Innodata
Annual Report 2005

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-K(Mark One)þ Annual report under section 13 or 15(d) of the securities exchange act of 1934For the fiscal year ended December 31, 2005o Transition report under section 13 or 15(d) of the securities exchange act of 1934Commission file number 0-22196INNODATA ISOGEN, INC.(Exact name of registrant as specified in its charter)Delaware13-3475943(State or other jurisdiction of(I.R.S. Employer Identification No.)incorporation or organization) Three University Plaza Hackensack, New Jersey07601(Address of principal executive offices)(Zip Code) (201) 488-1200 (Registrant's telephone number) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.01 par valueIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No þþIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þþIndicate 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 1934during the past twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes þþ No oIndicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to thebest of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. þþ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.Large accelerated filer o Accelerated filer o Non-accelerated filer þþ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þþ State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which thecommon equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recentlycompleted second fiscal quarter $60,000,000State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.24,086,603 shares of common stock, $.01 par value, as of February 28, 2006.DOCUMENTS INCORPORATED BY REFERENCE[SEE INDEX TO EXHIBITS]PART IDisclosures in this Form 10-K contain certain forward-looking statements, including without limitation, statements concerning our operations, economicperformance, and financial condition. These forward-looking statements are made pursuant to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995. The words “estimate,” “believe,” “expect,” and “anticipate” and other similar expressions generally identify forward-looking statements, which speak only as of their dates.These forward-looking statements are based largely on our current expectations, and are subject to a number of risks and uncertainties, including withoutlimitation, continuing revenue concentration in a limited number of clients, continuing reliance on project-based work, worsening of market conditions,changes in external market factors, the ability and willingness of our clients and prospective clients to execute business plans which give rise torequirements for digital content and professional services in knowledge processing, difficulty in integrating and deriving synergies from acquisitions,potential undiscovered liabilities of companies that we acquire, changes in our business or growth strategy, the emergence of new or growing competitors,various other competitive and technological factors, and other risks and uncertainties set forth under “Risk Factors.”Our actual results could differ materially from the results referred to in the forward-looking statements. In light of these risks and uncertainties, there can beno assurance that the results referred to in the forward-looking statements contained in this release will occur.We undertake no obligation to update or review any guidance or other forward-looking information, whether as a result of new information, futuredevelopments or otherwise. Item 1. Description of Business.GeneralWe provide business services that help organizations create, manage, use and distribute information more effectively and economically.Our services encompass outsourced content services and information technology (IT) professional services, which constitute separate reportingsegments. Our outsourced content offerings consist of fabrication services for digitization, imaging, data conversion and composition, XML and other mark-ups, translation and localization; and knowledge services for adding value to a client's content. Our IT professional offerings focus on the design,implementation, integration and deployment of systems used to author, manage and distribute content.Outsourced content services represented 87%, 81% and 82% of total revenue in each of the three years ended December 31, 2005, respectively. Outsourced content services for business processes that we anticipate a client will require for an indefinite period generate what we regard as recurringrevenues. Approximately 58% and 47% of our revenues were recurring in the years ended December 31, 2005 and 2004, respectively. A substantial majorityof our IT professional services is provided on a project basis that generates non-recurring revenues.In 2005, we provided our services to approximately 100 clients primarily in four content-intensive sectors. ·Publishing, media and information services, including EBSCO and Reed Elsevier; ·Global 2000 enterprises, including Hamilton Sundstrand and Lockheed Martin; ·Educational and cultural institutions, including Cornell University ·Government agencies I-1 We work directly with existing and prospective clients to identify and refine their objectives, and to design, implement, integrate and deploy newand improved solutions to satisfy those objectives. We believe we provide high quality, value-added services to our clients on a timely basis and havedeveloped a close relationship with them as a result. To enhance those relationships, we provide project support 24 hours a day, seven days a week, throughour Asia-based customer service center, and we maintain sales, service and strategic support in North America and Europe in proximity to the operations ofmost of our clients.One client accounted for 27%, 23% and 33% of our total revenues for each of the three years ended December 31, 2005, respectively. One otherclient accounted for 12% and 31% of our revenues for the years ended December 31, 2005 and 2004, respectively. No other client accounted for 10% or moreof our total revenues during these periods. Revenues from clients located in foreign countries (principally in Europe) accounted for 35%, 30% and 47% ofour total revenues for each of the three years ended December 31, 2005, respectively.A substantial portion of the services we provide to our clients is subject to our clients' needs. Our agreements with clients are in most casesterminable on 30 to 90 days' notice and are typically subject to client requirements.We are headquartered in Hackensack, New Jersey, just outside New York City. We have two additional solutions centers in North America, sevenproduction facilities in Asia (the Philippines, India and Sri Lanka) and a technology and tools development center in India. We were incorporated inDelaware in 1988.Innodata Isogen's ServicesOutsourced Content Services. We group our outsourced content services into two categories: fabrication services and knowledge services.Fabrication Services. Our fabrication services include digitization, imaging, data conversion and composition services, XML and mark-up services,as well as translation and localization services. We use leading-edge technologies to capture our clients' relevant content and convert it into XML and otherrelated mark-up standards. These technologies include high-speed scanning; a variety of commercial and proprietary optical/intelligent characterrecognition, or OCR/ICR, applications; structured workflow processes; and proprietary applications and tools designed to create meaningful, accurate andconsistent data.To convert the captured content to XML, tags are inserted within the content to provide a marker that computers can process. Our proprietarytechnology includes production-grade, auto-tagging applications that utilize pattern recognition algorithms based on comprehensive rule sets and relatedheuristics. This technology enables the mass creation or conversion of XML content from complex, unstructured data or content.We price our digitization, content conversion and composition services based on the quantity delivered or resources utilized.As an example, we built, for a secondary publisher, a searchable online archive that contains the back runs of three historical newspaperpublications. The archive shows each newspaper page as a high-resolution image that can be magnified over 200% of its normal size. Each issue is digitallyreproduced from cover to cover, including news stories and editorials, graphics and advertisements that bring history to life. Using the latest technology, weimaged the backfile and saved each page as a high-resolution, bitonal TIFF image. We captured the text of every headline, byline and story on every pageusing OCR, tagged the key information in XML and saved the text and image files for storage in an XML repository.Knowledge Services. Our knowledge services add value to a client's content. These services include content creation and enhancement, taxonomyand controlled vocabulary development, hyperlinking, indexing, abstracting, copyediting and general editorial services, including the provision of synopsesand annotations. We also provide editorial and research services that cover a wide spectrum of expertise, including medicine, law, engineering, management,finance, science and the humanities. To provide these services, we have organized knowledge teams that consist of a number of educated and highly trainedpeople with expertise in the relevant subject. We typically price our knowledge services based on the quantity delivered or resources utilized.I-2 As an example, a major publisher of scientific, technical and medical information sought to build one of the world's largest databases of scientificjournal citations and references. We created records of nearly 15,000 journal titles going back almost 13 years, encoded in a way that supported integratedweb searches and seamless linking. Under a long-term engagement, we maintain the database with daily updates, managing on behalf of our client aproduction process in which we aggregate, digitize, convert and enhance data.IT Professional Services. Clients that use our IT professional services typically require publishing, performance support or process automationsystems that enable multiple authors to collaborate on content and enable multiple products to be generated from single-source XML repositories. Projectsvary in size and duration. Our IT professional services are typically provided on a project basis that involves a defined task that, upon completion, does notgenerate any significant amount of continuing revenues. We frequently work on-site at clients to develop specifications and define requirements and tointeract with end-users of the application. Detailed design, implementation and testing are generally performed at our offices in Dallas and Austin, Texas, aswell as offshore at our office in Gurgaon, India.Our IT professional services focus on the design, implementation, integration and deployment of systems used to author, manage and distributecontent. We group these services into four categories: consulting; systems integration; custom application development; and other IT professional services,including applications maintenance, support, evaluation, implementation and training.Consulting. We offer consulting services that focus on evaluating, advising, creating, overseeing or reviewing processes and/or technology designsthat are necessary for a client to improve its management, use or distribution of information. We assist our clients by first understanding their businessobjectives and then analyzing and recommending the appropriate hardware and software specifications, as well as the process and engineering changes thatwill fulfill these objectives. Our consultants have a broad mix of functional and industry expertise. Our highly skilled process analysts, workflow architectsand project managers enable clients to outsource to us their entire content operations, and thereby enhance the client's ability to manage, use and distributethe content.As an example, a major defense contractor was awarded a multi-billion dollar military contract to build a new war plane. The military required thatthe technical documentation be delivered in electronic format and be useable by field technicians using handheld PDAs, as well as by pilots in the cockpit.The defense contractor hired us to recommend an XML-based publishing approach. Over several months, our team made several recommendations andredesigned the client's core business processes and systems architecture to achieve its objectives, including the ability to support high-volume, link-intensivedata. We were then engaged by the client to develop the system. The completed system provided an end-to-end workflow that included link management,support for complex graphics, customized backend databases to support fast search and retrieval and customized user interfaces.Systems Integration. Our systems integration services include the integration of disparate authoring tools, content and knowledge managementsystems and composition tools into an overall IT infrastructure, and also include the development of software that enhances the compatibility among variouscomponents of the overall IT infrastructure. We also undertake the management of programs and vendors during this process. Many of our systemsintegration projects involve organizations that are migrating to XML and other standards-based publishing systems or are seeking to integrate disparate datasources into a common environment. Our IT projects often include content analysis and the development of information architectures.For example, one of the world's most successful IT equipment manufacturers was faced with the challenge of producing increasingly complextechnical documentation faster, in more languages and across multiple platforms, as well as in print. This was necessary because of shortening product lifecycles and the desire to market products in remote global markets. Over a 12-month period, our team of information architects and developers providedstrategy and process consulting, product evaluation and information engineering services. We addressed complex content authoring, translation andlocalization and document rendition requirements. The result was a completely re-engineered standards-based product documentation system that enabledour client to easily revise and re-use content and translate that content into 35 languages seamlessly. We improved our client's time-to-market bysignificantly reducing the turnaround time for documentation and revisions, and substantially reduced overall product documentation costs. Our team of twodomestic project managers and five offshore developers continue to provide the client ongoing systems enhancement and maintenance under a long-termengagement.I-3 Custom Application Development. Our custom application development services help our clients create new applications and enhance thefunctionalities of our clients' existing software applications. We design systems, develop software and run pilots.Our application development services span the entire range of client server and Internet technologies. Our IT professional services staff is expert inXML and related information standards, as well as in emerging computing platforms. Our programmers are skilled in a range of programming languages andin a diverse set of application program interfaces, applications servers and database technologies.As an example, a client in the information services industry needed to build an enterprise-scale publishing platform for a new online informationservice using the latest knowledge processing technologies. Our team of onshore and offshore technologists designed and built the platform over a period ofseveral months, including authoring and classification workflow systems, backend database and user interface. Our content services department aggregated,digitized and enhanced multiple gigabytes of data for the successful product pilot. Our single program manager coordinated the efforts of our IT professionalservices team, our outsourced content services team and other vendors on-site at the client’s location.Other IT Professional Services. We assist our clients in the evaluation and implementation of software packages developed by third party vendors.We specialize in enterprise content management systems developed by several vendors, including: Documentum, Content@, XHive Corporation and VasontSystems; and document authoring systems developed by vendors including Arbortext and Blast Radius; publishing tools developed by vendors includingTopLeaf, Antenna House and FrameMaker; as well as various content analysis and extraction tools.We provide support for our clients’ content-related applications, ensuring that systems remain operational and responsive to changing userrequirements. In doing so, we are often able to enhance processes and improve service levels. Through our domestic, on-site and offshore delivery model, weprovide a range of support services to our clients.Sales and MarketingWe have four executive-level business development professionals and eight full-time sales personnel and are targeting to increase our full-timesalesperson headcount by the end of 2006. Historically, our sales efforts depended heavily on senior management. We are transitioning to a more structureddirect sales model in which we implement additional sales infrastructure, add dedicated sales support personnel and hire additional sales persons. In thismodel, our executive-level business development professionals will continue to manage key client relationships through targeted interaction with our clients'senior management, while sales professionals will be responsible for identifying prospective clients and executing day-to-day sales strategies.Our sales organization is responsible for qualifying and otherwise pursuing prospects, securing direct personal access to decision makers at existingand prospective clients and obtaining orders for our services and solutions. Our sales professionals work directly with clients to identify their requirementsand with our engineering teams to define the solutions that best fit our clients' specific needs.I-4 Sales activities include the design and generation of presentations and proposals, account and client relationship management and the organizationof account activities.Consulting personnel from our project analysis group and our engineering services group closely support our direct sales effort. These individualsassist the sales force in understanding the technical needs of clients and providing responses to these needs, including demonstrations, prototypes, pricingquotations and time estimates. In addition, account managers from our customer service group support our direct sales effort by providing ongoing project-level, post-sale support to our clients.We constantly seek to expand the nature and scope of our engagements with existing clients by increasing the volume of our business andextending the breadth and value of services offered.Our marketing organization is responsible for developing and increasing the visibility and awareness of our brand and our service offerings;defining and communicating our value proposition; and generating qualified, early-stage leads and furnishing effective sales support tools.Over the past 12 months, we have created a partner program pursuant to which we have formed collaborative relationships with selected leadingsoftware vendors and service providers in many of our key markets. We believe that our partner program is an important way for our sales force to generatemore and better-quality leads. Furthermore, the partner program helps us gain technical insights that allow us to better evaluate the effectiveness of thevarious tools that we recommend to our clients.Primary marketing outreach activities include event marketing (including exhibiting at trade shows, conferences and seminars); direct and databasemarketing; public and media relations (including speaking engagements and active participation in industry and technical standard bodies); and webmarketing (including search engine optimization, search engine marketing and the maintenance and continued development of external web sites).Research and DevelopmentIn 2005 we spent approximately $770,000 on research and development. We did not spend any significant amounts for research and development in2004 and 2003.CompetitionThe market for outsourced content services is highly competitive, fragmented and intense. Several of our major competitors are SPI Technologies,Apex CoVantage, Techbooks and Jouve. However, we are not aware of any single competitor that provides the same comprehensive range of outsourcedcontent services as we do. We believe that we also compete successfully by offering high quality services and favorable pricing by leveraging our technicalskills, IT infrastructure, process knowledge, offshore model and economies of scale. Our competitive advantages are especially attractive to clients forundertakings that are technically sophisticated, sizable in scope or scale, or that require a highly fail-safe environment with technology redundancy. We alsobelieve that the timeliness with which we provide our services enables our clients to reduce the time it takes for them to release their products to the market,thereby providing a competitive advantage to the client.A number of large and mid-sized technology and business consulting practices compete with our IT professional services by offering content-relatedintegration and consulting services as part of their broad and generalized offerings. Major companies such as IBM, EDS, Bearing Point, Accenture, BoozAllen and others compete for entire content supply chain dollars, and Thomas Technology Solutions and RivCom are also engaged in this business.However, there are few firms that focus exclusively on our niche, and most of these firms have less capacity and a narrower strategic focus on the contentsupply chain.I-5 As a provider of outsourced content services and IT professional services, we also compete at times with in-house personnel at existing orprospective clients who may attempt to duplicate our services in-house.Some of our competitors have longer operating histories, significantly greater financial, human, technical and other resources and greater namerecognition than we do, and we cannot assure you that we will continue to compete effectively with them.There are relatively few barriers preventing companies from competing with us. We do not own any patented technology that would preclude orinhibit others from entering our market.EmployeesAs of December 31, 2005, we employed 87 persons in the United States and Europe and approximately 6,000 persons in five production facilities inthe Philippines, one production facility in Sri Lanka, one production facility in India and a technology and tools development center in India. Most of ouremployees have graduated from at least a two-year college program. Many of our employees hold advanced degrees in law, business, technology, medicineand social sciences. No employees are currently represented by a labor union, and we believe that our relations with our employees are satisfactory.Item 1A. Risk Factors.We have historically relied on a very limited number of clients that have accounted for a significant portion of our revenues and our results ofoperations could be adversely affected if we lose one or more of these significant clients.We have historically relied on a very limited number of clients that have accounted for a significant portion of our revenues. One client accountedfor 27%, 23% and 33% of our total revenues for the years ended December 31, 2005, 2004 and 2003, respectively. One other client accounted for 12% and31% of our revenues for the years ended December 31, 2005 and 2004, respectively. We may lose any of these or our other major clients as a result of ourfailure to meet or satisfy our clients’ requirements, the completion or termination of a project or engagement, or the selection of another service provider.In addition, the revenues we generate from our major clients may decline or grow at a slower rate in future periods than in the past. If we lose any ofour significant clients, our revenues and results of operations could be adversely affected and we may incur a loss from operations. Our services are typicallysubject to client requirements, and in most cases are terminable upon 30 to 90 days’ notice.A significant portion of our services is provided on a non-recurring basis for specific projects, and our inability to replace large projects when they arecompleted has adversely affected, and could in the future adversely affect, our revenues and results of operations.We provide a portion of our services for specific projects that generate revenues that terminate on completion of a defined task and we regard theserevenues as non-recurring. Non-recurring revenues derived from these project-based arrangements accounted for approximately 42% of our total revenues forthe year ended December 31, 2005 and approximately 53% of our total revenues for the year ended December 31, 2004. While we seek wherever possible tocounterbalance periodic declines in revenues on completion of large projects with new arrangements to provide services to the same client or others, we werenot able in 2005 to avoid declines in revenues when large projects were completed. Our inability to obtain sufficient new projects to counterbalance anydecreases in such work adversely affected our revenues and results of operations in 2005 and may adversely affect our future revenues and results ofoperations.A large portion of our accounts receivable is payable by a limited number of clients; the inability of any of these clients to pay its accounts receivablewould adversely affect our results of operations.I-6 Several significant clients account for a large percentage of our accounts receivable. As of December 31, 2005, 37%, or $2.7 million, of our accountsreceivable was due from one client. If any of these clients were unable, or refuse, for any reason, to pay our accounts receivable, our results of operationswould be adversely affected.Quarterly fluctuations in our results of operations could make financial forecasting difficult and could negatively affect our stock price.We have experienced, and expect to continue to experience, significant fluctuations in our quarterly revenues and results of operations. During thepast eight quarters, our net income ranged from a loss of approximately $900,000 to a profit of approximately $3.1 million.Our quarterly operating results are also subject to certain seasonal fluctuations. Our fourth and first quarters include the months of December andJanuary, when billable services activity by professional staff, as well as engagement decisions by clients, may be reduced due to client budget planningcycles. Demand for our services generally may be lower in the fourth quarter due to reduced activity during the holiday season and fewer working days forour Philippines-based staff during this period. These and other seasonal factors may contribute to fluctuations in our results of operations from quarter toquarter.We compete in highly competitive markets that have low barriers to entry.The markets for our services are highly competitive and fragmented. We may not be able to compete successfully against our competitors in thefuture. Some of our competitors have longer operating histories, significantly greater financial, human, technical and other resources and greater namerecognition than we do. If we fail to be competitive with these companies in the future, we may lose market share, which could adversely affect our revenuesand results of operations.There are relatively few barriers preventing companies from competing with us. We do not own any patented technology that would preclude orinhibit others from entering our market. As a result, new market entrants also pose a threat to our business. We also compete with in-house personnel atcurrent and prospective clients, who may attempt to duplicate our services using in-house personnel. We cannot assure you that our clients will outsourcemore of their needs to us in the future, or that they will not choose to provide internally the services that they currently obtain from us. If we are not able tocompete effectively, our revenues and results of operations could be adversely affected.We are the subject of continuing litigation, including litigation by certain of our former employees.We are subject to various legal proceedings and claims which arise in the ordinary course of business. In addition, in connection with the cessationof all operations at certain of our foreign subsidiaries, certain former employees have filed various actions against one of our Philippine subsidiaries and havepurported also to sue us and certain of our officers and directors. An unfavorable ruling in any of these proceedings could adversely affect our financialcondition and results of operations. See “Legal Proceedings."Our international operations subject us to risks inherent in doing business on an international level, any of which could increase our costs and hinderour growth.The major part of our operations is carried on in the Philippines, India and Sri Lanka, while our headquarters are in the United States and our clientsare primarily located in North America and Europe. While we do not depend on revenues from sources internal to the countries in which we operate, we arenevertheless subject to certain adverse economic factors relating to overseas economies generally, including inflation, external debt, a negative balance oftrade and underemployment. Other risks associated with our international business activities include: I-7 •difficulties in staffing international projects and managing international operations, including overcoming logistical and communications challenges;•local competition, particularly in the Philippines, India and Sri Lanka;•imposition of public sector controls;•trade and tariff restrictions;•price or exchange controls;•currency control regulations;•foreign tax consequences;•labor disputes and related litigation and liability;•limitations on repatriation of earnings; and•the burdens of complying with a wide variety of foreign laws and regulations.One or more of these factors could adversely affect our business and results of operations.Our international operations subject us to currency exchange fluctuations, which could adversely affect our results of operations.To date, most of our revenues have been denominated in U.S. dollars, while a significant portion of our expenses, primarily labor expenses in thePhilippines, India and Sri Lanka, is incurred in the local currencies of countries in which we operate. For financial reporting purposes, we translate all non-United States denominated transactions into dollars in accordance with accounting principles generally accepted in the United States. As a result, we areexposed to the risk that fluctuations in the value of these currencies relative to the dollar could increase the dollar cost of our operations and thereforeadversely affect our results of operations.The Philippines has historically experienced high rates of inflation and major fluctuations in the exchange rate between the Philippine peso and theU.S. dollar. Continuing inflation without a corresponding devaluation of the peso against the dollar, or any other increase in the value of the peso relative tothe dollar, could adversely affect our results of operations. Since 1997, we have not purchased foreign currency futures contracts for pesos, but we may chooseto do so in the future.New regulation of the Internal Revenue Service may impose significant U.S. income taxes on our subsidiaries in the Philippines.Our subsidiaries incorporated in the Philippines were domesticated in Delaware as limited liability companies. In August 2004, the Internal RevenueService promulgated regulations, effective August 12, 2004, that treat certain companies incorporated in foreign jurisdictions and also domesticated asDelaware limited liability companies as U.S. corporations for U.S. federal income tax purposes. We have effected certain filings with the Secretary of State ofthe State of Delaware to ensure that these subsidiaries are no longer domesticated in Delaware. As a result, commencing January 1, 2005, these subsidiariesare not treated as U.S. corporations for U.S. federal income tax purposes under the regulations and are not subject to U.S. federal income taxes commencing asof such date.I-8 In the preamble to such regulations, the IRS expressed its view that dual registered companies described in the preceding sentence are also treated asU.S. corporations for U.S. federal income tax purposes for periods prior to August 12, 2004. On January 30, 2006, the IRS issued its final regulations, statingthat neither the temporary regulations nor these final regulations are retroactive. The earliest date that any entity is subject to these regulations is August 12,2004. For periods prior to the date these final regulations apply (i.e., prior to August 12, 2004), the classification of dually chartered entities is governed bythe pre-existing regulations. We believe that our historic treatment of these subsidiaries as not having been required to pay taxes in the United States for theperiod prior to August 12, 2004 is correct, and would vigorously defend its treatment if challenged. As such, we have made no provision for U.S. taxes in itsfinancial statements for these entities for the periods prior to August 12, 2004.Furthermore, we cannot assure you that the Internal Revenue Service will not assert other positions with respect to the foregoing matters, includingpositions with respect to our treatment of the tax consequences of the termination of the status of our Philippines subsidiaries as Delaware limited liabilitycompanies, that, if successful, could increase materially our liability for U.S. federal income taxes.If certain tax authorities in North America and Europe challenge the manner in which we allocate our profits, our net income will decrease.We benefit from tax incentives in certain jurisdictions where tax incentives have been extended to encourage foreign investment or where incometax rates are low. Our taxes could increase if these tax incentives are not renewed upon expiration, or if tax rates applicable to us are increased. Substantiallyall of the services provided by our Asian subsidiaries are performed on behalf of clients based in North America and Europe. We believe that profits from ourAsian operations are not sufficiently connected to jurisdictions in North America or Europe to give rise to income taxation in those jurisdictions, other thanU.S. taxes that may arise as the result of the former status of our Philippine subsidiaries as Delaware limited liability companies as described in the precedingrisk factor. Tax authorities in jurisdictions in North America and Europe could, however, challenge the manner in which we allocate our profits among oursubsidiaries, and we may not prevail in this type of challenge. If our Asian profits became subject to income taxes in these other jurisdictions, our worldwideeffective tax rate could increase, thereby decreasing our net income.An expiration or termination of our current tax holidays could adversely affect our results of operations.We currently benefit from income tax holiday incentives in the Philippines, India and Sri Lanka which provide that we pay reduced income taxes inthose jurisdictions for a fixed period of time that varies depending on the jurisdiction. An expiration or termination of our current tax holidays couldsubstantially increase our worldwide effective tax rate, thereby decreasing our net income and adversely affecting our results of operations.Regional instability in the Philippines, India and Sri Lanka could adversely affect business conditions in those regions, which could disrupt ouroperations and adversely affect our business and results of operations.We conduct a majority of our operations in the Philippines, India and Sri Lanka. These operations remain vulnerable to political unrest. Politicalinstability could adversely affect the legal environment for our business activities in those regions.In particular, the Philippines has experienced ongoing problems with insurgents. The Abu Sayyaf group of kidnappers, which is purported to haveties to the Al Qaeda terrorist organization, is concentrated on Basilan Island. While Basilan Island is not near our facilities and the government of thePhilippines has taken action to eradicate this group, we cannot assure you that these efforts will be successful or that the Abu Sayyaf group will not attempt todisrupt activities or commit terrorist acts in other areas of the Philippines or South Asia.In recent years there have been military confrontations between India and Pakistan that have occurred in the region of Kashmir and along the India-Pakistan border. In addition, in recent years there has been civil unrest in Sri Lanka.I-9 Further political tensions and an escalation in these hostilities could adversely affect our Philippines, Indian and Sri Lankan based operations andtherefore adversely affect our revenues and results of operations.Terrorist attacks or a war could adversely affect our results of operations.Terrorist attacks, such as the attacks of September 11, 2001 in the United States, and other acts of violence or war, such as the conflict in Iraq, couldaffect us or our clients by disrupting normal business practices for extended periods of time and reducing business confidence. In addition, these attacks maymake travel more difficult and may effectively curtail our ability to serve our clients' needs, any of which could adversely affect our results of operations.It is unlikely that we will pay dividends.We have not paid any cash dividends since our inception and do not anticipate paying any cash dividends in the foreseeable future. We expect thatour earnings, if any, will be used to finance our growth.Item 2. Description of Property.Our services are primarily performed from our Hackensack, New Jersey headquarters, our Dallas and Austin, Texas offices, and seven overseasfacilities, all of which are leased. In addition, we have a technology and tools development facility in Gurgaon, India, which is also leased. The squarefootage of all our leased properties is approximately 405,000. Rental payments on property leases were approximately $2.0 million in 2005.Item 3. Legal Proceedings.The Innodata Employees Association (IDEA), Jomarie Deles and other complainants have sued one of our Philippines subsidiaries, and havepurported also to sue us and certain of our officers and directors, in Innodata Philippines Employees Association (IDEA) v Innodata Philippines, Inc. (filedJuly 27, 2001 at the National Conciliation and Mediation Board of the Philippine Department of Labor and Employment in Manila); Innodata EmployeesAssociation (IDEA), Jomarie Deles, et al v. Innodata Philippines, Inc. (filed July 1, 2002 in the National Labor Relations Commission of the Republic of thePhilippines in Manila); and in related cases and proceedings filed in the Philippines Supreme Court, the Philippine Court of Appeals and the PhilippinesDepartment of Labor and Employment. Complainants seek to require reinstatement of employment and to recover back wages for an allegedly illegal facilityclosing on June 7, 2002 based on the terms of a collective bargaining agreement with this subsidiary. If complainants' claims had merit they could be entitledto back wages of up to $5.0 million for the period from June 7, 2002 to June 6, 2005, consistent with prevailing jurisprudence. After consultation withcounsel, we believe that the complainants' claims are without merit and we intend to defend against them vigorously.In addition, we are subject to various legal proceedings and claims which arise in the ordinary course of business. While we currently believe thatthe ultimate outcome of these proceedings will not have a material adverse affect on our financial condition or results of operations, litigation is subject toinherent uncertainties. Were an unfavorable ruling to occur, it could have a material adverse effect on our financial condition and results of operations.Item 4. Submission of Matters to a Vote of Security Holders-None.I-10 PART IIItem 5. Market for Common Equity and Related Stockholder Matters.Innodata Isogen, Inc. (the “Company”) Common Stock is quoted on the Nasdaq National Market System under the symbol “INOD.” On February 28,2006, there were 114 stockholders of record of the Company’s Common Stock based on information provided by the Company's transfer agent. Virtually allof the Company’s publicly held shares are held in “street name” and the Company believes the actual number of beneficial holders of its Common Stock tobe approximately 4,800.The following table sets forth the high and low sales prices on a quarterly basis for the Company's Common Stock, as reported on Nasdaq, for the twoyears ended December 31, 2005. Common Stock Sale Prices 2004 High Low First Quarter $4.95 $3.09 Second Quarter 4.20 2.80 Third Quarter 4.60 3.15 Fourth Quarter 9.99 3.28 2005 High Low First Quarter $10.07 $2.98 Second Quarter 3.96 2.30 Third Quarter 3.73 2.25 Fourth Quarter 3.63 2.25 DividendsThe Company has never paid cash dividends on its Common Stock and does not anticipate that it will do so in the foreseeable future. The futurepayment of dividends, if any, on the Common Stock is within the discretion of the Board of Directors and will depend on the Company's earnings, its capitalrequirements and financial condition and other relevant factors.II-1 Securities Authorized for Issuance Under Equity Compensation PlansThe following table sets forth the aggregate information for the Company's equity compensation plans in effect as of December 31, 2005: Number of Securities to be Issued Weighted-Average Number of Securities Upon Exercise of Exercise Price of Remaining Available For Outstanding Options, Outstanding Options, Future Issuance Under Plan Category Warrants and Rights Warrants and Rights Equity Compensation Plans (a) (b) (c) Equity compensation plans approved by security holders 5,555,000 $3.07 873,000 Equity compensation plans not approved by security holders 1,015,000(1)$0.84 - Total 6,570,000 $2.72 873,000 (1)Consists of stock options to purchase 1,015,164 shares of common stock granted to the Company's current Chairman pursuant to an agreemententered into at time of hire. II-2Item 6. Selected Financial Data (In thousands, except per share amounts). Year Ended December 31, 2005 2004 2003 2002 2001 (In thousands, except per share data) STATEMENT OF OPERATIONS DATA: REVENUES $42,052 $53,949 $36,714 $36,385 $58,278 OPERATING COSTS AND EXPENSES: Direct operating expenses 30,920 33,050 27,029 32,005 44,354 Selling and administrative 13,684 10,205 8,898 10,038 8,337 Terminated offering costs - 625 - - - Provision for doubtful accounts - - - - 2,942 Bad debt recovery, net - (963) - - - Restructuring costs and asset impairment - - - 244 865 Interest expense 18 25 9 29 9 Interest income (457) (87) (30) (89) (216) Total 44,165 42,855 35,906 42,227 56,291 (LOSS) INCOME BEFORE (BENEFIT FROM) PROVISION FORINCOME TAXES (2,113) 11,094 808 (5,842) 1,987 (BENEFIT FROM) PROVISION FOR INCOME TAXES (462) 3,237 333 (677) 639 NET (LOSS) INCOME $(1,651)$7,857 $475 $(5,165)$1,348 (LOSS) INCOME PER SHARE: Basic $(.07)$.35 $.02 $(.24)$.06 Diluted $(.07)$.32 $.02 $(.24)$.05 Cash dividends per share - - - - - December 31, 2005 2004 2003 2002 2001 (In thousands) BALANCE SHEET DATA: WORKING CAPITAL $21,432 $22,209 $11,983 $8,570 $8,854 TOTAL ASSETS $37,611 $37,211 $25,146 $22,697 $30,094 LONG TERM OBLIGATIONS $548 $150 $272 - - STOCKHOLDERS’ EQUITY $26,814 $26,737 $17,404 $15,569 $20,362 II-3 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.RevenuesWe derive the majority of our revenues from outsourced content services. These services consist of fabrication and knowledge services. Outsourcedcontent services that are provided for a specific project generate revenues that terminate on completion of a defined task and we regard these revenues as non-recurring. We also provide outsourced content services for business processes that we anticipate will continue for an indefinite period and therefore generatewhat we regard as recurring revenues. We price our outsourced content services based on the quantity delivered or resources utilized. Revenues foroutsourced content services are recognized in the period in which the services are performed and delivered.We also derive a portion of our revenues from IT professional services. A substantial majority of our IT professional services is provided on a projectbasis that generates non-recurring revenues. These services consist of consulting, systems integration, custom application development and otherprofessional services. We price our professional services on an hourly basis for actual time and expense incurred, or on a fixed-fee turn-key basis. Revenuesfor contracts billed on a time and materials basis are recognized as services are performed. Revenues under fixed-fee contracts are recognized on thepercentage of completion method of accounting as services are performed or milestones are achieved.Recurring revenues consisted of 58% and 47% of total revenues for the years ended December 31, 2005 and 2004, respectively. The substantialmajority of our recurring revenues are derived from outsourced content services. A small portion of our recurring revenues is derived from the applicationmaintenance agreements related to our IT professional services. Non-recurring revenues vary depending on the size and completion dates of specific projects.We have historically relied on a very limited number of clients that have accounted for a significant portion of our revenues. One client accountedfor 27%, 23% and 33% of our total revenues for the years ended December 31, 2005, 2004 and 2003, respectively. One other client accounted for 12% and31% of our revenues for the years ended December 31, 2005 and 2004, respectively. We may lose any of these or our other major clients as a result of ourfailure to meet or satisfy our clients’ requirements, the completion or termination of a project or engagement, or the selection of another service provider.In addition, the revenues we generate from our major clients may decline or grow at a slower rate in future periods than in the past. If we lose any ofour significant clients, our revenues and results of operations could be adversely affected and we may incur a loss from operations. Our services are typicallysubject to client requirements, and in most cases are terminable upon 30 to 90 days’ notice.See “Risk Factors.”Direct Operating CostsDirect operating costs for both our outsourced content services and IT professional services consist of direct payroll, occupancy costs, depreciation,telecommunications, computer services and supplies. We anticipate our cost of labor to increase in 2006 by approximately $500,000 per quarter as a result ofgeneral wage increases.Selling and Administrative ExpensesSelling and administrative expenses for both our outsourced content services and IT professional services consist of management and administrativesalaries, sales and marketing costs, new services research and related software development, and administrative overhead. We anticipate selling andadministrative expenses to increase in absolute terms as we continue to grow our business, and as we increase our spending on new services research andrelated software development. Commencing October 1, 2003, we unified our selling and related activities for our outsourced content services and ITprofessional services segments. As such, selling and corporate administrative costs are not segregated by, nor are they allocated to, operating segments forperiods commencing January 1, 2004.II-4 Results of OperationsYear Ended December 31, 2005 Compared to the Year Ended December 31, 2004RevenuesRevenues were $42.1 million for the year ended December 31, 2005 compared to $53.9 million for the similar period in 2004.One client accounted for 27% and 23% of our total revenues for the years ended December 31, 2005 and 2004, respectively. A second clientaccounted for 12% and 31% of our revenues for the years ended December 31, 2005 and 2004, respectively. No other client accounted for 10% or more of ourtotal revenues for these periods. Further, for the years ended December 31, 2005 and 2004, revenues from clients located in foreign countries (principally inEurope) accounted for 35% and 30% of our total revenues, respectively.Revenues from outsourced content services decreased 16% to $36.7 million for the year ended December 31, 2005 from $43.7 million for the similarperiod in 2004. This decrease primarily reflects an $8 million decline in revenues from a major outsourced content services project that was terminated late inthe first quarter of 2005. We did not obtain sufficient new projects to counterbalance the decline in revenues from the termination of this project.Revenues from IT professional services decreased 47% to $5.4 million for the year ended December 31, 2005 from $10.2 million for the similarperiod in 2004. The results in the 2004 period reflect approximately $4.4 million of revenues from two projects that were completed in 2004.For the year ended December 31, 2005, approximately 58% of our revenue was recurring and the 42% balance was non-recurring, compared with47% and 53%, respectively, for the year ended December 31, 2004.Direct Operating CostsDirect operating costs were $30.9 million and $33.1 million for the years ended December 31, 2005 and 2004, respectively, a decrease of 7%. Directoperating costs as a percentage of revenues were 73% for the year ended December 31, 2005 and 61% for the year ended December 31, 2004.Direct operating costs for outsourced content services were $26.6 million and $27.5 million for the years ended December 31, 2005 and 2004,respectively, a decrease of 3%. Direct operating costs of outsourced content services as a percentage of revenues from outsourced content services were 72%and 63% for the years ended December 31, 2005 and 2004, respectively. Fixed costs increased approximately 2%, principally resulting from growth in ourengineering technology department. The overall increase in fixed costs was in part offset by a reduction in depreciation and amortization costs ofapproximately $800,000. The increase in direct operating costs of outsourced content services as a percentage of revenues from outsourced content servicesprincipally results from a 2% percentage point increase in variable costs of production as a percent of revenues, and from decreased revenues in 2005 withouta corresponding decrease to fixed costs.Direct operating costs for IT professional services were $4.3 million and $5.6 million for the years ended December 31, 2005 and 2004 respectively.Direct operating costs of IT professional services as a percentage of revenues from IT professional services were 80% and 55% for the years endedDecember 31, 2005 and 2004, respectively. The dollar decrease in direct operating costs of IT professional services for the 2005 period was due to a reductionin labor costs. The increase in direct operating costs of IT professional services as a percentage of revenues from IT professional services was primarilyattributable to decreased revenues without a corresponding decrease in these costs.II-5 Selling and Administrative ExpensesSelling and administrative expenses were $13.7 million and $10.2 million for the years ended December 31, 2005 and 2004, respectively, anincrease of 34%. Selling and administrative expenses as a percentage of revenues were 33% and 19% for the years ended December 31, 2005 and 2004respectively. Selling and marketing expenses increased by approximately $1.8 million, partly as a result of increased costs from our continued efforts toenhance our business development infrastructure. In addition, in 2005 we spent approximately $0.8 million in new services research and related softwaredevelopment. The balance of the increase from 2004 principally reflects general increases in administrative costs.Net Loss/IncomeWe recorded a net loss of $1.7 million in 2005 compared with net income of $7.9 million in 2004. The principal reasons for the decrease in 2005were the decline in revenues and the increase in selling and administrative expenses.OtherOn January 5, 2005, we announced our intent to raise funds and filed a registration statement on Form S-3 to register 4,250,000 shares of ourcommon stock, plus 3,250,000 shares of common stock currently held by certain of our directors and officers. On March 23, 2005, we terminated the offeringand as such, in the fourth quarter 2004, expensed approximately $625,000 of offering costs.In January 2004, we reached a settlement agreement with and received $1.0 million in cash from a former client in full satisfaction of a $2.6 millionoutstanding balance that we had fully written off as a bad debt in 2001. The $1.0 million receipt, net of $37,000 in recovery costs, is reflected as bad debtrecovery for the year ended December 31, 2004.For the year ended December 31, 2005, the benefit from income taxes as a percentage of loss before income taxes was 22%. The 2005 benefit fromincome taxes is lower than the U.S. Federal statutory rate, principally due to a portion of the U.S. net operating losses which were not recognized, offset inpart by certain overseas income which is neither subject to foreign income taxes because of tax holidays granted to us, nor subject to tax in the U.S. unlessrepatriated.For the year ended December 31, 2004, the provision for income taxes as a percentage of income was 29%. The 2004 provision is lower than the U.S.Federal statutory rate, principally due to certain overseas income which is neither subject to foreign income taxes because of tax holidays granted to us, norsubject to tax in the U.S. unless repatriated.In August 2004, the IRS promulgated regulations, effective August 12, 2004, that had the effect of making certain of our overseas entities taxable inthe United States for U.S. federal income tax purposes. As a result, in the fourth quarter 2004, we provided approximately $450,000 for U.S. income taxesattributable to these applicable overseas entities. In addition, in December 2004, we effected certain filings in Delaware to ensure that these subsidiaries willnot be treated as U.S. corporations for U.S. federal income tax purposes as of the date of filing and as such, will not be subject to U.S. federal income taxescommencing January 1, 2005.II-6 Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003RevenuesRevenues were $53.9 million for the year ended December 31, 2004 compared to $36.7 million for the similar period in 2003.One client accounted for 23% and 33% of our total revenues for the years ended December 31, 2004 and 2003, respectively. A second clientaccounted for 31% of our revenues for the year ended December 31, 2004. No other client accounted for 10% or more of our total revenues for these periods.Further, for the years ended December 31, 2004 and 2003, revenues from clients located in foreign countries (principally in Europe) accounted for 30% and47% of our total revenues, respectively.Revenues from outsourced content services increased 46% to $43.7 million for the year ended December 31, 2004 from $30.0 million for the similarperiod in 2003. The increase was primarily due to increased revenues from several new projects. Of the $43.7 million of revenues for the year endedDecember, 31, 2004, approximately $13.8 million, or 31%, resulted from new projects, substantially all of which were for existing clients.Revenues from IT professional services increased 52% to $10.2 million for the year ended December 31, 2004 from $6.7 million for the similarperiod in 2003. This increase was primarily due to increased revenues from new projects. Approximately $9.5 million, or 93%, of revenues from ITprofessional services for the year ended December 31, 2004 resulted from new projects, a majority of which were for existing clients.For the year ended December 31, 2004, approximately 53% of our revenue was non-recurring and the 47% balance was recurring, compared with47% and 53%, respectively, for the year ended December 31, 2003.Direct Operating CostsDirect operating costs were $33.1 million and $27.0 million for the years ended December 31, 2004 and 2003, respectively, an increase of 23%.Direct operating costs as a percentage of revenues were 61% for the year ended December 31, 2004 and 74% for the year ended December 31, 2003.Direct operating costs for outsourced content services were $27.5 million and $23.0 million for the years ended December 31, 2004 and 2003,respectively, an increase of 19%. Direct operating costs of outsourced content services as a percentage of revenues from outsourced content services were63% and 77% for the years ended December 31, 2004 and 2003, respectively. The dollar increase for the content services segment in the 2004 period wasprincipally due to increases in both labor and non-labor costs as a result of increased revenues. The decrease in direct operating costs of outsourced contentservices as a percentage of revenues from outsourced content services for the 2004 period was principally due to lower labor costs as a percentage of revenuesresulting from improved process efficiencies and aggressive project cost management, as well as a 46% increase in revenues compared to a 12% increase infixed non-labor costs.Direct operating costs for IT professional services were $5.6 million and $4.0 million for the years ended December 31, 2004 and 2003 respectively.Direct operating costs of IT professional services as a percentage of revenues from IT professional services were 54% and 59% for the years endedDecember 31, 2004 and 2003, respectively. The dollar increase in direct operating costs of IT professional services for the 2004 period was principally due toincreases in personnel and related costs. The decrease in direct operating costs of IT professional services as a percentage of revenues from IT professionalservices for the 2004 period was primarily attributable to increased resource utilization resulting in a 4% decrease in non-labor costs as a percentage ofrevenues from IT professional services, and a one percent decrease in direct labor costs as a percentage of revenues. II-7 Selling and Administrative ExpensesSelling and administrative expenses were $10.2 million and $8.9 million for the years ended December 31, 2004 and 2003, respectively, an increaseof 15%. Selling and administrative expenses as a percentage of revenues were 19% and 24% for the years ended December 31, 2004 and 2003, respectively.Selling and administrative expenses for the year ended December 31, 2003 include a non-cash compensation charge of approximately $650,000. Excludingthis charge, selling and administrative expenses for the year ended December 31, 2004 would have increased by approximately $2.0 million, or 24%, fromthe similar period in 2003. Approximately $1.7 million of the increase in selling and administrative expenses relates to increases in selling and marketingcosts, primarily attributable to the hiring of additional business development, management and sales support personnel, as well as to increased marketingprograms and activities.Net IncomeWe recorded net income of $7.9 million in 2004 compared with net income of approximately $500,000 in 2003. The principal reason for theincrease in 2004 is the increase in revenues and the resulting gross margin.OtherOn January 5, 2005, we announced our intent to raise funds and filed a registration statement on Form S-3 to register 4,250,000 shares of ourcommon stock, plus 3,250,000 shares of common stock currently held by certain of our directors and officers. On March 23, 2005, we terminated the offeringand as such, in the fourth quarter 2004, expensed approximately $625,000 of offering costs.In January 2004, we reached a settlement agreement with and received $1.0 million in cash from a former client in full satisfaction of a $2.6 millionoutstanding balance that we had fully written off as a bad debt in 2001. The $1.0 million receipt, net of $37,000 in recovery costs, is reflected as bad debtrecovery for the year ended December 31, 2004.For the year ended December 31, 2004, the provision for income taxes as a percentage of income was 29%. The 2004 provision is lower than the U.S.Federal statutory rate, principally due to certain overseas income which is neither subject to foreign income taxes because of tax holidays granted to us, norsubject to tax in the U.S. unless repatriated.In August 2004, the IRS promulgated regulations, effective August 12, 2004, that had the effect of making certain of our overseas entities taxable inthe United States for U.S. federal income tax purposes. As a result, in the fourth quarter 2004, we provided approximately $450,000 for U.S. income taxesattributable to these applicable overseas entities. In addition, in December 2004, we effected certain filings in Delaware to ensure that these subsidiaries willnot be treated as U.S. corporations for U.S. federal income tax purposes as of the date of filing and as such, will not be subject to U.S. federal income taxescommencing January 1, 2005.The provision for income taxes for the year ended December 31, 2003 is higher as a percentage of pre-tax income than the federal statutory rate dueprimarily to foreign and state income taxes, and to certain foreign source losses for which no tax benefit is available, partially offset by the effect of income intax jurisdictions currently under tax holiday.II-8Liquidity and Capital ResourcesSelected measures of liquidity and capital resources, expressed in thousands are as follows: December 31,2005 December 31,2004 Cash and Cash Equivalents $20,059 $20,663 Working Capital 21,432 22,209 Net Cash Provided By Operating ActivitiesNet cash provided by operating activities was $1.1 million for the year ended December 31, 2005 compared to $15.7 million provided by operatingactivities for the year ended December 31, 2004, a decrease of approximately $14.5 million. The $14.5 million decrease in net cash provided by operatingactivities is principally due to a $9.5 million decrease in net income, a $1.3 million decrease in non-cash charges and a $3.7 million reduction as a result ofchanges in operating assets and liabilities.Accounts receivable totaled $7.2 million at December 31, 2005, representing approximately 55 days of sales outstanding, compared to $8.0 million,or 57 days, at December 31, 2004.A significant amount of the Company's revenues are derived from clients in the publishing industry. Accordingly, the Company's accountsreceivable generally include significant amounts due from such clients. In addition, as of December 31, 2005, approximately 36% of the Company's accountsreceivable was from foreign (principally European) clients and 37% of accounts receivable was due from one client. As of December 31, 2004, approximately27% of the Company's accounts receivable was from foreign (principally European) clients and 69% of accounts receivable was due from two clients.Net Cash Used in Investing ActivitiesFor the year ended December 31, 2005, we spent cash approximating $2.3 million for capital expenditures, compared to approximately $2,051,000for the year ended December 31, 2004. Furthermore, during the year ended December 31, 2005, we financed the purchase of software licenses totalingapproximately $488,000. Capital spending in 2005 and 2004 related principally to normal ongoing equipment upgrades, project requirement specificequipment, and improvements in infrastructure. During the next twelve months, we anticipate that capital expenditures for ongoing technology, hardware,equipment and infrastructure upgrades will approximate $3 million. Furthermore, in the next twelve months, we anticipate spendingapproximately $1.8 million on construction and infrastructure related costs in connection with the relocation of three of our Asian facilities, our Dallas officeand for the renovation of our U.S. headquarters. Such anticipated expenditures are in addition to potential capital expenditures for new service offerings. Inconnection with the relocation of our Dallas office, the lessor agreed to pay approximately $250,000 as incentive for us to terminate the lease prior to itscontractual expiration date. In connection with this transaction, we will recognize income of approximately $250,000 in the first quarter of 2006.Net Cash Provided by Financing ActivitiesProceeds from the exercise of stock options provided cash approximating $1,297,000 and $1,082,000 in 2005 and 2004, respectively. In addition,payments of long-term obligations approximated $702,000 and $88,000 in 2005 and 2004, respectively.During the year ended December 31, 2005, we entered into an agreement with a vendor to acquire certain additional software licenses and to receivesupport and subsequent software upgrades on this and other currently owned software licenses through February 2008 for a total cost of approximately$1.6 million. This total obligation and associated cost totaling approximately $1.6 million is a non-cash investing and financing activity. Of the $1.6million, approximately $528,000 was paid during the year ended December 31, 2005 and $528,000 will be paid as a financing activity in the next 12months.II-9 Availability of FundsWe have a $5.0 million line of credit pursuant to which we may borrow up to 80% of eligible accounts receivable at the bank’s alternate base rateplus ½% or LIBOR plus 3%. The line, which expires in May, 2006, is secured by our accounts receivable. The Company has not borrowed against its creditline in 2005.We believe that existing cash and internally generated funds will be sufficient for our reasonably anticipated working capital and capitalexpenditure requirements during the next 12 months. We fund our foreign expenditures from our U.S. corporate headquarters on an as-needed basis.Contractual ObligationsThe table below reflects our contractual cash obligations, expressed in thousands, at December 31, 2005. Payments Due by PeriodContractual Obligations Total Less than1 year 1-3 years 4-5 years After5 years Capital lease obligations $155 $135 $20 $- $- Non-cancelable operating leases 2,387 679 1,558 150 - Long-term vendor obligations 1,056 528 528 - - Total contractual cash obligations $3,598 $1,342 $2,106 $150 $- Inflation, Seasonality and Prevailing Economic ConditionsTo date, inflation has not had a significant impact on our operations. We generally perform work for our clients under project-specific contracts,requirements-based contracts or long-term contracts. Contracts are typically subject to numerous termination provisions.Our quarterly operating results are subject to certain seasonal fluctuations. Our fourth and first quarters include the months of December and January,when billable services activity by professional staff, as well as engagement decisions by clients, may be reduced due to client budget planning cycles.Demand for our services generally may be lower in the fourth quarter due to reduced activity during the holiday season and fewer working days for ourPhilippines-based staff during this period. These and other seasonal factors may contribute to fluctuations in our operating results from quarter to quarter.Critical Accounting Policies and EstimatesBasis of Presentation and Use of EstimatesManagement’s discussion and analysis of its results of operations and financial condition is based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statementsrequires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to accounts receivable. Management bases itsestimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form thebasis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ fromthese estimates under different assumptions or conditions.II-10 Allowance for Doubtful AccountsWe establish credit terms for new clients based upon management’s review of their credit information and project terms, and perform ongoing creditevaluations of our customers, adjusting credit terms when management believes appropriate based upon payment history and an assessment of their currentcredit worthiness. We record an allowance for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments. Wedetermine this allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history,our estimate of the client’s current ability to pay its obligation to us, and the condition of the general economy and the industry as a whole. While creditlosses have generally been within expectations and the provisions established, we cannot guarantee that credit loss rates in the future will be consistent withthose experienced in the past. In addition, we have credit exposure if the financial condition of one of our major clients were to deteriorate. In the event thatthe financial condition of our clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may benecessary.Revenue RecognitionWe recognize revenue for content manufacturing and outsourcing services in the period in which we perform services and deliver in accordance withStaff Accounting Bulletin 104.We recognize IT professional services revenue from custom application and systems integration development which requires significant production,modification or customization of software in accordance with Statement of Position (“SOP”) No. 97-2 “Software Revenue Recognition” and in a mannersimilar to SOP No. 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”. We recognize revenue for suchservices billed under fixed fee arrangements using the percentage-of-completion method under contract accounting as we perform services or reach outputmilestones. We measure the percentage completed either by the percentage of labor hours incurred to date in relation to estimated total labor hours or inconsideration of achievement of certain output milestones, depending on the specific nature of each contract. For arrangements in which percentage-ofcompletion accounting is used, we record cash receipts from customers and billed amounts due from customers in excess of recognized revenue as billings inexcess of revenues earned on contracts in progress (which is included in accounts receivable). Revenues from fixed-fee projects accounted for less than 10%of our total revenue for each of the three years ended December 31, 2005, respectively. We receive revenue billed on a time and materials basis as we performthe services.Property and EquipmentProperty and equipment is stated at cost and is depreciated on the straight-line method over the estimated useful lives of the related assets, which isgenerally two to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the lives of theleases.Long-lived AssetsWe account for long lived assets under Statement of Financial Accounting Standards (“SFAS”) 144, Accounting for the Impairment or Disposal ofLong Lived Assets. We assess the recoverability of our long-lived assets, which consist primarily of fixed assets and intangible assets with finite useful lives,whenever events or changes in circumstance indicate that the carrying value may not be recoverable. The following factors, if present, may trigger animpairment review: (i) significant underperformance relative to expected historical or projected future operating results; (ii) significant negativeindustry or economic trends; (iii) significant decline in our stock price for a sustained period; and (iv) a change in our market capitalization relative tonet book value. If the recoverability of these assets is unlikely because of the existence of one or more of the above-mentioned factors, we perform an impairment analysis using a projected discounted cash flow method. We must make assumptions regarding estimated future cash flows and other factors todetermine the fair value of these respective assets. If these estimates or related assumptions change in the future, we may be required to record an impairmentcharge. Impairment charges would be included in general and administrative expenses in our statements of operations, and would result in reducedcarrying amounts of the related assets on our balance sheets. We did not identify or record an impairment in any of our long lived assets in the three yearsended December 31, 2005.II-11 Income TaxesWe determine our deferred taxes based on the difference between the financial statement and tax bases of assets and liabilities, using enacted taxrates, as well as any net operating loss or tax credit carryforwards expected to reduce taxes payable in future years. We provide a valuation allowance when itis more likely than not that some or all of a deferred tax asset will not be realized. Unremitted earnings of foreign subsidiaries have been included in theconsolidated financial statements without giving effect to the United States taxes that may be payable on distribution to the United States to the extent suchearnings are not anticipated to be remitted to the United States.Goodwill and Other Intangible AssetsSFAS 142 requires that we test goodwill for impairment using a two-step fair value based test. The first step of the goodwill impairment test, used toidentify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of thereporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of the impairment loss, if any.If impairment is determined, we will recognize additional charges to operating expenses in the period in which they are identified, which would result in areduction of operating results and a reduction in the amount of goodwill. Our most recent test for impairment was conducted as of September 30, 2005 inwhich the estimated fair values of the reporting unit exceeded its carrying amount, including goodwill. As such, no impairment was identified or recorded.Accounting for Stock-Based CompensationWe account for our stock options issued to employees and outside directors pursuant to Accounting Principles Board Opinion (“APB”) No. 25,“Accounting for Stock Issued to Employees” and has adopted the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”,and SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123”. Although at timeswe have recognized compensation expense upon the modification of stock options, in the three years ended December 31, 2005, we have not recognizedcompensation expense upon the issuance of stock options.Development Costs of SoftwareWe expense as research and development costs for the development of new software to be sold, leased, or otherwise marketed as a separate product oras part of a product or process, and substantial enhancements to such existing software products, until technological feasibility has been established, at whichtime any additional development costs are capitalized until the product is available for general release to customers. We expense all other research anddevelopment costs as incurred.We did not capitalize any software development costs during the three years ended December 31, 2005. Included in the selling and administrativeexpense are research and development costs totaling approximately $770,000 for the year ended December 31, 2005.II-12 Significant New Accounting Pronouncements Not Yet AdoptedIn December 2004, the FASB issued SFAS No. 123 (R), ‘‘Share-Based Payment,’’ which is a revision of SFAS No. 123 and supersedes AccountingPrinciples Board (“APB”) Opinion No. 25. SFAS No. 123 (R) requires all share-based payments to employees, including grants of employee stock options, tobe valued at fair value on the date of grant, and to be expensed over the applicable vesting period. Pro forma disclosure of the income statement effects ofshare-based payments is no longer an alternative. SFAS No. 123 (R) is effective as of the beginning of the next fiscal year that begins after June 15, 2005. Forthe Company, SFAS 123 (R) is effective as of January 1, 2006. In addition, companies must also recognize compensation expense related to any awards thatare not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previouslycalculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. We expect that the adoption of SFAS No. 123 (R) willresult in increased compensation expense for stock options granted through December 31, 2005 of approximately $200,000 in 2006.In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces APB Opinion No. 20,“Accounting Changes” (“APB 20”) and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements” (“SFAS 3”). APB 20required that changes in accounting principles be recognized by including the cumulative effect of the change in the period in which the new accountingprinciple was adopted. SFAS 154 requires retrospective application of the change to prior periods’ financial statements, unless it is impracticable todetermine the period-specific effects of the change. SFAS 154 also provides that a change in method of depreciating or amortizing a long-lived non-financialasset be accounted for as a change in estimate effected by a change in accounting principle, and also provides that correction of errors in previously issuedfinancial statements should be termed a “restatement.” SFAS 154 is effective as of the beginning of the next fiscal year that begins after December 15, 2005.For the Company, SFAS 154 is effective as of January 1, 2006. We do not believe the adoption of this statement will have an impact on our consolidatedfinancial statements.Item 7A. Quantitative and Qualitative Disclosures About Market Risk.We are exposed to interest rate change market risk with respect to our credit line with a financial institution which is priced based on the bank’salternate base rate (7.25% at December 31, 2005) plus ½% or LIBOR (4.4375% at December 31, 2005) plus 3%. We have not borrowed under this line in2005. To the extent we utilize all or a portion of this line of credit, changes in the interest rate will have a positive or negative effect on our interest expense.We have operations in foreign countries. While we are exposed to foreign currency fluctuations, we presently have no financial instruments inforeign currency and do not maintain significant funds in foreign currency beyond those necessary for operations.II-13 Item 8. Financial Statements.INNODATA ISOGEN, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS PAGE Report of Independent Registered Public Accounting FirmII-15 Consolidated Balance Sheets as of December 31, 2005 and 2004II-16 Consolidated Statements of Operations for the three years ended December 31, 2005II-17 Consolidated Statement of Stockholders’ Equity for the three years ended December 31, 2005II-18 Consolidated Statements of Cash Flows for the three years ended December 31, 2005II-19 Notes to Consolidated Financial StatementsII-20 II-14 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and Stockholders ofInnodata Isogen, Inc.We have audited the accompanying consolidated balance sheets of Innodata Isogen, Inc. and subsidiaries as of December 31, 2005 and 2004, andthe related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005.These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statementsbased on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. TheCompany is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included considerationof internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of InnodataIsogen, Inc. and subsidiaries as of December 31, 2005 and 2004, and the consolidated results of their operations and their consolidated cash flows for each ofthe three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule II – Valuation andQualifying Accounts is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has beensubjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects inrelation to the basic financial statements taken as a whole. Grant Thornton LLP Edison, New JerseyMarch 17, 2006 (except for Note 13 as to whichis dated March 28, 2006) II-15 INNODATA ISOGEN, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSDECEMBER 31, 2005 AND 2004(Dollars in Thousands) 2005 2004 ASSETS CURRENT ASSETS: Cash and cash equivalents $20,059 $20,663 Accounts receivable-net of allowance for doubtful accounts of $111 and $135 at December 31, 2005 and2004 respectively 7,169 8,019 Prepaid expenses and other current assets 1,543 1,757 Refundable income taxes 1,215 - Deferred income taxes 338 645 Total current assets 30,324 31,084 PROPERTY AND EQUIPMENT-NET 4,823 4,559 OTHER ASSETS 1,789 893 GOODWILL 675 675 TOTAL $37,611 $37,211 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $1,529 $1,449 Accrued expenses 1,770 1,963 Accrued salaries, wages and related benefits 3,567 3,979 Income and other taxes 1,363 1,304 Current portion of long term obligations 663 180 Total current liabilities 8,892 8,875 DEFERRED INCOME TAXES 1,357 1,449 LONG TERM OBLIGATIONS 548 150 COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS’ EQUITY: Serial preferred stock; 5,000,000 shares authorized, none outstanding - - Common stock, $.01 par value; 75,000,000 shares authorized; 23,669,000 and 22,679,000 shares issued andoutstanding as of December 31, 2005 and 2004, respectively 237 227 Additional paid-in capital 16,632 14,914 Retained earnings 9,945 11,596 Total stockholders’ equity 26,814 26,737 TOTAL $37,611 $37,211 See notes to consolidated financial statements II-16INNODATA ISOGEN, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSYEARS ENDED DECEMBER 31, 2005, 2004 AND 2003(In thousands, except per share amounts) 2005 2004 2003 REVENUES $42,052 $53,949 $36,714 OPERATING COSTS AND EXPENSES Direct operating costs 30,920 33,050 27,029 Selling and administrative expenses 13,684 10,205 8,898 Terminated offering costs - 625 - Bad debt recovery - net - (963) - Interest expense 18 25 9 Interest income (457) (87) (30)Total 44,165 42,855 35,906 (LOSS) INCOME BEFORE (BENEFIT FROM) PROVISION FOR INCOME TAXES (2,113) 11,094 808 (BENEFIT FROM) PROVISION FOR INCOME TAXES (462) 3,237 333 NET (LOSS) INCOME $(1,651)$7,857 $475 INCOME PER SHARE: Basic: $(.07)$.35 $.02 Diluted: $(.07)$.32 $.02 WEIGHTED AVERAGE SHARES OUTSTANDING: Basic: 23,009 22,288 21,570 Diluted: 23,009 24,817 22,966 See notes to consolidated financial statements II-17 INNODATA ISOGEN, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITYYEARS ENDED DECEMBER 31, 2005, 2004 AND 2003(In thousands) Additional Common Stock Paid-in Retained Treasury Shares Amount Capital Earnings Stock Total January 1, 2003 22,046 $220 $14,084 $3,264 $(1,999)$15,569 Net income - - - 475 - 475 Issuance of common stock upon exercise ofstock options 515 6 565 - - 571 Retirement of treasury stock ( 26) - (25) - 25 - Income tax benefit from exercise of stockoptions - - 132 - - 132 Non-cash equity compensation - - 657 - - 657 December 31, 2003 22,535 226 15,413 3,739 (1,974) 17,404 Net income - - - 7,857 - 7,857 Issuance of common stock upon exercise ofstock options 728 7 1,075 - - 1,082 Retirement of treasury stock (584) (6) (1,968) - 1,974 - Income tax benefit from exercise of stockoptions - - 358 - - 358 Non-cash equity compensation - - 36 - - 36 December 31, 2004 22,679 227 14,914 11,596 -0- 26,737 Net loss - - - (1,651) - (1,651)Issuance of common stock upon exercise ofstock options 990 10 1,287 - - 1,297 Income tax benefit from exercise of stockoptions - - 334 - - 334 Non-cash equity compensation - - 97 - - 97 December 31, 2005 23,669 $237 $16,632 $9,945 $-0- $26,814 See notes to consolidated financial statements II-18 INNODATA ISOGEN INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 31, 2005, 2004 AND 2003(In thousands) 2005 2004 2003 OPERATING ACTIVITIES: Net (loss) income $(1,651)$7,857 $475 Adjustments to reconcile net income (loss) to net cash provided by operatingactivities: Depreciation and amortization 3,160 3,924 4,528 Non-cash compensation 97 36 657 Loss on disposal of fixed assets - - 147 Deferred income taxes 215 815 (2)Changes in operating assets and liabilities, net of acquisition: Accounts receivable 850 478 (5,244)Prepaid expenses and other current assets 167 (1,495) (947)Refundable income taxes (1,215) 1,075 416 Other assets (355) (160) 242 Accounts payable 80 150 652 Accrued expenses (193) 811 (856)Accrued salaries and wages (412) 1,114 339 Income and other taxes 393 1,064 275 Net cash provided by operating activities 1,136 15,669 682 INVESTING ACTIVITIES: Decrease (increase) in restricted cash - 1,000 (1,000)Capital expenditures (2,335) (2,051) (2,408)Net cash used in investing activities (2,335) (1,051) (3,408) FINANCING ACTIVITIES: Payment of long-term obligations (702) (88) (49)Proceeds from exercise of stock options 1,297 1,082 571 Net cash provided by financing activities 595 994 522 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (604) 15,612 (2,204) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 20,663 5,051 7,255 CASH AND CASH EQUIVALENTS, END OF YEAR $20,059 $20,663 $5,051 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Income taxes $504 $1,237 $417 Interest expense $18 $25 $23 NON-CASH INVESTING AND FINANCING ACTIVITIES: Acquisition of equipment utilizing capital leases $- $66 $467 Vendor financed software licenses acquired $1,583 $- $- See notes to consolidated financial statements II-19 INNODATA ISOGEN, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSYEARS ENDED DECEMBER 31, 2005, 2004 AND 20031.DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESDescription of Business-Innodata Isogen, Inc. and subsidiaries (the “Company”), is a leading provider of business services that help organizationscreate, manage, use and distribute information more effectively and economically. The Company provides outsourced content services and content-relatedinformation technology (IT) professional services. The Company’s outsourced content services focus on fabrication services and knowledge services.Fabrication services include digitization and data conversion services, content creation and XML services. Knowledge services include contentenhancement, hyperlinking, indexing and general editorial services. The Company’s IT professional services focus on the design, implementation,integration and deployment of systems used to author, manage and distribute content.Principles of Consolidation-The consolidated financial statements include the accounts of Innodata Isogen, Inc. and its subsidiaries, all of which arewholly owned. All significant intercompany transactions and balances have been eliminated in consolidation.Use of Estimates-In preparing financial statements in conformity with accounting principles generally accepted in the United States of America,management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assetsand liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results coulddiffer from those estimates.Revenue Recognition-Revenue for content manufacturing and outsourcing services is recognized in the period in which services are performed anddelivery has occurred in accordance with Staff Accounting Bulletin 104.The Company recognizes its IT professional services revenues from custom application and systems integration development which requiressignificant production, modification or customization of software in accordance with Statement of Position (“SOP”) No. 97-2 “Software RevenueRecognition” and in a manner similar to SOP No. 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”.Revenue from such services billed under fixed fee arrangements is recognized using the percentage-of-completion method under contract accounting asservices are performed or output milestones are reached. The percentage completed is measured either by the percentage of labor hours incurred to date inrelation to estimated total labor hours or in consideration of achievement of certain output milestones, depending on the specific nature of each contract. Forarrangements in which percentage-of completion accounting is used, the Company records cash receipts from customers and billed amounts due fromcustomers in excess of recognized revenue as billings in excess of revenues earned on contracts in progress (which is included in accounts receivable).Revenues from fixed-fee projects accounted for less than 10% of our total revenue for each of the three years ended December 31, 2005, 2004 and 2003.Revenue billed on a time and materials basis is recognized as services are performed.Foreign Currency-The functional currency for the Company’s production operations located in the Philippines, India and Sri Lanka is U.S. dollars.As such, transactions denominated in Philippine pesos, Indian and Sri Lanka rupees were translated to U.S. dollars at rates which approximate those in effecton transaction dates. Monetary assets and liabilities denominated in foreign currencies at December 31, 2005 and 2004 were translated at the exchange ratein effect as of those dates. Exchange gains and losses resulting from such transactions were not material in 2005, 2004 and 2003.Cash Equivalents-For financial statement purposes (including cash flows), the Company considers all highly liquid debt instruments purchasedwith an original maturity of three months or less to be cash equivalents.II-20Property and Equipment-Property and equipment is stated at cost and is depreciated on the straight-line method over the estimated useful lives ofthe related assets, which is generally two to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimateduseful lives or the lives of the leases.Long-lived Assets-The Company accounts for long lived assets under Statement of Financial Accounting Standards (“SFAS”) 144, Accounting forthe Impairment or Disposal of Long Lived Assets. Management assesses the recoverability of its long-lived assets, which consist primarily of fixed assets andintangible assets with finite useful lives, whenever events or changes in circumstance indicate that the carrying value may not be recoverable. The followingfactors, if present, may trigger an impairment review: (i) significant underperformance relative to expected historical or projected future operating results; (ii) significant negative industry or economic trends; (iii) significant decline in the Company’s stock price for a sustained period; and (iv) a change in the Company’s market capitalization relative to net book value. If the recoverability of these assets is unlikely because of the existence of one ormore of the above-mentioned factors, an impairment analysis is performed using a projected discounted cash flow method. Management must makeassumptions regarding estimated future cash flows and other factors to determine the fair value of these respective assets. If these estimates or relatedassumptions change in the future, the Company may be required to record an impairment charge. Impairment charges would be included in general and administrative expenses in the Company’s statements of operations, and would result in reduced carrying amounts of the related assets on the Company’s balance sheets. No impairment was identified or recorded in the three years ended December 31, 2005.Goodwill and Other Intangible Assets-Goodwill primarily includes the excess purchase price paid over the fair value of net assets acquired.Effective July 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Under SFAS 142, the Company tests its goodwill on anannual basis using a two-step fair value based test. The first step of the goodwill impairment test, used to identify potential impairment, compares the fairvalue of a reporting unit, with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step ofthe goodwill impairment test must be performed to measure the amount of the impairment loss, if any. If impairment is determined, the Company willrecognize additional charges to operating expenses in the period in which they are identified, which would result in a reduction of operating results and areduction in the amount of goodwill. In the annual impairment test conducted by the Company on September 30, 2005, the estimated fair values of thereporting unit exceeded its carrying amount, including goodwill. As such, no impairment was identified or recorded.Income Taxes-Deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities, usingenacted tax rates, as well as any net operating loss or tax credit carryforwards expected to reduce taxes payable in future years. A valuation allowance isprovided when it is more likely than not that some or all of a deferred tax asset will not be realized. Unremitted earnings of foreign subsidiaries for the threeyears ended December 31, 2005, have been included in the consolidated financial statements without giving effect to the United States taxes that may bepayable on distribution to the United States to the extent such earnings are not anticipated to be remitted to the United States.Accounting for Stock-Based Compensation-The Company accounts for its stock options issued to employees and outside directors pursuant toAccounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and has adopted the disclosure requirements of SFASNo. 123, “Accounting for Stock-Based Compensation”, and SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - anAmendment of FASB Statement No. 123”. Although at times compensation expense has been recognized upon the modification of stock options, in the threeyears ended December 31, 2005, no compensation expense has been recognized upon the issuance of stock options.The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognitionprovisions of SFAS No. 123 to stock-based employee compensation using the assumptions described in note 8, stock options. II-21 Year Ended December 31, 2005 2004 2003 (in thousands, except per share amounts) Net (loss) income, as reported $(1,651)$7,857 $475 Deduct: Total stock-based employee compensation determined under fair value basedmethod, net of related tax effects (6,731) (3,200) (3,193)Add: Compensation expense included in the determination of net (loss) income asreported, net of related tax effects, related to the extension of stock options 79 - 455 Pro forma net (loss) income $(8,303)$4,657 $(2,263) (Loss) income per share: Basic-as reported $(.07)$.35 $.02 Basic-pro forma $(.36)$.21 $(.10) Diluted-as reported $(.07)$.32 $.02 Diluted-pro forma $(.36)$.19 $(.10) Fair Value of Financial Instruments-The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable andaccounts payable approximated fair value as of December 31, 2005 and 2004 because of the relative short maturity of these instruments. The carryingamounts of long term obligations approximated their fair value as of December 31, 2005 and 2004 based upon rates currently available to the Company.Accounts Receivable-The majority of the Company’s accounts receivable are due from secondary publishers and information providers. TheCompany establishes credit terms for new clients based upon management’s review of their credit information and project terms, and performs ongoing creditevaluations of its customers, adjusting credit terms when management believes appropriate based upon payment history and an assessment of their currentcredit worthiness. The Company records an allowance for doubtful accounts for estimated losses resulting from the inability of its clients to make requiredpayments. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due(accounts outstanding longer than the payment terms are considered past due), the Company’s previous loss history, the client’s current ability to pay itsobligation to the Company, and the condition of the general economy and the industry as a whole. While credit losses have generally been withinexpectations and the provisions established, the Company cannot guarantee that credit loss rates in the future will be consistent with those experienced in thepast. In addition, there is credit exposure if the financial condition of one of the Company’s major clients were to deteriorate. In the event that the financialcondition of the Company’s clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be necessary.Concentration of Credit Risk-The Company maintains its cash with high quality financial institutions, located primarily in the United States. Tothe extent that such cash exceeds the maximum insurance levels, the Company is uninsured. The Company has not experienced any losses in such accounts.Income (Loss) Per Share- Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing income (loss) available tocommon shareholders by the weighted-average number of common shares outstanding during the period increased to include the number of additionalcommon shares that would have been outstanding if the dilutive potential common shares had been issued. The dilutive effect of the outstanding options isreflected in diluted earnings (loss) per share by application of the treasury stock method. Diluted net loss per share for 2005 does not include potentialcommon shares derived from stock options because as a result of the Company incurring losses, their effect would have been antidilutive.II-22 Development Costs for Software-Costs for the development of new software to be sold, leased, or otherwise marketed as a separate product or as partof a product or process, and substantial enhancements to such existing software products, are expensed as research and development costs as incurred untiltechnological feasibility has been established, at which time any additional development costs are capitalized until the product is available for generalrelease to customers. All other research and development costs are expensed as incurred.No software development costs were capitalized during the three years ended December 31, 2005. Included in the selling and administrative expense areresearch and development costs totaling approximately $770,000 for the year ended December 31, 2005.New Accounting Pronouncements:In December 2004, the FASB issued SFAS No. 123 (R), ‘‘Share-Based Payment’’, which is a revision of SFAS No. 123 and supersedes AccountingPrinciples Board (“APB”) Opinion No. 25. SFAS No. 123 (R) requires all share-based payments to employees, including grants of employee stock options, tobe valued at fair value on the date of grant, and to be expensed over the applicable vesting period. Pro forma disclosure of the income statement effects ofshare-based payments is no longer an alternative. SFAS No. 123 (R) is effective as of the beginning of the next fiscal year that begins after June 15, 2005. Forthe Company, SFAS 123 (R) is effective as of January 1, 2006. In addition, companies must also recognize compensation expense related to any awards thatare not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previouslycalculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. The Company expects its adoption of SFAS No. 123(R) will result in increased compensation expense for stock options granted through December 31, 2005 of approximately $200,000 in 2006.In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces APB Opinion No. 20,“Accounting Changes” (“APB 20”) and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements” (“SFAS 3”). APB 20required that changes in accounting principles be recognized by including the cumulative effect of the change in the period in which the new accountingprinciple was adopted. SFAS 154 requires retrospective application of the change to prior periods’ financial statements, unless it is impracticable todetermine the period-specific effects of the change. SFAS 154 also provides that a change in method of depreciating or amortizing a long-lived non-financialasset be accounted for as a change in estimate effected by a change in accounting principle, and also provides that correction of errors in previously issuedfinancial statements should be termed a “restatement.” SFAS 154 is effective as of the beginning of the next fiscal year that begins after December 15, 2005.For the Company, SFAS 154 is effective as of January 1, 2006. The Company does not believe the adoption of this statement will have an impact on itsconsolidated financial statements. II-23 2.PROPERTY AND EQUIPMENT Property and equipment, stated at cost less accumulated depreciation and amortization (in thousands), consist of the following: December 31, 2005 2004 Equipment $14,350 $13,011 Software 2,856 2,193 Furniture and office equipment 1,070 977 Leasehold improvements 2,573 2,433 Total 20,849 18,614 Less accumulated depreciation and amortization 16,026 14,055 $4,823 $4,559 Depreciation expense was approximately $2,561,000, $3,120,000 and $3,807,000 for each of the three years ended December 31, 2005,respectively.In 2003, the Company entered into a three year lease for certain equipment located in one of its Philippine facilities. The equipment was capitalizedat its fair market value of approximately $641,000, which represented the present value of the minimum lease payments plus trade-in value of exchangedequipment of $175,000. The loss on such trade-in approximated $58,000. In 2004, the Company entered into another three year lease agreement for certainequipment located in one of its India facilities. The equipment was capitalized at its fair market value of approximately $66,000 which represented thepresent value of the minimum lease payments.At December 31, 2005 and 2004, equipment under capital leases had a net book value of approximately $209,000 and $435,000 respectively.3.INCOME TAXESThe significant components of the provision for (benefit from) income taxes for each of the three years ended December 31, 2005, 2004 and 2003(in thousands) are as follows: 2005 2004 2003 Current income tax expense (benefit): Foreign $144 $174 $29 Federal (821) 1,943 230 State and local - 305 76 (677) 2,422 335 Deferred income tax expense (benefit) provision 215 815 (2)(Benefit from) provision for income taxes $(462)$3,237 $333 II-24 The reconciliation of the U.S. statutory rate with the Company’s effective tax rate for each of the three years ended December 31, 2005 issummarized as follows: 2005 2004 2003 Federal statutory rate (34.0)% 35.0% 35.0%Effect of: State income taxes (net of federal tax benefit) 3.9 2.5 5.9 Foreign source losses for which no tax benefit is available 2.2 1.5 7.3 Foreign entities subject to US federal income taxes - 4.3 - Effect of foreign tax holiday (25.9) (12.3) (24.0)Taxes on foreign income at rates that differ from US statutory rate (5.7) (1.4) 7.6 Valuation allowance on deferred tax assets 33.4 - - Non deductible compensation - - 5.9 Other 4.2 (0.4) 3.5 Effective rate (21.9)% 29.2% 41.2%During each of the three years ended December 31, 2005, 2004 and 2003 tax benefits related to stock option exercises were $334,000, $358,000and $132,000, respectively. Such benefits were recorded as a reduction of income taxes payable and an increase in additional paid-in capital.Deferred tax assets and liabilities are classified as current or non-current according to the classification of the related asset or liability. Significantcomponents of the Company’s deferred tax assets and liabilities as of December 31, 2005 and 2004 are as follows (in thousands): 2005 2004 Deferred income tax assets: Allowances not currently deductible $285 $230 Depreciation and amortization 155 32 Equity compensation not currently deductible 382 375 Net operating loss carryforward 1,006 - Expenses not deductible until paid 261 536 Total gross deferred income tax assets before valuation allowance 2,089 1,173 Valuation allowance (1,127) (105)Net deferred income tax assets 962 1,068 Deferred income tax liabilities: Foreign source income, not taxable until repatriated (1,981) (1,872)Total deferred income tax liabilities (1,981) (1,872) Net deferred (liability) asset $(1,019)$(804) Net deferred income tax asset-current 338 645 Net deferred income tax liability-non-current (1,357) (1,449) Net deferred income tax (liability) asset $(1,019)$(804) II-25 In assessing the realization of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred taxassets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods inwhich temporary differences are deductible and net operating losses are utilized. Based on a consideration of these factors, the Company has established avaluation allowance of approximately $1,127,000 and $105,000 at December 31, 2005 and 2004, respectively.United States and foreign components of (loss) income before income taxes for each of the three years ended December 31, 2005, 2004 and 2003(in thousands) are as follows: 2005 2004 2003 United States $(4,019)$6,731 $565 Foreign 1,906 4,363 243 Total $(2,113)$11,094 $808 Certain of the Company’s foreign subsidiaries are subject to tax holidays for various periods ranging from 2005 to 2014, pursuant to which theincome tax rate for these subsidiaries is substantially reduced. Unless renewed, as the tax holidays expire, the Company’s overall effective tax rate will benegatively impacted. The tax benefit for tax holidays was approximately $500,000, $800,000 and $300,000 for each of the three years endedDecember 31, 2005, 2004 and 2003, respectively.The Company has U.S. Federal net operating loss carryforwards available of approximately $3 million which will expire in 2025.In August 2004, the Internal Revenue Service (“IRS”) promulgated regulations, effective August 12, 2004, that treated certain of the Company’ssubsidiaries that are incorporated in foreign jurisdictions and also domesticated as Delaware limited liability companies as U.S. corporations for U.S. federalincome tax purposes. In the preamble to such regulations, the IRS expressed its view that dual registered companies described in the preceding sentence arealso treated as U.S. corporations for U.S. federal income tax purposes for periods prior to August 12, 2004. On January 30, 2006, the IRS issued its finalregulations, stating that neither the temporary regulations nor these final regulations are retroactive. The earliest date that any entity is subject to theseregulations is August 12, 2004. For periods prior to the date these final regulations apply (i.e., prior to August 12, 2004), the classification of dually charteredentities is governed by the pre-existing regulations. The Company believes that its historic treatment of these subsidiaries as not having been required to paytaxes in the United States for the period prior to August 12, 2004 is correct, and would vigorously defend its treatment if challenged. As such, the Companyhas made no provision for U.S. taxes in its financial statements for these entities for the periods prior to August 12, 2004. Furthermore, the Company cannotbe assured that the IRS will not assert other positions with respect to the foregoing matters that, if successful, could increase materially the Company’sliability for U.S. federal income taxes. In December 2004, the Company effected certain filings in Delaware to ensure that these subsidiaries will not betreated as U.S. corporations for U.S. federal income tax purposes as of the date of filing and as such, were not subject to U.S. federal income taxes commencingJanuary 1, 2005.4.LONG TERM OBLIGATIONSIn 2005, the Company entered into an agreement with a vendor to acquire certain additional software licenses and to receive support and subsequentsoftware upgrades on this and other currently owned software licenses through February 2008. Pursuant to the agreement, the Company paid $528,000 as ofDecember 31, 2005, and will make eight payments of approximately $132,000 per quarter thereafter, commencing in March 2006. II-26 The total cost (in thousands) was allocated to the following asset accounts: Other current assets $487 Other assets (long-term) 608 Property and equipment 488 Total $1,583 The current portion of the obligation totaling approximately $528,000 is included on the balance sheet under current portion of long termobligations. The remaining long-term portion is reflected as a long-term obligation. Also included in long-term obligations are long-term capital leaseobligations totaling $20,000.Long term obligations (including capital lease obligations totaling $155,000) are payable as follows (amounts in thousands): 2006 (current portion) $663 2007 (long term portion) 548 $1,211 The total obligation and associated cost totaling $1,583,000 is considered a 2005 non-cash investing and financing activity.5.COMMITMENTS AND CONTINGENT LIABILITIESLine of Credit-The Company has a $5 million line of credit pursuant to which it may borrow up to 80% of eligible accounts receivable at the bank’salternate base rate plus ½% or LIBOR plus 3%. The line, which expires in May 2006, is secured by the Company’s accounts receivable. The Company didnot borrow against its credit line in 2005.Leases-The Company is obligated under various operating lease agreements for office and production space. Certain agreements contain escalationclauses and requirements that the Company pay taxes, insurance and maintenance costs. Company leases that include escalated lease payments are straight-lined over the non-cancelable base lease period in accordance with SFAS 13.Lease agreements for production space in most overseas facilities, which expire through 2030, contain provisions pursuant to which the Companymay cancel the leases with a minimal notice period, generally subject to forfeiture of security deposit. The annual rental for the cancelable leased space in2005 is approximately $1,390,000. For the years ended December 31, 2005, 2004 and 2003, rent expense, principally for office and production space, totaledapproximately $1,956,000, $1,725,000 and $1,700,000, respectively.In addition, the Company leases certain equipment under short-term capital and operating lease agreements. For each of the three years endedDecember 31, 2005, rent expense for equipment totaled approximately $71,000, $47,000 and $36,000, respectively. II-27 At December 31, 2005, future minimum annual rental commitments on non-cancelable leases (excluding operating leases with terms less than oneyear) (in thousands) are as follows: Operating leases 2006 $679 2007 642 2008 458 2009 458 2010 138 2011 12 $2,387 In connection with the relocation of the Company’s Dallas office, the lessor agreed to pay approximately $250,000 as incentive to terminate thelease prior to its contractual expiration date. In connection with this transaction, the Company will recognize income of approximately $250,000 in the firstquarter of 2006.Litigation -In connection with the cessation of all operations at certain foreign subsidiaries, certain former employees have filed various actionsagainst certain of the Company’s Philippine subsidiaries, and have purported to also sue the Company and certain of its officers and directors, seeking torequire reinstatement of employment and to recover back wages for an allegedly illegal facility closing on June 7, 2002 based on the terms of a collectivebargaining agreement with this subsidiary. If the complainants’ claims have merit, they could be entitled to back wages of up to $5.0 million for the periodfrom June 7, 2002 to June 6, 2005, consistent with prevailing jurisprudence. Based upon consultation with legal counsel, management believes the claims arewithout merit and is defending against them vigorously.In addition, the Company is subject to various legal proceedings, tax audits and claims which arise in the ordinary course of business.While management currently believes that the ultimate outcome of all these proceedings will not have a material adverse effect on the Company’sfinancial position or overall trends in results of operations, litigation is subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists thepossibility of a material adverse impact on the operating results of the period in which the ruling occurs. In addition, the estimate of potential impact on theCompany’s financial position or overall results of operations for the above legal proceedings could change in the future.Foreign Currency-The Company’s production facilities are located in the Philippines, India and Sri Lanka. To the extent that the currencies ofthese countries fluctuate, the Company is subject to risks of changing costs of production after pricing is established for certain customer projects. However,most significant contracts contain provisions for price renegotiation.Employment Agreements-On January 1, 2004, the Company entered into a four year employment agreement with the co-founder of ISOGEN, anentity the Company acquired in 2001, to serve as an executive vice president of the Company. Pursuant to the agreement, he will be compensated at a rate of$250,000 per annum for the first year, subject to annual review for discretionary annual increases thereafter, and will be eligible to receive an annual cashbonus, the amount of which will be based upon meeting certain goals. In addition, on November 10, 2003, he was granted an option to purchase 200,000shares of the Company’s common stock at $3.35 per share. In connection with his previous employment agreement, in 2002 the executive was granted anoption to purchase 150,000 shares of the Company’s common stock at $4.00 per share, and was issued 11,587 unregistered shares of the Company’s commonstock.II-28 In December 2005, the Company entered into a three year employment agreement with its Chief Financial Officer. The agreement provides forannual base compensation of $300,000, plus additional short term incentive compensation conditioned on the attainment of certain quantity and qualityobjectives to be established by the Compensation Committee of the Board of Directors. The agreement also provides for insurance and other fringe benefits,and contains confidentiality and non-compete and non-interference provisions. In addition, the Company granted 250,000 fully vested options to purchase250,000 shares of the Company's common stock ("Option Shares") at an exercise price of $3.28 per share. The options expire on the earlier of (i) December 21,2015, (ii) 60 days after employment ceases or (iii) 12 months following the termination of employment as a result of his death or disability. Furthermore, noOption Shares may be sold during the first year after the date of grant; no more than 25% of the Option Shares may be sold during the second year after thedate of grant; no more than 50% of the Option Shares may be sold during the second and third years after the date of grant, and no more than 75% of theOption Shares may be sold during the second, third and fourth years after the date of grant. No restrictions on sales apply after the fourth anniversary of thedate of grant. Indemnifications-The Company is obligated under certain circumstances to indemnify directors and certain officers against costs and liabilitiesincurred in actions or threatened actions brought against such individual because such individuals acted in the capacity of director and/or officer of theCompany. In addition, the Company has contracts with certain clients pursuant to which the Company has agreed to indemnify the client for certain specifiedand limited claims. These indemnification obligations are in the ordinary course of business and, in many cases, do not include a limit on potential maximumfuture payments. As of December 31, 2005, the Company has not recorded a liability for any obligations arising as a result of these indemnifications.Liens-In connection with the procurement of tax incentives at one of the company’s foreign subsidiaries, the foreign zoning authority was granted afirst lien on the subsidiary’s property and equipment. As of December 31, 2005, such equipment had a book value of $690,000.6.PENSION BENEFITS U.S. Defined Contribution Pension Plan-The Company has a defined contribution plan qualified under Section 401(k) ofthe Internal Revenue Code, pursuant to which substantially all of its U.S. employees are eligible to participate after completing six months of service.Participants may elect to contribute a portion of their compensation to the plan. Under the plan, the Company has the discretion to match a portion ofparticipants’ contributions. The Company intends to match approximately $71,000 to the plan for the fiscal year ended December 31, 2005. For the fiscalyears ended December 31, 2004 and 2003, the Company’s matching contributions were approximately $75,000 and $48,000 respectively.Non-U.S. Pension benefits - Most of the Company’s non-U.S. subsidiaries provide for government mandated, defined pension benefits. For certain ofthese subsidiaries, vested eligible employees are provided a lump sum payment upon retiring from the Company at a defined age. The lump sum amount isbased on the salary and tenure as of retirement date. Other non-U.S subsidiaries provide for a lump sum payment to vested employees on retirement, death,incapacitation or termination of employment, based upon the salary and tenure as of the date employment ceases. The liability for such defined benefitobligations is determined and provided on the basis of actuarial valuations as of December 31, 2005. Pension expenses for foreign subsidiaries totaledapproximately $251,000, $228,000 and $124,000 for each of the three years ended December 31, 2005, 2004 and 2003, respectively.Included in accrued salary, wages and related benefits as of December 31, 2005 and 2004 are accrued pension liabilities related to the aboveunfunded plans totaling approximately $493,000 and $327,000 respectively.II-29 The following table sets out the status of the non-U.S pension benefits and the amounts (in thousands) recognized in the Company’s consolidatedfinancial statements. Amounts for 2003 are not significant and as such, have been excluded: Benefit obligations:Change in the benefit obligation 2005 2004 Projected Benefit Obligation at beginning of the year $327 $154 Service cost 129 83 Interest cost 34 20 Increase/(decrease in liability) - 50 Actuarial loss (Gain) 54 44 Benefits Paid (51) (24)Projected Benefit Obligation at end of year $493 $327 Components of Net Periodic Pension Cost: 2005 2004 Accumulated benefit obligation $169 $125 Vested benefit obligation $50 $30 2005 2004 Service cost $129 $83 Interest cost 34 20 Amortization for Increase/(decrease in liability) - 50 Actuarial loss (Gain) 54 44 Net Periodic pension cost $217 $197 Unrecognized Actuarial Loss/ (Gain):Experience gains and losses and effects of changes in actuarial assumptions are carried forward and amortized over a period no longer than theaverage future service of employees.The following table sets out the unrecognized actuarial gain/(loss) (in thousands), as of December, 31 2005.Net cumulative unrecognized actuarial gain/(loss) - January 1, 2005 - Actuarial (loss) for the year $(154)Net cumulative unrecognized (loss) - December 31, 2005 (154)Limit of corridor 28 Actuarial (loss) outside corridor to be recognized in future years $(126) Actuarial assumptions for all non-U.S. plans are described below. The discount rates are used to measure the year end benefit obligations and theearnings effects for the subsequent year. 2005 2004Discount rate7.5%-14% 7.5%-12%Rate of increase in compensation levels7%-10% 7-10% II-30 Estimated Future Benefit Payments:The following benefit payments (in thousands), which reflect expected future service, as appropriate, are expected to be paid:2006 $26 2007 29 2008 32 2009 35 2010 41 2011 to 2015 317 7.CAPITAL STOCKThe Company is authorized to issue 75,000,000 shares of common stock and 5,000,000 shares of preferred stock. Each share of common stock hasone vote. The Board of Directors is authorized to fix the terms, rights, preferences and limitations of the preferred stock and to issue the preferred stock inseries which differ as to their relative terms, rights, preferences and limitations.Stockholder Rights Plan-On December 16, 2002, the Board of Directors adopted a Stockholder Rights Plan (“Rights Plan”) in which one right(“Right”) was declared as a dividend for each share of the Company’s common stock outstanding. The purpose of the plan is to deter a hostile takeover of theCompany. Each Right entitles its holders to purchase, under certain conditions, one one-thousandth of a share of newly authorized Series C ParticipatingPreferred Stock (“Preferred Stock”), with one one-thousandth of a share of Preferred Stock intended to be the economic and voting equivalent of one share ofthe Company’s common stock. Rights will be exercisable only if a person or group acquires beneficial ownership of 15% (25% in the case of specifiedexecutive officers of the Company) or more of the Company’s common stock or commences a tender or exchange offer, upon the consummation of whichsuch person or group would beneficially own such percentage of the common stock. Upon such an event, the Rights enable dilution of the acquiring person’sor group’s interest by providing that other holders of the Company’s common stock may purchase, at an exercise price of $4.00, the Company’s commonstock having a market value of $8.00 based on the then market price of the Company’s common stock, or at the discretion of the Board of Directors, PreferredStock, having double the value of such exercise price. The Company will be entitled to redeem the Rights at $.001 per Right under certain circumstances setforth in the Rights Plan. The Rights themselves have no voting power and will expire on December 26, 2012, unless earlier exercised, redeemed orexchanged.Common Stock Reserved-As of December 31, 2005, the Company had reserved for issuance approximately 7,445,000 shares of common stockpursuant to the Company’s stock option plans (including an aggregate of 1,015,164 options issued to the Company’s Chairman which were not grantedpursuant to stockholder approved stock option plans).Treasury Stock-In 2004, the Company retired 584,000 shares of its treasury stock. II-31 8.STOCK OPTIONSThe Company adopted, with stockholder approval, 1996, 1998, 2001, and 2002 Stock Option Plans (the “1996 Plan,” “1998 Plan,” “2001 Plan,”and “2002 Plan”) which provide for the granting of options to purchase not more than an aggregate of 1,999,992, 3,600,000, 900,000, and 950,000 shares ofcommon stock, respectively, subject to adjustment under certain circumstances. Such options may be incentive stock options (“ISOs”) within the meaning ofthe Internal Revenue Code of 1986, as amended, or options that do not qualify as ISOs (“Non-Qualified Options”).The option exercise price per share may not be less than the fair market value per share of common stock on the date of grant (110% of such fairmarket value for an ISO, if the grantee owns stock possessing more than 10% of the combined voting power of all classes of the Company’s stock). Optionsmay be granted under the Stock Option Plan to all officers, directors, and employees of the Company and, in addition, Non-Qualified Options may be grantedto other parties who perform services for the Company. No options may be granted under the 1996 Plan after July 8, 2006; under the 1998 Plan after July 8,2008; under the 2001 Plan after May 31, 2011; and under the 2002 Plan after June 30, 2012.The Plans may be amended from time to time by the Board of Directors of the Company. However, the Board of Directors may not, withoutstockholder approval, amend the Plans to increase the number of shares of common stock which may be issued under the Plans (except upon changes incapitalization as specified in the Plans), decrease the minimum exercise price provided in the Plans or change the class of persons eligible to participate in thePlans.The fair value of options at date of grant was estimated using the Black-Scholes pricing model with the following weighted average assumptions:expected lives of eight years for options granted in 2005, four to four and one-half years for options granted in 2004, and six years for options granted in2003; risk free interest rate of 4.39% in 2005, 3.19% in 2004, and 4.2% in 2003; expected volatility of 150% in 2005, 114% in 2004, and 140% in 2003; anda zero dividend rate in each of the three years ended December 31, 2005. The weighted average grant date fair value of options granted in 2005, 2004, and2003 was $3.28, $2.89 and $3.18, respectively.II-32 The following table presents information related to stock options for 2005, 2004 and 2003. NumberOutstanding Weighted AverageExercise Price NumberExercisable Weighted AverageExercise Price Balance 1/1/03 7,264,884 $1.99 5,402,457 $1.53 Cancelled (127,176) $2.42 Granted 1,002,000 $3.40 Exercised (550,328) $1.14 Balance 12/31/03 7,589,380 $2.34 5,780,204 $1.83 Cancelled (49,174) $1.55 Granted 214,000 $3.74 Exercised (728,274) $1.48 Balance 12/31/04 7,025,932 $2.36 5,985,748 $2.14Cancelled (249,267) $3.67 Granted 784,000 $3.37 Exercised (990,395) $1.74 Balance 12/31/05 6,570,270 $2.72 6,372,254 $2.68 Per ShareRange ofExercise Prices NumberOutstanding WeightedAverageRemainingContractualLife WeightedAverageExercisePrice NumberExercisable WeightedAverageExercisePrice Balance 12/31/05$0.25 - 0.47 445,668 6 $0.41 445,668 $0.41 $0.50 - 0.67 1,231,196 5 $0.57 1,231,196 $0.57 $1.29 399,996 2 $1.29 399,996 $1.29 $2.00 110,244 9 $2.00 110,244 $2.00 $2.59 1,284,466 6 $2.59 1,284,466 $2.59 $3.00 - 4.60 2,000,500 8 $3.47 1,840,467 $3.46 $5.43 - 5.89 1,090,200 - $5.45 1,052,217 $5.45 $6.00 - 6.57 8,000 - $6.24 8,000 $6.24 6,570,270 $2.72 6,372,254 $2.68 Options granted prior to 2003 vest over a four year period and have a five year life. In 2004, substantially all options granted vest over a four yearperiod and have a ten year life. In 2005, the Company granted to officers and directors, fully vested options to purchase 760,000 shares of the Company'scommon stock ("Option Shares") at an exercise price of ranging between $3.00 and $3.46 per share. The options expire on the earlier of (i) ten years after dateof grant, (ii) 60 days after employment ceases and (iii) 12 months following the termination of employment as a result of his or her death or disability.Furthermore, no Option Shares may be sold during the first year after the date of grant; no more than 25% of the Option Shares may be sold during the secondyear after the date of grant; no more than 50% of the Option Shares may be sold during the second and third years after the date of grant, and no more than75% of the Option Shares may be sold during the second, third and fourth years after the date of grant. No restrictions on sales apply after the fourthanniversary of the date of grant. In 2003, the Company extended the expiration date of options granted to certain officers, directors and employees, substantially all of which werevested, to purchase 315,000, 566,000, 522,000 and 133,000 shares of its common stock at $.47, $.50, $.67 and $2.00, respectively. In connection with theextension, the option holders agreed not to sell shares of stock acquired upon exercise of the extended options for designated periods of time ending betweenJune 2004 to March 2005. In connection with this transaction, compensation expense of approximately $650,000 was recorded in the second quarter of 2003based upon the difference between the exercise price and the market price of the underlying common stock on the date the options were extended.Compensation expense is included as a component of selling and administrative expenses.II-33 In May 2005, the Company and certain of its officers and directors agreed to change the initial exercise price and initial expiration date of vestedoptions to purchase 1,390,346 shares of the Company’s common stock held by such officers to a new price of $2.59, and to new expiration dates as follows: Quantity Initial Price Initial Expiration Date New Price New Expiration Date 540,346 $1.56 May 31, 2005 $2.59 108,000 per year commencing May 31, 2009,remainder on May 31, 2013 810,000 $2.25 770,000 on October, 8, 2005 and40,000 on October 18, 2005 $2.59 162,000 per year commencing September 30, 2009until September 30, 2012, 8,000 onSeptember 30, 2013 and 154,000 on March 31, 2014 40,000 $2.50 October 3, 2005 $2.59 October 3, 2010In connection with the extension, the option holders agreed not to sell, pledge or otherwise dispose of any of the shares of common stock receivedupon exercise of their respective option(s) referred to above until the earliest to occur of (i) May 16, 2007; (ii) the first day on which the closing marketprice for the Company’s stock is at least $5.00 per share for ten consecutive trading days; or (iii) the termination of employment or directorship (asapplicable) with the Company either (A) by the Company, for reasons other than “for cause”; or (B) by the option holder, upon mutual agreement betweenthe option holder and the Company.In addition, the Chief Executive Officer further agreed to pay to the Company any pre-tax net profit earned from the sale of the shares of commonstock received upon exercise of his options set forth above if he directly or indirectly competes with the Company or solicits Company customers or clientsduring the period from May 16, 2005 until the first anniversary of the termination of his employment for any reason.No equity compensation expense has been recorded because the exercise price of the modified options was equal to the price of the underlyingcommon stock on the date the grants were modified. In addition, pursuant to Emerging Issues Task Force (“EITF”) 00-23, Issues Related to the Accountingfor Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44, the Company has determined that the modified grants continue toqualify for fixed accounting treatment.In December 2005, the Company accelerated the vesting of options to purchase 790,000 shares of Common Stock that were previously granted tothe Chief Executive Officer and certain officers and directors. Pursuant to the modification agreement, the officers and directors agreed to not sell, pledge orotherwise dispose of more than a certain number of shares issued or issuable upon exercise of these options during the period of time that such optionshares would otherwise have not vested. As a result of the accelerated vesting, the Company will avoid future non-cash compensation chargesapproximating $1.3 million resulting from the Company’s adoption of SFAS 123 (R) on January 1, 2006. II-34 9.SEGMENT REPORTING AND CONCENTRATIONSThe Company’s operations are classified into two reporting segments: (1) outsourced content services and (2) IT professional services. Theoutsourced content services segment focuses on fabrication services and knowledge services. Fabrication services include digitization and data conversionservices, content creation and XML services. Knowledge services include content enhancement, hyperlinking, indexing and general editorial services. TheIT professional services segment focuses on the design, implementation, integration and deployment of systems used to author, manage and distributecontent. The Company’s outsourced content services revenues are generated principally from its production facilities located in the Philippines, India andSri Lanka. The Company does not depend on revenues from sources internal to the countries in which the Company operates; nevertheless, the Company issubject to certain adverse economic and political risks relating to overseas economies in general, such as inflation, currency fluctuations and regulatoryburdens.Commencing October 1, 2003, the Company unified its selling and related activities for its content and professional services segments. As such,selling and corporate administrative costs are not segregated by, nor are they allocated to, operating segments. The loss (income) before income taxes, byoperating segment has been reclassified for comparative purposes. 2005 2004 2003 (in thousands) Revenues: Outsourced content services $36,655 $43,701 $29,977 IT Professional services 5,397 10,248 6,737 Total consolidated $42,052 $53,949 $36,714 Depreciation and amortization: Outsourced content services $2,728 $3,547 $4,157 IT Professional services 101 92 79 Selling and corporate administration 331 285 292 Total consolidated $3,160 $3,924 $4,528 Loss (income) before income taxes: Outsourced content services $9,204 $16,116 $6,576 IT Professional services 1,052 4,671 2,778 Selling and corporate administration (12,369) (9,693) (8,546)Total consolidated $(2,113)$11,094 $808 II-35 December 31, 2005 2004 (in thousands) Total assets Outsourced content services $15,436 $15,937 IT Professional services 3,140 2,033 Corporate (includes corporate cash) 19,035 19,241 Total consolidated $37,611 $37,211 Long-lived assets as of December 31, 2005 and 2004, respectively by geographic region are comprised of: 2005 2004 (in thousands) United States $2,022 $1,756 Foreign countries: Philippines 2,573 2,626 India 848 827 Sri Lanka 144 180 Total foreign 3,565 3,633 $5,587 $5,389 One client accounted for 27%, 23% and 33% of the Company's revenues for the years ended December 31, 2005, 2004 and 2003, respectively.One other client accounted for 12% and 31% of the Company’s revenues for the year ended December 31, 2005 and 2004, respectively. No other clientaccounted for 10% or more of revenues during these periods. Further, in the years ended December 31, 2005, 2004 and 2003, revenues to non-US clientsaccounted for 35%, 30%, and 47%, respectively, of the Company's revenues.Revenues for each of the three years ended December 31, 2005, 2004 and 2003 by geographic region (determined based upon customer’sdomicile), are as follows: 2005 2004 2003 (in thousands) United States $27,243 $37,842 $19,582 The Netherlands 10,819 12,648 12,147 Other - principally Europe 3,990 3,459 4,985 $42,052 $53,949 $36,714 A significant amount of the Company's revenues are derived from clients in the publishing industry. Accordingly, the Company's accountsreceivable generally include significant amounts due from such clients. In addition, as of December 31, 2005, approximately 36% of the Company'saccounts receivable was from foreign (principally European) clients and 37% of accounts receivable was due from one client. As of December 31, 2004,approximately 27% of the Company's accounts receivable was from foreign (principally European) clients and 69% of accounts receivable was due fromtwo clients. II-3610.INCOME (LOSS) PER SHARE 2005 2004 2003 (in thousands, except per share amounts) Net (loss) income $(1,651)$7,857 $475 Weighted average common shares outstanding 23,009 22,288 21,570 Dilutive effect of outstanding options - 2,529 1,396 Adjusted for dilutive computation 23,009 24,817 22,966 Basic (loss) income per share $(.07)$.35 $.02 Diluted (loss) income per share $(.07)$.32 $.02 Basic (loss) income per share is based on the weighted average number of common shares outstanding without consideration of potential commonstock. Diluted (loss) income per share is based on the weighted average number of common and potential common shares outstanding. The differencebetween weighted average common shares outstanding and adjusted dilutive shares outstanding represents the dilutive effect of outstanding options.Options to purchase 3,099,000 shares of common stock at December 31, 2005 and 1,337,000 shares of common stock at December 31, 2003 wereoutstanding but not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market priceof the common shares and therefore, the effect would have been antidilutive. Such shares excluded at December 31, 2004 were insignificant. In addition,diluted net loss per share in 2005 does not include 1,733,000 potential common shares derived from stock options because as a result of the Companyincurring losses, their effect would have been antidilutive.11.QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (in thousands, except per share amounts) 2005 Revenues $11,190 $10,110 $9,647 $11,105 Net income (loss) $299 ($517) ($875) ($558)Net income (loss) per share $.01 ($.02) ($.04) ($.02)Diluted net income (loss) per share $.01 ($.02) ($.04) ($.02)2004 Revenues $12,157 $12,354 $15,927 $13,511 Net income 2,080 1,577 3,103 1,097 Net income per share $.09 $.07 $.14 $.05 Diluted net income per share $.08 $.06 $.13 $.04 12.OTHERIn January 2004, the Company reached a settlement agreement and received $1,000,000 cash from a former client as full satisfaction of a $2.6million dollar remaining outstanding balance that the Company had fully written off as a bad debt in 2001. The $1,000,000 receipt, net of $37,000 inrecovery costs, is reflected as bad debt recovery income in the statement of operations for the year ended December 31, 2004.In January 2005, the Company filed a registration statement on Form S-3 to register 4,250,000 shares of its common stock, plus 3,250,000 shares ofcommon stock held by certain directors and officers of the Company. On March 23, 2005, the Company terminated the offering and, as such, in the fourthquarter 2004, expensed approximately $625,000 of offering costs. II-3713.SUBSEQUENT EVENTSPursuant to an income tax audit by the Indian bureau of taxation, on March 27, 2006 one of the Company’s Indian subsidiaries has received a taxassessment approximating $350,000, including interest, for the fiscal tax year ended March 31, 2003. Management disagrees with the basis of the taxassessment, and will vigorously appeal the assessment. However, the ultimate outcome cannot be determined at this time.In addition, the Company has been notified that its U.S. federal income tax return for 2004 will be subject to audit by the I.R.S. Since such audit hasnot yet commenced, the Company has no basis for determining the amount of any potential tax adjustment that might result from such audit. II-38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.NoneItem 9A. Controls and Procedures.An evaluation has been carried out under the supervision and with the participation of our management, including our Chief Executive Officerand Chief Financial Officer, of the effectiveness of the design and the operation of our "disclosure controls and procedures" (as such term is defined inRules 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2005 (“Evaluation Date”). Based on such evaluation, our Chief ExecutiveOfficer and Chief Financial Officer have concluded that, as of the Evaluation Date, the disclosure controls and procedures are reasonably designed andeffective to ensure that (i) information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (ii) such information is accumulated andcommunicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regardingrequired disclosure.There were no changes in our internal controls over financial reporting in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during our last fiscal quarter that materially affected or are reasonably likely to materially affect theinternal controls over financial reporting. II-39 PART IIIItem 10. Directors, Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.The information called for by Item 10 is incorporated by reference from the Company’s definitive proxy statement for the 2006 Annual Meeting ofStockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2005 fiscal year.The information concerning the Company’s Executive Officers required by this Item is incorporated by reference to the Company’s proxystatement under the heading “Executive Officers”. The information concerning the Company’s Directors required by this Item is incorporated by referenceto the Company’s proxy statement under the heading “Election of Directors”. Information concerning compliance by the Company’s Officers, Directorsand 10% stockholders with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the information contained in theCompany’s Proxy Statement under the heading “Compliance with Section 16(a) of the Exchange Act.” Information regarding the presence of an auditcommittee financial expert required by this Item is incorporated by reference to the Company’s Proxy Statement under the heading “Committees of theBoard of Directors.”The Company has a code of ethics that applies to all of its employees, officers, and directors, including its principal executive officer, principalfinancial and accounting officer, and controller. The text of the Company’s code of ethics is posted on its website at www.innodata-isogen.com. TheCompany intends to disclose future amendments to, or waivers from, certain provisions of the code of ethics for executive officers and directors inaccordance with applicable NASDAQ and SEC requirements.Item 11. Executive Compensation.The information called for by Item 11 is incorporated by reference from the Company’s definitive proxy statement for the 2006 Annual Meeting ofStockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2005 fiscal year.Information appearing under the captions “Compensation Committee Report on Executive Compensation”; “Report of the Audit Committee” and “StockPerformance Graph” to be included in the Company’s 2006 Proxy Statement is not incorporated herein by this reference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.The information called for by Item 12 is incorporated by reference from the Company’s definitive proxy statement for the 2006 Annual Meeting ofStockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2005 fiscal year.Item 13. Certain Relationships and Related Transactions.The information called for by Item 13 is incorporated by reference from the Company’s definitive proxy statement for the 2006 Annual Meeting ofStockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2005 fiscal year. III-1 Item 14. Principal Accountant Fees and Services.The information called for by Item 14 is incorporated by reference from the Company’s definitive proxy statement for the 2006 Annual Meeting ofStockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2005 fiscal year. III-2 PART IVItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.(a)1. Financial Statements. See Item 8. Index to Financial Statements. 2. Financial Statement Schedules. Schedule II - Valuation and Qualifying Accounts 3. ExhibitsExhibits which are indicated as being included in previous filings are incorporated herein by reference.ExhibitDescriptionFiled as Exhibit 3.1 (a)Restated Certificate of Incorporation filed onFiled as Exhibit 3.1(a) to our Form 10-K for the year ended April 29, 1993December 31, 2003 3.1 (b)Certificate of Amendment of Certificate ofFiled as Exhibit 3.1(b) to our Form 10-K for the year ended Incorporation of Innodata Corporation filed onDecember 31, 2003 March 1, 2001 3.1 (c)Certificate of Amendment of Certificate ofFiled as Exhibit 3.1(c) to our Form 10-K for the year ended Incorporation of Innodata CorporationDecember 31, 2003 Filed on November 14, 2003 3.2Form of Amended and Restated By-LawsExhibit 3.1 to Form 8-K dated December 16, 2002 3.3Form of Certificate of Designation ofFiled as Exhibit A to Exhibit 4.1 to Form 8-K dated Series C Participating Preferred StockDecember 16, 2002 4.2Specimen of Common Stock certificateExhibit 4.2 to Form SB-2 Registration Statement No. 33-62012 4.3Form of Rights Agreement, dated as ofExhibit 4.1 to Form 8-K dated December 16, 2002 December 16, 2002 between Innodata Corporation and American Stock Transfer & Trust Co., as Rights Agent 10.11994 Stock Option PlanExhibit A to Definitive Proxy dated August 9, 1994 10.21993 Stock Option PlanExhibit 10.4 to Form SB-2 Registration Statement No. 33-62012 10.3Form of Indemnification AgreementFiled as Exhibit 10.3 to Form 10-K dated December 31, 2002 Between us and our directors and one of our officers 10.41994 Disinterested Directors Stock Option PlanExhibit B to Definitive Proxy dated August 9, 1994 10.51995 Stock Option PlanExhibit A to Definitive Proxy dated August 10, 1995 10.61996 Stock Option PlanExhibit A to Definitive Proxy dated November 7, 1996 10.71998 Stock Option PlanExhibit A to Definitive Proxy dated November 5, 1998 10.82001 Stock Option PlanExhibit A to Definitive Proxy dated June 29, 2001 10.92002 Stock Option PlanExhibit A to Definitive Proxy dated September 3, 2002 10.10Employment Agreement dated as ofFiled as Exhibit 10.10 to our Form 10-K for the year ended January 1, 2004 with George KondrachDecember 31, 2003 10.11Letter Agreement dated as of August 9, 2004, byFiled as Exhibit 10.2 to Form S-3 Registration statement and between us and The Bank of New YorkNo. 333-121844 10.12Employment Agreement dated as of December 22,2005Exhibit 10.1 to Form 8-K dated December 28, 2005 22, 2005, by and between us and Steven L. Ford IV-1 ExhibitDescriptionFiled as Exhibit10.13Form of 2001 Stock Option Plan Grant Letter, datedDecember 22, 2005Filed as Exhibit 10.2 to Form 8-K dated December 28, 2005 Dated December 22, 2005 10.14Form of 1995 Stock Option AgreementExhibit 10.4 to Form 8-K dated December 15, 2005 10.15Form of 1998 Stock Option Agreement forExhibit 10.5 to Form 8-K dated December 15, 2005 Directors 10.16Form of 1998 Stock Option Agreement for OfficersExhibit 10.6 to Form 8-K dated December 15, 2005 10.17Form of 2001 Stock Option AgreementExhibit 10.7 to Form 8-K dated December 15, 2005 10.18Form of new vesting and lock-up agreement forExhibit 10.8 to Form 8-K dated December 15, 2005 each of Haig Bagerdjian, Louise Forlenza, John Marozsan and Todd Solomon 10.19Form of new vesting and lock-up agreementExhibit 10.9 to Form 8-K dated December 15, 2005 for Jack Abuhoff 10.20Form of new vesting and lock-up agreementExhibit 10.10 to Form 8-K dated December 15, 2005 for George Kondrach 10.21Form of new vesting and lock-up agreementExhibit 10.11 to Form 8-K dated December 15, 2005 for Stephen Agress 10.22Form of 2001 Stock Option Plan Grant Letter,Exhibit 10.2 to Form 8-K dated January 5, 2006 dated December 31, 2005, for Messrs. Abuhoff, Agress and Kondrach 10.23Form of 2001 Stock Option Plan Grant Letter,Exhibit 10.3 to Form 8-K dated January 5, 2006 dated December 31, 2005, for Messrs. Bagerdjian and Marozsan and Ms. Forlenza 21Significant subsidiaries of the registrantFiled herewith 23Consent of Grant Thornton LLPFiled herewith 31.1Certificate of Chief Executive OfficerFiled herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2Certificate of Chief Financial OfficerFiled herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1Certification Pursuant to 18 U.S.C. SectionFiled herewith 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2Certification Pursuant to 18 U.S.C. SectionFiled herewith 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. IV-2 INNODATA ISOGEN, INC.SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS(Dollars in Thousands)Activity in the Company's allowance for doubtful accounts for the years ended December 31, 2005, 2004 and 2003 was as follows: Additions Balance at Charged to Charged to Balance at Period Beginning of Period Costs and Expenses Other Accounts Deductions End of Period 2005 $135 $9 $- $(33)$111 2004 $1,219 $25 $- (1,109)$135 2003 $1,254 $- $- $(35)$1,219 IV-3SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized. INNODATA ISOGEN, INC. By: /s/ Jack Abuhoff Jack Abuhoff Chairman of the Board of Directors,Chief Executive Officer and President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacitiesand on the dates indicated.Signature Title Date /s/ Jack Abuhoff Chairman of the Board of Directors, March 29, 2006Jack Abuhoff Chief Executive Officer and President /s/ Steven L. Ford Executive Vice President, March 29, 2006Steven L. Ford Chief Financial Officer /s/ Stephen Agress Vice President Finance, March 29, 2006Stephen Agress Chief Accounting Officer /s/ Haig S. Bagerdjian Director March 29, 2006Haig S. Bagerdjian /s/ Louise C. Forlenza Director March 29, 2006Louise C. Forlenza /s/ John R. Marozsan Director March 29, 2006John R. Marozsan Exhibit 21Significant Subsidiaries Name under State or otherwhich subsidiary jurisdiction ofconductsName of SubsidiaryincorporationbusinessIsogen International, LLCDelawareSameInnodata India (Private) LimitedIndiaSameInnodata XML Content Factory, Inc.PhilippinesSameESS Manufacturing Company, Inc.PhilippinesSameContent Online Services, Inc.PhilippinesSameInnodata Asia Holdings, LimitedBermudaSameInnodata Lanka (Private) LimitedSri LankaSame Exhibit 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our report dated March 17, 2006 (except for Note 13 as to which is dated March 28, 2006) accompanying the consolidated financialstatements and schedules included in the Annual Report of Innodata Isogen, Inc. and subsidiaries on Form 10-K for the year ended December 31, 2005. Wehereby consent to the incorporation by reference of said report in the Registration Statements of Innodata Isogen, Inc. on Form S-8 (Registration No. 33-85530, dated October 21, 1994, Registration No. 333-3464, dated April 18, 1996, Registration No. 33-63085, dated September 9, 1998 and RegistrationNo. 333-82185, dated July 2, 1999, and Registration No. 333-118506, dated August 24, 2004) and on Form S-3 (Registration No. 33-62012, datedApril 11, 1996, Registration No. 333-91649, dated January 6, 2000 and Registration No. 333-51400, dated January 2, 2001).Grant Thornton LLPEdison, New JerseyMarch 17, 2006 (except for Note 13 as to whichis dated March 28, 2006) Exhibit 31.1CERTIFICATIONSI, Jack Abuhoff, certify that:1.I have reviewed this annual report on Form 10-K of Innodata Isogen, Inc.;2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisannual report;3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this annual report is being prepared; b)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Dated: March 29, 2006 /s/ Jack Abuhoff Jack Abuhoff Chairman of the Board, Chief Executive Officer and President Exhibit 31.2I, Steven L. Ford, certify that:1.I have reviewed this annual report on Form 10-K of Innodata Isogen, Inc.;2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annualreport;3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this annual report is being prepared; b)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Dated: March 29, 2006 /s/ Steven L. Ford Steven L. Ford Executive Vice President Chief Financial Officer Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Innodata Isogen, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2005 as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, Jack Abuhoff, Chief Executive Officer of the Company, certify, pursuant to 18U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1.the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. /s/ Jack Abuhoff Jack Abuhoff Chairman of the Board, Chief Executive Officer and President March 29, 2006 Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Innodata Isogen, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2005 as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, Steven L. Ford, Executive Vice President and Chief Financial Officer of theCompany, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1.the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. /s/ Steven L. Ford Steven L. Ford Executive Vice President Chief Financial Officer March 29, 2006 

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