Innodata
Annual Report 2012

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K(Mark One)(cid:0)Annual report under section 13 or 15(d) of the securities exchange act of 1934For the fiscal year ended December 31, 2012 ¨Transition report under section 13 or 15(d) of the securities exchange act of 1934 Commission file number 0-22196 INNODATA 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) 371-8000 (Registrant's telephone number) Securities registered under Section 12(b) of the Exchange Act: Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock $.01 par value The Nasdaq Stock Market, LLCPreferred Stock Purchase Right The Nasdaq Stock Market, LLC Securities registered under Section 12(g) of the Exchange Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes ¨ No (cid:0)(cid:0) Indicate 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 ¨ No (cid:0)(cid:0) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 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 (cid:0) (cid:0) No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). Yes (cid:0)(cid:0) No ¨ Indicate 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. (cid:0)(cid:0) 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 ¨ Accelerated filer (cid:0)(cid:0) Non-accelerated filer ¨ Smaller reporting company ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ¨ No (cid:0)(cid:0) The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (based on the closing price reported on The Nasdaq StockMarket on June 30, 2012) was $143,789,000. The number of outstanding shares of the registrant’s common stock, $.01 par value, as of January 31, 2013 was 24,889,165. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s definitive proxy statement for the 2013 Annual Meeting of Stockholders are incorporated by reference in Items 10,11,12,13 and 14of Part III of this Form 10-K.  INNODATA INCForm 10-KFor the Year Ended December 31, 2012 TABLE OF CONTENTS Page Part I Item 1.Business1Item 1A.Risk Factors9Item 1B.Unresolved Staff Comments20Item 2.Properties20Item 3.Legal Proceedings20Item 4.Mine Safety Disclosures20 Part II Item 5Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities21Item 6.Selected Financial Data22Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations24Item 7A.Quantitative and Qualitative Disclosures about Market Risk36Item 8.Financial Statements and Supplementary Data37Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure37Item 9A.Controls and Procedures37 Report of Management on Internal Control over Financial Reporting37 Report of Independent Registered Public Accounting Firm39Item 9B.Other Information40 Part III Item 10.Directors, Executive Officers and Corporate Governance41Item 11.Executive Compensation41Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters41Item 13.Certain Relationships and Related Transactions, and Director Independence41Item 14.Principal Accounting Fees and Services41 Part IV Item 15.Exhibits, Financial Statement Schedules42 Signatures 43  PART I Disclosures in this Form 10-K contain certain forward-looking statements, including without limitation, statements concerning ouroperations, economic performance, and financial condition. These forward-looking statements are made pursuant to the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Thewords “estimate,” “believe,” “expect,” “anticipate,” “intend,” “optimistic” and other similar expressions generally identify forward-lookingstatements, 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 without limitation, that our Innodata Advanced Data Solutions segment is subject to the risks and uncertainties of early-stage companies; theprimarily at-will nature of the Company’s contracts with its Content Services segment clients and the ability of the clients to reduce, delay or cancelprojects; continuing Content Services segment revenue concentration in a limited number of clients; continuing Content Services segment reliance onproject-based work; inability to replace projects that are completed, cancelled or reduced; depressed market conditions; changes in external marketfactors; the ability and willingness of our clients and prospective clients to execute business plans which give rise to requirements for services offeredby the Company; difficulty in integrating and deriving synergies from acquisitions, joint ventures and strategic investments; potential undiscoveredliabilities of companies that we acquire; changes in our business or growth strategy; the emergence of new or growing competitors; various othercompetitive and technological factors; and other risks and uncertainties indicated under “Risk Factors” and from time to time in our filings with theSecurities and Exchange Commission. Our actual results could differ materially from the results referred to in the forward-looking statements. In light of these risks anduncertainties, there can be no assurance that the results referred to in the forward-looking statements contained in this Form 10-K will occur. We undertake no obligation to update or review any guidance or other forward-looking information, whether as a result of new information,future developments or otherwise. Item 1. Business. Business Overview Innodata (NASDAQ: INOD) is a global provider of business process, information technology (IT) and professional services that are focused ondigital enablement. Our clients comprise several of the world’s leading digital retailers that sell digital content; preeminent publishers and other providers ofonline business information products; and enterprises in information-intensive industries (such as aerospace, defense, financial services, healthcare, hightechnology, insurance, and manufacturing) that create and manage large volumes of content to support their products or operations. We operate in two reporting segments: Content Services (CS) and Innodata Advanced Data Solutions (IADS). Content Services (CS) Segment Our Content Services (CS) segment provides solutions to digital retailers, information services companies, publishers and enterprises that have oneor more of the following broad business requirements: development of digital content (including eBooks); development of new digital information products;and operational support of existing digital information products and systems. 1 Many of our clients are driving or are responding to rapid and fundamental changes in the way end users discover, consume and create publishedinformation. For some of our publishing and information services clients, this means transforming information products from print to digital; for others, itmeans migrating already-digital products from web-only distribution to multiple-channel distribution that includes mobile and tablet devices and incorporatesmobility, social platform and semantic search; and for others still it means re-tooling pure search-based information products into workflow-imbeddedanalytical tools that combine content with software to enable context-aware decision-making; and for a select number of our information services clients, itmeans embracing the content-as-a-service model to integrate content with other tools, applications and data. Each of these transformations requires shifts inproducts, as well as the technology and the operations that support them. For our enterprise publishing clients, changes in the way end users discover, consume and create published information often necessitates replacingold processes and technologies that generated static, whole documents with new processes and technologies that enable content to reside as modular componentswhich are re-combined dynamically to create up-to-date, product-specific assembly guides, engineering diagrams/schematics, compliance documentation, fieldoperations guides and clinical documentation destined simultaneously for the web, tablets and smartphones. By blending consulting, technology and operations sourcing, along with deep domain expertise, Innodata provides measurable outcomes forpublishing companies, information services companies and enterprises through business transformation, accelerating innovation and efficient operations.Areas of notable technical competency and innovation include high-quality, large-scale transformation from image and PDF formats into digital text in a widevariety of formats (XML, ePUB3, XHTML, etc.); extraction and transformation of complex unstructured legal, financial, medical and technical informationto enriched, structured, normalized, and referenced information; and development and integration of technologies that relate to digital publishing workflow(including editorial and production systems), custom content management systems and digital asset management systems (including enterprise databasetechnologies) and media-neutral content delivery systems (including portals, websites and mobile applications). Each of our technical competencies issupported by defined approaches, frameworks and methodologies. We have a special focus on XML and related structured information standards, andthrough its employees Innodata has played leadership roles in the development of such standards. eBook Production and Distribution We are one of the largest producers of eBooks, serving four of the five leading digital retailers of eBooks as well as 80 leading trade, education andprofessional publishers that sell eBooks. We manufacture both standard eBooks and interactive eBooks in a variety of formats (including EPUB, Mobi andKindle) and in 12 major languages (including Japanese and Chinese). In addition, we distribute eBooks on behalf of publishers and authors to more than 25eBook retailers across North America, the United Kingdom, Australia and 24 countries in the European Union. Since the fall of 2011 we have produce over 1million eBooks. Information Product Development We help our clients develop high-value information products and knowledge repositories. Our clients include four of the ten largest informationindustry companies in the world, spanning financial, legal, healthcare and scientific information. Information and publishing is a $506 billion industryconsisting of more than 6,500 companies that create, publish, and aggregate content for the corporate, academic, government, healthcare, and consumermarkets1. Many of our clients specialize in the scientific, technical and medical (STM) segment (estimated revenues of $29.8 billion2) and the legal, tax andregulatory (LTR) segment (estimated revenues of $17.5 billion3). Both STM and LTR publishers make some or all of their revenues from the sale ofinformation products created from the primary and secondary data produced by professionals and researchers (in the case of STM) or courts, legislatures,administrative bodies and rule-making institutions (in the case of LTR). 1 Outsell Inc. (February 28, 2013). “Information Industry Market Size & Share Rankings Report: Preliminary 2012 Results.”2 Outsell Inc. (August 30, 2012). “2012 Market Size, Share, Forecast, and Trend Report: Scientific, Technical & Medical.”3 Outsell Inc. (September 24, 2012). “2012 Market Size, Share, Forecast, and Trend Report: Legal, Tax & Regulatory.” 2 We enable our clients to rapidly develop new digital products without direct investments in staff, facilities and technology. We embrace agiledevelopment methodologies that provide the benefits of early solution visualization and an iterative development process that spans content, technology anduser interface development. We use a combination of onsite project management, onshore solutions architecture and offshore globally distributed teams ofdevelopers, analysts and subject matter experts. For example, a leading legal publisher sought to develop a new digital product that would provide lawyers and compliance officers a workflow toolfor rule checking, rapid research and fact checking. The new digital tool needed to be accessible via laptops, smart phones and tablet devices. Moreover, itneeded to be updated daily to maintain pace with rapid regulatory developments (it was destined to replace a printed loose leaf series that was updated onlymonthly). Innodata technology architects, developers and content analysts designed and implemented the new digital tool within budget and on schedule.Using the new digital tool, lawyers and compliance officers can now confidently react faster to their clients’ increased regulatory burdens with up-to-dateinformation. For another leading global publisher, Innodata developed an eReader application designed specifically for complex professional reference material.The publisher saw an opportunity to increase sales by re-publishing its printed reference works as eBooks, but was unable to market them as eBooks becauseexisting eReader applications were built for simple fiction and trade books. Innodata developed an eReader application for the client that changed this – itenabled advanced search, linking and cross-references to external sources, subscriber annotations, frequent textual updates and a host of other functions thepublisher required in order to distribute its complex reference books as eBooks over the iPad® as well as Android and Windows-enabled mobile devices. Operational Support We help our clients significantly lower the cost of maintaining their high-value information products, applications and systems. Clients for which weperform such services include five of the top ten leading legal, tax and regulatory information providers, three of the top ten credit and financial informationproviders, and four of the top ten scientific, technical and medical information providers. Relative to information products, our focus is on the underlying“content supply chain” activities that are necessary to maintain the product. These activities often include content aggregation; extraction; encoding; indexingand abstracting; fabrication; and distribution. We deliver these activities on an outsourced basis. For example, for a leading provider of networking equipment, Innodata provides digital enhancement and related production systems support for itsproduct guides, release notes, configurations guides, installation guides and other documents. For an $8 billion leading provider of financial and news information, Innodata aggregates public source documentation from a variety of governmentagencies, which it transforms, analyzes and extracts in order to support a real-time, high-value information product. For a leading wholesale textbook distributor, Innodata provides support and maintenance for its digital book platform, including its customizablebookshelf and eReader applications and its conversion and fulfillment processes. 3 For a leading aerospace and defense client, Innodata provides ongoing maintenance for a content management system originally developed byInnodata that enables the client to publish and maintain customized technical documentation for each variant of the F-35 Joint Strike Fighter. The F-35 is afamily of single-seat, single-engine multirole fighter aircraft used to perform ground attack, reconnaissance, and air defense missions with stealth capability.The technical documentation system enables content to be stored and managed as modular components that are combined into configuration-specific packages,and supports secure electronic delivery to portable devices. Digital Content Supply Chain Strategy Innodata works with clients at a strategic business and technology level to address business process and technology challenges related to digitalcontent supply chain optimization and strategy. By aligning operations and technology with business goals, Innodata helps businesses accelerate new productdevelopment and introduction; control cost; consolidate and leverage technology investment; and obtain benefits of scale. For a multinational information services company, we worked in conjunction with a client’s internal teams to design new content architectures andimplement new content technologies that enabled the client to migrate its operations away from process and technologies designed primarily for print output tonew processes and technologies that were designed around the nature of the content itself and supported multiple simultaneous delivery channels. A global information company had acquired two businesses that each collected, processed and managed some of the same public law content. Thecompany recognized the opportunity to reduce cost by consolidating the processing of this overlapping content. To accomplish this cost savings, weimplemented a new, consolidated workflow system using Alfresco and jBPM which provided a common framework for content reuse, while enabling contentenrichment processes to be performed by external and internal resources in a fully managed environment. For a publisher of legal treatises and practice guides and provider of on-demand learning, Innodata created a future-state vision of operationalworkflows required to support an increasing array of technologies and online products. This future-state vision included recommendations regarding processimprovements and new technologies. Innodata Advanced Data Solutions (IADS) Segment Many enterprises are embracing new digital information technologies and workflow processes within their operations in order to improve internaldecision-support systems. We formed our IADS segment in mid-2011 to design and develop new capabilities to enable clients in the financial services,insurance, medical and healthcare sectors to improve decision-support through digital technologies. We believe that by creating and commercializing innovativebusiness strategies and technology solutions we will be able to accelerate our growth and reduce our revenue volatility. IADS operates through two subsidiaries. Synodex offers a range of services for healthcare, medical and insurance companies, and docGenixprovides services to financial services institutions. As of December 31, 2012 we owned 77% of Synodex and 94% of docGenix, both limited liabilitycompanies. These subsidiaries are in a developmental stage and reported minimal revenues in 2012. During the fiscal year ended December 31, 2012, weincurred approximately $7.5 million in pre-operating development expenses and approximately $2.0 million in related capital expenses for the development ofour Synodex and docGenix businesses, and we wrote off the assets of docGenix and recorded an impairment charge of $0.5 million. The existing docGenixproduct and service offering has not gained traction in the market place beyond its initial clients, and we will need to revise our docGenix product and servicesin response. We intend to continue to invest in Synodex and docGenix in the immediate future at the combined rate of $1.5-$2 million per quarter. 4 The main focus of the Synodex business is the extraction and classification of data from unstructured medical records in an innovative way so as toprovide improved data service capabilities for insurance underwriting, insurance claims, medical records management and clinical trial support services.Synodex has developed and piloted its APS.Extract™ product for specific use with life, disability and long-term care insurance underwriting and claims andhas cultivated a large number of interested clients in both the U.S. and the U.K. Most recently, Synodex launched its Synodex.Connect™ platform to facilitatedigital data exchange for underwriting workflows between independent brokers and insurance carriers, including delivery of Synodex’s APS.Extract data andreports. Synodex began unpaid pilot activities for clients in the fourth quarter of 2012. The main focus of the docGenix business is the extraction and classification of data from unstructured legal documents in order to improve anorganization’s ability to analyze documentation and feed actionable data to downstream applications. As an example of our docGenix service, Innodata provided a leading global investment company a new content management system for its complexderivatives agreements. The company is party to more than 5,000 derivative contracts where the impact of market changes and the counterparty and collateralchanges require daily verification and analysis. Conducting this research was slow and resource-intensive because contract creation, storage and retrievalprocesses were all still paper or image based. Using Innodata’s system, these complex documents are transformed into machine readable, computer-addressable data that is downstreamed to risk collateral and other mission-critical systems, and users can perform multi-dimensional, complex queries inminutes. Our Global Operations We provide our services using a globally distributed workforce utilizing advanced technologies which automate portions of our process and helpensure that our work product is highly accurate and consistent. Our production facilities are ISO 27001 certified and our production facilities located in India, the Philippines and Sri Lanka are SSAE 16 Type IIcertified. Our production facilities comply with the requirements of the United States’ Health Insurance Portability and Accountability Act of 1996 asamended (HIPAA) (including by the Health Information Technology for Economic and Clinical Health Data (HITECH)) and the United Kingdom’s DataProtection Act 1998 (DPA). Innodata is a U.S. Safe Harbor registered entity adhering to both the European Union and the Switzerland Safe HarborFrameworks on the protection of personal data. We encrypt all individual protected health information, both at rest and in motion, to the AES 256 or similarstandard, and we employ a range of security features including managed firewalls and intrusion services. For our data extraction services, we maintain staff in a wide spectrum of disciplines, including medicine, law, engineering, management, finance,science and the humanities. Our services are organized and managed around three vectors: a vertical industry focus, a horizontal service/process focus, and a supportiveoperations focus. The vertically-aligned groups understand our clients’ businesses and strategic initiatives. The vertical group for each particular industry includesexperts hired from that industry. Our service/process-aligned groups include engineering personnel and delivery personnel. Our engineering teams are responsible for creating secureand efficient custom workflows and integrating proprietary and third-party technologies to automate manual processes and improve the consistency andquality of our work product. These tools include categorization engines that utilize pattern recognition algorithms based on comprehensive rule sets and relatedheuristics, data extraction tools that automatically retrieve specific types of information from large data sources, and workflow systems that enable varioustasks and activities to be performed across our multiple facilities. 5 Our globally distributed delivery personnel are responsible for executing our client engagements in accordance with service-level agreements. Wedeliver services from facilities in the United States, India, the Philippines, Sri Lanka and Israel. Other support groups are responsible for managing diverse enabling functions including human resources, organizational development, network andcommunications technology infrastructure support and physical infrastructure and facilities management. Our sales staff, program managers and consultants operate primarily from our North American and European locations, as well as from client sites. Our Opportunity Rapid changes in digital content technologies have created the need for all sorts of companies to refashion their product offerings and their operations.Media, publishing and information services companies contend with new monetization models, delivery platforms, and channels. They seek to develop newdigital products as print product revenue wanes; to broaden their markets by distributing content over the iPad®, iPhone® and other portable devices; and tomonetize existing content in new, highly targeted custom products through flexible reuse and repurposing. Meanwhile, for enterprises that rely on content to support operations, this shift to digital technology offers opportunities to improve internal decisionsupport and risk mitigation in complex data operations by harnessing the power of machine-readable, digital data to drive improved decision support. Forenterprises that rely on content to support products, this shift to digital technology offers opportunities to create and manage content more efficiently, while atthe same time distributing content through an increased number of channels. As a result, media, publishing and information services companies, and content-intensive enterprises, are increasingly relying on service providers,such as Innodata, to provide digital content-related services. Clients Two clients each generated more than 10% of our revenues in the fiscal year ended 2012. Revenues from Apple Inc. (“Apple”) were approximately$25.7 million, or 30% of total revenues, and revenues from Reed Elsevier affiliated companies (the “RE Clients”) were approximately $9.6 million or 11% oftotal revenues. No other client generated more than 10% of our revenues in 2012. These two clients together generated approximately 41%, 31% and 17% of ourtotal revenues in the fiscal years ended December 31, 2012, 2011 and 2010, respectively. Revenues from clients located in foreign countries (principally inEurope) accounted for 24%, 30% and 33% of our total revenues for these respective fiscal years. We have long-standing relationships with many of our clients, and we have provided services to one of the two clients mentioned in the precedingparagraph for over ten years. Our track record of delivering high-quality services helps us to solidify client relationships. Many of our clients are recurringclients, meaning that they have continued to provide additional projects to us after our initial engagement with them. Our contractual arrangements with Apple during calendar year 2012 consisted of a master services agreement (“MSA”) and two statements of work(“SOWs”). The MSA and SOWs automatically renew on a monthly basis unless terminated by either party for convenience on 60 days’ prior notice withrespect to the MSA and one SOW, and on 30 days’ prior notice with respect to the second SOW. The MSA may be terminated by either Apple or the Companyfor material breach, failure to meet service levels, or insolvency related events that that are not cured during a 30-day notice period, or, if the material breach isincapable of cure, immediately on written notice. Apple may also terminate the MSA in the event of a force majeure that materially affects performance andlasts for more than 30 days. The SOWs may be terminated by either party for “cause” on 30 days’ notice (0 days’ notice if the “cause” is incurable), andwithout “cause” on 60 days’ notice with respect to one SOW and 30 days’ notice with respect to the second SOW. The MSA also contains confidentiality,indemnification and other standard provisions. 6 Our contractual arrangements with the RE Clients during 2012 consisted of multiple MSAs and separately agreed to SOWs for specific services.Two of the MSAs have indefinite terms, a third has a term that ends in February 2014, and the fourth has a term that ends on the later of September 2015 orthe expiration date of all SOWs issued under that MSA. RE Clients may terminate the MSAs on notice periods ranging from zero to six months, and they mayterminate their SOWs on notice periods of up to 180 days. They may also terminate certain of the MSAs and SOWs on notice periods of three months or lessfor “cause” and for insolvency related events, and on changes of control, force majeure and the imposition of certain price increases by the Company that arenot acceptable to them. The Company may terminate two of the MSAs on notice periods of 180 days, and a third on a notice period of three months, and itmay also terminate certain MSAs and SOWs for “cause”, insolvency related events affecting the RE Clients, and other defined events. The MSAs containconfidentiality, limitation of liability, indemnification and other standard provisions. Our agreements with our other clients are in many cases terminable on 30 to 90 days' notice. A substantial portion of the services we provide to ourclients is subject solely to their requirements. Competitive Strengths Our expertise in digital content. We are primarily focused on helping clients across multiple vertical industries to use digital data to build newkinds of products, to reduce costs and to improve decision-support. Our focus on quality. We have achieved a reputation within our clients for consistent high-quality. We maintain independent quality assurancecapabilities in all geographies where we operate. Our quality teams are compliant and certified to the ISO 9001:2008 quality management system standards. Our global delivery model. We have operations in seven countries in North America, Europe and Asia. We provide services to our clients througha comprehensive global delivery model that integrates both local and global resources to obtain the best economic results. Our production centers are ISO9001:2008 certified and we have an enterprise-wide ISO 27001 certification. Our proven track record and reputation. By consistently providing high-quality services, we have achieved a track record of client successes.This track record is reflected in our reputation as a leading service provider within the media, publishing and information services sector. Our reputation andbrand connote an assurance of expertise, quality execution and risk mitigation. Our focus on technology and engineering innovation. Our engineering and IT teams integrate proprietary and best-in-class third party tools intoour workflows to drive as much automation as possible. In addition, our engineering and IT teams provide services directly to our clients, helping themachieve improved efficiencies within their own operations. Our long-term relationships with clients. We have long-term relationships with many of our clients, who frequently retain us for additionalprojects after a successful initial engagement. We believe there are significant opportunities for additional growth with our existing clients, and we seek toexpand these relationships by increasing the depth and breadth of the services we provide. This strategy allows us to use our in-depth client-specific knowledgeto provide more fully integrated services and develop closer relationships with those clients. Our ability to scale. We have demonstrated the ability to expand our teams and facilities to meet the needs of our clients. By virtue of the significantnumbers of professional staff working on projects, we are able to build teams for new engagements quickly. We have also demonstrated the ability to hire andtrain staff quickly in order to service diverse and often large-scale needs of our clients. 7 Our internal infrastructure. We utilize established facilities, technology and communications infrastructure to support our business model. Weown and operate some of the most advanced content production facilities in the world, which are linked by multi-redundant data connections. Our Wide AreaNetwork – along with our Local Area Networks, Storage Area Networks and data centers – is configured with industry standard redundancy, often with morethan one backup to ensure 24x7 availability. Our infrastructure is built to accommodate advanced tools, processes and technologies that support our contentand technical experts. We encrypt all individual protected health information, both at rest and in motion, to the AES 256 or similar standard, and we employa range of security features including managed firewalls and intrusion services. Sales and Marketing We market and sell our services directly through our professional staff, senior management and direct sales personnel operating primarily out of ourcorporate headquarters in Hackensack, New Jersey, just outside New York City, and our Dallas, Texas office. During 2012, we had five executive-levelbusiness development and marketing professionals and approximately 20 sales personnel. We also deploy solutions architects, technical support experts andconsultants who support the development of new clients and new client engagements. These resources work within teams (both permanent and ad hoc) thatprovide support to clients. Our sales professionals identify and qualify prospects, securing direct personal access to decision makers at existing and prospective clients. Theyfacilitate interactions between client personnel and our service teams to define ways in which we can assist clients with their goals. For each prospective clientengagement, we assemble a team of our senior employees drawn from various disciplines within our Company. The team members assume assigned roles in aformalized process, using their combined knowledge and experience to understand the client’s goals and collaborate with the client on a solution. Sales activities include the design and generation of presentations and proposals, account and client relationship management and the organization ofaccount activities. Personnel from our solutions analysis group and our engineering services group closely support our direct sales effort. These individuals assist thesales force in understanding the technical needs of clients and providing responses to these needs, including demonstrations, prototypes, pricing quotationsand time estimates. In addition, account managers from our customer service group support our direct sales effort by providing ongoing project-level support toour clients. Our marketing organization is responsible for developing and increasing the visibility and awareness of our brand and our service offerings, definingand communicating our value proposition, generating qualified, early-stage leads and furnishing effective sales support tools. As part of our marketing strategy we partner with media organizations to build awareness, establish a reputation as an industry thought leader andgenerate leads. Media partners include trade associations and publications, trade show producers and consulting organizations. These partnerships areparticularly valuable in enterprise industries as we build our presence among digital content leaders and decision makers. 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 integrated marketing campaigns, search engine optimization, search engine marketing and the maintenance and continued development ofexternal websites). 8 Research and Development We did not incur any research and development costs in any of the three years ended December 31, 2012, 2011 or 2010. Competition The market for publishing services and related services is highly competitive, fragmented and intense. Our major competitors include ApexCoVantage, Aptara, Cenveo, Infosys, HCL Technologies, Macmillan India, SPI Technologies, JSI S.A.S. Groupe Jouve and Thomson Digital. We alsocompete with in-house personnel at existing or prospective clients who may attempt to duplicate our services in-house. We compete by offering high-quality services and favorable pricing that leverages our technical skills, IT infrastructure, offshore model andeconomies of scale. Our competitive advantages are especially attractive to clients for undertakings that are technically challenging are sizable in scope or scale,are continuing, or that require a highly fail-safe environment with technology redundancy. Locations We are headquartered in Hackensack, New Jersey, just outside New York City. We have an additional office in Dallas, Texas. We have eightproduction facilities in the Philippines, India, Sri Lanka and Israel. Employees As of December 31, 2012, we employed approximately 60 persons in the United States and Europe, and over 6,000 persons in eight global deliverycenters in the Philippines, India, Sri Lanka and Israel. Most of our employees have graduated from at least a two-year college program. Many of our employeeshold advanced degrees in law, business, technology, medicine and social sciences. No employees are currently represented by a labor union, and we believethat our relations with our employees are satisfactory. Corporate Information Our principal executive offices are located at Three University Plaza, Hackensack, New Jersey 07601, and our telephone number is (201) 371-8000.Our website is www.innodata.com, and information contained on our website is not included as a part of, or incorporated by reference into, this Annual Reporton Form 10-K. There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, andany amendments to those reports, as soon as reasonably practicable after we electronically file that material with, or furnish it to, the Securities and ExchangeCommission (SEC). Our SEC reports can be obtained through the Investor Relations section of our website or from the Securities and Exchange Commissionat www.sec.gov. 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 were to 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. Our top two clientsgenerated approximately 41%, 30% and 17% of the Company’s total revenues in the fiscal years ended December 31, 2012, 2011 and 2010, respectively.Another client accounted for less than 10% of our total revenues for the year ended December 31, 2012, but for 14% and 10% of our total revenues for theyears ended December 31, 2011 and 2010, respectively. One other client accounted for less than 10% of our total revenues for the years ended December 31,2012 and 2011, but for 11% of our total revenues for the year ended December 31, 2010. No other client accounted for 10% or more of revenues during theseperiods. Further, in the years ended December 31, 2012, 2011 and 2010, revenues from non-US clients accounted for 24%, 30% and 33%, respectively, of theCompany's revenues. We may lose any of these, or our other major clients, as a result of our failure to meet or satisfy our clients’ requirements, the completionor termination of a project or engagement, or the client’s selection of another service provider. 9 In addition, the volume of work performed for our major clients may vary from year to year, and services they require from us may change fromyear to year. If the volume of work performed for our major clients varies, or if the services they require from us change, our revenues and results of operationscould be adversely affected, and we may incur a loss from operations. Our services are typically subject to client requirements, and in many cases areterminable 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 theyare completed or otherwise terminated 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. While we seek,wherever possible, on completion or termination of large projects, to counterbalance periodic declines in revenues with new arrangements to provide services tothe same client or others, our inability to obtain sufficient new projects to counterbalance any decreases in such work may adversely affect our future revenuesand results of operations. The Synodex and docGenix subsidiaries in our IADS segment are early stage companies and have incurred net losses to date. We have invested significant amounts in our Synodex and docGenix subsidiaries in our IADS segment. Our total 2012 investment in Synodex anddocGenix was $9.5 million, consisting of $7.5 million in operating expenses and $2 million in capital expenditures. These subsidiaries generatedapproximately $1.2 million in revenues and incurred a net loss of $6.3 million, net of inter-segment profits, during 2012, and we wrote off the assets ofdocGenix and recorded an impairment charge of $0.5 million. The existing docGenix product and service offering has not gained traction in the market placebeyond its initial clients, and we will need to revise our docGenix product and services in response. We intend to continue to invest in Synodex and docGenixin the immediate future at the combined rate of $1.5-$2 million per quarter. These subsidiaries are still subject to the risks and uncertainties of early stagecompanies, and there can be no assurance that these subsidiaries will be viable. We have no prior experience in selling these IADS services and we aredependent on a small group of skilled personnel. Failure to generate revenues and margins could have an adverse effect on our result of operations andfinancial condition. New acquisitions, joint ventures or strategic investments or partnerships could harm our operating results. We may pursue new acquisitions, joint ventures or engage in strategic investments or partnerships to grow and enhance our capabilities. We cannotassure that we will successfully consummate any acquisitions or joint ventures, or profit by strategic investments, or achieve desired financial and operatingresults. Further, such activities involve a number of risks and challenges, including proper evaluation, diversion of management’s attention and properintegration with our current business. Accordingly, we might fail to realize the expected benefits or strategic objectives of any such venture we undertake. If weare unable to complete the kind of acquisitions for which we plan, we may not be able to achieve our planned rates of growth, profitability or competitiveposition in specific markets or services. 10 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 accountsreceivable would adversely affect our results of operations. Several significant clients account for a large percentage of our accounts receivable. If any of these clients were unable, or refused, for any reason, topay our accounts receivable, our financial condition and results of operations would be adversely affected. As of December 31, 2012, 55% or $7.9 million, ofour accounts receivable was due from four clients. See “Liquidity and Capital Resources.” In addition, we evaluate the financial condition of our clients and usually bill and collect on relatively short cycles. We maintain specific allowancesagainst doubtful receivables. Actual losses on client balances could differ from those that we currently anticipate and, as a result, we might need to adjust ourallowances. There is no guarantee that we will accurately assess the creditworthiness of our clients. Macroeconomic conditions, such as the continued creditcrisis and related turmoil in the global financial system, could also result in financial difficulties, including limited access to the credit markets, insolvency orbankruptcy, for our clients, and, as a result, could cause clients to delay payments to us, request modifications to their payment arrangements that couldincrease our receivables balance, or default on their payment obligations to us. If we are unable to collect timely from our clients, our cash flows could beadversely affected. Quarterly fluctuations in our revenues and results of operations could make financial forecasting difficult and could negatively affect our stockprice. 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 profit of approximately $15,000 in the first quarter of 2011 to a profit of approximately $3.4 million in thefirst quarter of 2012. We experience fluctuations in our revenue and earnings as we replace and begin new projects, which may have some normal start-up delays, or wemay be unable to replace a project entirely. These and other factors may contribute to fluctuations in our results of operations from quarter to quarter. A high percentage of our operating expenses, particularly personnel and rent, are relatively fixed in advance of any particular quarter. As a result,unanticipated variations in the number and timing of our projects, or in employee wage levels and utilization rates, may cause us to significantly underutilizeour production capacity and employees, resulting in significant variations in our operating results in any particular quarter, and have resulted in losses. The economic environment and pricing pressures could negatively impact our revenues and operating results. Due to the intense competition involved in outsourcing and information technology services, we generally face pricing pressures from our clients. Ourability to maintain or increase pricing is restricted as clients generally expect to receive volume discounts or special pricing incentives as we do more businesswith them; moreover, our large clients may exercise pressure for discounts outside of agreed terms. Our profitability could suffer if we are not able to maintain pricing on our existing projects and win new projects at appropriate margins. Our profit margin, and therefore our profitability, is dependent on the rates we are able to recover for our services. If we are not able to maintainpricing on our existing services and win new projects at profitable margins, our profitability could suffer. The rates we are able to recover for our services areaffected by a number of factors, including competition, the value our client derives from our services and general economic and political conditions. 11 If our pricing structures do not accurately anticipate the cost and complexity of performing our work, then our contracts could be unprofitable. We provide services either on a time-and-materials basis or on a fixed-price basis. Our pricing is highly dependent on our internal forecasts andpredictions about our projects, which might be based on limited data and could turn out to be inaccurate. If we do not accurately estimate the costs and timingfor completing projects, our contracts could prove unprofitable for us or yield lower profit margins than anticipated. Our inability to obtain price increases and improve our efficiency may impact our results of operations. Over the past few years, we have experienced wage inflation in the Asian countries where we have the majority of our operations. In addition, we haverecently experienced adverse fluctuations in foreign currency exchange rates. These global events have put pressure on our profitability and our margins.Although we have tried to partially offset wage increases and foreign currency fluctuations through price increases and improving our efficiency, we cannotensure that we may be able to continue to do so in the future, which would negatively impact our results of operations. If our clients are not satisfied with our services, they may terminate our contracts with them or our services, which could have an adverse impacton our business. Our business model depends in large part on our ability to attract additional work from our base of existing clients. Our business model also dependson relationships our account teams develop with our clients so that we can understand our clients’ needs and deliver solutions and services that are tailored tothose needs. If a client is not satisfied with the quality of work performed by us, or with the type of services or solutions delivered, then we could incuradditional costs to address the situation, the profitability of that work might be impaired, and the client’s dissatisfaction with our services could damage ourability to obtain additional work from that client. In particular, clients that are not satisfied might seek to terminate existing contracts, which would mean thatwe could incur costs for the services performed with no associated revenue upon termination of a contract. This could also direct future business to ourcompetitors. In addition, negative publicity related to our client services or relationships, regardless of its accuracy, may further damage our business byaffecting our ability to compete for new contracts with current and prospective clients. Our new clients may not generate the level of revenues anticipated for reasons beyond our control. As we get new opportunities and win new business, our new clients may not generate the level of revenues that we initially anticipated at the time ofsigning an agreement with them. This could be due to various reasons beyond our control. We may invest in people or technology and incur other costs inanticipation of revenues, and as such any deviation from our expected plan would impact our margins and earnings. Our business will suffer if we fail to develop new services and enhance our existing services in order to keep pace with the rapidly evolvingtechnological environment or provide new service offerings, which may not succeed. The outsourcing, information technology and consulting services industries are characterized by rapid technological change, evolving industrystandards, changing client preferences and new product and service introductions. Our future success will depend on our ability to develop solutions that keeppace with changes in the markets in which we provide services. We cannot guarantee that we will be successful in developing new services, addressingevolving technologies on a timely or cost-effective basis or, if these services are developed, that we will be successful in the marketplace. In addition, we cannotguarantee that products, services or technologies developed by others will not render our services non-competitive or obsolete. Our failure to address thesedevelopments could have a material adverse effect on our business, results of operations and financial condition. 12 We invest in developing and pursuing new service offerings from time to time. Our profitability could be reduced if these services do not yield theprofit margins we expect, or if the new service offerings do not generate the planned revenues. We have made and continue to make significant investments towards building-out new capabilities to pursue growth. These investments increase ourcosts and if these services do not yield the revenues or profit margins we expect and we are unable to grow our business and revenues proportionately, ourprofitability may be reduced. We depend on third-party technology in the provision of our services. We rely upon certain software that we license from third parties, including software integrated with our internally developed software used in theprovision of our services. These third-party software licenses may not continue to be available to us on commercially reasonable or competitive terms, if at all.The loss of, or inability to maintain or obtain any of these software licenses, could result in delays in the provision of our services until we develop, identify,license and integrate equivalent software. Any delay in the provision of our services could damage our business and adversely affect our results of operations.In addition, for our Synodex and docGenix subsidiaries of our IADS segment, we utilize third party data centers to serve our clients and generate revenues.Any disruption in provision of services from these data centers could result in loss of revenues, client dissatisfaction and loss of clients. We compete in highly competitive markets for our Content Services segment that have low barriers to entry. The markets for our services are highly competitive and fragmented. Some of our competitors have longer operating histories, significantly greaterfinancial, human, technical and other resources and greater name recognition than we do. If we fail to be competitive with these companies in the future, wemay lose market share, which could adversely affect our revenues and results of operations. There are relatively few barriers preventing companies from competing with us. As a result, new market entrants also pose a threat to our business.We also compete with in-house personnel at current and prospective clients, who may attempt to duplicate our services using their own personnel. We cannotguarantee that our clients will outsource more of their needs to us in the future, or that they will not choose to provide internally the services that they currentlyobtain from us. If we are not able to compete effectively, our revenues and results of operations could be adversely affected. Our intellectual property rights are valuable, and if we are unable to protect them or are subject to intellectual property rights claims, ourbusiness may be harmed. Our intellectual property rights include certain trademarks and trade secrets, which are important assets for our business. Although we takeprecautions to protect our intellectual property rights, these efforts may not be sufficient or effective. In addition, various events outside of our control pose athreat to our intellectual property rights as well as to our business. We may fail to attract and retain enough sufficiently trained employees to support our operations, as competition for highly skilled personnel issignificant. These factors could have a material adverse effect on our business, results of operations, financial condition and cash flows. The outsourcing industry relies on large numbers of skilled employees. Our success depends to a significant extent on our ability to attract, hire,train and retain qualified employees. Our performance largely depends on the talents and efforts of highly skilled individuals including our executives and keysales personnel. The outsourcing industry, including our Company, experiences high employee attrition. Increased competition for these professionals, in theoutsourcing industry or otherwise, could have an adverse effect on us. A significant increase in the attrition rate among employees with specialized skills coulddecrease our operating efficiency and productivity. 13 In addition, our ability to maintain and renew existing engagements and obtain new businesses will depend, in large part, on our ability to attract,train and retain personnel with skills that enable us to keep pace with growing demands for outsourcing, evolving industry standards and changing clientpreferences. Our failure to attract, train and retain personnel with the qualifications necessary to fulfill the needs of our existing and future clients or toassimilate new employees successfully could have a material adverse effect on our business, results of operations, financial condition and cash flows. Disruptions in telecommunications, system failures, data corruption or virus attacks could harm our ability to execute our global resource model,which could result in client dissatisfaction and a reduction of our revenues. We use a distributed global resource model. Our onshore workforce provides services from our North American and European offices, as well asfrom client sites; and our offshore workforce provides services from our eight overseas production facilities in the Philippines, India, Sri Lanka and Israel. Allour global facilities are linked with a telecommunications network that uses multiple service providers. We may not be able to maintain active voice and datacommunications between our various facilities and our clients' sites at all times due to disruptions in these networks, system failures, data corruption or virusattacks. Any significant failure in our ability to communicate could result in a disruption in business, which could hinder our performance or our ability tocomplete client projects on time. This, in turn, could lead to client dissatisfaction and an adverse effect on our business, results of operations and financialcondition. A material breach in security relating to our information systems could adversely affect us. Even though we have implemented network security measures, our servers may be vulnerable to computer viruses, cyber-attacks, break-ins andsimilar disruptions from unauthorized tampering. The occurrence of any of the events described above could result in interruptions, delays, the loss orcorruption of data, cessations in the availability of systems or liability under privacy laws or contracts, each of which could have a material adverse effect onour financial position and results of operations. Governmental and client focus on data security could increase our costs of operations. In addition, any incidents in which we fail to protect ourclients' information against security breaches could result in monetary damages against us, termination of our engagement by our client, andmay adversely impact our results of operations. Certain laws and regulations regarding data privacy and security affecting our clients impose requirements regarding the privacy and security ofinformation maintained by these clients, as well as notification to persons whose personal information is accessed by an unauthorized third party. As a resultof any continuing legislative initiatives and client demands, we may have to modify our operations with the goal of further improving data security. The costof compliance with these laws and regulations is high and is likely to increase in the future. Any such modifications may result in increased expenses andoperating complexity, and we may be unable to increase the rates we charge for our services sufficiently to offset these increases. In addition, as part of theservice we perform, we have access to confidential client data, including sensitive personal data and individuals protected health information. As a result, weare subject to numerous U.S. and foreign jurisdiction laws and regulations designed to protect this information, such as the Data Protection Act 1988, HealthInsurance Portability and Accountability Act of 1996 as amended (including by the Health Information Technology for economic and Clinical Health Act andvarious other laws governing the protection of individually identifiable information. We may also be bound by certain client agreements to use and disclose theconfidential client information in a manner consistent with the privacy standards under regulations applicable to such client. Any failure on our part to complywith these laws and regulations can result in negative publicity and diversion of management time and effort and may subject us to significant liabilities andother penalties. 14 If client confidential information is inappropriately disclosed due to a breach of our computer systems, system failures or otherwise, or if anyperson, including any of our employees, negligently disregards or intentionally breaches controls or procedures with which we are responsible for complyingwith respect to such data or otherwise mismanages or misappropriates that data, we may have substantial liabilities to our clients. Any incidents with respectto the handling of such information could involve us in litigation or indemnification claims with our clients and other parties. In addition, any breach oralleged breach of our confidentiality agreements with our clients may result in termination of their engagements, resulting in associated loss of revenue andincreased costs. Our international operations subject us to risks inherent in doing business on an international level, any of which could increase our costs andhinder our growth. The major part of our operations is carried on in the Philippines, India, Sri Lanka and Israel, while our headquarters are in the United States, andour clients are primarily located in North America and Europe. While we do not depend on significant revenues from sources internal to the countries in whichwe operate, we are nevertheless subject to certain adverse economic factors relating to overseas economies generally, including inflation, external debt, a negativebalance of trade and underemployment. Other risks associated with our international business activities include: • 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, Sri Lanka and Israel, is incurred in the local currencies of the countries in which we operate. For financial reporting purposes, we translateall non-U.S. 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 therefore adverselyaffect our results of operations. 15 The Philippines and India have at times experienced high rates of inflation as well as major fluctuations in the exchange rate between the Philippinepeso and the U.S. dollar and the Indian rupee and the U.S. dollar. Continuing inflation and significant fluctuations in the peso and rupee against the dollarcould adversely affect our results of operations. There is no guarantee that our financial results will not be adversely affected by currency exchange rate fluctuations or that any efforts by us toengage in foreign currency hedging activities will be effective. Finally, as most of our expenses are incurred in currencies other than those in which we bill forthe related services, any increase in the value of certain foreign currencies against the U.S. dollar could increase our operating costs. In the event that the government of India, the Philippines or the government of another country changes its tax policies, rules and regulations, ourtax expense may increase and affect our effective tax rates. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. We are subject to the continual examination by tax authorities inIndia and in the Philippines, and the Company assesses the likelihood of outcomes resulting from these examinations to determine the adequacy of itsprovision for income taxes. Although we believe our tax estimates are reasonable, the final determination of tax audits could be materially different from what isreflected in historical income tax provisions and accruals, and could result in a material effect on the Company’s income tax provision, net income or cashflows in the period or periods for which that determination is made. If additional taxes are assessed, it could have an adverse impact on our financial results. In addition, unanticipated changes in the tax rates, tax laws or the interpretation of tax laws in the jurisdiction where we operate, could affect ourfuture results of operations. Our operating results may be adversely affected by our use of derivative financial instruments. We have entered into a series of foreign currency forward contracts that are designated as cash flow hedges. These contracts are intended to partiallyoffset the impact of the movement of the exchange rates on future operating costs of our Asian subsidiaries. The hedging strategies that we have implemented ormay implement to mitigate foreign currency exchange rate risks may not reduce or completely offset our exposure to foreign exchange rate fluctuations and mayexpose our business to unexpected market, operational and counterparty credit risks. Accordingly, we may incur losses from our use of derivative financialinstruments that could have a material adverse effect on our business, results of operations and financial condition. Regulations 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 subsidiaries areno longer treated as U.S. corporations for U.S. federal income tax purposes under the regulations, and furthermore, are not subject to U.S. federal income taxescommencing as of such date. 16 In the preamble to such regulations, the IRS expressed its view that dual-registered companies described in the preceding paragraph are also treated asU.S. corporations for U.S. federal income tax purposes for periods prior to August 12, 2004. In 2006, the IRS issued its final regulations, stating that neitherthe temporary regulations nor these final regulations is retroactive. Further, additional guidance was released by the IRS which clarified that the regulationsupon which we relied were not binding on pre-existing entities until May 2006. For periods prior to this date (i.e., prior to August 12, 2004) these finalregulations apply, and the classification of dually chartered entities is governed by the pre-existing regulations. As such, we believe that our historic treatmentof these subsidiaries as not having been required to pay taxes in the United States for the period prior to August 12, 2004 is correct, and we have made noprovision for U.S. taxes in our financial statements for these entities for the periods prior to August 12, 2004. However, we cannot guarantee 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 Philippine subsidiaries as Delaware limited liabilitycompanies that, if successful, could increase materially our liability for U.S. federal income taxes. If tax authorities in any of the jurisdictions in which we operate contest the manner in which we allocate our profits, our net income coulddecrease. Substantially all of the services we provide to our clients are provided by our Asian subsidiaries located in a different jurisdiction. Tax authorities insome of these jurisdictions have from time to time challenged the manner in which we allocate our profits among our subsidiaries, and we may not prevail inthis type of challenge. If such a challenge were successful, our worldwide effective tax rate could increase, thereby decreasing our net income. An expiration or termination of our preferential tax rate incentives could adversely affect our results of operations. Certain foreign subsidiaries are subject to preferential tax rates. In addition, one of our foreign subsidiaries enjoys a tax holiday. These tax incentivesprovide that we pay reduced income taxes in those jurisdictions for a fixed period of time that varies depending on the jurisdiction. An expiration or terminationof these incentives could substantially increase our worldwide effective tax rate, thereby decreasing our net income and adversely affecting our results ofoperations. Our earnings may be adversely affected if we change our intent not to repatriate earnings in Asia or if such earnings become subject to U.S. taxon a current basis. We indefinitely reinvest the foreign earnings in our foreign subsidiaries. Unremitted earnings of our 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, because suchearnings are not anticipated to be remitted to the United States. At December 31, 2012 we had cash and cash equivalents of $25.4 million, of which $15.1million was held by our foreign subsidiaries, and short term investments of $3.1 million which was entirely held by our operating foreign subsidiaries locatedin Asia. A significant portion of the amounts held outside of the Unites States could be repatriated to the United States, but under current law, would besubject to Unites States federal income taxes, less applicable foreign tax credit. While we have no plans to remit the funds, events may occur in the future thatcould effectively force us to change our current intent not to repatriate our foreign earnings. If we change our intent and repatriate such earnings, we will have toaccrue the applicable amount of taxes associated with such earnings and pay taxes at a substantially higher rate than our effective income tax rate in 2012.These increased taxes could have a material adverse effect on our business, results of operations and financial condition. President Obama’s administration announced a number of tax-related legislative proposals that would, among other things, seek to effectively taxcertain profits of U.S. companies earned overseas. Although, several of these proposals were not enacted into law, Congress could consider any of thesemeasures at any time. If enacted into law, and depending on their precise terms, these proposals could increase our tax rate and tax payments, and could have amaterial adverse effect on our business, results of operations and financial condition. 17 Anti-outsourcing legislation, if adopted, could adversely affect our business, financial condition and results of operations and impair our ability toservice our clients. The issue of outsourcing of services abroad by U.S. companies is a topic of political discussion in the United States. Measures aimed at limiting orrestricting outsourcing by U.S. companies are under discussion in Congress and in numerous state legislatures. While no substantive anti-outsourcinglegislation has been introduced to date, given the ongoing debate over this issue, the introduction of such legislation is possible. If introduced, our business,financial condition and results of operations could be adversely affected and our ability to service our clients could be impaired. Our growth could be hindered by visa restrictions. Occasionally, we have employees from our other facilities visit or transfer to the United States to meet our clients and work on projects at clientssites. Any visa restrictions or new legislation putting a restriction on issuing visas could affect our business. Immigration and visa laws and regulations in the United States and other countries are subject to legislative and administrative changes as well aschanges in the application of standards. Immigration and visa laws and regulations can be significantly affected by political forces and levels of economicactivity. Our international expansion strategy and our business, results of operations and financial condition may be materially adversely affected if legislativeor administrative changes to immigration or visa laws and regulations impair our ability to staff projects with our professionals who are not citizens of thecountry where the work is to be performed. Political uncertainty, political unrest, terrorism, and natural calamities in the Philippines, India, Sri Lanka and Israel could adversely affectbusiness conditions in those regions, which in turn could disrupt our business and adversely impact our results of operations and financialcondition. We conduct the majority of our production operations in the Philippines, India, Sri Lanka and Israel. These countries and regions remain vulnerableto disruptions from political uncertainty, political unrest and terrorist acts. Any damage to our network and/or information systems would damage our ability to provide service, in whole or in part, and/or otherwise damageour operation and could have an adverse effect on our business, financial condition or results of operations. Further political tensions brought about by any ofthese groups and escalation of hostilities could adversely affect our operations based in these countries and therefore adversely affect our revenues and resultsof operations. We have significant amount of cash and cash equivalent and short term investments that are held by our operating foreign subsidiaries locatedin Asia. Any political uncertainly, unrest or disruption in any of these countries where we have our operations may not enable us to have access to these assets,which in turn could disrupt our business and financial condition. 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 the attacks in Mumbai, India in November 2008, and otheracts of violence or war, such as the conflict in Iraq, Syria and a few other countries could affect us or our clients by disrupting normal business practices forextended periods of time and reducing business confidence. In addition, these attacks may make travel more difficult and may effectively curtail our ability toserve our clients' needs, any of which could adversely affect our results of operations. 18 We are the subject of continuing litigation, including litigation by certain of our former employees. We are subject to various legal proceedings and claims that arise in the ordinary course of business. In 2008, the Supreme Court of the Republic of the Philippines refused to review a decision of the Court of Appeals in Manila against a Philippinessubsidiary of the Company that is inactive and has no material assets, and purportedly also against Innodata Inc. that orders the reinstatement of certainformer employees of the subsidiary to their former positions and also orders the payment of back wages and benefits that aggregate approximately $8.5million. Based on consultation with legal counsel, we believe that recovery against Innodata Inc. is nevertheless unlikely. While we currently believe that the ultimate outcome of these proceedings will not have a material adverse effect on our financial position or overalltrends in results of operations, litigation is subject to inherent uncertainties. Substantial recovery against us in the above-referenced Philippines actions couldhave a material adverse impact on us, and unfavorable rulings or recoveries in the other proceedings could have a material adverse impact on the operatingresults of the period in which the ruling or recovery occurs. In addition, our estimate of potential impact on our financial position or overall results ofoperations for the above legal proceedings could change in the future. See “Legal Proceedings.” Our reputation could be damaged or our profitability could suffer if we do not meet the controls and procedures in respect to the services andsolutions we provide to our clients, or if we contribute to our clients’ internal control deficiencies. Our clients may perform audits or require us to perform audits, provide audit reports or obtain certifications with respect to the controls andprocedures that we use in the performance of services for such clients, especially when we process data or information belonging to them. Our ability toacquire new clients and retain existing clients may be adversely affected and our reputation could be harmed if we receive a qualified opinion, or if we cannotobtain an unqualified opinion, or an appropriate certification with respect to our controls and procedures in connection with any such audit in a timelymanner. Additionally, our profitability could suffer if our controls and procedures were to result in internal controls failures or impair our client’s ability tocomply with its own internal control requirements. New and changing corporate governance and public disclosure requirements add uncertainty to our compliance policies and increase our costs ofcompliance. Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure, including the Sarbanes-Oxley Act of2002, other SEC regulations, and the NASDAQ Global Select Market rules, are creating uncertainty for companies like ours. These laws, regulations andstandards may lack specificity and are subject to varying interpretations. Their application in practice may evolve over time, as new guidance is provided byregulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs of compliance as a result ofongoing revisions to such corporate governance standards. Although we are committed to maintaining high standards of corporate governance and public disclosure, and complying with evolving laws,regulations and standards, if we fail to comply with new or changed laws, regulations or standards of corporate governance, our business and reputation maybe harmed. 19 We had a material weakness in internal control over financial reporting for the year ended December 31, 2012 and cannot assure you thatadditional material weaknesses will not be identified in the future. Our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of ourinternal controls over financial reporting and our external auditors’ audit of that assessment requires the commitment of significant financial and managerialresources. We consistently assess the adequacy of our internal controls over financial reporting, remediate any control deficiencies that may be identified, andvalidate through testing that our controls are functioning as documented. We identified a material weakness in our internal control over financial reporting forthe year ended December 31, 2012 in accounting for certain non-routine transactions. We intend to implement further enhancements to our internal control todetect or prevent such errors from occurring in the future. Our failure to successfully remediate a material weakness could result in adverse consequences tous, including, but not limited to, a loss of investor confidence in the reliability of our financial statements, which could cause the market price of our stock todecline. 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 1B. Unresolved Staff Comments. None. Item 2. Properties. Our services are primarily performed from our Hackensack, New Jersey headquarters, our Dallas, Texas office, and eight overseas productionfacilities in the Philippines, India, Sri Lanka and Israel, all of which are leased. The square footage of all our leased properties totals approximately 400,000. In addition, we may need to lease additional property in the future. We believe that we will be able to obtain suitable additional facilities oncommercially reasonable terms on an “as needed” basis. Item 3. Legal Proceedings. In 2008, the Supreme Court of the Republic of the Philippines refused to review a decision of the Court of Appeals in Manila against a Philippinessubsidiary of the Company that is inactive and has no material assets, and purportedly also against Innodata Inc. that orders the reinstatement of certainformer employees of the subsidiary to their former positions and also orders the payment of back wages and benefits that aggregate approximately $8.5million. Based on consultation with legal counsel, we believe that recovery against Innodata Inc. is nevertheless unlikely. The Court of Appeals decision was rendered in Case Nos. CA-G.R. SP No. 93295 Innodata Employees Association (IDEA), Eleanor Tolentino, etal. vs. Innodata Philippines, Inc., et al., and CA-G.R. SP No. 90538 Innodata Philippines, Inc. vs. Honorable Acting Secretary Manuel G. Imson, et al. 28June 2007). Matters relating to execution of this decision are on file with the Department of Labor and Employment National Labor Relations Commission,Republic of the Philippines (NLRC-NCR-Case No.07-04713-2002, et al., Innodata Employees Association (IDEA) and Eleanor A. Tolentino, et al. vs. InnodataPhilippines, Inc., et al), and the Department of Labor and Employment Office of the Secretary of Labor and Employment, Republic of the Philippines (CaseNo. OS-AJ-0015-2001, In Re: Labor Dispute at Innodata Philippines, Inc.). We are also subject to various legal proceedings and claims which arise in the ordinary course of business. While management currently believes that the ultimate outcome of these proceedings will not have a material adverse effect on our financial position oroverall trends in results of operations, litigation is subject to inherent uncertainties. Substantial recovery against us in the above referenced Philippines actionscould have a material adverse impact on us, and unfavorable rulings or recoveries in the other proceedings could have a material adverse impact on theoperating results of the period in which the ruling or recovery occurs. Item 4. Mine Safety Disclosures. None. 20 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Innodata Inc. (the “Company”) Common Stock is quoted on the Nasdaq National Market System under the symbol “INOD.” On February 4, 2013,there were 91 stockholders of record of the Company’s Common Stock based on information provided by the Company's transfer agent. Virtually all of theCompany’s publicly held shares are held in “street name” and the Company believes the actual number of beneficial holders of its Common Stock to be 3,443. 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 thetwo years ended December 31, 2012. Common Stock Sale Prices 2011 High Low First Quarter $3.06 $2.30 Second Quarter 2.85 2.24 Third Quarter 3.30 2.54 Fourth Quarter 4.39 2.72 2012 High Low First Quarter $6.24 $3.65 Second Quarter 7.25 4.90 Third Quarter 7.35 3.18 Fourth Quarter 4.24 2.80 Dividends The 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. 21 Securities Authorized for Issuance Under Equity Compensation Plans The following table sets forth the aggregate information for the Company's equity compensation plans in effect as of December 31, 2012: 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 (1) 2,986,000 $2.75 1,024,000 Equity compensation plans not approved by security holders - - - Total 2,986,000 $2.75 1,024,000 (1) 2009 Stock Plan, approved by the stockholders, see Note 8 to Consolidated Financial Statements, contained elsewhere herein. Purchase of Equity Securities There were no repurchases of equity securities during the year. In June 2010, we announced that our Board of Directors authorized the repurchase of up to $2.1 million of our common stock. As of December 31,2011, we repurchased 758,000 shares of our common stock representing almost the entire June 2010 authorization. In September 2011, our Board of Directorsauthorized the repurchase of up to $2.0 million of our common stock in open market or private transactions. There is no expiration date associated with theprogram. We did not repurchase any shares of our common stock under the September 2011 authorization. We did not have any sales of unregistered equity securities during the three months ended December 31, 2012. Item 6. Selected Financial Data. The following table sets forth our selected consolidated historical financial data as of the dates and for the periods indicated. Our selectedconsolidated financial data set forth below as of December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012 has beenderived from the audited financial statements included elsewhere herein. Our selected consolidated financial data set forth below as of December 31, 2010,2009 and 2008 and for the years ended December 31, 2009 and 2008 are derived from our audited financial statements not included elsewhere herein. Ourselected consolidated financial information for 2012, 2011 and 2010 should be read in conjunction with the Consolidated Financial Statements and the Notesand “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are included elsewhere in this Annual Reporton Form 10-K. 22 Year Ended December 31, 2012 2011 2010 2009 2008 (In thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues $86,591 $73,942 $61,513 $76,711 $73,175 Operating costs and expenses Direct operating expenses 57,382 50,176 47,284 52,143 51,347 Selling and administrative expenses 22,189 19,082 15,659 16,318 16,486 Impairment charge 505 - - - - 80,076 69,258 62,943 68,461 67,833 Income (loss) from operations 6,515 4,684 (1,430) 8,250 5,342 Interest income – net (324) (587) (215) (30) (206) Income (loss) before provision for (benefit from) income taxes 6,839 5,271 (1,215) 8,280 5,548 Provision for (benefit from) income taxes 1,150 1,361 (468) 967 (1,110)Net income (loss) 5,689 3,910 (747) 7,313 6,658 Loss attributable to non-controlling interests 1,784 561 - - - Net income (loss) attributable to Innodata Inc. and Subsidiaries $7,473 $4,471 $(747) $7,313 $6,658 Income (loss) per share attributable to Innodata Inc. and Subsidiaries Basic $0.30 $0.18 $(.03) $.30 $.27 Diluted $0.28 $0.18 $(.03) $.28 $.26 Cash dividends per share $- $- $- $- $- December 31, 2012 2011 2010 2009 2008 (In thousands) BALANCE SHEET DATA: Working capital $32,784 $28,148 $26,088 $32,589 $21,881 Total assets $66,181 $59,397 $52,247 $53,565 $44,459 Long term obligations $3,374 $2,944 $1,604 $1,199 $1,671 Stockholders’ equity $50,509 $41,168 $39,438 $40,985 $29,262 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in thisreport. In addition to historical information, this discussion includes forward-looking information that involves risks and assumptions which could causeactual results to differ materially from management’s expectations. See “Forward-Looking Statements” included elsewhere in this report. Executive Overview We are a global provider of business process, information technology (IT) and professional services that are focused on digital enablement. Weoperate in two reporting segment: Content Services (CS) and Innodata Advanced Data Solutions (IADS). The following table sets forth, for the period indicated, certain financial data expressed for the three years ended December 31, 2012: (Dollars in millions) Years Ended December 31, 2012 % of revenue 2011 % of revenue 2010 % of revenue Revenues $86.6 100.0% $73.9 100.0% $61.5 100.0%Direct operating costs 57.4 66.3% 50.1 67.8% 47.3 76.9%Selling and administrative expenses 22.2 25.6% 19.1 25.8% 15.6 25.4%Impairment charge 0.5 0.9% - - - - Income (loss) from operations 6.5 7.5% 4.7 6.4% (1.4) -2.3%Other income (0.3) (0.6) (0.2) Income (loss) before provision for (benefit from) income taxes 6.8 5.3 (1.2) Provision for (benefit from) income taxes 1.2 1.4 (0.5) Net income (loss) 5.7 3.9 (0.7) Loss attributable to non-controlling interest 1.8 0.6 - Net income (loss) attributable to Innodata Inc. andSubsidiaries $7.5 $4.5 $(0.7) Revenues We price our services based on the quantity delivered or resources utilized, and we recognize revenue in the period in which the services are performedand delivered. Revenues for contracts billed on a time-and-materials basis are recognized as services are performed. Revenues under fixed-fee contracts, whichare not significant to the overall revenues, are recognized on the percentage of completion method of accounting, as services are performed or milestones areachieved. We formed our IADS segment in mid-2011 to design and develop new capabilities to enable clients in the financial services, insurance, medical andhealthcare sectors to improve decision-support through digital technologies. IADS operates through two subsidiaries: Synodex and docGenix. Synodex offers arange of data analysis services in the healthcare, medical and insurance areas. docGenix provides services to financial services institutions. As of December31, 2012, we own 77% of Synodex, a limited liability company, and 94% of docGenix, a limited liability company. The subsidiaries are at an early stage ofdevelopment, and reported minimal revenues in 2012. There were no revenues in 2011. 24 Our top two clients generated approximately 41%, 30% and 17% of the Company’s total revenues in the fiscal years ended December 31, 2012, 2011and 2010, respectively. Another client accounted for less than 10% of our total revenues for the year ended December 31, 2012, but for 14% and 10% of ourtotal revenues for the year ended December 31, 2011 and 2010, respectively. One other client accounted for less than 10% of our total revenues for the yearsended December 31, 2012 and 2011, but for 11% of our total revenues for the year ended December 31, 2010. No other client accounted for 10% or more ofrevenues during these periods. Further, in the years ended December 31, 2012, 2011 and 2010, revenues from non-U.S. clients accounted for 24%, 30% and33%, respectively, of the Company's revenues. We may lose any of these, or our other major clients, as a result of our failure to meet or satisfy our clients’requirements, the completion or termination of a project or engagement, or the client’s selection of another service provider. We may also experience significantvolume fluctuation. Our services are typically subject to client requirements, and in many cases are terminable upon 30 to 90 days’ notice. Direct Operating Costs Direct operating costs consist of direct payroll, occupancy costs, depreciation and amortization, travel, telecommunications, computer services andsupplies, realized gains and losses on settlement of foreign currency forward contracts and other direct expenses that are incurred in providing services to ourclients. Selling and Administrative Expenses Selling and administrative expenses consist of management and administrative salaries and incentives, sales and marketing costs, new servicesresearch and related software development, professional fees and consultant costs and other administrative overhead costs. Results of Operations Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011 Revenues Total revenues were $86.6 million for the year ended December 31, 2012, a 17% increase from the $73.9 million for the year ended December 31,2011. Revenues from the Content Services segment were $85.4 million and $73.9 million for the years ended December 31, 2012 and 2011, respectively.Revenues from the IADS segment were $1.2 million for the year ended December 31, 2012. There were no revenues from the IADS segment for the year endedDecember 31, 2011. The $11.4 million increase in the Content Services segment is principally attributable to higher revenues from e-book related services that weperformed for one of our significant clients. We experienced sequential declines in revenue from this client in the last three quarters of 2012. Our top two clients generated $35 million or 41% and $22.2 million or 30% of our total revenues in the fiscal years ended December 31, 2012 and2011, respectively. Another client accounted for less than 10% of our total revenues for the year ended December 31, 2012, but for 14% of our total revenuesfor the year ended December 31, 2011. No other client accounted for 10% or more of revenues during these periods. Further, in the years ended December 31, 2012 and 2011, revenues from non-U.S. clients accounted for 24% and 30%, respectively, of our totalrevenues. Direct Operating Costs Direct operating costs were approximately $57.4 million and $50.2 million for years ended December 31, 2012 and 2011, respectively, an increase of$7.2 million or approximately 14%. Direct operating costs for the Content Services segment were $53.3 million and $49.6 million for the years endedDecember 31, 2012 and 2011, respectively, an increase of $3.7 million or approximately 7%. Direct operating costs for the IADS segment were approximately$4.1 million and $0.6 million for the respective periods, net of intersegment profits. 25 The increase in direct operating costs for the Content Services segment was principally attributable to an increase in production headcount and otheroperating costs in support of increased revenues. The increase in direct operating costs was partially offset by a decrease in direct labor costs achievedprimarily from productivity gains. The productivity gains were principally the result of increased efficiency, improvements in our processes and innovation inour technology. The increase in direct operating costs for the IADS segment represents production costs for initial engagements, increase in production labor costs toperform pilot engagements and facility overhead costs for our new delivery center in Asia. Direct operating costs as a percentage of total revenues declined to 66% for the year ended December 31, 2012 compared to 68% for the year endedDecember 31, 2011. Direct operating costs for the Content Services segment as a percentage of Content Services segment revenues were approximately 62% forthe year ended December 31, 2012, compared to 67% for the year ended December 31, 2011. Selling and Administrative Expenses Selling and administrative expenses were $22.2 million and $19.1 million for the years ended December 31, 2012 and 2011, respectively, anincrease of $3.1 million, or approximately 16%. Selling and administrative costs for the Content Services segment were $19.3 million and $17.5 million inthese respective periods. Selling and administrative expenses for the IADS segment for the respective periods were $2.9 million and $1.6 million, net ofintersegment profits. The increase in selling and administrative expenses for the Content Services segment for the year ended December 31, 2012 is principally attributableto compensation costs of new hires, wage increases and an increase in other miscellaneous administrative costs. During the year ended December 31, 2011, werecorded approximately $0.5 million from the recovery of bad debts from a previously fully reserved account receivable. Selling and administrative expenses for the Content Services segment, as a percentage of Content Services segment revenues, declined to 23% for theyear ended December 31, 2012, from 24% for the year ended 2011, and this was primarily as a result of higher revenues. The $1.3 million increase in selling and administrative expenses for the IADS segment is primarily attributable to compensation costs of newpersonnel hired for sales and marketing and increases in other administrative costs. Impairment Charge docGenix provided services to three clients in 2012 and we expect to continue to provide services to some of these clients in 2013. The existingdocGenix product and service offering did not gain traction in the market place beyond its initial clients. In order to reach a broader market we will need torevise our approach from that represented by the existing product and service. As a result in the fourth quarter of 2012, we evaluated the carrying value of thefixed assets of our docGenix subsidiary compared to its fair value and concluded that the carrying value exceeds its fair value. This resulted in an impairmentcharge of $0.5 million. Restructuring Costs In the second half of 2012, we restructured our operations, and recorded a one-time charge of approximately $0.2 million ($0.1 million in directoperating costs and $0.1 million in selling, general and administrative costs) representing severance and other personnel-related expenses. We expect costsavings of approximately $3.0 million per year from this restructuring activity. 26 Income Taxes For the year ended December 31, 2012, our U.S. entity recorded a benefit from income tax on account of losses incurred by our U.S. entity. Withrespect to our foreign subsidiaries, we recorded a provision for income taxes in accordance with the local tax regulations. As some of our foreign subsidiariesare subject to tax holidays or preferential tax rates, our overall effective tax rate was lower compared to the U.S. statutory tax rate. In addition, the earnings ofour foreign subsidiaries are not subject to tax in the U.S. unless the earnings are repatriated. For the year ended December 31, 2011, we recorded a provision for income taxes for the U.S. entity and certain, but not all of our foreign subsidiaries,as certain foreign subsidiaries are subject to tax holidays or preferential tax rates. In addition, the earnings of our foreign subsidiaries are not subject to tax inthe U.S. unless the earnings are repatriated. The effective tax rate at 17% was lower for the year ended December 31, 2012 compared to 26% for the year ended December 31, 2011 as the incomeattributable to our higher tax jurisdictions was lower. Beginning in 2002, unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to theUnited States taxes that may be payable on distribution to the United States, because such earnings are not anticipated to be remitted to the United States. Ifsuch earnings were to be distributed, we could be subject to United States income taxes that may not be fully offset by foreign tax credits. Determination at thistime, of the amount of unrecognized deferred tax liability related to these earnings is not practicable. In assessing the realization of deferred tax assets, we consider whether it is more likely than not that all or some portion of the deferred tax assets willnot be realizable. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in whichtemporary differences are deductible and net operating losses are available. We consider many factors when assessing the likelihood of future realization of thedeferred tax assets, including our recent cumulative earnings, expectation of future taxable income, the carryforward periods available to us for tax reportingpurposes, and other relevant factors. At December 31, 2012 and 2011, we had no valuation allowance on our deferred tax assets. Pursuant to an income tax audit by the Indian Bureau of Taxation in March 2006, one of our Indian subsidiaries received a tax assessmentapproximating $339,000, including interest, through December 31, 2012, for the fiscal tax year ended March 31, 2003. We disagree with the basis of the taxassessment and filed an appeal with the Appeal Officer against the assessment. In October 2010, the matter was resolved with a judgment in our favor. Underthe Indian Income Tax Act, however, the income tax assessing officer has a right to appeal against the judgment passed by the Appeal Officer. In December2010, the income tax assessing officer exercised this right, against which we filed an application to defend the case and we intend to contest it vigorously. TheIndian Bureau of Taxation has also completed an audit of our Indian subsidiary’s income tax return for the fiscal tax year ended March 31, 2004. The ultimateoutcome was favorable, and there was no tax assessment imposed for the fiscal tax year ended March 31, 2004. In 2008 and 2009, the Indian subsidiaryreceived a final tax assessment for the fiscal years ended March 31, 2005 and 2006 from the Indian Bureau of Taxation. The tax assessment amounted to$340,000 and $345,000, including interest through December 31, 2012, for the fiscal years ended March 31, 2005 and 2006, respectively. We disagree withthe basis of these tax assessments, have filed an appeal against the assessments, and we intend to contest the assessment vigorously. In January 2012, theIndian subsidiary received a final tax assessment approximately $1.1 million, including interest, for the fiscal year ended March 31, 2008 from the IndianBureau of Taxation. We disagree with the basis of this tax assessment, and have filed an appeal against the assessment. Due to this assessment, we recorded atax provision amounting to $323,000 including interest through December 31, 2012. Based on recent experience and the current development, we believe thatthe tax provision of $323,000 including interest is adequate. The Indian Bureau of Taxation commenced an audit of this subsidiary’s income tax return for thefiscal year ended March 31, 2010. The ultimate outcome cannot be determined at this time. As we are continually subject to tax audits by the Indian Bureau ofTaxation, we have assessed the likelihood of an unfavorable assessment for all fiscal years where we are not subject to a final tax assessment as of December31, 2012, and have recorded an additional tax provision amounting to approximately $1.0 million including interest through December 31, 2012. In January2013, one of our Philippine subsidiaries received an informal tax assessment for an amount totaling $3.8 million for the year ended December 31, 2009.Although, we have not yet received formal notice of this assessment, we have had a discussion with the tax examiner. Based on this discussion, we believe thatit is reasonably likely that we will be successful in contesting the assessment. Accordingly, we recorded no tax provision on said informal tax assessment. Inaddition, we will continuously monitor the outcome and will record an appropriate tax provision in the event there is any change in circumstances. 27 We had unrecognized tax benefits of $2.4 million and $2.3 million at December 31, 2012 and 2011, respectively. The portion of unrecognized taxbenefits relating to interest and penalties was $0.7 million and $0.6 million at December 31, 2012 and 2011, respectively. The unrecognized tax benefits as ofDecember 31, 2012 and 2011, if recognized, would have an impact on our effective tax rate. We are subject to various tax audits and claims which arise in the ordinary course of business. Management currently believes that the ultimateoutcome of these audits and claims will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. Net Income We generated net income of $7.5 million in the year ended December 31, 2012 compared to $4.5 million in the year ended December 31, 2011. Netincome for the Content Services segment was $13.8 million for the year ended December 31, 2012 compared to $6.7 million for the year ended December 31,2011. The significant increase in net income for the Content Services segment was primarily due to an increase in gross margins resulting from higherrevenues, and an increase in productivity due to improvements in processes and technology. This increase was partly offset by an increase in selling andadministrative expenses primarily due to compensation costs of new hires, wage increases and an increase in other administrative costs. A lower provision forincome taxes and higher losses attributable to non-controlling interests in the year ended December 31, 2012 compared to year ended December 31, 2011 alsocontributed to an increase in net income. Net loss for the IADS segment was $6.3 million for the year ended December 31, 2012 compared to $2.2 million forthe year ended December 31, 2011, net of intersegment profits. The increase in net loss was principally on account of new personnel hired for operations, andsales and marketing, increase in facility overhead costs and other administrative costs, and a $0.5 million impairment charge for our docGenix subsidiary. Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010 Revenues Revenues were $73.9 million for the year ended December 31, 2011 compared to $61.5 million for the year ended December 31, 2010, an increase of$12.4 million or approximately 20%. The $12.4 million increase in revenues is principally attributable to higher revenues from our e-book-related services thatwe perform for one of our larger clients and revenue from analytics services that we perform for a major accounting firm. Our top three clients generated $32.6 million or 44% and $17.2 million or 28% of our revenues in the fiscal years ended December 31, 2011 and2010, respectively. Another client accounted for less than 10% of our revenues for the year ended December 31, 2011, and for $6.6 million or 11% of ourrevenues for the year ended December 31, 2010. No other client accounted for 10% or more of our total revenues in either period. 28 Further, for the years ended December 31, 2011 and 2010, revenues from clients located in foreign countries (principally in Europe) amounted to$22.3 million or 30% and $20.5 million or 33%, respectively, of our total revenues. There were no revenues for the year ended December 31, 2011 from our recently formed IADS segment. Direct Operating Costs Direct operating costs were approximately $50.2 million and $47.3 million for the years ended December 31, 2011 and 2010, respectively, anincrease of $2.9 million or approximately 6%. The increase in direct operating costs was attributable to an increase in production headcount and other operating costs in support of increasedrevenues. In addition, direct operating costs increased on account of foreign exchange rate fluctuations caused by a strengthening of the Philippine peso andIndian rupee against the U.S. dollar. The U.S. dollar depreciated against the Asian currencies in the first three quarters of 2011; however, it surgedsignificantly in the fourth quarter of 2011. This resulted in a net loss on the settlement of foreign currency forward contracts in the fourth quarter of 2011. Therealized gain on the settlement of forward contracts in 2011 was $1.2 million as compared to $2.2 million in 2010. The increase in direct operating costs waspartially offset by a decrease in direct labor costs achieved primarily from productivity gains. The productivity gains were principally the result of increasedefficiency, improvements in our processes and innovation in our technology. Included in total direct operating costs is approximately $1.1 million in start-up costs that we incurred for the IADS segment during the year endedDecember 31, 2011. The changes in revenues and direct operating expenses mentioned above resulted in a decline in direct operating costs as a percentage of revenues to68% for the year ended December 31, 2011, from 77% for the year ended December 31, 2010. Excluding the start-up costs incurred for the IADS segmentfrom the total direct operating costs, direct operating costs would have increased by approximately 4% in 2011 as compared to 2010 and, as a percentage ofrevenues, would have been 66% in 2011, compared to 77% in 2010. Selling and Administrative Expenses Selling and administrative expenses were $19.1 million and $15.7 million for the years ended December 31, 2011 and 2010, respectively, anincrease of $3.4 million or 22%. Selling and administrative expenses as a percentage of revenues was 26% for the year ended December 31, 2011 and 25% forthe year ended December 31, 2010. The increase in selling and administrative expenses for the year ended December 31, 2011 is principally attributable to compensation costs of newpersonnel hired for sales and marketing, severance costs of $0.4 million, increases in variable employee incentives and $1.6 million on account of ourcontinued investments for the IADS segment, which includes approximately $0.3 million incurred towards professional fees for creating best-in-classinformation and a data security environment for the IADS segment. Excluding the $1.6 million start-up costs incurred for the IADS segment, selling and administrative expenses would have increased byapproximately 11% in 2011 as compared to 2010 and, as a percentage of revenues, would have been approximately 23% in 2011, compared to 25% in 2010. 29 Income Taxes For the year ended December 31, 2011, we recorded a provision for income taxes primarily for our foreign subsidiaries, which was partially offsetby a tax benefit recorded for the U.S. entity. The benefit from income tax recorded by the U.S. entity resulted from losses incurred by the U.S. entity duringthe year ended December 31, 2011. These losses were incurred primarily on account of start-up costs incurred for the IADS segment, with no associatedrevenue in 2011. Certain of the Company’s foreign subsidiaries are subject to preferential tax rates. In addition, one of the foreign subsidiaries enjoys a taxholiday. Due to the tax holiday and the preferential tax rates, the income tax rate for the Company was substantially reduced. Certain overseas income is notsubject to tax in the U.S. unless repatriated. For the year ended December 31, 2010, we recorded a provision for income taxes primarily for our foreign subsidiaries, which was more than offsetby the benefit recorded for the U.S. entity. The benefit from income tax recorded by the U.S. entity resulted primarily from losses incurred by the U.S. entityduring the year ended December 31, 2011. One of our foreign subsidiaries enjoyed a tax holiday in 2010. In addition, certain of our foreign subsidiaries enjoypreferential tax rates. Certain overseas income is not subject to tax in the U.S. unless repatriated. Net Income (Loss) We generated net income of $4.5 million in 2011 compared with a net loss of $0.7 million in 2010. The change was primarily attributable to anincrease in gross margins resulting from an increase in revenues, and an increase in productivity due to improvements in processes and technology. Thisincrease was partly offset by unfavorable foreign exchange rates, an increase in selling and administrative expenses primarily due to hiring of new sales andmarketing personnel, and an increase in variable employee incentives, and start-up costs incurred for the IADS segment amounting to $2.7 million. Thechange in net income also reflects an increase in interest income and an increase in the tax provision in 2011 compared to a tax benefit recorded in 2010. Liquidity and Capital Resources Selected measures of liquidity and capital resources, expressed in thousands, are as follows: December 31, 2012 2011 2010 Cash and cash equivalents $25,425 $11,389 $14,120 Short term investments 3,091 5,828 13,875 Working capital 32,784 28,148 26,088 At December 31, 2012 we had cash and cash equivalents of $25.4 million, of which $15.1 million was held by our foreign subsidiaries, and shortterm investments of $3.1 million which was entirely held by our operating foreign subsidiaries located in Asia. A significant portion of the amounts heldoutside of the Unites States could be repatriated to the United States, but under current law, would be subject to Unites States federal income taxes, lessapplicable foreign tax credit. However, our intent is to permanently reinvest these funds outside the Unites States. We have used, and plan to use, our existing cash for (i) expansion of existing operations; (ii) general corporate purposes, including working capital;(iii) possible business acquisitions; and (iv) continuing investments in IADS. As of December 31, 2012, we had no third party debt and had working capitalof approximately $32.8 million compared to working capital of approximately $28.1 million at December 31, 2011. We do not anticipate any near-termliquidity issues. Cash balances are held in bank deposits at leading U.S. and foreign commercial banks. 30 Net Cash Provided By (Used in) Operating Activities Cash provided by our operating activities in 2012 was $17.8 million, resulting from net income of $5.7 million, adjustments for non-cash items of$5.3 million, and $6.8 million provided for working capital. Adjustments for non-cash items principally consisted of $3.9 million for depreciation andamortization, stock compensation expense of $1.0 million and an impairment charge of approximately $0.5 million relating to the IADS segment. Workingcapital activities primarily consisted of a source of cash of $7.4 million as a result of a decrease in accounts receivable, use of cash of $0.7 million from anincrease in other assets, use of cash of $0.4 million from an increase in income and other taxes, partially offset by a source of cash of $0.5 million for prepaidexpenses and other current assets. Cash used in our operating activities in 2011 was $3.0 million, resulting from net income of $3.9 million, adjustments for non-cash items of $3.5million, and $10.4 million used for working capital. Adjustments for non-cash items principally consisted of $3.4 million for depreciation and amortization,stock compensation expense of $0.8 million, $0.8 million for a net change in deferred taxes and $0.5 million for pension costs. Working capital activitiesprimarily consisted of a use of cash of $13.0 million as a result of an increase in accounts receivable and a use of cash of $0.7 million for an increase in otherassets, partially offset by a source of cash of $1.7 million for accrued salaries and wages representing payroll and incentive accruals and a source of cashamounting to $0.7 million for an increase in accounts payable. Cash provided by our operating activities in 2010 was $4.9 million, resulting from a net loss of $0.7 million, adjustments for non-cash items of$2.4 million, and $3.2 million provided from working capital. Adjustments for non-cash items principally consisted of $3.7 million for depreciation andamortization, a $0.3 million reversal of a provision for doubtful accounts, primarily resulting from collections from one of our clients, for which we recordeda provision of $1.2 million in 2009, $1.6 million for a net change in deferred taxes and $0.4 million for pension costs. Working capital activities primarilyconsisted of a source of cash of $3.7 million as a result of net collections on accounts receivable, a use of cash of $0.7 million for an increase in other assets, ause of cash amounting to $0.4 million for a decline in accounts payable, and a source of cash of $0.9 million for income and other taxes. At December 31, 2012, our days’ sales outstanding were approximately 76 days as compared to 74 days as of December 31, 2011 and 60 days asof December 31, 2010. The increase in our days’ sales outstanding is primarily on account of a significant growth in revenue from one of our large clients.This client is a large company with a strong balance sheet. Net Cash Provided by (Used in) Investing Activities During 2012, 2011 and 2010, cash used in our investing activities for capital expenditures were $6.8 million, $5.9 million and $1.9 million,respectively. Capital spending in 2012 for Content Services segment was $5 million that principally consisted of purchases of technology equipment,including workstations, computer software and leasehold improvements, and to establish a new delivery center in Asia. Capital spending in 2012 for theIADS segment was $1.8 million that included costs incurred to develop our proprietary software platform, tools and technology. Capital spending in 2011principally consisted of the purchases of technology equipment including workstations, computer software and leasehold improvements. Also included withincapital expenditures are costs incurred to acquire and develop computer software and platform for the IADS segment amounting to $2.0 million and toestablish two new delivery centers in Asia. Capital spending in 2010 related principally to technology equipment and computer software. During 2013, weanticipate that capital expenditures for ongoing technology, equipment, infrastructure upgrades, development of proprietary software platform, tools andtechnologies for both CS and IADS will approximate $5.0 to $6.0 million, a portion of which we may finance. Also, included in the investing activitiesduring the year ended December 31, 2012 and 2011 is the sale of short-term and long-term investments primarily representing proceeds on the maturity ofcertificates of deposit in amounts of $2.7 million and $8.0 million, respectively. During the year ended December 31, 2010, we purchased short-term and long-term investments consisting of $13.9 million of certificates of deposit. 31 Net Cash Provided by (Used in) Financing Activities Payment of long term obligations approximated $0.2 million, $0.6 million and $0.7 million for 2012, 2011 and 2010, respectively. Proceeds fromthe exercise of stock options for the year ended December 31, 2012 were $0.6 million. There were no stock option exercises during the years ended December31, 2011 and 2010. In June 2010, we announced that our Board of Directors authorized the repurchase of up to $2.1 million of our common stock. In 2010 we acquired264,000 shares of our common stock for approximately $0.8 million, at a volume-weighted average price of $2.89 per share. During the year ended December31, 2011, we repurchased 494,000 additional shares of our common stock at a cost of approximately $1.3 million, at a volume-weighted average price of$2.69 per share. As of September 2011, we repurchased 758,000 shares of our common stock representing almost the entire June 2010 authorization. InSeptember 2011, our Board of Directors authorized the repurchase of up to $2.0 million of our common stock in open market or private transactions. We didnot repurchase any shares of our common stock under the September 2011 authorization. As we operate in a number of countries around the world, we face exposure to adverse movements in foreign currency exchange rates. Theseexposures may change over time as business practices evolve and may have a material adverse impact on our consolidated financial results. Our primaryexposure relates to non-U.S. based operating expenses in the Philippines, India and Israel. Our U.S. entity has historically funded expenditures for our foreignsubsidiaries. We are exposed to foreign exchange risk and therefore we use foreign currency forward contracts to mitigate our exposure to fluctuating futurecash flows arising from changes in foreign exchange rates. We may continue to enter into these or other such instruments in the future, to reduce foreigncurrency exposure to appreciation or depreciation in the value of these foreign currencies. In addition to our exposure to future cash flows, a significant portionof our cash and cash equivalents and short term investments are held by our operating foreign subsidiaries and therefore we are exposed to foreign exchangerisk on such cash and cash equivalents and short term investments arising from changes in foreign exchange rates. At present, we do not enter into anyhedging instruments to mitigate foreign exchange risk on such assets, however, we may do so in the future. Future Liquidity and Capital Resource Requirements We have a $15.0 million line of credit pursuant to which we may borrow up to 80% of eligible accounts receivable. Borrowings under the credit linebear interest at the bank’s alternate base rate plus 0.5% or LIBOR plus 2.5%. The line, which expires in June 2013, is collateralized by our accountsreceivable. We have no outstanding obligations under this credit line as of December 31, 2012. We believe that our existing cash and cash equivalents, short-term and long-term investments, funds generated from our operating activities andfunds available under our credit facility will provide sufficient sources of liquidity to satisfy our financial needs for the next twelve months. However, ifcircumstances change, we may need to raise debt or additional equity capital in the future. We have historically funded our foreign expenditures from our U.S.Corporate headquarters on an as-needed basis. In the second quarter of 2012, we filed a shelf registration statement on Form S-3, which will give us the ability to offer from time to time up to anaggregate of $70 million of securities, which may consist of common stock, preferred stock, debt securities, warrants, or units consisting of any of theforegoing. The registration is intended to give us flexibility should financing opportunities arise. Contractual Obligations The table below summarizes our contractual obligations (in thousands) at December 31, 2012, and the effect that those obligations are expected tohave on our liquidity and cash flows in future periods. 32 Contractual Obligations Total Less than1 year 1-3 years 4-5 years After5 years Capital lease obligations $32 $32 $- $- $- Vendor obligations 470 470 - - - Non-cancelable operating leases 10,824 1,850 3,804 2,753 2,417 Total contractual cash obligations $11,326 $2,352 $3,804 $2,753 $2,417 Future expected obligations under our pension benefit plans have not been included in the contractual cash obligations table above. Inflation, Seasonality and Prevailing Economic Conditions Our most significant costs are the salaries and related benefits of our employees in Asia. We are exposed to higher inflation in wage rates in thecountries in which we operate. We generally perform work for our clients under project-specific contracts, requirements-based contracts or long-term contracts.We must adequately anticipate wage increases, particularly on our fixed-price contracts. There can be no assurance that we will be able to recover costincreases through increases in the prices that we charge for our services to our clients. Our quarterly operating results are subject to certain fluctuations. We experience fluctuations in our revenue and earnings as we replace and begin newprojects, which may have some normal start-up delays, or we may be unable to replace a project entirely. These and other factors may contribute tofluctuations in our operating results from quarter to quarter. In addition, as some of our Asian facilities are closed during holidays in the fourth quarter, wetypically incur higher wages, due to overtime, that reduce our margins. Critical Accounting Policies and Estimates Basis of Presentation and Use of Estimates Our discussion and analysis of our results of operations, liquidity and capital resources are based on our consolidated financial statements which havebeen prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financialstatements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosures ofcontingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance fordoubtful accounts and billing adjustments, long-lived assets, goodwill, valuation of deferred tax assets, value of securities underlying stock-basedcompensation, litigation accruals, pension benefits, valuation of derivative instruments and estimated accruals for various tax exposures. We base ourestimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, includingassumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readilyapparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates and couldhave a significant adverse effect on our consolidated results of operations and financial position. We believe the following critical accounting policies affect ourmore significant estimates and judgments in the preparation of our consolidated financial statements. 33 Allowance for Doubtful Accounts We establish credit terms for new clients based upon management’s review of their credit information and project terms, and perform ongoing creditevaluations of our clients, 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, ourestimate 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 credit losses havegenerally been within expectations and the provisions established, we cannot guarantee that credit loss rates in the future will be consistent with thoseexperienced in the past. In addition, we would have credit exposure if the financial condition of one of our major clients were to deteriorate. In the event that thefinancial condition of our clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be necessary. Revenue Recognition Revenue is recognized in the period in which services are performed and delivery has occurred and when all the criteria of Staff Accounting Bulletin104 have been met. Revenues for contracts billed on a time-and-materials basis are recognized as services are performed. Revenues under fixed-fee contracts arerecognized on a percentage-of-completion method of accounting as services are performed or milestones are achieved. Revenues from fixed-fee projectsaccounted for less than 10% of our total revenue for each of the three years in the period ended December 31, 2012. Certain reimbursable expenses incurred onbehalf of clients are recorded on a net basis in revenues. Long-lived Assets We assess the recoverability of long-lived assets, which consist primarily of fixed assets and intangible assets with finite useful lives, wheneverevents or changes in circumstances 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) a significant decline in the Company’s stock price for a sustained period; and (iv) a change in the Company’s marketcapitalization relative to net book value. If the recoverability of these assets is unlikely because of the existence of one or more of the above-mentioned factors,an impairment analysis is performed, initially using a projected undiscounted cash flow method. We make assumptions regarding estimated future cashflows and other factors to determine the fair value of these respective assets. An impairment loss will be recognized only if the carrying value of a long-livedasset is not recoverable and exceeds its fair value, and is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. In the impairment review conducted by us, the carrying value of the fixed assets of our docGenix subsidiary exceeded its fair value. We recorded animpairment charge of $0.5 million for the year ended December 31, 2012. No impairment charges were recorded for the years ended December 31, 2011 and2010. Income Taxes We determine our deferred taxes based on the difference between the financial statement and tax basis of assets and liabilities, using enacted tax rates,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 it is morelikely than not that all or some portion of the deferred tax assets will not be realized. While we consider future taxable income in assessing the need for thevaluation allowance, in the event we were to determine that we would be able to realize the deferred tax assets in the future in excess of its net recorded amount,an adjustment to the deferred tax assets would increase income in the period such determination was made. Similarly, in the event we were to determine that wewould not be able to realize the deferred tax assets in the future considering the future taxable income, an adjustment to the deferred tax assets would decreaseincome in the period such determination was made. Change in valuation allowance from period to period is included in our tax provision in the period ofchange. We indefinitely reinvest the foreign earnings in our foreign subsidiaries. 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, because suchearnings are not anticipated to be remitted to the United States. 34 In addition we have provided for an accrual for potential tax obligations resulting from income tax audits and other potential tax obligations. We account for income taxes regarding uncertain tax positions, and recognize interest and penalties related to uncertain tax positions under “ incometax expense” in our consolidated statement of operations and comprehensive income. Goodwill and Other Intangible Assets We test goodwill annually for impairment using a two-step fair-value-based test. The first step of the goodwill impairment test, used to identifypotential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unitexceeds 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 impairmentis determined, we will recognize additional charges to operating expenses in the period in which they are identified, which would result in a reduction ofoperating results and a reduction in the amount of goodwill. Our most recent test for impairment was conducted as of September 30, 2012, in which theestimated fair values of the reporting unit exceeded its carrying amount, including goodwill. As such, no impairment was identified or recorded. Accounting for Stock-Based Compensation We are authorized to grant stock options to officers, directors, employees and others who render services to the Company under the 2009 Stock Planapproved by the stockholders. We measure and recognize stock-based compensation expense for all share-based payment awards made to employees and directors based onestimated fair value at the grant date and recognized over the requisite service period. Determining the fair value of stock-based awards at the grant date requiresjudgment, including estimating the expected term of stock options and the expected volatility of our stock. The fair value is determined using the Black-Scholes option-pricing model. We recorded stock-based compensation expense of approximately $1.0 million, $0.8 million and $0.3 million for the yearsended December 31, 2012, 2011 and 2010, respectively. Legal Proceedings We are subject to various legal proceedings and claims which arise in the ordinary course of business. Our legal reserves related to these proceedingsand claims are based on a determination of whether or not a loss is probable. We review outstanding claims and proceedings with external counsel to assessprobability and estimates of loss. The reserves are adjusted if necessary. If circumstances change, we may be required to record adjustments that could bematerial to our reported financial condition and results of operations. 35 Pensions Most of our non-U.S. subsidiaries provide for government mandated defined pension benefits covering those employees who meet certain eligibilityrequirements. Pension assumptions are significant inputs to actuarial models that measure pension benefit obligations and related effects on operations. Twocritical assumptions – discount rate and rate of increase in compensation levels – are important elements of plan expense and asset/liability measurements.These critical assumptions are evaluated at least annually on a plan and a country-specific basis. Other assumptions involving demographic factors such asretirement age, mortality and turnover are evaluated periodically and are updated to reflect actual experience and expectations for the future. Actual results inany given year will often differ from actuarial assumptions because of economic and other factors, and in accordance with generally accepted accountingprinciples, the impact of these differences are accumulated and amortized over future periods. Recent Accounting Pronouncements We adopted new guidance issued by the Financial Accounting Standards Board (FASB) by presenting total comprehensive income (loss) and thecomponents of net income (loss) in one statement. The adoption of this guidance resulted only in a change in how we present other comprehensive income(loss) in our consolidated financial statements and did not have any impact on our results of operations, financial position, or cash flows. In February 2013, the FASB issued guidance on comprehensive income which requires disclosure of significant amounts reclassified out ofaccumulated other comprehensive income by component and their corresponding effect on the respective line items of net income. This guidance is effective forreporting periods beginning after December 15, 2012 and is not expected to have a material impact on our consolidated financial statements or financialstatement disclosures. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Interest rate 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 (3.25% at December 31, 2012) plus 0.5% or LIBOR (0.20% at December 31, 2012) plus 2.5%. We have not borrowed under this line in2012. 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. Foreign currency risk We have operations in several international markets that subject us to foreign currency fluctuations. Although the majority of our contracts aredenominated in U.S. dollars, a substantial portion of the costs incurred to render services under these contracts is incurred in the local currencies of severalinternational markets where we carry on our operations. Our significant operations are based in the Philippines, India, Sri Lanka and Israel where revenues aregenerated in U.S. dollars and the corresponding expenses are generated in Philippine peso, Indian rupee, Sri Lanka rupee and Israeli shekel. To mitigate the exposure of fluctuating future cash flows due to changes in foreign exchange rates, we entered into foreign currency forward contracts.These foreign currency forward contracts were entered into with a maximum term of twelve months and have an aggregate notional amount of approximately$32.3 million as of December 31, 2012. We may continue to enter into these, or other such instruments, in the future to reduce foreign currency exposure toappreciation or depreciation in the value of these foreign currencies. The impact of foreign currency fluctuations will continue to present economic challenges to us and could negatively impact our overall results ofoperations. A 10% appreciation in the U.S. dollar’s value relating to the hedged currencies would decrease the forward contracts’ fair value by approximately$2.9 million as of December 31, 2012. Similarly, a 10% depreciation in the U.S. dollar’s value relative to the hedged currencies would increase the forwardcontracts’ fair value by approximately $3.6 million as of December 31, 2012. Any increase or decrease in the fair value of our currency exchange rate sensitiveforward contracts, if utilized, would be substantially offset by a corresponding decrease or increase in the fair value of the hedged underlying cash flows. 36 Other than the aforementioned forward contracts, we have not engaged in any hedging activities nor have we entered into off-balance-sheettransactions or arrangements. As of December 31, 2012, our foreign locations held cash and short-term investments totaling approximately $18.2 million. These assets are exposedto foreign exchange risk arising from changes in foreign exchange rates. At present, we do not enter into any hedging instruments to mitigate foreign exchangerisk on such assets; however, we may do so in the future. Item 8. Financial Statements and Supplementary Data. See Financial Statements and Financial Statement Index commencing on page F-1 herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in ourExchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rulesand forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, weconducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e). Based on thisevaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2012, our disclosure controls and procedures werenot effective. Changes in Internal Control over Financial Reporting There have been no changes in the Company’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) or 15d-15(f)under the Exchange Act) during the last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting. Report of Management on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal controlover financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance withaccounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that inreasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation ofour financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with managementauthorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on ourfinancial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is notintended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. 37 Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, managementconcluded that the Company’s internal control over financial reporting was not effective as of December 31, 2012, due to the existence of a material weakness,as described below. We identified a control deficiency in the application of the Company’s internal controls within the financial statement close process; namely that thepreparation and review process relating to the accounting for certain non-routine transactions was not effective and this led to an error in recording anadjustment attributable to a change in non-controlling interest in our docGenix subsidiary through the statement of operations and comprehensive income (loss)instead of recording it in the statement of stockholders' equity. This adjustment pertains to a one-time, non-routine, non-cash transaction which had no impacton the consolidated net income (loss), but had an impact on loss attributable to non-controlling interest and net income (loss) attributable to Innodata Inc. andsubsidiaries. Although, the error was subsequently corrected, and is correctly reflected in the accompanying consolidated financial statements, we considerthis deficiency to be a material weakness in our internal controls over financial reporting. The Company intends to implement further enhancements to itsinternal controls to detect or prevent such errors from occurring in the future. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2012, was audited by CohnReznick LLP, ourindependent registered public accounting firm, as stated in their report appearing below. 38 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of Innodata Inc.: We have audited Innodata Inc.’s and Subsidiaries (“Innodata”) internal control over financial reporting as of December 31, 2012, based on criteria establishedin Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Innodata’smanagement is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control overfinancial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express anopinion on the effectiveness of Innodata’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, assessing the riskthat a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performingsuch other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Acompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States ofAmerica, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonablepossibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Thefollowing material weakness has been identified and included in management’s assessment. The Company identified a material weakness in internal control relating to the accounting for certain non-routine transactions, which resulted in a materialaudit adjustment to the 2012 consolidated financial statements. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2012 financial statements, andthis report does not affect our report dated March 15, 2013, on those financial statements. In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2012 based on theCOSO criteria. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetsas of December 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years inthe period ended December 31, 2012 and the related financial statement schedule, of Innodata Inc. and Subsidiaries and our report dated March 15, 2013,expressed an unqualified opinion thereon. /s/CohnReznick LLP Roseland, New JerseyMarch 15, 2013 39 Item 9B. Other information. None. 40 PART III Item 10. Directors, Executive Officers and Corporate Governance. The information called for by Item 10 is incorporated by reference from the Company’s definitive proxy statement for the 2013 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 2012 fiscal year. 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.com. The Companyintends to disclose future amendments to, or waivers from, certain provisions of the code of ethics for executive officers and directors in accordance withapplicable 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 2013 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 2012 fiscal year. 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 2013 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 2012 fiscal year. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information called for by Item 13 is incorporated by reference from the Company’s definitive proxy statement for the 2013 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 2012 fiscal year. Item 14. Principal Accounting Fees and Services. The information called for by Item 14 is incorporated by reference from the Company’s definitive proxy statement for the 2013 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 2012 fiscal year. 41 PART IV Item 15. Exhibits, Financial Statement Schedules. (a)1. Financial Statements. See Item 8. Index to Financial Statements.2. Financial Statement Schedules. Schedule II – Valuation and Qualifying Accounts.3. Exhibits – See Exhibit Index attached hereto and incorporated by reference herein. 42 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 INC. By/s/ Jack Abuhoff Jack Abuhoff Chairman of the Board, 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 capacities andon the dates indicated. Signature Title Date /s/ Jack Abuhoff Chairman of the Board, March 15, 2013Jack Abuhoff Chief Executive Officer and President /s/ O’Neil Nalavadi Senior Vice President, March 15, 2013O’Neil Nalavadi Chief Financial Officer and Principal Accounting Officer /s/ Todd Solomon Director March 15, 2013Todd Solomon /s/ Louise C. Forlenza Director March 15, 2013Louise C. Forlenza /s/ Haig S. Bagerdjian Director March 15, 2013Haig S. Bagerdjian /s/ Stewart R. Massey Director March 15, 2013Stewart R. Massey /s/ Anthea C. Stratigos Director March 15, 2013Anthea C. Stratigos /s/ Andargachew S. Zelleke Director March 15, 2013Andargachew S. Zelleke 43 Item 8. Financial Statements. INNODATA INC. AND SUBSIDIARIESINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Report of Independent Registered Public Accounting FirmF-2 Consolidated Balance Sheets as of December 31, 2012 and 2011F-3 Consolidated Statements of Operations and Comprehensive Income (Loss) for the three years ended December 31, 2012F-4 Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2012F-5 Consolidated Statements of Cash Flows for the three years ended December 31, 2012F-6 Notes to Consolidated Financial StatementsF-7 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of Innodata Inc.: We have audited the accompanying consolidated balance sheets of Innodata Inc. and Subsidiaries as of December 31, 2012 and 2011, and the relatedconsolidated statements of operations and comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period endedDecember 31, 2012. Our audits of the consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15.These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to expressan opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Innodata Inc. andSubsidiaries as of December 31, 2012 and 2011, and their results of operations and cash flows for each of the three years in the period ended December 31,2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statementschedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the informationset forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Innodata Inc. and Subsidiaries’internal control over financial reporting as of December 31, 2012 based on criteria established in Internal Control – Integrated Framework issued by theCommittee of Sponsoring Organization of the Treadway Commission (COSO) and our report dated March 15, 2013, expressed an adverse opinion thereon. /s/ CohnReznick LLP Roseland, New JerseyMarch 15, 2013 F-2 INNODATA INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSDECEMBER 31, 2012 AND 2011(in thousands, except share data) 2012 2011 ASSETS Current assets: Cash and cash equivalents $25,425 $11,389 Short term investments 3,091 5,828 Accounts receivable-net of allowance for doubtful accounts of $608 at December 31, 2012 and 2011 14,317 21,706 Prepaid expenses and other current assets 2,561 2,984 Deferred income taxes 1,104 1,934 Total current assets 46,498 43,841 Property and equipment, net 10,656 7,430 Other assets 3,504 3,565 Deferred income taxes 4,848 3,886 Goodwill 675 675 Total assets $66,181 $59,397 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $1,618 $1,528 Accrued expenses 2,482 4,345 Accrued salaries, wages and related benefits 6,584 6,596 Income and other taxes 2,155 2,576 Current portion of long term obligations 818 639 Deferred income taxes 57 9 Total current liabilities 13,714 15,693 Deferred income taxes 182 153 Long term obligations 3,374 2,944 Commitments and contingencies Non-controlling interests (1,598) (561) STOCKHOLDERS’ EQUITY: Serial preferred stock; 5,000,000 shares authorized, none outstanding - - Common stock, $.01 par value; 75,000,000 shares authorized; 26,435,000 shares issued and 24,889,000outstanding at December 31, 2012; and 26,237,000 shares issued and 24,691,000 outstanding at December 31,2011 264 262 Additional paid-in capital 22,140 21,338 Retained earnings 32,356 24,883 Accumulated other comprehensive income (loss) 37 (1,027) 54,797 45,456 Less: treasury stock, 1,550,000 shares at December 31, 2012 and 1,546,000 at December 31, 2011, at cost (4,288) (4,288)Total stockholders’ equity 50,509 41,168 Total liabilities and stockholders’ equity $66,181 $59,397 See notes to consolidated financial statements. F-3 INNODATA INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010(In thousands, except per share amounts) 2012 2011 2010 Revenues $86,591 $73,942 $61,513 Operating costs and expenses Direct operating costs 57,382 50,176 47,284 Selling and administrative expenses 22,189 19,082 15,659 Impairment charge 505 - - 80,076 69,258 62,943 Income (loss) from operations 6,515 4,684 (1,430) Interest income - net (324) (587) (215) Income (loss) before provision for (benefit from) income taxes 6,839 5,271 (1,215) Provision for (benefit from) income taxes 1,150 1,361 (468) Net income (loss) 5,689 3,910 (747) Loss attributable to non-controlling interests 1,784 561 - Net income (loss) attributable to Innodata Inc. and Subsidiaries $7,473 $4,471 $(747) Income (loss) per share attributable to Innodata Inc. and Subsidiaries: Basic $0.30 $0.18 $(.03)Diluted $0.28 $0.18 $(.03) Weighted average shares outstanding: Basic 24,895 24,916 25,360 Diluted 26,232 25,103 25,360 Comprehensive Income (Loss): Net income (loss) attributable to Innodata Inc. and Subsidiaries: $7,473 $4,471 $(747)Pension liability adjustment, net of taxes (138) (284) (288)Change in fair value of derivatives, net of taxes of $705, $(1,142) and $2 for the yearsended December 31, 2012, 2011 and 2010, respectively 1,202 (1,945) 4 Comprehensive income (loss) attributable to Innodata Inc. and Subsidiaries $8,537 $2,242 $(1,031) See notes to consolidated financial statements. F-4 INNODATA INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYYEARS ENDED DECEMBER 31, 2012, 2011 AND 2010(In thousands) Accumulated Additional Other Common Stock Paid-in Retained Comprehensive Treasury Shares Amount Capital Earnings Income (Loss) Stock Total January 1, 2010 25,379 $262 $20,267 $21,159 $1,486 $(2,189) $40,985 Net loss - - - (747) - - (747)Stock-based compensation 40 - 256 - - 256 Pension liability adjustments,net of taxes - - - - (288) - (288)Change in fair value ofderivatives, net of taxes - - - - 4 - 4 Purchase of treasury stock (264) - - - - (772) (772) December 31, 2010 25,155 262 20,523 20,412 1,202 (2,961) 39,438 Net income - - - 4,471 - - 4,471 Stock-based compensation 30 - 815 - - - 815 Pension liability adjustments,net of taxes - - - - (284) - (284)Change in fair value ofderivatives, net of taxes - - - - (1,945) - (1,945)Purchase of treasury stock (494) - - - - (1,327) (1,327) December 31, 2011 24,691 262 21,338 24,883 (1,027) (4,288) 41,168 Net income - - - 7,473 - - 7,473 Stock-based compensation - - 977 - - - 977 Issuance of common stockupon exercise of stock options 202 2 572 - - - 574 Restricted shares withheld fortaxes (4) - - - - - - Acquisition of non-controllinginterest (747) (747)Pension liability adjustments,net of taxes - - - - (138) - (138)Change in fair value ofderivatives, net of taxes - - - - 1,202 - 1,202 December 31, 2012 24,889 $264 $22,140 $32,356 $37 $(4,288) $50,509 See notes to consolidated financial statements. F-5 INNODATA INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 31, 2012, 2011 AND 2010(In thousands) 2012 2011 2010 Cash flow from operating activities: Net income (loss) $5,689 $3,910 $(747)Adjustments to reconcile net income (loss) to net cash provided by (used in) operatingactivities: Depreciation and amortization 3,897 3,414 3,703 Recovery of doubtful accounts - (423) (341)Stock-based compensation 977 815 256 Deferred income taxes (762) (767) (1,617)Pension costs 668 501 382 Impairment charge 505 - - Changes in operating assets and liabilities: Accounts receivable 7,389 (12,894) 3,693 Prepaid expenses and other current assets 548 (13) 61 Other assets (722) (668) (735)Accounts payable 90 673 (406)Accrued expenses (81) 371 (101)Accrued salaries, wages and related benefits (12) 1,726 (152)Income and other taxes (421) 375 862 Net cash provided by (used in) operating activities 17,765 (2,980) 4,858 Cash flows from investing activities: Capital expenditures (6,845) (5,886) (1,872)Sale (purchase) of investments 2,737 8,047 (13,875)Net cash provided by (used in) investing activities (4,108) 2,161 (15,747) Cash flows from financing activities: Proceeds from exercise of stock options 574 - - Payment of long-term obligations (195) (585) (699)Purchase of treasury stock - (1,327) (772)Net cash provided by (used in) financing activities 379 (1,912) (1,471) Increase (decrease) in cash and cash equivalents 14,036 (2,731) (12,360)Cash and cash equivalents, beginning of year 11,389 14,120 26,480 Cash and cash equivalents, end of year $25,425 $11,389 $14,120 Supplemental disclosures of cash flow information: Cash paid for income taxes $1,794 $1,079 $308 Vendor financed software licenses acquired $- $1,325 $- See notes to consolidated financial statements F-6 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1.Description of Business and Summary of Significant Accounting Policies Description of Business- Innodata Inc. and subsidiaries (the “Company”) is a global provider of business process, information technology (IT) andprofessional services that are focused on digital enablement. Our clients include leading media, publishing and information services companies, as well asenterprises that are prominent in information technology, manufacturing, aerospace, defense, financial services, government, healthcare, insurance,intelligence, manufacturing and law. The Company operates in two reportable segments. The Company’s Content Services (CS) segment provides the following services – development of digital content including eBooks, development ofnew digital information products and operational support of existing digital information products and systems. The Company formed our Innodata Advanced Date Solutions (IADS) segment in mid-2011 to design and develop new capabilities to enable clients inthe financial services, insurance, medical and healthcare sectors to improve decision-support through digital technologies. IADS operates through twosubsidiaries: Synodex and docGenix. Synodex offers a range of data analysis services in the healthcare, medical and insurance areas. docGenix providesservices to financial services institutions. As of December 31, 2012, the Company owned 77% of Synodex, a limited liability company, and 94% ofdocGenix, a limited liability company. The subsidiaries are at an early stage of development, and reported minimal revenues in 2012. Principles of Consolidation and Basis of Presentation-The consolidated financial statements include the accounts of Innodata Inc. and its wholly-owned subsidiaries and the Synodex and docGenix limited liability companies that are majority-owned by the Company. The non-controlling interests in theSynodex and docGenix limited liability companies are accounted in accordance with the non-controlling interest guidance. All significant intercompanytransactions 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 could differfrom those estimates. Significant estimates include those related to revenue recognition, allowance for doubtful accounts and billing adjustments, long-livedassets, goodwill, valuation of deferred tax assets, value of securities underlying stock-based compensation, litigation accruals, pension benefits, valuation ofderivative instruments and estimated accruals for various tax exposures. Revenue Recognition-Revenue is recognized in the period in which services are performed and delivery has occurred and when all the criteria ofStaff Accounting Bulletin 104 have been met. Revenues for contracts billed on a time-and-materials basis are recognized as services are performed. Revenues under fixed-fee contracts arerecognized on a percentage-of-completion method of accounting as services are performed or milestones are achieved. Revenues from fixed-fee projectsaccounted for less than 5% of the Company’s total revenue for each of the three years in the period ended December 31, 2012. Certain reimbursable expensesincurred on behalf of clients are recorded on a net basis in revenues. Foreign Currency Translation-The functional currency for the Company’s production operations located in the Philippines, India, Sri Lanka andIsrael is U.S. dollars. As such, transactions denominated in Philippine pesos, Indian and Sri Lankan rupees and Israeli shekels were translated to U.S.dollars at rates which approximate those in effect on transaction dates. Monetary assets and liabilities denominated in foreign currencies at December 31, 2012and 2011 were translated at the exchange rate in effect as of those dates. Nonmonetary assets, liabilities, and stockholders’ equity are translated at theappropriate historical rates. Included in direct operating costs are exchange losses (gains) resulting from such transactions of approximately $431,000,$621,000 and $414,000 for the years ended December 31, 2012, 2011 and 2010, respectively. F-7 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Derivative Instruments-The Company has designated its derivatives (foreign currency forward contracts) as a cash flow hedge. Accordingly, theeffective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income or loss, and is subsequentlyreclassified to earnings when the hedge exposure affects earnings. The Company formally documents all relationships between hedging instruments andhedged items, as well as its risk management objective and strategy for undertaking various hedging activities. Cash Equivalents-For financial statement purposes (including cash flows), the Company considers all highly liquid instruments purchased withan original maturity of three months or less to be cash equivalents. Investments-Short-term investments consist of certificates of deposits. Property and Equipment-Property and equipment are stated at cost and are 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 estimated usefullives or the lives of the leases. Certain assets under capital leases are amortized over the lives of the respective leases or the estimated useful lives of the assets,whichever is shorter. Long-lived Assets-Management assesses the recoverability of its long-lived assets, which consist primarily of fixed assets and intangible assets withfinite useful lives, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The following factors, if present, maytrigger an impairment review: (i) significant underperformance relative to expected historical or projected future operating results; (ii) significant negativeindustry or economic trends; (iii) significant decline in the Company’s stock price for a sustained period; and (iv) a change in the Company’s marketcapitalization relative to net book value. If the recoverability of these assets is unlikely because of the existence of one or more of the above-mentioned factors,an impairment analysis is performed, initially using a projected undiscounted cash flow method. Management makes assumptions regarding estimated futurecash flows and other factors to determine the fair value of these respective assets. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable, exceeds its fair value, and is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. In the impairment review conducted by management, the carrying value of the fixed assets of its docGenix subsidiary exceeded its fair value. TheCompany recorded an impairment charge of $0.5 million for the year ended December 31, 2012. No impairment charges were recorded for the year endedDecember 31, 2011 and 2010. Goodwill and Other Intangible Assets-Goodwill represents the excess purchase price paid over the fair value of net assets acquired. The Companytests its goodwill on an annual basis using a two-step fair value based test. The first step of the goodwill impairment test, used to identify potentialimpairment, compares the fair value of a reporting unit, with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds itsfair value, the second step of the goodwill impairment test must be performed to measure the amount of the impairment loss, if any. If impairment isdetermined, the Company will recognize additional charges to operating expenses in the period in which they are identified, which would result in a reductionof operating results and a reduction in the amount of goodwill. In the annual impairment test conducted by the Company as of September 30, 2012, 2011 and 2010 the estimated fair value of the reporting unitexceeded its carrying amount, including goodwill. As such, no impairment was identified or recorded. F-8 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income Taxes-Deferred taxes are determined based on the difference between the financial statement and tax basis 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 all or some portion of the deferred tax assets will not be realized. While the Company considers future taxableincome in assessing the need for the valuation allowance, in the event that the Company determined that it would be able to realize the deferred tax assets in thefuture in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.Similarly, in the event that the Company determined that it would not be able to realize the deferred tax assets in the future considering future taxable income,an adjustment to the deferred tax assets would decrease income in the period such determination was made. Changes in valuation allowance from period toperiod are included in the Company’s tax provision in the period of change. The Company indefinitely reinvests the foreign earnings in its foreignsubsidiaries. Unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the United Statestaxes that may be payable on distribution to the United States, because such earnings are not anticipated to be remitted to the United States. The Company accounts for income taxes regarding uncertain tax positions, and recognizes interest and penalties related to uncertain tax positions inincome tax expense in the consolidated statements of operations and comprehensive income (loss). Accounting for Stock-Based Compensation – The Company measures and recognizes stock-based compensation expense for all share-basedpayment awards made to employees and directors based on estimated fair value at the grant date. The stock-based compensation expense is recognized over therequisite service period. The fair value is determined using the Black-Scholes option-pricing model. The stock-based compensation expense related to the Company’s various stock option plans was allocated as follows (in thousands): Years Ended December 31, 2012 2011 2010 Direct operating costs $109 $72 $13 Selling and adminstrative expenses 868 743 243 Total stock-based compensation $977 $815 $256 Fair Value of Financial Instruments- The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable andaccounts payable approximated their fair value as of December 31, 2012 and 2011, because of the relative short maturity of these instruments. Fair value measurements and disclosures define fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) inthe principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting standard establishes a fair value hierarchy that prioritizes the inputs used to measure fair value into three levels. The three levels aredefined as follows: ·Level 1: Unadjusted quoted price in active market for identical assets and liabilities.·Level 2: Observable inputs other than those included in Level 1.·Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. F-9 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accounts Receivable-The majority of the Company’s accounts receivable are due from publishers, information providers and e-book platformproviders. The Company establishes credit terms for new clients based upon management’s review of their credit information and project terms, and performsongoing credit evaluations of its clients, adjusting credit terms when management believes appropriate based upon payment history and an assessment of theircurrent creditworthiness. The Company records an allowance for doubtful accounts for estimated losses resulting from the inability of its clients to makerequired payments. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are pastdue (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 within expectationsand the provisions established, the Company cannot guarantee that credit loss rates in the future will be consistent with those experienced in the past. Inaddition, there is credit exposure if the financial condition of one of the Company’s major clients were to deteriorate. In the event that the financial condition ofone 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 highly rated financial institutions, located in the United States and in foreignlocations where Company has its operations. At December 31, 2012, the Company had cash and cash equivalents of $25.4 million, of which $15.1 millionwas held by its foreign subsidiaries, and short term investments of $3.1 million which was entirely held by its operating foreign subsidiaries with local bankslocated in Asia. To the extent that such cash exceeds the maximum insurance levels, the Company would be uninsured. The Company has not experienced anylosses in such accounts. Income (Loss) per Share- Basic income (loss) per share is computed using the weighted-average number of common shares outstanding during theyear. Diluted income (loss) per share is computed by considering the impact of the potential issuance of common shares, using the treasury stock method, onthe weighted average number of shares outstanding. For those securities that are not convertible into a class of common stock, the “two class” method ofcomputing income (loss) per share is used. Pension-The Company records annual pension costs based on calculations, which include various actuarial assumptions including discount rates,compensation increases and other assumptions involving demographic factors. The Company reviews its actuarial assumptions on an annual basis andmakes modifications to the assumptions based on current rates and trends. The Company believes that the assumptions used in recording its pensionobligations are reasonable based on its experience, market conditions and inputs from its actuaries. Deferred Revenue-Deferred revenue represents payments received from clients in advance of providing services and amounts deferred if conditionsfor revenue recognition have not been met. Included in accrued expenses on the accompanying consolidated balance sheets as of December 31, 2012 and 2011is deferred revenue amounting to $1.0 million and $0.8 million, respectively. Recent Accounting Pronouncements-The Company adopted new guidance issued by the Financial Accounting Standards Board (FASB) bypresenting total comprehensive income (loss) and the components of net income (loss) in one statement. The adoption of this guidance resulted only in a changein how we present other comprehensive income (loss) in our consolidated financial statements and did not have any impact on our results of operations,financial position, or cash flows. In February 2013, the FASB issued guidance on comprehensive income which requires disclosure of significant amounts reclassified out ofaccumulated other comprehensive income by component and their corresponding effect on the respective line items of net income. This guidance is effective forreporting periods beginning after December 15, 2012 and is not expected to have a material impact on the Company’s consolidated financial statements orfinancial statement disclosures. F-10 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2.Property and equipment Property and equipment, which include amounts recorded under capital leases, are stated at cost less accumulated depreciation and amortization (inthousands), and consist of the following: December 31, 2012 2011 Equipment $23,798 $21,833 Software 7,583 6,216 Furniture and office equipment 3,400 2,658 Leasehold improvements 7,362 5,591 Total 42,143 36,298 Less accumulated depreciation and amortization (31,487) (28,868) $10,656 $7,430 Depreciation and amortization expense of property and equipment was approximately $3.1 million, $2.8 million and $3.1 million for the years endedDecember 31, 2012, 2011 and 2010, respectively. At December 31, 2012 and 2011, equipment under capital leases had a gross cost of approximately $1.6 million. Accumulated depreciation ofequipment under capital leases was $1.6 million and $1.5 million for 2012 and 2011, respectively. Amortization of assets under capital leases is includedunder depreciation and amortization expense. 3.Income taxes The significant components of the provision for (benefit from) income taxes for each of the three years in the period ended December 31, 2012 are asfollows (in thousands): 2012 2011 2010 Current income tax expense: Foreign $1,912 $2,129 $1,134 Federal - 48 - State and local 11 12 7 1,923 2,189 1,141 Deferred income tax benefit: Foreign (69) - (234)Federal (738) (352) (1,180)State and local 34 (476) (195) (773) (828) (1,609) Provision for (benefit from) income taxes $1,150 $1,361 $(468) F-11 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS The reconciliation of the U.S. statutory rate with the Company’s effective tax rate for each of the three years ended December 31, 2012 is summarizedas follows: 2012 2011 2010 Federal statutory rate 34.0% 34.0% (34.0)%Effect of: State income taxes (net of federal tax benefit) 3.0 3.0 (3.0)Taxes on foreign income at rates that differ from U.S. statutory rate (21.8) (18.3) (29.0)Change in valuation allowance on deferred tax assets - - (19.2)Increase in unrecognized tax benefits 1.4 9.0 45.7 Other 0.2 (1.9) 1.0 Effective tax rate 16.8% 25.8% (38.5)% No tax benefits related to stock option exercises were recorded for each of the three years in the period ended December 31, 2012, due to net operatingloss carryforwards. 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, are as follows (in thousands): 2012 2011 Deferred income tax assets: Allowances not currently deductible $367 $449 Depreciation and amortization 414 376 Equity compensation not currently deductible 864 548 Net operating loss carryforwards 2,622 2,546 Expenses not deductible until paid 1,305 1,055 Tax credit carryforwards 176 176 Derivatives - 659 Other 204 11 Totals 5,952 5,820 Deferred income tax liabilities: Derivatives (46) - Other (193) (162)Totals (239) (162) Net deferred tax assets $5,713 $5,658 Net deferred income tax asset-current $1,104 $1,934 Net deferred income tax asset-long term 4,848 3,886 Net deferred income tax liability-current (57) (9)Net deferred income tax liability-non-current (182) (153) Net deferred income tax assets $5,713 $5,658 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 realizable. 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 available. At December 31, 2012 and 2011, the Company had no valuation allowanceon its deferred tax assets. The Company indefinitely reinvests the foreign earnings in its foreign subsidiaries. Unremitted earnings of foreign subsidiaries have been includedin the consolidated financial statements without giving effect to the United States taxes that may be payable on distribution to the United States, because suchearnings are not anticipated to be remitted to the United States. Undistributed earnings of foreign subsidiaries amount to approximately $31.7 million atDecember 31, 2012. These earnings are considered to be indefinitely reinvested, and accordingly, no provision for U.S. federal or state income taxes has beenmade. If such earnings are repatriated in the future, or are no longer deemed to be indefinitely reinvested, we will accrue the applicable amount of taxesassociated with such earnings. Determination at this point in time, of the amount of unrecognized deferred tax liability related to these earnings is notpracticable. F-12 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS United States and foreign components of income (loss) before income taxes for each of the three years ended December 31, (in thousands) are asfollows: 2012 2011 2010 United States $(1,920) $(2,476) $(3,852)Foreign 8,759 7,747 2,637 Total $6,839 $5,271 $(1,215) Certain of the Company’s foreign subsidiaries are subject to preferential tax rates. In addition, one of the foreign subsidiaries enjoys a tax holiday.Due to the tax holiday and the preferential tax rates, the income tax rate for the Company was substantially reduced, the tax benefit from which wasapproximately $1.5 million, $1.1 million and $0.1 million for each of the three years in the period ended December 31, 2012, respectively. At December 31, 2012, the Company has available U.S. federal and New Jersey state net operating loss carryforwards of approximately $11.4million and $13.1 million, respectively. These net operating loss carryforwards expire at various times through the year 2032. Stock option exercises resultedin tax deductions in excess of previously recorded benefits based on the option value at the time of grant (a “windfall”). Although these benefits were reflected inthe net operating losses, the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable. Accordingly, sincethe tax benefit did not reduce the current taxes payable due to net operating losses, these windfall tax benefits were not reflected in the deferred tax assets for2012 and 2011. Windfalls included in net operating losses but not reflected in deferred tax assets as of December 31, 2012 were approximately $4.2 million. The Company had unrecognized tax benefits of $2.4 million and $2.3 million at December 31, 2012 and 2011, respectively. The portion ofunrecognized tax benefits relating to interest and penalties was $0.7 million and $0.6 million at December 31, 2012 and 2011, respectively. The unrecognizedtax benefits as of December31, 2012 and 2011, if recognized, would have an impact on the Company’s effective tax rate. The following table represents a roll forward of the Company’s unrecognized tax benefits and associated interest for the years ended (amounts inthousands): December 31, 2012 2011 Balance at beginning of year $2,278 $1,827 Increases for tax position in prior years - 317 Decrease for tax position in prior years (60) - Interest accrual 132 134 Balance at end of year $2,350 $2,278 The Company is subject to U.S. federal income tax as well as income tax in various states and foreign jurisdictions. The Company is no longersubject to examination by federal and New Jersey taxing authorities for years prior to 2006. Various foreign subsidiaries currently have open tax years rangingfrom 2004 through 2011. F-13 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pursuant to an income tax audit by the Indian Bureau of Taxation in March 2006, one of the Company’s Indian subsidiaries received a taxassessment approximating $339,000, including interest, through December 31, 2012, for the fiscal tax year ended March 31, 2003. Management disagreedwith the basis of the tax assessment and filed an appeal with the Appeal Officer against the assessment. In October 2010, the matter was resolved with ajudgment in the Company’s favor. Under the Indian Income Tax Act, however, the income tax assessing officer has a right to appeal against the judgmentpassed by the Appeal Officer. In December 2010, the income tax assessing officer exercised this right, against which the Company has filed an application todefend the case, and the Company intends to contest it vigorously. The Indian Bureau of Taxation has also completed an audit of the Company’s Indiansubsidiary’s income tax return for the fiscal tax year ended March 31, 2004. The ultimate outcome was favorable, and there was no tax assessment imposedfor the fiscal tax year ended March 31, 2004. In 2008 and 2009, the Indian subsidiary received a final tax assessment for the fiscal years ended March 31,2005 and 2006 from the Indian Bureau of Taxation. The tax assessment amounted to $340,000 and $345,000, including interest through December 31, 2012,for the fiscal years ended March 31, 2005 and 2006, respectively. Management disagrees with the basis of these tax assessments, has filed an appeal againstthe assessments, which it is contesting vigorously. In January 2012, the Indian subsidiary received a final tax assessment approximately $1.1 million,including interest, for the fiscal year ended March 31, 2008 from the Indian Bureau of Taxation. Management disagrees with the basis of this tax assessment,and has filed an appeal against the assessment. Due to this assessment, the Company recorded a tax provision amounting to $323,000 including interestthrough December 31, 2012. Based on recent experience and the current development, management believes that the tax provision of $323,000 includinginterest is adequate. The Indian Bureau of Taxation commenced an audit of this subsidiary’s income tax return for the fiscal year ended March 31, 2010. Theultimate outcome cannot be determined at this time. As the Company is continually subject to tax audits by the Indian Bureau of Taxation, the Companyassessed the likelihood of an unfavorable assessment for all fiscal years where the Company is not subject to a final tax assessment as of December 31, 2012,and recorded an additional tax provision amounting to approximately $1.0 million including interest through December 31, 2012. In January 2013, one of the Company’s Philippine subsidiaries received an informal tax assessment for an amount totaling $3.8 million for the yearended December 31, 2009. Although, the Company has not yet received formal notice of this assessment, the Company has had a discussion with the taxexaminer. Based on this discussion, management believes that it is reasonably likely that it will be successful in contesting the assessment. Accordingly, theCompany recorded no tax provision on said informal tax assessment. In addition, the Company will continuously monitor the outcome and will record anappropriate tax provision in the event there is any change in circumstances. 4.Long term obligations Total long-term obligations as of December 31, 2012 and 2011 consist of the following (in thousands): 2012 2011 Vendor obligations Capital lease obligations $32 $15 Deferred lease payments 697 418 Microsoft licenses (1) 409 857 Pension obligations Accrued pension liability 3,054 2,293 4,192 3,583 Less: Current portion of long term obligations 818 639 Totals $3,374 $2,944 F-14 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) In April 2011, the Company renewed a vendor agreement to acquire certain additional software licenses and to receive support and subsequentsoftware upgrades on these and other currently owned software licenses through February 2014. Pursuant to this agreement, the Company is obligated to payapproximately $470,000 annually over the term of the agreement. As of December 31, 2012, the Company has paid $940,000. The total cost, net of deferredinterest, was allocated to the following asset accounts in 2011(in thousands): Prepaid expenses and other current assets $433 Other assets 867 Property and equipment 25 $1,325 Amortization expense was approximately $0.8 million, $0.6 million and $0.6 million for the years ended December 31, 2012, 2011 and 2010,respectively. 5.Commitments and contingencies Line of Credit-The Company has a $15.0 million line of credit pursuant to which it may borrow up to 80% of eligible accounts receivable.Borrowings under the credit line bear interest at the bank’s alternate base rate plus 0.5% or LIBOR plus 2.5%. The line, which expires in June 2013, iscollateralized by the Company’s accounts receivable. The Company has no outstanding obligations under this credit line as of December 31, 2012. 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 expensedon a straight-line basis over the non-cancelable base lease period. Lease agreements for production space in most overseas facilities, which expire through the year 2030, contain provisions pursuant to which theCompany may cancel the leases with a minimal notice period, generally subject to forfeiture of the security deposit. Rent expense, principally for office andproduction space totaled approximately $3.6 million, $3.2 million and $3.0 million for the years ended December 31, 2012, 2011 and 2010, respectively. Future minimum lease payments, by year and in the aggregate, under non-cancelable operating leases with initial or remaining terms of one year ormore as of December 31, 2012 (in thousands) are as follows: Years Ending December 31, 2013 $1,850 2014 1,829 2015 1,975 2016 1,865 2017 888 Thereafter 2,417 Total minimum lease payments $10,824 Litigation-In 2008, the Supreme Court of the Republic of the Philippines refused to review a decision of the Court of Appeals in Manila against aPhilippines subsidiary of the Company that is inactive and has no material assets, and purportedly also against Innodata Inc., that orders the reinstatement ofcertain former employees of the subsidiary to their former positions and also orders the payment of back wages and benefits that aggregate approximately $8.5million. Based on consultation with legal counsel, the Company believes that recovery against the Company is unlikely. The Company is also subject to various legal proceedings and claims which arise in the ordinary course of business. F-15 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS While management currently believes that the ultimate outcome of 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. Substantial recovery against the Company in theabove-referenced Philippines actions could have a material adverse impact on the Company, and unfavorable rulings or recoveries in the other proceedingscould have a material adverse impact on the operating results of the period in which the ruling or recovery occurs. In addition, the Company’s estimate of thepotential impact on the Company’s financial position or overall results of operations for the above legal proceedings could change in the future. Our legal reserves related to these legal proceedings and claims are based on a determination of whether or not a loss is probable. We reviewoutstanding claims and proceedings with external counsel to assess probability and estimates of loss. The reserves are adjusted if necessary. While we intendto defend these matters vigorously, adverse outcomes that we estimate could reach approximately $300,000 in aggregate beyond recorded amounts arereasonably possible. If circumstances change, we may be required to record adjustments that could be material to our reported financial condition and resultsof operations. Foreign Currency-The Company’s production facilities are located in the Philippines, India, Sri Lanka and Israel. To the extent that the currenciesof these countries fluctuate, the Company is subject to risks of changing costs of production after pricing is established for certain client projects. In addition,the Company is exposed to foreign exchange fluctuation on the monetary assets and liabilities held by its foreign subsidiaries that are denominated in localcurrency. Indemnifications-The Company is obligated under certain circumstances to indemnify directors, certain officers and employees against costs andliabilities incurred in actions or threatened actions brought against such individuals because such individuals acted in the capacity of director and/or officer orfiduciary of the Company. In addition, the Company has contracts with certain clients pursuant to whom the Company has agreed to indemnify the client forcertain specified and limited claims. These indemnification obligations occur in the ordinary course of business and, in many cases do not include a limit onpotential maximum future payments. As of December 31, 2012, the Company has not recorded a liability for any obligations arising as a result of theseindemnifications. 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, 2012, the net book value of the property and equipment was $0.3 million. 6.Pension benefits U.S. Defined Contribution Pension Plan-The Company has a defined contribution plan qualified under Section 401(k) of the 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 aportion of their compensation to the plan. Under the plan, the Company has the discretion to match a portion of participants’ contributions. The Companyintends to match approximately $0.1 million to the plan for the year ended December 31, 2012. For the year ended December 31, 2011 the Company did notmake any matching contributions. For the year ended December 31 2010 the Company’s matching contributions were approximately $0.1 million. Non-U.S. Pension benefits-The accounting standard for pensions requires an employer to recognize a net liability or asset and an offsettingadjustment to accumulated other comprehensive income (loss) to report the funded status of defined benefit pension and other post-retirement benefit plans. F-16 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Most of the non-U.S. subsidiaries provide for government-mandated defined pension benefits. For certain of these subsidiaries, vested eligibleemployees are provided a lump sum payment upon retiring from the Company at a defined age. The lump sum amount is based on the salary and tenure as ofretirement date. Other non-U.S subsidiaries provide for a lump sum payment to vested employees on retirement, death, incapacitation or termination ofemployment, based upon the salary and tenure as of the date employment ceases. The liability for such defined benefit obligations is determined and providedon the basis of actuarial valuations. As of December 31, 2012, these plans are unfunded. Pension expense for foreign subsidiaries totaled approximately $0.7million, $0.5 million and $0.4 million for each of the three years in the period ended December 31, 2012. The following table summarizes the amounts recognized in accumulated other comprehensive income (loss), net of taxes (in thousands): Years Ended December 31, 2012 2011 2010 Amortization of transition obligation $90 $89 $91 Actuarial loss (228) (373) (379)Total $(138) $(284) $(288) Amounts in accumulated other comprehensive income (loss) not yet reflected in netperiodic pension cost, net of taxes: Actuarial gain $173 $401 Transition obligation (216) (306) Total $(43) $95 Amounts in accumulated other comprehensive income (loss) expected to be amortized in2013 net periodic pension cost, net of taxes: Actuarial loss $329 Transition obligation 84 Total $413 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 for each of the three years ended December 31, 2012: Benefit Obligations: Change in the Benefit Obligation: 2012 2011 2010 Projected benefit obligation at beginning of the year $2,695 $2,074 $1,392 Service cost 420 332 244 Interest cost 218 186 142 Actuarial loss 186 299 271 Foreign currency exchange rate changes 101 (100) 86 Benefits paid (68) (96) (61)Projected benefit obligation at end of year $3,552 $2,695 $2,074 F-17 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Components of Net Periodic Pension Cost: 2012 2011 2010 Service cost $420 $332 $244 Interest cost 218 186 142 Actuarial (gain) loss recognized 30 (17) (4)Net periodic pension cost $668 $501 $382 The accumulated benefit obligation, which represents benefits earned to date, was approximately $1.8 million and $1.1 million at December 31,2012 and 2011, respectively. 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. The assumptions for each of the three years ended December 31, 2012 are as follows: 2012 2011 2010 Discount rate 5.8%-14% 7.2%-9.5% 8.5%-9.9% Rate of increase in compensation levels 7%-9% 7%-9% 7%-9% Estimated Future Benefit Payments: The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands): Years Ending December 31, 2013 $173 2014 66 2015 171 2016 281 2017 95 2018 to 2022 1,026 $1,812 F-18 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7.Capital Stock Common Stock-The Company is authorized to issue 75,000,000 shares of common stock. Each share of common stock has one vote. Subject topreferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably such dividends, ifany, as may be declared by the Board of Directors. No common stock dividends have been declared to date. Preferred Stock-The Company is authorized to issue 5,000,000 shares of preferred stock. The Board of Directors is authorized to fix the terms,rights, preferences and limitations of the preferred stock and to issue the preferred stock in series which differ as to their relative terms, rights, preferencesand limitations. Stockholders Rights Agreement- On December 27, 2012, the Board of Directors declared a dividend of one preferred share purchase right (each, a“Right,” and collectively, the “Rights”) for each outstanding share of the Company’s common stock on January 14, 2013. The description and terms of theRights are set forth in a Rights Agreement between the Company and American Stock Transfer & Trust Co., as rights agent, dated as of December 27, 2012(the “Rights Agreement”). Each Right entitles its holder to purchase, under certain conditions, one one-thousandth of a share of Series C Participating PreferredStock (“Preferred Stock”). Each one one-thousandth of a share of Preferred Stock has substantially the same rights as one share of the Company’s commonstock. Subject to the terms and conditions of the Rights Agreement, Rights become exercisable ten days after the public announcement that a “Person” hasbecome an “Acquiring Person” (as each such term is defined in the Rights Agreement) by obtaining beneficial ownership of 20% or more of the Company’soutstanding common stock, or, if earlier, ten business days (or a later date determined by the Board of Directors before any Person becomes an AcquiringPerson) after a Person begins a tender or exchange offer which, if completed, would result in that Person becoming an Acquiring Person. Any Rights held by anAcquiring Person are void and may not be exercised. If a Person becomes an Acquiring Person, all holders of Rights, except the Acquiring Person, may purchase at the Right’s then-current exercise price,the Company’s common stock having a market value equal to twice the exercise price. Moreover, at any time after a Person becomes an Acquiring Person(unless such Person acquires 50 percent or more of the common stock of the Company then outstanding, as more fully described in the Rights Agreement), theBoard of Directors may exchange one share of the Company’s common stock for each outstanding Right (other than rights owned by such Person, whichwould have become void). In addition, if the Company is acquired in a merger or other business combination transaction after a Person becomes an AcquiringPerson, all holders of Rights, except the Acquiring Person, may purchase at the Right’s then-current exercise price, a number of the acquiring Company’scommon stock having a market value of twice the exercise price. If the Company receives a “qualifying offer” (which includes certain all-cash fully financedtender offers or exchange offers for all of the Company’s outstanding common stock), under certain circumstances, holders of 10 percent of the Company’soutstanding common stock (excluding stock held by the offeror and its affiliates and associates) may direct the Board of Directors to call a special meeting ofstockholders to consider a resolution exempting such “qualifying offer” from the Rights Agreement. The Rights themselves have no voting power. The Board ofDirectors may redeem the Rights at an initial redemption price of $0.001 per Right under certain circumstances set forth in the Rights Agreement. If the Rights Agreement is approved by stockholders at the 2013 annual meeting, the Rights will expire on January 13, 2016 unless earlier redeemedor exchanged. If stockholders do not approve the Rights Agreement, or if at the annual meeting of stockholders there is no proposal to approve the RightsAgreement, the Rights will expire immediately following certification of the vote at the 2013 annual meeting. The Company has authorized 100,000 shares of Preferred Stock, none of which are outstanding. Common Stock Reserved-As of December 31, 2012, the Company had reserved for issuance approximately 4,010,000 shares of common stockpursuant to the Company’s stock option plans. F-19 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Treasury Stock-In June 2010, the Company announced that the Board of Directors authorized the repurchase of up to $2.1 million of its commonstock. As of December 31, 2011, the Company repurchased 758,000 shares of its common stock representing almost the entire June 2010 authorization. InSeptember 2011, the Company’s Board of Directors authorized the repurchase of up to $2.0 million of its common stock in open market or privatetransactions. There is no expiration date associated with the program. The Company did not repurchase any shares of its common stock under the September2011 authorization. 8.Stock Options The Company adopted, with stockholder approval, the Innodata Inc. 2009 Stock Plan, as amended and restated (the “2009 Plan”). The maximumnumber of shares of common stock that may be delivered under the 2009 Plan is 2,270,118 shares, less one share for every share that becomes subject to anOption or Stock Appreciation Rights (SAR) granted after March 31, 2012, and two shares for every share that becomes subject to an Award other than anOption or SAR granted after March 31, 2012. If after March 31, 2012 (i) any shares subject to an award or portion of any award under the 2001 and 2002Stock Option Plans (collectively, the “Prior Plans”) that expires or terminates unexercised, becomes unexercisable, or is forfeited, or is otherwise terminated,surrendered or canceled as to any shares without the delivery of shares of Stock or (ii) shares subject to any Award or portion of an Award under the Plan thatexpires or terminates unexercised, becomes unexercisable, or is forfeited, or is otherwise terminated, surrendered or canceled as to any shares without thedelivery of shares of Stock, the applicable shares subject to such award under the Prior Plans or the Award shall thereafter be available for further Awardsunder the Plan. Shares that become available for Awards shall be added back as (i) one share for each such share subject to an option under the Prior Plans oran Option or SAR under the Plan, and (ii) as two shares for each such share subject to awards other than Options or SAR under the Plan. All directors, officers and other employees, and other persons who provide services to the Company, are eligible to participate in the 2009 Plan. The2009 Plan provides for the grants of stock options (which may be incentive stock options within the meaning of the Internal Revenue Code of 1986, asamended, or non-qualified stock options). The stock options granted may have a maximum term of up to ten years. The Company’s Board of Directors may amend, alter, suspend, discontinue, or terminate the 2009 Plan or any portion thereof at any time; providedthat no such amendment, alteration, suspension, discontinuation or termination shall be made without stockholder approval, if such approval is necessary tocomply with any tax or regulatory requirement applicable to the 2009 Plan; and provided further that any such amendment, alteration, suspension,discontinuance or termination that would impair the rights of any participant or any holder or beneficiary of any award theretofore granted shall not to thatextent be effective without the consent of the affected participant, holder or beneficiary. Notwithstanding the foregoing, the Board of Directors may unilaterallyamend the 2009 Plan and outstanding awards without participant consent, as it deems necessary or appropriate, to ensure compliance with applicablesecurities laws and provisions of the Internal Revenue Code of 1986. The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model. The weighted average fair values ofthe options granted and weighted average assumptions are as follows: F-20 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2012 2011 2010 Weighted average fair value of options granted $2.32 $1.61 $3.04 Risk-free interest rate 0.65%-0.74% 0.9%-2.8% 2.5%-3.2%Expected life (years) 5 5-8 8 Expected volatility factor 69% 68%-74% 90%Expected dividends None None None The Company estimates the risk-free interest rate using the U.S. Treasury yield curve for periods equal to the expected term of the options in effect atthe time of grant. The expected term of options granted is based on a combination of vesting schedules, term of the options and historical experience. Expectedvolatility is based on historical volatility of the Company’s common stock. The Company uses an expected dividend yield of zero since it has never declaredor paid any dividends on its capital stock. A summary of option activity under the Plans as of December 31, 2012, and changes during the year then ended is presented below: Number of Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (years) Aggregate Intrinsic Value Outstanding at January 1, 2012 3,478,329 $2.73 Granted 90,000 $4.19 Exercised (231,772) $3.21 Forfeited/Expired (350,500) $2.64 Outstanding at December 31, 2012 2,986,057 $2.75 4.34 $3,229,575 Exercisable at December 31, 2012 1,426,057 $2.74 2.39 $1,607,575 Vested and expected to vest at December 31, 2012 2,986,057 $2.75 4.34 $3,229,575 The total compensation cost related to non-vested stock options not yet recognized as of December 31, 2012 totaled approximately $1.1 million. Theweighted-average period over which these costs will be recognized is twenty-two months. Because of the Company’s net operating loss carryforwards, no tax benefits resulting from the exercise of stock options have been recorded, thusthere was no effect on cash flows from operating or financing activities. The total intrinsic value of options exercised during the year ended December 31, 2012 amounted to approximately $0.5 million. No options wereexercised during the years ended December 31, 2011 and 2010. The total fair value of stock options vested during the year ended December 31, 2012 wasapproximately $0.3 million. On May 31, 2012, the Company’s Chairman and CEO (the “CEO”) exercised 44,000 stock options at a total exercise price of $113,960. The CEOpaid the exercise price by surrendering to the Company 20,758 of the shares of common stock he would have otherwise received on the option exercise. Inaddition, the CEO surrendered 8,936 shares to the Company in consideration of the payment by the Company on his behalf of $49,062 of the Company’sminimum withholding tax requirement payable in respect of the option exercise. Because the payment value attributable to the surrendered shares uponsettlement does not exceed the fair value of the option, no compensation cost was recognized at the date of settlement. In connection with this transaction, theCompany issued a net total of 14,306 shares of common stock to the CEO. F-21 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of restricted shares under the Company’s stock option plans as of December 31, 2012, and changes during the period then ended, are presentedbelow: Number of Shares Weighted-Average Grant Date Fair Value Unvested at January 1, 2012 60,000 $3.49 Granted - - Vested (27,500) 3.90 Forfeited/Expired — - Unvested at December 31, 2012 32,500 $3.14 9.Comprehensive income (loss) Accumulated other comprehensive income (loss), as reflected in the consolidated balance sheets, consists of pension liability adjustments, net oftaxes, and changes in fair value of derivatives, net of taxes. The components of accumulated other comprehensive income (loss) as of December 31, 2012 and2011, and changes during the periods then ended, are presented below (in thousands): Pension Liability Fair Value of Accumulated Other Adjustment Derivatives Comprehensive Income (Loss) Balance at January 1, 2011 $379 $823 $1,202 Current-period change (284) (1,945) (2,229)Balance at December 31, 2011 95 (1,122) (1,027)Current-period change (138) 1,202 1,064 Balance at December 31, 2012 $(43) $80 $37 10.Segment reporting and concentrations For the year ended December 31, 2012, the Company’s operations are classified into two reportable segments: Content Services (CS) and InnodataAdvanced Data Solutions (IADS). CS segment provides solutions to digital retailers, information services companies, publishers and enterprises that have one or more of the followingbroad business requirements: development of digital content (including eBooks); development of new digital information products; and operational support ofexisting digital information products and systems. In the second quarter of 2011, the Company launched its IADS segment to perform advanced data analysis. IADS operates through two subsidiaries:Synodex and docGenix. Synodex offers a range of data analysis services in the healthcare, medical and insurance areas. docGenix provides services tofinancial services institutions. A significant portion of the Company’s revenues is generated from its production facilities in the Philippines, India, Sri Lanka and Israel. Revenues from external clients and segment operating profit, and other reportable segment information are as follows (in thousands): F-22 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2012 2011 Revenues: Content Services $85,386 $73,942 IADS 1,205 - Total consolidated $86,591 $73,942 Income (loss) before provision for income taxes: Content Services $14,775 $8,038 IADS (1) (7,936) (2,767)Total consolidated $6,839 $5,271 December 31, 2012 December 31, 2011 Total assets: Content Services $61,858 $57,280 IADS 4,323 2,117 Total consolidated $66,181 $59,397 (1) Before elimination of any inter-segment profits. Income (loss) before provision for income taxes for Content Services and IADS was $13.1 million and $(6.3) million, respectively, for the yearended December 31, 2012, after eliminating inter-segment profits. Income (loss) before provision for income taxes for Content Services and IADS was $7.5million and $(2.2) million, respectively, for the year ended December 31, 2011, after eliminating inter-segment profits. Long-lived assets as of December 31, 2012 and 2011 by geographic region are comprised of: 2012 2011 (in thousands) United States $3,978 $2,771 Foreign countries: Philippines 1,424 1,878 India 4,926 2,494 Sri Lanka 931 876 Israel 72 86 Total foreign 7,353 5,334 $11,331 $8,105 Our top two clients generated approximately 41%, 30% and 17% of the Company’s total revenues in the fiscal years ended December 31, 2012, 2011and 2010, respectively. Another client accounted for less than 10% of our total revenues for the year ended December 31, 2012, but for 14% and 10% of ourtotal revenues for the year ended December 31, 2011 and 2010, respectively. One other client accounted for less than 10% of our total revenues for the yearsended December 31, 2012 and 2011, but for 11% of our total revenues for the year ended December 31, 2010. No other client accounted for 10% or more oftotal revenues during these periods. Further, in the years ended December 31, 2012, 2011 and 2010, revenues from non-US clients accounted for 24%, 30%and 33%, respectively, of the Company's revenues. F-23 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Revenues for each of the three years in the period ended December 31, 2012 by geographic region (determined based upon client’s domicile), are asfollows: 2012 2011 2010 (in thousands) United States $65,533 $51,626 $41,015 United Kingdom 8,529 9,721 8,198 The Netherlands 7,658 7,850 8,230 Other - principally Europe 4,871 4,745 4,070 $86,591 $73,942 $61,513 As of December 31, 2012, approximately 30% of the Company's accounts receivable was from foreign (principally European) clients and 55% ofaccounts receivable was due from four clients. As of December 31, 2011, approximately 20% of the Company's accounts receivable was from foreign(principally European) clients and 62% of accounts receivable was due from two clients. No other client accounts for 10% or more of the receivables as ofDecember 31, 2012 and 2011. 11.Income (Loss) per Share For the Years Ended December 31, 2012 2011 2010 (in thousands) Net income (loss) attributable to Innodata Inc. and Subsidiaries $7,473 $4,471 $(747) Weighted average common shares outstanding 24,895 24,916 25,360 Dilutive effect of outstanding options 1,337 187 - Adjusted for dilutive computation 26,232 25,103 25,360 Basic income (loss) per share is computed using the weighted-average number of common shares outstanding during the year. Diluted income (loss)per share is computed by considering the impact of the potential issuance of common shares, using the treasury stock method, on the weighted averagenumber of shares outstanding. For those securities that are not convertible into a class of common stock, the two-class method of computing income (loss) pershare is used. Options to purchase 0.1 million, 1.1 million and 0.4 million shares of common stock in 2012, 2011 and 2010, respectively, were outstanding butnot included in the computation of diluted income (loss) per share because the options’ exercise price was greater than the average market price of the commonshares and therefore, the effect would have been antidilutive. In addition, diluted net loss per share in 2010 does not include 1.8 million potential commonshares derived from the exercise of stock options because as a result of the Company’s incurring losses, their effect would have been antidilutive. F-24 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12.Quarterly Financial Data (Unaudited) The quarterly results of operations are summarized below: FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (in thousands, except per share amounts) 2012 Revenues $25,136 $22,768 $19,710 $18,977 Gross profit $9,031 $8,114 $6,201 $5,863 Net income and income per share attributable to Innodata Inc. andSubsidiaries: Net income $3,432 $2,088 $1,289 $664 Basic net income per share $0.14 $.08 $.05 $0.03 Diluted net income per share $0.13 $.08 $.05 $0.03 2011 Revenues $14,701 $16,257 $19,245 $23,739 Gross profit $4,028 $4,887 $6,414 $8,437 Net income and income per share attributable to Innodata Inc. andSubsidiaries: Net income $15 $807 $1,376 $2,273 Basic and diluted net income per share $- $.03 $.06 $.09 13.Derivatives The Company has a large portion of its operations in international markets that subject it to foreign currency fluctuations. The most significantforeign currency exposures occur when revenue and associated accounts receivable are collected in one currency and expenses incurred in order to generate thatrevenue are accounted for in another currency. The Company’s primary exchange rate exposure relates to payroll, other payroll costs and operating expenses inthe Philippines, India and Sri Lanka. To manage its exposure to fluctuations in foreign currency exchange rates, the Company entered into foreign currency forward contracts, authorizedunder Company policies, with counterparties that were highly rated financial institutions. The Company utilized non-deliverable forward contracts expiringwithin twelve months to reduce its foreign currency risk. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective andstrategy for undertaking hedge transactions. The Company does not hold or issue derivatives for trading purposes. All derivatives are recognized at their fairvalue and are classified based on the instrument’s maturity date. The total notional amount for outstanding derivatives as of December 31, 2012 and 2011 was$32.3 million and $28.0 million, respectively. The following table presents the fair value of derivative instruments included within the consolidated balance sheets as of December 31, 2012 and 2011(in thousands): Balance Sheet Location Fair Value 2012 2011 Derivatives designated as hedging instruments: Prepaid expenses and Foreign currency forward contracts other current assets $125 $- Accrued expenses $- $1,782 F-25 INNODATA INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS The effect of foreign currency forward contracts designated as cash flow hedges on the consolidated statements of operations for the years endedDecember 31, 2012, 2011 and 2010 were as follows (in thousands): 2012 2011 2010 Net gain (loss) recognized in OCI (1) $966 $(1,883) $2,246 Net gain (loss) reclassified from accumulated OCI into income (2) $(941) $1,203 $2,242 Net gain recognized in income (3) $— $— $— (1) Net change in the fair value of the effective portion classified in other comprehensive income (loss) (OCI).(2) Effective portion classified within direct operating costs.(3) There were no ineffective portions for the periods presented. 14.Financial Instruments The following table sets forth the financial instruments as of December 31, 2012 and 2011, that the Company measured at fair value, on a recurringbasis by level, within the fair value hierarchy (in thousands). As required by the standard, assets measured at fair value are classified in their entirety basedon the lowest level of input that is significant to their fair value measurement. December 31, 2012 Level 1 Level 2 Level 3 Assets Derivatives $— $125 $— December 31, 2011 Level 1 Level 2 Level 3 Liability Derivatives $— $1,782 $— The Level 2 assets contain foreign currency forward contracts. Fair value is determined based on the observable market transactions of spot andforward rates. The fair value of these contracts as of December 31, 2012 is included in prepaid expenses and other current assets and fair value as ofDecember 31, 2011 is included in accrued expenses in the accompanying consolidated balance sheets. F-26 Exhibits which are indicated as being included in previous filings are incorporated herein by reference. Exhibit Description Filed as Exhibit 3.1 (a) Restated Certificate of Incorporation filed on April 29, 1993 Filed as Exhibit 3.1(a) to our Form 10-K for the year ended December 31,2003 3.1 (b) Certificate of Amendment of Certificate of Incorporation ofInnodata Corporation filed on March 1, 2001 Filed as Exhibit 3.1(b) to our Form 10-K for the year ended December 31,2003 3.1 (c) Certificate of Amendment of Certificate of Incorporation ofInnodata Corporation Filed on November 14, 2003 Filed as Exhibit 3.1(c) to our Form 10-K for the year ended December 31,2003 3.1 (d) Certificate of Amendment of Certificate of Incorporation ofInnodata Isogen, Inc. Filed as Exhibit 3.1 to our Form 10Q for the quarter ended June 30, 2012 3.2 Form of Amended and Restated By-Laws Exhibit 3.1 to Form 8-K dated December 16, 2002 3.3 Form of Certificate of Designation of Series C ParticipatingPreferred Stock Filed as Exhibit A to Exhibit 4.1 to Form 8-K dated December 16, 2002 4.2 Specimen of Common Stock certificate Exhibit 4.2 to Form SB-2 Registration Statement No. 33-62012 4.3 Form of Rights Agreement, dated as of December 16, 2002between Innodata Corporation and American Stock Transferand Trust Co., as Rights Agent Exhibit 4.1 to Form 8-K dated December 16, 2002 4.4 Form of Rights Agreement as of December 27, 2012 betweenInnodata Inc. and American Stock Transfer and Trust Co., asRights Agent Exhibit 4.1 to Form 8-K dated December 27, 2012 10.1 1994 Stock Option Plan Exhibit A to Definitive Proxy dated August 9, 1994 10.2 1993 Stock Option Plan Exhibit 10.4 to Form SB-2 Registration Statement No. 33-62012 10.3 Form of Indemnification Agreement between us and ourdirectors and one of our Officers Exhibit 10.3 to Form 10-K for the year ended December 31, 2002 10.4 1994 Disinterested Directors Stock Option Plan Exhibit B to Definitive Proxy dated August 9, 1994 10.5 1995 Stock Option Plan Exhibit A to Definitive Proxy dated August 10, 1995 10.6 1996 Stock Option Plan Exhibit A to Definitive Proxy dated November 7, 1996 10.7 1998 Stock Option Plan Exhibit A to Definitive Proxy dated November 5, 1998 10.8 2001 Stock Option Plan Exhibit A to Definitive Proxy dated June 29, 2001 10.9 2002 Stock Option Plan Exhibit A to Definitive Proxy dated September 3, 2002 10.10 Employment Agreement dated as of January 1, 2004 withGeorge Kondrach Filed as Exhibit 10.10 to our Form 10-K for the year ended December 31,2003 10.11 Letter Agreement dated as of August 9, 2004, by and betweenus and The Bank of New York Filed as Exhibit 10.2 to Form S-3 Registration statement No. 333-121844 10.12 Employment Agreement dated as of December 22, 2005, byand between us and Steven L. Ford Exhibit 10.1 to Form 8-K dated December 28, 2005 10.13 Form of 2001 Stock Option Plan Grant Letter, Dated December22, 2005 Exhibit 10.2 to Form 8-K dated December 28, 2005 10.14 Form of 1995 Stock Option Agreement Exhibit 10.4 to Form 8-K dated December 15, 2005   10.15 Form of 1998 Stock Option Agreement for Directors Exhibit 10.5 to Form 8-K dated December 15, 2005 10.16 Form of 1998 Stock Option Agreement for Officers Exhibit 10.6 to Form 8-K dated December 15, 2005 10.17 Form of 2001 Stock Option Agreement Exhibit 10.7 to Form 8-K dated December 15, 2005 10.18 Form of new vesting and lock-up agreement for each of HaigBagerdjian, Louise Forlenza, John Marozsan and ToddSolomon Exhibit 10.8 to Form 8-K dated December 15, 2005 10.19 Form of new vesting and lock-up agreement for Jack Abuhoff Exhibit 10.9 to Form 8-K dated December 15, 2005 10.20 Form of new vesting and lock-up agreement for GeorgeKondrach Exhibit 10.10 to Form 8-K dated December 15, 2005 10.21 Form of new vesting and lock-up agreement for Stephen Agress Exhibit 10.11 to Form 8-K dated December 15, 2005 10.22 Form of 2001 Stock Option Plan Grant Letter, dated December31, 2005, for Messrs. Abuhoff, Agress and Kondrach Exhibit 10.2 to Form 8-K dated January 5, 2006 10.23 Form of 2001 Stock Option Plan Grant Letter, dated December31, 2005, for Messrs. Bagerdjian and Marozsan and Ms.Forlenza Exhibit 10.3 to Form 8-K dated January 5, 2006 10.24 Transition Agreement Dated as of September 29, 2006 withStephen Agress Exhibit 10.1 to Form 8-K dated October 3, 2006 10.25 Form of Stock Option Modification Agreement with WithStephen Agress Exhibit 10.2 to Form 8-K dated October 3, 2006 10.26 Employment Agreement dated as of February 1, 2006 withJack Abuhoff Exhibit 10.2 to Form 8-K dated April 27, 2006 10.27 Employment Agreement dated as of January 1, 2007 withAshok Mishra Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2007 10.28 Innodata Incentive Compensation Plan Exhibit 10.1 to Form 8-K dated February 13, 2008 10.29 Form of 2002 Stock Option Plan Grant Letter, dated August13, 2008, for Messrs. Bagerdjian, Marozsan and Woodward,and Ms. Forlenza Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2008 10.30 Amended and Restated Employment Agreement dated as ofDecember 24, 2008 with Jack S. Abuhoff Exhibit 10.1 to Form 8-K dated December 30, 2008 10.31 Employment Agreement dated as of March 25, 2009 with JackAbuhoff Exhibit 10.1 to Form 8-K dated March 25, 2009 10.32 Separation Agreement and General Release dated as of April 27,2009 with Steven Ford Exhibit 10.1 to Form 8-K dated April 27, 2009 10.33 2009 Stock Plan Annex A to Definitive Proxy dated April 28, 2009 10.34 Employment Agreement dated as of November 9, 2009 withO’Neil Nalavadi Exhibit 10.1 to Form 8-K dated October 11, 2009 10.35 Form of 2009 Stock Option Plan Grant Letter, dated April 2,2010 for O’Neil Nalavadi Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2010  10.36 Form of 2009 Stock Option Plan Grant Letter, dated March16, 2010 for O’Neil Nalavadi Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2010 10.37 Form of 2009 Stock Option Plan Grant Letter, dated March16, 2010 for O’Neil Nalavadi Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2010 10.38 Amended and Restated 2009 Stock Plan Annex A to Definitive Proxy dated April 22, 2011 10.39 Amended dated as of July 11, 2011 to Employment Agreementwith Jack S. Abuhoff Exhibit 10.1 to Form 8-K dated July 12, 2011 10.40 Amended dated as of July 11, 2011 to Employment Agreementwith O’Neil Nalavadi Exhibit 10.2 to Form 8-K dated July 12, 2011 10.41 Amendment dated as of November 9, 2012 to EmploymentAgreement with O’Neil Nalavadi Exhibit 10.3 to Form 8-K dated November 8, 2012 10.42 Form of Director Stock Option Grant Letter dated March 8,2013 Filed herewith 10.43 Form of Stock Option Grant Letter dated March 8, 2013 forMessrs. Abuhoff, Mishra and Nalavadi Filed herewith 10.44 Form of Stock Option Grant Letter dated March 8, 2013 forJack Abuhoff Filed herewith 16 Letter of Grant Thornton regarding change in certifyingaccountant Exhibit 4.01 to Form 8-K dated September 12, 2008 21 Significant subsidiaries of the registrant Filed herewith 23 Consent of CohnReznick LLP Filed herewith 31.1 Certificate of Chief Executive Officer pursuant to Section 302of the Sarbanes-Oxley Act of 2002 Filed herewith 31.2 Certificate of Chief Financial Officer pursuant to Section 302of the Sarbanes-Oxley Act of 2002. Filed herewith 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith 101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the ConsolidatedStatements of Operations and Comprehensive Income (Loss)(iii) the Consolidated Statements of Stockholders’ Equity, (iv)the Consolidated Statements of Cash Flows and (v) the Notesto the Consolidated Financial Statements. Filed herewith  INNODATA INC. AND SUBSIDIARIESSCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS(Dollars in Thousands) Activity in the Company's allowance for doubtful accounts for the years ended December 31, 2012, 2011 and 2010 was as follows: Additions Charged to Period Balance atBeginning of Period Costs and Expenses Charged toOther Accounts Deductions Balance atEnd of Period 2012 $608 $- $- $- $608 2011 $1,308 $111 $- $(811) $608 2010 $1,808 $74 $- $(574) $1,308  Exhibit 10.42 2009 Stock Plan Grant March 8, 2013 Via Email[NAME]Email: [_____] Dear [NAME]: I am pleased to inform you that you have been granted a non-qualified option (the "Option") to purchase shares (“Shares”) of common stock of Innodata Inc.(the "Company"). Your grant has been made under the Innodata Isogen, Inc. 2009 Stock Plan, as amended and restated (the “Plan”). A copy of the Plan isattached to this letter. Grant Date: March 4, 2013Number of Shares That May Be Purchased On Exercise of the Option: 47,066Option Exercise Price per Share: $3.39Option Expiration Date: March 3, 2020 For the Option to be valid, you must within 30 days after receipt sign, date and return the original of this letter to Amy Agress, Vice President andGeneral Counsel, Innodata Inc., Three University Plaza, Hackensack, New Jersey 07601 USA; email aagress@innodata.com. Vesting: 100% of the Shares vest on March 4, 2016, subject to the provisions set forth in “Service Requirements” below. Exercise: You may exercise this Option at any time, in whole or in part, to purchase a whole number of vested Shares by following the exercise procedures setup by the Company. All exercises must take place before the Expiration Date, or such earlier date as is set forth below under Service Requirements. Eachexercise must be for no less than 500 Shares, until there are less than 500 Shares remaining. Service Requirements: In the event of the termination of your services as a Director by you, the Company or its stockholders (whether voluntary orinvoluntary and whether or not for cause or good reason or otherwise), all further vesting of the Shares under this Option will cease as of your last day ofservice, and all unvested Shares will be cancelled. The Option to exercise vested Shares will expire 60 days after your services as a Director ceases. In the eventyour service as a Director is terminated by your death or disability, the Option will expire 12 months after such termination. Securities Laws Restrictions. You represent that when you exercise your Option you will be purchasing Shares for your own account and not on behalf ofothers. You understand and acknowledge that federal and state securities laws govern and restrict your right to offer, sell or otherwise dispose of any Sharesunless otherwise covered by a Form S-8 or unless your offer, sale or other disposition thereof is otherwise registered under the Securities Act of 1933, asamended, (the "1933 Act") and state securities laws or, in the opinion of the Company's counsel, such offer, sales or other disposition is exempt fromregistration thereunder. You agree that you will not offer, sell or otherwise dispose of any Shares in any manner (i) which would require the Company to fileany registration statement (or similar filing under state laws) with the Securities and Exchange Commission or to amend or supplement any such filing or (ii)in any manner which would violate or cause the Company to violate the 1933 Act, the rules and regulations promulgated thereunder or any other state orfederal law, or (iii) other than during “window periods” from time to time announced by the Company in its sole discretion. You further understand that thecertificates for any Shares you purchase will bear such legends as the Company deems necessary or desirable in connection with the 1933 Act or other rules,regulations or laws. If you are a director, officer or principal shareholder, Section 16(b) of the Securities Exchange Act of 1934 further restricts your ability tosell or otherwise dispose of Shares.  Non-Transferability of Option. The Option is personal to you and is non-transferable by you other than by will or the laws of descent and distribution or asotherwise permitted by the Plan. During your lifetime only you can exercise the Option except as otherwise permitted by the Plan. Upon your death, the personor persons to whom your rights pass by will or laws of descent and distribution will have the right to exercise the Option. Withholding Taxes. The Company shall have the right to withhold from your compensation any withholding taxes payable as a result of your receipt ofShares. The Company shall also have the right to require that you pay to it all such withholding taxes in cash as a condition precedent to the exercise of thisOption. You agree to notify the Company when you sell or otherwise transfer or dispose of the Shares. Stock Settlement. At your election, upon exercise of this Option you may stock settle the Option by having the Company withhold shares of common stockresulting from the exercise with a value equal to the exercise price of the Option and the minimum tax withholding requirements of the Company. The shares ofcommon stock withheld will be valued at the fair market value on the date of exercise, which shall be determined based on the closing price of the Company’scommon stock on the date of exercise. Conformity with Plan. The Option is intended to conform in all respects with, and is subject to all applicable provisions of, the Plan, which is incorporatedherein by reference. Any inconsistencies between this letter and the Plan shall be resolved in accordance with the terms of the Plan. By executing and returningthe enclosed copy of this letter, you acknowledge your receipt of the Plan and agree to be bound by all the terms of the Plan. All definitions stated in the Planapply to this letter. YOU SHOULD READ THE PLAN CAREFULLY. Successors. The agreements contained in this letter shall be binding upon and inure to the benefit of any successor of the Company. Entire Agreement. This agreement constitutes the entire understanding between you and the Company, and supersedes all other agreements, whether written ororal, with respect to the Option referred to in this letter. Please sign a copy of this letter in the space below and return it to the Company to confirm your understanding and acceptance of the agreementscontained in this letter. Very truly yours, Jack Abuhoff Chairman and CEO By signing below I acknowledge my understanding of and agreement to all of the terms and conditions contained in this letter. [Name]  Exhibit 10.43 2009 Stock Plan Grant March 8, 2013 Via Email[NAME]Email: [______] Dear [NAME]: I am pleased to inform you that you have been granted a non-qualified option (the "Option") to purchase shares (“Shares”) of common stock of Innodata Inc.(the "Company"). Your grant has been made under the Innodata Isogen, Inc. 2009 Stock Plan, as amended and restated (the “Plan”). A copy of the Plan isattached to this letter. Grant Date: March 4, 2013Number of Shares That May Be Purchased On Exercise of the Option: [NUMBER OF SHARES]Option Exercise Price per Share: $3.39Option Expiration Date: March 3, 2020 For the Option to be valid, you must within 30 days after receipt sign, date and return the original of this letter to Amy Agress, Vice President andGeneral Counsel, Innodata Inc., Three University Plaza, Hackensack, New Jersey 07601 USA; email aagress@innodata.com. Vesting: 100% of the Shares vest on March 4, 2016, subject to the provisions set forth in “Employment Requirements” [ADD IF APPLICABLE: and“Change of Control” below]. Exercise: You may exercise this Option at any time, in whole or in part, to purchase a whole number of vested Shares by following the exercise procedures setup by the Company. All exercises must take place before the Expiration Date, or such earlier date as is set forth below under Employment Requirements. Eachexercise must be for no less than 500 Shares, until there are less than 500 Shares remaining. Employment Requirements: Except as set forth below, in the event that you or the Company (or a subsidiary of the Company) terminates your employment(whether voluntary or involuntary and whether or not for cause or good reason or otherwise), all further vesting of the Shares under this Option will cease as ofyour last day of employment, and all unvested Shares will be cancelled. The Option to exercise vested Shares will expire 60 days after your employmentceases. In the event your employment is terminated by your death or disability, the Option will expire 12 months after such termination. [The actual grant letter for each optionee incorporates by reference any change of control, accelerated vesting, or similar provisions that are set out in anyemployment agreement for such optionee.]  Securities Laws Restrictions. You represent that when you exercise your Option you will be purchasing Shares for your own account and not on behalf ofothers. You understand and acknowledge that federal and state securities laws govern and restrict your right to offer, sell or otherwise dispose of any Sharesunless otherwise covered by a Form S-8 or unless your offer, sale or other disposition thereof is otherwise registered under the Securities Act of 1933, asamended, (the "1933 Act") and state securities laws or, in the opinion of the Company's counsel, such offer, sales or other disposition is exempt fromregistration thereunder. You agree that you will not offer, sell or otherwise dispose of any Shares in any manner (i) which would require the Company to fileany registration statement (or similar filing under state laws) with the Securities and Exchange Commission or to amend or supplement any such filing or (ii)in any manner which would violate or cause the Company to violate the 1933 Act, the rules and regulations promulgated thereunder or any other state orfederal law, or (iii) other than during “window periods” from time to time announced by the Company in its sole discretion. You further understand that thecertificates for any Shares you purchase will bear such legends as the Company deems necessary or desirable in connection with the 1933 Act or other rules,regulations or laws. If you are a director, officer or principal shareholder, Section 16(b) of the Securities Exchange Act of 1934 further restricts your ability tosell or otherwise dispose of Shares. Non-Transferability of Option. The Option is personal to you and is non-transferable by you other than by will or the laws of descent and distribution or asotherwise permitted by the Plan. During your lifetime only you can exercise the Option except as otherwise permitted by the Plan. Upon your death, the personor persons to whom your rights pass by will or laws of descent and distribution will have the right to exercise the Option. Withholding Taxes. The Company shall have the right to withhold from your salary or other compensation any withholding taxes payable as a result of yourreceipt of Shares. The Company shall also have the right to require that you pay to it all such withholding taxes in cash as a condition precedent to the exerciseof this Option. You agree to notify the Company when you sell or otherwise transfer or dispose of the Shares. Stock Settlement. At your election, upon exercise of this Option you may stock settle the Option by having the Company withhold shares of common stockresulting from the exercise with a value equal to the exercise price of the Option and the minimum tax withholding requirements of the Company. The shares ofcommon stock withheld will be valued at the fair market value on the date of exercise, which shall be determined based on the closing price of the Company’scommon stock on the date of exercise. Conformity with Plan. The Option is intended to conform in all respects with, and is subject to all applicable provisions of, the Plan, which is incorporatedherein by reference. Any inconsistencies between this letter and the Plan shall be resolved in accordance with the terms of the Plan. By executing and returningthe enclosed copy of this letter, you acknowledge your receipt of the Plan and agree to be bound by all the terms of the Plan. All definitions stated in the Planapply to this letter. YOU SHOULD READ THE PLAN CAREFULLY. Employment and Successors. Nothing herein confers any right or obligation on you to continue in the employ of the Company or any subsidiary or shallaffect in any way your right or the right of the Company or any subsidiary, as the case may be, to terminate your employment at any time. The agreementscontained in this letter shall be binding upon and inure to the benefit of any successor of the Company. Entire Agreement. This agreement constitutes the entire understanding between you and the Company, and supersedes all other agreements, whether written ororal, with respect to the Option referred to in this letter.  Please sign a copy of this letter in the space below and return it to the Company to confirm your understanding and acceptance of the agreementscontained in this letter. Very truly yours, [AUTHORIZED SIGNATORY] By signing below I acknowledge my understanding of and agreement to all of the terms and conditions contained in this letter. [NAME]  Exhibit 10.44 2009 Stock Plan Grant March 8, 2013 Via EmailMr. Jack AbuhoffEmail: [________________] Dear Jack: I am pleased to inform you that you have been granted a non-qualified option (the "Option") to purchase shares (“Shares”) of common stock of Innodata Inc.(the "Company"). Your grant has been made under the Innodata Isogen, Inc. 2009 Stock Plan, as amended and restated (the “Plan”). A copy of the Plan isattached to this letter. Grant Date: March 4, 2013Number of Shares That May Be Purchased On Exercise of the Option: 100,000Option Exercise Price per Share: $3.39Option Expiration Date: March 3, 2020 For the Option to be valid, you must within 30 days after receipt sign, date and return the original of this letter to Amy Agress, Vice President andGeneral Counsel, Innodata Inc., Three University Plaza, Hackensack, New Jersey 07601 USA; email aagress@innodata.com. Vesting: 100% of the Shares vest on March 4, 2016, subject to the provisions set forth in “Employment Requirements” and “Change of Control” below. Exercise: Once the Shares are vested, you may only exercise this Option if the market price of the Company’s common stock is $6.00 or greater at the time ofexercise. You may exercise this Option, in whole or in part, to purchase a whole number of vested Shares by following the exercise procedures set up by theCompany. All exercises must take place before the Expiration Date, or such earlier date as is set forth below under Employment Requirements. Each exercisemust be for no less than 500 Shares, until there are less than 500 Shares remaining. Employment Requirements: Except as set forth below, in the event that you or the Company (or a subsidiary of the Company) terminates your employment(whether voluntary or involuntary and whether or not for cause or good reason or otherwise), all further vesting of the Shares under this Option will cease as ofyour last day of employment, and all unvested Shares will be cancelled. The Option to exercise vested Shares will expire 60 days after your employmentceases. In the event your employment is terminated by your death or disability, the Option will expire 12 months after such termination. If during the term of the employment agreement between you and the Company effective February 1, 2009 (the “Agreement”) the Company terminates youremployment for reasons other than death, disability or for Cause, or you terminate your employment for Good Reason (all as defined in the Agreement), anyunvested Shares will become fully vested.  Change of Control: If a Change of Control occurs during the term of the Agreement, any unvested Shares will become fully vested upon the occurrence of theChange of Control (as defined in the Agreement). Securities Laws Restrictions. You represent that when you exercise your Option you will be purchasing Shares for your own account and not on behalf ofothers. You understand and acknowledge that federal and state securities laws govern and restrict your right to offer, sell or otherwise dispose of any Sharesunless otherwise covered by a Form S-8 or unless your offer, sale or other disposition thereof is otherwise registered under the Securities Act of 1933, asamended, (the "1933 Act") and state securities laws or, in the opinion of the Company's counsel, such offer, sales or other disposition is exempt fromregistration thereunder. You agree that you will not offer, sell or otherwise dispose of any Shares in any manner (i) which would require the Company to fileany registration statement (or similar filing under state laws) with the Securities and Exchange Commission or to amend or supplement any such filing or (ii)in any manner which would violate or cause the Company to violate the 1933 Act, the rules and regulations promulgated thereunder or any other state orfederal law, or (iii) other than during “window periods” from time to time announced by the Company in its sole discretion. You further understand that thecertificates for any Shares you purchase will bear such legends as the Company deems necessary or desirable in connection with the 1933 Act or other rules,regulations or laws. If you are a director, officer or principal shareholder, Section 16(b) of the Securities Exchange Act of 1934 further restricts your ability tosell or otherwise dispose of Shares. Non-Transferability of Option. The Option is personal to you and is non-transferable by you other than by will or the laws of descent and distribution or asotherwise permitted by the Plan. During your lifetime only you can exercise the Option except as otherwise permitted by the Plan. Upon your death, the personor persons to whom your rights pass by will or laws of descent and distribution will have the right to exercise the Option. Withholding Taxes. The Company shall have the right to withhold from your salary or other compensation any withholding taxes payable as a result of yourreceipt of Shares. The Company shall also have the right to require that you pay to it all such withholding taxes in cash as a condition precedent to the exerciseof this Option. You agree to notify the Company when you sell or otherwise transfer or dispose of the Shares. Stock Settlement. At your election, upon exercise of this Option you may stock settle the Option by having the Company withhold shares of common stockresulting from the exercise with a value equal to the exercise price of the Option and the minimum tax withholding requirements of the Company. The shares ofcommon stock withheld will be valued at the fair market value on the date of exercise, which shall be determined based on the closing price of the Company’scommon stock on the date of exercise. Conformity with Plan. The Option is intended to conform in all respects with, and is subject to all applicable provisions of, the Plan, which is incorporatedherein by reference. Any inconsistencies between this letter and the Plan shall be resolved in accordance with the terms of the Plan. By executing and returningthe enclosed copy of this letter, you acknowledge your receipt of the Plan and agree to be bound by all the terms of the Plan. All definitions stated in the Planapply to this letter. YOU SHOULD READ THE PLAN CAREFULLY.  Employment and Successors. Nothing herein confers any right or obligation on you to continue in the employ of the Company or any subsidiary or shallaffect in any way your right or the right of the Company or any subsidiary, as the case may be, to terminate your employment at any time. The agreementscontained in this letter shall be binding upon and inure to the benefit of any successor of the Company. Entire Agreement. This agreement constitutes the entire understanding between you and the Company, and supersedes all other agreements, whether written ororal, with respect to the Option referred to in this letter. Please sign a copy of this letter in the space below and return it to the Company to confirm your understanding and acceptance of the agreementscontained in this letter. Very truly yours, Amy Agress VP, General Counsel and Secretary By signing below I acknowledge my understanding of and agreement to all of the terms and conditions contained in this letter. Jack Abuhoff Exhibit 21 Significant Subsidiaries Name under State or other which subsidiary jurisdiction of conductsName of Subsidiary incorporation businessInnodata India Private Limited India SameInnodata Knowledge Services, Inc. Philippines SameESS Manufacturing Company, Inc. Philippines SameInnodata Asia Holdings, Limited Bermuda Same  Exhibit 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement No. 33-85530, dated October 21, 1994, Registration No. 333-3464, dated April 18,1996, Registration No. 33-63085, dated September 9, 1998, Registration No. 333-82185, dated July 2, 1999, Registration No. 333-118506, dated August24, 2004, Registration No. 333-172831, dated March 15, 2011 and Registration No. 333-176402, dated August 19, 2011 on Form S-8 and the RegistrationNo. 33-62012, dated April 11, 1996, Registration No. 333-91649, dated November 24, 1999, Registration No. 333-51400, dated December 7, 2000,Registration No. 333-121844, dated January 5, 2005 and Registration No. 333-182114, dated June 14, 2012 on Form S-3 and the Registration No. 333-121844, dated January 21, 2005 on Form S-3/A of our reports dated March 15, 2013, relating to our audits of the consolidated financial statements andfinancial statement schedule of Innodata Inc. and Subsidiaries as of December 31, 2012 and 2011 and for each of the three years in the period ended December31, 2012 and the effectiveness of internal control over financial reporting of Innodata Inc. and Subsidiaries as of December 31, 2012, included in this AnnualReport on Form 10-K of Innodata Inc. for the year ended December 31, 2012. /s/ CohnReznick LLP Roseland, New JerseyMarch 15, 2013  Exhibit 31.1CERTIFICATIONS I, Jack Abuhoff, certify that: 1.I have reviewed this annual report on Form 10-K of Innodata 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; c)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 d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscalquarter 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 15, 2013 /s/ Jack Abuhoff Jack Abuhoff Chairman of the Board, Chief Executive Officer and President Exhibit 31.2 I, O’Neil Nalavadi, certify that: 1.I have reviewed this annual report on Form 10-K of Innodata 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant 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)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; c)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 d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscalquarter 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 control overfinancial reporting. Dated: March 15, 2013 /s/ O’Neil Nalavadi O’Neil Nalavadi Senior Vice President Chief Financial Officerand Principal Accounting Officer Exhibit 32.1 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Innodata Inc. (the “Company”) on Form 10-K for the year ended December 31, 2012 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Jack Abuhoff, Chairman of the Board, Chief Executive Officer and President 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/ Jack Abuhoff Jack Abuhoff Chairman of the Board, Chief Executive Officer and President March 15, 2013  Exhibit 32.2 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Innodata Inc. (the “Company”) on Form 10-K for the year ended December 31, 2012 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, O’Neil Nalavadi, Senior 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/ O’Neil Nalavadi O’Neil Nalavadi Senior Vice President Chief Financial Officerand Principal Accounting Officer March 15, 2013 

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