Maybe I'm reading this incorrectly, however try this in Sheet "2" H8
=IF(INDEX('1'!$H$9:$L$100,MATCH($A8,'1'!$E$9:$E$100,0),MATCH(H$7,'1'!$H$8:$L$8,0))<>"","P","O")
Drag across to Column L then down
In any case look at your names to see how to make the dropdown in Sheet "1" E9 Dynamic to avoid blanks in the list.
Apologies for reverting to 2003 for the attached, I'm away from my 2007 M/Cs
[EDIT]
If I am correct then better with
=IF(ISNUMBER(MATCH($A8,'1'!$E$9:$E$100,0)),IF(INDEX('1'!$H$9:$L$100,MATCH($A8,'1'!$E$9:$E$100,0),MATCH(H$7,'1'!$H$8:$L$8,0))<>"","P","O"),"")
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