taxes
    Liquidity
    and Capital Resources
    Year
    ended December 31, 2005
  Operating Activities:
  Investing Activities:
 37




---



##### Table of Contents



Financing Activities:
  Year
    ended December 31, 2004
  Operating Activities:
  Investing Activities:
    Financing Activities;
  Rescission
    Offer and Reporting Obligations
    Form S-8
   38




---



##### Table of Contents



Off-Balance
    Sheet Arrangements
    Contractual
    Obligations
      Years Ending
    December 31,(In thousands)2006

$
3,1612007


2,9772008


2,8052009


2,4402010


2,789Thereafter


12,089Total minimum payments

$
26,261      39




---



##### Table of Contents



Recent
    Accounting Pronouncements
  fair-value-based
  No. 109-2,
  ,
   ,
  Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk  Foreign
    Currency Exchange Risk
   40




---



##### 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)
 41




---



##### Table of Contents




    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. 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) Form 10-K
  Item 9B.
    Other
    Information   PART III  Item 10.
    Directors
    and Executive Officers of the Registrant    Regulation S-K
 42




---



##### Table of Contents



Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters  Regulation S-K
  Item 13.
    Certain
    Relationships and Related Transactions    Item 14.
    Principal
    Accountant Fees and Services   Part IV  Item 15.
    Exhibits,
    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, 2004 and 2005


F-3Consolidated
    Statements of Operations and Other Comprehensive Income for the
    years ended December 31, 2003, 2004 and 2005


F-4Consolidated
    Statements of Stockholders Equity (Deficit) for the years
    ended December 31, 2003, 2004 and 2005


F-5Consolidated
    Statements of Cash Flows for the years ended December 31,
    2003, 2004 and 2005


F-6Notes to
    Consolidated Financial Statements


F-7   Financial Statement Schedule
  Form 10-K
 43




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
      Form 10-K,
        44




---



##### Table of Contents



Schedule II  Valuation
    and Qualifying Accounts
  Years Ended December 31,
    2003, 2004 and 2005Balance at


Charged toBeginning of


Costs and





Balance atDescription

Year


Expenses


Deduction


End of Year(In thousands)Valuation allowance for accounts
    receivable 2003:

$
237


$
293


$
23


$
553Valuation allowance for accounts
    receivable 2004:


553



(51
)


(51
)


451Valuation allowance for accounts
    receivable 2005:


451



102



(66
)


487       Exhibits
  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(1)


Amended and Restated Customer
    Support Services Agreement, dated July 1, 2004, between
    PeopleSupport, Inc. and Expedia, Inc.10.7(1)


Memorandum of Agreement, dated
    December 15, 2003, between PeopleSupport, Inc. and Ayala Land,
    Inc.10.8(2)


Definitive Contract of Lease with
    Ayala10.9*(1)


Letter Agreement, dated May 20,
    2002, between PeopleSupport, Inc. and Caroline Rook10.10(1)


Master Services Agreement, dated
    January 2, 2003, between PeopleSupport, Inc. and EarthLink, Inc.10.11(1)


Professional Services Contract,
    dated December 4, 2000, between PeopleSupport, Inc. and Network
    Solutions, Inc.10.12*(1)


Form of 2004 Stock Incentive Plan10.13*(1)


Form of 2004 Employee Stock
    Purchase Plan10.14*(1)


Form of Indemnification Agreement
    between the Registrant and its officers and directors10.15*(1)


Form of PeopleSupport, Inc. 2004
    Stock Incentive Plan Stock Option Agreement10.16(2)


Master Services Agreement, dated
    June 11, 2003, between PeopleSupport, Inc. and ConsumerInfo.com10.17*(3)


Form of PeopleSupport, Inc. 2004
    Stock Incentive Plan Stock Notice of Stock  Option Grant10.18*(3)


Form of PeopleSupport, Inc. 2004
    Stock Incentive Plan Stock Notice of Stock Option Grant (for
    Director Lever and Above)10.19*(3)


Form of PeopleSupport, Inc. 2004
    Stock Incentive Plan Stock Notice of Exercise of Stock Option10.20*(4)


Form of PeopleSupport, Inc. 2004
    Stock Incentive Plan Restricted Stock Units Agreement (for
    Non-Employee Directors)10.21*(4)


Form of PeopleSupport, Inc. 2004
    Stock Incentive Plan Restricted Stock Units Agreement (for
    Executives) 45




---



##### Table of Contents



Number

Description10.22(5)


Agreement and plan of Merger,
    among PeopleSupport, Inc., Rapid Text, Inc., and the
    Stockholders of Rapid Text, Inc., dated January 9, 2006.10.23(5)


Office Lease, dated January 9, 200621.1


List of Subsidiaries23.2


Consent of BDO Seidman, LLP24.1


Power of Attorney (included in
    signature page)31.1


Certification by Chief Executive
    Officer of Registrant pursuant to Section 302 of the
    Sarbanes-Oxley Act of 200231.2


Certification by Chief Financial
    Officer of Registrant pursuant to Section 302 of the
    Sarbanes-Oxley Act of 200232.1(6)


Certification by Chief Executive
    Officer of Registrant pursuant to Section 906 of the
    Sarbanes-Oxley Act of 200232.2(6)


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 same numbered exhibit 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)
    
    Previously filed as an exhibit to the Registrants Annual
    Report on Form
    10-K for the
    year ended December 31, 2005, and incorporated herein by
    reference.(3)
    
    Incorporated by reference to the Registrants Registration
    Statement on
    Form S-8,
    File
    No. 333-120150,
    filed with the Securities and Exchange Commission on
    November 2, 2004.(4)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K,
    filed with the Securities and Exchange Commission on
    October 26, 2005.(5)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    Filed with the Securities and Exchange Commission on
    January 12, 2006.(6)
    
    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. 46




---



##### 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
        Internal
    Control-Integrated Framework Internal Control-Integrated Framework
          F-2




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  CONSOLIDATED BALANCE SHEETS
  As of
    December 31,2004


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

$
41,583


$
27,760Restricted short-term cash
    equivalent


422



Marketable securities






23,853Accounts receivable, net of
    allowance for doubtful accounts of $451 and $487


5,560



8,414Investment in receivable portfolios


7



Deferred tax assets


668



4,226Prepaid expenses and other current
    assets


1,633



2,448Total current assets


49,873



66,701Property and equipment, net


7,407



10,622Deferred management incentive plan
    compensation


940



598Deferred tax assets


6,161



15,051Other long-term assets


699



1,354Total assets

$
65,080


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

$
1,346


$
2,181Accrued liabilities


2,527



3,912Management incentive plan
    obligation


342



475Deferred revenue


1,888



3,481Other current liabilities


106



69Total current liabilities


6,209



10,118Management incentive plan
    obligation


684



474Deferred rent


117



978Other long-term liabilities


135



364Total liabilities


7,145



11,934Commitments and contingencies
    (Note 5)Redeemable convertible preferred
    stock, $.001 par value; authorized 4,000 shares






Stockholders equityCommon stock, $.001 par
    value; authorized 87,000 shares; 18,015 and
    18,306 shares issued and outstanding at December 31,
    2004 and 2005, respectively


18



18Additional paid-in capital


112,514



113,234Accumulated deficit


(53,043
)


(30,214
)Accumulated other comprehensive
    income


80



342Deferred stock compensation


(1,634
)


(988
)Total stockholders equity


57,935



82,392Total liabilities, preferred stock
    and stockholders equity

$
65,080


$
94,326    F-3




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF OPERATIONS
    AND OTHER COMPREHENSIVE INCOME
  Years Ended
    December 31,2003


2004


2005(In thousands, except per share
    data)Revenues

$
30,013


$
44,511


$
62,124Cost of revenues (exclusive of
    management incentive plan and depreciation expense shown below)


12,921



24,483



35,460Management incentive
    plan  cost of revenues






788



273Selling, general and
    administrative (exclusive of management incentive plan expense
    shown below)


6,134



9,721



12,485Management incentive
    plan  selling, general and administrative






4,549



69Depreciation and amortization


3,166



3,927



4,414Gain on sale of receivable
    portfolios






(172
)


Restructuring charges


(345
)


(22
)


8,137



1,237



9,423Interest expense


3







Interest income


(75
)


(231
)


(1,388
)Other expense (income)


(8
)


7



47Income before benefit for income
    taxes


8,217



1,461



10,764Provision (benefit) for income
    taxes


231



(6,863
)


(12,065
)Net income


7,986



8,324



22,829Foreign currency translation
    adjustment


(3
)


(140
)


411Unrealized loss on securities






(4
)


(149
)Comprehensive income

$
7,983


$
8,180


$
23,091Basic earnings per share

$
3.15


$
1.39


$
1.26Diluted earnings per share

$
0.64


$
0.55


$
1.21Basic weighted average shares
    outstanding


2,533



5,996



18,165Diluted weighted average shares
    outstanding


12,560



15,012



18,917    F-4




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF STOCKHOLDERS
    EQUITY (DEFICIT)
  Years Ended December 31, 2003, 2004 and 2005
  Accumulated





TotalAdditional





Other


Deferred


StockholdersCommon Stock


Paid-in


Accumulated


Comprehensive


Stock


EquityShares


Amount


Capital


Deficit


Income


Compensation


(Deficit)(In thousands)Balance, at December 31, 2002


2,533


$
3


$
4,409


$
(69,353
)

$
227


$



$
(64,714
)Exercise of stock options


3







1















1Comprehensive income (loss)














7,986



(3
)






7,983Deferred stock compensation










1,998











(1,998
)


Amortization of deferred stock
    compensation










(5
)










124



119Balance, 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
)

$
82,392    F-5




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Years Ended
    December 31,2003


2004


2005(In thousands)OPERATING ACTIVITIESNet income

$
7,986


$
8,324


$
22,829Adjustments to reconcile net income
    to net cash provided by operating activities:Depreciation and amortization


3,166



3,927



4,414Provision for doubtful accounts


293



(51
)


102Stock-based compensation


119



1,774



882Amortization of deferred
    compensation costs






85



342Gain on sale of receivable portfolio






(172
)


Non-cash restructuring charges


427







Reduction of excess accrual for
    restructuring


(974
)


(22
)


Loss on disposal of property and
    equipment






313



64Benefit for deferred income taxes






(6,829
)


(12,269
)Changes in operating assets and
    liabilities:Accounts receivable


270



(3,032
)


(2,953
)Prepaid expenses and other assets


(624
)


(404
)


(770
)Other long-term assets


(49
)


(118
)


(805
)Accounts payable and accrued
    liabilities


765



370



3,225Deferred revenue


163



652



1,606Reserve for restructuring


58







Cash payments on restructuring
    reserve


(758
)


(3
)


Net cash provided by operating
    activities


10,842



4,814



16,667INVESTING ACTIVITIESPurchases of receivable portfolios


(723
)






Collections applied to principal of
    receivable portfolios


101



510



7Proceeds from sale of receivable
    portfolios






355



Purchases of property and equipment


(3,370
)


(6,950
)


(7,327
)Proceeds from sale of fixed assets










120Restricted cash equivalent


349



228



422Proceeds from called short term
    investments










2,000Purchases of marketable securities










(29,600
)Maturities of marketable securities










3,600Net cash used in investing
    activities


(3,643
)


(5,857
)


(30,778
)FINANCING ACTIVITIESPayments of capital lease obligation


(59
)






Payments on line of credit
    borrowings


(166
)






Repurchase of common stock






(1,350
)


Proceeds from the exercise of
    warrants to purchase redeemable preferred stock






157



Proceeds from initial public
    offering






34,820



Public offering costs






(3,250
)


Proceeds from the exercise of stock
    options


1



104



295Net cash provided by (used in)
    financing activities


(224
)


30,481



295Effect of exchange rate changes on
    cash


(3
)


(6
)


(7
)Net increase (decrease) in cash and
    cash equivalents


6,972



29,432



(13,823
)Cash and cash equivalents,
    beginning of period


5,179



12,151



41,583Cash and cash equivalents, end of
    period

$
12,151


$
41,583


$
27,760SUPPLEMENTAL DISCLOSURES OF CASH
    FLOW INFORMATIONInterest paid for the period

$
3


$



$
Taxes paid for the period


15



392



48NON-CASH INVESTING AND FINANCING
    ACTIVITIESUnrealized holding (losses) on
    marketable securities

$



$



$
(146
)Construction in progress incurred
    but not paid










1,329Conversion of preferred to common
    stock






74,268



Non-cash tax benefit from
    disqualifying dispositions










189    F-6




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (In
    thousands, except per share data)
  1  Description
    of the Company
    2  Summary
    of Significant Accounting Policies
  Use of
    Estimates
    Concentrations
    of Risk
        As of and for the Years Ended
    December 31,2003


2004


2005% of


% of A/R,


% of


% of A/R,


% of


% of A/R,Revenue


Net


Revenue


Net


Revenue


NetCompany A


49
%



%


31
%


19
%


27
%


21
%Company B


26



17



8



5



7



9Company C


13



75



26



31



20



26Company D


4



4



12



3



12



      F-7




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Principles
    of Consolidation
    Cash,
    Cash Equivalents and Restricted Cash Equivalent
    Property
    and Equipment
    Furniture and fixtures


5 yearsComputer equipment


3 yearsSoftware


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




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Cost
    of Revenues
    Net
    Income Per Share
      Years Ended
    December 31,2003


2004


2005Options


136



15



220Preferred stock warrants


1,211







Common stock warrants


72



127



501,419



142



270     Years Ended
    December 31,2003


2004


2005Income


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

$
7,986



2,533


$
3.15


$
8,324



5,996


$
1.39


$
22,829



18,165


$
1.26Effect of dilutive securities:Options






438











945











752Warrants






201











604











Convertible preferred stock






9,388











7,467











Income available to common
    stockholders

$
7,986



12,560


$
0.64


$
8,324



15,012


$
0.55


$
22,829



18,917


$
1.21   Segments
    of an Enterprise
   F-9




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Income
    Taxes
    Fair
    Value of Financial Instruments
    Foreign
    Currency
    Stock-Based
    Compensation
    Years Ended
    December 31,2003


2004


2005Net income as reported

$
7,986


$
8,324


$
22,829Add: Stock-based compensation
    expense included in reported net income, net of related tax
    effects


119



1,774



564Deduct: Total stock-based
    compensation expense determined under fair value based methods
    for all awards, net of related tax effects


(332
)


(2,153
)


(2,250
)Pro forma net income

$
7,773


$
7,945


$
21,143Basic earnings per shareAs reported

$
3.15


$
1.39


$
1.26Pro forma

$
3.07


$
1.33


$
1.16Diluted earnings per shareAs reported

$
0.64


$
0.55


$
1.21Pro forma

$
0.62


$
0.53


$
1.12  F-10




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Years Ended
    December 31,2003


2004


2005Risk free interest rate


2.71
%


3.73
%


4.2
%Expected life (years)


5.0



4.0



4.4Dividend yield


0.0
%


0.0
%


0.0
%Expected volatility


0.0
%


30.9
%


48.7
%     Comprehensive
    income
      Foreign Currency


Unrealized Loss onItems


Securities


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
)

$
342   Recent
    Accounting Pronouncements
  fair-value-based
  No. 109-2,
 F-11




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    ,
   ,
  3  Property
    and Equipment
    2004


2005Furniture and fixtures

$
2,724


$
2,371Computer equipment


7,931



11,298Software


930



1,206Leasehold improvements


3,636



5,64515,221



20,520Less: Accumulated depreciation and
    amortization


(7,814
)


(9,898
)Total property and equipment

$
7,407


$
10,622     4   Credit
    Agreements
   F-12




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   5  Commitments
    and Contingencies
  Leases
    OperatingYears Ending
    December 31,

Lease2006

$
3,1612007


2,9772008


2,8052009


2,4402010


2,789Thereafter


12,089Total

$
26,261          F-13




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Contractual
    Compensation Obligation
    Litigation
    6  Convertible
    Preferred Stock
  one-for-one and/or one-for-one .
  7  Warrants
    one-for-one .
 F-14




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   8  Stock
    Options and Restricted Stock Units
  2004
    Stock Incentive Plan
        2004
    Employee Stock Purchase Plan
       F-15




---



##### Table of Contents



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


Exercise


SharesShares


Price


ExercisableBalance, at December 31, 2002


847


$
1.32



326Granted


422



0.41Canceled


(162
)


1.17Exercised


(3
)


0.41Balance, at December 31, 2003


1,104



1.01



495Granted


460



5.59Canceled


(103
)


3.44Exercised


(209
)


0.50Balance, at December 31, 2004


1,252



2.57



450Granted


962



8.39Canceled


(224
)


6.70Exercised


(291
)


9.17Balance, at December 31, 2005


1,699


$
5.58



474       F-16




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Outstanding Weighted
    Average


ExercisableRemaining





Weighted AverageContractual


Exercise





ExerciseExercise Price per
    Share

Shares


Life (Years)


Price


Shares


Price$   0.03


33



2.54


$
0.03



33


$
0.030.19


89



2.92



0.19



89



0.190.41


394



7.57



0.41



154



0.411.15


9



4.05



1.15



9



1.151.89


3



4.15



1.89



3



1.895.15


73



4.72



5.15



73



5.156.80


90



8.77



6.80



37



6.806.85


42



8.21



6.85



16



6.857.23


399



9.80



7.23



1



7.237.69


20



9.77



7.69



0



0.008.15


27



8.94



8.15



10



8.158.48


47



9.30



8.48



1



8.488.49


15



10.00



8.49



0



0.008.56


87



9.99



8.56



0



0.008.63


148



9.94



8.63



0



0.009.09


50



8.82



9.09



20



9.099.36


20



9.49



9.36



3



9.369.40


55



9.55



9.40



0



0.0010.80


98



9.15



10.80



25



10.80Total


1,699



8.35


$
5.59



474


$
2.98       Years Ended
    December 31,2003


2004


2005Cost of revenues

$
61


$
566


$
271Selling, general &
    administrative


58



1,208



611$
119


$
1,774


$
882    F-17




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    9  Restructuring
    Charges
              Severance and


Lease


AssetRelated Cost


Termination


Write-Down


TotalReserve for restructuring, at
    December 31, 2002

$
753


$
802


$



$
1,5552003 restructuring charges


79



267



283



629Cash payments


(170
)


(588
)






(758
)Reduction of excess accrual


(637
)


(337
)






(974
)Non cash charges






(144
)


(283
)


(427
)Reserve for restructuring, at
    December 31, 2003


25











25Cash payments


(3
)










(3
)Reduction of excess accrual


(22
)










(22
)Reserve for restructuring, at
    December 31, 2004

$



$



$



$
  F-18




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   10  Income
    Taxes
    Years Ended
    December 31,2003


2004


2005Current:Federal

$
120


$
(23
)

$
137State


111



(11
)


67231



(34
)


204Deferred:Federal






(6,529
)


(12,050
)State






(300
)


(219
)



(6,829
)


(12,269
)Total provision (benefit)

$
231


$
(6,863
)

$
(12,065
)     Years Ended
    December 31,2003


2004


2005Federal statutory rate


35.0
%


35.0
%


35.0
%State taxes net of federal benefit


1.3



(0.8
)


(0.9
)Difference between foreign tax
    rates and U.S. tax rates


(1.9
)


(86.6
)


(16.6
)Other


0.1



7.6



(0.8
)Deferred stock compensation (ISOs)






42.5



2.9Change in valuation allowance


(31.7
)


(467.4
)


(131.7
)2.8
%


(469.7
)%


(112.1
)%     Years Ended
    December 31,2003


2004


2005Domestic

$
7,773


$
(2,156
)

$
5,667Foreign


444



3,617



5,097$
8,217


$
1,461


$
10,764  F-19




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Years EndedDecember 31,2004


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

$
23,779


$
21,693Reserves and allowances


103



181Other


(255
)


28Federal effect of state tax






(426
)Less: valuation allowance


(16,798
)


(2,200
)$
6,829


$
19,276         11  Geographic
    and Product Data
  U.S.-based
 F-20




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     As ofDecember 31,2004


2005Long-lived assets:U.S.

$
1,797


$
1,312Philippines


5,610



9,310Total

$
7,407


$
10,622   Years Ended
    December 31,2003


2004


2005Depreciation and amortization:U.S.

$
1,896


$
1,376


$
1,005Philippines


1,270



2,551



3,409Total

$
3,166


$
3,927


$
4,414   12  Stock
    Split
    13  Initial
    Public Offering
    one-to-one
      14  Subsequent
    Events
   F-21




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      15  Quarterly
    Financial Data (Unaudited)
    20041st Qtr.


2nd Qtr.


3rd Qtr.(2)


4th Qtr.(3)(In thousands, except per share
    data)Revenues

$
9,551


$
10,445


$
11,936


$
12,579Income from operations


1,881



1,323



1,975



(3,942
)Net income


1,839



1,290



1,932



3,263Basic income per share(1)

$
0.71


$
0.57


$
0.90


$
0.19Diluted income per share(1)

$
0.13


$
0.09


$
0.14


$
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(4)


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 basic and diluted per share amounts have been restated to
    give retroactive effect to a 1 for 2.74 reverse stock split of
    our stock that occurred on August 5, 2004.(2)
    
    On February 25, 2005, the Company restated its results for
    the three and nine months ended September 30, 2004 to
    exclude a charge related to payment obligations of approximately
    $4,800 under the management incentive plan in connection with
    the Companys initial public offering and to make other
    adjustments related to obligations under the plan. During the
    initial preparation of the Companys financial statements
    for the quarter ended September 30, 2004, the $4,800 paid
    under the incentive plan was recorded as of September 30
    because by September 30 the registration statement for the
    offering had been declared effective by the SEC, the offering
    had priced and the management payments were highly probable.
    Subsequently, the Company concluded that the event triggering
    the payment obligations was the closing of, and the receipt of
    funds F-22




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  from, the offering, and the charge should have been recorded at
    that time. As a result of the adjustments, the restated results
    of operations for the quarter ended September 30, 2004 were
    as follows:  For the Quarter EndedSeptember 30,
    2004As reported


As restatedRevenues

$
11,936


$
11,936Income (loss) from operations


(2,811
)


1,975Net income (loss)


(2,730
)


1,932Basic income (loss) per share(1)

$
(1.28
)

$
0.90Diluted income (loss) per share(1)

$
(1.28
)

$
0.14     (3)
    
    In the quarter ended December 31, 2004, the Company
    recorded a charge of $5,337 related to the management incentive
    plan. In addition, the Company released a portion of the
    deferred tax valuation allowances in the amount of $6,863, as
    the Company determined that it is more likely than not that a
    portion of the deferred tax assets will be realizable (see
    Note 10).(4)
    
    During the year ended December 31, 2005, the Company
    reevaluated the deferred tax asset valuation allowance each
    quarter and released $700 in the first quarter, $400 in the
    second quarter, $3,200 in the third quarter and $10,300 in the
    fourth quarter. These amounts are included in net income for the
    respective quarter. In addition, the Company recorded a charge
    of approximately $86 each quarter in 2005 related to the
    management incentive plan.  year-to-date
  16  Related
    Party Transactions
   F-23




---



##### 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, 2006/s/  CAROLINE
    ROOKCaroline
    Rook

Chief Financial Officer (Principal
    Financial and Accounting Officer)

March 16, 2006/s/  ADAM
    BERGERAdam
    Berger

Director

March 16, 2006/s/  C.
    LARRY BRADFORDC.
    Larry Bradford

Director

March 16, 2006/s/  MICHAEL
    EDELLMichael
    Edell

Director

March 16, 2006/s/  GEORGE
    ELLISGeorge
    Ellis

Director

March 16, 2006/s/  FRANK
    PERNAFrank
    Perna

Director

March 16, 2006/s/  JOE
    ROSEJoe
    Rose

Director

March 16, 2006