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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 1934    
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the year ended December 31, 2004                                                        

Commission File Number: 333-115328





PeopleSupport, Inc.


(Exact name of Registrant as specified in its charter)


|                                                                                                  |  |                                     
|------------------------------------------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                                                          |  | 95-4695021                          
|(State or other jurisdiction
    of incorporation or organization)                                |  | (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 Registered
|                                         |  |                                          
|Common Stock, par value $0.001 per share |  | Nasdaq National Market                   

Securities registered pursuant to Section 12(g) of the
Act: None





o þ


o


o þ






DOCUMENTS INCORPORATED BY REFERENCE












---










PeopleSupport, Inc. and Subsidiaries


FORM 10-K


For the Fiscal Year Ended December 31, 2004


INDEX


|           |  |                                                                                                                      |  |      |    | 
|---------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|Item No.   |  |                                                                                                                      |  | Page |   
|           |  |                                                                                                                      |  |      |   
|PART I    
|Item 1.    |  | Business                                                                                                             |  |      | 1  | 
|Item 2.    |  | Properties                                                                                                           |  |      | 27 | 
|Item 3.    |  | Legal Proceedings                                                                                                    |  |      | 27 | 
|Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                                                              |  |      | 27 | 
|PART II   
|Item 5.    |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |      | 27 | 
|Item 6.    |  | Selected Financial Data                                                                                              |  |      | 29 | 
|Item 7.    |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |  |      | 31 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures
    about Market Risk                                                       |  |      | 46 | 
|Item 8.    |  | Financial Statements and Supplementary
    Data                                                                      |  |      | 47 | 
|Item 9.    |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |  |      | 47 | 
|Item 9A.   |  | Controls and Procedures                                                                                              |  |      | 48 | 
|Item 9B.   |  | Other Information                                                                                                    |  |      | 48 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers of the
    Registrant                                                               |  |      | 48 | 
|Item 11.   |  | Executive Compensation                                                                                               |  |      | 49 | 
|Item 12.   |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |  |      | 49 | 
|Item 13.   |  | Certain Relationships and Related
    Transactions                                                                   |  |      | 49 | 
|Item 14.   |  | Principal Accountant Fees and Services                                                                               |  |      | 49 | 
|PART IV   
|Item 15.   |  | Exhibits and Financial Statement
    Schedules                                                                       |  |      | 49 | 
|Signatures |  |                                                                                                                      |  |     
|EX-10.5.1 
|EX-10.13  
|EX-23.2   
|EX-31.1   
|EX-31.2   
|EX-32.1   
|EX-32.2   





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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS











PART I







|        |         
|------- | --------
|Item 1. | Business



Overview






1



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Corporate Background and History




2



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Industry Background




| |         
| | --------
| | Overview







| |                                               
| | ----------------------------------------------
| | Current Trends in Customer Management Services







| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;                                        
|
| |  | increasing capital requirements for sophisticated communications
    technology needed to provide timely technical support and
    customer care; and

3



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| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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






| |                                                         
| | --------------------------------------------------------
| | Attract Additional Large Customer Management
    Clients



5



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| |                                               
| | ----------------------------------------------
| | Expand Accounts Receivable Management Services





| |                          
| | -------------------------
| | Broaden Service Offerings





| |                                                           
| | ----------------------------------------------------------
| | Continue to Attract and Retain Top Professional
    Talent





| |                               
| | ------------------------------
| | Expand to Additional Countries



6



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| |                                        
| | ---------------------------------------
| | Pursue Selective Strategic Acquisitions



Our Services






| |                             
| | ----------------------------
| | Customer Management Services









| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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                                                                                                                                                                                         

7



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| |   |                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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.





| |                                        
| | ---------------------------------------
| | 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. 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                                                                                                                                                                                                                                                                                                       

8



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | dedicated to us. 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 communications between the United States and the
    Philippines 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 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.                                                                                                                                                                                                                                                                                                                       
|
| |  | Proprietary self-help software. As part of our customer
    management services, we offer clients use of our self-help
    technology, RightResponse. RightResponse uses a proprietary
    natural language search engine to match customer inquiries with
    relevant information contained in a database updated by our
    knowledge engineers. Web- based reports and analytical tools
    allow clients to evaluate the effectiveness of our self-help
    services and provide statistics on their self-help functions.                                                                                                                                                                                                                                                                               
|
| |  | 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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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We were engaged by a large travel services provider that decided
    to expand its outsourced customer management services in order
    to achieve vendor diversity and scalability as it entered an
    aggressive growth phase. The client also experienced seasonal
    patterns in its business that required dynamic staffing to
    respond to customer needs. The initial phase of our engagement
    involved collaborating with the client to integrate multiple
    back-end systems and to conduct an intensive four week training
    program for our professionals. Within three months, we began
    providing limited customer management services to test the
    processes we jointly developed and adjust our service as
    appropriate. During the next six months, we increased the volume
    and scope of our services for this client and have continued to
    adapt our services to meet the clients needs. We handle a
    significant amount of this clients overall customer
    management needs and a majority of their outsourced customer
    management services. The services we provide include hotel and
    travel reservation sales, schedule changes, customer inquiries
    and issue resolution. Our services are conducted via voice and
    e-mail interactions.
|
| |  | We were engaged by a client in the technology sector that was
    facing downward pricing pressure and needed to reduce internal
    costs. The client had limited exposure to offshore BPO services
    through an outsourced e-mail support arrangement with an
    India-based company and agreed to test our e-mail response
    capabilities. The client informed us that we achieved
    consistently strong performance in the first few weeks and
    decided to expand our relationship and test the viability of our
    offshore voice support. As a result, we agreed to expand our
    services by adding a small group of our professionals to handle
    inbound telephone calls. The client monitored our performance
    and customer satisfaction feedback to determine whether a
    potential widespread change in support strategy would be
    accepted by its customers. Over the next few months, the client
    asked us to expand our voice team to handle multiple service
    lines. We also were asked to be a part of our clients
    planning for its entire offshore strategy. Currently, we have a
    team of several hundred professionals dedicated to this client
    over multiple facilities.                                                                         

Employees






| |                      
| | ---------------------
| | Hiring and Recruiting



10



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| |                     
| | --------------------
| | 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;
|
| |  | 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.                                                               



11



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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






| |                            
| | ---------------------------
| | Sales and Marketing Support



12



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| |                   
| | ------------------
| | 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



Proprietary Rights




Regulation






13



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Available Information






14



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Risk Factors




| |                              
| | -----------------------------
| | Risks Related to Our Business



| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our revenues are highly dependent on three major clients that
    collectively accounted for 69% of our revenues in 2004, and any
    loss of business from our major clients would reduce our
    revenues and seriously harm us.







| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our clients may adopt technologies that decrease the demand
    for our services, which could reduce our revenues and seriously
    harm our business.





| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our revenues are highly dependent on a few industries and any
    decrease in demand for outsourced services in these industries
    could reduce our revenues and seriously harm our business.



15



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| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | We serve markets that are highly competitive and we may be
    unable to compete with businesses that have greater resources
    than we do.







| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A reversal of industry trends toward offshore outsourcing due
    to negative public reaction in the United States and recently
    proposed legislation may adversely affect demand for our
    services.





16



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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.





| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | Our clients alternatives to our services, including their
    willingness to replace their internal solutions or existing
    vendors; 
|
| |  | Our clients budgetary constraints, and the timing of our
    clients budget cycles and approval process;                              
|
| |  | Our clients willingness to expend the time and resources
    necessary to integrate their systems with our systems and
    network; and
|
| |  | The timing and expiration of our clients current
    outsourcing agreements for similar services.                                      



17



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| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | 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 customer management
    professionals; 
|
| |  | Generate sufficient revenues and manage costs to maintain
    profitability;
|
| |  | Manage growth in our operations; and                                        
|
| |  | Access additional capital when required and on reasonable terms.            



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating results may fluctuate significantly and could
    cause the market price of our common stock to fall rapidly and
    without notice.





| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The addition or loss of a major client and the volume of
    services provided to our major clients;                                                                      
|
| |  | The extent to which our services achieve or maintain market
    acceptance, which may be affected by political and public
    relations reactions to offshore outsourcing;
|
| |  | Our ability to introduce new or enhanced services to our
    existing and prospective clients and to attract and retain new
    clients;                                  
|
| |  | Long sales cycles and fluctuations in sales cycles;                                                                                                                       
|
| |  | The extent to which we incur expenses in a given period in
    anticipation of increased demand in future periods, and the
    extent to which that demand materializes;  
|
| |  | Changes in our pricing policies or those of our competitors, as
    well as increased price competition in general;                                                       
|
| |  | Variation in demand for our services and services or products of
    our major clients, particularly clients in the travel and
    hospitality industry; and              
|
| |  | The introduction of new or enhanced services by other outsourced
    service providers.                                                                                   



18



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| |                                                                               
| | ------------------------------------------------------------------------------
| | If we fail to manage our growth effectively, our business may
    not succeed.





| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maintain the hiring, training and management necessary to ensure
    the quality and responsiveness of our services;                                                                      
|
| |  | Expand and enhance our administrative and technical
    infrastructure, facilities, and capacities to accommodate
    increased call volume and other customer management
    demands; and
|
| |  | Continue to improve our management, financial and information
    systems and controls.                                                                                                   





| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may experience significant employee turnover rates in the
    future and we may be unable to hire and retain enough
    sufficiently trained employees to support our operations, which
    could harm our business.





| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our senior management team is important to our continued
    success and the loss of members of senior management could
    negatively affect our operations.





| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The planned move of our operations to our new facility in
    Manila could result in interruptions in service, which could
    reduce our revenues and harm our business.



19



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| |                                                                                     
| | ------------------------------------------------------------------------------------
| | Our facilities are at risk of damage by earthquakes and other
    natural disasters.





| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | 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.



20



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| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Unauthorized disclosure of sensitive or confidential client
    and customer data, whether through breach of our computer
    systems or otherwise, could expose us to protracted and costly
    litigation and cause us to lose clients.





| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | Our ability to use net operating loss carryforwards in the
    United States may be limited.





| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | The current tax holidays in the Philippines will expire
    within the next several years.





| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | We may choose to expand operations outside of the Philippines
    and may not be successful.



21



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| |                                                                              
| | -----------------------------------------------------------------------------
| | 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.







| |                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our ability to raise capital in the future, if and when
    needed, may be limited, and could prevent us from executing our
    business strategy. The sale of additional equity securities
    would result in further dilution to our stockholders.





| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Market acceptance of and demand for our offshore outsourced
    services which may be affected by political and public relations
    reactions to offshore outsourcing;
|
| |  | Access to and availability to sufficient management, technical,
    marketing, and financial personnel;                                                                
|
| |  | The need to enhance our operating infrastructure;                                                                                                                      
|
| |  | The continued development of new or enhanced services and hosted
    solutions;                                                                                        
|
| |  | The need to adapt to changing technologies and technical
    requirements;                                                                                             
|
| |  | Increasing costs, particularly in the Philippines;                                                                                                                     

22



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| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | The existence of opportunities to acquire businesses or
    technologies, or opportunities for expansion; and
|
| |  | Increased competition and competitive pressures.                                                             



We
failed to register our securities under the Securities and
Exchange Act of 1934 and, as a result, we may incur liability to
repurchase certain stock options and shares, and may face
potential claims under federal and state securities laws.










| |                                                   
| | --------------------------------------------------
| | Risks Related to Doing Business in the Philippines



| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



23



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| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | The Philippines may experience economic instability, which
    could increase our costs and harm our business.





| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | We benefit from Philippine laws granting preferential tax
    treatment which, if eliminated, could result in increased
    operating expenses.





| |                          
| | -------------------------
| | Other Risks Related to Us



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | Our stock price may be volatile, and you may not be able to
    resell shares of our common stock at or above the price you
    paid, or at all.



24



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##### 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.





| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Substantial future sales of our common stock in the public
    market could cause our stock price to fall.







| |                                                                         
| | ------------------------------------------------------------------------
| | We will incur increased costs as a result of being a public
    company.



25



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##### Table of Contents





| |                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Delaware law and our amended and restated certificate of
    incorporation and bylaws contain anti-takeover provisions that
    could delay or discourage business combinations and takeover
    attempts that stockholders may consider favorable.





| |   |                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Classify our board of directors into three groups, each of
    which, after an initial transition period, will serve for
    staggered three-year terms;                                                                                                                                                                                                                
|
| |  | Permit the board of directors to elect a director to fill a
    vacancy created by the expansion of the board of directors;                                                                                                                                                                                                                                             
|
| |  | Permit stockholders to remove our directors only for cause;                                                                                                                                                                                                                                                                                                             
|
| |  | Permit a special stockholders meeting to be called only by
    our chairman of the board of directors, president, or chief
    executive officer, a majority of our board of directors or
    two-thirds of the independent directors;                                                                                                                                 
|
| |  | Require stockholders to give us advance notice to nominate
    candidates for election to our board of directors or to make
    stockholder proposals at a stockholders meeting;                                                                                                                                                                                       
|
| |  | Permit our board of directors to issue, without approval of our
    stockholders, up to 4,000,000 shares of preferred stock
    with terms that our board of directors may determine and that
    may be senior to the terms of our common stock;                                                                                                                       
|
| |  | Prohibit cumulative voting in the election of directors that
    would otherwise allow less than a majority of stockholders to
    elect directors;                                                                                                                                                                                                                     
|
| |  | Permit the board of directors to alter certain provisions of our
    amended and restated bylaws without obtaining stockholder
    approval;                                                                                                                                                                                                                            
|
| |  | Require approval of at least 75% of the shares entitled to vote
    at an election of directors to adopt, amend or repeal our
    amended and restated bylaws or amend or repeal the provisions of
    our amended and restated certificate of incorporation regarding
    the election and removal of directors and the ability of
    stockholders to take action; and
|
| |  | Eliminate the right of stockholders to call a special meeting of
    stockholders and to take action by written consent.                                                                                                                                                                                                                                                





| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Our corporate actions are substantially influenced by
    officers, directors, principal stockholders and affiliated
    entities.



26



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##### Table of Contents










|        |           
|------- | ----------
|Item 2. | Properties










|        |                  
|------- | -----------------
|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

Price Range of Common Stock




|                                        |  |     |      |  |      |   |       | 
|--------------------------------------- |  | --- | ---- |  | ---- | - | ----- | 
|Quarter Ended                           |  | Low |      |  | High |  
|                                        |  |     |      |  |      |  
|December 31, 2004                       |  | $   | 6.50 |  |      | $ | 10.15 | 
|March 31, 2005 (through March 30, 2005) |  |     | 8.29 |  |      |   | 11.59 | 



Dividend Policy




27



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##### Table of Contents



Recent Sales of Unregistered Securities






Use of Initial Public Offering Proceeds








28



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Repurchase of Securities


|           |  |                  |         |  |                    |                     |      |                    |                     |  |                    |  |  |  |   | 
|---------- |  | ---------------- | ------- |  | ------------------ | ------------------- | ---- | ------------------ | ------------------- |  | ------------------ |  |  |  | - | 
|           |  | (a)              |         |  | (b)                |                     |      | (c)                |                     |  | (d)                | 
|           |  |                  |         |  |                    | Total Number of     |      |                    |                    
|           |  |                  |         |  |                    | Shares Purchased    |      |                    | Maximum Number of   | 
|           |  |                  |         |  |                    | as Part of Publicly |      |                    | Shares that May Yet | 
|           |  | Total Number of  |         |  | Average Price Paid |                     |      | Announced Plans or |                     |  | be Purchased Under | 
|Period     |  | Shares Purchased |         |  | per Share          |                     |      | Programs(1)        |                     |  | Plans or Programs  | 
|           |  |                  |         |  |                    |                     |      |                    |                     |  |                    | 
|April 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
    $1,350,000. No other shares were approved by the Board of
    Directors for repurchase during 2004.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                                                                      |                                                                      |                                       |        |         |      |   |        |         |   |   |        |        |   |      |        |       |  |   |        |       | 
|----------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | ------------------------------------- | ------ | ------- | ---- | - | ------ | ------- | - | - | ------ | ------ | - | ---- | ------ | ----- |  | - | ------ | ----- | 
|                                                                                                      |                                                                      | Years Ended December 31,              |       
|                                                                                                      |                                                                      |                                       |       
|                                                                                                      |                                                                      | 2000                                  |        |         | 2001 |   |        | 2002    |   |   | 2003   |        |   | 2004 |       
|                                                                                                      |                                                                      |                                       |        |         |      |   |        |         |   |   |        |        |   |      |       
|                                                                                                      |                                                                      | (In thousands, except per share data) |       
|Consolidated Statements of Operations Data:                                                           |                                                                      |                                       |        |         |      |   |        |         |   |   |        |        |   |      |        |       |  |   |        |      
|Revenues                                                                                              |                                                                      | $                                     | 10,979 |         |      | $ | 19,733 |         |   | $ | 19,780 |        |   | $    | 30,013 |       |  | $ | 44,511 |      
|Cost of revenues (exclusive of management incentive plan and
    depreciation expense shown below)(1) |                                                                      |                                       | 15,020 |         |      |   | 12,573 |         |   |   | 11,188 |        |   |      | 12,921 |       |  |   | 24,483 |      
|                                                                                                      | Management incentive plan  cost of revenues(2)                      |                                       |        |        |      |   |        |        |   |   |        |       |   |      |        |      |  |   |        | 788   | 
|Selling, general & administrative (exclusive of
    management incentive plan expense shown below)(1) |                                                                      |                                       | 37,759 |         |      |   | 15,128 |         |   |   | 5,587  |        |   |      | 6,134  |       |  |   | 9,721  |      
|                                                                                                      | Management incentive plan  selling,
    general & administrative(2) |                                       |        |        |      |   |        |        |   |   |        |       |   |      |        |      |  |   |        | 4,549 | 
|Depreciation and amortization                                                                         |                                                                      |                                       | 1,957  |         |      |   | 3,795  |         |   |   | 4,065  |        |   |      | 3,166  |       |  |   | 3,927  |      
|Gain on sale of receivable portfolios(3)                                                              |                                                                      |                                       |       |         |      |   |       |         |   |   |       |        |   |      |       |       |  |   | (172   | )    
|Restructuring charges(4)                                                                              |                                                                      |                                       | 3,038  |         |      |   |       |         |   |   | 3,824  |        |   |      | (345   | )     |  |   | (22    | )    
|                                                                                                      |                                                                      |                                       |        |         |      |   |        |         |   |   |        |        |   |      |       
|                                                                                                      | Income (loss) from operations                                        |                                       |        | (46,795 | )    |   |        | (11,763 | ) |   |        | (4,884 | ) |      |        | 8,137 |  |   |        | 1,237 | 
|Interest expense                                                                                      |                                                                      |                                       | (716   | )       |      |   | (790   | )       |   |   | (506   | )      |   |      | (3     | )     |  |   |       |      

29



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|                                                          |            |                                       |         |        |      |   |         |       |   |   |        |       |   |      |       |        |  |   |        |        | 
|--------------------------------------------------------- | ---------- | ------------------------------------- | ------- | ------ | ---- | - | ------- | ----- | - | - | ------ | ----- | - | ---- | ----- | ------ |  | - | ------ | ------ | 
|                                                          |            | Years Ended December 31,              |        
|                                                          |            |                                       |        
|                                                          |            | 2000                                  |         |        | 2001 |   |         | 2002  |   |   | 2003   |       |   | 2004 |      
|                                                          |            |                                       |         |        |      |   |         |       |   |   |        |       |   |      |      
|                                                          |            | (In thousands, except per share data) |        
|Interest income                                           |            |                                       | 1,484   |        |      |   | 895     |       |   |   | 90     |       |   |      | 75    |        |  |   | 231    |       
|Gain on the extinguishment of debt(5)                     |            |                                       |        |        |      |   |        |       |   |   | 2,430  |       |   |      |      |        |  |   |       |       
|Other income (expense)                                    |            |                                       |        |        |      |   | 1       |       |   |   | (9     | )     |   |      | 8     |        |  |   | (7     | )     
|                                                          |            |                                       |         |        |      |   |         |       |   |   |        |       |   |      |      
|Income (loss) before provision (benefit) for income taxes |            |                                       | (46,027 | )      |      |   | (11,657 | )     |   |   | (2,879 | )     |   |      | 8,217 |        |  |   | 1,461  |       
|Provision (benefit) for income taxes(6)                   |            |                                       |        |        |      |   | 13      |       |   |   | 13     |       |   |      | 231   |        |  |   | (6,863 | )     
|                                                          |            |                                       |         |        |      |   |         |       |   |   |        |       |   |      |      
|Net income (loss)(7)                                      |            | $                                     | (46,027 | )      |      | $ | (11,670 | )     |   | $ | (2,892 | )     |   | $    | 7,986 |        |  | $ | 8,324  |       
|                                                          |            |                                       |         |        |      |   |         |       |   |   |        |       |   |      |      
|Net income (loss) per share of common stock:              |            |                                       |         |        |      |   |         |       |   |   |        |       |   |      |       |        |  |   |        |       
|                                                          | Basic(8)   |                                       | $       | (19.24 | )    |   | $       | (4.65 | ) |   | $      | (1.14 | ) |      | $     | 3.15   |  |   | $      | 1.39   | 
|                                                          | Diluted(8) |                                       | $       | (19.24 | )    |   | $       | (4.65 | ) |   | $      | (1.14 | ) |      | $     | 0.64   |  |   | $      | 0.55   | 
|Weighted average number of common shares outstanding:     |            |                                       |         |        |      |   |         |       |   |   |        |       |   |      |       |        |  |   |        |       
|                                                          | Basic(8)   |                                       |         | 2,392  |      |   |         | 2,512 |   |   |        | 2,533 |   |      |       | 2,533  |  |   |        | 5,996  | 
|                                                          | Diluted(8) |                                       |         | 2,392  |      |   |         | 2,512 |   |   |        | 2,533 |   |      |       | 12,560 |  |   |        | 15,012 | 

|                                                  |  |                    |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        | 
|------------------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------ | 
|                                                  |  | As of December 31, |        
|                                                  |  |                    |        
|                                                  |  | 2000               |         |   | 2001 |   |         | 2002 |  |   | 2003    |   |  | 2004 |        
|                                                  |  |                    |         |   |      |   |         |      |  |   |         |   |  |      |        
|                                                  |  | (In thousands)     |        
|Consolidated Balance Sheet Data:                  |  |                    |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        | 
|Cash, cash equivalents and short-term investments |  | $                  | 21,998  |   |      | $ | 8,613   |      |  | $ | 5,179   |   |  | $    | 12,151  |   |  | $ | 41,583 | 
|Working capital                                   |  |                    | 15,165  |   |      |   | 5,179   |      |  |   | 4,124   |   |  |      | 11,798  |   |  |   | 43,664 | 
|Total assets                                      |  |                    | 36,187  |   |      |   | 22,715  |      |  |   | 15,259  |   |  |      | 22,535  |   |  |   | 65,080 | 
|Long term liabilities, less current portion       |  |                    | 2,970   |   |      |   | 3,011   |      |  |   | 176     |   |  |      | 267     |   |  |   | 936    | 
|Redeemable convertible preferred stock            |  |                    | 74,110  |   |      |   | 74,110  |      |  |   | 74,110  |   |  |      | 74,110  |   |  |   |       | 
|Total stockholders equity (deficit)              |  | $                  | (50,974 | ) |      | $ | (61,777 | )    |  | $ | (64,714 | ) |  | $    | (56,611 | ) |  | $ | 57,935 | 






|    |                                                                                 
|--- | --------------------------------------------------------------------------------
|(1) | Included in expenses above are non-cash stock based compensation
    charges of:

|                 |                                   |                          |       |       |      |   |     |      |  |      |   |   |      |   |     |    |  |   |       |       | 
|---------------- | --------------------------------- | ------------------------ | ----- | ----- | ---- | - | --- | ---- |  | ---- | - | - | ---- | - | --- | -- |  | - | ----- | ----- | 
|                 |                                   | Years Ended December 31, |      
|                 |                                   |                          |      
|                 |                                   | 2000                     |       |       | 2001 |   |     | 2002 |  | 2003 |   |   | 2004 |  
|                 |                                   |                          |       |       |      |   |     |      |  |      |   |   |      |  
|                 |                                   | (In thousands)           |      
|Cost of revenues |                                   | $                        | 94    |       |      | $ | 25  |      |  | $    |  |   |      | $ | 61  |    |  | $ | 566   |      
|                 | Selling, general & administrative |                          |       | 2,342 |      |   |     | 633  |  |      |   |  |      |   |     | 58 |  |   |       | 1,208 | 
|                 |                                   |                          |       |       |      |   |     |      |  |      |   |   |      |   |    
|                 |                                   | $                        | 2,436 |       |      | $ | 658 |      |  | $    |  |   |      | $ | 119 |    |  | $ | 1,774 |      
|                 |                                   |                          |       |       |      |   |     |      |  |      |   |   |      |   |    






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 will be 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

30



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##### Table of Contents



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 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 and will be amortized over future
    periods.                                                             
|   
|(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
    quarterly net income (loss) for 2003 and 2004.                                                                                                                                                                                                                                                                                 
|   
|(8) | For information regarding the computation of per share amounts,
    refer to Note 2 of the notes to our consolidated financial
    statements included elsewhere 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








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| |                                                           
| | ----------------------------------------------------------
| | Quarterly Results of Operations and Performance
    Trends

|                            |  |                                       |       |  |         |   |       |            |  |   |            |  |  |   |       | 
|--------------------------- |  | ------------------------------------- | ----- |  | ------- | - | ----- | ---------- |  | - | ---------- |  |  | - | ----- | 
|                            |  | 2003                                  |      
|                            |  |                                       |      
|                            |  | 1st                                   |       |  | 2nd     |   |       | 3rd        |  |   | 4th        | 
|                            |  | Quarter                               |       |  | Quarter |   |       | Quarter(1) |  |   | Quarter(2) | 
|                            |  |                                       |       |  |         |   |       |            |  |   |            | 
|                            |  | (In thousands, except per share data) |      
|Revenues                    |  | $                                     | 6,409 |  |         | $ | 7,320 |            |  | $ | 7,720      |  |  | $ | 8,564 | 
|Income from operations      |  |                                       | 1,148 |  |         |   | 1,739 |            |  |   | 2,085      |  |  |   | 3,165 | 
|Net income                  |  |                                       | 1,130 |  |         |   | 1,719 |            |  |   | 2,042      |  |  |   | 3,095 | 
|Basic income per share(3)   |  | $                                     | 0.45  |  |         | $ | 0.68  |            |  | $ | 0.81       |  |  | $ | 1.22  | 
|Diluted income per share(3) |  | $                                     | 0.09  |  |         | $ | 0.14  |            |  | $ | 0.16       |  |  | $ | 0.23  | 

|                              |  |         |       |  |         |   |        |            |  |   |            |  |  |   |        |  
|----------------------------- |  | ------- | ----- |  | ------- | - | ------ | ---------- |  | - | ---------- |  |  | - | ------ | -
|                              |  | 2004    |      
|                              |  |         |      
|                              |  | 1st     |       |  | 2nd     |   |        | 3rd        |  |   | 4th        | 
|                              |  | Quarter |       |  | Quarter |   |        | Quarter(4) |  |   | Quarter(5) | 
|                              |  |         |       |  |         |   |        |            |  |   |            | 
|Revenues                      |  | $       | 9,551 |  |         | $ | 10,445 |            |  | $ | 11,936     |  |  | $ | 12,579 |  
|Income (loss) from operations |  |         | 1,881 |  |         |   | 1,323  |            |  |   | 1,975      |  |  |   | (3,942 | )
|Net income                    |  |         | 1,839 |  |         |   | 1,290  |            |  |   | 1,932      |  |  |   | 3,263  |  
|Basic income per share(3)     |  | $       | 0.71  |  |         | $ | 0.57   |            |  | $ | 0.90       |  |  | $ | 0.19   |  
|Diluted income per share(3)   |  | $       | 0.13  |  |         | $ | 0.09   |            |  | $ | 0.14       |  |  | $ | 0.18   |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In the quarter ended September 30, 2003, we recorded a loss
    on disposal of assets in the amount of $1.1 million related
    to the final closure of our St. Louis operation, and we
    released a portion of the prior years excess accrual for
    restructuring charges in an amount of $0.7 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(2) | In the quarter ended December 31, 2003, we released a
    portion of the prior years excess accrual for
    restructuring charges in the amount of $1.2 million, based
    on lower than anticipated actual expense for severance
    obligations, which was partially offset by charges of
    $0.5 million for severance-related and facilities costs in
    St. Louis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(3) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(4) | On February 25, 2005, we restated our 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 our initial
    public offering and to make other adjustments related to
    obligations under the plan. During the initial preparation of
    our 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,
    we concluded that the event triggering the payment obligations
    was the closing of, and the receipt of funds from, the offering,
    and the

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| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 Ended  |       
| |  |                                    |  | September 30, 2004     |       
| |  |                                    |  |                        |       
| |  |                                    |  | As Reported            |        |   | As Restated |  
| |  |                                    |  |                        |        |   |             |  
| |  |                                    |  | (In thousands,         |       
| |  |                                    |  | except per share data) |       
| |  | Revenues                           |  | $                      | 11,936 |   |             | $ | 11,936 | 
| |  | Income (loss) from operations      |  |                        | (2,811 | ) |             |   | 1,975  | 
| |  | Net income (loss)                  |  |                        | (2,730 | ) |             |   | 1,932  | 
| |  | Basic income (loss) per share(3)   |  | $                      | (1.28  | ) |             | $ | 0.90   | 
| |  | Diluted income (loss) per share(3) |  | $                      | (1.28  | ) |             | $ | 0.14   | 





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | In the quarter ended December 31, 2004, we released a
    portion of the deferred tax valuation allowances as we
    determined that it is more likely than not that a portion of the
    deferred tax assets will be realized. We recorded a benefit for
    income taxes of $6.8 million associated with the release of
    certain valuation allowances. In addition, we recorded a charge
    of $5.3 million resulting from our obligation to make
    payments to key employees under our 2002 management incentive
    plan in connection with our IPO.





| |                    
| | -------------------
| | 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.





33



---



##### Table of Contents





| |                       
| | ----------------------
| | Key Expense Categories

Cost of revenues.




Selling, general and administrative.


Depreciation and amortization.


Restructuring charges.


34



---



##### Table of Contents











| |                          
| | -------------------------
| | Certain Charges and Gains

Gain on extinguishment of debt.


Compensation obligations.


Critical Accounting Policies and Estimates






| |                                          
| | -----------------------------------------
| | Revenues and Deferred Revenue Recognition



35



---



##### Table of Contents









| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | 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,










| |                            
| | ---------------------------
| | Accounting for Income Taxes



36



---



##### Table of Contents















| |                                     
| | ------------------------------------
| | Restructuring Charges and Exit Costs

Liability Recognition
for Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring),


37



---



##### Table of Contents



Accounting for Costs Associated with Exit or Disposal
Activities,


Long-lived asset impairment.


Results of Operations




|                                                                                                     |                                                                     |              |     |     |      |  |     |      |  |  |     |    | 
|---------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------ | --- | --- | ---- |  | --- | ---- |  |  | --- | -- | 
|                                                                                                     |                                                                     | Years Ended  |    
|                                                                                                     |                                                                     | December 31, |    
|                                                                                                     |                                                                     |              |    
|                                                                                                     |                                                                     | 2002         |     |     | 2003 |  |     | 2004 | 
|                                                                                                     |                                                                     |              |     |     |      |  |     |      | 
|Consolidated Statements of Operations Data:                                                          |                                                                     |              |     |     |      |  |     |      |  |  |     |   
|Revenues                                                                                             |                                                                     |              | 100 | %   |      |  | 100 | %    |  |  | 100 | % 
|Cost of revenues (exclusive of management incentive plan and
    depreciation expense shown below)   |                                                                     |              | 57  |     |      |  | 43  |      |  |  | 55  |   
|                                                                                                     | Management incentive plan  cost of revenues                        |              |     |    |      |  |     |     |  |  |     | 2  | 
|Selling, general and administrative (exclusive of management
    incentive plan expense shown below) |                                                                     |              | 28  |     |      |  | 20  |      |  |  | 22  |   
|                                                                                                     | Management incentive plan  selling, general and
    administrative |              |     |    |      |  |     |     |  |  |     | 10 | 
|Depreciation and amortization                                                                        |                                                                     |              | 21  |     |      |  | 11  |      |  |  | 9   |   
|Gain on sale of receivable portfolios                                                                |                                                                     |              |    |     |      |  |    |      |  |  |    |   
|Restructuring charges                                                                                |                                                                     |              | 19  |     |      |  | (1  | )    |  |  |    |   
|                                                                                                     |                                                                     |              |     |     |      |  |     |      | 
|                                                                                                     | Income (loss) from operations                                       |              |     | (25 | )    |  |     | 27   |  |  |     | 3  | 
|Interest income (expense)                                                                            |                                                                     |              | (2  | )   |      |  |    |      |  |  | 1   |   
|Gain on the extinguishment of debt                                                                   |                                                                     |              | 12  |     |      |  |    |      |  |  |    |   
|Provision (benefit) for income taxes                                                                 |                                                                     |              |    |     |      |  |    |      |  |  | (15 | ) 
|                                                                                                     |                                                                     |              |     |     |      |  |     |      | 
|Net income (loss)                                                                                    |                                                                     |              | (15 | )%  |      |  | 27  | %    |  |  | 19  | % 
|                                                                                                     |                                                                     |              |     |     |      |  |     |      | 



| |                                                                            
| | ---------------------------------------------------------------------------
| | Year Ended December 31, 2003 Compared with Year Ended
    December 31, 2004



| |         
| | --------
| | Revenues



38



---



##### Table of Contents







| |                 
| | ----------------
| | Cost of Revenues







| |                                    
| | -----------------------------------
| | Selling, General and Administrative



39



---



##### Table of Contents









| |                              
| | -----------------------------
| | Depreciation and Amortization





| |                      
| | ---------------------
| | Restructuring Charges





| |                          
| | -------------------------
| | Interest Income (Expense)







| |                                     
| | ------------------------------------
| | Provision (Benefit) for Income Taxes





40



---



##### Table of Contents





| |                                                                            
| | ---------------------------------------------------------------------------
| | Year Ended December 31, 2002 Compared with Year Ended
    December 31, 2003



| |         
| | --------
| | Revenues





| |                 
| | ----------------
| | Cost of Revenues





| |                                    
| | -----------------------------------
| | Selling, General and Administrative







| |                              
| | -----------------------------
| | Depreciation and Amortization





| |                      
| | ---------------------
| | Restructuring Charges



41



---



##### Table of Contents







| |                          
| | -------------------------
| | Interest Income (Expense)





| |                               
| | ------------------------------
| | Gain on Extinguishment of Debt





| |                           
| | --------------------------
| | Provision for Income Taxes



Liquidity and Capital Resources






| |                     
| | --------------------
| | Operating Activities





| |                     
| | --------------------
| | Investing Activities



42



---



##### Table of Contents









| |                     
| | --------------------
| | Financing Activities













| |                                           
| | ------------------------------------------
| | Rescission Offer and Reporting Obligations



43



---



##### Table of Contents









Off-Balance Sheet Arrangements




Contractual Obligations






44



---



##### Table of Contents





|                          |  |                |        | 
|------------------------- |  | -------------- | ------ | 
|Years Ending December 31, |  | (In thousands) |       
|                          |  |                |       
|2005                      |  | $              | 2,073  | 
|2006                      |  |                | 2,638  | 
|2007                      |  |                | 2,331  | 
|2008                      |  |                | 2,124  | 
|2009                      |  |                | 1,712  | 
|Thereafter                |  |                | 12,028 | 
|                          |  |                |       
|Total minimum payments    |  | $              | 22,906 | 
|                          |  |                |       







| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements



45



---



##### Table of Contents


















|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about Market
    Risk

Foreign Currency Exchange Risk




46



---



##### 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





47



---



##### Table of Contents










|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of disclosure controls and
procedures.






Changes in internal control over financial
reporting.







Item 9B.     Other
Information







PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant



48



---



##### Table of Contents










|         |                       
|-------- | ----------------------
|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








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules





| |                         
| | ------------------------
| | (a)                     
|
| | (1) Financial Statements



Consolidated Financial Statements of PeopleSupport, Inc.


|                                                                                                                                         |  |  |     | 
|---------------------------------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Report of BDO Seidman, LLP, Independent
    Registered Public Accounting Firm                                                            |  |  | F-1 | 
|Consolidated Balance Sheets at
    December 31, 2003 and 2004                                                                            |  |  | F-2 | 
|Consolidated Statements of Operations and
    Other Comprehensive Income (Loss) for the years ended
    December 31, 2002, 2003 and 2004 |  |  | F-3 | 
|Consolidated Statements of
    Stockholders Equity (Deficit) for the years ended
    December 31, 2002, 2003 and 2004                   |  |  | F-4 | 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2002, 2003 and 2004                                           |  |  | F-5 | 
|Notes to Consolidated Financial
    Statements                                                                                           |  |  | F-6 | 



| |                                 
| | --------------------------------
| | (2) Financial Statement Schedule

49



---



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Report of Independent Registered Public Accounting Firm










| |                     
| | --------------------
| | /s/ BDO SEIDMAN, LLP





50



---



##### Table of Contents



Schedule II  Valuation and Qualifying
Accounts


|                                                  |  |                                              |     |  |                  |   |     |           |  |            |             |   |  |   |     |  |  |  |  | 
|------------------------------------------------- |  | -------------------------------------------- | --- |  | ---------------- | - | --- | --------- |  | ---------- | ----------- | - |  | - | --- |  |  |  |  | 
|                                                  |  | Years Ended December 31, 2002, 2003 and 2004 |     |  |                 
|                                                  |  |                                              |     |  |                 
|                                                  |  | Balance at                                   |     |  | Charged to Costs |   |     |           |  | Balance at |             |   | 
|Description                                       |  | Beginning of Year                            |     |  | and Expenses     |   |     | Deduction |  |            | End of Year |   |  |  
|                                                  |  |                                              |     |  |                  |   |     |           |  |            |             |   |  |  
|                                                  |  | (In thousands)                               |     |  |                 
|Valuation allowance for accounts receivable 2002: |  | $                                            | 186 |  |                  | $ | 351 |           |  | $          | (300        | ) |  | $ | 237 |  |  |  |  | 
|Valuation allowance for accounts receivable 2003: |  |                                              | 237 |  |                  |   | 293 |           |  |            | 23          |   |  |   | 553 |  |  |  |  | 
|Valuation allowance for accounts receivable 2004: |  | $                                            | 553 |  |                  | $ | (51 | )         |  | $          | (51         | ) |  | $ | 451 |  |  |  |  | 





| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | (b) Exhibits with each management contract or
    compensatory plan or arrangement required to be filed
    identified. See below.



|       |     |             |  |                                                                                                                              
|------ | --- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------
|Number |     | Description
|       |     |            
|       | 3   | .1**        |  | Amended and Restated Certificate of Incorporation of the
    Registrant                                                      
|       | 3   | .1.1**      |  | Certificate of Amendment to Amended and Restated Certificate of
    Incorporation                                            
|       | 3   | .1.2**      |  | Certificate of Amendment to Amended and Restated Certificate of
    Incorporation                                            
|       | 3   | .1.3**      |  | Certificate of Correction of Certificate of Amendment to Amended
    and Restated Certificate of Incorporation               
|       | 3   | .1.4**      |  | Certificate of Amendment to Amended and Restated Certificate of
    Incorporation                                            
|       | 3   | .2**        |  | Form of Amended and Restated Certificate of Incorporation of the
    Registrant                                              
|       | 3   | .3**        |  | Amended and Restated Bylaws                                                                                                  
|       | 3   | .4**        |  | Form of Amended and Restated Bylaws of the Registrant                                                                        
|       | 4   | .1**        |  | Specimen Common Stock Certificate                                                                                            
|       | 4   | .2**        |  | Amended and Restated Investor Rights Agreement                                                                               
|       | *10 | .1**        |  | PeopleSupport, Inc. 1998 Stock Incentive Plan                                                                                
|       | *10 | .2.1**      |  | Form of PeopleSupport, Inc. Stock Option Agreement (no
    acceleration on change of control)                                
|       | *10 | .2.2**      |  | Form of PeopleSupport, Inc. 1998 Stock Option Agreement
    (includes acceleration on change of control)                     
|       | *10 | .3**        |  | PeopleSupport, Inc. 2002 Management Incentive Plan                                                                           
|       | *10 | .3.1**      |  | Amendment to PeopleSupport, Inc. 2002 Management Incentive Plan                                                              
|       | 10  | .4**       |  | Amended and Restated Customer Support Services Agreement dated
    July 1, 2004 between PeopleSupport, Inc. and Expedia, Inc.
|       | 10  | .5**        |  | Memorandum of Agreement dated December 15, 2003 between
    PeopleSupport, Inc. and Ayala Land, Inc.                         
|       | 10  | .5.1       |  | Definitive Contract of Lease with Ayal                                                                                       
|       | *10 | .6**        |  | Letter Agreement dated May 20, 2002 between PeopleSupport,
    Inc. and Caroline Rook                                        
|       | 10  | .7**       |  | Master Services Agreement dated January 2, 2003 between
    PeopleSupport, Inc. and EarthLink, Inc.                          
|       | 10  | .8**       |  | Professional Services Contract dated December 4, 2000
    between PeopleSupport, Inc. and Network Solutions, Inc.            
|       | *10 | .9**        |  | Form of 2004 Stock Incentive Plan                                                                                            

51



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##### Table of Contents



|       |     |       |             |                                                                                                                     
|------ | --- | ----- | ----------- | --------------------------------------------------------------------------------------------------------------------
|Number |     |       | Description
|       |     |       |            
|       | *10 | .10** |             | Form of 2004 Employee Stock Purchase Plan                                                                           
|       | *10 | .11** |             | Form of Indemnification Agreement between the Registrant and its
    officers and directors                         
|       | *10 | .12** |             | Form of PeopleSupport, Inc. 2004 Stock Incentive Plan Stock
    Option Agreement                                    
|       | 10  | .13  |             | Master Services Agreement dated June 11, 2003 between
    PeopleSupport, Inc. and ConsumerInfo.comb                 
|       | 16  | .1**  |             | Letter from PricewaterhouseCoopers LLP                                                                              
|       | 21  | .1**  |             | List of Subsidiaries                                                                                                
|       | 23  | .2    |             | Consent of BDO Seidman, LLP                                                                                         
|       | 24  | .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 2002
|       | 31  | .2    |             | Certification by Chief Financial Officer of Registrant pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002
|       | 32  | .1*** |             | Certification by Chief Executive Officer of Registrant pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002
|       | 32  | .2*** |             | 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.                                                                                                                                                                                                                                                                                                                                                                                          
|   
|**  | 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.                                                                                                                                                                                                                                    
|   
|*** | 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.
|   
|   | Confidential treatment has been requested for portions of this
    exhibit. These portions have been omitted from the Registration
    Statement and submitted separately to the Securities and
    Exchange Commission.                                                                                                                                                                                                                                                     

52



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















| |                     
| | --------------------
| | /s/ BDO Seidman, LLP
| |                     
| | BDO Seidman, LLP    





F-1



---



##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


(In thousands, except per share data)


|                                                                                      |                                                                                                                                                                                                                                                                                                                     |                                                                                  |         |         |        |   |        |         |        | 
|------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------- | ------- | ------ | - | ------ | ------- | ------ | 
|                                                                                      |                                                                                                                                                                                                                                                                                                                     | As of December 31,                                                               |        
|                                                                                      |                                                                                                                                                                                                                                                                                                                     |                                                                                  |        
|                                                                                      |                                                                                                                                                                                                                                                                                                                     | 2003                                                                             |         |         | 2004   |  
|                                                                                      |                                                                                                                                                                                                                                                                                                                     |                                                                                  |         |         |        |  
|ASSETS                                                                               
|Current assets:                                                                       |                                                                                                                                                                                                                                                                                                                     |                                                                                  |         |         |        |   |        |        
|                                                                                      |                                                                                                                                                                                                                                                                                                                     | Cash and cash equivalents                                                        |         | $       | 12,151 |   |        | $       | 41,583 | 
|                                                                                      |                                                                                                                                                                                                                                                                                                                     | Restricted short-term cash equivalent                                            |         |         | 101    |   |        |         | 422    | 
|                                                                                      |                                                                                                                                                                                                                                                                                                                     | Accounts receivable, net of allowance for doubtful accounts of
    $553 and $451 |         |         | 2,476  |   |        |         | 5,560  | 
|                                                                                      |                                                                                                                                                                                                                                                                                                                     | Investment in receivable portfolios                                              |         |         | 622    |   |        |         | 7      | 
|                                                                                      |                                                                                                                                                                                                                                                                                                                     | Deferred tax assets                                                              |         |         |       |   |        |         | 668    | 
|                                                                                      |                                                                                                                                                                                                                                                                                                                     | Prepaid expenses and other current assets                                        |         |         | 1,217  |   |        |         | 1,633  | 
|                                                                                      |                                                                                                                                                                                                                                                                                                                     |                                                                                  |         |         |        |  
|Total current assets                                                                  |                                                                                                                                                                                                                                                                                                                     |                                                                                  | 16,567  |         |        |   | 49,873 |        
|Property and equipment, net                                                           |                                                                                                                                                                                                                                                                                                                     |                                                                                  | 4,829   |         |        |   | 7,407  |        
|Restricted long-term cash equivalent                                                  |                                                                                                                                                                                                                                                                                                                     |                                                                                  | 550     |         |        |   |       |        
|Deferred management incentive plan compensation                                       |                                                                                                                                                                                                                                                                                                                     |                                                                                  |        |         |        |   | 940    |        
|Deferred tax assets                                                                   |                                                                                                                                                                                                                                                                                                                     |                                                                                  |        |         |        |   | 6,161  |        
|Other long-term assets                                                                |                                                                                                                                                                                                                                                                                                                     |                                                                                  | 589     |         |        |   | 699    |        
|                                                                                      |                                                                                                                                                                                                                                                                                                                     |                                                                                  |         |         |        |  
|Total assets                                                                          |                                                                                                                                                                                                                                                                                                                     | $                                                                                | 22,535  |         |        | $ | 65,080 |        
|                                                                                      |                                                                                                                                                                                                                                                                                                                     |                                                                                  |         |         |        |  
|LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS EQUITY
    (DEFICIT)                  
|Current liabilities:                                                                  |                                                                                                                                                                                                                                                                                                                     |                                                                                  |         |         |        |   |        |        
|                                                                                      |                                                                                                                                                                                                                                                                                                                     | Accounts payable                                                                 |         | $       | 1,031  |   |        | $       | 1,346  | 
|                                                                                      |                                                                                                                                                                                                                                                                                                                     | Accrued liabilities                                                              |         |         | 2,478  |   |        |         | 2,527  | 
|                                                                                      |                                                                                                                                                                                                                                                                                                                     | Management incentive plan obligation                                             |         |         |       |   |        |         | 342    | 
|                                                                                      |                                                                                                                                                                                                                                                                                                                     | Deferred revenue                                                                 |         |         | 1,235  |   |        |         | 1,888  | 
|                                                                                      |                                                                                                                                                                                                                                                                                                                     | Reserve for restructuring                                                        |         |         | 25     |   |        |         |       | 
|                                                                                      |                                                                                                                                                                                                                                                                                                                     | Other current liabilities                                                        |         |         |       |   |        |         | 106    | 
|                                                                                      |                                                                                                                                                                                                                                                                                                                     |                                                                                  |         |         |        |  
|Total current liabilities                                                             |                                                                                                                                                                                                                                                                                                                     |                                                                                  | 4,769   |         |        |   | 6,209  |        
|Management incentive plan obligation                                                  |                                                                                                                                                                                                                                                                                                                     |                                                                                  |        |         |        |   | 684    |        
|Deferred rent                                                                         |                                                                                                                                                                                                                                                                                                                     |                                                                                  | 267     |         |        |   | 117    |        
|Other long-term liabilities                                                           |                                                                                                                                                                                                                                                                                                                     |                                                                                  |        |         |        |   | 135    |        
|                                                                                      |                                                                                                                                                                                                                                                                                                                     |                                                                                  |         |         |        |  
|Total liabilities                                                                     |                                                                                                                                                                                                                                                                                                                     |                                                                                  | 5,036   |         |        |   | 7,145  |        
|                                                                                      |                                                                                                                                                                                                                                                                                                                     |                                                                                  |         |         |        |  
|Commitments and contingencies (Note 5)                                                |                                                                                                                                                                                                                                                                                                                     |                                                                                  |         |         |        |   |        |        
|Redeemable convertible preferred stock, $.001 par value;
    authorized 4,000 shares: |                                                                                                                                                                                                                                                                                                                     |                                                                                  |         |         |        |   |        |        
|                                                                                      | Convertible Series A preferred stock 
    $.001 par value; designated 712 and 0 shares at
    December 31, 2003 and 2004; 712 shares issued and
    outstanding at December 31, 2003; 0 shares issued and
    outstanding at December 31, 2004; liquidation preference
    over common stockholders of $1,302      |                                                                                  |         | 1,286   |        |   |        |        |       
|                                                                                      | Convertible Series B preferred stock 
    $.001 par value; designated 3,848 and 0 shares at
    December 31, 2003 and 2004; 2,239 shares issued and
    outstanding at December 31, 2003, 0 shares issued and
    outstanding at December 31, 2004; liquidation preference
    over common stockholders of $6,134  |                                                                                  |         | 6,098   |        |   |        |        |       
|                                                                                      | Convertible Series C preferred stock 
    $.001 par value; designated 3,289 and 0 shares at
    December 31, 2003 and 2004; 3,289 shares issued and
    outstanding at December 31, 2003, 0 shares issued and
    outstanding at December 31, 2004; liquidation preference
    over common stockholders of $17,571 |                                                                                  |         | 17,515  |        |   |        |        |       
|                                                                                      | Convertible Series D preferred stock 
    $.001 par value; designated 3,378 and 0 shares at
    December 31, 2003 and 2004; 3,149 shares issued and
    outstanding at December 31, 2003, 0 shares issued and
    outstanding at December 31, 2004; liquidation preference
    over common stockholders of $49,268 |                                                                                  |         | 49,211  |        |   |        |        |       
|Stockholders equity (deficit)                                                        |                                                                                                                                                                                                                                                                                                                     |                                                                                  |         |         |        |   |        |        
|                                                                                      | Common stock, $.001 par value; authorized
    87,000 shares; 2,536 and 18,015 shares issued and
    outstanding at December 31, 2003 and 2004, respectively                                                                                                                                                         |                                                                                  |         | 3       |        |   |        | 18      |       
|                                                                                      | Additional paid-in capital                                                                                                                                                                                                                                                                                          |                                                                                  |         | 6,403   |        |   |        | 112,514 |       
|                                                                                      | Accumulated deficit                                                                                                                                                                                                                                                                                                 |                                                                                  |         | (61,367 | )      |   |        | (53,043 | )     
|                                                                                      | Accumulated other comprehensive income                                                                                                                                                                                                                                                                              |                                                                                  |         | 224     |        |   |        | 80      |       
|                                                                                      | Deferred stock compensation                                                                                                                                                                                                                                                                                         |                                                                                  |         | (1,874  | )      |   |        | (1,634  | )     
|                                                                                      |                                                                                                                                                                                                                                                                                                                     |                                                                                  |         |         |        |  
|Total stockholders equity (deficit)                                                  |                                                                                                                                                                                                                                                                                                                     |                                                                                  | (56,611 | )       |        |   | 57,935 |        
|                                                                                      |                                                                                                                                                                                                                                                                                                                     |                                                                                  |         |         |        |  
|Total liabilities, preferred stock and stockholders equity
    (deficit)             |                                                                                                                                                                                                                                                                                                                     | $                                                                                | 22,535  |         |        | $ | 65,080 |        
|                                                                                      |                                                                                                                                                                                                                                                                                                                     |                                                                                  |         |         |        |  

See accompanying notes to consolidated financial
statements.


F-2



---



##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


AND OTHER COMPREHENSIVE INCOME (LOSS)


(In thousands, except per share data)


|                                                                                                     |                                                                     |                          |        |        |      |   |        |       |  |   |        |       | 
|---------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------ | ------ | ------ | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                                                                                     |                                                                     | Years Ended December 31, |       
|                                                                                                     |                                                                     |                          |       
|                                                                                                     |                                                                     | 2002                     |        |        | 2003 |   |        | 2004  | 
|                                                                                                     |                                                                     |                          |        |        |      |   |        |       | 
|Revenues                                                                                             |                                                                     | $                        | 19,780 |        |      | $ | 30,013 |       |  | $ | 44,511 |      
|Cost of revenues (exclusive of management incentive plan and
    depreciation expense shown below)   |                                                                     |                          | 11,188 |        |      |   | 12,921 |       |  |   | 24,483 |      
|                                                                                                     | Management incentive plan  cost of revenues                        |                          |        |       |      |   |        |      |  |   |        | 788   | 
|Selling, general and administrative (exclusive of management
    incentive plan expense shown below) |                                                                     |                          | 5,587  |        |      |   | 6,134  |       |  |   | 9,721  |      
|                                                                                                     | Management incentive plan  selling, general and
    administrative |                          |        |       |      |   |        |      |  |   |        | 4,549 | 
|Depreciation and amortization                                                                        |                                                                     |                          | 4,065  |        |      |   | 3,166  |       |  |   | 3,927  |      
|Gain on sale of receivable portfolios                                                                |                                                                     |                          |       |        |      |   |       |       |  |   | (172   | )    
|Restructuring charges                                                                                |                                                                     |                          | 3,824  |        |      |   | (345   | )     |  |   | (22    | )    
|                                                                                                     |                                                                     |                          |        |        |      |   |        |       | 
|                                                                                                     | Income (loss) from operations                                       |                          |        | (4,884 | )    |   |        | 8,137 |  |   |        | 1,237 | 
|Interest expense                                                                                     |                                                                     |                          | 506    |        |      |   | 3      |       |  |   |       |      
|Interest income                                                                                      |                                                                     |                          | (90    | )      |      |   | (75    | )     |  |   | (231   | )    
|Gain on the extinguishment of debt                                                                   |                                                                     |                          | (2,430 | )      |      |   |       |       |  |   |       |      
|Other expense (income)                                                                               |                                                                     |                          | 9      |        |      |   | (8     | )     |  |   | 7      |      
|                                                                                                     |                                                                     |                          |        |        |      |   |        |       | 
|Income (loss) before provision for income taxes                                                      |                                                                     |                          | (2,879 | )      |      |   | 8,217  |       |  |   | 1,461  |      
|Provision (benefit) for income taxes                                                                 |                                                                     |                          | 13     |        |      |   | 231    |       |  |   | (6,863 | )    
|                                                                                                     |                                                                     |                          |        |        |      |   |        |       | 
|Net income (loss)                                                                                    |                                                                     |                          | (2,892 | )      |      |   | 7,986  |       |  |   | 8,324  |      
|Foreign currency translation adjustment                                                              |                                                                     |                          | (46    | )      |      |   | (3     | )     |  |   | (140   | )    
|Unrealized loss on securities                                                                        |                                                                     |                          |       |        |      |   |       |       |  |   | (4     | )    
|                                                                                                     |                                                                     |                          |        |        |      |   |        |       | 
|Comprehensive income (loss)                                                                          |                                                                     | $                        | (2,938 | )      |      | $ | 7,983  |       |  | $ | 8,180  |      
|                                                                                                     |                                                                     |                          |        |        |      |   |        |       | 
|Basic earnings (loss) per share                                                                      |                                                                     | $                        | (1.14  | )      |      | $ | 3.15   |       |  | $ | 1.39   |      
|Diluted earnings (loss) per share                                                                    |                                                                     | $                        | (1.14  | )      |      | $ | 0.64   |       |  | $ | 0.55   |      
|Basic weighted average shares outstanding                                                            |                                                                     |                          | 2,533  |        |      |   | 2,533  |       |  |   | 5,996  |      
|Diluted weighted average shares outstanding                                                          |                                                                     |                          | 2,533  |        |      |   | 12,560 |       |  |   | 15,012 |      

See accompanying notes to consolidated financial
statements.


F-3



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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)


Years Ended December 31, 2002, 2003 and 2004


(In thousands)


|                                            |  |              |        |   |            |   |    |             |  |       |               |   |          |        |         |               |              |   |      |           |  |   |        |   |  |   |         |  
|------------------------------------------- |  | ------------ | ------ | - | ---------- | - | -- | ----------- |  | ----- | ------------- | - | -------- | ------ | ------- | ------------- | ------------ | - | ---- | --------- |  | - | ------ | - |  | - | ------- | -
|                                            |  |              |        |   |            |   |    | Accumulated |  |       |               |   | Total    |       
|                                            |  | Common Stock |        |   | Additional |   |    |             |  | Other |               |   | Deferred |        |         | Stockholders |             
|                                            |  |              |        |   | Paid-In    |   |    | Accumulated |  |       | Comprehensive |   |          | Stock  |         |               | Equity       |  
|                                            |  | Shares       |        |   | Amount     |   |    | Capital     |  |       | Deficit       |   |          | Income |         |               | Compensation |   |      | (Deficit) | 
|                                            |  |              |        |   |            |   |    |             |  |       |               |   |          |        |         |               |              |   |      |           | 
|Balance, at December 31, 2001               |  |              | 2,532  |   |            | $ | 3  |             |  | $     | 4,408         |   |          | $      | (66,461 | )             |              | $ | 273  |           |  | $ |       |   |  | $ | (61,777 | )
|Exercise of stock options                   |  |              | 1      |   |            |   |   |             |  |       | 1             |   |          |        |        |               |              |   |     |           |  |   |       |   |  |   | 1       |  
|Comprehensive loss                          |  |              |       |   |            |   |   |             |  |       |              |   |          |        | (2,892  | )             |              |   | (46  | )         |  |   |       |   |  |   | (2,938  | )
|                                            |  |              |        |   |            |   |    |             |  |       |               |   |          |        |         |               |              |   |      |           | 
|Balance, at December 31, 2002               |  |              | 2,533  |   |            |   | 3  |             |  |       | 4,409         |   |          |        | (69,353 | )             |              |   | 227  |           |  |   |       |   |  |   | (64,714 | )
|Exercise of stock options                   |  |              | 3      |   |            |   |   |             |  |       | 1             |   |          |        |        |               |              |   |     |           |  |   |       |   |  |   | 1       |  
|Comprehensive income (loss)                 |  |              |       |   |            |   |   |             |  |       |              |   |          |        | 7,986   |               |              |   | (3   | )         |  |   |       |   |  |   | 7,983   |  
|Deferred stock compensation                 |  |              |       |   |            |   |   |             |  |       | 1,998         |   |          |        |        |               |              |   |     |           |  |   | (1,998 | ) |  |   |        |  
|Amortization of deferred stock compensation |  |              |       |   |            |   |   |             |  |       | (5            | ) |          |        |        |               |              |   |     |           |  |   | 124    |   |  |   | 119     |  
|                                            |  |              |        |   |            |   |    |             |  |       |               |   |          |        |         |               |              |   |      |           | 
|Balance, at December 31, 2003               |  |              | 2,536  |   |            |   | 3  |             |  |       | 6,403         |   |          |        | (61,367 | )             |              |   | 224  |           |  |   | (1,874 | ) |  |   | (56,611 | )
|Exercise of stock options                   |  |              | 209    |   |            |   |   |             |  |       | 104           |   |          |        |        |               |              |   |     |           |  |   |       |   |  |   | 104     |  
|Initial public offering                     |  |              | 5,349  |   |            |   | 5  |             |  |       | 31,565        |   |          |        |        |               |              |   |     |           |  |   |       |   |  |   | 31,570  |  
|Conversion of preferred shares              |  |              | 10,461 |   |            |   | 11 |             |  |       | 74,257        |   |          |        |        |               |              |   |     |           |  |   |       |   |  |   | 74,268  |  
|Warrant conversion                          |  |              | 7      |   |            |   |   |             |  |       |              |   |          |        |        |               |              |   |     |           |  |   |       |   |  |   |        |  
|Repurchase of common stock                  |  |              | (547   | ) |            |   | (1 | )           |  |       | (1,349        | ) |          |        |        |               |              |   |     |           |  |   |       |   |  |   | (1,350  | )
|Comprehensive income (loss)                 |  |              |       |   |            |   |   |             |  |       |              |   |          |        | 8,324   |               |              |   | (144 | )         |  |   |       |   |  |   | 8,180   |  
|Deferred stock compensation                 |  |              |       |   |            |   |   |             |  |       | 1,728         |   |          |        |        |               |              |   |     |           |  |   | (1,728 | ) |  |   |        |  
|Amortization of deferred stock compensation |  |              |       |   |            |   |   |             |  |       | (194          | ) |          |        |        |               |              |   |     |           |  |   | 1,968  |   |  |   | 1,774   |  
|                                            |  |              |        |   |            |   |    |             |  |       |               |   |          |        |         |               |              |   |      |           | 
|Balance, at December 31, 2004               |  |              | 18,015 |   |            | $ | 18 |             |  | $     | 112,514       |   |          | $      | (53,043 | )             |              | $ | 80   |           |  | $ | (1,634 | ) |  | $ | 57,935  |  
|                                            |  |              |        |   |            |   |    |             |  |       |               |   |          |        |         |               |              |   |      |           | 

See accompanying notes to consolidated financial
statements.


F-4



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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)


|                                                                                             |                                               |                          |        |        |      |   |        |       |   |   |        |        |  
|-------------------------------------------------------------------------------------------- | --------------------------------------------- | ------------------------ | ------ | ------ | ---- | - | ------ | ----- | - | - | ------ | ------ | -
|                                                                                             |                                               | Years Ended December 31, |       
|                                                                                             |                                               |                          |       
|                                                                                             |                                               | 2002                     |        |        | 2003 |   |        | 2004  |  
|                                                                                             |                                               |                          |        |        |      |   |        |       |  
|OPERATING ACTIVITIES                                                                         |                                               |                          |        |        |      |   |        |       |   |   |        |       
|Net income (loss)                                                                            |                                               | $                        | (2,892 | )      |      | $ | 7,986  |       |   | $ | 8,324  |       
|Adjustments to reconcile net income (loss) to net cash provided
    by operating activities: |                                               |                          |        |        |      |   |        |       |   |   |        |       
|                                                                                             | Depreciation and amortization                 |                          |        | 4,065  |      |   |        | 3,166 |   |   |        | 3,927  |  
|                                                                                             | Amortization of debt discount                 |                          |        | 194    |      |   |        |      |   |   |        |       |  
|                                                                                             | Provision for doubtful accounts               |                          |        | 351    |      |   |        | 293   |   |   |        | (51    | )
|                                                                                             | Stock-based compensation                      |                          |        |       |      |   |        | 119   |   |   |        | 1,774  |  
|                                                                                             | Amortization of deferred compensation costs   |                          |        |       |      |   |        |      |   |   |        | 85     |  
|                                                                                             | Gain on sale of receivable portfolio          |                          |        |       |      |   |        |      |   |   |        | (172   | )
|                                                                                             | Gain on extinguishment of debt                |                          |        | (2,430 | )    |   |        |      |   |   |        |       |  
|                                                                                             | Non-cash restructuring charges                |                          |        | 1,548  |      |   |        | 427   |   |   |        |       |  
|                                                                                             | Reduction of excess accrual for restructuring |                          |        | (59    | )    |   |        | (974  | ) |   |        | (22    | )
|                                                                                             | Loss on disposal of property and equipment    |                          |        |       |      |   |        |      |   |   |        | 313    |  
|                                                                                             | Deferred income taxes                         |                          |        |       |      |   |        |      |   |   |        | (6,829 | )
|Changes in operating assets and liabilities:                                                 |                                               |                          |        |        |      |   |        |       |   |   |        |       
|                                                                                             | Accounts receivable                           |                          |        | (306   | )    |   |        | 270   |   |   |        | (3,032 | )
|                                                                                             | Prepaid expenses and other assets             |                          |        | (59    | )    |   |        | (624  | ) |   |        | (404   | )
|                                                                                             | Other long-term assets                        |                          |        | (21    | )    |   |        | (49   | ) |   |        | (118   | )
|                                                                                             | Accounts payable and accrued liabilities      |                          |        | (1,799 | )    |   |        | 765   |   |   |        | 370    |  
|                                                                                             | Deferred revenue                              |                          |        | 965    |      |   |        | 163   |   |   |        | 652    |  
|                                                                                             | Reserve for restructuring                     |                          |        | 2,336  |      |   |        | 58    |   |   |        |       |  
|                                                                                             | Cash payments on restructuring reserve        |                          |        | (1,384 | )    |   |        | (758  | ) |   |        | (3     | )
|                                                                                             |                                               |                          |        |        |      |   |        |       |  
|Net cash provided by operating activities                                                    |                                               |                          | 509    |        |      |   | 10,842 |       |   |   | 4,814  |       
|INVESTING ACTIVITIES                                                                         |                                               |                          |        |        |      |   |        |       |   |   |        |       
|Purchases of receivable portfolios                                                           |                                               |                          |       |        |      |   | (723   | )     |   |   |       |       
|Collections applied to principal of receivable portfolios                                    |                                               |                          |       |        |      |   | 101    |       |   |   | 510    |       
|Proceeds from sale of receivable portfolios                                                  |                                               |                          |       |        |      |   |       |       |   |   | 355    |       
|Purchases of property and equipment                                                          |                                               |                          | (752   | )      |      |   | (3,370 | )     |   |   | (6,950 | )     
|Sales of short-term investments                                                              |                                               |                          | 771    |        |      |   |       |       |   |   |       |       
|Restricted cash equivalent                                                                   |                                               |                          | (1,000 | )      |      |   | 349    |       |   |   | 228    |       
|                                                                                             |                                               |                          |        |        |      |   |        |       |  
|Net cash used in investing activities                                                        |                                               |                          | (981   | )      |      |   | (3,643 | )     |   |   | (5,857 | )     
|FINANCING ACTIVITIES                                                                         |                                               |                          |        |        |      |   |        |       |   |   |        |       
|Payments of capital lease obligation                                                         |                                               |                          | (224   | )      |      |   | (59    | )     |   |   |       |       
|Repayments of note payable                                                                   |                                               |                          | (1,725 | )      |      |   |       |       |   |   |       |       
|Payments on line of credit borrowings                                                        |                                               |                          | (198   | )      |      |   | (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      |        |      |   | 1      |       |   |   | 104    |       
|                                                                                             |                                               |                          |        |        |      |   |        |       |  
|Net cash provided by (used in) financing activities                                          |                                               |                          | (2,146 | )      |      |   | (224   | )     |   |   | 30,481 |       
|Effect of exchange rate changes on cash                                                      |                                               |                          | (46    | )      |      |   | (3     | )     |   |   | (6     | )     
|                                                                                             |                                               |                          |        |        |      |   |        |       |  
|Net increase (decrease) in cash and cash equivalents                                         |                                               |                          | (2,664 | )      |      |   | 6,972  |       |   |   | 29,432 |       
|Cash and cash equivalents, beginning of period                                               |                                               |                          | 7,843  |        |      |   | 5,179  |       |   |   | 12,151 |       
|                                                                                             |                                               |                          |        |        |      |   |        |       |  
|Cash and cash equivalents, end of period                                                     |                                               | $                        | 5,179  |        |      | $ | 12,151 |       |   | $ | 41,583 |       
|                                                                                             |                                               |                          |        |        |      |   |        |       |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                            |                                               |                          |        |        |      |   |        |       |   |   |        |       
|                                                                                             | Interest paid for the period                  |                          | $      | 296    |      |   | $      | 3     |   |   | $      |       |  
|                                                                                             | Taxes paid for the period                     |                          |        | 8      |      |   |        | 15    |   |   |        | 392    |  
|                                                                                             |                                               |                          |        |        |      |   |        |       |  
|NON-CASH INVESTING AND FINANCING ACTIVITIES                                                  |                                               |                          |        |        |      |   |        |       |   |   |        |       
|                                                                                             | Conversion of preferred to common stock       |                          | $      |       |      |   | $      |      |   |   | $      | 74,268 |  
|                                                                                             |                                               |                          |        |        |      |   |        |       |  

See accompanying notes to consolidated financial
statements.


F-5



---



##### 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, |   
|          |  |                                            |   
|          |  | 2002                                       |    |   | 2003      |  |    | 2004    | 
|          |  |                                            |    |   |           |  |    |         | 
|          |  | % of                                       |    |   | % of A/R, |  |    | % of    |  |  | % of A/R, |   |  | % of    |    |   | % of A/R, | 
|          |  | Revenue                                    |    |   | Net       |  |    | Revenue |  |  | Net       |   |  | Revenue |    |   | Net       | 
|          |  |                                            |    |   |           |  |    |         |  |  |           |   |  |         |    |   |           | 
|Company A |  |                                            | 53 | % |           |  | 36 | %       |  |  | 49        | % |  |         |   | % |           |  | 31 | % |  |  | 19 | %
|Company B |  |                                            | 36 |   |           |  | 50 |         |  |  | 26        |   |  |         | 17 |   |           |  | 8  |   |  |  | 5  |  
|Company C |  |                                            |   |   |           |  |   |         |  |  | 13        |   |  |         | 75 |   |           |  | 26 |   |  |  | 31 |  
|Company D |  |                                            |   |   |           |  |   |         |  |  | 4         |   |  |         | 4  |   |           |  | 12 |   |  |  | 3  |  





F-6



---



##### 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 years       | 
|Computer equipment     |  |  | 3 years       | 
|Software               |  |  | 1 to 3  years | 





| |                                
| | -------------------------------
| | Impairment of Long-lived Assets





| |                  
| | -----------------
| | Reclassifications





| |                    
| | -------------------
| | Revenue Recognition







F-7



---



##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
Continued




| |                 
| | ----------------
| | Cost of Revenues





| |                            
| | ---------------------------
| | Net Income (Loss) Per Share





|                            |  |                          |        |  |      |  |       |      |  |  |     | 
|--------------------------- |  | ------------------------ | ------ |  | ---- |  | ----- | ---- |  |  | --- | 
|                            |  | Years Ended December 31, |       
|                            |  |                          |       
|                            |  | 2002                     |        |  | 2003 |  |       | 2004 | 
|                            |  |                          |        |  |      |  |       |      | 
|Convertible preferred stock |  |                          | 9,388  |  |      |  |      |      |  |  |    | 
|Options                     |  |                          | 847    |  |      |  | 136   |      |  |  | 15  | 
|Preferred stock warrants    |  |                          | 1,604  |  |      |  | 1,211 |      |  |  |    | 
|Common stock warrants       |  |                          | 96     |  |      |  | 72    |      |  |  | 127 | 
|                            |  |                          |        |  |      |  |       |      | 
|                            |  |                          | 11,935 |  |      |  | 1,419 |      |  |  | 142 | 
|                            |  |                          |        |  |      |  |       |      | 



|                                               |                                      |                          |        |        |               |  |       |           |  |   |             |       |   |               |       |       |           |  |        |             |  |   |               |      |  |           |       |       |  |  |        |       |  |   |      |      | 
|---------------------------------------------- | ------------------------------------ | ------------------------ | ------ | ------ | ------------- |  | ----- | --------- |  | - | ----------- | ----- | - | ------------- | ----- | ----- | --------- |  | ------ | ----------- |  | - | ------------- | ---- |  | --------- | ----- | ----- |  |  | ------ | ----- |  | - | ---- | ---- | 
|                                               |                                      | Years Ended December 31, |       
|                                               |                                      |                          |       
|                                               |                                      | 2002                     |        |        | 2003          |  |       | 2004      | 
|                                               |                                      |                          |        |        |               |  |       |           | 
|                                               |                                      | Loss                     |        |        | Shares        |  |       | Per Share |  |   | Income      |       |   | Shares        |       |       | Per Share |  |        | Income      |  |   | Shares        |      |  | Per Share |      
|                                               |                                      | (Numerator)              |        |        | (Denominator) |  |       | Amount    |  |   | (Numerator) |       |   | (Denominator) |       |       | Amount    |  |        | (Numerator) |  |   | (Denominator) |      |  | Amount    |      
|                                               |                                      |                          |        |        |               |  |       |           |  |   |             |       |   |               |       |       |           |  |        |             |  |   |               |      |  |           |      
|Basic earnings per share:                      |                                      |                          |        |        |               |  |       |           |  |   |             |       |   |               |       |       |           |  |        |             |  |   |               |      |  |           |       |       |  |  |        |       |  |   |      |     
|                                               | (Loss) income to common stockholders |                          | $      | (2,892 | )             |  |       | 2,533     |  |   | $           | (1.14 | ) |               | $     | 7,986 |           |  |        | 2,533       |  |   | $             | 3.15 |  |           | $     | 8,324 |  |  |        | 5,996 |  |   | $    | 1.39 | 
|Effect of dilutive securities:                 |                                      |                          |        |        |               |  |       |           |  |   |             |       |   |               |       |       |           |  |        |             |  |   |               |      |  |           |       |       |  |  |        |       |  |   |      |     
|                                               | Options                              |                          |        |       |               |  |       |          |  |   |             |       |   |               |       |      |           |  |        | 438         |  |   |               |      |  |           |       |      |  |  |        | 945   |  |   |      |      | 
|                                               | Warrants                             |                          |        |       |               |  |       |          |  |   |             |       |   |               |       |      |           |  |        | 201         |  |   |               |      |  |           |       |      |  |  |        | 604   |  |   |      |      | 
|                                               | Convertible preferred stock          |                          |        |       |               |  |       |          |  |   |             |       |   |               |       |      |           |  |        | 9,388       |  |   |               |      |  |           |       |      |  |  |        | 7,467 |  |   |      |      | 
|                                               |                                      |                          |        |        |               |  |       |           |  |   |             |       |   |               |       |       |           |  |        |             |  |   |               |      |  |           |      
|(Loss) income available to common stockholders |                                      | $                        | (2,892 | )      |               |  | 2,533 |           |  | $ | (1.14       | )     |   | $             | 7,986 |       |           |  | 12,560 |             |  | $ | 0.64          |      |  | $         | 8,324 |       |  |  | 15,012 |       |  | $ | 0.55 |     
|                                               |                                      |                          |        |        |               |  |       |           |  |   |             |       |   |               |       |       |           |  |        |             |  |   |               |      |  |           |      



| |                          
| | -------------------------
| | Segments of an Enterprise



F-8



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##### 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



F-9



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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
Continued




|                                                                                                                                            |             |                          |        |       |      |   |       |      |  |   |        |      | 
|------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------------------ | ------ | ----- | ---- | - | ----- | ---- |  | - | ------ | ---- | 
|                                                                                                                                            |             | Years Ended December 31, |       
|                                                                                                                                            |             |                          |       
|                                                                                                                                            |             | 2002                     |        |       | 2003 |   |       | 2004 | 
|                                                                                                                                            |             |                          |        |       |      |   |       |      | 
|Net income (loss), as reported                                                                                                              |             | $                        | (2,892 | )     |      | $ | 7,986 |      |  | $ | 8,324  |     
|Add: Stock-based compensation expense included in reported net
    income, net of related tax effects                                       |             |                          |       |       |      |   | 119   |      |  |   | 1,774  |     
|Deduct: Total stock-based compensation expense determined under
    fair value based methods for all awards, net of related tax
    effects |             |                          | (416   | )     |      |   | (332  | )    |  |   | (2,153 | )   
|                                                                                                                                            |             |                          |        |       |      |   |       |      | 
|Pro forma net income (loss)                                                                                                                 |             | $                        | (3,308 | )     |      | $ | 7,773 |      |  | $ | 7,945  |     
|                                                                                                                                            |             |                          |        |       |      |   |       |      | 
|Basic (loss) earnings per share                                                                                                             |             |                          |        |       |      |   |       |      |  |   |        |     
|                                                                                                                                            | As reported |                          | $      | (1.14 | )    |   | $     | 3.15 |  |   | $      | 1.39 | 
|                                                                                                                                            | Pro forma   |                          | $      | (1.31 | )    |   | $     | 3.07 |  |   | $      | 1.33 | 
|Diluted (loss) earnings per share                                                                                                           |             |                          |        |       |      |   |       |      |  |   |        |     
|                                                                                                                                            | As reported |                          | $      | (1.14 | )    |   | $     | 0.64 |  |   | $      | 0.55 | 
|                                                                                                                                            | Pro forma   |                          | $      | (1.31 | )    |   | $     | 0.62 |  |   | $      | 0.53 | 



|                        |  |              |      |   |      |  |      |      |  |  |      |  
|----------------------- |  | ------------ | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                        |  | Years Ended  |     
|                        |  | December 31, |     
|                        |  |              |     
|                        |  | 2002         |      |   | 2003 |  |      | 2004 | 
|                        |  |              |      |   |      |  |      |      | 
|Risk free interest rate |  |              | 2.71 | % |      |  | 2.71 | %    |  |  | 3.73 | %
|Expected life (years)   |  |              | 5.0  |   |      |  | 5.0  |      |  |  | 4.0  |  
|Dividend yield          |  |              | 0.0  | % |      |  | 0.0  | %    |  |  | 0.0  | %
|Expected volatility     |  |              | 0.0  | % |      |  | 0.0  | %    |  |  | 30.9 | %



| |                     
| | --------------------
| | Comprehensive income



F-10



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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
Continued




|                           |             |                  |     |      |                    |   |    |       |   |   |     |      |  
|-------------------------- | ----------- | ---------------- | --- | ---- | ------------------ | - | -- | ----- | - | - | --- | ---- | -
|                           |             | Foreign Currency |     |      | Unrealized Loss on |   |    |      
|                           |             | Items            |     |      | Securities         |   |    | Total |  
|                           |             |                  |     |      |                    |   |    |       |  
|Balance, December 31, 2002 |             | $                | 227 |      |                    | $ |   |       |   | $ | 227 |     
|                           | 2003 change |                  |     | (3   | )                  |   |    |      |   |   |     | (3   | )
|                           |             |                  |     |      |                    |   |    |       |  
|Balance, December 31, 2003 |             |                  | 224 |      |                    |   |   |       |   |   | 224 |     
|                           | 2004 change |                  |     | (140 | )                  |   |    | (4    | ) |   |     | (144 | )
|                           |             |                  |     |      |                    |   |    |       |  
|Balance, December 31, 2004 |             | $                | 84  |      |                    | $ | (4 | )     |   | $ | 80  |     
|                           |             |                  |     |      |                    |   |    |       |  



| |                               
| | ------------------------------
| | Gain on extinguishment of debt





| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements









F-11



---



##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
Continued










|  |                         
|- | ------------------------
|3 |  Property and Equipment



|                                                |  |      |         |   |      |   |        |  
|----------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                                |  | 2003 |         |   | 2004 |  
|                                                |  |      |         |   |      |  
|Furniture and fixtures                          |  | $    | 2,709   |   |      | $ | 2,724  |  
|Computer equipment                              |  |      | 6,525   |   |      |   | 7,931  |  
|Software                                        |  |      | 3,963   |   |      |   | 930    |  
|Leasehold improvements                          |  |      | 2,616   |   |      |   | 3,636  |  
|                                                |  |      |         |   |      |  
|                                                |  |      | 15,813  |   |      |   | 15,221 |  
|Less: Accumulated depreciation and amortization |  |      | (10,984 | ) |      |   | (7,814 | )
|                                                |  |      |         |   |      |  
|Total property and equipment                    |  | $    | 4,829   |   |      | $ | 7,407  |  
|                                                |  |      |         |   |      |  





|  |                    
|- | -------------------
|4 |  Credit Agreements



F-12



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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
Continued






| |                                  
| | ---------------------------------
| | 5  Commitments and Contingencies



| |       
| | ------
| | Leases





|                          |  |           |        | 
|------------------------- |  | --------- | ------ | 
|                          |  | Operating |       
|Years Ending December 31, |  | Lease     |       
|                          |  |           |       
|2005                      |  | $         | 2,073  | 
|2006                      |  |           | 2,638  | 
|2007                      |  |           | 2,331  | 
|2008                      |  |           | 2,124  | 
|2009                      |  |           | 1,712  | 
|Thereafter                |  |           | 12,028 | 
|                          |  |           |       
|Total                     |  | $         | 22,906 | 
|                          |  |           |       







F-13



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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
Continued








| |                                    
| | -----------------------------------
| | Contractual Compensation Obligation





| |           
| | ----------
| | Litigation







| |                                
| | -------------------------------
| | 6  Convertible Preferred Stock



F-14



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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
Continued




| |             
| | ------------
| | 7  Warrants

















| |                  
| | -----------------
| | 8  Stock options



| |                          
| | -------------------------
| | 2004 Stock Incentive Plan



F-15



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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
Continued










| |                                  
| | ---------------------------------
| | 2004 Employee Stock Purchase Plan









F-16



---



##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
Continued






|                              |           |           |       |          |                  |   |      |             |  |  |     |  | 
|----------------------------- | --------- | --------- | ----- | -------- | ---------------- | - | ---- | ----------- |  |  | --- |  | 
|                              |           |           |       | Weighted |                  |   |     
|                              |           | Number of |       |          | Average Exercise |   |      | Shares      | 
|                              |           | Shares    |       |          | Price            |   |      | Exercisable | 
|                              |           |           |       |          |                  |   |      |             | 
|Balance, at December 31, 2001 |           |           | 1,286 |          |                  | $ | 3.97 |             |  |  | 311 | 
|                              | Granted   |           |       | 465      |                  |   |      | 0.52        |  |  |     |  | 
|                              | Canceled  |           |       | (903     | )                |   |      | 4.69        |  |  |     |  | 
|                              | Exercised |           |       | (1       | )                |   |      | 0.41        |  |  |     |  | 
|                              |           |           |       |          |                  |   |      |             | 
|Balance, at December 31, 2002 |           |           | 847   |          |                  |   | 1.32 |             |  |  | 326 | 
|                              | Granted   |           |       | 422      |                  |   |      | 0.41        |  |  |     |  | 
|                              | Canceled  |           |       | (162     | )                |   |      | 1.17        |  |  |     |  | 
|                              | Exercised |           |       | (3       | )                |   |      | 0.41        |  |  |     |  | 
|                              |           |           |       |          |                  |   |      |             | 
|Balance, at December 31, 2003 |           |           | 1,104 |          |                  |   | 1.01 |             |  |  | 495 | 
|                              | Granted   |           |       | 460      |                  |   |      | 5.59        |  |  |     |  | 
|                              | Canceled  |           |       | (103     | )                |   |      | 3.44        |  |  |     |  | 
|                              | Exercised |           |       | (209     | )                |   |      | 0.50        |  |  |     |  | 
|                              |           |           |       |          |                  |   |      |             | 
|Balance, at December 31, 2004 |           |           | 1,252 |          |                  | $ | 2.57 |             |  |  | 450 | 
|                              |           |           |       |          |                  |   |      |             | 





|                         |  |                              |       |             |                  |  |          |       |  |   |        |          |  |       |     |  |  |   |      | 
|------------------------ |  | ---------------------------- | ----- | ----------- | ---------------- |  | -------- | ----- |  | - | ------ | -------- |  | ----- | --- |  |  | - | ---- | 
|                         |  | Outstanding Weighted Average |       |             | Exercisable      | 
|                         |  |                              |       |             | Weighted Average | 
|                         |  |                              |       | Remaining   |                  |  |          |       |  |  
|                         |  |                              |       | Contractual |                  |  | Exercise |       |  |   |        | Exercise | 
|Exercise Price Per Share |  | Shares                       |       |             | Life (Years)     |  |          | Price |  |   | Shares |          |  | Price |    
|                         |  |                              |       |             |                  |  |          |       |  |   |        |          |  |       |    
|$0.03                    |  |                              | 33    |             |                  |  | 3.54     |       |  | $ | 0.03   |          |  |       | 33  |  |  | $ | 0.03 | 
|0.19                     |  |                              | 100   |             |                  |  | 3.89     |       |  |   | 0.19   |          |  |       | 100 |  |  |   | 0.19 | 
|0.41                     |  |                              | 666   |             |                  |  | 8.49     |       |  |   | 0.41   |          |  |       | 179 |  |  |   | 0.41 | 
|1.15                     |  |                              | 16    |             |                  |  | 5.05     |       |  |   | 1.15   |          |  |       | 16  |  |  |   | 1.15 | 
|1.89                     |  |                              | 32    |             |                  |  | 5.15     |       |  |   | 1.89   |          |  |       | 32  |  |  |   | 1.89 | 
|5.15                     |  |                              | 90    |             |                  |  | 5.82     |       |  |   | 5.15   |          |  |       | 88  |  |  |   | 5.15 | 
|6.80                     |  |                              | 120   |             |                  |  | 9.77     |       |  |   | 6.80   |          |  |       |    |  |  |   | 6.80 | 
|6.85                     |  |                              | 74    |             |                  |  | 9.24     |       |  |   | 6.85   |          |  |       |    |  |  |   | 6.85 | 
|8.15                     |  |                              | 39    |             |                  |  | 9.94     |       |  |   | 8.15   |          |  |       |    |  |  |   | 8.15 | 
|9.09                     |  |                              | 82    |             |                  |  | 9.82     |       |  |   | 9.09   |          |  |       | 2   |  |  |   | 9.09 | 
|                         |  |                              |       |             |                  |  |          |       |  |   |        |          |  |       |    
|                         |  |                              | 1,252 |             |                  |  | 7.97     |       |  | $ | 2.57   |          |  |       | 450 |  |  | $ | 1.42 | 
|                         |  |                              |       |             |                  |  |          |       |  |   |        |          |  |       |    

F-17



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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
Continued






|                                  |  |                          |   |      |  |   |      |  |  |   |       | 
|--------------------------------- |  | ------------------------ | - | ---- |  | - | ---- |  |  | - | ----- | 
|                                  |  | Years Ended December 31, |  
|                                  |  |                          |  
|                                  |  | 2002                     |   | 2003 |  |   | 2004 | 
|                                  |  |                          |   |      |  |   |      | 
|Cost of revenues                  |  | $                        |  |      |  | $ | 61   |  |  | $ | 566   | 
|Selling, general & administrative |  |                          |  |      |  |   | 58   |  |  |   | 1,208 | 
|                                  |  |                          |   |      |  |   |      |  | 
|                                  |  | $                        |  |      |  | $ | 119  |  |  | $ | 1,774 | 
|                                  |  |                          |   |      |  |   |      |  | 





| |                          
| | -------------------------
| | 9  Restructuring Charges



F-18



---



##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
Continued








|                                                |  |           |       |   |             |   |        |        |  |   |        |   |  |   |        |  
|----------------------------------------------- |  | --------- | ----- | - | ----------- | - | ------ | ------ |  | - | ------ | - |  | - | ------ | -
|                                                |  | Severance |       |   |             |   |        |        | 
|                                                |  | and       |       |   |             |   | Asset  |        |  |  
|                                                |  | Related   |       |   | Lease       |   |        | Write- |  |   |       
|                                                |  | Cost      |       |   | Termination |   |        | Down   |  |   | Total  |  
|                                                |  |           |       |   |             |   |        |        |  |   |        |  
|Reserve for restructuring, at December 31, 2001 |  | $         |      |   |             | $ | 662    |        |  | $ |       |   |  | $ | 662    |  
|2002 restructuring charges                      |  |           | 1,095 |   |             |   | 1,241  |        |  |   | 1,548  |   |  |   | 3,884  |  
|Cash payments                                   |  |           | (342  | ) |             |   | (1,042 | )      |  |   |       |   |  |   | (1,384 | )
|Reduction of excess accrual                     |  |           |      |   |             |   | (59    | )      |  |   |       |   |  |   | (59    | )
|Non cash charges                                |  |           |       |   |             |   |       |        |  |   | (1,548 | ) |  |   | (1,548 | )
|                                                |  |           |       |   |             |   |        |        |  |   |        |  
|Reserve for restructuring, at December 31, 2002 |  |           | 753   |   |             |   | 802    |        |  |   |       |   |  |   | 1,555  |  
|2003 restructuring charges                      |  |           | 79    |   |             |   | 267    |        |  |   | 283    |   |  |   | 629    |  
|Cash 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    |   |             |   |       |        |  |   |       |   |  |   | 25     |  
|Cash payments                                   |  |           | (3    | ) |             |   |       |        |  |   |       |   |  |   | (3     | )
|Reduction of excess accrual                     |  |           | (22   | ) |             |   |       |        |  |   |       |   |  |   | (22    | )
|                                                |  |           |       |   |             |   |        |        |  |   |        |  
|Reserve for restructuring, at December 31, 2004 |  | $         |      |   |             | $ |       |        |  | $ |       |   |  | $ |       |  
|                                                |  |           |       |   |             |   |        |        |  |   |        |  

F-19



---



##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
Continued




|   |               
|-- | --------------
|10 |  Income Taxes



|                          |         |                          |    |    |      |   |     |      |  |   |        |        |  
|------------------------- | ------- | ------------------------ | -- | -- | ---- | - | --- | ---- |  | - | ------ | ------ | -
|                          |         | Years Ended December 31, |   
|                          |         |                          |   
|                          |         | 2002                     |    |    | 2003 |   |     | 2004 | 
|                          |         |                          |    |    |      |   |     |      | 
|Current:                  |         |                          |    |    |      |   |     |      |  |   |        |       
|                          | Federal |                          | $  |   |      |   | $   | 120  |  |   | $      | (23    | )
|                          | State   |                          |    | 13 |      |   |     | 111  |  |   |        | (11    | )
|                          |         |                          |    |    |      |   |     |      | 
|                          |         | $                        | 13 |    |      | $ | 231 |      |  | $ | (34    | )     
|                          |         |                          |    |    |      |   |     |      | 
|Deferred:                 |         |                          |    |    |      |   |     |      |  |   |        |       
|                          | Federal |                          | $  |   |      |   | $   |     |  |   | $      | (6,529 | )
|                          | State   |                          |    |   |      |   |     |     |  |   |        | (300   | )
|                          |         |                          |    |    |      |   |     |      | 
|                          |         |                          |   |    |      |   |    |      |  |   | (6,829 | )     
|                          |         |                          |    |    |      |   |     |      | 
|Total provision (benefit) |         | $                        | 13 |    |      | $ | 231 |      |  | $ | (6,863 | )     
|                          |         |                          |    |    |      |   |     |      | 



|                                                        |  |                          |       |    |      |  |       |      |  |  |        |   
|------------------------------------------------------- |  | ------------------------ | ----- | -- | ---- |  | ----- | ---- |  |  | ------ | --
|                                                        |  | Years Ended December 31, |      
|                                                        |  |                          |      
|                                                        |  | 2002                     |       |    | 2003 |  |       | 2004 | 
|                                                        |  |                          |       |    |      |  |       |      | 
|Federal statutory rate                                  |  |                          | 35.0  | %  |      |  | 35.0  | %    |  |  | 35.0   | % 
|State taxes net of federal benefit                      |  |                          | (0.4  | )  |      |  | 1.3   |      |  |  | (0.8   | ) 
|Difference between foreign tax rates and U.S. tax rates |  |                          | 2.9   |    |      |  | (1.9  | )    |  |  | (86.6  | ) 
|Other                                                   |  |                          | (0.9  | )  |      |  | 0.1   |      |  |  | 7.6    |   
|Deferred stock compensation (ISOs)                      |  |                          |      |    |      |  |      |      |  |  | 42.5   |   
|Change in valuation allowance                           |  |                          | (37.0 | )  |      |  | (31.7 | )    |  |  | (467.4 | ) 
|                                                        |  |                          |       |    |      |  |       |      | 
|                                                        |  |                          | (0.4  | )% |      |  | 2.8   | %    |  |  | (469.7 | )%
|                                                        |  |                          |       |    |      |  |       |      | 



|         |  |                          |        |   |      |   |       |      |  |   |        |  
|-------- |  | ------------------------ | ------ | - | ---- | - | ----- | ---- |  | - | ------ | -
|         |  | Years Ended December 31, |       
|         |  |                          |       
|         |  | 2002                     |        |   | 2003 |   |       | 2004 | 
|         |  |                          |        |   |      |   |       |      | 
|Domestic |  | $                        | (3,121 | ) |      | $ | 7,773 |      |  | $ | (2,156 | )
|Foreign  |  |                          | 242    |   |      |   | 444   |      |  |   | 3,617  |  
|         |  |                          |        |   |      |   |       |      | 
|         |  | $                        | (2,879 | ) |      | $ | 8,217 |      |  | $ | 1,461  |  
|         |  |                          |        |   |      |   |       |      | 

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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
Continued




|                          |                                             |              |         |        |      |   |         |        |  
|------------------------- | ------------------------------------------- | ------------ | ------- | ------ | ---- | - | ------- | ------ | -
|                          |                                             | Years Ended  |        
|                          |                                             | December 31, |        
|                          |                                             |              |        
|                          |                                             | 2003         |         |        | 2004 |  
|                          |                                             |              |         |        |      |  
|Net deferred tax asset:   |                                             |              |         |        |      |   |         |       
|                          | Net operating loss and credit carryforwards |              | $       | 19,823 |      |   | $       | 23,779 |  
|                          | Reserves and allowances                     |              |         | 381    |      |   |         | 103    |  
|                          | Other                                       |              |         | 436    |      |   |         | (255   | )
|Less: valuation allowance |                                             |              | (20,640 | )      |      |   | (16,798 | )     
|                          |                                             |              |         |        |      |  
|                          |                                             | $            |        |        |      | $ | 6,829   |       
|                          |                                             |              |         |        |      |  











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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
Continued




11  Geographic and Product Data






|                   |             |                    |       |       |      |   |       |       | 
|------------------ | ----------- | ------------------ | ----- | ----- | ---- | - | ----- | ----- | 
|                   |             | As of December 31, |      
|                   |             |                    |      
|                   |             | 2003               |       |       | 2004 |  
|                   |             |                    |       |       |      |  
|Long-lived assets: |             |                    |       |       |      |   |       |      
|                   | U.S.        |                    | $     | 1,540 |      |   | $     | 1,797 | 
|                   | Philippines |                    |       | 3,289 |      |   |       | 5,610 | 
|                   |             |                    |       |       |      |  
|Total              |             | $                  | 4,829 |       |      | $ | 7,407 |      
|                   |             |                    |       |       |      |  

|                               |             |                          |       |       |      |   |       |       |  |   |       |       | 
|------------------------------ | ----------- | ------------------------ | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                               |             | Years Ended December 31, |      
|                               |             |                          |      
|                               |             | 2002                     |       |       | 2003 |   |       | 2004  | 
|                               |             |                          |       |       |      |   |       |       | 
|Depreciation and amortization: |             |                          |       |       |      |   |       |       |  |   |       |      
|                               | U.S.        |                          | $     | 3,022 |      |   | $     | 1,896 |  |   | $     | 1,376 | 
|                               | Philippines |                          |       | 1,043 |      |   |       | 1,270 |  |   |       | 2,551 | 
|                               |             |                          |       |       |      |   |       |       | 
|Total                          |             | $                        | 4,065 |       |      | $ | 3,166 |       |  | $ | 3,927 |      
|                               |             |                          |       |       |      |   |       |       | 



|   |              
|-- | -------------
|12 |  Stock Split





|   |                          
|-- | -------------------------
|13 |  Initial Public Offering







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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
Continued






|   |                    
|-- | -------------------
|14 |  Subsequent Events









|   |                                       
|-- | --------------------------------------
|15 |  Quarterly Financial Data (Unaudited)



|                            |  |                                       |       |  |          |   |       |             |  |   |             |  |  |   |       | 
|--------------------------- |  | ------------------------------------- | ----- |  | -------- | - | ----- | ----------- |  | - | ----------- |  |  | - | ----- | 
|                            |  | 2003                                  |      
|                            |  |                                       |      
|                            |  | 1st Qtr.                              |       |  | 2nd Qtr. |   |       | 3rd Qtr.(1) |  |   | 4th Qtr.(2) | 
|                            |  |                                       |       |  |          |   |       |             |  |   |             | 
|                            |  | (In thousands, except per share data) |      
|Revenues                    |  | $                                     | 6,409 |  |          | $ | 7,320 |             |  | $ | 7,720       |  |  | $ | 8,564 | 
|Income from operations      |  |                                       | 1,148 |  |          |   | 1,739 |             |  |   | 2,085       |  |  |   | 3,165 | 
|Net income                  |  |                                       | 1,130 |  |          |   | 1,719 |             |  |   | 2,042       |  |  |   | 3,095 | 
|Basic income per share(3)   |  | $                                     | 0.45  |  |          | $ | 0.68  |             |  | $ | 0.81        |  |  | $ | 1.22  | 
|Diluted income per share(3) |  | $                                     | 0.09  |  |          | $ | 0.14  |             |  | $ | 0.16        |  |  | $ | 0.23  | 

|                            |  |          |       |  |          |   |        |             |  |   |             |  |  |   |        |  
|--------------------------- |  | -------- | ----- |  | -------- | - | ------ | ----------- |  | - | ----------- |  |  | - | ------ | -
|                            |  | 2004     |      
|                            |  |          |      
|                            |  | 1st Qtr. |       |  | 2nd Qtr. |   |        | 3rd Qtr.(4) |  |   | 4th Qtr.(5) | 
|                            |  |          |       |  |          |   |        |             |  |   |             | 
|Revenues                    |  | $        | 9,551 |  |          | $ | 10,445 |             |  | $ | 11,936      |  |  | $ | 12,579 |  
|Income from operations      |  |          | 1,881 |  |          |   | 1,323  |             |  |   | 1,975       |  |  |   | (3,942 | )
|Net income                  |  |          | 1,839 |  |          |   | 1,290  |             |  |   | 1,932       |  |  |   | 3,263  |  
|Basic income per share(3)   |  | $        | 0.71  |  |          | $ | 0.57   |             |  | $ | 0.90        |  |  | $ | 0.19   |  
|Diluted income per share(3) |  | $        | 0.13  |  |          | $ | 0.09   |             |  | $ | 0.14        |  |  | $ | 0.18   |  






|    |                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In the quarter ended September 30, 2003, the Company
    recorded a loss on disposal of assets in the amount of
    $1.1 million related to the final closure of our
    St. Louis operation, and the Company released a portion of
    the prior years excess accrual for restructuring charges
    in an amount of $0.7 million.                                                
|   
|(2) | In the quarter ended December 31, 2003, the Company
    released a portion of the prior years excess accrual for
    restructuring charges in the amount of $1.2 million, based
    on lower than anticipated actual expense for severance
    obligations, which was partially offset by charges of
    $0.5 million for severance-related and facilities costs in
    St. Louis.
|   
|(3) | 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.                                                                                                                                                                                                    
|   
|(4) | 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                                                                

F-23



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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
Continued




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 ended |       
| |  |                                    |  | September 30, 2004    |       
| |  |                                    |  |                       |       
| |  |                                    |  | As reported           |        |   | As restated |  
| |  |                                    |  |                       |        |   |             |  
| |  | Revenues                           |  | $                     | 11,936 |   |             | $ | 11,936 | 
| |  | Income (loss) from operations      |  |                       | (2,811 | ) |             |   | 1,975  | 
| |  | Net income (loss)                  |  |                       | (2,730 | ) |             |   | 1,932  | 
| |  | Basic income (loss) per share(3)   |  | $                     | (1.28  | ) |             | $ | 0.90   | 
| |  | Diluted income (loss) per share(3) |  | $                     | (1.28  | ) |             | $ | 0.14   | 








|    |                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | In the quarter ended December 31, 2004, the Company
    recorded a total 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).



F-24



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##### Table of Contents



SIGNATURES






| |                    
| | -------------------
| | PEOPLESUPPORT, INC.



| |     |                     
| | --- | --------------------
| | By: | /s/ LANCE ROSENZWEIG

| |                                   
| | ----------------------------------
| |                                   
| | 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 31, 2005
|                                          
|/s/ CAROLINE ROOKCaroline
    Rook         |  | Chief Financial Officer (Principal Financial and Accounting
    Officer)                                               |  | March 31, 2005
|                                          
|/s/ ADAM BERGERAdam
    Berger             |  | Director                                                                                                               |  | March 31, 2005
|                                          
|/s/ C. LARRY BRADFORDC.
    Larry Bradford |  | Director                                                                                                               |  | March 31, 2005
|                                          
|/s/ MICHAEL EDELLMichael
    Edell         |  | Director                                                                                                               |  | March 31, 2005
|                                          
|/s/ WILLIAM QUIGLEYWilliam
    Quigley     |  | Director                                                                                                               |  | March 31, 2005
|                                          
|/s/ MICHAEL SONGMichael
    Song           |  | Director                                                                                                               |  | March 31, 2005
|                                          
|/s/ GEORGE ELLISGeorge
    Ellis           |  | Director                                                                                                               |  | March 31, 2005