**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-K**


(Mark
      One)


þ  Annual
      report under section 13 or 15( d )
      of the
      securities exchange act of 1934


**For
      the fiscal year ended** **December
      31, 2005**





o  Transition
      report under section 13 or 15 (d )
      of the
      securities exchange act of 1934





**Commission
      file number** **0-22196**


**INNODATA
      ISOGEN, INC.**


(Exact
      name of registrant as specified in its charter)





**Delaware**
            **13-3475943**(State
                or other jurisdiction of
            (I.R.S.
                Employer Identification No.)incorporation
                or organization)**Three
                University Plaza****Hackensack,
                New Jersey**
            **07601**(Address
                of principal executive offices)
            (Zip
                Code)**(201)
                488-1200**(Registrant's
                telephone number)




Securities
              registered under Section 12(b) of the Exchange Act:
            
            **None**Securities
              registered under Section 12(g) of the Exchange Act:
            
            **Common
              Stock, $.01 par value**





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes o No **þ**





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 o No **þ**





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





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 the best
      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
      this
      Form 10-K. **þ**





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 and large accelerated filer” in Rule 12b-2 of
      the Exchange Act.


Large
      accelerated filer o  Accelerated
      filer o  Non-accelerated
      filer **þ**





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes o No **þ**





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      last sold, or the average bid and asked price of such common equity, as of
      the
      last business day of the registrant's most recently completed second fiscal
      quarter **$60,000,000**





State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date.





**24,086,603
      shares of common stock, $.01 par value, as of February 28,
      2006.**





DOCUMENTS
      INCORPORATED BY REFERENCE


[SEE
      INDEX TO EXHIBITS]








**PART
      I**





*Disclosures
      in this Form 10-K contain certain forward-looking statements, including without
      limitation, statements concerning our operations, economic performance, and
      financial condition. These forward-looking statements are made pursuant to
      the
      safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
      The words “estimate,” “believe,” “expect,” and “anticipate” and other similar
      expressions generally identify forward-looking statements, which speak only
      as
      of their dates.*





*These
      forward-looking statements are based largely on our current expectations, and
      are subject to a number of risks and uncertainties, including without
      limitation, continuing revenue concentration in a limited number of clients,
      continuing reliance on project-based work, worsening of market conditions,
      changes in external market factors, the ability and willingness of our clients
      and prospective clients to execute business plans which give rise to
      requirements for digital content and professional services in knowledge
      processing, difficulty in integrating and deriving synergies from acquisitions,
      potential undiscovered liabilities of companies that we acquire, changes in
      our
      business or growth strategy, the emergence of new or growing competitors,
      various other competitive and technological factors, and other risks and
      uncertainties set forth under “Risk Factors.”*





*Our
      actual results could differ materially from the results referred to in the
      forward-looking statements. In light of these risks and uncertainties, there
      can
      be no assurance that the results referred to in the forward-looking statements
      contained in this release will occur.*





*We
      undertake no obligation to update or review any guidance or other
      forward-looking information, whether as a result of new information, future
      developments or otherwise.*




**Item
      1. Description of Business.**





**General**





We provide
      business services that help organizations create, manage, use and distribute
      information more effectively and economically.





Our
      services encompass outsourced content services and information technology (IT)
      professional services, which constitute separate reporting segments. Our
      outsourced content offerings consist of fabrication services for digitization,
      imaging, data conversion and composition, XML and other mark-ups, translation
      and localization; and knowledge services for adding value to a client's content.
      Our IT professional offerings focus on the design, implementation, integration
      and deployment of systems used to author, manage and distribute content.





Outsourced
      content services represented 87%, 81% and 82% of total revenue in each of the
      three years ended December 31, 2005, respectively.  Outsourced
      content services for business processes that we anticipate a client will require
      for an indefinite period generate what we regard as recurring revenues.
      Approximately 58% and 47% of our revenues were recurring in the years ended
      December 31, 2005 and 2004, respectively. A substantial majority of our IT
      professional services is provided on a project basis that generates
      non-recurring revenues.





In
      2005,
      we provided our services to approximately 100 clients primarily in four
      content-intensive sectors.




·
            Publishing,
                media and information services, including EBSCO and Reed Elsevier;





·
            Global
                2000 enterprises, including Hamilton Sundstrand and Lockheed Martin;





·
            Educational
                and cultural institutions, including Cornell University





·
            Government
                agencies




I-1


We
      work
      directly with existing and prospective clients to identify and refine their
      objectives, and to design, implement, integrate and deploy new and improved
      solutions to satisfy those objectives. We believe we provide high quality,
      value-added services to our clients on a timely basis and have developed a
      close
      relationship with them as a result. To enhance those relationships, we provide
      project support 24 hours a day, seven days a week, through our Asia-based
      customer service center, and we maintain sales, service and strategic support
      in
      North America and Europe in proximity to the operations of most of our clients.





One
      client accounted for 27%, 23% and 33% of our total revenues for each of the
      three years ended December 31, 2005, respectively. One other client accounted
      for 12% and 31% of our revenues for the years ended December 31, 2005 and 2004,
      respectively. No other client accounted for 10% or more of our total revenues
      during these periods. Revenues from clients located in foreign countries
      (principally in Europe) accounted for 35%, 30% and 47% of our total revenues
      for
      each of the three years ended December 31, 2005, respectively.





A
      substantial portion of the services we provide to our clients is subject to
      our
      clients' needs. Our agreements with clients are in most cases terminable on
      30
      to 90 days' notice and are typically subject to client
      requirements.





We
      are
      headquartered in Hackensack, New Jersey, just outside New York City. We have
      two
      additional solutions centers in North America, seven production facilities
      in
      Asia (the Philippines, India and Sri Lanka) and a technology and tools
      development center in India. We were incorporated in Delaware in 1988.





**Innodata
      Isogen's Services**





*Outsourced
      Content Services.* We
      group
      our outsourced content services into two categories: fabrication services and
      knowledge services.





*Fabrication
      Services.* Our
      fabrication services include digitization, imaging, data conversion and
      composition services, XML and mark-up services, as well as translation and
      localization services. We use leading-edge technologies to capture our clients'
      relevant content and convert it into XML and other related mark-up standards.
      These technologies include high-speed scanning; a variety of commercial and
      proprietary optical/intelligent character recognition, or OCR/ICR, applications;
      structured workflow processes; and proprietary applications and tools designed
      to create meaningful, accurate and consistent data.





To
      convert the captured content to XML, tags are inserted within the content to
      provide a marker that computers can process. Our proprietary technology includes
      production-grade, auto-tagging applications that utilize pattern recognition
      algorithms based on comprehensive rule sets and related heuristics. This
      technology enables the mass creation or conversion of XML content from complex,
      unstructured data or content.





We
      price
      our digitization, content conversion and composition services based on the
      quantity delivered or resources utilized.





As
      an
      example, we built, for a secondary publisher, a searchable online archive that
      contains the back runs of three historical newspaper publications *.* The
      archive shows each newspaper page as a high-resolution image that can be
      magnified over 200% of its normal size. Each issue is digitally reproduced
      from
      cover to cover, including news stories and editorials, graphics and
      advertisements that bring history to life. Using the latest technology, we
      imaged the backfile and saved each page as a high-resolution, bitonal TIFF
      image. We captured the text of every headline, byline and story on every page
      using OCR, tagged the key information in XML and saved the text and image files
      for storage in an XML repository.





*Knowledge
      Services.* Our
      knowledge services add value to a client's content. These services include
      content creation and enhancement, taxonomy and controlled vocabulary
      development, hyperlinking, indexing, abstracting, copyediting and general
      editorial services, including the provision of synopses and annotations. We
      also
      provide editorial and research services that cover a wide spectrum of expertise,
      including medicine, law, engineering, management, finance, science and the
      humanities. To provide these services, we have organized knowledge teams that
      consist of a number of educated and highly trained people with expertise in
      the
      relevant subject. We typically price our knowledge services based on the
      quantity delivered or resources utilized.





I-2


As
      an
      example, a major publisher of scientific, technical and medical information
      sought to build one of the world's largest databases of scientific journal
      citations and references. We created records of nearly 15,000 journal titles
      going back almost 13 years, encoded in a way that supported integrated web
      searches and seamless linking. Under a long-term engagement, we maintain the
      database with daily updates, managing on behalf of our client a production
      process in which we aggregate, digitize, convert and enhance data.





*IT
      Professional Services.* Clients
      that use our IT professional services typically require publishing, performance
      support or process automation systems that enable multiple authors to
      collaborate on content and enable multiple products to be generated from
      single-source XML repositories. Projects vary in size and duration. Our IT
      professional services are typically provided on a project basis that involves
      a
      defined task that, upon completion, does not generate any significant amount
      of
      continuing revenues. We frequently work on-site at clients to develop
      specifications and define requirements and to interact with end-users of the
      application. Detailed design, implementation and testing are generally performed
      at our offices in Dallas and Austin, Texas, as well as offshore at our office
      in
      Gurgaon, India.





Our
      IT
      professional services focus on the design, implementation, integration and
      deployment of systems used to author, manage and distribute content. We group
      these services into four categories: consulting; systems integration; custom
      application development; and other IT professional services, including
      applications maintenance, support, evaluation, implementation and training.





*Consulting.* We offer
      consulting services that focus on evaluating, advising, creating, overseeing
      or
      reviewing processes and/or technology designs that are necessary for a client
      to
      improve its management, use or distribution of information. We assist our
      clients by first understanding their business objectives and then analyzing
      and
      recommending the appropriate hardware and software specifications, as well
      as
      the process and engineering changes that will fulfill these objectives. Our
      consultants have a broad mix of functional and industry expertise. Our highly
      skilled process analysts, workflow architects and project managers enable
      clients to outsource to us their entire content operations, and thereby enhance
      the client's ability to manage, use and distribute the content.





As
      an
      example, a major defense contractor was awarded a multi-billion dollar military
      contract to build a new war plane. The military required that the technical
      documentation be delivered in electronic format and be useable by field
      technicians using handheld PDAs, as well as by pilots in the cockpit. The
      defense contractor hired us to recommend an XML-based publishing approach.
      Over
      several months, our team made several recommendations and redesigned the
      client's core business processes and systems architecture to achieve its
      objectives, including the ability to support high-volume, link-intensive data.
      We were then engaged by the client to develop the system. The completed system
      provided an end-to-end workflow that included link management, support for
      complex graphics, customized backend databases to support fast search and
      retrieval and customized user interfaces.





*Systems
      Integration.* Our
      systems integration services include the integration of disparate authoring
      tools, content and knowledge management systems and composition tools into
      an
      overall IT infrastructure, and also include the development of software that
      enhances the compatibility among various components of the overall IT
      infrastructure. We also undertake the management of programs and vendors during
      this process. Many of our systems integration projects involve organizations
      that are migrating to XML and other standards-based publishing systems or are
      seeking to integrate disparate data sources into a common environment. Our
      IT
      projects often include content analysis and the development of information
      architectures.





For
      example, one of the world's most successful IT equipment manufacturers was
      faced
      with the challenge of producing increasingly complex technical documentation
      faster, in more languages and across multiple platforms, as well as in print.
      This was necessary because of shortening product life cycles and the desire
      to
      market products in remote global markets. Over a 12-month period, our team
      of
      information architects and developers provided strategy and process consulting,
      product evaluation and information engineering services. We addressed complex
      content authoring, translation and localization and document rendition
      requirements. The result was a completely re-engineered standards-based product
      documentation system that enabled our client to easily revise and re-use content
      and translate that content into 35 languages seamlessly. We improved our
      client's time-to-market by significantly reducing the turnaround time for
      documentation and revisions, and substantially reduced overall product
      documentation costs. Our team of two domestic project managers and five offshore
      developers continue to provide the client ongoing systems enhancement and
      maintenance under a long-term engagement.





I-3


*Custom
      Application Development.* Our
      custom application development services help our clients create new applications
      and enhance the functionalities of our clients' existing software applications.
      We design systems, develop software and run pilots.





Our
      application development services span the entire range of client server and
      Internet technologies. Our IT professional services staff is expert in XML
      and
      related information standards, as well as in emerging computing platforms.
      Our
      programmers are skilled in a range of programming languages and in a diverse
      set
      of application program interfaces, applications servers and database
      technologies.





As
      an
      example, a client in the information services industry needed to build an
      enterprise-scale publishing platform for a new online information service using
      the latest knowledge processing technologies. Our team of onshore and offshore
      technologists designed and built the platform over a period of several months,
      including authoring and classification workflow systems, backend database and
      user interface. Our content services department aggregated, digitized and
      enhanced multiple gigabytes of data for the successful product pilot. Our single
      program manager coordinated the efforts of our IT professional services team,
      our outsourced content services team and other vendors on-site at the client’s
      location.





*Other
      IT Professional Services.* We
      assist our clients in the evaluation and implementation of software packages
      developed by third party vendors. We specialize in enterprise content management
      systems developed by several vendors, including: Documentum, Content@, XHive
      Corporation and Vasont Systems; and document authoring systems developed by
      vendors including Arbortext and Blast Radius; publishing tools developed by
      vendors including TopLeaf, Antenna House and FrameMaker; as well as various
      content analysis and extraction tools.





We
      provide support for our clients’ content-related applications, ensuring that
      systems remain operational and responsive to changing user requirements. In
      doing so, we are often able to enhance processes and improve service levels.
      Through our domestic, on-site and offshore delivery model, we provide a range
      of
      support services to our clients.





**Sales
      and Marketing**





We
      have
      four executive-level business development professionals and eight full-time
      sales personnel and are targeting to increase our full-time salesperson
      headcount by the end of 2006. Historically, our sales efforts depended heavily
      on senior management. We are transitioning to a more structured direct sales
      model in which we implement additional sales infrastructure, add dedicated
      sales
      support personnel and hire additional sales persons. In this model, our
      executive-level business development professionals will continue to manage
      key
      client relationships through targeted interaction with our clients' senior
      management, while sales professionals will be responsible for identifying
      prospective clients and executing day-to-day sales strategies.





Our
      sales
      organization is responsible for qualifying and otherwise pursuing prospects,
      securing direct personal access to decision makers at existing and prospective
      clients and obtaining orders for our services and solutions. Our sales
      professionals work directly with clients to identify their requirements and
      with
      our engineering teams to define the solutions that best fit our clients'
      specific needs.





I-4


Sales
      activities include the design and generation of presentations and proposals,
      account and client relationship management and the organization of account
      activities.





Consulting
      personnel from our project analysis group and our engineering services group
      closely support our direct sales effort. These individuals assist the sales
      force in understanding the technical needs of clients and providing responses
      to
      these needs, including demonstrations, prototypes, pricing quotations and time
      estimates. In addition, account managers from our customer service group support
      our direct sales effort by providing ongoing project-level, post-sale support
      to
      our clients.





We
      constantly seek to expand the nature and scope of our engagements with existing
      clients by increasing the volume of our business and extending the breadth
      and
      value of services offered.





Our
      marketing organization is responsible for developing and increasing the
      visibility and awareness of our brand and our service offerings; defining and
      communicating our value proposition; and generating qualified, early-stage
      leads
      and furnishing effective sales support tools.





Over
      the
      past 12 months, we have created a partner program pursuant to which we have
      formed collaborative relationships with selected leading software vendors and
      service providers in many of our key markets. We believe that our partner
      program is an important way for our sales force to generate more and
      better-quality leads. Furthermore, the partner program helps us gain technical
      insights that allow us to better evaluate the effectiveness of the various
      tools
      that we recommend to our clients.





Primary
      marketing outreach activities include event marketing (including exhibiting
      at
      trade shows, conferences and seminars); direct and database marketing; public
      and media relations (including speaking engagements and active participation
      in
      industry and technical standard bodies); and web marketing (including search
      engine optimization, search engine marketing and the maintenance and continued
      development of external web sites).





**Research
      and Development**





In
      2005
      we spent approximately $770,000 on research and development. We did not spend
      any significant amounts for research and development in 2004 and
      2003.





**Competition**





The
      market for outsourced content services is highly competitive, fragmented and
      intense. Several of our major competitors are SPI Technologies, Apex CoVantage,
      Techbooks and Jouve. However, we are not aware of any single competitor that
      provides the same comprehensive range of outsourced content services as we
      do.
      We believe that we also compete successfully by offering high quality services
      and favorable pricing by leveraging our technical skills, IT infrastructure,
      process knowledge, offshore model and economies of scale. Our competitive
      advantages are especially attractive to clients for undertakings that are
      technically sophisticated, sizable in scope or scale, or that require a highly
      fail-safe environment with technology redundancy. We also believe that the
      timeliness with which we provide our services enables our clients to reduce
      the
      time it takes for them to release their products to the market, thereby
      providing a competitive advantage to the client.





A
      number
      of large and mid-sized technology and business consulting practices compete
      with
      our IT professional services by offering content-related integration and
      consulting services as part of their broad and generalized offerings. Major
      companies such as IBM, EDS, Bearing Point, Accenture, Booz Allen and others
      compete for entire content supply chain dollars, and Thomas Technology Solutions
      and RivCom are also engaged in this business. However, there are few firms
      that
      focus exclusively on our niche, and most of these firms have less capacity
      and a
      narrower strategic focus on the content supply chain.





I-5


As
      a
      provider of outsourced content services and IT professional services, we also
      compete at times with in-house personnel at existing or prospective clients
      who
      may attempt to duplicate our services in-house.





Some
      of
      our competitors have longer operating histories, significantly greater
      financial, human, technical and other resources and greater name recognition
      than we do, and we cannot assure you that we will continue to compete
      effectively with them.





There
      are
      relatively few barriers preventing companies from competing with us. We do
      not
      own any patented technology that would preclude or inhibit others from entering
      our market.





**Employees**





As
      of
      December 31, 2005, we employed 87 persons in the United States and Europe and
      approximately 6,000 persons in five production facilities in the Philippines,
      one production facility in Sri Lanka, one production facility in India and
      a
      technology and tools development center in India. Most of our employees have
      graduated from at least a two-year college program. Many of our employees hold
      advanced degrees in law, business, technology, medicine and social sciences.
      No
      employees are currently represented by a labor union, and we believe that our
      relations with our employees are satisfactory.





**Item
      1A. Risk Factors.**





**We
      have historically relied on a very limited number of clients that have accounted
      for a significant portion of our revenues and our results of operations could
      be
      adversely affected if we lose one or more of these significant
      clients.**





We
      have
      historically relied on a very limited number of clients that have accounted
      for
      a significant portion of our revenues. One client accounted for 27%, 23% and
      33%
      of our total revenues for the years ended December 31, 2005, 2004 and 2003,
      respectively. One other client accounted for 12% and 31% of our revenues for
      the
      years ended December 31, 2005 and 2004, respectively. We may lose any of these
      or our other major clients as a result of our failure to meet or satisfy our
      clients’ requirements, the completion or termination of a project or engagement,
      or the selection of another service provider.





In
      addition, the revenues we generate from our major clients may decline or grow
      at
      a slower rate in future periods than in the past. If we lose any of our
      significant clients, our revenues and results of operations could be adversely
      affected and we may incur a loss from operations. Our services are typically
      subject to client requirements, and in most cases are terminable upon 30 to
      90
      days’ notice.





**A
      significant portion of our services is provided on a non-recurring basis for
      specific projects, and our inability to replace large projects when they are
      completed has adversely affected, and could in the future adversely affect,
      our
      revenues and results of operations.**





We
      provide a portion of our services for specific projects that generate revenues
      that terminate on completion of a defined task and we regard these revenues
      as
      non-recurring. Non-recurring revenues derived from these project-based
      arrangements accounted for approximately 42% of our total revenues for the
      year
      ended December 31, 2005 and approximately 53% of our total revenues for the
      year ended December 31, 2004. While we seek wherever possible to
      counterbalance periodic declines in revenues on completion of large projects
      with new arrangements to provide services to the same client or others, we
      were
      not able in 2005 to avoid declines in revenues when large projects were
      completed. Our inability to obtain sufficient new projects to counterbalance
      any
      decreases in such work adversely affected our revenues and results of operations
      in 2005 and may adversely affect our future revenues and results of
      operations.





**A
      large portion of our accounts receivable is payable by a limited number of
      clients; the inability of any of these clients to pay its accounts receivable
      would adversely affect our results of operations.**





I-6


Several
      significant clients account for a large percentage of our accounts receivable.
      As of December 31, 2005, 37%, or $2.7 million, of our accounts
      receivable was due from one client. If any of these clients were unable, or
      refuse, for any reason, to pay our accounts receivable, our results of
      operations would be adversely affected.





**Quarterly
      fluctuations in our results of operations could make financial forecasting
      difficult and could negatively affect our stock price.**





We
      have
      experienced, and expect to continue to experience, significant fluctuations
      in
      our quarterly revenues and results of operations. During the past eight
      quarters, our net income ranged from a loss of approximately $900,000 to a
      profit of approximately $3.1 million.





Our
      quarterly operating results are also subject to certain seasonal fluctuations.
      Our fourth and first quarters include the months of December and January, when
      billable services activity by professional staff, as well as engagement
      decisions by clients, may be reduced due to client budget planning cycles.
      Demand for our services generally may be lower in the fourth quarter due to
      reduced activity during the holiday season and fewer working days for our
      Philippines-based staff during this period. These and other seasonal factors
      may
      contribute to fluctuations in our results of operations from quarter to quarter.





**We
      compete in highly competitive markets that have low barriers to
      entry.**





The
      markets for our services are highly competitive and fragmented. We may not
      be
      able to compete successfully against our competitors in the future. Some of
      our
      competitors have longer operating histories, significantly greater financial,
      human, technical and other resources and greater name recognition than we do.
      If
      we fail to be competitive with these companies in the future, we may lose market
      share, which could adversely affect our revenues and results of operations.





There
      are
      relatively few barriers preventing companies from competing with us. We do
      not
      own any patented technology that would preclude or inhibit others from entering
      our market. As a result, new market entrants also pose a threat to our business.
      We also compete with in-house personnel at current and prospective clients,
      who
      may attempt to duplicate our services using in-house personnel. We cannot assure
      you 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 currently
      obtain from us. If we are not able to compete effectively, our revenues and
      results of operations could be adversely affected.





**We
      are the subject of continuing litigation, including litigation by certain of
      our
      former employees.**





We
      are
      subject to various legal proceedings and claims which arise in the ordinary
      course of business. In addition, in connection with the cessation of all
      operations at certain of our foreign subsidiaries, certain former employees
      have
      filed various actions against one of our Philippine subsidiaries and have
      purported also to sue us and certain of our officers and directors. An
      unfavorable ruling in any of these proceedings could adversely affect our
      financial condition and results of operations. See “Legal Proceedings."





**Our
      international operations subject us to risks inherent in doing business on
      an
      international level, any of which could increase our costs and hinder our
      growth.**





The
      major
      part of our operations is carried on in the Philippines, India and Sri Lanka,
      while our headquarters are in the United States and our clients are primarily
      located in North America and Europe. While we do not depend on revenues from
      sources internal to the countries in which we operate, we are nevertheless
      subject to certain adverse economic factors relating to overseas economies
      generally, including inflation, external debt, a negative balance of trade
      and
      underemployment. Other risks associated with our international business
      activities include:




I-7


•
            difficulties
                in staffing international projects and managing international operations,
                including overcoming logisticaland 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 the Philippines, India
      and
      Sri Lanka, is incurred in the local currencies of countries in which we operate.
      For financial reporting purposes, we translate all non-United States denominated
      transactions into dollars in accordance with accounting principles generally
      accepted in the United States. As a result, we are exposed 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 adversely affect our
      results of operations.





The
      Philippines has historically experienced high rates of inflation and major
      fluctuations in the exchange rate between the Philippine peso and the U.S.
      dollar. Continuing inflation without a corresponding devaluation of the peso
      against the dollar, or any other increase in the value of the peso relative
      to
      the dollar, could adversely affect our results of operations. Since 1997, we
      have not purchased foreign currency futures contracts for pesos, but we may
      choose to do so in the future.





**New
      regulation of the Internal Revenue Service may impose significant U.S. income
      taxes on our subsidiaries in the Philippines.**





Our
      subsidiaries incorporated in the Philippines were domesticated in Delaware
      as
      limited liability companies. In August 2004, the Internal Revenue Service
      promulgated regulations, effective August 12, 2004, that treat certain
      companies incorporated in foreign jurisdictions and also domesticated as
      Delaware limited liability companies as U.S. corporations for U.S. federal
      income tax purposes. We have effected certain filings with the Secretary of
      State of the State of Delaware to ensure that these subsidiaries are no longer
      domesticated in Delaware. As a result, commencing January 1, 2005,
      these subsidiaries are not treated as U.S. corporations for U.S. federal income
      tax purposes under the regulations and are not subject to U.S. federal income
      taxes commencing as of such date.





I-8


In
      the
      preamble to such regulations, the IRS expressed its view that dual registered
      companies described in the preceding sentence are also treated as U.S.
      corporations for U.S. federal income tax purposes for periods prior to August
      12, 2004. On January 30, 2006, the IRS issued its final regulations, stating
      that neither the temporary regulations nor these final regulations are
      retroactive. The earliest date that any entity is subject to these regulations
      is August 12, 2004. For periods prior to the date these final regulations apply
      (i.e., prior to August 12, 2004), the classification of dually chartered
      entities is governed by the pre-existing regulations. We believe that our
      historic treatment of these subsidiaries as not having been required to pay
      taxes in the United States for the period prior to August 12, 2004 is correct,
      and would vigorously defend its treatment if challenged. As such, we have made
      no provision for U.S. taxes in its financial statements for these entities
      for
      the periods prior to August 12, 2004.





Furthermore,
      we cannot assure you that the Internal Revenue Service will not assert other
      positions with respect to the foregoing matters, including positions with
      respect to our treatment of the tax consequences of the termination of the
      status of our Philippines subsidiaries as Delaware limited liability companies,
      that, if successful, could increase materially our liability for U.S. federal
      income taxes.





**If
      certain tax authorities in North America and Europe challenge the manner in
      which we allocate our profits, our net income will
      decrease.**





We
      benefit from tax incentives in certain jurisdictions where tax incentives have
      been extended to encourage foreign investment or where income tax rates are
      low.
      Our taxes could increase if these tax incentives are not renewed upon
      expiration, or if tax rates applicable to us are increased. Substantially all
      of
      the services provided by our Asian subsidiaries are performed on behalf of
      clients based in North America and Europe. We believe that profits from our
      Asian operations are not sufficiently connected to jurisdictions in North
      America or Europe to give rise to income taxation in those jurisdictions, other
      than U.S. taxes that may arise as the result of the former status of our
      Philippine subsidiaries as Delaware limited liability companies as described
      in
      the preceding risk factor. Tax authorities in jurisdictions in North America
      and
      Europe could, however, challenge the manner in which we allocate our profits
      among our subsidiaries, and we may not prevail in this type of challenge. If
      our
      Asian profits became subject to income taxes in these other jurisdictions,
      our
      worldwide effective tax rate could increase, thereby decreasing our net income.





**An
      expiration or termination of our current tax holidays could adversely affect
      our
      results of operations.**





We
      currently benefit from income tax holiday incentives in the Philippines, India
      and Sri Lanka which provide that we pay reduced income taxes in those
      jurisdictions for a fixed period of time that varies depending on the
      jurisdiction. An expiration or termination of our current tax holidays could
      substantially increase our worldwide effective tax rate, thereby decreasing
      our
      net income and adversely affecting our results of operations.





**Regional
      instability in the Philippines, India and Sri Lanka could adversely affect
      business conditions in those regions, which could disrupt our operations and
      adversely affect our business and results of operations.**





We
      conduct a majority of our operations in the Philippines, India and Sri Lanka.
      These operations remain vulnerable to political unrest. Political instability
      could adversely affect the legal environment for our business activities in
      those regions.





In
      particular, the Philippines has experienced ongoing problems with insurgents.
      The Abu Sayyaf group of kidnappers, which is purported to have ties to the
      Al
      Qaeda terrorist organization, is concentrated on Basilan Island. While Basilan
      Island is not near our facilities and the government of the Philippines has
      taken action to eradicate this group, we cannot assure you that these efforts
      will be successful or that the Abu Sayyaf group will not attempt to disrupt
      activities or commit terrorist acts in other areas of the Philippines or South
      Asia.





In
      recent
      years there have been military confrontations between India and Pakistan that
      have occurred in the region of Kashmir and along the India-Pakistan border.
      In
      addition, in recent years there has been civil unrest in Sri Lanka.





I-9


Further
      political tensions and an escalation in these hostilities could adversely affect
      our Philippines, Indian and Sri Lankan based operations and therefore adversely
      affect our revenues and results of operations.





**Terrorist
      attacks or a war could adversely affect our results of
      operations.**





Terrorist
      attacks, such as the attacks of September 11, 2001 in the United States,
      and other acts of violence or war, such as the conflict in Iraq, could affect
      us
      or our clients by disrupting normal business practices for extended periods
      of
      time and reducing business confidence. In addition, these attacks may make
      travel more difficult and may effectively curtail our ability to serve our
      clients' needs, any of which could adversely affect our results of operations.





**It
      is unlikely that we will pay dividends.**





We
      have
      not paid any cash dividends since our inception and do not anticipate paying
      any
      cash dividends in the foreseeable future. We expect that our earnings, if any,
      will be used to finance our growth.





**Item
      2. Description of Property.**





Our
      services are primarily performed from our Hackensack, New Jersey headquarters,
      our Dallas and Austin, Texas offices, and seven overseas facilities, all of
      which are leased. In addition, we have a technology and tools development
      facility in Gurgaon, India, which is also leased. The square footage of all
      our
      leased properties is approximately 405,000. Rental payments on property leases
      were approximately $2.0 million in 2005.





**Item
      3. Legal Proceedings.**





The
      Innodata Employees Association (IDEA), Jomarie Deles and other complainants
      have
      sued one of our Philippines subsidiaries, and have purported also to sue us
      and
      certain of our officers and directors, in *Innodata
      Philippines Employees Association (IDEA) v Innodata
      Philippines, Inc.* (filed
      July 27, 2001 at the National Conciliation and Mediation Board of the
      Philippine Department of Labor and Employment in Manila); Innodata Employees
      Association (IDEA), *Jomarie
      Deles, et al v. Innodata Philippines, Inc.* (filed
      July 1, 2002 in the National Labor Relations Commission of the Republic of
      the Philippines in Manila); and in related cases and proceedings filed in the
      Philippines Supreme Court, the Philippine Court of Appeals and the Philippines
      Department of Labor and Employment. Complainants seek to require reinstatement
      of employment and to recover back wages for an allegedly illegal facility
      closing on June 7, 2002 based on the terms of a collective bargaining
      agreement with this subsidiary. If complainants' claims had merit they could
      be
      entitled to back wages of up to $5.0 million for the period from
      June 7, 2002 to June 6, 2005, consistent with prevailing
      jurisprudence. After consultation with counsel, we believe that the
      complainants' claims are without merit and we intend to defend against them
      vigorously.





In
      addition, we are subject to various legal proceedings and claims which arise
      in
      the ordinary course of business. While we currently believe that the ultimate
      outcome of these proceedings will not have a material adverse affect on our
      financial condition or results of operations, litigation is subject to inherent
      uncertainties. Were an unfavorable ruling to occur, it could have a material
      adverse effect on our financial condition and results of operations.





**Item
      4. Submission of Matters to a Vote of Security
      Holders-None.**





I-10




**PART
        II**
 
 
 **Item
        5. Market for Common Equity and Related Stockholder Matters.**
 
 Innodata
        Isogen, Inc. (the “Company”) Common Stock is quoted on the Nasdaq National
        Market System under the symbol “INOD.” On February 28, 2006, there were 114
        stockholders of record of the Company’s Common Stock based on information
        provided by the Company's transfer agent. Virtually all of the Company’s
        publicly held shares are held in “street name” and the Company believes the
        actual number of beneficial holders of its Common Stock to be approximately
        4,800.
 
 The
        following table sets forth the high and low sales prices on a quarterly basis
        for the Company's Common Stock, as reported on Nasdaq, for the two years
        ended
        December 31, 2005.
 
 **Common
                  Stock****Sale
                  Prices****2004**
              
              **High**
              
              **Low**First
                  Quarter
              
              $
              4.95
              
              $
              3.09Second
                  Quarter
              
              
              4.20
              
              
              2.80Third
                  Quarter
              
              
              4.60
              
              
              3.15Fourth
                  Quarter
              
              
              9.99
              
              
              3.28**2005**
              
              
              **High**
              
              
              **Low**First
                  Quarter
              
              $
              10.07
              
              $
              2.98Second
                  Quarter
              
              
              3.96
              
              
              2.30Third
                  Quarter
              
              
              3.73
              
              
              2.25Fourth
                  Quarter
              
              
              3.63
              
              
              2.25
 
 **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 future payment
        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 capital requirements
        and financial condition and other relevant factors.
 
 II-1
 **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, 2005:
 
 **Number
                  of****Securities
                  to be Issued**
              
              
              **Weighted-Average**
              
              
              **Number
                  of Securities****Upon
                  Exercise of**
              
              
              **Exercise
                  Price of**
              
              
              **Remaining
                  Available For****Outstanding
                  Options,**
              
              
              **Outstanding
                  Options,**
              
              
              **Future
                  Issuance Under****Plan
                  Category**
              
              
              **Warrants
                  and Rights**
              
              
              **Warrants
                  and Rights**
              
              
              **Equity
                  Compensation Plans****(a**)****
              
              
              **(b)**
              
              
              **(c)**Equity
                  compensation plansapproved
                  by security holders
              
              
              5,555,000
              
              $
              3.07
              
              
              873,000Equity
                  compensation plansnot
                  approved by security holders
              
              
              1,015,000
              (1)
              $
              0.84
              
              
              -Total
              
              
              6,570,000
              
              $
              2.72
              
              
              873,000
 
 (1)
              Consists
                  of stock options to purchase 1,015,164 shares of common stock granted
                  to
                  the Company's current Chairman pursuant to an agreement entered
                  into at
                  time of hire.
  II-2
 
 **Item
        6. Selected Financial Data (In thousands, except per share
        amounts).**
 **Year
                    Ended December 31,****2005**
                
                
                **2004**
                
                
                **2003**
                
                
                **2002**
                
                
                **2001****(In
                    thousands, except per share data)****STATEMENT
                    OF OPERATIONS DATA:**REVENUES
                
                $
                42,052
                
                $
                53,949
                
                $
                36,714
                
                $
                36,385
                
                $
                58,278OPERATING
                    COSTS AND EXPENSES:Direct
                    operating expenses
                
                
                30,920
                
                
                33,050
                
                
                27,029
                
                
                32,005
                
                
                44,354Selling
                    and administrative
                
                
                13,684
                
                
                10,205
                
                
                8,898
                
                
                10,038
                
                
                8,337Terminated
                    offering costs
                
                
                -
                
                
                625
                
                
                -
                
                
                -
                
                
                -Provision
                    for doubtful accounts
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                2,942Bad
                    debt recovery, net
                
                
                -
                
                
                (963
                )
                
                -
                
                
                -
                
                
                -Restructuring
                    costs and asset impairment
                
                
                -
                
                
                -
                
                
                -
                
                
                244
                
                
                865Interest
                    expense
                
                
                18
                
                
                25
                
                
                9
                
                
                29
                
                
                9Interest
                    income
                
                
                (457
                )
                
                (87
                )
                
                (30
                )
                
                (89
                )
                
                (216
                )Total
                
                
                44,165
                
                
                42,855
                
                
                35,906
                
                
                42,227
                
                
                56,291(LOSS)
                      INCOME BEFORE (BENEFIT FROM) PROVISION FOR INCOME
                      TAXES
                
                
                (2,113
                )
                
                11,094
                
                
                808
                
                
                (5,842
                )
                
                1,987(BENEFIT
                      FROM) PROVISION FOR INCOME TAXES
                
                
                (462
                )
                
                3,237
                
                
                333
                
                
                (677
                )
                
                639NET
                    (LOSS) INCOME
                
                $
                (1,651
                )
                $
                7,857
                
                $
                475
                
                $
                (5,165
                )
                $
                1,348(LOSS)
                    INCOME PER SHARE:Basic
                
                $
                (.07
                )
                $
                .35
                
                $
                .02
                
                $
                (.24
                )
                $
                .06Diluted
                
                $
                (.07
                )
                $
                .32
                
                $
                .02
                
                $
                (.24
                )
                $
                .05Cash
                    dividends per share
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
 
 
 **December
                    31,****2005**
                
                
                **2004**
                
                
                **2003**
                
                
                **2002**
                
                
                **2001****(In
                    thousands)****BALANCE
                    SHEET DATA:**WORKING
                    CAPITAL
                
                $
                21,432
                
                $
                22,209
                
                $
                11,983
                
                $
                8,570
                
                $
                8,854TOTAL
                    ASSETS
                
                $
                37,611
                
                $
                37,211
                
                $
                25,146
                
                $
                22,697
                
                $
                30,094LONG
                    TERM OBLIGATIONS
                
                $
                548
                
                $
                150
                
                $
                272
                
                
                -
                
                
                -STOCKHOLDERS’
                    EQUITY
                
                $
                26,814
                
                $
                26,737
                
                $
                17,404
                
                $
                15,569
                
                $
                20,362
 
 II-3


**Item
        7. Management's Discussion and Analysis of Financial Condition and Results
        of
        Operations.**
 
 *Revenues*
 
 We
        derive
        the majority of our revenues from outsourced content services. These services
        consist of fabrication and knowledge services. Outsourced content services
        that
        are provided for a specific project generate revenues that terminate on
        completion of a defined task and we regard these revenues as non-recurring.
        We
        also provide outsourced content services for business processes that we
        anticipate will continue for an indefinite period and therefore generate
        what we
        regard as recurring revenues. We price our outsourced content services based
        on
        the quantity delivered or resources utilized. Revenues for outsourced content
        services are recognized in the period in which the services are performed
        and
        delivered.
 
 We
        also
        derive a portion of our revenues from IT professional services.
        A substantial majority of our IT professional services is provided on a
        project basis that generates non-recurring revenues. These services consist
        of
        consulting, systems integration, custom application development and other
        professional services. We price our professional services on an hourly basis
        for
        actual time and expense incurred, or on a fixed-fee turn-key basis. Revenues
        for
        contracts billed on a time and materials basis are recognized as services
        are
        performed. Revenues under fixed-fee contracts are recognized on the percentage
        of completion method of accounting as services are performed or milestones
        are
        achieved.
 
 Recurring
        revenues consisted of 58% and 47% of total revenues for the years ended December
        31, 2005 and 2004, respectively. The substantial majority of our recurring
        revenues are derived from outsourced content services. A small portion of
        our
        recurring revenues is derived from the application maintenance agreements
        related to our IT professional services. Non-recurring revenues vary depending
        on the size and completion dates of specific projects.
 
 We
        have
        historically relied on a very limited number of clients that have accounted
        for
        a significant portion of our revenues. One client accounted for 27%, 23%
        and 33%
        of our total revenues for the years ended December 31, 2005, 2004 and 2003,
        respectively. One other client accounted for 12% and 31% of our revenues
        for the
        years ended December 31, 2005 and 2004, respectively. We may lose any of
        these
        or our other major clients as a result of our failure to meet or satisfy
        our
        clients’ requirements, the completion or termination of a project or engagement,
        or the selection of another service provider.
 
 In
        addition, the revenues we generate from our major clients may decline or
        grow at
        a slower rate in future periods than in the past. If we lose any of our
        significant clients, our revenues and results of operations could be adversely
        affected and we may incur a loss from operations. Our services are typically
        subject to client requirements, and in most cases are terminable upon 30
        to 90
        days’ notice.
 
 See
“Risk
        Factors.”
 
 *Direct
        Operating Costs*
 
 Direct
        operating costs for both our outsourced content services and IT professional
        services consist of direct payroll, occupancy costs, depreciation,
        telecommunications, computer services and supplies. We anticipate our cost
        of
        labor to increase in 2006 by approximately $500,000 per quarter as a result
        of
        general wage increases.
 
 *Selling
        and Administrative Expenses*
 
 Selling
        and administrative expenses for both our outsourced content services and
        IT
        professional services consist of management and administrative salaries,
        sales
        and marketing costs, new services research and related software development,
        and
        administrative overhead. We anticipate selling and administrative expenses
        to
        increase in absolute terms as we continue to grow our business, and as we
        increase our spending on new services research and related software development.
        Commencing October 1, 2003, we unified our selling and related activities
        for our outsourced content services and IT professional services segments.
        As
        such, selling and corporate administrative costs are not segregated by, nor
        are
        they allocated to, operating segments for periods commencing January 1,
        2004.
 
 II-4
 **Results
        of Operations**
 
 **Year
        Ended December 31, 2005 Compared to the Year Ended December 31,
        2004**
 
 *Revenues*
 
 Revenues
        were $42.1 million for the year ended December 31, 2005 compared to
        $53.9 million for the similar period in 2004.
 
 One
        client accounted for 27% and 23% of our total revenues for the years ended
        December 31, 2005 and 2004, respectively. A second client accounted for 12%
        and 31% of our revenues for the years ended December 31, 2005 and 2004,
        respectively. No other client accounted for 10% or more of our total revenues
        for these periods. Further, for the years ended December 31, 2005 and 2004,
        revenues from clients located in foreign countries (principally in Europe)
        accounted for 35% and 30% of our total revenues, respectively.
 
 Revenues
        from outsourced content services decreased 16% to $36.7 million for the
        year ended December 31, 2005 from $43.7 million for the similar period
        in 2004. This decrease primarily reflects an $8 million decline in revenues
        from a major outsourced content services project that was terminated
        late in the first quarter of 2005. We did not obtain sufficient new projects
        to
        counterbalance the decline in revenues from the termination of this
        project.
 
 Revenues
        from IT professional services decreased 47% to $5.4 million for the year
        ended December 31, 2005 from $10.2 million for the similar period in
        2004. T he
        results in the 2004 period reflect approximately $4.4 million
        of revenues from two projects that were completed in 2004.
 
 For
        the
        year ended December 31, 2005, approximately 58% of our revenue was recurring
        and
        the 42% balance was non-recurring, compared with 47% and 53%, respectively,
        for
        the year ended December 31, 2004.
 
 *Direct
        Operating Costs*
 
 Direct
        operating costs were $30.9 million and $33.1 million for the years
        ended December 31, 2005 and 2004, respectively, a decrease of 7%. Direct
        operating costs as a percentage of revenues were 73% for the year ended
        December 31, 2005 and 61% for the year ended December 31, 2004.
 
 Direct
        operating costs for outsourced content services were $26.6 million and
        $27.5 million for the years ended December 31, 2005 and 2004,
        respectively, a decrease of 3%. Direct operating costs of outsourced content
        services as a percentage of revenues from outsourced content services were
        72%
        and 63% for the years ended December 31, 2005 and 2004, respectively. Fixed
        costs increased approximately 2%, principally resulting from growth in our
        engineering technology department. The overall increase in fixed costs was
        in
        part offset by a reduction in depreciation and amortization costs of
        approximately $800,000. The
        increase in direct operating costs of outsourced content services as a
        percentage of revenues from outsourced content services principally results
        from
        a 2% percentage point increase in v ariable
        costs of production as a percent of revenues, and from decreased revenues
        in
        2005 without a corresponding decrease to fixed costs.
 
 Direct
        operating costs for IT professional services were $4.3 million and $5.6
        million for the years ended December 31, 2005 and 2004 respectively. Direct
        operating costs of IT professional services as a percentage of revenues from
        IT
        professional services were 80% and 55% for the years ended December 31,
        2005 and 2004, respectively. The
        dollar decrease in direct operating costs of IT professional services for
        the
        2005 period was due to a reduction in labor costs. The increase in direct
        operating costs of IT professional services as a percentage of revenues from
        IT
        professional services was primarily attributable to decreased revenues without
        a
        corresponding decrease in these costs.
 
 II-5
 *Selling
        and Administrative Expenses*
 
 Selling
        and administrative expenses were $13.7 million and $10.2 million for
        the years ended December 31, 2005 and 2004, respectively, an increase of
        34%. Selling and administrative expenses as a percentage of revenues were
        33%
        and 19% for the years ended December 31, 2005 and 2004 respectively.
        Selling and marketing expenses increased by approximately $1.8 million, partly
        as a result of increased costs from our continued efforts to enhance our
        business development infrastructure. In
        addition, in 2005 we spent approximately $0.8 million in new services research
        and related software development. The balance of the increase from 2004
        principally reflects general increases in administrative costs.
 
 *Net
        Loss/Income*
 
 We
        recorded a net loss of $1.7 million in 2005 compared with net income of $7.9
        million in 2004. The principal reasons for the decrease in 2005 were the
        decline
        in revenues and the increase in selling and administrative
        expenses.
 
 *Other*
 
 On
        January 5, 2005, we announced our intent to raise funds and filed a registration
        statement on Form   S-3 to register 4,250,000 shares of our
        common stock, plus 3,250,000 shares of common stock currently held by certain
        of
        our directors and officers. On March 23, 2005, we terminated the offering
        and as
        such, in the fourth quarter 2004, expensed approximately $625,000 of offering
        costs.
 
 In
        January 2004, we reached a settlement agreement with and received
        $1.0 million in cash from a former client in full satisfaction of a
        $2.6 million outstanding balance that we had fully written off as a bad
        debt in 2001. The $1.0 million receipt, net of $37,000 in recovery costs,
        is reflected as bad debt recovery for the year ended December 31, 2004.
 
 For
        the
        year ended December 31, 2005, the benefit from income taxes as a percentage
        of loss before income taxes was 22%. The 2005 benefit from income taxes is
        lower
        than the U.S. Federal statutory rate, principally due to a portion of the
        U.S.
        net operating losses which were not recognized, offset in part by certain
        overseas income which is neither subject to foreign income taxes because
        of tax
        holidays granted to us, nor subject to tax in the U.S. unless repatriated.
 
 For
        the
        year ended December 31, 2004, the provision for income taxes as a
        percentage of income was 29%. The 2004 provision is lower than the U.S. Federal
        statutory rate, principally due to certain overseas income which is neither
        subject to foreign income taxes because of tax holidays granted to us, nor
        subject to tax in the U.S. unless repatriated.
 
 In
        August
        2004, the IRS promulgated regulations, effective August 12, 2004, that had
        the
        effect of making certain of our overseas entities taxable in the United States
        for U.S. federal income tax purposes. As a result, in the fourth quarter
        2004,
        we provided approximately $450,000 for U.S. income taxes attributable to
        these
        applicable overseas entities. In addition, in December 2004, we effected
        certain
        filings in Delaware to ensure that these subsidiaries will not be treated
        as
        U.S. corporations for U.S. federal income tax purposes as of the date of
        filing
        and as such, will not be subject to U.S. federal income taxes commencing
        January
        1, 2005.
 
 II-6
 **Year
        Ended December 31, 2004 Compared to the Year Ended December 31,
        2003**
 
 *Revenues*
 
 Revenues
        were $53.9 million for the year ended December 31, 2004 compared to
        $36.7 million for the similar period in 2003.
 
 One
        client accounted for 23% and 33% of our total revenues for the years ended
        December 31, 2004 and 2003, respectively. A second client accounted for 31%
        of our revenues for the year ended December 31, 2004. No other client
        accounted for 10% or more of our total revenues for these periods. Further,
        for
        the years ended December 31, 2004 and 2003, revenues from clients located
        in foreign countries (principally in Europe) accounted for 30% and 47% of
        our
        total revenues, respectively.
 
 Revenues
        from outsourced content services increased 46% to $43.7 million for the
        year ended December 31, 2004 from $30.0 million for the similar period
        in 2003. The increase was primarily due to increased
        revenues from several new projects. Of the $43.7 million of revenues for
        the
        year ended December, 31, 2004, approximately $13.8 million, or 31%, resulted
        from new projects, substantially all of which were for existing
        clients.
 
 Revenues
        from IT professional services increased 52% to $10.2 million for the year
        ended December 31, 2004 from $6.7 million for the similar period in
        2003. T his
        increase was primarily due to increased revenues from new projects.
        Approximately $9.5 million, or 93%, of revenues from IT professional services
        for the year ended December 31, 2004 resulted from new projects, a majority
        of
        which were for existing clients.
 
 For
        the
        year ended December 31, 2004, approximately 53% of our revenue was non-recurring
        and the 47% balance was recurring, compared with 47% and 53%, respectively,
        for
        the year ended December 31, 2003.
 
 *Direct
        Operating Costs*
 
 Direct
        operating costs were $33.1 million and $27.0 million for the years
        ended December 31, 2004 and 2003, respectively, an increase of 23%. Direct
        operating costs as a percentage of revenues were 61% for the year ended
        December 31, 2004 and 74% for the year ended December 31, 2003.
 
 Direct
        operating costs for outsourced content services were $27.5 million and
        $23.0 million for the years ended December 31, 2004 and 2003,
        respectively, an increase of 19%. Direct operating costs of outsourced content
        services as a percentage of revenues from outsourced content services were
        63%
        and 77% for the years ended December 31, 2004 and 2003, respectively. The
        dollar increase for the content services segment in the 2004 period was
        principally due to increases in both labor and non-labor costs as a result
        of
        increased revenues. The decrease in direct operating costs of outsourced
        content
        services as a percentage of revenues from outsourced content services for
        the
        2004 period was principally due to lower labor costs as a percentage of revenues
        resulting from improved process efficiencies and aggressive project cost
        management, as well as a 46% increase in revenues compared to a 12% increase
        in
        fixed non-labor costs.
 
 Direct
        operating costs for IT professional services were $5.6 million and $4.0
        million for the years ended December 31, 2004 and 2003 respectively. Direct
        operating costs of IT professional services as a percentage of revenues from
        IT
        professional services were 54% and 59% for the years ended December 31,
        2004 and 2003, respectively. The dollar increase in direct operating costs
        of IT
        professional services for the 2004 period was principally due to increases
        in
        personnel and related costs. The decrease in direct operating costs of IT
        professional services as a percentage of revenues from IT professional services
        for the 2004 period was primarily attributable to increased resource utilization
        resulting in a 4% decrease in non-labor costs as a percentage of revenues
        from
        IT professional services, and a one percent decrease in direct labor costs
        as a
        percentage of revenues.
  II-7
 *Selling
        and Administrative Expenses*
 
 Selling
        and administrative expenses were $10.2 million and $8.9 million for
        the years ended December 31, 2004 and 2003, respectively, an increase of
        15%. Selling and administrative expenses as a percentage of revenues were
        19%
        and 24% for the years ended December 31, 2004 and 2003, respectively.
        Selling and administrative expenses for the year ended December 31, 2003
        include
        a non-cash compensation charge of approximately $650,000. Excluding this
        charge,
        selling and administrative expenses for the year ended December 31, 2004
        would have increased by approximately $2.0 million, or 24%, from the
        similar period in 2003. Approximately $1.7 million of the increase in selling
        and administrative expenses relates to increases in selling and marketing
        costs,
        primarily attributable to the hiring of additional business development,
        management and sales support personnel, as well as to increased marketing
        programs and activities.
 
 *Net
        Income*
 
 We
        recorded net income of $7.9 million in 2004 compared with net income of
        approximately $500,000 in 2003. The principal reason for the increase in
        2004 is
        the increase in revenues and the resulting gross margin.
 
 *Other*
 
 On
        January 5, 2005, we announced our intent to raise funds and filed a registration
        statement on Form   S-3 to register 4,250,000 shares of our
        common stock, plus 3,250,000 shares of common stock currently held by certain
        of
        our directors and officers. On March 23, 2005, we terminated the offering
        and as
        such, in the fourth quarter 2004, expensed approximately $625,000 of offering
        costs.
 
 In
        January 2004, we reached a settlement agreement with and received
        $1.0 million in cash from a former client in full satisfaction of a
        $2.6 million outstanding balance that we had fully written off as a bad
        debt in 2001. The $1.0 million receipt, net of $37,000 in recovery costs,
        is reflected as bad debt recovery for the year ended December 31, 2004.
 
 For
        the
        year ended December 31, 2004, the provision for income taxes as a
        percentage of income was 29%. The 2004 provision is lower than the U.S. Federal
        statutory rate, principally due to certain overseas income which is neither
        subject to foreign income taxes because of tax holidays granted to us, nor
        subject to tax in the U.S. unless repatriated.
 
 In
        August
        2004, the IRS promulgated regulations, effective August 12, 2004, that had
        the
        effect of making certain of our overseas entities taxable in the United States
        for U.S. federal income tax purposes. As a result, in the fourth quarter
        2004,
        we provided approximately $450,000 for U.S. income taxes attributable to
        these
        applicable overseas entities. In addition, in December 2004, we effected
        certain
        filings in Delaware to ensure that these subsidiaries will not be treated
        as
        U.S. corporations for U.S. federal income tax purposes as of the date of
        filing
        and as such, will not be subject to U.S. federal income taxes commencing
        January
        1, 2005.
 
 The
        provision for income taxes for the year ended December 31, 2003 is higher
        as a
        percentage of pre-tax income than the federal statutory rate due primarily
        to
        foreign and state income taxes, and to certain foreign source losses for
        which
        no tax benefit is available, partially offset by the effect of income in
        tax
        jurisdictions currently under tax holiday.
 
 II-8
 
 **Liquidity
        and Capital Resources**
 
 Selected
        measures of liquidity and capital resources, expressed in thousands are as
        follows:
 
 **December
                  31, 2005**
              
              
              **December
                  31, 2004**Cash
                  and Cash Equivalents
              
              $
              20,059
              
              $
              20,663Working
                  Capital
              
              
              21,432
              
              
              22,209
 
 *Net
        Cash Provided By Operating Activities*
 
 Net
        cash
        provided by operating activities was $1.1 million for the year ended
        December 31, 2005 compared to $15.7 million provided by operating
        activities for the year ended December 31, 2004, a decrease of
        approximately $14.5 million. The $14.5 million
        decrease in net cash provided by operating activities is principally due
        to a
        $9.5 million decrease in net income, a $1.3 million decrease in non-cash
        charges and a $3.7 million reduction as a result of changes in operating
        assets
        and liabilities .
 
 Accounts
        receivable totaled $7.2 million at December 31, 2005, representing
        approximately 55 days of sales outstanding, compared to $8.0 million, or 57
        days, at December 31, 2004.
 
 A
        significant amount of the Company's revenues are derived from clients in
        the
        publishing industry. Accordingly, the Company's accounts receivable generally
        include significant amounts due from such clients. In addition, as of
        December 31, 2005, approximately 36% of the Company's accounts receivable
        was from foreign (principally European) clients and 37% of accounts receivable
        was due from one client. As of December 31, 2004, approximately 27% of the
        Company's accounts receivable was from foreign (principally European) clients
        and 69% of accounts receivable was due from two clients.
 
 *Net
        Cash Used in Investing Activities*
 
 For
        the
        year ended December 31, 2005, we spent cash approximating $2.3 million for
        capital expenditures, compared to approximately $2,051,000 for the year ended
        December 31, 2004. Furthermore, during the year ended
        December 31, 2005, we financed the purchase of software licenses
        totaling approximately $488,000. Capital spending in 2005 and 2004 related
        principally to normal ongoing equipment upgrades, project requirement specific
        equipment, and improvements in infrastructure. During the next twelve months,
        we
        anticipate that capital expenditures for ongoing technology, hardware, equipment
        and infrastructure upgrades will approximate $3 million. Furthermore, in
        the
        next twelve months, we anticipate spending approximately $1.8 million
        on construction and infrastructure related costs in connection with the
        relocation of three of our Asian facilities, our Dallas office and for the
        renovation of our U.S. headquarters. Such anticipated expenditures are in
        addition to potential capital expenditures for new service offerings. In
        connection with the relocation of our Dallas office, the lessor agreed to
        pay
        approximately $250,000 as incentive for us to terminate the lease prior to
        its
        contractual expiration date. In connection with this transaction, we will
        recognize income of approximately $250,000 in the first quarter of
        2006.
 
 *Net
        Cash Provided by Financing Activities*
 
 Proceeds
        from the exercise of stock options provided cash approximating $1,297,000
        and
        $1,082,000 in 2005 and 2004, respectively. In addition, payments of long-term
        obligations approximated $702,000 and $88,000 in 2005 and 2004,
        respectively.
 
 During
        the year ended December 31, 2005, we entered into an agreement with a
        vendor to acquire certain additional software licenses and to receive support
        and subsequent software upgrades on this and other currently owned software
        licenses through February 2008 for a total cost of approximately
        $1.6 million. This total obligation and associated cost totaling
        approximately $1.6 million is a non-cash investing and financing activity.
        Of
        the $1.6 million, approximately $528,000 was paid during the year ended December
        31, 2005 and $528,000 will be paid as a financing activity in the next 12
        months.
 
 II-9
 *Availability
        of Funds*
 
 We
        have a
        $5.0 million line of credit pursuant to which we may borrow up to 80% of
        eligible accounts receivable at the bank’s alternate base rate plus 1⁄2% or LIBOR
        plus 3%. The line, which expires in May, 2006, is secured by our accounts
        receivable. The Company has not borrowed against its credit line in
        2005.
 
 We
        believe that existing cash and internally generated funds will be sufficient
        for
        our reasonably anticipated working capital and capital expenditure requirements
        during the next 12 months. We fund our foreign expenditures from our U.S.
        corporate headquarters on an as-needed basis.
 
 **Contractual
        Obligations**
 
 The
        table
        below reflects our contractual cash obligations, expressed in thousands,
        at
        December 31, 2005.
 **Payments
                    Due by Period****Contractual
                    Obligations**
                
                
                **Total**
                
                
                **Less
                    than**
                  **1
                    year**
                
                
                **1-3
                    years**
                
                
                **4-5
                    years**
                
                
                **After**
                  **5
                    years**Capital
                    lease obligations
                
                $
                155
                
                $
                135
                
                $
                20
                
                $
                -
                
                $
                -Non-cancelable
                    operating leases
                
                
                2,387
                
                
                679
                
                
                1,558
                
                
                150
                
                
                -Long-term
                    vendor obligations
                
                
                1,056
                
                
                528
                
                
                528
                
                
                -
                
                
                -Total
                    contractual cash obligations
                
                $
                3,598
                
                $
                1,342
                
                $
                2,106
                
                $
                150
                
                $
                -




**Inflation,
        Seasonality and Prevailing Economic Conditions**
 
 To
        date,
        inflation has not had a significant impact on our operations. We generally
        perform work for our clients under project-specific contracts,
        requirements-based contracts or long-term contracts. Contracts are typically
        subject to numerous termination provisions.
 
 Our
        quarterly operating results are subject to certain seasonal fluctuations.
        Our
        fourth and first quarters include the months of December and January, when
        billable services activity by professional staff, as well as engagement
        decisions by clients, may be reduced due to client budget planning cycles.
        Demand for our services generally may be lower in the fourth quarter due
        to
        reduced activity during the holiday season and fewer working days for our
        Philippines-based staff during this period. These and other seasonal factors
        may
        contribute to fluctuations in our operating results from quarter to quarter.
 
 **Critical
        Accounting Policies and Estimates**
 
 *Basis
        of Presentation and Use of Estimates*
 
 Management’s
        discussion and analysis of its results of operations and financial condition
        is
        based upon our consolidated financial statements, which have been prepared
        in
        accordance with accounting principles generally accepted in the United States.
        The preparation of these financial statements requires management to make
        estimates and judgments that affect the reported amounts of assets, liabilities,
        revenues and expenses, and related disclosure of contingent assets and
        liabilities. On an on-going basis, we evaluate our estimates, including those
        related to accounts receivable. Management bases its estimates on historical
        experience and on various other assumptions that are believed to be reasonable
        under the circumstances, the results of which form the basis for making
        judgments about the carrying values of assets and liabilities that are not
        readily apparent from other sources. Actual results may differ from these
        estimates under different assumptions or conditions.
 
 II-10
 *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 credit evaluations
        of
        our customers, adjusting credit terms when management believes appropriate
        based
        upon payment history and an assessment of their current credit worthiness.
        We
        record an allowance for doubtful accounts for estimated losses resulting
        from
        the inability of our clients to make required payments. We determine this
        allowance by considering a number of factors, including the length of time
        trade
        accounts receivable are past due, our previous loss history, our estimate
        of the
        client’s current ability to pay its obligation to us, and the condition of the
        general economy and the industry as a whole. While credit losses have generally
        been within expectations and the provisions established, we cannot guarantee
        that credit loss rates in the future will be consistent with those experienced
        in the past. In addition, we have credit exposure if the financial condition
        of
        one of our major clients were to deteriorate. In the event that the financial
        condition of our clients were to deteriorate, resulting in an impairment
        of
        their ability to make payments, additional allowances may be necessary.
 
 *Revenue
        Recognition*
 
 We
        recognize revenue for content manufacturing and outsourcing services in the
        period in which we perform services and deliver in accordance with Staff
        Accounting Bulletin 104.
 
 We
        recognize IT professional services revenue from custom application and systems
        integration development which requires significant production, modification
        or
        customization of software in accordance with Statement of Position (“SOP”)
        No. 97-2 *“Software
        Revenue Recognition”* and in a
        manner similar to SOP No. 81-1 *“Accounting
        for Performance of Construction-Type and Certain Production-Type
        Contracts”.* We
        recognize revenue for such services billed under fixed fee arrangements using
        the percentage-of-completion method under contract accounting as we perform
        services or reach output milestones. We measure the percentage completed
        either
        by the percentage of labor hours incurred to date in relation to estimated
        total
        labor hours or in consideration of achievement of certain output milestones,
        depending on the specific nature of each contract. For arrangements in which
        percentage-of completion accounting is used, we record cash receipts from
        customers and billed amounts due from customers in excess of recognized revenue
        as billings in excess of revenues earned on contracts in progress (which
        is
        included in accounts receivable). Revenues from fixed-fee projects accounted
        for
        less than 10% of our total revenue for each of the three years ended December
        31, 2005, respectively. We receive revenue billed on a time and materials
        basis
        as we perform the services.
 
 *Property
        and Equipment*
 
 Property
        and equipment is stated at cost and is depreciated on the straight-line method
        over the estimated useful lives of the related assets, which is generally two to five
        years. Leasehold improvements are amortized on a straight-line basis over
        the
        shorter of their estimated useful lives or the lives of the leases.
 
 *Long-lived
        Assets*
 
 We
        account for long lived assets under Statement of Financial Accounting Standards
        (“SFAS”) 144, Accounting for the Impairment or Disposal of Long Lived Assets. We
        assess the recoverability of our long-lived assets, which consist primarily
        of
        fixed assets and intangible assets with finite useful lives, whenever events
        or
        changes in circumstance indicate that the carrying value may not be recoverable.
        The following factors, if present, may trigger an impairment  review: 
(i)  significant  underperformance  relative  to 
expected historical  or  projected  future  operating 
results; (ii) significant negative industry  or  economic 
trends; (iii) significant decline in our stock price  for  a 
sustained  period;  and  (iv)  a  change  in our
        market capitalization 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,  we perform an  impairment
        analysis using a projected discounted cash flow  method.  We must make
        assumptions regarding estimated future cash flows and other factors to determine
        the fair value of these respective assets. If these estimates or related
        assumptions change in the future, we may be required to record an impairment
        charge. Impairment charges would be included in  general  and 
administrative  expenses  in  our statements  of
        operations,  and  would result in reduced carrying amounts of the
        related assets on  our balance  sheets. We did not identify or record
        an impairment in any of our long lived assets in the three years ended December
        31, 2005.
 
 II-11
 *Income
        Taxes*
 
 We
        determine our deferred taxes based on the difference between the financial
        statement and tax bases 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
        more
        likely than not that some or all of a deferred tax asset will not be realized.
        Unremitted earnings of foreign subsidiaries have been included in the
        consolidated financial statements without giving effect to the United States
        taxes that may be payable on distribution to the United States to the extent
        such earnings are not anticipated to be remitted to the United States.
 
 *Goodwill
        and Other Intangible Assets*
 
 SFAS
        142
        requires that we test goodwill for impairment using a two-step fair value
        based
        test. The first step of the goodwill impairment test, used to identify potential
        impairment, compares the fair value of a reporting unit with its carrying
        amount, including goodwill. If the carrying amount of the reporting unit
        exceeds
        its fair value, the second step of the goodwill impairment test must be
        performed to measure the amount of the impairment loss, if any. If impairment
        is
        determined, we will recognize additional charges to operating expenses in
        the
        period in which they are identified, which would result in a reduction of
        operating results and a reduction in the amount of goodwill. Our most recent
        test for impairment was conducted as of September 30, 2005 in which the
        estimated fair values of the reporting unit exceeded its carrying amount,
        including goodwill. As such, no impairment was identified or
        recorded.
 
 *Accounting
        for Stock-Based Compensation*
 
 We
        account for our stock
        options issued to employees and outside directors pursuant to Accounting
        Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to
        Employees” and has adopted the disclosure requirements of SFAS No. 123,
“Accounting for Stock-Based Compensation”, and SFAS No. 148, “Accounting for
        Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
        Statement No. 123”. Although at times we have recognized compensation expense
        upon the modification of stock options, in the three years ended December
        31,
        2005, we have not recognized compensation expense upon the issuance of stock
        options.
 
 *Development
        Costs of Software*
 
 We
        expense as research and development costs for the development of new software
        to
        be sold, leased, or otherwise marketed as a separate product or as part of
        a
        product or process, and substantial enhancements to such existing software
        products, until technological feasibility has been established, at which
        time
        any additional development costs are capitalized until the product is available
        for general release to customers.  We expense all other research and
        development costs as incurred.
 
 We
        did
        not capitalize any software development costs during the three years ended
        December 31, 2005.  Included in the selling and administrative expense are
        research and development costs totaling approximately $770,000 for the year
        ended December 31, 2005.
 
 II-12
 *Significant
        New Accounting Pronouncements Not Yet Adopted*
 
 In
        December 2004, the FASB issued SFAS No. 123 (R), ‘‘Share-Based
        Payment,’’ which is a revision of SFAS No. 123 and supersedes Accounting
        Principles Board (“APB”) Opinion No. 25.
        SFAS No. 123 (R) requires all share-based payments to
        employees, including grants of employee stock options, to be valued at fair
        value on the date of grant, and to be expensed over the applicable vesting
        period. Pro forma disclosure of the income statement effects of share-based
        payments is no longer an alternative. SFAS No. 123 (R) is
        effective as of the beginning of the next fiscal year that begins after June
        15,
        2005. For the Company, SFAS 123 (R) is effective as of January 1, 2006. In
        addition, companies must also recognize compensation expense related to any
        awards that are not fully vested as of the effective date. Compensation expense
        for the unvested awards will be measured based on the fair value of the awards
        previously calculated in developing the pro forma disclosures in accordance
        with
        the provisions of SFAS No. 123. We expect that the adoption of SFAS No. 123
        (R) will result in increased compensation expense for stock options granted
        through December 31, 2005 of approximately $200,000 in 2006.
 
 In
        May
        2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
(“SFAS 154”), which replaces APB Opinion No. 20, “Accounting Changes” (“APB 20”)
        and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial
        Statements” (“SFAS 3”). APB 20 required that changes in accounting principles be
        recognized by including the cumulative effect of the change in the period
        in
        which the new accounting principle was adopted. SFAS 154 requires retrospective
        application of the change to prior periods’ financial statements, unless it is
        impracticable to determine the period-specific effects of the change. SFAS
        154
        also provides that a change in method of depreciating or amortizing a long-lived
        non-financial asset be accounted for as a change in estimate effected by
        a
        change in accounting principle, and also provides that correction of errors
        in
        previously issued financial statements should be termed a “restatement.” SFAS
        154 is effective as of the beginning of the next fiscal year that begins
        after
        December 15, 2005. For the Company, SFAS 154 is effective as of January 1,
        2006.
        We do not believe the adoption of this statement will have an impact on our
        consolidated financial statements.
 
 **Item
        7A. Quantitative and Qualitative Disclosures About Market
        Risk.**
 
 We
        are
        exposed to interest rate change market risk with respect to our credit line
        with
        a financial institution which is priced based on the bank’s alternate base rate
        (7.25% at December 31, 2005) plus 1⁄2% or LIBOR (4.4375% at December 31, 2005)
        plus 3%. We have not borrowed under this line in 2005. To the extent we utilize
        all or a portion of this line of credit, changes in the interest rate will
        have
        a positive or negative effect on our interest expense.
 
 We
        have
        operations in foreign countries. While we are exposed to foreign currency
        fluctuations, we presently have no financial instruments in foreign currency
        and
        do not maintain significant funds in foreign currency beyond those necessary
        for
        operations.
 
 II-13
  **Item
        8. Financial Statements.**
 
 **INNODATA
        ISOGEN, INC. AND SUBSIDIARIES**
 **INDEX
        TO FINANCIAL STATEMENTS**
 **PAGE**Report
                    of Independent Registered Public Accounting Firm
                II-15Consolidated
                    Balance Sheets as of December 31, 2005 and 2004
                II-16Consolidated
                    Statements of Operations for the three years ended December 31,
                    2005
                II-17Consolidated
                    Statement of Stockholders’ Equity for the three years ended December 31,
                    2005
                II-18Consolidated
                    Statements of Cash Flows for the three years ended December 31,
                    2005
                II-19Notes
                    to Consolidated Financial Statements
                II-20






II-14




**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 Board
        of
        Directors and Stockholders of
 Innodata
        Isogen, Inc.
 
 We
        have
        audited the accompanying consolidated balance sheets of Innodata
        Isogen, Inc. and subsidiaries as of December 31, 2005 and 2004, and
        the related consolidated statements of operations, stockholders’ equity and cash
        flows for each of the three years in the period ended December 31, 2005.
        These financial statements are the responsibility of the Company’s management.
        Our responsibility is to express an opinion on these financial statements
        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 that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. The
        Company is not required to have, nor were we engaged to perform an audit
        of its
        internal control over financial reporting. Our audits included consideration
        of
        internal control over financial reporting as a basis for designing audit
        procedures that are appropriate in the circumstances, but not for the purpose
        of
        expressing an opinion on the effectiveness of the Company’s internal control
        over financial reporting. Accord ingly
        we
        express no such opinion.  An
        audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the financial statements. An audit also includes assessing
        the
        accounting principles used and significant estimates made by management,
        as well
        as evaluating the overall financial statement presentation. We believe that
        our
        audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the consolidated financial position of Innodata
        Isogen, Inc. and subsidiaries as of December 31, 2005 and 2004, and
        the consolidated results of their operations and their consolidated cash
        flows
        for each of the three years in the period ended December 31, 2005 in
        conformity with accounting principles generally accepted in the United States
        of
        America.
  Our
          audit
          was conducted for the purpose of forming an opinion on the basic financial
          statements taken as a whole. The Schedule II – *Valuation and Qualifying
          Accounts* is presented for purposes of additional analysis and is not a
          required part of the basic financial statements. This schedule has been
          subjected to the auditing procedures applied in the audit of the basic
          financial
          statements and, in our opinion, is fairly stated in all material respects
          in
          relation to the basic financial statements taken as a whole.
 
 Grant
                  Thornton LLPEdison,
                New Jersey
                March
                  17, 2006 (except for Note 13 as to which
                is
                  dated March 28, 2006)
  II-15
 **INNODATA
        ISOGEN, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 **DECEMBER
        31, 2005 AND 2004**
 **(Dollars
        in Thousands)**
 **2005**
                
                
                **2004****ASSETS****CURRENT
                    ASSETS:**Cash
                    and cash equivalents
                
                $
                20,059
                
                $
                20,663Accounts
                    receivable-net of allowance for doubtful accounts of $111 and
                    $135 at
                    December 31, 2005 and 2004 respectively
                
                
                7,169
                
                
                8,019Prepaid
                    expenses and other current assets
                
                
                1,543
                
                
                1,757Refundable
                    income taxes
                
                
                1,215
                
                
                -Deferred
                    income taxes
                
                
                338
                
                
                645**Total
                    current assets**
                
                
                30,324
                
                
                31,084**PROPERTY
                    AND EQUIPMENT-NET**
                
                
                4,823
                
                
                4,559**OTHER
                    ASSETS**
                
                
                1,789
                
                
                893**GOODWILL**
                
                
                675
                
                
                675**TOTAL**
                
                $
                37,611
                
                $
                37,211**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY****CURRENT
                    LIABILITIES**:Accounts
                    payable
                
                $
                1,529
                
                $
                1,449Accrued
                    expenses
                
                
                1,770
                
                
                1,963Accrued
                    salaries, wages and related benefits
                
                
                3,567
                
                
                3,979Income
                    and other taxes
                
                
                1,363
                
                
                1,304Current
                    portion of long term obligations
                
                
                663
                
                
                180**Total
                    current liabilities**
                
                
                8,892
                
                
                8,875**DEFERRED
                    INCOME TAXES**
                
                
                1,357
                
                
                1,449**LONG
                    TERM OBLIGATIONS**
                
                
                548
                
                
                150**COMMITMENTS
                    AND CONTINGENT LIABILITIES****STOCKHOLDERS’
                    EQUITY**:Serial
                    preferred stock; 5,000,000 shares authorized, none
                    outstanding
                
                
                -
                
                
                -Common
                    stock, $.01 par value; 75,000,000 shares authorized; 23,669,000
                    and
                    22,679,000 shares issued and outstanding as of December 31, 2005
                    and 2004,
                    respectively
                
                
                237
                
                
                227Additional
                    paid-in capital
                
                
                16,632
                
                
                14,914Retained
                    earnings
                
                
                9,945
                
                
                11,596**Total
                    stockholders’ equity**
                
                
                26,814
                
                
                26,737**TOTAL**
                
                $
                37,611
                
                $
                37,211
 
 See
          notes
          to consolidated financial statements
  II-16


**INNODATA
      ISOGEN, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**YEARS
      ENDED DECEMBER 31, 2005, 2004 AND 2003**


**(In
      thousands, except per share amounts)**





**2005**
            
            
            **2004**
            
            
            **2003****REVENUES**
            
            $
            42,052
            
            $
            53,949
            
            $
            36,714**OPERATING
                COSTS AND EXPENSES**Direct
                operating costs
            
            
            30,920
            
            
            33,050
            
            
            27,029Selling
                and administrative expenses
            
            
            13,684
            
            
            10,205
            
            
            8,898Terminated
                offering costs
            
            
            -
            
            
            625
            
            
            -Bad
                debt recovery - net
            
            
            -
            
            
            (963
            )
            
            -Interest
                expense
            
            
            18
            
            
            25
            
            
            9Interest
                income
            
            
            (457
            )
            
            (87
            )
            
            (30
            )**Total**
            
            
            44,165
            
            
            42,855
            
            
            35,906**(LOSS)
                INCOME BEFORE (BENEFIT FROM) PROVISION FOR INCOME
                TAXES**
            
            
            (2,113
            )
            
            11,094
            
            
            808**(BENEFIT
                FROM) PROVISION FOR INCOME TAXES**
            
            
            (462
            )
            
            3,237
            
            
            333**NET
                (LOSS) INCOME**
            
            $
            (1,651
            )
            $
            7,857
            
            $
            475**INCOME
                PER SHARE:**Basic:
            
            $
            (.07
            )
            $
            .35
            
            $
            .02Diluted:
            
            $
            (.07
            )
            $
            .32
            
            $
            .02**WEIGHTED
                AVERAGE SHARES OUTSTANDING:**Basic:
            
            
            23,009
            
            
            22,288
            
            
            21,570Diluted:
            
            
            23,009
            
            
            24,817
            
            
            22,966





See
      notes
      to consolidated financial statements




II-17




**INNODATA
        ISOGEN, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENT OF STOCKHOLDERS’ EQUITY**
 **YEARS
        ENDED DECEMBER 31, 2005, 2004 AND 2003**
 **(In
        thousands)**
 
 **Additional****Common
                  Stock**
              
              
              **Paid-in**
              
              
              **Retained**
              
              
              **Treasury****Shares**
              
              
              **Amount**
              
              
              **Capital**
              
              
              **Earnings**
              
              
              **Stock**
              
              
              **Total****January
                  1, 2003**
              
              
              22,046
              
              $
              220
              
              $
              14,084
              
              $
              3,264
              
              $
              (1,999
              )
              $
              15,569Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              475
              
              
              -
              
              
              475Issuance
                  of common stock upon exercise of stock options
              
              
              515
              
              
              6
              
              
              565
              
              
              -
              
              
              -
              
              
              571Retirement
                  of treasury stock
              
              
              (
                  26
              )
              
              -
              
              
              (25
              )
              
              -
              
              
              25
              
              
              -Income
                  tax benefit from exercise of stock options
              
              
              -
              
              
              -
              
              
              132
              
              
              -
              
              
              -
              
              
              132Non-cash
                  equity compensation
              
              
              -
              
              
              -
              
              
              657
              
              
              -
              
              
              -
              
              
              657**December
                  31, 2003**
              
              
              22,535
              
              
              226
              
              
              15,413
              
              
              3,739
              
              
              (1,974
              )
              
              17,404Netincome
              
              
              -
              
              
              -
              
              
              -
              
              
              7,857
              
              
              -
              
              
              7,857Issuance
                  of common stock upon exercise of stock options
              
              
              728
              
              
              7
              
              
              1,075
              
              
              -
              
              
              -
              
              
              1,082Retirement
                  of treasury stock
              
              
              (584
              )
              
              (6
              )
              
              (1,968
              )
              
              -
              
              
              1,974
              
              
              -Income
                  tax benefit from exercise of stock options
              
              
              -
              
              
              -
              
              
              358
              
              
              -
              
              
              -
              
              
              358Non-cash
                  equity compensation
              
              
              -
              
              
              -
              
              
              36
              
              
              -
              
              
              -
              
              
              36**December
                  31, 2004**
              
              
              22,679
              
              
              227
              
              
              14,914
              
              
              11,596
              
              
              -0-
              
              
              26,737Netloss
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,651
              )
              
              -
              
              
              (1,651
              )Issuance
                  of common stock upon exercise of stock options
              
              
              990
              
              
              10
              
              
              1,287
              
              
              -
              
              
              -
              
              
              1,297Income
                  tax benefit from exercise of stock options
              
              
              -
              
              
              -
              
              
              334
              
              
              -
              
              
              -
              
              
              334Non-cash
                  equity compensation
              
              
              -
              
              
              -
              
              
              97
              
              
              -
              
              
              -
              
              
              97**December
                  31, 2005**
              
              
              23,669
              
              $
              237
              
              $
              16,632
              
              $
              9,945
              
              $
              -0-
              
              $
              26,814




See
        notes
        to consolidated financial statements
  II-18




**INNODATA
        ISOGEN INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **YEARS
        ENDED DECEMBER 31, 2005, 2004 AND 2003**
 **(In
        thousands)**
 
 **2005**
              
              
              **2004**
              
              
              **2003****OPERATING
                  ACTIVITIES:**Net
                  (loss) income
              
              $
              (1,651
              )
              $
              7,857
              
              $
              475Adjustments
                  to reconcile net income (loss) to net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              3,160
              
              
              3,924
              
              
              4,528Non-cash
                  compensation
              
              
              97
              
              
              36
              
              
              657Loss
                  on disposal of fixed assets
              
              
              -
              
              
              -
              
              
              147Deferred
                  income taxes
              
              
              215
              
              
              815
              
              
              (2
              )Changes
                  in operating assets and liabilities, net of acquisition:Accounts
                  receivable
              
              
              850
              
              
              478
              
              
              (5,244
              )Prepaid
                  expenses and other current assets
              
              
              167
              
              
              (1,495
              )
              
              (947
              )Refundable
                  income taxes
              
              
              (1,215
              )
              
              1,075
              
              
              416Other
                  assets
              
              
              (355
              )
              
              (160
              )
              
              242Accounts
                  payable
              
              
              80
              
              
              150
              
              
              652Accrued
                  expenses
              
              
              (193
              )
              
              811
              
              
              (856
              )Accrued
                  salaries and wages
              
              
              (412
              )
              
              1,114
              
              
              339Income
                  and other taxes
              
              
              393
              
              
              1,064
              
              
              275Net
                  cash provided by operating activities
              
              
              1,136
              
              
              15,669
              
              
              682**INVESTING
                  ACTIVITIES:**Decrease
                  (increase) in restricted cash
              
              
              -
              
              
              1,000
              
              
              (1,000
              )Capital
                  expenditures
              
              
              (2,335
              )
              
              (2,051
              )
              
              (2,408
              )Net
                  cash used in investing activities
              
              
              (2,335
              )
              
              (1,051
              )
              
              (3,408
              )**FINANCING
                  ACTIVITIES:**Payment
                  of long-term obligations
              
              
              (702
              )
              
              (88
              )
              
              (49
              )Proceeds
                  from exercise of stock options
              
              
              1,297
              
              
              1,082
              
              
              571Net
                  cash provided by financing activities
              
              
              595
              
              
              994
              
              
              522**INCREASE
                  (DECREASE) IN CASH AND CASH EQUIVALENTS**
              
              
              (604
              )
              
              15,612
              
              
              (2,204
              )**CASH
                  AND CASH EQUIVALENTS, BEGINNING OF YEAR**
              
              
              20,663
              
              
              5,051
              
              
              7,255**CASH
                  AND CASH EQUIVALENTS, END OF YEAR**
              
              $
              20,059
              
              $
              20,663
              
              $
              5,051**SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION**Cash
                  paid during the year for:Income
                  taxes
              
              $
              504
              
              $
              1,237
              
              $
              417Interest
                  expense
              
              $
              18
              
              $
              25
              
              $
              23**NON-CASH
                  INVESTING AND FINANCING ACTIVITIES:**Acquisition
                  of equipment utilizing capital leases
              
              $
              -
              
              $
              66
              
              $
              467Vendor
                  financed software licenses acquired
              
              $
              1,583
              
              $
              -
              
              $
              -
 
 See
        notes
        to consolidated financial statements
  II-19




**INNODATA
        ISOGEN, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **YEARS
        ENDED DECEMBER 31, 2005, 2004 AND 2003**
 
 **1.**
              **DESCRIPTION
                  OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
                  POLICIES**
 
 **Description
        of Business-** Innodata
        Isogen, Inc. and subsidiaries (the “Company”), is a leading provider of
        business services that help organizations create, manage, use and distribute
        information more effectively and economically. The Company provides outsourced
        content services and content-related information technology (IT) professional
        services. The Company’s outsourced content services focus on fabrication
        services and knowledge services. Fabrication services include digitization
        and
        data conversion services, content creation and XML services. Knowledge services
        include content enhancement, hyperlinking, indexing and general editorial
        services. The Company’s IT professional services focus on the design,
        implementation, integration and deployment of systems used to author, manage
        and
        distribute content.
 
 **Principles
        of Consolidation** -The
        consolidated financial statements include the accounts of Innodata Isogen,
        Inc.
        and its subsidiaries, all of which are wholly owned. All significant
        intercompany transactions and balances have been eliminated in consolidation.
 
 **Use
        of Estimates** -In
        preparing financial statements in conformity with accounting principles
        generally accepted in the United States of America, management is required
        to
        make estimates and assumptions that affect the reported amounts of assets
        and
        liabilities, and the disclosure of contingent assets and liabilities at the
        date
        of the financial statements, and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those estimates.
 
 **Revenue
        Recognition** -Revenue
        for content manufacturing and outsourcing services is recognized in the period
        in which services are performed and delivery has occurred in accordance with
        Staff Accounting Bulletin 104.
 
 The
        Company recognizes its IT professional services revenues from custom application
        and systems integration development which requires significant production,
        modification or customization of software in accordance with Statement of
        Position (“SOP”) No. 97-2 *“Software
        Revenue Recognition”* and in a
        manner similar to SOP No. 81-1 *“Accounting
        for Performance of Construction-Type and Certain Production-Type
        Contracts”.* Revenue
        from such services billed under fixed fee arrangements is recognized using
        the
        percentage-of-completion method under contract accounting as services are
        performed or output milestones are reached. The percentage completed is measured
        either by the percentage of labor hours incurred to date in relation to
        estimated total labor hours or in consideration of achievement of certain
        output
        milestones, depending on the specific nature of each contract. For arrangements
        in which percentage-of completion accounting is used, the Company records
        cash
        receipts from customers and billed amounts due from customers in excess of
        recognized revenue as billings in excess of revenues earned on contracts
        in
        progress (which is included in accounts receivable). Revenues from fixed-fee
        projects accounted for less than 10% of our total revenue for each of the
        three
        years ended December 31, 2005, 2004 and 2003. Revenue billed on a time and
        materials basis is recognized as services are performed.
 
 **Foreign
        Currency** -The
        functional currency for the Company’s production operations located in the
        Philippines, India and Sri Lanka is U.S. dollars. As such, transactions
        denominated in Philippine pesos, Indian and Sri Lanka rupees were translated
        to
        U.S. dollars at rates which approximate those in effect on transaction dates.
        Monetary assets and liabilities denominated in foreign currencies at
        December 31, 2005 and 2004 were translated at the exchange rate in effect
        as of those dates. Exchange gains and losses resulting from such transactions
        were not material in 2005, 2004 and 2003.
 
 **Cash
        Equivalents-** For
        financial statement purposes (including cash flows), the Company considers
        all
        highly liquid debt instruments purchased with an original maturity of three
        months or less to be cash equivalents.
 
 II-20
 
 **Property
        and Equipment-** Property
        and equipment is stated at cost and is depreciated on the straight-line method
        over the estimated useful lives of the related assets, which is generally
        two to
        five years. Leasehold improvements are amortized on a straight-line basis
        over
        the shorter of their estimated useful lives or the lives of the
        leases.
 
 **Long-lived
        Assets** -The
        Company accounts for long lived assets under Statement of Financial Accounting
        Standards (“SFAS”) 144, Accounting for the Impairment or Disposal of Long Lived
        Assets. Management assesses the recoverability of its long-lived assets,
        which
        consist primarily of fixed assets and intangible assets with finite useful
        lives, whenever events or changes in circumstance indicate that the carrying
        value may not be recoverable. The following factors, if present, may trigger
        an
        impairment  review:  (i)  significant 
underperformance  relative  to  expected historical 
or  projected  future  operating  results; (ii) significant
        negative industry  or  economic  trends; (iii) significant
        decline in the Company’s stock price  for  a  sustained 
period;  and  (iv)  a  change  in the Company’s market
        capitalization relative to net book value. If the recoverability of these
        assets
        is unlikely because of the  existence  of one or more of the
        above-mentioned factors,  an  impairment analysis is performed using a
        projected discounted cash flow  method.  Management must make
        assumptions regarding estimated future cash flows and other factors to determine
        the fair value of these respective assets. If these estimates or related
        assumptions change in the future, the Company may be required to record an
        impairment charge. Impairment charges would be included in  general 
and  administrative  expenses  in  the  Company’s 
statements  of operations,  and  would result in reduced carrying
        amounts of the related assets on  the  Company’s  balance 
sheets. No impairment was identified or recorded in the three years ended
        December 31, 2005.
 
 **Goodwill
        and Other Intangible Assets-** Goodwill
        primarily includes the excess purchase price paid over the fair value of
        net
        assets acquired. Effective July 1, 2002, the Company adopted SFAS No. 142,
        “Goodwill and Other Intangible Assets.” Under SFAS 142, the Company tests its
        goodwill on an annual basis using a two-step fair value based test. The first
        step of the goodwill impairment test, used to identify potential impairment,
        compares the fair value of a reporting unit, with its carrying amount, including
        goodwill. If the carrying amount of the reporting unit exceeds its fair value,
        the second step of the goodwill impairment test must be performed to measure
        the
        amount of the impairment loss, if any. If impairment is determined, the Company
        will recognize additional charges to operating expenses in the period in
        which
        they are identified, which would result in a reduction of operating results
        and
        a reduction in the amount of goodwill. In the annual impairment test conducted
        by the Company on September 30, 2005, the estimated fair values of the reporting
        unit exceeded its carrying amount, including goodwill. As such, no impairment
        was identified or recorded.
 
 **Income
        Taxes** -Deferred
        taxes are determined based on the difference between the financial statement
        and
        tax bases of assets and liabilities, using enacted tax rates, as well as
        any net
        operating loss or tax credit carryforwards expected to reduce taxes payable
        in
        future years. A valuation allowance is provided when it is more likely than
        not
        that some or all of a deferred tax asset will not be realized. Unremitted
        earnings of foreign subsidiaries for the three years ended December 31, 2005,
        have been included in the consolidated financial statements without giving
        effect to the United States taxes that may be payable on distribution to
        the
        United States to the extent such earnings are not anticipated to be remitted
        to
        the United States.
 
 **Accounting
        for Stock-Based Compensation** - The
        Company accounts for its stock options issued to employees and outside directors
        pursuant to Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for
        Stock Issued to Employees” and has adopted the disclosure requirements of SFAS
        No. 123, “Accounting for Stock-Based Compensation”, and SFAS No. 148,
“Accounting for Stock-Based Compensation - Transition and Disclosure - an
        Amendment of FASB Statement No. 123”. Although at times compensation expense has
        been recognized upon the modification of stock options, in the three years
        ended
        December 31, 2005, no compensation expense has been recognized upon
        the issuance of stock options.
 
 The
        following table illustrates the effect on net income (loss) and earnings
        (loss)
        per share if the Company had applied the fair value recognition provisions
        of
        SFAS No. 123 to stock-based employee compensation using the assumptions
        described in note 8, stock options.
  II-21
  **Year
                    Ended December 31,****2005**
                
                
                **2004**
                
                
                **2003****(in
                    thousands, except per share amounts****)**Net
                    (loss) income, as reported
                
                $
                (1,651
                )
                $
                7,857
                
                $
                475Deduct:
                    Total stock-based employee compensation determined under fair
                    value based
                    method, net of related tax effects
                
                
                (6,731
                )
                
                (3,200
                )
                
                (3,193
                )Add:
                    Compensation expense included in the determination of net (loss)
                    income as
                    reported, net of related tax effects, related to the extension
                    of stock
                    options
                
                
                79
                
                
                -
                
                
                455Pro
                    forma net (loss) income
                
                $
                (8,303
                )
                $
                4,657
                
                $
                (2,263
                )(Loss)
                    income per share:Basic-as
                    reported
                
                $
                (.07
                )
                $
                .35
                
                $
                .02Basic-pro
                    forma
                
                $
                (.36
                )
                $
                .21
                
                $
                (.10
                )Diluted-as
                    reported
                
                $
                (.07
                )
                $
                .32
                
                $
                .02Diluted-pro
                    forma
                
                $
                (.36
                )
                $
                .19
                
                $
                (.10
                )
  **Fair
        Value of Financial Instruments** - The
        carrying amounts of financial instruments, including cash and cash equivalents,
        accounts receivable and accounts payable approximated fair value as of December
        31, 2005 and 2004 because of the relative short maturity of these instruments.
        The carrying amounts of long term obligations approximated their fair value
        as
        of December 31, 2005 and 2004 based upon rates currently available to the
        Company.
 
 **Accounts
        Receivable** -The
        majority of the Company’s accounts receivable are due from secondary publishers
        and information providers. The Company establishes credit terms for new clients
        based upon management’s review of their credit information and project terms,
        and performs ongoing credit evaluations of its customers, adjusting credit
        terms
        when management believes appropriate based upon payment history and an
        assessment of their current credit worthiness. The Company records an allowance
        for doubtful accounts for estimated losses resulting from the inability of
        its
        clients to make required payments. The Company determines its allowance by
        considering a number of factors, including the length of time trade accounts
        receivable are past due (accounts outstanding longer than the payment terms
        are
        considered past due), the Company’s previous loss history, the client’s current
        ability to pay its obligation to the Company, and the condition of the general
        economy and the industry as a whole. While credit losses have generally been
        within expectations and the provisions established, the Company cannot guarantee
        that credit loss rates in the future will be consistent with those experienced
        in the past. In addition, there is credit exposure if the financial condition
        of
        one of the Company’s major clients were to deteriorate. In the event that the
        financial condition of the Company’s clients were to deteriorate, resulting in
        an impairment of their ability to make payments, additional allowances may
        be
        necessary.
 
 **Concentration
        of Credit Risk** -The
        Company maintains its cash with high quality financial i nstitutions,
        located primarily in the United States. To the extent that such cash exceeds
        the
        maximum insurance levels, the Company is uninsured. The Company has not
        experienced any losses in such accounts.
 
 **Income
        (Loss) Per Share** - Basic
        earnings (loss) per share is computed by dividing income (loss) available
        to
        common shareholders by the weighted-average number of common shares outstanding
        during the period. Diluted earnings (loss) per share is computed by dividing
        income (loss) available to common shareholders by the weighted-average number
        of
        common shares outstanding during the period increased to include the number
        of
        additional common shares that would have been outstanding if the dilutive
        potential common shares had been issued. The dilutive effect of the outstanding
        options is reflected in diluted earnings (loss) per share by application
        of the
        treasury stock method. Diluted net loss per share for 2005 does not include
        potential common shares derived from stock options because as a result of
        the
        Company incurring losses, their effect would have been
        antidilutive.
 
 II-22
 **Development
        Costs for Software-** C osts
        for
        the development of new software to be sold, leased, or otherwise marketed
        as a
        separate product or as part of a product or process, and substantial
        enhancements to such existing software products, are expensed as research
        and
        development costs as incurred until technological feasibility has been
        established, at which time any additional development costs are capitalized
        until the product is available for general release to customers.  All other
        research and development costs are expensed as incurred.
 
 No
        software development costs were capitalized during the three years ended
        December 31, 2005.  Included in the selling and administrative expense are
        research and development costs totaling approximately $770,000 for the year
        ended December 31, 2005.
 
 **New
        Accounting Pronouncements:**
 
 In
        December 2004, the FASB issued SFAS No. 123 (R), ‘‘Share-Based
        Payment’’, which is a revision of SFAS No. 123 and supersedes Accounting
        Principles Board (“APB”) Opinion No. 25. SFAS
        No. 123 (R) requires all share-based payments to employees,
        including grants of employee stock options, to be valued at fair value on
        the
        date of grant, and to be expensed over the applicable vesting period. Pro
        forma
        disclosure of the income statement effects of share-based payments is no
        longer
        an alternative. SFAS No. 123 (R) is effective as of the beginning of the
        next
        fiscal year that begins after June 15, 2005. For the Company, SFAS 123 (R)
        is
        effective as of January 1, 2006. In addition, companies must also recognize
        compensation expense related to any awards that are not fully vested as of
        the
        effective date. Compensation expense for the unvested awards will be measured
        based on the fair value of the awards previously calculated in developing
        the
        pro forma disclosures in accordance with the provisions of SFAS No. 123.
        The Company expects its adoption of SFAS No. 123 (R) will result in increased
        compensation expense for stock options granted through December 31, 2005
        of
        approximately $200,000 in 2006.
 
 In
        May
        2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
(“SFAS 154”), which replaces APB Opinion No. 20, “Accounting Changes” (“APB 20”)
        and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial
        Statements” (“SFAS 3”). APB 20 required that changes in accounting principles be
        recognized by including the cumulative effect of the change in the period
        in
        which the new accounting principle was adopted. SFAS 154 requires retrospective
        application of the change to prior periods’ financial statements, unless it is
        impracticable to determine the period-specific effects of the change. SFAS
        154
        also provides that a change in method of depreciating or amortizing a long-lived
        non-financial asset be accounted for as a change in estimate effected by
        a
        change in accounting principle, and also provides that correction of errors
        in
        previously issued financial statements should be termed a “restatement.” SFAS
        154 is effective as of the beginning of the next fiscal year that begins
        after
        December 15, 2005. For the Company, SFAS 154 is effective as of January 1,
        2006.
        The Company does not believe the adoption of this statement will have an
        impact
        on its consolidated financial statements.
  II-23
  **2.**
              **PROPERTY AND
                EQUIPMENT**
  Property
        and equipment, stated at cost less accumulated depreciation and amortization
        (in
        thousands), consist of the following:
 
 **December
                  31,****2005**
              
              
              **2004**Equipment
              
              $
              14,350
              
              $
              13,011Software
              
              
              2,856
              
              
              2,193Furniture
                  and office equipment
              
              
              1,070
              
              
              977Leasehold
                  improvements
              
              
              2,573
              
              
              2,433Total
              
              
              20,849
              
              
              18,614Less
                  accumulated depreciation and amortization
              
              
              16,026
              
              
              14,055$
              4,823
              
              $
              4,559
  Depreciation
        expense was approximately $2,561,000, $3,120,000 and $3,807,000 for each
        of the
        three years ended December 31, 2005, respectively.
 
 In
        2003,
        the Company entered into a three year lease for certain equipment located
        in one
        of its Philippine facilities. The equipment was capitalized at its fair market
        value of approximately $641,000, which represented the present value of the
        minimum lease payments plus trade-in value of exchanged equipment of $175,000.
        The loss on such trade-in approximated $58,000. In 2004, the Company entered
        into another three year lease agreement for certain equipment located in
        one of
        its India facilities. The equipment was capitalized at its fair market value
        of
        approximately $66,000 which represented the present value of the minimum
        lease
        payments.
 
 At
        December 31, 2005 and 2004, equipment under capital leases had a net book
        value
        of approximately $209,000 and $435,000 respectively.
 
 **3.**
              **INCOME
                  TAXES**
 
 The
        significant components of the provision for (benefit from) income taxes for
        each
        of the three years ended December 31, 2005, 2004 and 2003 (in
        thousands) are as follows:
 
 **2005**
              
              
              **2004**
              
              
              **2003**Current
                  income tax expense (benefit):Foreign
              
              $
              144
              
              $
              174
              
              $
              29Federal
              
              
              (821
              )
              
              1,943
              
              
              230State
                  and local
              
              
              -
              
              
              305
              
              
              76(677
              )
              
              2,422
              
              
              335Deferred
                  income tax expense (benefit) provision
              
              
              215
              
              
              815
              
              
              (2
              )(Benefit
                  from) provision for income taxes
              
              $
              (462
              )
              $
              3,237
              
              $
              333
  II-24
 The
        reconciliation of the U.S. statutory rate with the Company’s effective tax rate
        for each of the three years ended December 31, 2005 is summarized as
        follows:
 
 **2005**
              
              
              **2004**
              
              
              **2003**Federal
                  statutory rate
              
              
              (34.0
              )%
              
              35.0
              %
              
              35.0
              %Effect
                  of:State
                  income taxes (net of federal tax benefit)
              
              
              3.9
              
              
              2.5
              
              
              5.9Foreign
                  source losses for which no tax benefit is available
              
              
              2.2
              
              
              1.5
              
              
              7.3Foreign
                  entities subject to US federal income taxes
              
              
              -
              
              
              4.3
              
              
              -Effect
                  of foreign tax holiday
              
              
              (25.9
              )
              
              (12.3
              )
              
              (24.0
              )Taxes
                  on foreign income at rates that differ from USstatutory
                  rate
              
              
              (5.7
              )
              
              (1.4
              )
              
              7.6Valuation
                  allowance on deferred tax assets
              
              
              33.4
              
              
              -
              
              
              -Non
                  deductible compensation
              
              
              -
              
              
              -
              
              
              5.9Other
              
              
              4.2
              
              
              (0.4
              )
              
              3.5Effective
                  rate
              
              
              (21.9
              )%
              
              29.2
              %
              
              41.2
              %
 
 During
        each of the three years ended December 31, 2005, 2004 and 2003 tax benefits
        related to stock option exercises were $334,000, $358,000 and $132,000,
        respectively. Such benefits were recorded as a reduction of income taxes
        payable
        and an increase in additional paid-in capital.
 
 Deferred
        tax assets and liabilities are classified as current or non-current according
        to
        the classification of the related asset or liability. Significant components
        of
        the Company’s deferred tax assets and liabilities as of December 31, 2005 and
        2004 are as follows (in thousands):
 
 **2005**
              
              
              **2004**Deferred
                  income tax assets:Allowances
                  not currently deductible
              
              $
              285
              
              $
              230Depreciation
                  and amortization
              
              
              155
              
              
              32Equity
                  compensation not currently deductible
              
              
              382
              
              
              375Net
                  operating loss carryforward
              
              
              1,006
              
              
              -Expenses
                  not deductible until paid
              
              
              261
              
              
              536Total
                  gross deferred income tax assets before valuation
                  allowance
              
              
              2,089
              
              
              1,173Valuation
                  allowance
              
              
              (1,127
              )
              
              (105
              )Net
                  deferred income tax assets
              
              
              962
              
              
              1,068Deferred
                  income tax liabilities:Foreign
                  source income, not taxable until repatriated
              
              
              (1,981
              )
              
              (1,872
              )Total
                  deferred income tax liabilities
              
              
              (1,981
              )
              
              (1,872
              )Net
                  deferred (liability) asset
              
              $
              (1,019
              )
              $
              (804
              )Net
                  deferred income tax asset-current
              
              
              338
              
              
              645Net
                  deferred income tax liability-non-current
              
              
              (1,357
              )
              
              (1,449
              )Net
                  deferred income tax (liability) asset
              
              $
              (1,019
              )
              $
              (804
              )
  II-25
 In
        assessing the realization of deferred tax assets, management considers whether
        it is more likely than not that all or some portion of the deferred tax assets
        will not be realized. The ultimate realization of the deferred tax assets
        is
        dependent upon the generation of future taxable income during the periods
        in
        which temporary differences are deductible and net operating losses are
        utilized. Based on a consideration of these factors, the Company has established
        a valuation allowance of approximately $1,127,000 and $105,000 at
        December 31, 2005 and 2004, respectively.
 
 United
        States and foreign components of (loss) income before income taxes for each
        of
        the three years ended December 31, 2005, 2004 and 2003 (in thousands) are
        as follows:
 
 **2005**
              
              
              **2004**
              
              
              **2003**United
                  States
              
              $
              (4,019
              )
              $
              6,731
              
              $
              565Foreign
              
              
              1,906
              
              
              4,363
              
              
              243Total
              
              $
              (2,113
              )
              $
              11,094
              
              $
              808
 
 Certain
        of the Company’s foreign subsidiaries are subject to tax holidays for various
        periods ranging from 2005 to 2014, pursuant to which the income tax rate
        for
        these subsidiaries is substantially reduced. Unless renewed, as the tax holidays
        expire, the Company’s overall effective tax rate will be negatively impacted.
        The tax benefit for tax holidays was approximately $500,000, $800,000 and
        $300,000 for each of the three years ended December 31, 2005, 2004 and
        2003, respectively.
 
 The
        Company has U.S. Federal net operating loss carryforwards available of
        approximately $3 million which will expire in 2025.
 
 In
        August
        2004, the Internal Revenue Service (“IRS”) promulgated regulations, effective
        August 12, 2004, that treated certain of the Company’s subsidiaries that are
        incorporated in foreign jurisdictions and also domesticated as Delaware limited
        liability companies as U.S. corporations for U.S. federal income tax purposes.
        In the preamble to such regulations, the IRS expressed its view that dual
        registered companies described in the preceding sentence are also treated
        as
        U.S. corporations for U.S. federal income tax purposes for periods prior
        to
        August 12, 2004. On January 30, 2006, the IRS issued its final regulations,
        stating that neither the temporary regulations nor these final regulations
        are
        retroactive. The earliest date that any entity is subject to these regulations
        is August 12, 2004. For periods prior to the date these final regulations
        apply
        (i.e., prior to August 12, 2004), the classification of dually chartered
        entities is governed by the pre-existing regulations. The Company believes
        that
        its historic treatment of 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 would vigorously defend its treatment if challenged. As such, the Company
        has made no provision for U.S. taxes in its financial statements for these
        entities for the periods prior to August 12, 2004. Furthermore, the Company
        cannot be assured that the IRS will not assert other positions with respect
        to
        the foregoing matters that, if successful, could increase materially the
        Company’s liability for U.S. federal income taxes. In December 2004, the Company
        effected certain filings in Delaware to ensure that these subsidiaries will
        not
        be treated as U.S. corporations for U.S. federal income tax purposes as of
        the
        date of filing and as such, were not subject to U.S. federal income taxes
        commencing January 1, 2005.
 
 **4.**
              **LONG
                  TERM OBLIGATIONS**
 
 In
        2005,
        the Company entered into an agreement with a vendor to acquire certain
        additional software licenses and to receive support and subsequent software
        upgrades on this and other currently owned software licenses through February
        2008. Pursuant to the agreement, the Company paid $528,000 as of
        December 31, 2005, and will make eight payments of approximately
        $132,000 per quarter thereafter, commencing in March 2006.
  II-26
 
  The total cost (in thousands) was allocated to the
          following
          asset accounts:
 Other
                  current assets
              
              $
              487Other
                  assets (long-term)
              
              
              608Property
                  and equipment
              
              
              488Total
              
              $
              1,583
 
 The
        current portion of the obligation totaling approximately $528,000 is included
        on
        the balance sheet under current portion of long term obligations. The remaining
        long-term portion is reflected as a long-term obligation. Also included in
        long-term obligations are long-term capital lease obligations totaling
        $20,000.
 
 Long
        term
        obligations (including capital lease obligations totaling $155,000) are payable
        as follows (amounts in thousands):
 
 2006
                  (current portion)
              
              $
              6632007
                  (long term portion)
              
              
              548$
              1,211
 
 The
        total
        obligation and associated cost totaling $1,583,000 is considered a 2005 non-cash
        investing and financing activity.
 
 **5.**
              **COMMITMENTS
                  AND CONTINGENT LIABILITIES**
 
 **Line
        of Credit** -The
        Company has a $5 million line of credit pursuant to which it may borrow up
        to 80% of eligible accounts receivable at the bank’s alternate base rate plus 1⁄2%
        or LIBOR plus 3%. The line, which expires in May 2006, is secured by the
        Company’s accounts receivable. The Company did not borrow against its credit
        line in 2005.
 
 **Leases** -The
        Company is obligated under various operating lease agreements for office
        and
        production space. Certain agreements contain escalation clauses and requirements
        that the Company pay taxes, insurance and maintenance costs. Company leases
        that
        include escalated lease payments are straight-lined over the non-cancelable
        base
        lease period in accordance with SFAS 13.
 
 Lease
        agreements for production space in most overseas facilities, which expire
        through 2030, contain provisions pursuant to which the Company may cancel
        the
        leases with a minimal notice period, generally subject to forfeiture of security
        deposit. The annual rental for the cancelable leased space in 2005 is
        approximately $1,390,000. For the years ended December 31, 2005, 2004 and
        2003, rent expense, principally for office and production space, totaled
        approximately $1,956,000, $1,725,000 and $1,700,000, respectively.
 
 In
        addition, the Company leases certain equipment under short-term capital and
        operating lease agreements. For each of the three years ended December 31,
        2005, rent expense for equipment totaled approximately $71,000, $47,000 and
        $36,000, respectively.
  II-27
 At
        December 31, 2005, future minimum annual rental commitments on
        non-cancelable leases (excluding operating leases with terms less than one
        year)
        (in thousands) are as follows:
 
 **Operating
                  leases**2006
              
              $
              6792007
              
              
              6422008
              
              
              4582009
              
              
              4582010
              
              
              1382011
              
              
              12$
              2,387
 
 In
        connection with the relocation of the Company’s Dallas office, the lessor agreed
        to pay approximately $250,000 as incentive to terminate the lease prior to
        its
        contractual expiration date. In connection with this transaction, the Company
        will recognize income of approximately $250,000 in the first quarter of
        2006.
 
 **Litigation** -In
        connection with the cessation of all operations at certain foreign subsidiaries,
        certain former employees have filed various actions against certain of the
        Company’s Philippine subsidiaries, and have purported to also sue the Company
        and certain of its officers and directors, seeking to require reinstatement
        of
        employment and to recover back wages for an allegedly illegal facility closing
        on June 7, 2002 based on the terms of a collective bargaining agreement with
        this subsidiary. If the complainants’ claims have merit, they could be entitled
        to back wages of up to $5.0 million for the period from June 7, 2002 to June
        6,
        2005, consistent with prevailing jurisprudence. Based upon consultation with
        legal counsel, management believes the claims are without merit and is defending
        against them vigorously.
 
 In
        addition, the Company is subject to various legal proceedings, tax audits
        and
        claims which arise in the ordinary course of business.
 
 While
        management currently believes that the ultimate outcome of all these proceedings
        will not have a material adverse effect on the Company’s financial position or
        overall trends in results of operations, litigation is subject to inherent
        uncertainties. Were an unfavorable ruling to occur, there exists the possibility
        of a material adverse impact on the operating results of the period in which
        the
        ruling occurs. In addition, the estimate of potential impact on the Company’s
        financial position or overall results of operations for the above legal
        proceedings could change in the future.
 
 **Foreign
        Currency** -The
        Company’s production facilities are located in the Philippines, India and Sri
        Lanka. To the extent that the currencies of these countries fluctuate, the
        Company is subject to risks of changing costs of production after pricing
        is
        established for certain customer projects. However, most significant contracts
        contain provisions for price renegotiation.
 
 **Employment
        Agreements** -On
        January 1, 2004, the Company entered into a four year employment agreement
        with the co-founder of ISOGEN, an entity the Company acquired in 2001, to
        serve
        as an executive vice president of the Company. Pursuant to the agreement,
        he
        will be compensated at a rate of $250,000 per annum for the first year, subject
        to annual review for discretionary annual increases thereafter, and will
        be
        eligible to receive an annual cash bonus, the amount of which will be based
        upon
        meeting certain goals. In addition, on November 10, 2003, he was granted an
        option to purchase 200,000 shares of the Company’s common stock at $3.35 per
        share. In connection with his previous employment agreement, in 2002 the
        executive was granted an option to purchase 150,000 shares of the Company’s
        common stock at $4.00 per share, and was issued 11,587 unregistered shares
        of
        the Company’s common stock.
 
 II-28
 In
        December 2005, the Company entered into a three year employment agreement
        with
        its Chief Financial Officer. The agreement provides for annual base compensation
        of $300,000, plus additional short term incentive compensation conditioned
        on
        the attainment of certain quantity and quality objectives to be established
        by
        the Compensation Committee of the Board of Directors. The agreement also
        provides for insurance and other fringe benefits, and contains confidentiality
        and non-compete and non-interference provisions. In addition, the Company
        granted 250,000 fully vested options to purchase 250,000 shares of the Company's
        common stock ("Option Shares") at an exercise price of $3.28 per share. The
        options expire on the earlier of (i) December 21, 2015, (ii) 60 days after
        employment ceases or (iii) 12 months following the termination of employment
        as
        a result of his death or disability. Furthermore, no Option Shares may be
        sold
        during the first year after the date of grant; no more than 25% of the Option
        Shares may be sold during the second year after the date of grant; no more
        than
        50% of the Option Shares may be sold during the second and third years after
        the
        date of grant, and no more than 75% of the Option Shares may be sold during
        the
        second, third and fourth years after the date of grant. No restrictions on
        sales
        apply after the fourth anniversary of the date of grant.
 
 **Indemnifications** -The
        Company is obligated under certain circumstances to indemnify directors and
        certain officers against costs and liabilities incurred in actions or threatened
        actions brought against such individual because such individuals acted in
        the
        capacity of director and/or officer of the Company. In addition, the Company
        has
        contracts with certain clients pursuant to which the Company has agreed to
        indemnify the client for certain specified and limited claims. These
        indemnification obligations are in the ordinary course of business and, in
        many
        cases, do not include a limit on potential maximum future payments. As of
        December 31, 2005, the Company has not recorded a liability for any
        obligations arising as a result of these indemnifications.
 
 **Liens** -In
        connection with the procurement of tax incentives at one of the company’s
        foreign subsidiaries, the foreign zoning authority was granted a first lien
        on
        the subsidiary’s property and equipment. As of December 31, 2005, such
        equipment had a book value of $690,000.
 
 **6.**
              **PENSION
                  BENEFITS******
 
 **U.S.
        Defined Contribution Pension Plan-** The
        Company has a defined contribution plan qualified under Section 401(k) 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 a portion of their compensation
        to
        the plan. Under the plan, the Company has the discretion to match a portion
        of
        participants’  contributions.
        The Company intends to match approximately $71,000 to the plan for the fiscal
        year ended December 31, 2005.  For the fiscal years ended December 31, 2004
        and 2003, the Company’s matching contributions were approximately $75,000 and
        $48,000 respectively.
 
 **Non-U.S.
        Pension benefits -** Most
        of
        the Company’s non-U.S. subsidiaries provide for government mandated, defined
        pension benefits. For certain of these subsidiaries, vested eligible employees
        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 of retirement date.
        Other non-U.S subsidiaries provide for a lump sum payment to vested employees
        on
        retirement, death, incapacitation or termination of employment, based upon
        the
        salary and tenure as of the date employment ceases. The liability for such
        defined benefit obligations is determined and provided on the basis of actuarial
        valuations as of December 31, 2005. Pension expenses for foreign subsidiaries
        totaled approximately $251,000, $228,000 and $124,000 for each of the three
        years ended December 31, 2005, 2004 and 2003, respectively.
 
 Included
        in accrued salary, wages and related benefits as of December 31, 2005 and
        2004
        are accrued pension liabilities related to the above unfunded plans totaling
        approximately $493,000 and $327,000 respectively.
 
 II-29
 The
        following table sets out the status of the non-U.S pension benefits and the
        amounts (in thousands) recognized in the Company’s consolidated financial
        statements. Amounts for 2003 are not significant and as such, have been
        excluded:
  **Benefit
        obligations:**
 
 **Change
                  in the benefit obligation**
              
              
              **2005**
              
              
              **2004**Projected
                  Benefit Obligation at beginning of the year
              
              $
              327
              
              $
              154Service
                  cost
              
              
              129
              
              
              83Interest
                  cost
              
              
              34
              
              
              20Increase/(decrease
                  in liability)
              
              
              -
              
              
              50Actuarial
                  loss (Gain)
              
              
              54
              
              
              44Benefits
                  Paid
              
              
              (51
              )
              
              (24
              )Projected
                  Benefit Obligation at end of year****
              
              $
              493
              
              $
              327
 
 **Components
        of Net Periodic Pension Cost:**
 **2005**
              
              
              **2004**Accumulated
                  benefit obligation
              
              $
              169
              
              $
              125Vested
                  benefit obligation
              
              $
              50
              
              $
              30
 
  **2005**
              
              
              **2004**Service
                  cost
              
              $
              129
              
              $
              83Interest
                  cost
              
              
              34
              
              
              20Amortization
                  for Increase/(decrease in liability)
              
              
              -
              
              
              50Actuarial
                  loss (Gain)
              
              
              54
              
              
              44Net
                  Periodic pension cost
              
              $
              217
              
              $
              197
 
 **Unrecognized
        Actuarial Loss/ (Gain):**
 
 Experience
        gains and losses and effects of changes in actuarial assumptions are carried
        forward and amortized over a period no longer than the average future service
        of
        employees.
 
 The
        following table sets out the unrecognized actuarial gain/(loss) (in thousands),
        as of December, 31 2005.
 
 Net
                  cumulative unrecognized actuarial gain/(loss) - January 1,
                  2005
              
              
              **-**Actuarial
                  (loss) for the year
              
              $
              (154
              )Net
                  cumulative unrecognized (loss) - December 31, 2005
              
              
              (154
              )Limit
                  of corridor
              
              
              28Actuarial
                  (loss) outside corridor to be recognized in future years
              
              $
              (126
              )
  Actuarial
        assumptions for all non-U.S. plans are described below. The discount rates
        are
        used to measure the year end benefit obligations and the earnings effects
        for
        the subsequent year.
 
 **2005**
              
              **2004**Discount
                  rate
              7.5%-14%
              
              7.5%-12%Rate
                  of increase in compensation levels
              7%-10%
              
              7-10%
  II-30
 **Estimated
        Future Benefit Payments:**
 
 The
        following benefit payments (in thousands), which reflect expected future
        service, as appropriate, are expected to be paid:
 
 2006
              
              $
              262007
              
              
              292008
              
              
              322009
              
              
              352010
              
              
              412011
                  to 2015
              
              
              317
 
 **7.**
              **CAPITAL
                  STOCK**
 
 T he Company is
        authorized to issue 75,000,000 shares of common stock and 5,000,000 shares
        of
        preferred stock. Each share of common stock has one vote. The
        Board
        of Directors is authorized to fix the terms, rights, preferences and limitations
        of the preferred stock and to issue the preferred stock in series which differ
        as to their relative terms, rights, preferences and limitations.
 
 **Stockholder
        Rights Plan** -On
        December 16, 2002, the Board of Directors adopted a Stockholder Rights Plan
        (“Rights Plan”) in which one right (“Right”) was declared as a dividend for each
        share of the Company’s common stock outstanding. The purpose of the plan is to
        deter a hostile takeover of the Company. Each Right entitles its holders
        to
        purchase, under certain conditions, one one-thousandth of a share of newly
        authorized Series C Participating Preferred Stock (“Preferred Stock”), with
        one one-thousandth of a share of Preferred Stock intended to be the economic
        and
        voting equivalent of one share of the Company’s common stock. Rights will be
        exercisable only if a person or group acquires beneficial ownership of 15%
        (25%
        in the case of specified executive officers of the Company) or more of the
        Company’s common stock or commences a tender or exchange offer, upon the
        consummation of which such person or group would beneficially own such
        percentage of the common stock. Upon such an event, the Rights enable dilution
        of the acquiring person’s or group’s interest by providing that other holders of
        the Company’s common stock may purchase, at an exercise price of $4.00, the
        Company’s common stock having a market value of $8.00 based on the then market
        price of the Company’s common stock, or at the discretion of the Board of
        Directors, Preferred Stock, having double the value of such exercise price.
        The
        Company will be entitled to redeem the Rights at $.001 per Right under certain
        circumstances set forth in the Rights Plan. The Rights themselves have no
        voting
        power and will expire on December 26, 2012, unless earlier exercised,
        redeemed or exchanged.
 
 **Common
        Stock Reserved** -As
        of
        December 31, 2005, the Company had reserved for issuance approximately
        7,445,000 shares of common stock pursuant to the Company’s stock option plans
        (including an aggregate of 1,015,164 options issued to the Company’s Chairman
        which were not granted pursuant to stockholder approved stock option plans).
 
 **Treasury
        Stock** -In
        2004,
        the Company retired 584,000 shares of its treasury stock.
  II-31
  **8.**
              **STOCK
                  OPTIONS**
 
 The
        Company adopted, with stockholder approval, 1996, 1998, 2001, and 2002 Stock
        Option Plans (the “1996 Plan,” “1998 Plan,” “2001 Plan,” and “2002 Plan”) which
        provide for the granting of options to purchase not more than an aggregate
        of
        1,999,992, 3,600,000, 900,000, and 950,000 shares of common stock, respectively,
        subject to adjustment under certain circumstances. Such options may be incentive
        stock options (“ISOs”) within the meaning of the Internal Revenue Code of 1986,
        as amended, or options that do not qualify as ISOs (“Non-Qualified Options”).
 
 The
        option exercise price per share may not be less than the fair market value
        per
        share of common stock on the date of grant (110% of such fair market value
        for
        an ISO, if the grantee owns stock possessing more than 10% of the combined
        voting power of all classes of the Company’s stock). Options may be granted
        under the Stock Option Plan to all officers, directors, and employees of
        the
        Company and, in addition, Non-Qualified Options may be granted to other parties
        who perform services for the Company. No options may be granted under the
        1996
        Plan after July 8, 2006; under the 1998 Plan after July 8, 2008; under
        the 2001 Plan after May 31, 2011; and under the 2002 Plan after
        June 30, 2012.
 
 The
        Plans
        may be amended from time to time by the Board of Directors of the Company.
        However, the Board of Directors may not, without stockholder approval, amend
        the
        Plans to increase the number of shares of common stock which may be issued
        under
        the Plans (except upon changes in capitalization as specified in the Plans),
        decrease the minimum exercise price provided in the Plans or change the class
        of
        persons eligible to participate in the Plans.
 
 The
        fair
        value of options at date of grant was estimated using the Black-Scholes pricing
        model with the following weighted average assumptions: expected lives of
        eight
        years for options granted in 2005, four to four and one-half years for options
        granted in 2004, and six years for options granted in 2003; risk free interest
        rate of 4.39% in 2005, 3.19% in 2004, and 4.2% in 2003; expected volatility
        of
        150% in 2005, 114% in 2004, and 140% in 2003; and a zero dividend rate in
        each
        of the three years ended December 31, 2005. The weighted average grant date
        fair
        value of options granted in 2005, 2004, and 2003 was $3.28, $2.89 and $3.18,
        respectively.
 
 II-32
 The
        following table presents information related to stock options for 2005, 2004
        and
        2003.
 **Number**
                  **Outstanding**
                
                
                
                **Weighted
                    Average Exercise****Price**
                
                **Number**
                  **Exercisable**
                
                **Weighted
                    Average Exercise****Price**Balance
                    1/1/03
                
                
                7,264,884
                
                
                
                $1.99
                
                5,402,457
                
                $1.53Cancelled
                
                
                (127,176)
                
                
                
                $2.42Granted
                
                
                1,002,000
                
                
                
                $3.40Exercised
                
                
                (550,328)
                
                
                
                $1.14Balance
                    12/31/03
                
                
                7,589,380
                
                
                
                $2.34
                
                5,780,204
                
                $1.83Cancelled
                
                
                (49,174)
                
                
                
                $1.55Granted
                
                
                214,000
                
                
                
                $3.74Exercised
                
                
                (728,274)
                
                
                
                $1.48Balance
                    12/31/04
                
                
                7,025,932
                
                
                
                $2.36
                
                5,985,748
                
                $2.14Cancelled
                
                
                (249,267)
                
                
                
                $3.67Granted
                
                
                784,000
                
                
                
                $3.37Exercised
                
                
                (990,395)
                
                
                
                $1.74Balance
                    12/31/05
                
                
                6,570,270
                
                
                
                $2.72
                
                6,372,254
                
                $2.68**Per
                    Share**
                  **Range
                    of**
                  **Exercise****Prices**
                
                **Number**
                  **Outstanding**
                
                **Weighted**
                  **Average**
                  **Remaining**
                  **Contractual**
                  **Life**
                
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price**
                
                **Number**
                  **Exercisable**
                
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price**Balance
                    12/31/05
                $0.25
                    - 0.47
                
                445,668
                
                6
                
                $0.41
                
                445,668
                
                $0.41$0.50
                    - 0.67
                
                1,231,196
                
                5
                
                $0.57
                
                1,231,196
                
                $0.57$1.29
                
                399,996
                
                2
                
                $1.29
                
                399,996
                
                $1.29$2.00
                
                110,244
                
                9
                
                $2.00
                
                110,244
                
                $2.00$2.59
                
                1,284,466
                
                6
                
                $2.59
                
                1,284,466
                
                $2.59$3.00
                    - 4.60
                
                2,000,500
                
                8
                
                $3.47
                
                1,840,467
                
                $3.46$5.43
                    - 5.89
                
                1,090,200
                
                -
                
                $5.45
                
                1,052,217
                
                $5.45$6.00
                    - 6.57
                
                8,000
                
                -
                
                $6.24
                
                8,000
                
                $6.246,570,270
                
                
                
                $2.72
                
                6,372,254
                
                $2.68




Options
        granted prior to 2003 vest over a four year period and have a five year life.
        In
        2004, substantially all options granted vest over a four year period and
        have a
        ten year life. In
        2005,
        the Company granted to officers and directors, fully vested options to purchase
        760,000 shares of the Company's common stock ("Option Shares") at an exercise
        price of ranging between $3.00 and $3.46 per share. The options expire on
        the
        earlier of (i) ten years after date of grant, (ii) 60 days after employment
        ceases and (iii) 12 months following the termination of employment as a result
        of his or her death or disability. Furthermore, no Option Shares may be sold
        during the first year after the date of grant; no more than 25% of the Option
        Shares may be sold during the second year after the date of grant; no more
        than
        50% of the Option Shares may be sold during the second and third years after
        the
        date of grant, and no more than 75% of the Option Shares may be sold during
        the
        second, third and fourth years after the date of grant. No restrictions on
        sales
        apply after the fourth anniversary of the date of grant.
 
 In
        2003,
        the Company extended the expiration date of options granted to certain officers,
        directors and employees, substantially all of which were vested, to purchase
        315,000, 566,000, 522,000 and 133,000 shares of its common stock at $.47,
        $.50,
        $.67 and $2.00, respectively. In connection with the extension, the option
        holders agreed not to sell shares of stock acquired upon exercise of the
        extended options for designated periods of time ending between June 2004 to
        March 2005. In connection with this transaction, compensation expense of
        approximately $650,000 was recorded in the second quarter of 2003 based upon
        the
        difference between the exercise price and the market price of the underlying
        common stock on the date the options were extended. Compensation expense
        is
        included as a component of selling and administrative expenses.
 
 II-33
 In
        May 2005, the Company and certain of its officers and directors agreed to
        change the initial exercise price and initial expiration date of vested options
        to purchase 1,390,346 shares of the Company’s common stock held by such officers
        to a new price of $2.59, and to new expiration dates as follows:
 
 **Quantity**
              
              **Initial
                  Price**
              
              **Initial
                  Expiration Date**
              
              **New
                  Price**
              
              **New
                  Expiration Date**540,346
              
              $1.56
              
              May
                  31, 2005
              
              $2.59
              
              108,000
                  per year commencing May 31, 2009, remainder on
                  May 31, 2013810,000
              
              $2.25
              
              770,000
                  on October, 8, 2005 and 40,000 on
                  October 18, 2005
              
              $2.59
              
              162,000
                  per year commencing September 30, 2009 until
                  September 30, 2012, 8,000 on September 30, 2013 and
                  154,000 on March 31, 201440,000
              
              $2.50
              
              October
                  3, 2005
              
              $2.59
              
              October
                  3, 2010
 
 In
        connection with the extension, the option holders agreed not to sell, pledge
        or
        otherwise dispose of any of the shares of common stock received upon exercise
        of
        their respective option(s) referred to above until the earliest to occur
        of (i)
        May 16, 2007; (ii) the first day on which the closing market price for the
        Company’s stock is at least $5.00 per share for ten consecutive trading days; or
        (iii) the termination of employment or directorship (as applicable) with
        the
        Company either (A) by the Company, for reasons other than “for cause”; or (B) by
        the option holder, upon mutual agreement between the option holder and the
        Company.
 
 In
        addition, the Chief Executive Officer further agreed to pay to the Company
        any
        pre-tax net profit earned from the sale of the shares of common stock received
        upon exercise of his options set forth above if he directly or indirectly
        competes with the Company or solicits Company customers or clients during
        the
        period from May 16, 2005 until the first anniversary of the termination of
        his
        employment for any reason.
 
 No
        equity
        compensation expense has been recorded because the exercise price of the
        modified options was equal to the price of the underlying common stock on
        the
        date the grants were modified. In addition, pursuant to Emerging Issues Task
        Force (“EITF”) 00-23, Issues Related to the Accounting for Stock Compensation
        under APB Opinion No. 25 and FASB Interpretation No. 44, the Company has
        determined that the modified grants continue to qualify for fixed accounting
        treatment.
 
 In
        December 2005, the Company accelerated the vesting of options to purchase
        790,000 shares of Common Stock that were previously granted to the Chief
        Executive Officer and certain officers and directors. Pursuant to the
        modification agreement, the officers and directors agreed to not sell, pledge
        or
        otherwise dispose of more than a certain number of shares issued or issuable
        upon exercise of these options during the period of time that such option
        shares
        would otherwise have not vested. As a result of the accelerated vesting,
        the
        Company will avoid future non-cash compensation charges approximating $1.3
        million resulting from the Company’s adoption of SFAS 123 (R) on January 1,
        2006.
  II-34
 **9.**
              **SEGMENT
                  REPORTING AND
                  CONCENTRATIONS**
 
 The
        Company’s operations are classified into two reporting segments: (1) outsourced
        content services and (2) IT professional services. The outsourced content
        services segment focuses on fabrication services and knowledge services.
        Fabrication services include digitization and data conversion services, content
        creation and XML services. Knowledge services include content enhancement,
        hyperlinking, indexing and general editorial services. The IT professional
        services segment focuses on the design, implementation, integration and
        deployment of systems used to author, manage and distribute content. The
        Company’s outsourced content services revenues are generated principally from
        its production facilities located in the Philippines, India and Sri Lanka.
        The
        Company does not depend on revenues from sources internal to the countries
        in
        which the Company operates; nevertheless, the Company is subject to certain
        adverse economic and political risks relating to overseas economies in general,
        such as inflation, currency fluctuations and regulatory burdens.
 
 Commencing
        October 1, 2003, the Company unified its selling and related activities for
        its
        content and professional services segments. As such, selling and corporate
        administrative costs are not segregated by, nor are they allocated to, operating
        segments. The loss (income) before income taxes, by operating segment has
        been
        reclassified for comparative purposes.
 **2005**
                
                
                **2004**
                
                
                **2003****(in
                    thousands****)**Revenues:Outsourced
                    content services
                
                $
                36,655
                
                $
                43,701
                
                $
                29,977IT
                    Professional services
                
                
                5,397
                
                
                10,248
                
                
                6,737Total
                    consolidated
                
                $
                42,052
                
                $
                53,949
                
                $
                36,714Depreciation
                    and amortization:Outsourced
                    content services
                
                $
                2,728
                
                $
                3,547
                
                $
                4,157IT
                    Professional services
                
                
                101
                
                
                92
                
                
                79Selling
                    and corporate administration
                
                
                331
                
                
                285
                
                
                292Total
                    consolidated
                
                $
                3,160
                
                $
                3,924
                
                $
                4,528Loss
                    (income) before income taxes:Outsourced
                    content services
                
                $
                9,204
                
                $
                16,116
                
                $
                6,576IT
                    Professional services
                
                
                1,052
                
                
                4,671
                
                
                2,778Selling
                    and corporate administration
                
                
                (12,369
                )
                
                (9,693
                )
                
                (8,546
                )Total
                    consolidated
                
                $
                (2,113
                )
                $
                11,094
                
                $
                808




II-35




**December
                  31,****2005**
              
              
              **2004****(in
                  thousands****)**Total
                  assetsOutsourced
                  content services
              
              $
              15,436
              
              $
              15,937IT
                  Professional services
              
              
              3,140
              
              
              2,033Corporate
                  (includes corporate cash)
              
              
              19,035
              
              
              19,241Total
                  consolidated
              
              $
              37,611
              
              $
              37,211
 
 Long-lived
        assets as of December 31, 2005 and 2004, respectively by geographic region
        are
        comprised of:
 **2005**
                
                
                **2004****(in
                    thousands****)**United
                    States
                
                $
                2,022
                
                $
                1,756Foreign
                    countries:Philippines
                
                
                2,573
                
                
                2,626India
                
                
                848
                
                
                827Sri
                    Lanka
                
                
                144
                
                
                180Total
                    foreign
                
                
                3,565
                
                
                3,633$
                5,587
                
                $
                5,389
 
 One
          client accounted for 27%, 23% and 33% of the Company's revenues for the
          years
          ended December 31, 2005, 2004 and 2003, respectively. One other client
          accounted for 12% and 31% of the Company’s revenues for the year ended December
          31, 2005 and 2004, respectively. No other client accounted for 10% or more
          of
          revenues during these periods. Further, in the years ended December 31,
          2005, 2004 and 2003, revenues to non-US clients accounted for 35%, 30%,
          and 47%,
          respectively, of the Company's revenues.
 
 Revenues
          for each of the three years ended December 31, 2005, 2004 and 2003 by geographic
          region (determined based upon customer’s domicile), are as follows:
 
 **2005**
                
                
                **2004**
                
                
                **2003****(in
                    thousands****)**United
                    States
                
                $
                27,243
                
                $
                37,842
                
                $
                19,582The
                    Netherlands
                
                
                10,819
                
                
                12,648
                
                
                12,147Other
                    - principally Europe
                
                
                3,990
                
                
                3,459
                
                
                4,985$
                42,052
                
                $
                53,949
                
                $
                36,714
 
 A
          significant amount of the Company's revenues are derived from clients in
          the
          publishing industry. Accordingly, the Company's accounts receivable generally
          include significant amounts due from such clients. In addition, as of
          December 31, 2005, approximately 36% of the Company's accounts receivable
          was from foreign (principally European) clients and 37% of accounts receivable
          was due from one client. As of December 31, 2004, approximately 27% of
          the
          Company's accounts receivable was from foreign (principally European) clients
          and 69% of accounts receivable was due from two clients.
  II-36
 
 **10.**
                **INCOME
                    (LOSS) PER
                    SHARE**




**2005**
              
              
              **2004**
              
              
              **2003****(in
                  thousands, except per share amounts****)**Net
                  (loss) income
              
              $
              (1,651
              )
              $
              7,857
              
              $
              475Weighted
                  average common shares outstanding
              
              
              23,009
              
              
              22,288
              
              
              21,570Dilutive
                  effect of outstanding options
              
              
              -
              
              
              2,529
              
              
              1,396Adjusted
                  for dilutive computation
              
              
              23,009
              
              
              24,817
              
              
              22,966Basic
                  (loss) income per share
              
              $
              (.07
              )
              $
              .35
              
              $
              .02Diluted
                  (loss) income per share
              
              $
              (.07
              )
              $
              .32
              
              $
              .02
 
 Basic
        (loss) income per share is based on the weighted average number of common
        shares
        outstanding without consideration of potential common stock. Diluted (loss)
        income per share is based on the weighted average number of common and potential
        common shares outstanding. The difference between weighted average common
        shares
        outstanding and adjusted dilutive shares outstanding represents the dilutive
        effect of outstanding options. Options to purchase 3,099,000 shares of common
        stock at December 31, 2005 and 1,337,000 shares of common stock at December
        31,
        2003 were outstanding but not included in the computation of diluted earnings
        per share because the options’ exercise price was greater than the average
        market price of the common shares and therefore, the effect would have been
        antidilutive. Such shares excluded at December 31, 2004 were insignificant.
        In
        addition, diluted net loss per share in 2005 does not include 1,733,000
        potential common shares derived from stock options because as a result of
        the
        Company incurring losses, their effect would have been antidilutive.
 
 **11.**
              **QUARTERLY
                  RESULTS OF OPERATIONS
                  (UNAUDITED)**
  **First**
                **Quarter**
              
              
              **Second**
                **Quarter**
              
              
              **Third**
                **Quarter**
              
              
              **Fourth**
                **Quarter****(in
                  thousands, except per share amounts****)****2005**Revenues
              
              $
              11,190
              
              $
              10,110
              
              $
              9,647
              
              $
              11,105Net
                  income (loss)
              
              $
              299
              
              
              ($517
              )
              
              ($875
              )
              
              ($558
              )Net
                  income (loss) per share
              
              $
              .01
              
              
              ($.02
              )
              
              ($.04
              )
              
              ($.02
              )Diluted
                  net income (loss) per share
              
              $
              .01
              
              
              ($.02
              )
              
              ($.04
              )
              
              ($.02
              )**2004**Revenues
              
              $
              12,157
              
              $
              12,354
              
              $
              15,927
              
              $
              13,511Net
                  income
              
              
              2,080
              
              
              1,577
              
              
              3,103
              
              
              1,097Net
                  income per share
              
              $
              .09
              
              $
              .07
              
              $
              .14
              
              $
              .05Diluted
                  net income per share
              
              $
              .08
              
              $
              .06
              
              $
              .13
              
              $
              .04
 
 **12.**
              **OTHER**
 
 In
        January 2004, the Company reached a settlement agreement and received $1,000,000
        cash from a former client as full satisfaction of a $2.6 million dollar
        remaining outstanding balance that the Company had fully written off as a
        bad
        debt in 2001. The $1,000,000 receipt, net of $37,000 in recovery costs, is
        reflected as bad debt recovery income in the statement of operations for
        the
        year ended December 31, 2004.
 
 In
        January 2005, the Company filed a registration statement on Form S-3 to register
        4,250,000 shares of its common stock, plus 3,250,000 shares of common stock
        held
        by certain directors and officers of the Company. On March 23, 2005, the
        Company
        terminated the offering and, as such, in the fourth quarter 2004, expensed
        approximately $625,000 of offering costs.
  II-37
 
 **13.**
              **SUBSEQUENT
                  EVENTS**
 
 Pursuant
        to an income tax audit by the Indian bureau of taxation, on March 27, 2006
        one
        of the Company’s Indian subsidiaries has received a tax assessment approximating
        $350,000, including interest, for the fiscal tax year ended March 31, 2003.
        Management disagrees with the basis of the tax assessment, and will vigorously
        appeal the assessment. However, the ultimate outcome cannot be determined
        at
        this time.
 
 In
        addition, the Company has been notified that its U.S. federal income tax
        return
        for 2004 will be subject to audit by the I.R.S. Since such audit has not
        yet
        commenced, the Company has no basis for determining the amount of any potential
        tax adjustment that might result from such audit.
  II-38
 **Item
        9. Changes in and Disagreements with Accountants on Accounting and Financial
        Disclosure.**
 
 None
 
 **Item
        9A. Controls and Procedures.**
 
 An
        evaluation has been carried out under the supervision and with the participation
        of our management, including our Chief Executive Officer and Chief Financial
        Officer, of the effectiveness of the design and the operation of our "disclosure
        controls and procedures" (as such term is defined in Rules 13a-15(e) under
        the
        Securities Exchange Act of 1934) as of December 31, 2005 (“Evaluation Date”).
        Based on such evaluation, our Chief Executive Officer and Chief Financial
        Officer have concluded that, as of the Evaluation Date, the disclosure controls
        and procedures are reasonably designed and effective to ensure that (i)
        information required to be disclosed by us in the reports we file or submit
        under the Securities Exchange Act of 1934 is recorded, processed, summarized
        and
        reported within the time periods specified in the SEC's rules and forms,
        and
        (ii) such information is accumulated and communicated to our management,
        including our Chief Executive Officer and Chief Financial Officer, as
        appropriate to allow timely decisions regarding required
        disclosure.
 
 There
        were no changes in our internal controls over financial reporting in connection
        with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under
        the Exchange Act that occurred during our last fiscal quarter that materially
        affected or are reasonably likely to materially affect the internal controls
        over financial reporting.
  II-39




**PART
        III**
 
 **Item
        10. Directors, Officers, Promoters and Control Persons; Compliance with Section
        16(a) of the Exchange Act.**
 
 The
        information called for by Item 10 is incorporated by reference from the
        Company’s definitive proxy statement for the 2006 Annual Meeting of Stockholders
        to be filed pursuant to Regulation 14A under the Exchange Act no later than
        120
        days after the end of the Company’s 2005 fiscal year.
 
 The
        information concerning the Company’s Executive Officers required by this Item is
        incorporated by reference to the Company’s proxy statement under the heading
“Executive Officers”. The information concerning the Company’s Directors
        required by this Item is incorporated by reference to the Company’s proxy
        statement under the heading “Election of Directors”. Information concerning
        compliance by the Company’s Officers, Directors and 10% stockholders with
        Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
        reference to the information contained in the Company’s Proxy Statement under
        the heading “Compliance with Section 16(a) of the Exchange Act.” Information
        regarding the presence of an audit committee financial expert required by
        this
        Item is incorporated by reference to the Company’s Proxy Statement under the
        heading “Committees of the Board of Directors.”
 
 The
        Company has a code of ethics that applies to all of its employees, officers,
        and
        directors, including its principal executive officer, principal financial
        and
        accounting officer, and controller. The text of the Company’s code of ethics is
        posted on its website at www.innodata-isogen.com. The Company intends to
        disclose future amendments to, or waivers from, certain provisions of the
        code
        of ethics for executive officers and directors in accordance with applicable
        NASDAQ and SEC requirements.
 
 **Item
        11. Executive Compensation.**
 
 The
        information called for by Item 11 is incorporated by reference from the
        Company’s definitive proxy statement for the 2006 Annual Meeting of Stockholders
        to be filed pursuant to Regulation 14A under the Exchange Act no later than
        120
        days after the end of the Company’s 2005 fiscal year. Information appearing
        under the captions “Compensation Committee Report on Executive Compensation”;
“Report of the Audit Committee” and “Stock Performance Graph” to be included in
        the Company’s 2006 Proxy Statement is not incorporated herein by this reference.
 
 **Item
        12. Security Ownership of Certain Beneficial Owners and Management and Related
        Stockholder Matters.**
 
 The
        information called for by Item 12 is incorporated by reference from the
        Company’s definitive proxy statement for the 2006 Annual Meeting of Stockholders
        to be filed pursuant to Regulation 14A under the Exchange Act no later than
        120
        days after the end of the Company’s 2005 fiscal year.
 
 **Item
        13. Certain Relationships and Related Transactions.**
 
 The
        information called for by Item 13 is incorporated by reference from the
        Company’s definitive proxy statement for the 2006 Annual Meeting of Stockholders
        to be filed pursuant to Regulation 14A under the Exchange Act no later than
        120
        days after the end of the Company’s 2005 fiscal year.
  III-1
 **Item
        14. Principal Accountant Fees and Services.**
 
 The
        information called for by Item 14 is incorporated by reference from the
        Company’s definitive proxy statement for the 2006 Annual Meeting of Stockholders
        to be filed pursuant to Regulation 14A under the Exchange Act no later than
        120
        days after the end of the Company’s 2005 fiscal year.
  III-2
 
  **PART
          IV**
 
 **Item
          15. Exhibits, Financial Statement Schedules and Reports on Form
          8-K.**
 
 (a)
                1.
                    Financial Statements. See Item 8. Index to Financial
                    Statements.2.
                    Financial Statement Schedules. Schedule II - Valuation and Qualifying
                    Accounts3.**Exhibits**
 
 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
                Filed
                    as Exhibit 3.1(a) to our Form 10-K for the year endedApril
                    29, 1993
                December
                    31, 20033.1
                    (b)
                Certificate
                    of Amendment of Certificate of
                Filed
                    as Exhibit 3.1(b) to our Form 10-K for the year endedIncorporation
                    of Innodata Corporation filed on
                December
                    31, 2003March
                    1, 20013.1
                    (c)
                Certificate
                    of Amendment of Certificate of
                Filed
                    as Exhibit 3.1(c) to our Form 10-K for the year endedIncorporation
                    of Innodata Corporation
                December
                    31, 2003Filed
                    on November 14, 20033.2
                Form
                    of Amended and Restated By-Laws
                Exhibit
                    3.1 to Form 8-K dated December 16, 20023.3
                Form
                    of Certificate of Designation of
                Filed
                    as Exhibit A to Exhibit 4.1 to Form 8-K datedSeries
                    C Participating Preferred Stock
                December
                    16, 20024.2
                Specimen
                    of Common Stock certificate
                Exhibit
                    4.2 to Form SB-2 Registration Statement No. 33-620124.3
                Form
                    of Rights Agreement, dated as of
                Exhibit
                    4.1 to Form 8-K dated December 16, 2002December
                    16, 2002 between Innodata Corporationand
                    American Stock Transfer & Trust Co., asRights
                    Agent10.1
                1994
                    Stock Option Plan
                Exhibit
                    A to Definitive Proxy dated August 9, 199410.2
                1993
                    Stock Option Plan
                Exhibit
                    10.4 to Form SB-2 Registration Statement No. 33-6201210.3
                Form
                    of Indemnification Agreement
                Filed
                    as Exhibit 10.3 to Form 10-K dated December 31, 2002Between
                    us and our directors and one of ourofficers10.4
                1994
                    Disinterested Directors Stock Option Plan
                Exhibit
                    B to Definitive Proxy dated August 9, 199410.5
                1995
                    Stock Option Plan
                Exhibit
                    A to Definitive Proxy dated August 10, 199510.6
                1996
                    Stock Option Plan
                Exhibit
                    A to Definitive Proxy dated November 7, 199610.7
                1998
                    Stock Option Plan
                Exhibit
                    A to Definitive Proxy dated November 5, 199810.8
                2001
                    Stock Option Plan
                Exhibit
                    A to Definitive Proxy dated June 29, 200110.9
                2002
                    Stock Option Plan
                Exhibit
                    A to Definitive Proxy dated September 3, 200210.10
                Employment
                    Agreement dated as of
                Filed
                    as Exhibit 10.10 to our Form 10-K for the year endedJanuary 1, 2004
                    with George Kondrach
                December
                    31, 200310.11
                Letter
                    Agreement dated as of August 9, 2004, by
                Filed
                    as Exhibit 10.2 to Form S-3 Registration statementand
                    between us and The Bank of New York
                No.
                    333-12184410.12
                Employment
                    Agreement dated as of December 22,2005
                Exhibit
                    10.1 to Form 8-K dated December 28, 200522,
                    2005, by and between us and Steven L. Ford
  IV-1
  **Exhibit**
                **Description**
                **Filed
                    as Exhibit**10.13
                Form
                    of 2001 Stock Option Plan Grant Letter, dated December 22,
                    2005
                Filed
                    as Exhibit 10.2 to Form 8-K dated December 28, 2005Dated
                    December 22, 200510.14
                Form
                    of 1995 Stock Option Agreement
                Exhibit
                    10.4 to Form 8-K dated December 15, 200510.15
                Form
                    of 1998 Stock Option Agreement for
                Exhibit
                    10.5 to Form 8-K dated December 15, 2005Directors10.16
                Form
                    of 1998 Stock Option Agreement for Officers
                Exhibit
                    10.6 to Form 8-K dated December 15, 200510.17
                Form
                    of 2001 Stock Option Agreement
                Exhibit
                    10.7 to Form 8-K dated December 15, 200510.18
                Form
                    of new vesting and lock-up agreement for
                Exhibit
                    10.8 to Form 8-K dated December 15, 2005each
                    of Haig Bagerdjian, Louise Forlenza,John
                    Marozsan and Todd Solomon10.19
                Form
                    of new vesting and lock-up agreement
                Exhibit
                    10.9 to Form 8-K dated December 15, 2005for
                    Jack Abuhoff10.20
                Form
                    of new vesting and lock-up agreement
                Exhibit
                    10.10 to Form 8-K dated December 15, 2005for
                    George Kondrach10.21
                Form
                    of new vesting and lock-up agreement
                Exhibit
                    10.11 to Form 8-K dated December 15, 2005for
                    Stephen Agress10.22
                Form
                    of 2001 Stock Option Plan Grant Letter,
                Exhibit
                    10.2 to Form 8-K dated January 5, 2006dated
                    December 31, 2005, for Messrs. Abuhoff,Agress
                    and Kondrach10.23
                Form
                    of 2001 Stock Option Plan Grant Letter,
                Exhibit
                    10.3 to Form 8-K dated January 5, 2006dated
                    December 31, 2005, for Messrs. Bagerdjianand
                    Marozsan and Ms. Forlenza21
                Significant
                    subsidiaries of the registrant
                Filed
                    herewith23
                Consent
                    of Grant Thornton LLP
                Filed
                    herewith31.1
                Certificate
                    of Chief Executive Officer
                Filed
                    herewithpursuant
                    to Section 302 of theSarbanes-Oxley
                    Act of 200231.2
                Certificate
                    of Chief Financial Officer
                Filed
                    herewithpursuant
                    to Section 302 of theSarbanes-Oxley
                    Act of 2002.32.1
                Certification
                    Pursuant to 18 U.S.C. Section
                Filed
                    herewith1350,
                    as adopted pursuant to Section 906 of theSarbanes-Oxley
                    Act of 2002.32.2
                Certification
                    Pursuant to 18 U.S.C. Section
                Filed
                    herewith1350,
                    as adopted pursuant to Section 906 of theSarbanes-Oxley
                    Act of 2002.
 
 IV-2
  **INNODATA
            ISOGEN, INC.**
 **SCHEDULE
            II**
 **VALUATION
            AND QUALIFYING ACCOUNTS**
 **(Dollars
            in Thousands)**
 
 Activity
            in the Company's allowance for doubtful accounts for the years ended
            December
            31, 2005, 2004 and 2003 was as follows:
 
 **Additions****Balance
                      at**
                  
                  **Charged
                      to**
                  
                  **Charged
                      to**
                  
                  
                  
                  **Balance
                      at****Period**
                  
                  **Beginning
                      of Period**
                  
                  **Costs
                      and Expenses**
                  
                  **Other
                      Accounts**
                  
                  **Deductions**
                  
                  **End
                      of Period**2005
                  
                  $
                  135
                  
                  $
                  9
                  
                  $
                  -
                  
                  $
                  (33
                  )
                  $
                  1112004
                  
                  $
                  1,219
                  
                  $
                  25
                  
                  $
                  -
                  
                  
                  (1,109
                  )
                  $
                  1352003
                  
                  $
                  1,254
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  (35
                  )
                  $
                  1,219
 
 IV-3
 **SIGNATURES**
  In
          accordance with Section 13 or 15(d) of the Exchange Act, the registrant
          caused
          this report to be signed on its behalf by the undersigned, thereunto duly
          authorized.
  INNODATA
                    ISOGEN, INC.By:
                /s/ Jack
                  AbuhoffJack
                  AbuhoffChairman
                    of the
                    Board of Directors,
                  Chief Executive Officer and
                    President
  In
          accordance with the Exchange Act, this report has been signed below by
          the
          following persons on behalf of the registrant and in the capacities and
          on the
          dates indicated .
 
 Signature
                
                Title
                
                Date/s/
                    Jack Abuhoff
                
                Chairman
                    of the Board of Directors,
                
                March
                    29, 2006Jack
                    Abuhoff
                
                Chief
                    Executive Officer and President/s/
                    Steven L. Ford
                
                Executive
                    Vice President,
                
                March
                    29, 2006Steven
                    L. Ford
                
                Chief
                    Financial Officer/s/
                    Stephen Agress
                
                Vice
                    President Finance,
                
                March
                    29, 2006Stephen
                    Agress
                
                Chief
                    Accounting Officer/s/
                    Haig S. Bagerdjian
                
                Director
                
                March
                    29, 2006Haig
                    S. Bagerdjian/s/
                    Louise C. Forlenza
                
                Director
                
                March
                    29, 2006Louise
                    C. Forlenza/s/
                    John R. Marozsan
                
                Director
                
                March
                    29, 2006John
                    R. Marozsan