UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

or

For the transition period from       to

Commission File Number: 333-115328

PeopleSupport, Inc.

1100 Glendon Ave., Suite 1250 Los Angeles, California 90024
(Address of principal executive offices)

(310) 824-6200
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     18,122,747 shares of common stock were outstanding as of April 29, 2005.

PEOPLESUPPORT, INC.
FORM 10-Q
FOR THE QUARTER ENDED
March 31, 2005

INDEX

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PART I—FINANCIAL INFORMATION

PEOPLESUPPORT, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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PEOPLESUPPORT, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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PEOPLESUPPORT, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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PEOPLESUPPORT, INC. AND SUBSIDIARIES

Note 1. Basis of Presentation

     The accompanying unaudited consolidated financial statements of PeopleSupport, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. The information at March 31, 2005, and for the three months ended March 31, 2004 and 2005, is unaudited. The balance sheet data at December 31, 2004 is derived from the audited consolidated financial statements for the year ended December 31, 2004. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2004 included in the Company’s Annual Report on Form 10-K.

     On August 5, 2004, the Company’s Board of Directors effected a 1 for 2.74 reverse stock split of the Company’s common and preferred stock. The financial statements have been retroactively restated for the effects of the reverse stock split.

     The Company operates in one reportable segment.

Note 2. Recent Accounting Pronouncements

     In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” This statement is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation” and APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Entities will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service, the requisite service period (usually the vesting period), in exchange for the award. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. This statement is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. The Company is currently assessing the impact of this accounting standard on the Company’s results of operations and financial position.

Note 3. Significant Customers

     Revenue and net accounts receivable from significant customers were as follows:

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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Cash, Cash Equivalents and Marketable Securities

     The following table summarizes the fair value of the Company’s cash and available-for-sale securities held in its investment portfolio, recorded as cash, cash equivalents or marketable securities as of December 31, 2004 and March 31, 2005:

     Unrealized gains and losses on investment securities by type as of March 31, 2005 were as follows:

     Contractual maturities of investment securities as of March 31, 2005 were as follows:

Note 5. Comprehensive Income

     The components of comprehensive income are as follows:

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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Realizability of Deferred Tax Assets

     In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Management considers projected future taxable income, customer contract terms and customer concentrations in making this assessment. Management reassesses the realizability of deferred tax assets on a periodic basis. At such times as Management determines that the recoverability of any remaining portion of deferred tax assets is more likely realizable than not, the Company will further release a portion of the deferred tax valuation allowances, record an income tax benefit and subsequently record a provision for income taxes for financial statement purposes based on the amount of taxable net income. Management reassessed the realizability of the net deferred tax assets and determined that no additional adjustment to the deferred tax valuation allowance was appropriate or required as of March 31, 2005.

Note 7. Stock Compensation

     The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” and related interpretations and complies with the disclosure provisions of Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Company’s stock price and the exercise price. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and related interpretations.

     The estimated weighted average fair value of options granted during the three months ended March 31, 2004 and 2005 was $9.23 and $3.28, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes valuation model using the following weighted average assumptions used for grants for the three months ended March 31, 2004 and 2005:

     The Black-Scholes valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. If compensation cost for the Company’s stock option plans were determined based on the fair value at the grant date of awards for the three months ended March 31, 2004 and 2005, consistent with the provisions of SFAS No. 123, the Company’s net income and income per share would have been as indicated below:

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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Deferred compensation expense is amortized ratably using an accelerated method over the vesting period. During the three months ended March 31, 2004 and 2005, non-cash stock-based compensation expense included in the consolidated statement of operations amounted to $441 and $247, respectively, and was recorded in cost of revenues and selling, general and administrative as follows:

Note 8. Computation of Earnings Per Share

     Basic earnings per share excludes dilution and is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock (i.e., warrants to purchase common stock and common stock options using the treasury stock method) were exercised or converted into common stock.

     The following is a summary of the number of shares of securities outstanding during the respective periods that have been excluded from the calculation because the effect on net income per share would have been antidilutive.

     The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations:

Note 9. Stockholders’ Equity

     During the three months ended March 31, 2005, 37 shares of common stock were issued due to the exercise of common stock options resulting in proceeds to the Company of approximately $39.

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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Rescission Offer

     Grants of certain unexercised options under the Company’s 1998 Incentive Stock Plan between January 1, 2003 through April 28, 2004, may not have been exempt from registration or qualification under federal and state securities laws and the Company did not obtain any required registration or qualification. As a result, the Company intends to make a rescission offer to the U.S. holders of these options. In order to comply with California securities law, the Company will offer to repurchase these unexercised options. Before completion of its initial public offering, the Company applied to the California Department of Corporations for approval of the terms of the repurchase offer. Following approval of our repurchase application, we issued shares upon exercise of certain of these options granted between January 1, 2003 through April 28, 2004. Accordingly, we plan to re-apply to the California Department of Corporations for expanded approval to repurchase both options and these shares issued upon exercise of options. We also intend to file a registration statement on Form S-1 to register the offer to repurchase the options and shares. Pursuant to the terms of our previously approved repurchase application, we intend to offer to repurchase the options at 20% of the option exercise price multiplied by the number of shares underlying the option, plus interest at an annual rate of 7% from the grant date. We intend to offer to repurchase shares issued upon exercise of options at the full exercise price paid for the shares, plus interest at an annual rate of 7% from the date of exercise of the underlying options. Under these terms, we would be required to pay approximately $0.1 million, plus statutory interest at an annual rate of 7% if all persons entitled to have their options repurchased elect to do so. Federal securities laws do not expressly provide that a rescission offer will terminate a purchaser’s right to rescind a sale of stock that was not registered as required. If any or all of the offerees reject our offer to repurchase the options, we may continue to be liable under federal and state securities laws. We do not believe that this rescission offer will have a material effect on our results of operations, cash flows or financial positions.

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PEOPLESUPPORT, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws that involve material risks and uncertainties, including without limitation, statements about our expectations regarding our revenues, our clients, our expenses, our anticipated cash needs, our estimates regarding our capital requirements and our needs for additional financing. We generally identify forward-looking statements by using such terms as “may”, “will,” “could,” “should,” “potential,” “continue,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” or similar phrases or the negatives of such terms. We base these statements on our beliefs as well as assumptions we made using information currently available to us. These forward-looking statements are subject to risks, uncertainties and assumptions, including those identified below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors,” as well as other matters not yet known to us or not currently considered material by us. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. These risks, uncertainties and assumptions include, but are not limited to, our dependence on a limited number of clients, negative public reaction to offshore outsourcing and the effect of recently proposed legislation, competitive conditions in the markets we serve, our ability to manage our growth, the risks associated with our operations in the Philippines, and other risks discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors” in this report. These forward-looking statements represent our estimates and assumptions only as of the date of this report and, unless required by law, we undertake no obligation to update or revise these forward-looking statements. You should, however, review the factors and risks we describe in other reports and registration statements that we file from time to time with the Securities and Exchange Commission (the “SEC”).

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

          In this quarterly report, all references to “us,” “our” and “our company” refer to PeopleSupport, Inc. and its subsidiaries.

          The following discussion should be read in conjunction with the unaudited consolidated financial statements and accompanying notes, which appear elsewhere in this Form 10-Q. This discussion contains forward-looking statements based on current expectations 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 in “—Risk Factors” and elsewhere in this report.

Overview

          We provide business process outsourcing, or “BPO”, services from our facilities in the Philippines. We provide customer management services for U.S.-based clients who wish to outsource this function. As of March 31, 2005, we service 27 U.S.-based clients in a variety of industries. Our three largest customer management service clients during the period covered by this report collectively accounted for approximately 62% of our revenues for the three months ended March 31, 2005. Expedia, our largest client, and EarthLink, our second largest client, together accounted for approximately 49% of our revenues for the three months ended March 31, 2005.

          In July 2003, we also began providing accounts receivable management services for past due receivables, which consist of defaulted accounts that our clients have written off their books, and accounts that are in default but have not yet been written off by our clients. We plan to focus our accounts receivable management services primarily on collecting defaulted consumer receivables on a contingent basis that have been written off by the creditor. We also perform early-stage accounts receivable collection services on defaulted consumer accounts that have not been written off by managing collection of accounts receivable of at-risk customers.

          Sources of Revenues

     For the three months ended March 31, 2005, we derived substantially all of our revenues from customer management fees, which include:

•	time-delineated or session based fees, including hourly or per minute charges and charges per interaction, and training fees all of which are separately negotiated on an individual client basis; and

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PEOPLESU