##### Table of Contents





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

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2007ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to          .   Commission File Number: 001-33679
    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 RegisteredCommon Stock, par value $0.001 per share

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

Accelerated
    filer þ

Non-accelerated
    filer o
    (Do not check if a smaller reporting company)

Smaller reporting
    company o   Rule 12b-2 o þ
       DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K




---



##### 





PeopleSupport,
    Inc. and Subsidiaries
  FORM 10-K
    For the Fiscal Year Ended December 31, 2007
  INDEX
   
 PART IItem 1.


Business


4Item 1A.


Risk Factors


12Item 1B.


Unresolved Staff Comments


24Item 2.


Properties


24Item 3.


Legal Proceedings


24Item 4.


Submission of Matters to a Vote of Security
    Holders


24PART IIItem 5.


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


25Item 6.


Selected Financial Data


28Item 7.


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


29Item 7A.


Quantitative and Qualitative Disclosures about
    Market Risk


41Item 8.


Financial Statements and Supplementary Data


42Item 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


42Item 9A.


Controls and Procedures


42Item 9B.


Other Information


45PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


45Item 11.


Executive Compensation


45Item 12.


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


45Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


45Item 14.


Principal Accountant Fees and Services


45PART IVItem 15.


Exhibits and Financial Statement Schedules


46Signatures


78Exhibit 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2   2




---



##### Table of Contents



SPECIAL
    NOTE REGARDING FORWARD-LOOKING STATEMENTS
  forward-looking
 3




---



##### Table of Contents



PART I  Item 1.
    Business  Form 10-K
  Overview
  U.S.-based
  Corporate
    Background and History
    Industry
    Overview
        in-house,
  
    Significant cost benefits;
    Best practices in leveraging learned experiences across multiple
    clients in an efficient and effective manner, particularly
    within the clients specific industries; 4




---



##### Table of Contents




    The importance of professionally managed customer communications
    to retain and grow customer relationships, and generating
    revenues for our clients by up-selling and cross-selling
    additional products and services;
    The ability to free available resources and management to focus
    on developing core products and services;
    The use of highly skilled professionals by the outsourcing
    industry;
    The extensive and ongoing staff training and associated costs
    required for maintaining in-house technical support and customer
    service solutions; and
    The ability to avoid capital requirements for the sophisticated
    communications technology needed to provide timely, high quality
    customer service.  Competitive
    Strengths
    Low
    Cost Offshore Delivery Model
      Deep
    Industry Expertise with a Focus on Collaborative Client
    Relationships
   5




---



##### Table of Contents



Sales
    and Service Delivery Effort Focused on Every Step of the
    Customer Interaction
    Scalable
    Delivery and Technology Platform
    Attractive
    Employment Culture
    Our
    Business Strategy
    Increase
    Organic Growth, Add New Customers and Expand
    Geographies
    Deliver
    High Quality, Value  Added Multilingual
    Services
   6




---



##### Table of Contents



pay-for-performance
  Diversify
    Service Offerings to Leverage Existing
    Infrastructure
    Expand
    to Additional Countries
    Pursue
    Selective Strategic Acquisitions
    Improve
    Operational Efficiencies to Partly Mitigate Unfavorable Impact
    of Appreciating Foreign Currencies
   7




---



##### Table of Contents



Services
  Customer
    Management Services
    case-by-case
    
    Customer service.  Our customer service support
    services are initiated by inbound calls and
    e-mail from
    our clients customers and address a wide range of
    questions regarding their account billing, changes in services,
    reservation changes, delivery updates on goods or services,
    complaint and issue resolution and general product or service
    inquiries.
    Inbound sales.  We handle inbound calls from
    customers purchasing products and services from our clients,
    including travel reservations, financial transactions,
    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 retention of
    customers who are at risk for cancellation or defection.
    Technical support.  Our technical support
    services include handling troubleshooting calls, responding to
    software and hardware problems, providing support for Internet
    service problems, managing corporate help desks and providing
    warranty or post-warranty support.
    Direct response sales services.  Our direct
    response services involve handling inbound telephone orders or
    inquiries for clients in the direct marketing industry,
    including those calls received in response to print
    advertisements, infomercials and other electronic media. Our
    professionals answer questions and process orders for the
    purchase of our clients products or services and identify
    opportunities to sell other products and services.
    Accounts receivable management services.  We
    collect consumer receivables in the financial services,
    telecommunications and utilities industries. We manage
    receivables that have already been written off by the creditor
    and also manage receivables that are past due but have not yet
    been written off by our clients.  e-mail
  Transcription
    and Captioning Services
   8




---



##### Table of Contents



Other
    BPO Services
    Clients
      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;
    secure our clients confidential data; and
    provide a technology platform that offers a seamless customer
    experience.  U.S.-based
  U.S.-based
 9




---



##### Table of Contents



Delivery
    Platform
    
    Hub and spoke architecture.Our
    data centers located in the United States and the Philippines
    use a technical infrastructure designed to facilitate rapid
    expansion and consistency in delivering services to and from any
    of our outsourcing centers. Our data centers are connected to
    each other using multiple, redundant communication lines, which
    are dedicated International Private Lines (IPLs). Our hub
    and spoke operating model allows us to provide consistent
    and scalable business processes across multiple outsourcing
    centers. Applications and data are stored at our data center
    hubs in the United States and deployed at our
    spokes offshore. This allows us to quickly and
    efficiently handle additional volume and services for our new
    and existing clients and to expand our outsourcing network by
    establishing new spokes virtually anywhere in the
    world that is accessible with a fiber optic network.
    Robust data security.  We use several layers of
    information security protection, including applications and
    devices designed to prevent unauthorized access to data residing
    in our systems and aggressive monitoring of audit trails at
    application and network layers. All outside connections to our
    network must pass through a sophisticated security system that
    is supported by multiple firewalls. Data access to client
    back-end systems is also protected by these security measures.
    We constantly monitor the network for attacks by potential
    hackers. As required by our clients, we apply best practices to
    prevent our professionals from copying or transmitting customer
    data.
    Dedicated telecommunications network.  We have
    designed and deployed a dedicated telecommunications system
    which enables us to securely route multi-channel communications
    between the United States and our offshore outsourcing centers.
    Our system transmits communications traffic with minimal latency
    and high transmission quality over a private network leased from
    major telecommunications providers. Our lease agreements with
    these providers generally provide for annual terms and fixed
    fees based on the levels of capacity dedicated to our usage.
    Customer traffic is initially received by one of our
    U.S. data centers where we seamlessly route calls to the
    optimal location in the Philippines or Costa Rica based on our
    professionals skill sets and availability. In most cases,
    these communications between the United States and our offshore
    centers are indistinguishable from domestic communications
    between points within the United States.
    Integrated customer communications
    channels.  We provide customer management services
    through multiple communications channels, including inbound
    telephone calls,
    e-mail and
    webchats. Our customer management professionals are trained to
    offer services through each of these communications channels.
    Our customer interaction systems are also integrated with our
    workforce management system, which is used to manage optimal
    staffing and service levels. These systems are all linked to a
    proprietary reporting system that is updated hourly for all
    interactions occurring in our outsourcing centers. This provides
    our clients with 10




---



##### Table of Contents



a single view of all interactions between our professionals and
    their customers. We also offer real-time reporting capabilities
    to our clients.  
    Proprietary integrated Intellicenter feedback
    system.  Intellicenter is our proprietary
    reporting and analytical system that generates client-specific
    interaction reports. These reports are accessible to our clients
    on an hourly, daily, weekly and monthly basis. Intellicenter
    also provides access to customer contact transcripts and allows
    our clients to review the customer interaction database of all
    e-mail and
    webchat transcripts. The system provides historical trend
    information to help clients monitor the volume and effectiveness
    of our interactions with customers.
    24/7 client helpdesk.We have a helpdesk
    staffed 24/7, which offers our clients complete coverage in the
    event of any system issues. We have established standardized
    procedures to identify, track, categorize and prioritize
    inquiries by order of importance to our clients. We also operate
    an information technology calling tree which allows us to
    escalate issues up the personnel chain of command as the
    situation warrants.
    Quality assurance.  Our quality assurance
    analysts use our quality management software to monitor service
    level compliance and randomly sample customer interactions. The
    system is configured for voice, data and computer screen capture
    to record the total customer experience and provide live
    monitoring and playback via a web browser from any location.  Sales and
    Marketing
    Sales
    Support and Marketing Support
    Sales
    
    develop client relationships;
    help define the scope, deliverables and execution strategies for
    proposals;
    prepare pricing estimates and margin analysis for proposed
    client contracts;
    finalize sales proposals; and
    assist in the negotiation and closing of new client arrangements.  Operations
   11




---



##### Table of Contents



Employees
    Hiring
    and Recruiting
      Proprietary
    Rights
    Item 1A.
    Risk
    Factors  Form 10-K Form 10-K.
 12




---



##### Table of Contents



Our
    revenues are highly dependent on four major clients that
    collectively accounted for 59% of our revenues for the year
    ended December 31 , 2007, and any loss of business from our
    major clients would reduce our revenues and seriously harm
    us.
    Many
    of our contracts can be terminated by our clients on short
    notice and in many cases without penalty. We generally do not
    have exclusive arrangements with our clients or a minimum
    revenue commitment, which creates uncertainty about our volume
    of services and the amount of revenues we will generate from any
    of our clients.
    If we
    fail to manage our growth effectively, the quality of our
    services may decline, our revenue and margins may be reduced and
    we may incur losses.
    We may
    experience significant employee turnover rates and we may be
    unable to hire and retain enough sufficiently trained employees
    to support our operations, which could harm our
    business.
    Our
    operations could suffer from telecommunications or technology
    downtime, disruptions or increased costs.
   13




---



##### Table of Contents



We
    could cause disruptions to our clients business from
    inadequate service, and our insurance coverage may be inadequate
    to cover this risk.
    Our
    clients may not pay us for services we have
    provided.
    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
    senior management team is important to our continued success and
    the loss of members of senior management could negatively affect
    our operations.
   14




---



##### Table of Contents



U.S.-based
  We
    have no experience developing land or buildings and should we
    choose to do so, we may incur unexpected expenses and/or losses
    which may harm our business and financial results.
    Our
    facilities are at risk of damage by earthquake, typhoons,
    tsunamis and other natural disasters.
    Terrorist
    attacks could adversely affect the economy, disrupt our
    operations and cause our business to suffer.
    We
    have a limited operating history and our business and future
    prospects are difficult to evaluate.
    
    attract and retain clients;
    attract and retain key personnel and qualified professionals;
    generate sufficient revenues and manage costs to maintain
    profitability;
    integrate acquisitions, adjust to new businesses and develop
    operating procedures for new countries;
    manage growth in our operations; and
    access additional capital when required and on reasonable terms. 15




---



##### Table of Contents



Our
    ability to use net operating loss carryforwards in the United
    States may be limited.
    We may
    make acquisitions that prove unsuccessful or divert our
    resources.
    Goodwill and
    Other Intangible Assets, S
  We may
    choose to expand operations to other countries and may not be
    successful.
   16




---



##### Table of Contents



We are
    subject to extensive laws and regulations that could limit or
    restrict our activities and impose financial requirements or
    limitations on the conduct of our business.
            Our
    revenues are highly dependent on a few industries and any
    decrease in demand for outsourced services in these industries
    would likely reduce our revenues and seriously harm our
    business.
   17




---



##### Table of Contents



We
    have reorganized our operations along industry verticals, which
    can be disruptive.
    A
    reversal of industry trends toward offshore outsourcing due to
    negative public reaction in the United States would harm
    our ability to compete effectively with competitors that operate
    facilities in the United States.
    Our
    clients may adopt technologies that decrease the demand for our
    services, which could reduce our revenues and seriously harm our
    business.
    We
    serve markets that are highly competitive, and our inability to
    compete successfully against current or future competitors,
    pricing pressures or loss of market share could result in
    increased costs and reduced revenue and operating
    margins.
    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.
   18




---



##### Table of Contents



Our
    investments in marketable securities are subject to risks which
    may cause losses.
      Risks
    Related to Doing Business in the Philippines
  We
    face competition in the Philippines for our professionals, which
    could increase the cost of qualified employees and the amount of
    employee turnover.
    Currency
    fluctuations in the Philippine peso relative to the U.S. dollar
    have increased and could continue to increase our
    expenses.
    We
    recently entered into forward foreign currency contracts. These
    instruments are volatile and may cause our financial results to
    vary significantly from period to period.
   19




---



##### Table of Contents



Our
    current tax holidays in the Philippines may not be
    extended.
    The
    Philippines periodically experiences political or economic
    instability, which could disrupt our operations, increase our
    costs and harm our business.
      Risks
    Related to Doing Business in Costa Rica
  We
    have limited experience with operations in Costa Rica and are
    subject to particular risks associated with the development of
    operations in Costa Rica.
      
    we may be unable to find, hire or retain, at rates attractive to
    us, a sufficient number of qualified employees;
    currency fluctuations in the Costa Rican colon relative to the
    U.S. dollar could significantly increase our expenses;
    we are dependent on telecommunications service provided by a
    limited number of available vendors in order to conduct our
    business, and if the telecommunications service were to fail,
    experience problems or be interrupted or unreliable, we may be
    unable to service our client or fulfill our contractual
    obligations;
    our facilities are at risk of damage by earthquakes, typhoons
    and other natural disasters; and
    we may have overestimated the demand for Spanish language BPO
    services which may not be sufficient to expand our Costa Rican
    operations.  Our
    Costa Rican operations are dependent on a single client,
    Washington Mutual, which has the option to acquire the
    operations from us and therefore deprive us of our presence in
    Latin America.
   20




---



##### Table of Contents



Government
    regulations and various bureaucratic constraints have increased
    and may continue to increase operational costs in Costa Rica
    beyond budgeted expectations.
    Risks
    Related to Our Stock
  Our
    stock price may be volatile, and you may not be able to resell
    shares of our common stock at or above the price you paid, or at
    all.
    Our
    operating results may fluctuate significantly and could cause
    the market price of our common stock to fall rapidly and without
    notice.
    If
    securities or industry analysts cease publishing research or
    reports about our business or if they downgrade their
    recommendations regarding our stock, our stock price and trading
    volume could decline.
   21




---



##### Table of Contents



If we
    fail to maintain an effective system of internal controls or
    discover material weaknesses in our internal controls over
    financial reporting, we may not be able to report our financial
    results accurately, which could harm our business and cause our
    stock price to drop.
    We
    will continue to incur increased costs as a result of being a
    public company.
    Delaware
    law and our amended and restated certificate of incorporation,
    amended and restated bylaws and our recently adopted stockholder
    rights plan contain anti-takeover provisions that could delay or
    discourage business combinations and takeover attempts that
    stockholders may consider favorable.
    
    classify our board of directors into three groups, each of which
    will serve for staggered three-year terms;
    permit the board of directors to elect a director to fill a
    vacancy created by the expansion of the board of directors;
    permit stockholders to remove our directors only for cause;
    permit a special stockholders meeting to be called only by
    our chairman of the board of directors, president, or chief
    executive officer, a majority of our board of directors or
    two-thirds of the independent directors;
    require stockholders to give us advance notice to nominate
    candidates for election to our board of directors or to make
    stockholder proposals at a stockholders meeting;
    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. 22




---



##### Table of Contents



Substantial
    future sales of our common stock in the public market could
    cause our stock price to fall. The sale of additional equity
    securities by us would result in further dilution to our
    stockholders.
    Our
    ability to raise capital in the future, if and when needed, may
    be limited, and could prevent us from executing our business
    strategy.
    Risks
    related to the Recent Acquisition Speculation and Investor
    Actions
  Despite
    recent acquisition speculation, a merger, acquisition or other
    transaction involving us may not occur or may occur at a price
    per share of our common stock that is below the current trading
    price, which could harm our stock price.
    Acquisition
    speculation and investor actions could cause us to lose key
    personnel, prevent us from hiring additional key personnel and
    distract our management, which could harm our
    business.
   23




---



##### Table of Contents



Customer
    uncertainty related to acquisition speculation and investor
    actions could harm our business.
    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties      Item 3.
    Legal
    Proceedings      Item 4.
    Submission
    of Matters to a Vote of Security Holders   24




---



##### Table of Contents



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

HIGH


LOW2007Fourth Quarter

$
14.88


$
10.25Third Quarter


12.96



8.19Second Quarter


13.42



11.23First Quarter


24.41



10.752006Fourth Quarter

$
22.29


$
18.03Third Quarter


18.92



11.05Second Quarter


14.55



9.90First Quarter


10.70



8.60    25




---



##### Table of Contents



Five-Year
    Stock Performance Graph
      Comparison
    of Cumulative Total Return
  
  10/1/2004


12/31/2004


12/31/2005


12/31/2006


12/31/2007PeopleSupport, Inc.


$
100.0



$
112.0



$
95.4



$
236.5



$
153.7NASDAQ Stock Market Index


$
100.0



$
115.0



$
117.5



$
129.6



$
142.4S&P Data Processing & Outsourced Services Index


$
100.0



$
105.9



$
111.7



$
123.3



$
125.9PeopleSupports Peer Group


$
100.0



$
110.0



$
129.0



$
191.8



$
144.0   Stock
    Repurchases
   26




---



##### Table of Contents



Total Number of


Dollar Value ofShares Purchased as


Shares That MayTotal Number


Average Price


Part of Publicly


Yet be Purchasedof Shares


Paid per


Announced Plans or


Under thePurchased


Share


Programs


Plan or Programs(In thousands, except average price per share)October 1 - October 31, 2007


758


$
11.82



758


$
2,386November 1 - November 30, 2007


222


$
10.75



222



December 1 - December 31, 2007














Total


980


$
11.58



980   Dividend
    Policy
    Information
    with Respect to Securities Authorized for Issuance Under Equity
    Compensation Plans
    Number of SecuritiesRemaining Availablefor FutureNumber of Securities


Weighted-Average


Issuance Underto be Issued Upon


Exercise Price of


Equity CompensationExercise of


Outstanding


Plans (ExcludingOutstanding Options,


Options, Warrants


Securities ReflectedPlan Category

Warrants and Rights(a)


and Rights(b)


in
    Column(a)©(In thousands, except average price per share)Equity Compensation Plans Approved by Security Holders


2,770


$
10.93



712Equity Compensation Plans Not Approved by Security Holders










Total


2,770


$
10.93



712  27




---



##### Table of Contents



Item 6.
    Selected
    Financial Data  Form 10-K.
  Years Ended December 312007


2006(5)


2005


2004


2003(In thousands, except share data)Consolidated Statement of Operations Data:Revenues

$
140,647


$
110,119


$
62,124


$
44,511


$
30,013Costs of revenues(1)


101,810



70,203



35,733



25,271



12,921Selling, general & administrative expenses(1)


24,430



20,719



12,554



14,270



6,134Depreciation and amortization


10,149



7,467



4,414



3,927



3,166Gain on sale of receivable portfolios(2)














(172
)


Restructuring charges(3)














(22
)


(345
)Income from operations


4,258



11,730



9,423



1,237



8,137Interest income, net


(6,169
)


(2,540
)


(1,388
)


(231
)


(72
)Other (income) expense(6)


(25,166
)


212



47



7



(8
)Income before income taxes


35,593



14,058



10,764



1,461



8,217Income taxes


3,343



(94
)


(12,065
)


(6,863
)


231Net income

$
32,250


$
14,152


$
22,829


$
8,324


$
7,986Net income per share of common stock:Basic(4)

$
1.40


$
0.74


$
1.26


$
1.39


$
3.15Diluted(4)

$
1.37


$
0.72


$
1.21


$
0.55


$
0.64Weighted average number of common shares outstanding:Basic(4)


23,051



19,088



18,165



5,996



2,533Diluted(4)


23,605



19,621



18,917



15,012



12,560   As of December 312007


2006


2005


2004


2003(In thousands)Consolidated Balance Sheet Data:Cash and cash equivalents

$
78,403


$
80,880


$
27,760


$
41,583


$
12,151Marketable securities


43,322



59,653



23,853







Working capital


111,602



124,187



56,583



43,664



11,798Total assets


233,210



217,591



94,326



65,080



22,535Total non-current liabilities


2,627



3,159



1,816



936



267Redeemable convertible preferred stock


















74,110Total stockholders equity (deficit)

$
207,431


$
192,430


$
82,392


$
57,935


$
(56,611
)  28




---



##### Table of Contents



(1)
    
    Included in expenses above are non-cash stock based compensation
    charges of:  Years Ended December 312007


2006


2005


2004


2003(In thousands)Cost of revenues

$
1,354


$
731


$
271


$
566


$
61Selling, general & administrative


4,509



2,062



611



1,208



58$
5,863


$
2,793


$
882


$
1,774


$
119    (2)
    
    Gain on sale of receivable portfolios is the net amount we
    earned on the sale of two accounts receivable portfolios by our
    subsidiary, ProArm management, Inc., during 2004.(3)
    
    Restructuring charges are comprised of estimated and actual
    obligations for various non-cancelable leases, the write-down of
    abandoned leasehold improvements and fixed assets at customer
    service centers in the United States where we terminated
    operations, and severance and other U.S. employee-related costs
    in connection with the movement of our operations, first to
    St. Louis, and then to the Philippines. Partial charges
    were reversed in 2004 and 2003 due to over-accrual.(4)
    
    The basic and diluted share and per share amounts in the
    consolidated statements 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.(5)
    
    Our consolidated statement of operations for the year ended
    December 31, 2006 and consolidated balance sheet as of
    December 31, 2006, include the effects of the RapidText
    acquisition. Therefore, the years presented prior to fiscal year
    2006 may not be comparable to fiscal year 2006.(6)
    
    Starting in January 2007, we entered into foreign exchange
    forward contracts to hedge against the effect of the declining
    value of the U.S. dollar against the Philippine peso. These
    forward contracts were accounted for on a mark-to-market basis,
    with realized and unrealized gains recognized and included in
    other income in the consolidated statement of operations for the
    year ended December 31, 2007. In 2007, the realized and
    unrealized gain from forward contracts was $23.5 million.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Future
    Uncertainties
  Managements Discussion and Analysis of Financial
    Condition and Results of Operations (MD&A) provides
    supplemental information which sets forth the major factors that
    have affected our financial condition and results of operation
    and should be read in conjunction with the consolidated
    financial statements and accompanying notes, which appear
    elsewhere in this Annual Report on
    Form 10-K.
    This section contains forward-looking statements that involve
    risks and uncertainties. Our actual results could differ
    materially from those anticipated in these
    forward-looking
    statements as a result of various factors, including those
    discussed below and elsewhere in this Annual Report on
    Form 10-K,
    particularly under the heading Risk Factors.
  Overview
  U.S.-
  e-mail,
 29




---



##### Table of Contents



Sources
    of Revenues
    
    time-delineated or production-based fees, including hourly or
    per minute charges, charges per interaction or transaction and
    training fees, all of which are separately negotiated on an
    individual client basis; and
    implementation fees, including revenues associated with the
    installation and integration of new clients into our
    telecommunications, information technology and client reporting
    structures.    2007


2006


2005Time-delineated or production-based fees

$
133,311


$
101,583


$
57,473Set-up and
    training fees


5,143



5,565



2,189Other


2,193



2,971



2,462Total

$
140,647


$
110,119


$
62,124   U.S.-
  Significant
    Clients and Status of Key Contracts
     30




---



##### Table of Contents



Key
    Expense Categories
  Cost of revenues.
      Selling, general and administrative
    expenses U.S.-based
  Depreciation and amortization.
  Management
    Incentive Compensation Plan
    Critical
    Accounting Policies and Estimates
   31




---



##### Table of Contents



Revenues
    and Deferred Revenue Recognition
  Revenue Recognition in Financial
    Statements Revenue Recognition
      Allowance
    for Doubtful Accounts
    Accounting
    for Stock based Awards
  Share Based Payments
    Accounting
    for Income Taxes
  Accounting for Income Taxes
  Accounting for Uncertainty
    in Income Taxes, an
    Interpretation of FASB Statement No. 109
 32




---



##### Table of Contents



Long-Lived
    Assets
        Foreign
    Currency Translation
    Foreign Currency Translation.
  Foreign
    Exchange Forward Contracts
  Accounting for Derivative Instruments
    and Hedging Activities
 33




---



##### Table of Contents



Summary
    Financial Results
      Results
    of Operations
    Years Ended December 31,2007


2006


2005Percentages of RevenuesRevenues


100.0
%


100.0
%


100.0
%Cost of revenues


72.4



63.8



57.5Selling, general and administrative expenses


17.4



18.8



20.2Depreciation and amortization


7.2



6.8



7.1Income from operations


3.0



10.6



15.2Interest income, net


(4.4
)


(2.3
)


(2.2
)Other (income) expense


(17.9
)


0.2



0.1Income before income taxes


25.3



12.7



17.3Income taxes


2.4



(0.1
)


(19.4
)Net income


22.9
%


12.8
%


36.7
%   Year
    Ended December 31, 2007 Compared with Year Ended
    December 31, 2006
  Revenues
     34




---



##### Table of Contents



Cost of
    Revenues
      Selling,
    General and Administrative
      Depreciation
    and Amortization
      Interest
    Income
    Other
    Income
   35




---



##### Table of Contents



Income
    Taxes
    Year
    Ended December 31, 2006 Compared with Year Ended
    December 31, 2005
  Revenues
    Cost of
    Revenues
    Selling,
    General and Administrative
    Depreciation
    and Amortization
  U.S.-based
 36




---



##### Table of Contents



Interest
    Income
    Income
    taxes
    Liquidity
    and Capital Resources
      Operating
    Activities
    Investing
    Activities
     37




---



##### Table of Contents



Financing
    Activities:
      Off-Balance
    Sheet Arrangements
  Line
    of Credit
    Contractual
    Obligations
    Years Ending December 31,(In thousands)2008

$
7,4192009


6,0862010


6,3612011


5,4592012


4,572Thereafter


14,891Total minimum payments

$
44,788        38




---



##### Table of Contents



Contingencies
      Foreign
    Currency Forward Contracts
      Quarterly
    Results of Operations
  20071st Qtr


2nd Qtr


3rd Qtr


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

$
33,597


$
34,328


$
36,932


$
35,790Income from operations


1,082



518



2,411



247Net income(3)


3,863



3,907



6,354



18,126Basic earnings per share


0.16



0.17



0.27



0.83Diluted earnings per share


0.16



0.16



0.27



0.81   39




---



##### Table of Contents



20061st Qtr


2nd Qtr


3rd Qtr


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

$
23,047


$
25,947


$
30,117


$
31,008Income from operations(1)


3,353



3,594



3,973



810Net income(2)


2,874



3,808



3,512



3,958Basic earnings per share

$
0.16


$
0.21


$
0.19


$
0.19Diluted earnings per share

$
0.15


$
0.20


$
0.18


$
0.18     (1)
    
    The decrease in fourth quarter 2006 income from operations as
    compared to the previous 2006 quarters was primarily due to the
    following items which total approximately
    $2.5 million  increased information technology
    infrastructure costs and various credits associated with our
    contract in Costa Rica with a single anchor client, increased
    depreciation expense due to overall capacity and infrastructure
    built, additional amortization related to our software licenses,
    increased Sarbanes Oxley compliance and audit costs, increased
    non-cash compensation charges and an increase to our allowance
    for doubtful accounts.(2)
    
    During the year ended December 31, 2006, we assessed the
    deferred tax asset valuation allowance each quarter and
    decreased the allowance by $0.5 million and
    $1.0 million in the second and fourth quarters. The
    allowance was increased in the third quarter by
    $0.1 million, for a net tax effect for all of 2006 of
    $1.4 million.(3)
    
    The increase in fourth quarter 2007 net income as compared
    to the previous 2007 quarters was primarily due to realized and
    unrealized gain related to foreign exchange forward contracts of
    $18.2 million (before taxes).  Stockholder
    Rights Plan
    Subsequent
    Events
    Recent
    Accounting Pronouncements
  Business Combinations Accounting for Income Taxes
 40




---



##### Table of Contents



Goodwill and Other Intangible Assets
  Non-controlling Interests
    in Consolidated Financial Statements Consolidated Financial Statements
      Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk  Foreign
    Currency Exchange Risk
   41




---



##### Table of Contents



Interest
    Rate Risk
      Inflation
    Rate Sensitivity
    Item 8.
    Financial
    Statements and Supplementary Data    Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Disclosure
    Controls and Procedures
   42




---



##### Table of Contents



Managements
    Report on Internal Control Over Financial Reporting
  Rule 13a-15(f)
  
    pertain to the maintenance of records that, in reasonable
    detail, accurately and fairly reflect the transactions and
    dispositions of our assets;
    provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles and
    that our receipts and expenditures are being made only in
    accordance with authorizations of our management and our Board
    of Directors; and
    provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of our
    assets that could have a material effect on our financial
    statements.  Internal Control-Integrated Framework. Rules 13a-15(e) 15d-15(e)
    Form 10-K,
  Changes
    in Internal Control Over Financial Reporting
  Rule 13a-15(f)
 43




---



##### Table of Contents



Separate
    Standard Audit Report Expressing an Unqualified Opinion
    on
 Internal Control Over Financial Reporting
  Report of Independent Registered Public Accounting Firm
     Internal Control  Integrated Framework
            
      44




---



##### Table of Contents



Item 9B.
    Other
    Information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters  Form 10-K,
  Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   45




---



##### Table of Contents



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Form 10-K,
  Financial
    Statements
  Form 10-K
  Consolidated
    Financial Statements of PeopleSupport, Inc.
  Report of BDO Seidman, LLP, Independent
    Registered Public Accounting Firm


50Consolidated Balance Sheets at December 31,
    2007 and 2006


51Consolidated Statements of Operations and
    Comprehensive Income for the years ended December 31, 2007,
    2006 and 2005


52Consolidated Statements of Stockholders
    Equity for the years ended December 31, 2007, 2006 and
    2005


53Consolidated Statements of Cash Flows for the
    years ended December 31, 2007, 2006 and 2005


54Notes to Consolidated Financial Statements


55   Financial
    Statement Schedules
  10-K
  Report of
    Independent Registered Public Accounting Firm
      10-K,
    
      46




---



##### Table of Contents



Schedule II 
    Valuation and Qualifying Accounts (in thousands)
  Years Ended December 31, 2004, 2005 and 2006Balance at


Charged toBeginning


Costs and





Balance atDescription

of Year


Expenses


Deduction


End of YearValuation allowance for accounts receivable2005


451



102



(66
)


4872006


487



528



(68
)


9472007


947



104



(722
)


329   Balance atBeginning








Balance atof Year


Releases


Increases


End of YearDeferred income tax valuation allowance2005


16,798



(14,598
)






2,2002006


2,200



(2,350
)


150



2007














     Exhibits
  Form 10-K,
 47




---



##### Table of Contents



Exhibit Index
  Number

Description3
.1(1)

Amended and Restated Certificate of Incorporation3
.2(1)

Amended and Restated Bylaws4
.1(1)

Specimen Common Stock Certificate4
.2(1)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Office Lease, dated January 9, 2006 for Burbank facility between
    PeopleSupport as tenant and former stockholders of RapidText10
.17(6)

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

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

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

Master Outsourcing Services Agreement between Washington Mutual,
    Inc. and PeopleSupport, Inc. dated February 17, 2006 and two
    Services Agreements thereunder10
.21(9)

Deed of Absolute Sale dated January 26, 2007, between
    PeopleSupport Properties Philippines Inc. and
    Fort Bonifacio Development Corporation21
.1(10)

List of Subsidiaries23
.1(10)

Consent of Independent Registered Public Accounting Firm31
.1(10)

Certification by Chief Executive Officer of Registrant pursuant
    to Section 302 of the Sarbanes-Oxley Act of 200231
.2(10)

Certification by Chief Financial Officer of Registrant pursuant
    to Section 302 of the Sarbanes-Oxley Act of 200232
.1(8)

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

Certification by Chief Financial Officer of Registrant pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002  48




---



##### Table of Contents



*
    
    Indicates management employment contract or compensatory plans
    or arrangements.
    
    Confidential treatment has been requested for portions of this
    exhibit. Portions of this document have been omitted and
    submitted separately to the Securities and Exchange Commission.(1)
    
    Incorporated by reference to the Registrants Registration
    Statement on
    Form S-1,
    File
    No. 333-115328,
    originally filed with the Securities and Exchange Commission on
    May 10, 2004, as amended.(2)
    
    Incorporated by reference to the Registrants Annual Report
    on
    Form 10-K,
    filed with the Securities and Exchange Commission on
    March 31, 2005.(3)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K,
    filed with the Securities and Exchange Commission on
    October 26, 2005.(4)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    filed with the Securities and Exchange Commission on
    January 12, 2006.(5)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K,
    filed with the Securities and Exchange Commission May 31,
    2006.(6)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K,
    filed with the Securities and Exchange Commission on
    August 2, 2006.(7)
    
    Incorporated by reference to the Registrants Quarterly
    Report on
    Form 10-Q
    filed with the Securities and Exchange Commission on
    November 1, 2006.(8)
    
    The material contained in this exhibit is not deemed
    filed with the SEC and is not to be incorporated by
    reference into any filing of the Registrant under the Securities
    Act of 1933 or the Securities Exchange Act of 1934, whether made
    before or after the date hereof and irrespective of any general
    incorporation language contained in such filing, except to the
    extent that the Registrant specifically incorporates it by
    reference.(9)
    
    Incorporated by reference to the Registrants Annual Report
    on Form 10-K, filed with the Securities and Exchange Commission
    on March 16, 2007.  (10)
    
    Filed herewith. 49




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM             Internal Control 
    Integrated Framework
  
      50




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
 CONSOLIDATED
    BALANCE SHEETS  December 31,2007


2006(In thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents

$
78,403


$
80,880Marketable securities


19,996



39,520Accounts receivable, net of allowance for doubtful accounts of
    $329 and $947


19,206



18,127Deferred tax assets






1,888Prepaid expenses and other current assets


17,149



5,745Total current assets


134,754



146,160Property and equipment, net


33,761



22,080Marketable securities


23,326



20,133Deferred tax assets


23,366



18,372Goodwill and other intangible assets, net


8,267



8,346Other non-current assets


9,736



2,500Total assets

$
233,210


$
217,591LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
2,446


$
7,389Accrued compensation


4,218



3,490Accrued liabilities


6,965



5,844Management incentive plan obligation






629Deferred revenue


5,252



4,515Deferred tax liabilities


4,205



Other current liabilities


66



106Total current liabilities


23,152



21,973Deferred rent


2,580



1,812Other non-current liabilities


47



1,347Total liabilities


25,779



25,132Minority interest






29Commitments and contingenciesStockholders equityCommon stock, $.001 par value; authorized 87.0 million
    shares; 21.6 million and 23.5 million shares issued
    and outstanding at December 31, 2007 and 2006, respectively


22



23Additional paid-in capital


195,472



208,044Retained earnings (accumulated deficit)


10,700



(16,062
)Accumulated other comprehensive income


1,237



425Total stockholders equity


207,431



192,430Total liabilities and stockholders equity

$
233,210


$
217,591    51




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
 CONSOLIDATED
    STATEMENTS OF OPERATIONS
    AND COMPREHENSIVE INCOME  Years Ended December 31,2007


2006


2005(In thousands, except per share data)Revenues

$
140,647


$
110,119


$
62,124Cost of revenues (exclusive of depreciation expense shown below)


101,810



70,203



35,733Selling, general and administrative expenses


24,430



20,719



12,554Depreciation and amortization


10,149



7,467



4,414Income from operations


4,258



11,730



9,423Interest income, net


(6,169
)


(2,540
)


(1,388
)Other (income) expense


(25,166
)


212



47Income before income taxes


35,593



14,058



10,764Income taxes


3,343



(94
)


(12,065
)Net income


32,250



14,152



22,829Foreign currency translation adjustments


412



632



411Unrealized gain (loss) on marketable securities


(1,035
)


7



(149
)Change in pension liability


1,435







Comprehensive income

$
33,062


$
14,791


$
23,091Basic earnings per share

$
1.40


$
0.74


$
1.26Diluted earnings per share

$
1.37


$
0.72


$
1.21Basic weighted average shares outstanding


23,051



19,088



18,165Diluted weighted average shares outstanding


23,605



19,621



18,917    52




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
 CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITYYears Ended December 31, 2005, 2006 and 2007 Retained


AccumulatedAdditional


Earnings


Other





TotalCommom


Paid-in


(Accumulated


Comprehensive


Deferred


StockholdersShares


Stock


Capital


Deficit)


Income


Compensation


Equity(In thousands)Balance, at December 31, 2004


18,015


$
18


$
112,514


$
(53,043
)

$
80


$
(1,634
)

$
57,935Exercise of stock options


291







295















295Deferred compensation for restricted stock units










414











(388
)


26Amortization of deferred stock compensation










(178
)










1,034



856Tax benefit for disqualifying dispositions of stock options










189















189Comprehensive income














22,829



262







23,091Balance, at December 31, 2005


18,306



18



113,234



(30,214
)


342



(988
)


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










(988
)










988



Secondary public offering


4,830



5



90,882















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


343







1,375















1,375Tax benefit from employee stock option exercises










747















747Stock-based compensation










2,794















2,794Adoption of SFAS 158, net of tax


















(556
)






(556
)Comprehensive income














14,152



639







14,791Balance, at December 31, 2006


23,479



23



208,044



(16,062
)


425







192,430Secondary public offering cost


33







(167
)














(167
)Exercise of stock options and release of restricted stock units


260



1



744















745Tax benefit from employee stock option exercises










433















433Stock-based compensation










5,863















5,863Common stock repurchases and cancellations


(2,173
)


(2
)


(19,445
)


(5,488
)










(24,935
)Comprehensive income














32,250



812







33,062Balance, at December 31, 2007


21,599


$
22


$
195,472


$
10,700


$
1,237


$



$
207,431    53




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
 CONSOLIDATED
    STATEMENTS OF CASH FLOWS  Years Ended December 31,2007


2006


2005(In thousands)OPERATING ACTIVITIESNet income

$
32,250


$
14,152


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


10,149



7,467



4,414Allowance for doubtful accounts


101



460



102Stock-based compensation expense


5,863



2,794



882Amortization of deferred compensation costs


32



342



342Unrealized gain on derivatives


(18,978
)






Loss on disposal of property and equipment






3



64Deferred income taxes


1,532



(963
)


(12,269
)Tax benefits from employee stock option exercises


(433
)


(747
)


Changes in assets and liabilities:Accounts receivable


(1,179
)


(8,949
)


(2,953
)Prepaid expenses and other assets


459



(2,719
)


(1,575
)Accounts payable and accrued liabilities


(3,311
)


10,962



3,225Deferred rent


777



146



Deferred revenue


669



(421
)


1,606Net cash provided by operating activities


27,931



22,527



16,667INVESTING ACTIVITIESAcquisitions, net of cash acquired






(8,968
)


Collections applied to principal of receivable portfolios










7Purchases of property and equipment


(21,722
)


(17,307
)


(7,327
)Proceeds from sale of property and equipment










120Restricted cash equivalent










422Net proceeds from called short term investments










2,000Purchases of marketable securities


(84,473
)


(57,800
)


(29,600
)Proceeds from sale/maturities of marketable securities


99,770



22,000



3,600Net cash used for investing activities


(6,425
)


(62,075
)


(30,778
)FINANCING ACTIVITIESPayments of capital lease obligation


(59
)


(380
)


Repurchases of common stock


(24,935
)






Proceeds from public offerings






96,600



Public offering costs


(167
)


(5,713
)


Tax benefits from employee stock option exercises


433



747



Proceeds from exercise of stock options


745



1,375



295Net cash (used for) provided by financing activities


(23,983
)


92,629



295Effect of exchange rate changes on cash






39



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


(2,477
)


53,120



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


80,880



27,760



41,583Cash and cash equivalent, end of period

$
78,403


$
80,880


$
27,760CASH PAID FOR:Interest paid

$
4


$
8


$
Taxes paid

$
109


$
813


$
48NON-CASH ACTIVITIES:Unrealized holding gains/(losses) on marketable securities

$
1,034


$
7


$
(146
)Non-cash purchases of property and equipment

$



$
873


$
Non-cash other comprehensive income adjustment for pension
    liabilities

$
(1,435
)

$
556


$
    54




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Note 1.
    Organization    Note 2.
    Summary
    of Significant Accounting Policies  Use of
    Estimates
    Concentrations
    of Risk
          As of and for the Years Ended December 31,2007


2006


2005% of Revenue


% of A/R, Net


% of Revenue


% of A/R, Net


% of Revenue


% of A/R, NetCustomer A


21
%


14
%


17
%


19
%


27
%


21
%Customer B


16



21



16



16



20



26Customer C


13



11



13



9



12



Customer D


9



11



9



8



9



15    55




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Principles
    of Consolidation
    Reclassifications
    Cash,
    Cash Equivalents and Marketable Securities
    Allowance
    for Doubtful Accounts
    Property
    and Equipment
     56




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Impairment
    of Long-lived Assets
      Goodwill
    and Other Intangible Assets
    Revenue
    Recognition
      Cost
    of Revenues
    Earnings
    Per Share
   57




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2007


2006


2005Weighted








Weighted








WeightedAverage








Average








AverageNumber of








Number of








Number ofNet


Common


Per Share


Net


Common


Per Share


Net


Common


Per ShareIncome


Shares


Amount


Income


Shares


Amount


Income


Shares


AmountBasic earnings per share

$
32,250



23,051


$
1.40


$
14,152



19,088


$
0.74


$
22,829



18,165


$
1.26Effect of potential common shares:Options






473











491











752Restricted stock units






81











42











Diluted earnings per share

$
32,250



23,605


$
1.37


$
14,152



19,621


$
0.72


$
22,829



18,917


$
1.21     Years Ended December 31,2007


2006


2005Options


771



43



220Common stock warrants and Restricted Stock Units


100



2



50871



45



270   Income
    Taxes
  Accounting for Income Taxes,
 58




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accumulated
    Other Comprehensive Income
  Reporting Comprehensive Income,
  Foreign





MinimumCurrency


Unrealized


PensionTranslation


Gain (Loss) on


LiabilityAdjustment


Securities


Adjustment


TotalBalance at December 12/31/2004

$
84


$
(4
)

$



$
802005 change


411



(149
)






262Balance at December 12/31/2005


495



(153
)






3422006 change


632



7



(556
)


83Balance at December 12/31/2006


1,127



(146
)


(556
)


4252007 change


412



(1,035
)


1,435



812Balance at December 12/31/2007

$
1,539


$
(1,181
)

$
879


$
1,237   Fair
    Value of Financial Instruments
    Foreign
    Currency Translation
    Foreign Currency Translation
  Foreign
    Exchange Forward Contracts
  Accounting for
    Derivative Instruments and Hedging Activities
 59




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Stock-based
    Compensation Expense
  Share-Based Payment
  Accounting
    for Pension Plans
  Employers Accounting for
    Defined Benefit Pension and Other Postretirement Plans
  Recent
    Accounting Pronouncements
  Business Combinations Accounting for Income Taxes Goodwill and
    Other Intangible Assets
  Non-controlling Interests
    in Consolidated Financial Statements
 60




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidated Financial Statements
  , the Fair Value Option for Financial
    Assets and Financial Liabilities  Including an
    amendment of FASB Statement No. 115
    Note 3.
    Cash,
    Cash Equivalents and Marketable Securities    Short Term


Long TermAmortized


Unrealized


Market


Cash &


Marketable


MarketableCost


Gain (Loss)


Value


Equivalents


Securities


SecuritiesCash and cash equivalents

$
78,403


$



$
78,403


$
78,403


$



$
Government bonds


19,102



31



19,133







18,021



1,112Corporate bonds


3,394



(367
)


3,027











3,027Mortgage backed securities


16,681



(143
)


16,538











16,538Preferred stocks


3,343



(694
)


2,649











2,649Asset backed securities


1,975







1,975







1,975



Total

$
122,898


$
(1,173
)

$
121,725


$
78,403


$
19,996


$
23,326  61




---



##### Table of Contents



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


Government


Backed


Preferred


Asset BackedMaturities

Bonds


Bonds


Securities


Stock


Securities


Total1 year

$



$
18,021


$



$



$
1,975


$
19,9961 to 5 years


794



862



4,293



2,649







8,5985 to 10 years


2,233



250



164











2,64710+ Years










12,081











12,081Total

$
3,027


$
19,133


$
16,538


$
2,649


$
1,975



43,322     Short Term


Long TermAmortized


Unrealized


Market


Cash &


Marketable


MarketableCost


Losses


Value


Equivalents


Securities


SecuritiesCash and Cash Equivalents

$
80,880


$



$
80,880


$



$



$
Government Bonds


33,992



(77
)


33,915







24,942



8,973Corporate Bonds


16,184



(9
)


16,175







14,578



1,597Mortgage Backed Securities


9,615



(52
)


9,563











9,563Total

$
140,671


$
(138
)

$
140,533


$
80,880


$
39,520


$
20,133    62




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 4.
    Property
    and Equipment    2007


2006Land

$
8,810


$
Furniture, fixtures and equipment


3,925



3,540Computer equipment and software


23,316



16,931Telephone equipment


12,517



8,340Leasehold improvements


12,760



10,515Property and equipment, gross


61,328



39,326Less: Accumulated depreciation and amortization


(27,567
)


(17,246
)Property and equipment, net

$
33,761


$
22,080     Note 5.
    Commitments
    and Contingencies  Leases
      OperatingYears Ending December 31,

Lease2008

$
7,4192009


6,0862010


6,3612011


5,4592012


4,572Thereafter


14,891Total

$
44,788    63




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Contractual
    Compensation Obligation
    Litigation
    on-going
  Note 6.
    Stock-
    Based Compensation    2004
    Stock Incentive Plan
   64




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Accounting
    for Stock Based Compensation
    Year EndedDecember 31,2005Net income as reported

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


882Deduct: Total stock-based compensation expense determined under
    fair value based methods for all awards, net related tax effects


(2,250
)Pro forma net income

$
21,461Basic earnings per shareAs reported

$
1.26Pro forma net income

$
1.18Diluted earnings per shareAs reported

$
1.21Pro forma net income

$
1.13    65




---



##### Table of Contents



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


Restricted Stock Units2007


2006


2005


2007


2006


2005Expected volatility


64.2
%


53.0
%


49.0
%Dividend yield










Expected term


4.5



4.5



4.4



2.0



2.0



2.0Risk free interest rate


4.3
%


4.8
%


4.2
%       2007


2006


2005Weighted











Weighted











WeightedAverage











Average











AverageWeighted


Remaining








Weighted


Remaining








Weighted


RemainingAverage


Contractual


Aggregate





Average


Contractual


Aggregate





Average


Contractual


AggregateOptions


Exercise


Term


Intrinsic


Options


Exercise


Term


Intrinsic


Options


Exercise


Term


IntrinsicOutstanding


Price


(Years)


Value


Outstanding


Price


(Years)


Value


Outstanding


Price


(Years)


Value(In thousands)








(In thousands)


(In thousands)








(In thousands)


(In thousands)








(In thousands)Outstanding at beginning of year


1,948


$
9.56



8.2


$
22,383



1,699


$
5.58



8.3


$
5,288



1,252


$
2.57



8.0


$
9,268Granted


567



13.22











787



15.40











962



8.39Issued via RapidText acquisition


















10



1.93











Expired


(31
)


8.49











(13
)


8.74











(19
)


4.02Forfeited


(379
)


13.16











(206
)


7.72











(205
)


6.96Exercised


(252
)


3.37











(329
)


4.37











(291
)


1.01Outstanding at end of year


1,853


$
10.93



8.0


$
7,225



1,948


$
9.56



8.2


$
22,383


$
1,699


$
5.58



8.3


$
5,288Vested or expected to vest


1,651


$
10.61



7.9


$
6,848



1,701


$
9.24



6.3


$
20,103















Exercisable at end of year


802


$
8.36



6.9


$
4,833



584


$
4.38



5.1


$
9,735


$
474


$
2.98



4.0


$
2,687  66




---



##### Table of Contents



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


Weighted





WeightedRemaining


Average





AverageOptions


Contractual


Exercise


Options


ExerciseRange of Exercise Prices

Outstanding


Life (Years)


Price


Exercisable


Price(In thousands)








(In thousands)$ 0.03 - $ 0.19


22



0.5


$
0.03



22


$
0.03$ 0.20 - $ 0.41


141



5.7



0.41



140



0.41$ 0.42 - $ 6.85


101



5.4



6.22



98



6.20$ 6.86 - $ 7.23


287



7.8



7.23



153



7.23$ 7.24 - $ 8.63


146



7.7



8.45



88



8.37$ 8.64 - $11.24


196



7.8



10.28



93



10.20$11.25 - $11.91


487



9.2



11.73



73



11.90$11.92 - $12.17


23



8.4



12.17



23



12.17$12.18 - $18.35


345



8.6



17.79



97



18.35$19.48 - $21.14


106



8.7



20.12



16



20.70Total


1,853



8.0


$
10.93



802


$
8.36   2007


2006(In thousands)Net proceeds from stock options exercised

$
744


$
1,375Tax benefits related to stock options exercised

$
433


$
747Intrinsic value of stock options exercised

$
2,362


$
3,337     2007


2006Weighted











WeightedWeighted


Average








Weighted


AverageRestricted


Average


Remaining





Restricted


Average


RemainingStock


Grant


Contractual


Aggregate


Stock


Grant


Contractual


AggregateUnits


Date Fair


Term


Intrinsic


Units


Date Fair


Term


IntrinsicOutstanding


Value


(Years)


Value


Outstanding


Value


(Years)


ValueOutstanding at beginning of year


178


$
13.90



1.5


$
3,747



54


$
7.69



1.8


$
458Granted


838



11.97











148



15.14Canceled


(41
)


11.78











(7
)


7.49Released


(58
)


13.52











(17
)


7.67Outstanding at end of year


917


$
12.26



2.3


$
12,539



178


$
13.90



1.5


$
3,747    67




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2007


2006Cost of revenues

$
1,354


$
731Selling, general & administrative


4,510



2,062$
5,864


$
2,793     Note 7.
    Pension
    Plan      Normal Retirement. th
  Early Retirement.
  Late Retirement. th
   68




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    At December 31,2007


2006Change in Benefit ObligationBenefit obligation at beginning of year

$
1,236


$
402Effect of foreign currency translation


100



34Service cost


428



46Interest cost


52



258Curtailment


(33
)


(345
)Actuarial (gain) loss


(1,644
)


841Benefit obligation at end of year

$
139


$
1,236Change in Plan AssetsFair value of plan assets at beginning of year

$



$
Employer contribution


587



Actual return on plan assets


36



Fair value of plan assets at end of year

$
623


$
Funded StatusPlan assets less pension plan obligations

$
484


$
(1,236
)Unrecognized net transition obligation


13



23Unrecognized net actuarial (gain) loss


(892
)


533Net amount recognized

$
(395
)

$
(680
)Accumulated benefit obligation

$
77


$
188       For the Years EndedDecember 31,2007


2006Discount rate


7.50
%


7.5
%Expected rate of return on plan assets


7.50
%


n/aExpected rate of compensation increase


7.50
%


7.5
%    69




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      For the Years Ended December 31,2007


2006Service cost

$
428


$
258Interest cost


52



46Expected return on plan assets


(17
)


Amortization of net transition obligation


2



Amortization of net actuarial gain (loss)


(187
)


Net periodic benefit cost

$
278


$
304     PensionPeriod

Benefits2008

$
82009


42010


92011


102012


252013-2017


164      70




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 8.
    Income
    Taxes    Years Ended December 31,2007


2006


2005Current:Federal

$
203


$
615


$
137State


37


$
254


$
67Foreign


1,571







1,811



869



204Deferred:Federal


(118
)


930



(12,050
)State


738



(1,893
)


(219
)Foreign


912







1,532



(963
)


(12,269
)Total provision (benefit)

$
3,343


$
(94
)

$
(12,065
)     Years Ended December 31,2007


2006


2005Federal statutory rate


35.0
%


35.0
%


35.0
%State taxes net of federal benefit


1.4



2.6



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


(30.1
)


(31.6
)


(16.6
)Change in valuation allowance






(10.2
)


(131.7
)Stock options


2.9



3.5



2.9Other


0.2







(0.8
)9.4
%


(0.7
)%


(112.1
)%     Years Ended December 31,2007


2006


2005Domestic

$
(2,157
)

$
1,374


$
5,667Foreign


37,750



12,684



5,097Total

$
35,593


$
14,058


$
10,764  71




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2007


2006Net deferred tax asset:Net operating loss and credit carryforwards

$
26,049


$
20,253Depreciation/amortization


(112
)


(38
)Reserves and allowances


592



775Stock based compensation


1,064



327Federal effect of state tax


(794
)


(1,057
)Unrealized foreign exchange gain


(7,199
)


Other


(439
)


$
19,161


$
20,260            72




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  pre-tax Accounting for Income Taxes  Special Areas
  Accounting
    for Uncertainty in Income Taxes
  Accounting for Uncertainty in Income
    Taxes  an Interpretation of FASB Statement
    No. 109 Accounting for Income Taxes
    and/or
  Note 9.
    Geographic
    and Segment Information  The Company operates as two business
    segments: U.S.-based
    Years Ended December 31,2007


2006


2005RevenueU.S

$
135,092


$
109,560


$
62,124Foreign


5,555



559



Total revenue

$
140,647


$
110,119


$
62,124Depreciation and amortizationU.S

$
2,380


$
1,646


$
1,005Philippines


7,190



5,551



3,409Costa Rica


579



270



Total depreciation and amortization

$
10,149


$
7,467


$
4,414   73




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  December 31,2007


2006Total assetsU.S

$
159,511


$
179,766Philippines


71,998


$
35,545Costa Rica


1,701


$
2,280Total assets

$
233,210


$
217,591Long-lived assets(1)U.S

$
6,528


$
3,704Philippines


25,910



16,554Costa Rica


1,323



1,822Total long-lived assets

$
33,761


$
22,080GoodwillU.S

$
7,629


$
7,629Philippines






Costa Rica






Total goodwill

$
7,629


$
7,629     (1)
    
    Long-lived assets include property and quipment, net and
    intangibles, net.  Note 10.
    Foreign
    Currency Forward Contracts  Accounting for Derivative Instruments and Hedging
    Activities
    Note 11.
    Credit
    Agreements   74




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 12.
    RapidText
    Acquisition      Description

ValueNet current assets

$
1,262Property, plant and equipment


195Noncurrent other assets


250Net current liabilities


(748
)Long term capital leases


(139
)Estimated fair value, net assets acquired


820Goodwill


7,310Other intangible assets


860Total purchase price

$
8,990     Intangible Assets

ValueCustomer list

$
500Non-compete agreements


200Software


60Trademarks/Tradenames


100Total

$
860   Goodwill and Other Intangible
    Assets
   75




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Pro
    Forma Financial Data (unaudited)
    Year EndedDecember 31,2005(In thousands)Pro forma revenue

$
71,814Pro forma net income

$
23,047Pro forma basic income per share

$
1.27Pro forma diluted income per share

$
1.22Pro forma basic weighted average shares outstanding


18,165Pro forma diluted weighted average shares outstanding


18,919   Note 13.
    Related
    Party Transactions    Note 14.
    Stock
    Repurchase Program      Note 15.
    Captive
    Service Agreement    Note 16.
    Stockholder
    Rights plan   76




---



##### Table of Contents



PEOPLESUPPORT,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 17
    Subsequent Events
    Quarterly
    Financial Data (Unaudited)
    20071st Qtr.


2nd Qtr


3rd Qtr.


4th Qtr.Revenues

$
33,597


$
34,328


$
36,932


$
35,790Income from operations


1,082



518



2,411



247Net income(1)


3,863



3,907



6,354



18,126Basic income per share

$
0.16


$
0.17


$
0.27


$
0.83Diluted income per share

$
0.16


$
0.16


$
0.27


$
0.81   20061st Qtr.


2nd Qtr


3rd Qtr.


4th Qtr.Revenues

$
23,047


$
25,947


$
30,117


$
31,008Income from operations


3,353



3,594



3,973



810Net income


2,874



3,808



3,512



3,958Basic income per share

$
0.16


$
0.21


$
0.19


$
0.19Diluted income per share

$
0.15


$
0.20


$
0.18


$
0.18     (1)
    
    The increase in fourth quarter 2007 net income as compared
    to the previous 2007 quarters was primarily due to realized and
    unrealized gain related to foreign exchange forward contracts of
    $18.2 million.   77




---



##### Table of Contents



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

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

March 6, 2008/s/  CAROLINE
    ROOKCaroline
    Rook

Chief Financial Officer
    (Principal Financial and
    Accounting Officer)

March 6, 2008/s/  ADAM
    BERGERAdam
    Berger

Director

March 6, 2008/s/  C.
    LARRY BRADFORDC.
    Larry Bradford

Director

March 6, 2008/s/  MICHAEL
    EDELLMichael
    Edell

Director

March 6, 2008/s/  GEORGE
    ELLISGeorge
    Ellis

Director

March 6, 2008/s/  FRANK
    PERNAFrank
    Perna

Director

March 6, 2008/s/  JOE
    ROSEJoe
    Rose

Director

March 6, 2008  78