**106941**


**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-K**


(Mark
      One)


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


**For
      the fiscal year ended** **December
      31, 2007**





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)
                371-2828**(Registrant's
                telephone number)




Securities
        registered under Section 12(b) of the Exchange Act:


Title
                of Each Class
            
            Name
                of Each Exchange on Which RegisteredCommon
                Stock $.01 par value
            
            The
                Nasdaq Stock Market, LLC





Securities
      registered under Section 12(b) of the Exchange Act:   None





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


Yes 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 þ Non-accelerated
      filer o Smaller
      reporting company o





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





The
      aggregate market value of the registrant’s common stock held by non-affiliates
      of the registrant (based on the closing price reported on the Nasdaq Stock
      Market on June 30, 2007) was $94,761,108.





The
      number of outstanding shares of the registrant’s common stock, $.01 par value,
      as of February 29, 2008 was 24,725,791.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the Registrant’s definitive proxy statement for the 2008 Annual Meeting of
      Stockholders to be held on June 5, 2008 are incorporated by reference in Items
      10,11,12,13 and 14 of Part III of this Form 10-K.










**INNODATA
      ISOGEN, INC**


**Form
      10-K**


**For
      the Year Ended December 31, 2007**





**TABLE
      OF CONTENTS**




**Page****Part
                I**Item
                1.
            Business
            1Item
                1A.
            Risk
                Factors
            9Item
                1B.
            Unresolved
                Staff Comments
            13Item
                2.
            Properties
            13Item
                3.
            Legal
                Proceedings
            13Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            14**Part
                II**Item
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            15Item
                6.
            Selected
                Financial Data
            16Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            18Item
                7A.
            Quantitative
                and Qualitative Disclosures about Market Risks
            30Item
                8.
            Financial
                Statements and Supplementary Data
            31Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            31Item
                9A.
            Controls
                and Procedures
            31Report
                of Management on Internal Control over Financial Reporting
            31Item
                9B.
            Other
                Information
            32**Part
                III**Item
                10.
            Directors
                and Executive Officers and Corporate Governance
            33Item
                11.
            Executive
                Compensation
            33Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            33Item
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            33Item
                14.
            Principal
                Accountant Fees and Services
            33**Part
                IV**Item
                15.
            Exhibits,
                Financial Statement Schedules and Reports on Form 8-K
            34Signatures
            
            35










**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.**




**Business
      Overview**




We
      provide knowledge process outsourcing (KPO) services, as well as publishing
      and
      related information technology (IT) services, that
      help leading media, publishing and information services companies create, manage
      and maintain their products. We also provide our services to companies in other
      information-intensive industries, such as information technology, manufacturing,
      aerospace, defense, government, law and intelligence.




We
      help our
      clients lower costs, realize productivity gains and improve operations, enabling
      them to compete more effectively in demanding global markets.




Our
      publishing services include digitization, conversion, composition, data modeling
      and XML encoding. Our KPO services include research & analysis, authoring,
      copy-editing, abstracting, indexing and other content creation activities.
      We
      often combine publishing services and KPO services within a single client
      engagement, providing an end-to-end content supply chain solution.





Our
      staff
      of IT systems professionals design, implement, integrate and deploy systems
      and
      technologies used to improve the efficiency of authoring, managing and
      distributing content.





We
      use a
      distributed global resource model. Our onshore workforce (consisting of
      consultants, information architects, solution architects, and program managers)
      works from our North American and European offices, as well as from client
      sites. Our distributed global workforce (consisting of encoders, graphic
      artists, project managers, programmers, and data architects performing
      publishing services, and advanced degree holders such as physicians, attorneys,
      MBAs and engineers who perform our KPO services) deliver those services from
      our
      ten offshore facilities in India, the Philippines, Sri Lanka and Israel.


1




For
      fiscal 2007, our revenue was $67.7 million, representing an increase of 65%
      over
      2006, and our net income was $4.6 million, as compared to a net loss in 2006
      of
      $7.3 million.





Services
      that we anticipate a client will require for an indefinite period generate
      what
      we regard as recurring revenues. Services that terminate upon completion of
      a
      defined task generate what we regard as project, or non-recurring, revenues.
      Approximately 61%, 61% and 58% of our revenues were recurring in the fiscal
      years ended December 31, 2007, 2006 and 2005, respectively.





In
      2007,
      we provided our services to approximately 140 clients’ primarily in four
      content-intensive sectors:





·
            Media,
                publishing and information services, including clients such as EBSCO
                and
                Reed Elsevier;





·
            Defense
                and aerospace, including clients such as Hamilton Sundstrand and
                Lockheed
                Martin;





·
            Government
                and advanced programs, including clients such as the Defense Intelligence
                Agency and the Financial Accounting Standards Board;
                and





·
            Commercial
                and technology, including clients such as Alcatel-Lucent and
                Nortel.





Our
      business is organized and managed around three vectors: a vertical industry
      focus, a horizontal service/process focus, and a focus on supportive operations.





Our
      vertically-aligned groups understand our clients’ businesses and strategic
      initiatives and are able to help them meet their goals. With respect to media,
      publishing and information services, for example, we have continued to hire
      experts out of that sector to establish solutions and services tailored to
      companies in that sector. They work with many of the world’s leading media,
      publishing and information services companies, dealing with challenges involving
      new product creation, product maintenance, digitization, content management
      and
      content creation.





Our
      service/process-aligned groups are comprised of engineering and delivery
      personnel responsible for creating the most efficient and cost-effective custom
      workflows. These workflows integrate proprietary and third-party technologies,
      while harnessing the benefits of a globally distributed workforce. They are
      responsible for executing our client engagements in accordance with our
      service-level agreements and ensuring client satisfaction.





Our
      support groups are responsible for managing a diverse group of enabling
      functions, including human resources and recruiting, global technology
      infrastructure and physical infrastructure and facilities.





In
      2007,
      the Company reorganized its management and reporting structure into one
      operating segment. Refer to “Management Discussion and Analysis” for further
      information.





**Our
      Opportunity**





Media,
      publishing and information services companies, as well as companies in other
      content-intensive sectors, are increasingly seeking ways to reduce content
      costs
      as well as to accelerate delivery times and improve quality. Increasingly,
      they
      view outsourcing, along with technology and process re-engineering, as crucial
      strategies for accomplishing these objectives.


2




The
      trend
      toward outsourcing has accelerated in recent years. Businesses are outsourcing
      their internal processes – often to offshore providers – to improve productivity
      and manage costs. By
      leveraging offshore talent, companies are increasingly boosting their profits,
      productivity, quality levels, business value and performance. As outsourcing
      to
      offshore providers has become more accepted, a growing number of organizations
      have become more confident in making the decision to outsource business
      operations to Asia and other high-value labor markets. Moreover, the notion
      of
      what can be outsourced and the benefits that can be achieved via outsourcing
      continue to expand. Client demands are evolving toward higher value-added and
      more complex services ,
      including research
      & analysis, editorial tasks and other knowledge-based functions. This trend
      is driven by competitive pressures as well as by advances in technology.




The
      KPO
      market is in its formative stages, but is expected to become quite large.
      Overall demand is expected to range in the tens of billions of dollars within
      the next decade. An
      increasing number of companies are outsourcing high-end knowledge work as they
      seek to gain cost-savings and operational efficiencies and access the highly
      talented workforce in countries such as the Philippines and India. Universities
      in those countries are graduating thousands of qualified lawyers, doctors and
      scientists each year. As technology makes it possible to move vast amounts
      of
      data across the globe at relatively low cost, it is now quite cost effective
      for
      companies to tap into this labor pool.





With
      respect to information and content processes, there is growing awareness that
      labor cost reduction is only part of the solution. Advances in technologies
      for
      creating, managing, finding, sharing and delivering content (including text
      analytics, semantic technologies and search technologies) have enabled what
      were
      previously manual tasks to become either fully or partially
      automated.





As
      a
      result, content-driven companies, like media, publishing and information
      services companies, are increasingly relying on service providers, such as
      Innodata Isogen, to provide both outsourcing and related IT services.





To
      meet
      this demand, we have assembled dedicated teams of scientists, doctors, lawyers
      and other subject matter experts, armed with an in-depth understanding of
      complex technical material. For increasing numbers of clients, we are becoming
      an extended part of their work teams, helping them enhance and create content,
      write technical documentation and deliver **** research
      and analysis services utilizing global resources as well as advanced
      technologies.





**Our
      Services**





We
      believe that we have developed an effective set of core competencies that enable
      us to help information-intensive companies reduce their operating costs, realize
      benefits of scale and flexible cost structures and achieve significant process
      improvements. Our business model combines a global offshore staff, on-site
      staff
      and technologists who integrate internally-developed and best-in-class third
      party products to continually improve the efficiency of our processes.





We
      provide a broad and expanding range of publishing services, knowledge process
      outsourcing services and engineering and consulting services.





*Publishing
      Services –* Our
      publishing services include activities such as digitization, conversion,
      composition, data modeling and XML encoding. Typically, we bill clients for
      services based upon the units of information we produce and deliver.





For
      example, we are helping several publishers take advantage of the growing
      interest in eBooks. We are digitizing and converting thousands of books into
      an
      eBook-ready format for a global electronics manufacturer that has recently
      launched a new digital reading device for consumers.


3


We
      are
      also helping leading publishers of scientific, technical and medical journals
      aggregate content, copy-edit author submissions and compose journal pages for
      both online and print publication. For one such publisher, seeking 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 supports integrated web searches and seamless linking.




*Knowledge
      Processing Outsourcing (KPO) Services* –
Our
      KPO
      services specifically target processes that demand advanced information analysis
      and interpretation, as well as judgment and decision-making. For information
      and
      media companies, these services include content creation and enhancement,
      analytics, taxonomy and controlled vocabulary development, hyperlinking,
      indexing, abstracting, technical writing and editing, copy-editing and general
      editorial services, including the provision of synopses and annotations. These
      services cover a wide spectrum of disciplines, including medicine, law,
      engineering, management, finance, science and the humanities. To provide these
      services, we have organized knowledge teams that consist of educated and highly
      trained people with expertise in relevant subjects. We typically price our
      knowledge services based on the quantity delivered or resources utilized.





For
      example, we support several providers of medical informatics products and
      clinical decision support systems. Our physicians and health care professionals
      create content for these systems by analyzing the latest medical journal
      articles and conference proceedings.





In
      many
      of our engagements, we perform end-to-end services that combine publishing
      and
      KPO services, using advanced technologies, to provide fully outsourced content
      supply chain solutions. For example, under a long-term engagement, we maintain
      a
      leading bibliographic citations database, managing, on behalf of our client,
      a
      continuing production process in which we first aggregate, digitize and convert
      data from multiple sources and then have healthcare professionals perform
      analyses of the data and create derivative data for inclusion in the client
      database. Our engineering staff continues to drive the automation of several
      of
      these underlying processes.




We
      are
      also using our KPO delivery capabilities that we use to support information
      companies as a springboard to enable us to enter new markets and provide new
      services. For example, we are using our legal subject matter experts who deliver
      KPO services to media, publishing and information services companies to also
      provide select KPO services – such as research and document review – to
      corporate law offices and law firms.






In
      2007,
      we launched two new KPO services: research & analysis and technical writing.
      For research & analysis projects, we form dedicated teams of subject matter
      experts to provide expert research and analysis on a wide range of topics,
      from
      media analysis and medical studies to technical patent submissions and reports
      on energy markets. We provide everything from sophisticated market and
      competitive research to detailed financial and trend analysis.




For
      example, we are helping a leading
      publisher provide
      detailed information on patents to its subscribers – executives at Fortune 500
      companies and inventors and scientists at leading research institutes. We are
      also helping a leading information
      services provider deliver
      critical news to executives in several industries. We
      put in
      place a streamlined process and an advanced set of tools  to
      enable
      our employees to monitor incoming news, select relevant stories and write daily
      summaries, which we then post directly to our client’s website.




We
      are
      also building upon our extensive experience in technical documentation to
      provide outsourcing services for corporate technical writing teams. Most
      departments responsible for delivering vital technical information about
      products or services are also under increasing pressure to cut costs. We offer
      them the ability to blend internal and external resources by basing key staff
      at
      headquarters while pushing content development to offshore locations. In this
      way, we deliver cost savings to our clients, enabling them to provide better
      documentation and improve efficiency and productivity.




4




As
      an
      example, we are currently providing technical writing services for a leading
      global technology manufacturer. We have expanded our team from five resources
      to
      more than 30, which include project managers, writers and editors who work
      from
      multiple locations across China, the Philippines and the United States.
      Co-locating technical documentation teams in both China and the Philippines
      has
      eased the collaboration process and helped the company establish a stronger
      working relationship between its engineers and the writing team. Just as
      important, our outsourcing team is helping the company continue to generate
      quality documentation – ensuring that our client’s customers use the products
      effectively – while also reducing overall costs.





*Technology
      Services* —
Both
      our publishing services and KPO services are supported by our technology
      engineering teams, comprised of solution architects, analysts, programmers
      and
      systems integrators. **** A
      number
      of our engineering staff have played leadership roles in the development of
      structured information standards such as Standard General Markup Language
      (SGML), Extensible Markup Language (XML), as well as XML-based standards such
      as
      Darwin Typing Information Architecture (DITA) and S1000D.





Our
      technologists build the workflow and tools that we utilize internally for
      projects that we perform for clients on an outsourced basis. They also provide
      services directly to clients.





Their
      role in outsourced projects is to improve efficiency and quality. They
      continually design and develop productivity tools to automate manual processes
      and improve the consistency and quality of our work product. These tools include
      categorization engines that utilize pattern recognition algorithms based on
      comprehensive rule sets and related heuristics, data extraction tools that
      automatically retrieve specific types of information from large data sources,
      and workflow systems that enable various tasks and activities to be performed
      across our multiple facilities.





When
      working directly for clients, our engineers provide IT services (which include
      systems integration, custom application development, applications maintenance,
      tool evaluation and training) which are typically provided on a project basis
      that does not generate significant amounts of recurring revenue. Clients who
      use
      their services typically require publishing, performance support or process
      automation systems that enable information to be created, managed and
      distributed utilizing the most cost efficient and effective technologies. For
      example, the world’s leading software company recently selected our staff to
      help create automated processes for reducing the cost of creating online help
      information. Our engineering staff created the systems that are used by one
      of
      the world’s largest IT companies to create and publish multi-lingual product and
      technical information. It also collaborated with Lockheed Martin to build a
      content management system and digital asset management system for the F-35
      Joint
      Strike Fighter program. For a leading electronic publisher of financial data,
      it
      automated the process of extracting and normalizing detailed financial
      information from public company filings. Our staff define client requirements
      (often working on-site at clients during this process), write specifications
      and
      design, develop, test and integrate technologies. Projects vary in size and
      duration.




For
      an
      outsourced project for a $10 billion information services company, our
      engineering staff is developing a machine-aided indexing solution that uses
      lemmatization (the process that determines the most crucial term in a sentence
      to reflect its meaning and context) and semantically-driven natural language
      analysis to deliver precision and recall at 95% accuracy. Once the text is
      tokenized or assigned value according to the words in a particular sentence,
      a
      set of rules and linguistic filters are then used to identify candidate term
      phrases within the text. The system also extracts terms and ranks them based
      on
      the decreasing likelihood of accuracy against a thesaurus that applies simple
      string matching. This automation enables us to add millions of additional topics
      to the publisher’s database, which may then be further enhanced by our science
      KPO team.





*Consulting
      Services* —
      Our publishing services and KPO services are also supported by our consulting
      staff, who collaborate with clients in analyzing their publishing and business
      environments, identifying opportunities for optimization and creating roadmaps
      for significant cost savings and productivity improvement. Their expertise
      includes offshoring strategy, technology strategy and business process
      re-engineering related to information and content creation, management and
      distribution.


5




For
      example, our consulting staff is working with one of the world’s largest special
      interest publishers, helping it create an optimized content processing function
      drawing upon outsourced services and the latest content technologies. With
      more
      than 3,000 titles in print, the client desires an end-to-end publishing solution
      that addresses its current and anticipated requirements for print and online
      publishing.





A
      leading
      $5 billion global information services company engaged our consulting group
      to
      help re-engineer internal processes and provide recommendations regarding
      outsourcing tasks and activities presently performed in-house. The team
      performed a detailed as-is analysis and collaborated with the client in
      developing a future-state solution that specifically supported the ability
      to
      re-purpose content, using existing content to develop new information
      products.





**Clients**





In
      2007,
      we provided our services to approximately 140 clients.





Our
      top
      four clients generated approximately 61%, 54% and 53% of our revenues in the
      fiscal years ended December 31, 2007, 2006 and 2005, respectively. Revenues
      from
      clients located in foreign countries (principally in Europe) accounted for
      23%,
      37% and 35% of our total revenues for each of these respective fiscal years.





We
      have
      long standing relationships with many of our clients. We have been continually
      providing services to our top four clients for over seven years. Approximately
      95% of clients are recurring clients, meaning that they have continued to
      provide additional projects to us after their initial engagement. Our track
      record of delivering high quality services helps us to solidify client
      relationships and gain increased business from our existing clients. As a
      result, our history of client retention enables us to derive a significant
      proportion of revenue from repeat clients.





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





**Competitive
      Strengths**





*Our
      vertical expertise.* We are primarily focused on the media, publishing and information services
      vertical market. We maintain a staff of highly skilled experts to provide a
      range of end-to-end business solutions. In addition, we utilize our underlying
      domain experts in law, medicine, finance and engineering to provide additional
      value-added KPO services directly to these sectors.





*Our
      global delivery model.* We have operations in seven countries in North America, Europe and Asia. We
      provide services to our clients through a comprehensive global delivery model
      that integrates both local and global resources to obtain the best economic
      results. For example, we create high-end website content using teams from India,
      the Philippines and Israel that together constitute a global workflow. We use
      a
      similar approach in providing technical writing services to a large
      telecommunications company, virtually joining resources from the United States,
      the Philippines and China. Our offshore outsourcing centers are ISO 9001:2000
      certified and our engineering and IT facility in Noida meets ISO/IEC
      27001:2005 **** specifications.


6




*Our
      proven track record and reputation.* By consistently providing high quality services, we have achieved a track record
      of project successes. This track record is embodied by our reputation as a
      leader in the KPO marketplace, especially within the media, publishing and
      information services sector. This reputation or brand provides an assurance
      of
      expertise, quality execution and risk mitigation.





*Our
      focus on technology and engineering.* Rather than simply relying on labor cost arbitrage to create value for clients,
      our engineering team optimizes efficiency by integrating proprietary and
      best-in-class third party tools into our workflows. In addition, our engineering
      team provides work directly to our clients, helping them achieve better improved
      efficiencies within their own operations.





*Our
      long-term relationships with clients.*   We have long-term
      relationships with many of our clients, who frequently retain us for additional
      projects after a successful initial engagement. In 2007, existing clients from
      prior years generated more than 98% of our revenues. We believe there are
      significant opportunities for additional growth with our existing clients,
      and
      we seek to expand these relationships by increasing the depth and breadth of
      the
      services we provide. This strategy allows us to use our in-depth client-specific
      knowledge to provide more fully integrated KPO services and develop closer
      relationships with those clients.





*Our
      ability to scale.* We have demonstrated the ability to expand our teams and facilities to meet
      the
      needs of our clients. By virtue of the significant numbers of professional
      staff
      working on projects, we are able to build teams for new engagements quickly.
      We
      have also demonstrated the ability to hire and train people
      quickly.





*Our
      internal infrastructure.* We utilize established facilities, technology and communications infrastructure
      to support our business model. We
      own
      and operate some of the most advanced content production facilities in the
      world, which are linked by multi-redundant data connections. Our Wide Area
      Network – along with our Local Area Networks, Storage Area Networks and data
      centers – is configured with full redundancy, often with more than one backup to
      ensure 24x7 availability.  Our infrastructure is built to accommodate
      advanced tools, processes and technologies that support our content and
      technical experts.





*Our
      focus on quality.* We believe strongly in quality throughout our organization. We maintain
      independent quality assurance capabilities in all geographies where we operate.
      Our quality teams are compliant and certified to the ISO 9000:2000 quality
      management system standards.




**Sales
      and Marketing**





We
      market
      and sell our services directly through our professional staff, senior management
      and direct sales personnel operating out of our corporate headquarters outside
      New York City, our Dallas office and our Paris office. We have four
      executive-level business development and marketing professionals, and during
      2007, we maintained approximately 15 full-time sales and marketing personnel. We
      also
      deploy solutions architects, technical support experts and consultants who
      support the development of new clients and new client engagements. These
      resources work within teams (both permanent and ad hoc) that provide support
      to
      clients.





Our
      sales
      professionals identify and qualify prospects, securing direct personal access
      to
      decision makers at existing and prospective clients. They facilitate
      interactions between client personnel and our service teams to better define
      ways in which we can assist clients with their goals. For each prospective
      client engagement, we assemble a team of our senior employees drawn from various
      disciplines within our company. The team members assume assigned roles in a
      formalized process, using their combined knowledge and experience to understand
      the client’s goals and collaborate with the client on a solution.





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





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 support to our
      clients.


7




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, generating qualified, early-stage leads
      and
      furnishing effective sales support tools.





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 integrated
      marketing campaigns, search engine optimization, search engine marketing and
      the
      maintenance and continued development of external websites).





**Research
      and Development**





In
      2006
      and 2005, we spent approximately $922,000 and $770,000, respectively, on
      research and development. We did not incur any research and development costs
      in
      2007.





**Competition**





The
      market for publishing services and related KPO and IT services is highly
      competitive, fragmented and intense. Our major competitors include SPI
      Technologies, Apex CoVantage, Aptara, Thomson Digital, MacMillan India, Satyam
      and Cenveo.





We
      believe that we compete successfully by offering high quality services and
      favorable pricing that leverages 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,
      require “high-end” talent, are sizable in scope or scale, are continuing, or
      that require a highly fail-safe environment with technology redundancy.





As
      a
      provider of these services, we also compete with in-house personnel at existing
      or prospective clients who may attempt to duplicate our services in-house.





**Locations**





We
      are
      headquartered in Hackensack, New Jersey, just outside New York City. We have
      additional offices in Dallas, Texas, Paris, France and Beijing, China. We have
      ten production facilities in the Philippines, India, Sri Lanka and Israel.
      We
      were incorporated in Delaware in 1988.





**Employees**





As
      of
      December 31, 2007, we employed 68 persons in the United States and Europe and
      approximately 7700 persons in  ten
      production facilities in the Philippines, India, Sri Lanka and Israel. Most
      of
      our employees have graduated from at least a two-year college program. Many
      of
      our 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.





**Corporate
      Information**





Our
      principal executive offices are located at Three University Plaza, Hackensack,
      New Jersey 07601, and our telephone number is (201) 371-2828. Our website is www.innodata-isogen.com ,
      and
      information contained on our website is not included as a part of, or
      incorporated by reference into, this Annual Report on Form 10-K. There we make
      available, free of charge, our annual report on Form 10-K, quarterly reports
      on
      Form 10-Q, current report on Form 8-K, and any amendments to those reports
      as
      soon as reasonably practical after we electronically file that material with
      or
      furnish it to the Securities and Exchange Commission (SEC). Our SEC reports
      can
      be obtained through the Investor Relations section of our website or from the
      Securities and Exchange Commission at www.sec.gov .


8




**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. Our top four clients generated
      approximately 61%, 54% and 53% of our revenues in the fiscal years ended
      December 31, 2007, 2006 and 2005, 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 volume of work performed for our major clients may vary from
      year
      to year and services they require from us may change from year to year. If
      the
      volume of work performed for our major clients varies of if the services they
      require from us change, 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 39%, 39% and 42% of our total revenues
      in the fiscal years ended December 31, 2007, 2006 and 2005, respectively. 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, our inability to obtain sufficient new projects to
      counterbalance any decreases in such work 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.**





Several
      significant clients account for a large percentage of our accounts receivable.
      As of December 31, 2007, 50% or $5.3 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 $3.0 million
      to a profit of approximately $2.2 million.


9


Our
      quarterly operating results are also subject to certain seasonal fluctuations.
      We generally experience lower revenue in the first quarter as we replace
      projects that were brought to end in the fourth quarter and we begin new
      projects, which may have some normal start up delays during the first quarter.
      These and other seasonal factors may contribute to fluctuations in our results
      of operations from quarter to quarter.





A
      high
      percentage of our operating expenses, particularly personnel and rent, are
      relatively fixed in advance of any particular quarter. As a result,
      unanticipated variations in the number and timing of our projects or in employee
      wage levels and utilization rates may cause us to significantly underutilize
      our
      production capacity and employees, resulting in significant variations in our
      operating results in any particular quarter, and could result in
      losses.





**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 their own 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:





•
            difficulties
                in staffing international projects and managing international operations,
                including overcoming logistical and communications challenges;





•
            local
                competition, particularly in the Philippines, India and Sri Lanka;





•
            imposition
                of public sector controls;


10


•
            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.





There
      is
      no guarantee that our financial results will not be adversely affected by
      currency exchange rate fluctuations or that any efforts by us to engage in
      foreign currency hedging activities would be effective. Finally, as most of
      our
      expenses are incurred in currencies other than those in which we bill for the
      related services and any increase in the value of certain foreign currencies,
      against the U.S. Dollar could increase our operating costs.





**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.





In
      the
      preamble to such regulations, the I.R.S. 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. In 2006, the IRS issued its final regulations, stating that neither
      the temporary regulations nor these final regulations are retroactive. Further,
      additional guidance was released by the IRS which clarified that the regulations
      upon which we relied were not binding on pre-existing entities until May 2006.
      For periods prior to this date these final regulations apply (i.e., prior to
      August 12, 2004) and the classification of dually chartered entities is governed
      by the pre-existing regulations. As such, 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 we have made
      no
      provision for U.S. taxes in its financial statements for these entities for
      the
      periods prior to August 12, 2004.


11




However,
      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 Philippine 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.**





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. Tax
      authorities in any of our jurisdictions 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 such a challenge were successful, 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. The income tax
      holiday of one of our Philippine subsidiaries will expire in May
      2008.





**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 have 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.





While
      the
      threat of military confrontation between India and Pakistan in Kashmir has
      receded, political uncertainty in Pakistan may have spill over effects to its
      relationship with India.  Further, the government of Sri Lanka has
      terminated the Norwegian-brokered ceasefire with its rebels and there are
      concerns that hostilities may escalate.




12




Further
        political tensions and an escalation in these hostilities could adversely
        affect
        our operations based in India, the Philippines and Sri Lanka 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
      1B. Unresolved Staff Comments.**




None





**Item
      2. Properties.**





Our
      services are primarily performed from our Hackensack, New Jersey headquarters,
      our Dallas, Texas office, and nine 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 450,000. Rental payments on property leases were approximately
      $2.5 million in 2007.





We
      currently lease property sufficient for our business operations, although we
      may
      need to lease additional property in the future. We also believe that we will
      be
      able to obtain suitable additional facilities on commercially reasonable terms
      on an “as needed” basis.





**Item
      3. Legal Proceedings.**





In
      connection with the cessation of operations in 2002 at certain Philippine
      subsidiaries, and the failure in 2001 to arrive at agreeable terms for a
      collective bargaining agreement with one of these subsidiaries, certain former
      employees and the Innodata Employee Association (IDEA) filed various actions
      against subsidiaries of Innodata Isogen, Inc., and also purportedly against
      Innodata Isogen, Inc. and certain of the Company’s officers and directors. The
      Supreme Court of the Republic of the Philippines, Manila (Case No. G.R. No.
      178603-04 Innodata Philippines, Inc. vs. Innodata Employees Association, et
      al.
      10 September 2007) has refused to review a decision in these actions by a lower
      appellate court (Court Of Appeals of the Republic of the Philippines in Manila,
      Case Nos. CA-G.R. SP No. 93295 Innodata Employees Association (IDEA), Eleanor
      Tolentino, et al. vs. Innodata Philippines, Inc., et al., and CA-G.R. SP No.
      90538 Innodata Philippines, Inc. vs. Honorable Acting Secretary Manuel G. Imson,
      et al 28 June 2007) against one of these subsidiaries in the Philippines that
      is
      inactive and has no material assets, and purportedly also against Innodata
      Isogen, Inc., that orders the reinstatement of certain former employees to
      their
      former positions and payment of back wages and benefits that aggregate
      approximately $7.5 million. A motion filed by the Philippine subsidiary with
      the
      Supreme Court to reconsider the refusal of the Supreme Court to review the
      decision of the lower appellate court was denied by the Supreme Court, and
      the
      Philippine subsidiary has filed a second motion with the Supreme Court to
      reconsider the refusal of the Supreme Court to review the decision of the lower
      appellate court. All other Company affiliates were found by the lower appellate
      court to have no liability. Based on consultation with legal counsel, the
      Company believes that should the order of the lower appellate court be upheld,
      recovery against Innodata Isogen, Inc. would nevertheless be
      unlikely.




13




The
      Company is also subject to various legal
      proceedings and claims which arise in the ordinary course of
      business.




While
      management currently believes that the ultimate outcome of these proceedings
      will not have a material adverse effect on the Company’s financial position or
      overall trends in results of operations, litigation is subject to inherent
      uncertainties. Substantial recovery against the Company in the above referenced
      Philippines actions could have a material adverse impact on the Company, and
      unfavorable rulings or recoveries in the other proceedings could have a material
      adverse impact on the operating results of the period in which the ruling or
      recovery occurs.




**Item
      4. Submission of Matters to a Vote of Security Holders**





None




14


**PART
      II**




**Item
      5. Market Price of and Dividends on the Registrant’s 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 29, 2008, there were 103
      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
      3,760.





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, 2007.




**Common
                Stock****Sale
                Prices****2006**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            4.05
            
            $
            2.35Second
                Quarter
            
            
            3.06
            
            
            2.06Third
                Quarter
            
            
            2.48
            
            
            1.53Fourth
                Quarter
            
            
            2.41
            
            
            1.61**2007**
            
            
            **High**
            
            
            **Low**First
                Quarter
            
            $
            3.75
            
            $
            1.95Second
                Quarter
            
            
            4.25
            
            
            2.55Third
                Quarter
            
            
            4.30
            
            
            2.56Fourth
                Quarter
            
            
            6.38
            
            
            3.36





**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.


15


**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, 2007:





**Number
                of****Securities to be Issued**
            
            **Weighted-Average**
            
            **Number of Securities****Upon Exercise of**
            
            **Exercise Price of**
            
            **Remaining Available For****Outstanding Options,**
            
            **Outstanding Options,**
            
            **Future Issuance Under****Plan
                Category**
            
            **Warrants and Rights**
            
            **Warrants and Rights**
            
            **Equity Compensation Plans****(a)**
            
            **(b)**
            
            **(c)**Equity
                compensation plans approved by security holders (1)
            
            
            3,168,000
            
            $
            2.69
            
            
            2,366,000Equity
                compensation plans not approved by security holders
            
            
            -
            
            
            -
            
            
            -Total
            
            
            3,168,000
            
            $
            2.69
            
            
            2,366,000




(1)
            1998,
                2001 and 2002 Stock Option Plans, approved by the stockholders, see
                Note 9
                to Consolidated Financial Statements, contained herein.





**Recent
      Sales of Unregistered Securities; Use of Proceeds from Registered
      Securities.**





Since
      January 1, 2007 and through December 31, 2007, the Company has issued
      the following securities:





On
      September 12, 2007, the Company’s Chairman and CEO (the “CEO”) exercised
      1,139,160 stock options at a total exercise price of $882,844. The CEO paid
      the
      exercise price by surrendering to the Company 229,310 of the shares of common
      stock he would have otherwise received on the option exercise. In addition, the
      CEO surrendered 395,695 shares to the Company in consideration of the payment
      by
      the Company on his behalf of $1,523,426 of the Company’s minimum withholding tax
      requirement payable in respect of the option exercise. Because the payment
      value
      attributable to the surrendered shares upon settlement does not exceed the
      fair
      value of the option, no compensation cost was recognized at the date of
      settlement. In connection with this transaction, the Company issued a net total
      of 514,155 shares of common stock to the CEO.





**Treasury
      Stock**





In
      August, 2006, the Board of Directors authorized the repurchase of up to $1.0
      million of its common stock of which approximately $681,000 remains available
      for repurchase under the program as of December 31, 2007. During the year ended
      December 31, 2007, the Company did not repurchase any shares of its common
      stock. During the year ended December 31, 2006, the Company had repurchased
      182,262 shares of its common stock at a cost of $319,000. There is no expiration
      date associated with the program.





**Item
      6. Selected Financial Data.**





The
      following table sets forth our selected consolidated historical financial data
      as of the dates and for the periods indicated. Our selected consolidated
      financial data set forth below as of December 31, 2007 and 2006 and for
      each of the three years in the period ended December 31, 2007 has been
      derived from the audited financial statements included elsewhere herein. Our
      selected consolidated financial data set forth below as of December 31,
      2005, 2004 and 2003 and for each of the years ended December 31, 2004 and
      2003 are derived from the audited financial statements not included elsewhere
      herein. Our selected consolidated financial information for 2007, 2006 and
      2005
      should be read in conjunction with the Consolidated Financial Statements and
      the
      Notes and “Item 7. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations” which are included elsewhere in this Annual
      Report on **** Form 10-K.


16




**Year
                  Ended December 31,****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003****(In
                  thousands, except per share data)****STATEMENT
                  OF OPERATIONS DATA:**Revenues
              
              $
              67,731
              
              $
              40,953
              
              $
              42,052
              
              $
              53,949
              
              $
              36,714Operating
                  costs and expensesDirect
                  operating expenses
              
              
              48,581
              
              
              34,141
              
              
              30,920
              
              
              33,050
              
              
              27,029Selling
                  and administrative expenses
              
              
              15,281
              
              
              14,284
              
              
              13,684
              
              
              10,205
              
              
              8,898Restructuring
                  costs
              
              
              -
              
              
              604
              
              
              -
              
              
              -
              
              
              -63,862
              
              
              49,029
              
              
              44,604
              
              
              43,255
              
              
              35,927Income
                  (loss) from operations
              
              
              3,869
              
              
              (8,076
              )
              
              (2,552
              )
              
              10,694
              
              
              787Other
                  (income) expensesTerminated
                  offering costs
              
              
              -
              
              
              -
              
              
              -
              
              
              625
              
              
              -Bad
                  debt recovery, net
              
              
              -
              
              
              -
              
              
              -
              
              
              (963
              )
              
              -Interest
                  expense
              
              
              33
              
              
              7
              
              
              18
              
              
              25
              
              
              9Interest
                  income
              
              
              (678
              )
              
              (683
              )
              
              (457
              )
              
              (87
              )
              
              (30
              )Income
                  (loss) before (benefit from)provision
                  for income taxes
              
              
              4,514
              
              
              (7,400
              )
              
              (2,113
              )
              
              11,094
              
              
              808(Benefit
                  from) provision for income taxes
              
              
              (52
              )
              
              (77
              )
              
              (462
              )
              
              3,237
              
              
              333Net
                  income (loss)
              
              $
              4,566
              
              $
              (7,323
              )
              $
              (1,651
              )
              $
              7,857
              
              $
              475Income
                  (loss) per share:Basic
              
              $
              .19
              
              $
              (.30
              )
              $
              (.07
              )
              $
              .35
              
              $
              .02Diluted
              
              $
              .18
              
              $
              (.30
              )
              $
              (.07
              )
              $
              .32
              
              $
              .02Cash
                  dividends per share
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
  **December
                  31,****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003****(In
                  thousands)****BALANCE
                  SHEET DATA:**Working
                  capital
              
              $
              16,329
              
              $
              14,292
              
              $
              21,432
              
              $
              22,209
              
              $
              11,983Total
                  assets
              
              $
              38,449
              
              $
              30,329
              
              $
              37,611
              
              $
              37,211
              
              $
              25,146Long
                  term obligations
              
              $
              2,128
              
              $
              1,564
              
              $
              548
              
              $
              150
              
              $
              272Stockholders’
                  equity
              
              $
              23,230
              
              $
              19,009
              
              $
              26,814
              
              $
              26,737
              
              $
              17,404




17


**Item
      7. Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations.**





The
      following discussion should be read in conjunction with our consolidated
      financial statements and the related notes included elsewhere in this report.
      In
      addition to historical information, this discussion includes forward-looking
      information that involves risks and assumptions which could cause actual results
      to differ materially from management’s expectations. See “Forward-Looking
      Statements” included elsewhere in this report.





**Executive
      Overview**





We
      provide a broad and expanding range of knowledge process outsourcing services
      as
      well as publishing and related information technology services that help
      companies create and manage information more effectively and economically.
      Our
      solutions enable organizations to find new ways to transform inefficient
      business processes, improve operations and reduce costs.





In
      2007,
      we commenced a reorganization of our management and operating structure. Prior
      to 2007, our operations were classified into two operating segments: (1)
      content-related BPO and KPO services and (2) IT professional services. In this
      reorganization, we merged the content-related BPO and KPO services and IT
      professional services segments (ceasing to monitor its operations by these
      two
      segments). With this reorganization, our Company
      consists of one business that generates revenues and expenses. The structure
      of our Company's current operating segment reflects the way the chief
      operating decision maker looks at the overall Company to evaluate performance
      and makes executive decisions (including the allocation of resources) about
      the
      business. There is no end to end responsibility or management other than at
      the
      consolidated level and discrete financial information is available at the
      consolidated level.





The
      following table sets forth, for the period indicated, certain financial data
      expressed for the three years ended December 31, 2007:





**Years
                Ended December 31,****2007**
            
            **% of revenue**
            
            
            **2006**
            
            **% of revenue**
            
            
            **2005**
            
            **% of revenue**Revenues
            
            $
            67.7
            
            
            100.0
            %
            
            $
            41.0
            
            
            100.0
            %
            
            $
            42.1
            
            
            100
            %Direct
                operating costs
            
            
            48.6
            
            
            71.8
            %
            
            
            34.1
            
            
            83.2
            %
            
            
            30.9
            
            
            73.4
            %Selling
                and administrative expenses
            
            
            15.3
            
            
            22.6
            %
            
            
            14.3
            
            
            34.8
            %
            
            
            13.7
            
            
            32.5
            %Restructuring
                costs
            
            
            -
            
            
            -
            
            
            
            0.6
            
            
            1.5
            %
            
            
            -
            
            
            -Income
                (loss) from operations
            
            
            3.8
            
            
            5.6
            %
            
            
            (8.0
            )
            
            (19.5
            )%
            
            
            (2.5
            )
            
            (5.9
            )%Other
                (income) expenses
            
            
            (0.7
            )
            
            
            
            
            
            (0.6
            )
            
            
            
            
            
            (0.4
            )Income
                  (loss) before benefit fromincome
                  taxes
            
            
            4.5
            
            
            
            
            
            
            (7.4
            )
            
            
            
            
            
            (2.1
            )Benefit
                from income taxes
            
            
            (0.1
            )
            
            
            
            
            
            (0.1
            )
            
            
            
            
            
            (0.4
            )Net
                income (loss)
            
            $
            4.6
            
            
            6.8
            %
            
            $
            (7.3
            )
            
            (17.8
            )%
            
            $
            (1.7
            )
            
            (4.0
            )%





*Revenues*





Our
      publishing services include digitization, conversion, composition, data modeling
      and XML encoding and KPO services include research and analysis, authoring,
      copy-editing, abstracting, indexing and other content creation activities.
      Our
      IT system professionals support the design, implementation, integration and
      deployment of digital systems used to author, manage and distribute content.
      Services that we anticipate a client will require for an indefinite period
      generate what we regard as recurring revenues. 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 price our publishing
      services and KPO services based on the quantity delivered or resources utilized
      and recognize revenue in the period in which the services are performed and
      delivered. A substantial majority of our IT professional services is
      provided on a project basis that generates non-recurring revenues. 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.


18




Recurring
      revenues consisted of 61%, 61% and 58% of total revenues for the years ended
      December 31, 2007, 2006 and 2005, respectively. We have historically relied
      on a
      very limited number of clients that have accounted for a significant portion
      of
      our revenues. Our top four clients generated approximately 61%, 54% and 53%
      of
      our revenues is the fiscal year ended December 31, 2007, 2006 and 2005,
      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.





Refer
      to
“Risk Factors.”





*Direct
      Operating Costs*





Direct
      operating costs consist of direct payroll, occupancy costs, depreciation,
      telecommunications, computer services and supplies. We anticipate our cost
      of
      labor to increase in 2008 by approximately $500,000 per quarter as a result
      of
      general wage increases.





*Selling
      and Administrative Expenses*





Selling
      and administrative expenses consist of management and administrative salaries,
      sales and marketing costs, new services research and related software
      development, and administrative overhead.




**Results
      of Operations**





**Year
      Ended December 31, 2007 Compared to the Year Ended December 31,
      2006**





*Revenues*





Revenues
      were $67.7 million for the year ended December 31, 2007 compared to
      $41.0 million for the similar period in 2006, an increase of approximately
      65%. The $26.7 million increase in revenues, which is principally attributable
      to four clients (three existing clients and one new client), reflects a $20.9
      million increase from recurring revenue and $5.8 million from non-recurring
      project revenue.  Furthermore, more than 62% of the total revenue increase
      is attributable to knowledge services.





Our
      top
      four clients generated approximately 61% and 54% of our revenues is the fiscal
      year ended December 31, 2007 and 2006, respectively. Further,
      for the year ended December 31, 2007 and 2006, revenues from clients located
      in
      foreign countries (principally in Europe) accounted for 23% and 37%
      respectively, of our total revenues.





For
      the
      years ended December 31, 2007 and 2006, approximately 61% of our revenue was
      recurring and the 39% balance was non-recurring.


19




We
      have
      provided our services to approximately 150 clients as of December 31, 2007
      as
      compared to approximately 130 clients as of December 31, 2006.





*Direct
      Operating Costs*





Direct
      operating costs were $48.6 million and $34.1 million for the years
      ended December 31, 2007 and 2006, respectively, an increase of
      approximately 43%. Direct operating costs as a percentage of revenues were
      72%
      for the year ended December 31, 2007 and 83% for the year ended
      December 31, 2006.





The
      increase in direct operating costs was principally attributable to the increase
      in variable labor (management and production personnel) and other operating
      costs in support of higher revenue volume. The direct operating expenses as
      a
      percentage of revenues were lower in 2007 as compared to 2006, principally
      due
      to decreased variable costs as a percent of revenues, and increased operating
      leverage resulting from the increase in revenues with no significant increase
      in
      fixed costs. These favorable results were offset in part by $2.6 million in
      direct operating costs resulting from a weakened US dollar against the
      Philippine peso and India rupee.





*Selling
      and Administrative Expenses*





Selling
      and administrative expenses were $15.3 million and $14.3 million for
      the years ended December 31, 2007 and 2006, respectively, an increase
      of approximately 7%. Selling and administrative expenses as a percentage of
      revenues were 23% and 35% for the years ended December 31, 2007 and 2006
      respectively. The lower percentage reflects sustained operating costs levels
      on
      a higher revenue base.





Selling
      and administrative expenses in 2006 includes approximately $246,000 received
      as
      an inducement to terminate our Dallas office lease prior to its contractual
      expiration dates, accrued severance costs of approximately $275,000 related
      to
      the termination of an executive’s employment and approximately $922,000 in
      research and development for new services. After excluding the effect of these
      non-recurring adjustments, the resulting increase in selling and administrative
      expenses principally reflects increased sales and administrative payroll and
      payroll related costs associated with annual salary increases and increased
      professional fees, including fees associated with Section 404 of the Sarbanes
      Oxley incurred in 2007.





*Restructuring
      Costs*





As
      part
      of an overall cost reduction plan to reduce operating costs, in September 2006
      we announced a worldwide workforce reduction of slightly under 300 employees,
      the majority of whom were based in Asia. Most employees were terminated prior
      to
      September 30, and we substantially implemented the plan at end of
      2006.





As
      a
      result, the Company recorded total charges of $604,000 in 2006 associated with
      the restructuring plan. The 2006 charge consisted of $531,000 of employee
      severance costs and $73,000 of costs to implement the plan. Of the total amount,
      $60,000 represents charges relating to stock option modifications.





In
      connection with the restructuring, the Company paid cash of $544,000 and
      recognized costs amounting to $60,000 for stock option modifications. The
      Company currently expects no future costs to be incurred associated with the
      restructuring plan.





As
      of
      December 31, 2006, accrued expenses included approximately $102,000 related
      to
      the restructuring charges, which were paid in 2007.


20





*Income
      Taxes*





For
      the
      year ended December 31, 2007, the benefit from income taxes as a percentage
      of income before income taxes was 1%. The 2007 benefit from income taxes is
      lower than the U.S. Federal statutory rate, principally due to the U.S. net
      operating losses which were not recognized as a result of a valuation allowance.
      In addition, certain overseas income 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, 2006, the benefit from income taxes as a percentage
      of loss before income taxes was 1%. The 2006 benefit from income taxes is lower
      than the U.S. Federal statutory rate, principally due to the U.S. net operating
      losses which were not recognized as a result of a valuation allowance. In
      addition, certain overseas income 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
      assessing the realization of deferred tax assets, we consider whether it is
      more
      likely than not that all or some portion of our deferred tax assets will not
      be
      realized. Our ultimate realization of the deferred tax assets is dependent
      upon
      our generating 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, we have established a valuation allowance of
      approximately $4.6 million at December 31, 2007. In 2007, we have utilized
      $2.1 million of net operating losses.




Pursuant
      to an income tax audit by the Indian bureau of taxation, on March 27, 2006,
      one
      of our Indian subsidiaries received a tax assessment approximating $404,000,
      including interest through December 31, 2007, for the fiscal tax year ended
      March 31, 2003. We disagree with the basis of the tax assessment, and
      have filed an appeal against the assessment, which we will fight vigorously.
      The
      Indian bureau of taxation has also completed an audit of our Indian subsidiary’s
      income tax return for the fiscal tax year ended March 31, 2004. The
      ultimate outcome was favorable, and there was no tax assessment imposed for
      the
      fiscal tax year ended March 31, 2004. On March 20, 2007, the
      Indian bureau of taxation commenced an audit of our subsidiary’s income tax
      return for the fiscal year ended 2005. We cannot determine the ultimate outcome
      at this time.





As
      a
      result of an IRS audit settlement, we recognized approximately $234,000 of
      previously unrecognized tax benefits for the year ended December 31, 2007.
      An
      additional $176,000 of unrecognized tax benefits relating to uncertain income
      tax positions was provided for the year ended December 31, 2007.





We
      are
      subject to various tax audits and claims which arise in the ordinary course
      of
      business.  Management currently believes that the ultimate outcome of these
      audits and claims will not have a material adverse effect on our financial
      position or results of operations.





Our
      liability for net unrecognized tax benefits at December 31, 2007 and 2006
      was approximately $411,000 and $481,000, respectively. This liability represents
      an accrual relating to uncertain income tax positions we have taken on our
      domestic and foreign tax returns. We report interest expense and penalties
      related to income tax liabilities as a component of our provision for income
      taxes. As of December 31, 2007 and 2006, we had accrued a liability for interest
      and penalties totaling approximately $153,000 and $138,000,
      respectively.





Furthermore
      we had unrecognized tax benefits of $176,000 and $167,000 as of December 31,
      2007 and December 31, 2006, respectively, which, if recognized, would increase
      our net operating loss carry forward. This increase, if recognized, would not
      have an impact on our effective tax rate since the increase to our deferred
      tax
      assets would result in a corresponding increase to our valuation
      allowance.


21




In
      August
      2004, IRS promulgated regulations, effective August 12, 2004, that had the
      effect of making certain of our overseas entities 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. As a result, 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. On January 30, 2006, the IRS issued its final
      regulations, stating that neither the temporary regulations nor these final
      regulations are retroactive. In December 2007, the Company received a
      notification from IRS for the entitlement of the refund for taxes paid and
      the
      interest amounting to approximately $395,000 and $60,000, respectively. The
      Company appropriately recorded a benefit and an income tax receivable at
      December 31, 2007.




*Net
      Loss/Income*





We
      recorded net income of $4.6 million in 2007 compared with a net loss of
      $7.3 million in 2006. The change was principally attributable to the increase
      in
      gross margin resulting from increased revenues and lower selling and
      administrative expenses as a percentage of revenues.




**Year
      Ended December 31, 2006 Compared to the Year Ended December 31,
      2005**





*Revenues*




Revenues
      were $41.0 million for the year ended December 31, 2006 compared to
      $42.1 million for the similar period in 2005, a decrease of 3%. The decrease
      in
      revenue is primarily attributable to non-recurring projects that reached
      completion.





Three
      clients accounted for 28%, 12% and 10% of the Company’s revenues in the year
      ended December 31, 2006. Two clients accounted for 27% and 12% of the Company’s
      revenues in the year ended December 31, 2005. Further, for the years ended
      December 31, 2006 and 2005 revenues from clients located in foreign
      countries (principally in Europe) accounted for 37% and 35% of our total
      revenues, respectively.





For
      the
      year ended December 31, 2006, approximately 61% of our revenue was recurring
      and
      the 39% balance was non-recurring, compared with 58% and 42%, respectively,
      for
      the year ended December 31, 2005.





*Direct
      Operating Costs*





Direct
      operating costs were $34.1 million and $30.9 million for the years
      ended December 31, 2006 and 2005, respectively, an increase of 10%. Direct
      operating costs as a percentage of revenues were 83% for the year ended
      December 31, 2006 and 73% for the year ended December 31,
      2005.





The
      increase in direct operating costs, both in total dollar amount and as a
      percentage of revenues, is principally attributable to increases in pay rates
      for both management and production personnel, growth in our engineering
      technology department, and increases in various fixed expenses.





*Selling
      and Administrative Expenses*





Selling
      and administrative expenses were $14.3 million and $13.7 million for
      the years ended December 31, 2006 and 2005, respectively, an increase
      of 4%. Selling and administrative expenses as a percentage of revenues were
      35%
      and 33% for the years ended December 31, 2006 and 2005 respectively.
      Included as a reduction in selling and administrative expenses in 2006 is
      approximately $246,000 received as an inducement to terminate our Dallas office
      lease prior to its contractual expiration date. Selling and administrative
      expenses for the year ended December 31, 2006 also includes accrued severance
      costs of approximately $275,000 related to the termination of an executive’s
      employment. In addition, in the year ended December 31, 2006, we spent
      approximately $922,000 in new services research and development compared to
      $770,000 in the comparable 2005 period. The balance of the increase from 2005
      principally reflects general increases in administrative costs.


22




*Restructuring
      Costs*





As
      part
      of an overall cost reduction plan to reduce operating costs, in September 2006
      we announced a worldwide workforce reduction of slightly under 300 employees,
      the majority of whom were based in Asia. Most employees were terminated prior
      to
      September 30, and we substantially implemented the plan at end of
      2006.





As
      a
      result, the Company recorded total charges of $604,000 in 2006 associated with
      the restructuring plan of which $531,000 and $73,000 represent severance costs
      and costs to implement, respectively. The total amount, which includes $60,000
      non-cash consideration via stock option has been charged to earnings, of which
      $102,000 has been accrued and included under the caption “Accrued Expenses” in
      the balance sheet as at December 31, 2006.





In
      connection with the restructuring, the Company paid cash of $442,000 and
      recognized costs amounting to $60,000 for a stock option modification and paid
      the balance of $102,000 during the first two quarters of 2007.




*Income
      Taxes*





For
      the
      year ended December 31, 2006, the benefit from income taxes as a percentage
      of loss before income taxes was 1%. The 2006 benefit from income taxes is lower
      than the U.S. Federal statutory rate, principally due to the U.S. net operating
      losses which were not recognized as a result of a valuation allowance. In
      addition, certain overseas income 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, 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.





*Net
      Loss/Income*





We
      recorded a net loss of $7.3 million in 2006 compared with a net loss of
      $1.7 million in 2005. The principal reasons for the increase in net loss in
      2006
      were a decline in revenues, increases in operating costs and expenses and a
      $604,000 restructuring charge.




**Liquidity
      and Capital Resources**





Selected
      measures of liquidity and capital resources, expressed in thousands are as
      follows:




**December
                31,****2007**
            
            **2006**
            
            **2005**Cash
                and cash equivalents
            
            $
            14,751
            
            $
            13,597
            
            $
            20,059Working
                capital
            
            
            16,329
            
            
            14,292
            
            
            21,432




23





At
      December 31, 2007, we had cash and cash equivalents of $14.8 million. We have
      used, and plan to use, such cash for (i) expansion of existing operations;
      (ii)
      general corporate purposes, including working capital; and (iii) possible
      acquisitions of related businesses. As of December 31, 2007, we had no third
      party debt and had working capital of approximately $16 million as compared
      to
      working capital of approximately $14 million at December 31, 2006. Accordingly,
      we do not anticipate any near-term liquidity issues.





Our
      quarterly operating results are also subject to certain seasonal fluctuations.
      We generally experience lower revenue in the first quarter as we replace
      projects that were brought to end in the fourth quarter and we begin new
      projects, which may have some normal start up delays during the first quarter.
      These and other seasonal factors may contribute to fluctuations in our results
      of operations from quarter to quarter.





*Net
      Cash Provided By (Used In) Operating Activities*





Cash
      provided by our operating activities in 2007 was $6 million resulting from
      a net
      income of $4.6 million, adjustments for non-cash items of $3.9 million and
      $2.5
      million used for working capital. Adjustments for non-cash items primarily
      consisted of $3.2 million for depreciation and amortization and $0.7 million
      for
      pension costs. Working capital activities primarily consisted of a use of cash
      of $4.2 million for an increase in accounts receivable primarily related to
      increase in revenue, a source of cash of $1.0 million of an increase in accounts
      payable due to timing of expenditure, a source of cash of $1.7 million for
      an
      increase in accrued salaries and wages due to an increase in the number of
      employees and higher labor rates in support of higher revenue volume and a
      use
      of cash of $1.5 million due to payment of minimum withholding taxes on the
      net
      settlement of stock options exercised by the Chairman and CEO.





Cash
      used
      in our operating activities in 2006 was $3.4 million resulting from a net loss
      of $7.3 million, offset by adjustments for non-cash items of $3.8 million and
      $0.1 million generated by working capital. Adjustments for non-cash items
      primarily consisted of $3.4 million for depreciation and amortization and $0.3
      million for pension costs. Working capital activities primarily consisted of
      a
      source of cash of $0.7 million for a decrease in accounts receivable primarily
      related to decrease in our revenues and timing of collections, a use of cash
      of
      0.5 million for a decrease in accounts payable representing payments made to
      the
      vendors, a source of cash of $0.7 million for an increase in accrued expenses
      and accrued salaries and wages primarily related to the accruals for bonus
      and
      retirement benefits and a use of cash of $0.7 million due to increase in prepaid
      expenses and other current assets.





Cash
      provided by our operating activities in 2005 was $1.1 million resulting from
      a
      net loss of $1.7 million, offset by adjustments for non-cash items of $3.7
      million and $0.9 million used for working capital. Adjustments for non-cash
      items primarily consisted of $3.1 million for depreciation and amortization
      and
      $0.3 million for pension costs. Working capital activities primarily consisted
      of a source of cash of $0.9 million for a decrease in accounts receivable
      primarily related to decrease in our revenues and timing of collections, a
      use
      of cash of $1.2 million for an increase in refundable income taxes and a use
      of
      cash of $0.9 million for a decrease in accrued expenses and accrued salaries
      and
      wages primarily related to timing of payment of management
      incentives.




At
      December 31, 2007, our days’ sales outstanding were approximately 52 days as
      compared to 56 days as of December 31, 2006 and 55 days as of December 31,
      2005.




*Net
      Cash Used in Investing Activities*





During
      2007, 2006 and 2005, cash used in our investing activities was $4.4 million,
      $2.3 million and $2.3 million, respectively for capital expenditures. Capital
      spending in 2007 related principally to normal technology equipment and facility
      upgrades. Capital spending in 2006 and 2005 related principally to normal
      ongoing equipment upgrades, project requirement specific equipment, and
      improvements in infrastructure. Furthermore, in 2007, we financed the
      acquisition of certain computer and communications equipment approximating
      $0.8
      million whereas we purchased software licenses totaling approximately $0.2
      million and $1.6 million in 2006 and 2005, respectively. During the next twelve
      months, we anticipate that capital expenditures for ongoing technology,
      hardware, equipment and infrastructure upgrades will approximate $4.5 million,
      a
      portion of which we may finance.


24




*Net
      Cash Provided by Financing Activities*





Cash
      proceeds received from the exercise of stock options amounted to approximately
      $0.5 million, $0.3 million and $1.3 million in 2007, 2006 and 2005,
      respectively.





In August,
      2006, the Board of Directors authorized the repurchase of up to $1.0 million
      of
      its common stock of which we repurchased 182,262 shares of our common stock.
      We
      paid $0.3 million to repurchase these shares. No shares were repurchased in
      2007.





In
      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, representing a non-cash investing
      and financing activity. Approximately $0.6 million, $0.5 million and $0.5
      million was paid in 2007, 2006 and 2005, respectively with no remaining balance
      due as of December 31, 2007.





In
      2006,
      additional software licenses amounting to $164,000 were acquired under staggered
      payment terms. Total payment made on these purchases in 2007 and 2006 amounted
      to $78,000 and $82,000, respectively with the remaining balance to be paid
      by
      January 2008.





In
      2007,
      the Company financed the acquisition of certain computer and communication
      equipments. The capital lease obligations bear interest at rates ranging from
      6%
      to 10% and are payable over two to five years.





As
      we
      operate in a number of countries around the world, we face exposure to adverse
      movements in foreign currency exchange rates. These exposures may change over
      time as business practices evolve and may have a material adverse impact on
      our
      consolidated financial results. Our primary exposure relate to non-U.S. based
      operating expenses in Asia. In October 2007, we entered into foreign currency
      forward contracts, with a maximum term of two months and an aggregate notional
      amount of $4.5 million, to sell U.S. Dollars for Philippine Peso and Indian
      Rupee that were all settled in November and December 2007. Our U.S. Corporate
      headquarters funds expenditure for our foreign subsidiaries based in the
      Philippines and India. We are exposed to foreign exchange risk and therefore
      we
      use foreign currency forward contracts to mitigate our exposure of fluctuating
      future cash flows arising due to changes in foreign exchange rates. There were
      no unsettled contract at December 31, 2007 and all realized gains and losses
      were reported in our consolidated statement of operations.





Other
      than the aforementioned forward contracts, we have not engaged in any hedging
      activities nor have we entered into off-balance sheet transactions, arrangements
      or other relationships with unconsolidated entities or other persons that are
      likely to affect liquidity or the availability of our requirements for capital
      resources.




**Future
      Liquidity and Capital Resource Requirements**





The
      Company has an uncommitted line of credit of $5 million which expires on
      May 31, 2008. Under the terms of the agreement any amounts drawn against this
      facility must be secured by a certificate of deposit of an equal amount.
      Additionally, any amounts drawn will bear interest at the bank’s alternate base
      rate plus 1⁄2% or LIBOR plus 3%. The Company has no outstanding obligations under
      this credit line as of December 31, 2007.


25




We
      believe that our existing cash and cash equivalents, funds generated from our
      operating activities and funds available under our credit facility will provide
      sufficient sources of liquidity to satisfy our financial needs for the next
      twelve months. However, if circumstances change, we may need to raise debt
      or
      additional equity capital in the future. We fund our foreign expenditures from
      our U.S. Corporate headquarters on an as-needed basis.





**Contractual
      Obligations**





The
      table
      below summarizes our contractual obligations (in thousands) at December 31,
      2007, and the effect that those obligations are expected to have on our
      liquidity and cash flows in future periods.





**Payments
                  Due by Period****Contractual
                  Obligations**
              
              **Total**
              
              **Less**
                **than**
                **1
                  year**
              
              **1-3
                  years**
              
              **4-5
                  years**
              
              **After**
                **5
                  years**Capital
                  lease obligations
              
              $
              659
              
              $
              260
              
              $
              393
              
              $
              6
              
              $
              -Non-cancelable
                  operating leases
              
              
              2,554
              
              
              980
              
              
              1,293
              
              
              281
              
              
              -Long-term
                  vendor obligations
              
              
              4
              
              
              4
              
              
              -
              
              
              -
              
              
              -Total
                  contractual cash obligations
              
              $
              3,217
              
              $
              1,244
              
              $
              1,686
              
              $
              287
              
              $
              -





Future
      expected obligations under the Company’s pension benefit plan have not been
      included in the contractual cash obligations table above.





**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***





Our
      discussion and analysis of our results of operations, liquidity and capital
      resources are based on our consolidated financial statements which have been
      prepared in conformity with accounting principles generally accepted in the
      United States of America. The preparation of these consolidated financial
      statements requires us to make estimates and judgments that affect the reported
      amounts of assets, liabilities, revenues and expenses, and disclosure of
      contingent assets and liabilities. On an on-going basis, we evaluate our
      estimates and judgments, including those related to revenue recognition,
      allowance for doubtful accounts and billing adjustments, long-lived assets,
      goodwill, valuation of deferred tax assets, value of securities underlying
      stock-based compensation, litigation accruals, post retirement benefits and
      estimated accruals for various tax exposures. We base our estimates on
      historical and anticipated results and trends and on various other assumptions
      that we believe are reasonable under the circumstances, including assumptions
      as
      to future events. These estimates form the basis for making judgments about
      the
      carrying values of assets and liabilities that are not readily apparent from
      other sources. By their nature, estimates are subject to an inherent degree
      of
      uncertainty. Actual results may differ from our estimates and could have a
      significant adverse effect on our results of operations and financial position.
      We believe the following critical accounting policies affect our more
      significant estimates and judgments in the preparation of our consolidated
      financial statements.


26




***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 in the period in which we perform services and deliver in
      accordance with Staff Accounting Bulletin 104.





We
      recognize IT professional services revenues from custom application and systems
      integration development which requires significant production, modification
      or
      customization of software 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 in the period
      ended December 31, 2007. We recognize revenue billed on a time and
      materials basis as we perform the services.





***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 recognize an
      impairment in any of our long lived assets in each
      of
      the three years in the period ended December 31, 2007 .


27




***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.
      We have provided a valuation allowance for net operating loss carryforwards
      which may not be realized and for deferred tax assets in foreign jurisdictions
      which may not be realized because of our current tax holidays. 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. In addition we have
      provided for an accrual for potential tax obligations resulting from income
      tax
      audits and other potential tax obligations.





The
      Company adopted Financial Accounting Standards Board (“FASB”) Interpretation
      No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes” on
      January 1, 2007. FIN 48 requires companies to determine whether it is “more
      likely than not” that a tax position will be sustained upon examination by the
      appropriate taxing authorities before any tax benefit can be recorded in the
      financial statements. It also provides guidance on the recognition, measurement,
      classification and disclosure in the financial statements for uncertain tax
      positions taken or expected to be taken in a tax return. No cumulative effect
      of
      a change in accounting principle or adjustment to the liability for unrecognized
      tax benefits was recognized as a result of the adoption of FIN 48. Accordingly,
      the adoption of FIN 48 did not have an effect on the results of operations
      or
      financial position of the Company.




***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, 2007, 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
      are
      authorized under the 1998, 2001 and 2002 Stock Options Plans to grant stock
      options to officers, directors and employees of the Company.




28





Effective
        January 1, 2006, we were required to account for stock-based awards in
        accordance with the fair value recognition provisions of SFAS No. 123 (Revised
        2004) *Share-Based
        Payment* (“SFAS 123(R)”),
        which required the measurement and recognition of stock-based compensation
        expense for all share-based payment awards made to employees and directors
        based
        on estimated fair value at the grant date and is recognized over the requisite
        service period. Determining the fair value of stock-based awards at the grant
        date requires judgment, including estimating the expected term of stock options
        and the expected volatility of our stock. The fair value is determined using
        the
        Black-Scholes option-pricing model. We recorded stock-based compensation
        expense
        of approximately $174,000 and $241,000 for the year ended December 31, 2007
        and
        2006, respectively.




***Legal
      Proceedings***





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. Our
      legal
      reserves related to these proceedings and claims are based on a determination
      of
      whether or not the loss is either probable or reasonably possible. We review
      outstanding claims and proceedings with external counsel to assess probability
      and estimates of loss. The reserves are adjusted if necessary. If circumstances
      change, we may be required to record adjustments that could be material to
      its
      reported financial condition and results of operation. Based on consultation
      with legal counsel, the Company believes that recovery against us for the legal
      proceedings and claims would nevertheless be unlikely.





***Pension***





Most
      of
      our non-U.S. subsidiaries provide for government mandated defined pension
      benefits covering those employees who meet certain eligibility requirements.
      Pension assumptions are significant inputs to actuarial models that measure
      pension benefit obligations and related effects on operations. Two critical
      assumptions – discount rate and rate of increase in compensation levels – are
      important elements of plan expense and asset/liability measurements. These
      critical assumptions are evaluated at least annually on a plan and a country
      specific basis. Other assumptions involving demographic factors such as
      retirement age, mortality and turnover are evaluated periodically and are
      updated to reflect actual experience and expectations for the future. Actual
      results in any given year will often differ from actuarial assumptions because
      of economic and other factors, an in accordance with generally accepted
      accounting principles, the impact of these differences and accumulated and
      amortized over future periods.




***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 any of the three years
      in
      the period ended December 31, 2007.  Included in selling and
      administrative expense are research and development costs totaling approximately
      $922,000 and $770,000 for the years ended December 31, 2006 and 2005,
      respectively. The Company did not incur any research and development costs
      in
      2007.




29




***Recent
        Accounting Pronouncements***
 
 In
        September 2006, the FASB issued SFAS No. 157, *Fair
        Value Measurements* (“SFAS 157”), to define fair value, establish a framework for measuring
        fair value in conformity with accounting principles generally accepted in
        the
        United Sates of America, which expands disclosures about fair value
        measurements. SFAS 157 requires quantitative disclosures using a tabular
        format in all periods (interim and annual) and qualitative disclosures about
        the
        valuation techniques used to measure fair value in all annual periods.
        SFAS 157 will be effective for us beginning January 1, 2008. We do not
        believe that the adoption of SFAS 157 will have a material impact on our
        consolidated financial statements.




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* (“SFAS
      159”). SFAS 159 expands opportunities to use fair value measurements in
      financial reporting and permits entities to choose to measure many financial
      instruments and certain other items at fair value. SFAS 159 will be
      effective for us on January 1, 2008. We
      do not
      believe that the adoption of SFAS 159 will have a material impact on our
      consolidated financial statements.





In.
      December 2007, the FASB issued SFAS No. 141(R), *“Business
      Combinations”* (“SFAS
      141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes principles
      and requirements for how an acquirer recognizes and measures in its financial
      statements the identifiable assets acquired, the liabilities assumed, any
      non-controlling interest in the acquiree and the goodwill acquired. The
      Statement also establishes disclosure requirements which will enable users
      to
      evaluate the nature and financial effects of the business combination. SFAS
      141(R) is effective for fiscal years beginning after December 15, 2008. The
      adoption of SFAS 141(R) will have an impact on accounting for business
      combinations once adopted, but the effect is dependent upon acquisitions at
      that
      time.





In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements, an amendment of ARB
      No. 51* . SFAS
      No. 160 requires entities to report noncontrolling (minority) interests as
      a component of shareholders’ equity on the balance sheet; include all earnings
      of a consolidated subsidiary in consolidated results of operations; and treat
      all transactions between an entity and noncontrolling interest as equity
      transactions between the parties. SFAS
      No. 160 is effective for fiscal years, and interim periods within those
      fiscal years, beginning on or after December 15, 2008. Earlier adoption is
      prohibited. SFAS No. 160 must be applied prospectively as of the beginning
      of the fiscal year in which SFAS No. 160 is initially applied, except for
      the presentation and disclosure requirements. The presentation and disclosure
      requirements are applied retrospectively for all periods presented. The Company
      does not have a noncontrolling interest in one or more subsidiaries.
      Accordingly, the Company does not anticipate that the initial application of
      SFAS No. 160 will have an impact on the Company.





**Item
      7A. Quantitative and Qualitative Disclosures About Market
      Risk.**





**Interest
      rate risk**





We
      are
      exposed to interest rate change market risk with respect to our credit line
      with
      a financial institution which is priced based on the bank’s alternate base rate
      (7.25% at December 31, 2007) plus 1⁄2% or LIBOR (4.38% at December 31, 2007) plus
      3%. We have not borrowed under this line in 2007. To the extent we utilize
      all
      or a portion of this line of credit, changes in the interest rate will have
      a
      positive or negative effect on our interest expense.





**Foreign
      currency risk**





We
      have
      operations in foreign countries. Our U.S. Corporate headquarters funds operating
      expenses of our foreign subsidiaries based in the Philippines and India. We
      are
      exposed to foreign exchange risk and therefore entered into foreign currency
      forward contracts in October 2007 to mitigate our exposure to fluctuating future
      cash flows due to changes in foreign exchange rates. These forward contracts
      were entered into for a maximum term of two months and had an aggregate notional
      amount of $4.5 million to sell U.S. Dollars for Philippine Peso and Indian
      Rupee
      We may continue to enter into such instruments in the future to reduce foreign
      currency exposure to appreciation or depreciation in the value of these foreign
      currencies. There were no unsettled contracts at December 31, 2007. Other than
      the aforementioned forward contracts, we have not engaged in any hedging
      activities nor have we entered into off-balance sheet transactions, arrangements
      or other relationships with unconsolidated entities or other persons that are
      likely to affect liquidity or the availability of our requirements for capital
      resources. As of December 31, 2007 our foreign locations held cash totaling
      approximately $9.5 million.


30




**Item
      8. Financial Statements and Supplementary Data.**





See
      Financial Statements and Financial Statement Index commencing on page F-1
      hereof.





**Item
      9. Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure.**





None





**Item
      9A. Controls and Procedures.**





**Evaluation
      of Disclosure Controls and Procedures**





In
      accordance with Exchange Act Rules 13a-15(e), we carried out an evaluation,
      under the supervision and with the participation of management, including our
      Chief Executive Officer and Chief Financial Officer, of the effectiveness of
      our
      disclosure controls and procedures as required by Exchange Act Rule 13a-15(b)
      as
      of the end of the period covered by this report. Based on that evaluation,
      our
      Chief Executive Officer and Chief Financial Officer concluded that our
      disclosure controls and procedures were effective as of December 31, 2007.




**Changes
      in Internal Control over Financial Reporting**





There
      have been no changes in the Company’s internal controls over financial reporting
      (as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange
      Act)
      during the last fiscal quarter to which this report relates that have materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      control over financial reporting.




**Report
      of Management on Internal Control Over Financial Reporting**




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting for the company. Internal control over
      financial reporting is a process to provide reasonable assurance regarding
      the
      reliability of our financial reporting for external purposes in accordance
      with
      accounting principles generally accepted in the United States of America.
      Internal control over financial reporting includes maintaining records that
      in
      reasonable detail accurately and fairly reflect our transactions; providing
      reasonable assurance that transactions are recorded as necessary for preparation
      of our financial statements; providing reasonable assurance that receipts and
      expenditures of company assets are made in accordance with management
      authorization; and providing reasonable assurance that unauthorized acquisition,
      use or disposition of company assets that could have a material effect on our
      financial statements would be prevented or detected on a timely basis. Because
      of its inherent limitations, internal control over financial reporting is not
      intended to provide absolute assurance that a misstatement of our financial
      statements would be prevented or detected.




31




Management
        conducted an evaluation of the effectiveness of our internal control over
        financial reporting based on the framework in *Internal
        Control – Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission.
        Based
        on this evaluation, management concluded that the company’s internal control
        over financial reporting was effective as of December 31, 2007. There were
        no
        changes in our internal control over financial reporting during the quarter
        ended December 31, 2007 that have materially affected, or are reasonably
        likely to materially affect, our internal control over financial reporting.




The
      effectiveness of the Company’s internal control over financial reporting as of
      December 31, 2007, was audited by Grant Thornton LLP, an independent
      registered public accounting firm, as stated in their report appearing on pages
      F-2, which expressed an unqualified opinion on the effectiveness of the
      Company’s internal control over financial reporting as of December 31,
      2007.





**Item
      9B. Other information.**





None


32





**PART
      III**





**Item
      10. Directors, Executive Officers and Corporate
      Governance.**


The
      information called for by Item 10 is incorporated by reference from the
      Company’s definitive proxy statement for the 2008 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 2007 fiscal year.





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 2008 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 2007 fiscal year.





**Item
      12. Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.**





The
      information called for by Item 12 is incorporated by reference from the
      Company’s definitive proxy statement for the 2008 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 2007 fiscal year.





**Item
      13. Certain Relationships and Related Transactions, and Director
      Independence.**





The
      information called for by Item 13 is incorporated by reference from the
      Company’s definitive proxy statement for the 2008 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 2007 fiscal year.





**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 2008 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 2007 fiscal year.




33


**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
                Accounts.


3.
            Exhibits
                – See Exhibit Index attached hereto and incorporated by reference
                herein.




34





**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
                13, 2008Jack
                Abuhoff
            
            Chief
                Executive Officer and President/s/
                Steven L. Ford
            
            Executive
                Vice President,
            
            March
                13, 2008Steven
                L. Ford
            
            Chief
                Financial Officer
              and
                Principal Accounting Officer/s/
                Haig S. Bagerdjian
            
            Director
            
            March
                13, 2008Haig
                S. Bagerdjian/s/
                Louise C. Forlenza
            
            Director
            
            March
                13, 2008Louise
                C. Forlenza/s/
                John R. Marozsan
            
            Director
            
            March
                13, 2008John
                R. Marozsan/s/
                Peter H. Woodward
            
            Director
            
            March
                13, 2008Peter
                H. Woodward




35




**Item
      8. Financial Statements.**





**INNODATA
      ISOGEN, INC. AND SUBSIDIARIES**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**PAGE**Report
                of Independent Registered Public Accounting Firm
            F-2Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            F-3Consolidated
                Statements of Operations for the three years ended December
                31, 2007
            F-4Consolidated
                Statement of Stockholders’ Equity for the three years ended  December
                31, 2007
            F-5Consolidated
                Statements of Cash Flows for the three years ended December
                31, 2007
            F-6Notes
                to Consolidated Financial Statements
            F-7





**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 (the “Company”) as of December 31, 2007 and 2006, and the
      related consolidated statements of income, stockholders’ equity, and cash flows
      for each of the three years in the period ended December 31, 2007. Our audits
      of
      the basic financial statements included the financial statement schedule listed
      in the index appearing under Item 15. We also have audited Innodata Isogen,
      Inc.
      and subsidiaries internal control over financial reporting as of December 31,
      2007, based on criteria established in *Internal
      Control—Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      The
      Company’s management is responsible for these financial statements and financial
      statement schedule, for maintaining effective internal control over financial
      reporting, and for its assessment of the effectiveness of internal control
      over
      financial reporting, included in the accompanying Management’s Report on
      Internal Control Over Financial Reporting. Our responsibility is to express
      an
      opinion on these financial statements and financial statement schedule and
      an
      opinion on Innodata Isogen, Inc. and subsidiaries’ internal control over
      financial reporting 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. 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 financial position of Innodata Isogen, Inc. and
      subsidiaries’ as of December 31, 2007 and 2006, and the results of its
      operations and its cash flows for each of the three years in the period ended
      December 31, 2007 in conformity with accounting principles generally accepted
      in
      the United States of America. Also in our opinion, the related financial
      statement schedule, when considered in relation to the basic financial
      statements taken as a whole, presents fairly, in all material respects, the
      information set forth therein.





In
      our
      opinion, Innodata Isogen, Inc. and subsidiaries’ maintained, in all material
      respects, effective internal control over financial reporting as of December
      31,
      2007, based on criteria established in Internal Control—Integrated Framework
      issued by COSO.





As
      discussed in Note 9 to the consolidated financial statements, the Company
      changed its method of accounting for share-based compensation effective January
      1, 2006 in connection with the adoption of Statement of Financial Accounting
      Standards No. 123 (revised 2004), “Share-Based Payment”. Also, as discussed in
      Note 6 to the consolidated financial statements, the Company has adopted
      Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans”, in 2006.





/s/
      GRANT
      THORNTON LLP




Edison,
      New Jersey


March
      11,
      2008


F-2





**INNODATA
      ISOGEN, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**DECEMBER
      31, 2007 AND 2006**


**(in
      thousands, except share data)**


**2007**
              
              **2006****ASSETS****Current
                  assets:**Cash
                  and cash equivalents
              
              $
              14,751
              
              $
              13,597Accounts
                  receivable-net of allowance for doubtful accounts of $127 and $70
                  at
                  December 31, 2007 and 2006 respectively
              
              
              10,673
              
              
              6,484Prepaid
                  expenses and other current assets
              
              
              2,117
              
              
              1,589Refundable
                  income taxes
              
              
              453
              
              
              1,062Deferred
                  income taxes
              
              
              202
              
              
              190Total
                  current assets
              
              
              28,196
              
              
              22,922Property
                  and equipment, net
              
              
              7,160
              
              
              4,564Other
                  assets
              
              
              2,037
              
              
              1,912Deferred
                  income taxes
              
              
              381
              
              
              256Goodwill
              
              
              675
              
              
              675**Total
                  assets**
              
              $
              38,449
              
              $
              30,329**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****Current
                  liabilities:**Accounts
                  payable
              
              $
              1,973
              
              $
              987Accrued
                  expenses
              
              
              2,227
              
              
              1,969Accrued
                  salaries, wages and related benefits
              
              
              5,244
              
              
              3,554Income
                  and other taxes
              
              
              2,053
              
              
              1,295Current
                  portion of long term obligations
              
              
              370
              
              
              825Total
                  current liabilities
              
              
              11,867
              
              
              8,630Deferred
                  income taxes
              
              
              1,224
              
              
              1,126Long
                  term obligations
              
              
              2,128
              
              
              1,564**Commitments
                  and contingencies****STOCKHOLDERS’
                  EQUITY**:Serial
                  preferred stock; 5,000,000 shares authorized, none
                  outstanding
              
              
              -
              
              
              -Common
                  stock, $.01 par value; 75,000,000 shares authorized; 24,881,000
                  issued and24,699,000
                  outstanding at December 31, 2007; and 24,087,000 shares issued
                  and23,905,000
                  outstanding at December 31, 2006
              
              
              249
              
              
              241Additional
                  paid-in capital
              
              
              16,323
              
              
              17,225Retained
                  earnings
              
              
              7,188
              
              
              2,622Accumulated
                  other comprehensive loss
              
              
              (211
              )
              
              (760
              )23,549
              
              
              19,328Less:
                  treasury stock, 182,000 shares at cost
              
              
              (319
              )
              
              (319
              )Total
                  stockholders’ equity
              
              
              23,230
              
              
              19,009**Total
                  liabilities and stockholders’ equity**
              
              $
              38,449
              
              $
              30,329




See
      notes
      to consolidated financial statements.


F-3


**INNODATA
      ISOGEN, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**YEARS
      ENDED DECEMBER 31, 2007, 2006 AND 2005**


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





**2007**
            
            **2006**
            
            **2005****Revenues**
            
            $
            67,731
            
            $
            40,953
            
            $
            42,052**Operating
                costs and expenses**Direct
                operating costs
            
            
            48,581
            
            
            34,141
            
            
            30,920Selling
                and administrative expenses
            
            
            15,281
            
            
            14,284
            
            
            13,684Restructuring
                costs
            
            
            -
            
            
            604
            
            
            -63,862
            
            
            49,029
            
            
            44,604**Income
                (loss) from operations**
            
            
            3,869
            
            
            (8,076
            )
            
            (2,552
            )**Other
                (income) expenses**Interest
                expense
            
            
            33
            
            
            7
            
            
            18Interest
                income
            
            
            (678
            )
            
            (683
            )
            
            (457
            )**Income
                (loss) before benefit from income taxes**
            
            
            4,514
            
            
            (7,400
            )
            
            (2,113
            )Benefit
                from income taxes
            
            
            (52
            )
            
            (77
            )
            
            (462
            )**Net
                income (loss)**
            
            $
            4,566
            
            $
            (7,323
            )
            $
            (1,651
            )**Income
                (loss) per share:**Basic:
            
            $
            .19
            
            $
            (.30
            )
            $
            (.07
            )Diluted:
            
            $
            .18
            
            $
            (.30
            )
            $
            (.07
            )**Weighted
                average shares outstanding:**Basic:
            
            
            24,142
            
            
            24,021
            
            
            23,009Diluted:
            
            
            25,327
            
            
            24,021
            
            
            23,009





See
      notes
      to consolidated financial statements.


F-4


**INNODATA
      ISOGEN, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY**


**YEARS
      ENDED DECEMBER 31, 2007, 2006 AND 2005**


**(In
      thousands)**


**Accumulated****Additional**
              
              
              
              **Other****Common
                  Stock**
              
              **Paid-in**
              
              **Retained**
              
              **Comprehensive**
              
              **Treasury****Shares**
              
              **Amount**
              
              **Capital**
              
              **Earnings**
              
              **Loss**
              
              **Stock**
              
              **Total****January
                  1, 2005**
              
              
              22,679
              
              $
              227
              
              $
              14,914
              
              $
              11,596
              
              
              -
              
              
              -
              
              $
              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
              
              
              -
              
              
              -
              
              
              26,814Netloss
              
              
              -
              
              
              -
              
              
              -
              
              
              (7,323
              )
              
              -
              
              
              -
              
              
              (7,323
              )Issuance
                  of common stock upon exercise of stock options
              
              
              418
              
              
              4
              
              
              352
              
              
              -
              
              
              -
              
              
              -
              
              
              356Purchase
                  of treasury stock
              
              
              (182
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (319
              )
              
              (319
              )Non-cash
                  equity compensation
              
              
              -
              
              
              -
              
              
              241
              
              
              -
              
              
              -
              
              
              -
              
              
              241Adjustment
                    to initially apply FASB Statement 158,net of
                    tax
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (760
              )
              
              -
              
              
              (760
              )**December
                  31, 2006**
              
              
              23,905
              
              
              241
              
              
              17,225
              
              
              2,622
              
              
              (760
              )
              
              (319
              )
              
              19,009Netincome
              
              
              -
              
              
              -
              
              
              -
              
              
              4,566
              
              
              -
              
              
              -
              
              
              4,566Issuance
                  of common stock upon exercise of stock options
              
              
              794
              
              
              8
              
              
              447
              
              
              -
              
              
              -
              
              
              -
              
              
              455Payment
                  of minimum withholding taxes on net settlement of stock
                  options
              
              
              -
              
              
              -
              
              
              (1,523
              )
              
              -
              
              
              -
              
              
              -
              
              
              (1,523
              )Non-cash
                  equity compensation
              
              
              -
              
              
              -
              
              
              174
              
              
              -
              
              
              -
              
              
              -
              
              
              174Change
                    in transitional projected benefit obligation, net of
                    tax
              
              
              -
                  -
              
              
              -
              
              
              -
              
              
              -
              
              
              549
              
              
              -
              
              
              549**December
                  31, 2007**
              
              
              24,699
              
              $
              249
              
              $
              16,323
              
              $
              7,188
              
              $
              (211
              )
              $
              (319
              )
              $
              23,230





See
      notes
      to consolidated financial statements.


F-5


**INNODATA
      ISOGEN INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**YEARS
      ENDED DECEMBER 31, 2007, 2006 AND 2005**


**(In
      thousands)**




**2007**
            
            **2006**
            
            **2005****Cash
                flow from operating activities:**Net
                income (loss)
            
            $
            4,566
            
            $
            (7,323
            )
            $
            (1,651
            )Adjustments
                to reconcile net income (loss) to net cashprovided
                by (used in) operating activities:Depreciation
                and amortization
            
            
            3,156
            
            
            3,437
            
            
            3,160Stock-based
                compensation
            
            
            174
            
            
            241
            
            
            97Deferred
                income taxes
            
            
            (87
            )
            
            (222
            )
            
            215Pension
                cost
            
            
            667
            
            
            313
            
            
            251Changes
                in operating assets and liabilities, net of acquisitions:Accounts
                receivable
            
            
            (4,189
            )
            
            685
            
            
            850Prepaid
                expenses and other current assets
            
            
            (976
            )
            
            (665
            )
            
            167Refundable
                income taxes
            
            
            609
            
            
            153
            
            
            (1,215
            )Other
                assets
            
            
            (147
            )
            
            (189
            )
            
            (355
            )Accounts
                payable
            
            
            986
            
            
            (542
            )
            
            80Accrued
                expenses
            
            
            258
            
            
            367
            
            
            (211
            )Payment
                of minimum withholding taxes on net settlement of stock
                options
            
            
            (1,523
            )
            
            -
            
            
            -Accrued
                salaries and wages
            
            
            1,745
            
            
            379
            
            
            (663
            )Income
                and other taxes
            
            
            758
            
            
            (68
            )
            
            393Net
                cash provided by (used in) operating activities
            
            
            5,997
            
            
            (3,434
            )
            
            1,118**Cash
                flows from investing activities:**Capital
                expenditures
            
            
            (4,449
            )
            
            (2,329
            )
            
            (2,335
            )Net
                cash used in investing activities
            
            
            (4,449
            )
            
            (2,329
            )
            
            (2,335
            )**Cash
                flows from financing activities:**Payment
                of long-term obligations
            
            
            (849
            )
            
            (736
            )
            
            (684
            )Proceeds
                from exercise of stock options
            
            
            455
            
            
            356
            
            
            1,297Purchase
                of treasury stock
            
            
            -
            
            
            (319
            )
            
            -Net
                cash (used in) provided by financing activities
            
            
            (394
            )
            
            (699
            )
            
            613**Increase
                (decrease) in cash and cash equivalents**
            
            
            1,154
            
            
            (6,462
            )
            
            (604
            )**Cash
                and cash equivalents, beginning of period**
            
            
            13,597
            
            
            20,059
            
            
            20,663**Cash
                and cash equivalents, end of period**
            
            $
            14,751
            
            $
            13,597
            
            $
            20,059**Supplemental
                disclosures of cash flow information:**Cash
                paid for income taxes
            
            $
            325
            
            $
            340
            
            $
            504Cash
                paid for interest
            
            $
            33
            
            $
            7
            
            $
            18**Non-cash
                investing and financing activities:**Acquisition
                of equipment utilizing capital leases
            
            $
            770
            
            $
            -
            
            $
            -Vendor
                financed software licenses acquired
            
            $
            -
            
            $
            164
            
            $
            1,583




See
      notes
      to consolidated financial statements


F-6


**INNODATA
      ISOGEN, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**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
      knowledge process outsourcing (KPO) services as well as publishing and related
      information technology services that help organizations create, manage, use
      and
      distribute information more effectively and economically. Our publishing
      services include digitization, conversion, composition, data modeling and XML
      encoding and KPO services include research and analysis, authoring,
      copy-editing, abstracting, indexing and other content creation activities.
      Our
      IT system professional supports the design, implementation, integration and
      deployment of digital 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.
      Significant estimates include those related to revenue
      recognition, allowance for doubtful accounts and billing adjustments, long-lived
      assets, goodwill, valuation of deferred tax assets, value of securities
      underlying stock-based compensation, litigation accruals, post retirement
      benefits and estimated accruals for various tax exposures.





**Revenue
      Recognition** -Revenue
      is recognized in the period in which services are performed and delivery has
      occurred and when all the criteria of Staff Accounting Bulletin 104 have been
      met.





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 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 in the period ended December 31, 2007. Revenue billed on a time and
      materials basis is recognized as services are performed.





**Foreign
      Currency Translation** -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, 2007 and 2006 were translated at the exchange rate in effect
      as of those dates. Included in direct operating costs are exchange gains and
      losses resulting from such transactions were approximately $404,000, $28,000
      and
      $74,000 for the years ended December 31, 2007, 2006 and 2005,
      respectively.





**Foreign
      Exchange** -In
      2007,
      the Company entered into foreign currency forward contracts against the
      Philippine Peso and Indian Rupee primarily to hedge its exposure of fluctuating
      future cash flows. There were no foreign currency forward contracts outstanding
      at December 31, 2007. The realized gains resulting from such contracts were
      not
      material in 2007.


F-7


**INNODATA
      ISOGEN, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**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.





**Property
      and Equipment-** Property
      and equipment are stated at cost and are 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. Certain
      assets under capital leases are amortized over the lives of the respective
      leases or the estimated useful lives of the assets, whichever is shorter.





**Long-lived
      Assets** -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 initially
      using a projected undiscounted 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, which would be based on discounted cash
      flows, 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 each
      of
      the three years in the period ended December 31, 2007 .





**Goodwill
      and Other Intangible Assets-** Goodwill
      represents 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 (“SFAS 142”). 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.





Prior
      to
      2007, the Company’s operations were classified into two operating segments: (1)
      content-related BPO services and (2) IT professional services. These operating
      segments qualified as reporting units under SFAS 142. In 2007, the Company
      commenced a reorganization of its management and operating structure. In this
      reorganization, management merged the content-related BPO and KPO services
      and
      IT professional services segments (Refer note 11 to consolidated financial
      statements). The
      Company's current operating segment structure reflects the way the chief
      operating decision maker looks at the overall Company to evaluate performance
      and makes executive decisions (including the allocation of resources) about
      the
      business. With
      this
      reorganization, the Company no longer has two reporting units and two operating
      segments, but consists
      of one business that generates revenues and expenses. Thus, the entire goodwill
      is allocated to the consolidated company for the purposes of goodwill impairment
      test.





In
      the
      annual impairment test conducted by the Company on September 30, 2007, 2006
      and
      2005 the estimated fair values of the reporting unit exceeded its carrying
      amount, including goodwill. As such, no impairment was identified or
      recorded.


F-8


**INNODATA
      ISOGEN, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**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 not considered more
      likely than not that all of some portion of the deferred tax assets will be
      realized. Unremitted earnings of foreign subsidiaries for each of the three
      years in the period ended December 31, 2007, 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.





The
      Company adopted Financial Accounting Standards Board (“FASB”) Interpretation
      No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes” on
      January 1, 2007. FIN 48 requires companies to determine whether it is “more
      likely than not” that a tax position will be sustained upon examination by the
      appropriate taxing authorities before any tax benefit can be recorded in the
      financial statements. It also provides guidance on the recognition, measurement,
      classification and disclosure in the financial statements for uncertain tax
      positions taken or expected to be taken in a tax return. No cumulative effect
      of
      a change in accounting principle or adjustment to the liability for unrecognized
      tax benefits was recognized as a result of the adoption of FIN 48. Accordingly,
      the adoption of FIN 48 did not have an effect on the results of operations
      or
      financial position of the Company.





**Accounting
      for Stock-Based Compensation** **-**  Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS No. 123 (Revised 2004) *Share-Based
      Payment* (“SFAS 123(R)”),
      which required the measurement and recognition of stock-based compensation
      expense for all share-based payment awards made to employees and directors
      based
      on estimated fair value at the grant date. The stock-based compensation expense
      is recognized over the requisite service period. The fair value is determined
      using the Black-Scholes option-pricing model.





The
      stock-based compensation expense related to the Company’s various stock option
      plans was allocated as follows (in thousands):




**Years
                  Ended December 31,****2007**
              
              **2006**Cost
                  of sales
              
              $
              74
              
              $
              80Selling
                  and adminstrative expenses
              
              
              100
              
              
              101Restructuring
                  costs
              
              
              —
              
              
              60Total
                  stock-based compensation
              
              $
              174
              
              $
              241




Prior
      to
      adopting the provisions of SFAS 123(R), the Company recorded stock-based
      compensation expense for employee stock options using the assumptions described
      in Note 9, “Stock Options” pursuant to Accounting Principles Board (“APB”)
      Opinion No. 25, Accounting for Stock Issued to Employees, and provided the
      required pro forma disclosures of SFAS 123. The following table illustrates
      the
      pro forma effect on net loss and basic and diluted net loss per share for 2005
      had the Company accounted for employee stock-based compensation in accordance
      with SFAS No. 123:


F-9


**INNODATA
        ISOGEN, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **Year
                  Ended****December 31, 2005**(in thousands, exceptper share amounts)Net
                  loss, as reported
              
              $
              (1,651
              )Deduct:
                  Total stock-based employee compensation determined under the fair
                  value
                  method, net of related tax effects
              
              
              (6,731
              )Add:
                  Stock-based compensation expense included in the determination
                  of net loss
                  as reported, net of related tax effects, related to extension of
                  stock
                  options
              
              
              79Pro
                  forma net loss
              
              $
              (8,303
              )Net
                  loss per share, basic and diluted:As
                  reported
              
              $
              (0.07
              )Pro
                  forma
              
              $
              (0.36
              )





**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, 2007 and 2006 because of the relative short maturity of these instruments.
      The carrying amounts of long term obligations approximated their fair value
      as
      of December 31, 2007 and 2006 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.





**Earnings** **per Share** - Basic
      income (loss) per share is computed using the weighted-average number of common
      shares outstanding during the year. Diluted income (loss) per share is computed
      by considering the impact of the potential issuance of common shares, using
      the
      treasury stock method, on the weighted average number of shares outstanding.
      As
      the Company was in a net loss position for the year ended December 31, 2006
      and
      2005, the potential common shares derived from stock options were excluded
      from
      the calculation of diluted income (loss) per share as the shares would have
      had
      an anti-dilutive effect.


F-10


**INNODATA
        ISOGEN, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**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 each of the three years
      in
      the period ended December 31, 2007.  Included in selling and
      administrative expense are research and development costs totaling approximately
      $922,000 and $770,000 for the years ended December 31, 2006 and 2005,
      respectively. The Company did not incur any research and development costs
      in
      2007.





**Pension-** The
      Company records annual pension costs based on calculations, which include
      various actuarial assumptions including discount rates, compensation increases
      and other assumptions involving demographic factors. The Company reviews its
      actuarial assumptions on an annual basis and makes modifications to the
      assumptions based on current rates and trends. The Company believes that the
      assumptions used in recording its pension obligations are reasonable based
      on
      its experience, market conditions and inputs from its actuaries.





**Reclassifications-** Certain
      reclassifications have been made to the prior years’ consolidated financial
      statements to conform to the current year presentation.




**Recent
      Accounting Pronouncements**





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS 157”), to define fair value, establish a framework for measuring
      fair value in conformity with accounting principles generally accepted in the
      United Sates of America, which expands disclosures about fair value
      measurements. SFAS 157 requires quantitative disclosures using a tabular
      format in all periods (interim and annual) and qualitative disclosures about
      the
      valuation techniques used to measure fair value in all annual periods.
      SFAS 157 will be effective for us beginning January 1, 2008. We do not
      believe that the adoption of SFAS 157 will have a material impact on our
      consolidated financial statements.





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* (“SFAS
      159”). SFAS 159 expands opportunities to use fair value measurements in
      financial reporting and permits entities to choose to measure many financial
      instruments and certain other items at fair value. SFAS 159 will be
      effective for us on January 1, 2008. We do not believe that the adoption of
      SFAS 157 will have a material impact on our consolidated financial
      statements.





In.
      December 2007, the FASB issued SFAS No. 141(R), *“Business
      Combinations”* (“SFAS
      141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes principles
      and requirements for how an acquirer recognizes and measures in its financial
      statements the identifiable assets acquired, the liabilities assumed, any
      non-controlling interest in the acquiree and the goodwill acquired. The
      Statement also establishes disclosure requirements which will enable users
      to
      evaluate the nature and financial effects of the business combination. SFAS
      141(R) is effective for fiscal years beginning after December 15, 2008. The
      adoption of SFAS 141(R) will have an impact on accounting for business
      combinations once adopted, but the effect is dependent upon acquisitions at
      that
      time.





In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements, an amendment of ARB
      No. 51* . SFAS
      No. 160 requires entities to report noncontrolling (minority) interests as
      a component of shareholders’ equity on the balance sheet; include all earnings
      of a consolidated subsidiary in consolidated results of operations; and treat
      all transactions between an entity and noncontrolling interest as equity
      transactions between the parties. SFAS
      No. 160 is effective for fiscal years, and interim periods within those
      fiscal years, beginning on or after December 15, 2008. Earlier adoption is
      prohibited. SFAS No. 160 must be applied prospectively as of the beginning
      of the fiscal year in which SFAS No. 160 is initially applied, except for
      the presentation and disclosure requirements. The presentation and disclosure
      requirements are applied retrospectively for all periods presented. The Company
      does not have a noncontrolling interest in one or more subsidiaries.
      Accordingly, the Company does not anticipate that the initial application of
      SFAS No. 160 will have an impact on the Company.


F-11


**INNODATA
        ISOGEN, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**2.**
            **Property
                and equipment**





Property
      and equipment, which include amounts recorded under capital leases, are stated
      at cost less accumulated depreciation and amortization (in thousands), consist
      of the following:





******December
                31,****2007**
            
            **2006**Equipment
            
            $
            18,648
            
            $
            14,475Software
            
            
            3,293
            
            
            3,150Furniture
                and office equipment
            
            
            1,672
            
            
            1,328Leasehold
                improvements
            
            
            3,550
            
            
            3,317Total
            
            
            27,163
            
            
            22,270Less
                accumulated depreciation and amortization
            
            
            (20,003
            )
            
            (17,706
            )$
            7,160
            
            $
            4,564




Depreciation
      expense was approximately $2,622,000, $2,750,000 and $2,561,000 for each of
      the
      three years in the period ended December 31, 2007.





At
      December 31, 2007 and 2006, equipment under capital leases had a gross cost
      of
      approximately $1,481,000 and $707,000, respectively. Amortization of assets
      under capital leases is included under depreciation expense.





**3.**
            **Income
                taxes**





The
      significant components of the benefit from income taxes for each of the three
      years in the period ended December 31, 2007 (in thousands) are as follows:





**2007**
            
            **2006**
            
            **2005**Current
                income tax expense (benefit):Foreign
            
            $
            441
            
            $
            191
            
            $
            144Federal
            
            
            (359
            )
            
            (35
            )
            
            (821
            )State
                and local
            
            
            (54
            )
            
            (11
            )
            
            -28
            
            
            145
            
            
            (677
            )Deferred
                income tax expense (benefit) provisionForeign
            
            $
            (103
            )
            $
            (222
            )
            $
            (52
            )Federal
            
            
            31
            
            
            -
            
            
            139State
                and local
            
            
            (8
            )
            
            -
            
            
            128$
            (80
            )
            $
            (222
            )
            $
            215Benefit
                from income taxes
            
            $
            (52
            )
            $
            (77
            )
            $
            (462
            )


F-12




**INNODATA
      ISOGEN, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


The
      reconciliation of the U.S. statutory rate with the Company’s effective tax rate
      for each of the three years ended December 31, is summarized as
      follows:





**2007**
            
            **2006**
            
            **2005**Federal
                statutory rate
            
            
            34.0
            %
            
            (34.0
            )%
            
            (34.0
            )%Effect
                of:State
                income taxes (net of federal tax benefit)
            
            
            (11.3
            )
            
            -
            
            
            3.9Taxes
                on foreign income at rates that differ from USStatutory
                rate
            
            
            (2.5
            )
            
            (6.4
            )
            
            (29.4
            )Change
                in valuation allowance on deferred tax assets
            
            
            (4.8
            )
            
            39.1
            
            
            33.4IRS
                refund for foreign subsidiaries
            
            
            (8.7
            )
            
            -
            
            
            -Other
            
            
            (7.8
            )
            
            0.3
            
            
            4.2Effective
                rate
            
            
            (1.1
            )%
            
            (1.0
            )%
            
            (21.9
            )%





Tax
      benefits related to stock option exercises were $334,000 for the year ended
      December 31, 2005. Such benefits were recorded as a reduction of income taxes
      payable and an increase in additional paid-in capital. No such benefit was
      recorded in the year ended December 31, 2007 and 2006 due to net
      operating loss carryforwards.





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, are as
      follows (in thousands):





**2007**
            
            **2006**Deferred
                income tax assets:Allowances
                not currently deductible
            
            $
            88
            
            $
            145Depreciation
                and amortization
            
            
            95
            
            
            239Equity
                compensation not currently deductible
            
            
            212
            
            
            559Net
                operating loss carryforward
            
            
            4,682
            
            
            4,396Expenses
                not deductible until paid
            
            
            890
            
            
            302Total
                gross deferred income tax assets before valuation
                allowance
            
            
            5,967
            
            
            5,641Valuation
                allowance
            
            
            (4,627
            )
            
            (4,340
            )Net
                deferred income tax assets
            
            
            1,340
            
            
            1,301Deferred
                income tax liabilities:Foreign
                source income, not taxable until repatriated
            
            
            (1,981
            )
            
            (1,981
            )Net
                deferred liability
            
            $
            (641
            )
            $
            (680
            )Net
                deferred income tax asset-current
            
            
            202
            
            
            190Net
                deferred income tax asset-long term
            
            
            381
            
            
            256Net
                deferred income tax liability-non-current
            
            
            (1,224
            )
            
            (1,126
            )Net
                deferred income tax liability
            
            $
            (641
            )
            $
            (680
            )


F-13




**INNODATA
      ISOGEN, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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 realizable. 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 $4,627,000 and $4,340,000 at
      December 31, 2007 and 2006, respectively. The increase resulted primarily
      from net operating losses incurred for which realization is uncertain. The
      net
      change in the total valuation allowance for the years ended December 31, 2007,
      2006 and 2005 was an increase of $287,000, $3,213,000 and $1,127,000,
      respectively. In 2007, the Company has utilized $2.1 million of net operating
      losses. The 2006 increase was offset by a reversal of a valuation allowance
      of
      approximately $420,000 which has been recorded for one of the Company’s Indian
      subsidiaries.





United
      States and foreign components of income (loss) before income taxes for each
      of
      the three years ended December 31, (in thousands) are as follows:





**2007**
            
            **2006**
            
            **2005**United
                States
            
            $
            2,750
            
            $
            (9,707
            )
            $
            (4,019
            )Foreign
            
            
            1,764
            
            
            2,307
            
            
            1,906Total
            
            $
            4,514
            
            $
            (7,400
            )
            $
            (2,113
            )




Certain
      of the Company’s foreign subsidiaries are subject to tax holidays for various
      periods ranging from 2007 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 $95,000, $450,000 and
      $500,000 for each of the three years in the period ended December 31, 2007.
      The income tax holiday of one of our Philippine subsidiaries will expire in
      May
      2008.





At
      December 31, 2007, the Company has U.S. Federal and New Jersey state net
      operating loss carryforwards available of approximately $11.7 million and $10
      million, respectively, of which $2 million relates to exercise of stock options,
      which when utlized would increase the additional paid in capital. These net
      operating loss carryforwards expire at various times through 2027.





The
      Company adopted Financial Accounting Standards Board (“FASB”) Interpretation
      No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes” on
      January 1, 2007. FIN 48 requires companies to determine whether it is “more
      likely than not” that a tax position will be sustained upon examination by the
      appropriate taxing authorities before any tax benefit can be recorded in the
      financial statements. It also provides guidance on the recognition, measurement,
      classification and disclosure in the financial statements for uncertain tax
      positions taken or expected to be taken in a tax return. No cumulative effect
      of
      a change in accounting principle or adjustment to the liability for unrecognized
      tax benefits was recognized as a result of the adoption of FIN 48. Accordingly,
      the adoption of FIN 48 did not have an effect on the results of operations
      or
      financial position of the Company.





The
      Company had unrecognized tax benefits of $740,000 and $786,000 at December
      31,
      2007 and 2006, respectively. The portion of unrecognized tax benefits relating
      to interest and penalties were $153,000 and $138,000 at December 31, 2007 and
      2006, respectively. $564,000 and $549,000 of our unrecognized tax benefits
      as of
      December 31, 2007 and 2006, respectively if recognized, would have an impact
      on
      the Company’s effective tax rate.


F-14




**INNODATA
      ISOGEN, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


The
      following presents a roll forward of the Company’s unrecognized tax benefits and
      associated interest for the year ended December 31, 2007 (amounts in
      thousands):


Unrecognized tax
                benefitsBalance
                  - January 1, 2007
              
              $
              786Settlement
                  of IRS income tax audit
              
              
              (234
              )Increase
                  for current year position
              
              
              176Interest
                  accrual
              
              
              12Balance –
                  December 31, 2007
              
              $
              740





The
      Company is subject to US federal income tax as well as income tax in various
      states and foreign jurisdictions. In the third quarter of 2007, the IRS
      completed the audit for the Company’s 2004 and 2005 income tax returns, which
      resulted in a decrease to the Company’s net operating loss carryforward of
      approximately $70,000. The Company is no longer subject to examination of
      federal and New Jersey taxing authorities for years prior to 2006. Various
      foreign subsidiaries currently have open tax years ranging from 2003 through
      2006.





Pursuant
      to an income tax audit by the Indian bureau of taxation, on March 27, 2006,
      one
      of the Company’s Indian subsidiaries received a tax assessment approximating
      $404,000, including interest through December 31, 2007, for the fiscal tax
      year
      ended March 31, 2003. Management disagrees with the basis of the tax
      assessment, and has filed an appeal against the assessment, which it will fight
      vigorously. The Indian bureau of taxation has also completed an audit of the
      Company’s Indian subsidiary’s income tax return for the fiscal tax year ended
      March 31, 2004. The ultimate outcome was favorable, and there was no
      tax assessment imposed for the fiscal tax year ended March 31, 2004.
      On March 20, 2007, the Indian bureau of taxation commenced an audit of
      the subsidiary’s income tax return for the fiscal year ended 2005. The ultimate
      outcome cannot be determined at this time.




In
      August
      2004, IRS promulgated regulations, effective August 12, 2004, that had the
      effect of making certain of our overseas entities 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. As a result, 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. On January 30, 2006, the IRS issued its final
      regulations, stating that neither the temporary regulations nor these final
      regulations are retroactive. In December 2007, the Company received a
      notification from IRS for the entitlement of the refund for taxes paid and
      the
      interest amounting to approximately $395,000 and $60,000, respectively. The
      Company appropriately recorded a benefit and an income tax receivable at
      December 31, 2007.








**4.**
            **Long
                term obligations**





Total
      long-term obligation as of December 31, 2007 and 2006 consist of the
      following:





**2007**
            
            **2006**Vendor
                obligationsCapital
                lease obligations (1)
            
            $
            659
            
            $
            23Deferred
                lease payments
            
            
            131
            
            
            177Microsoft
                license
            
            
            4
            
            
            609Pension
                obligationsAccrued
                pension liability
            
            
            1,704
            
            
            1,580$
            2,498
            
            $
            2,389Less:
                Current portion of long-term obligations
            
            
            370
            
            
            825Total
            
            $
            2,128
            
            $
            1,564


F-15




**INNODATA
      ISOGEN, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(1)
      In
      2007, the Company financed the acquisition of certain computer and communication
      equipments. The capital lease obligations bear interest at rates ranging from
      6%
      to 10% and are payable over two to five years. The Company paid in full its
      capital lease obligation for software licenses acquired in 2006 in January
      2008.





The
      future minimum lease payments required under the capital leases and the present
      value of the net minimum lease payments as of December 31, 2007 are as follows
      (in thousands):





2008
            
            $
            3032009
            
            
            2972010
            
            
            1242011
            
            
            7Total
                minimum lease payments
            
            
            731Less:
                Amount representing interest
            
            
            72Present
                value of net minimum lease payments
            
            
            659Less:
                Current maturities of capital lease obligations
            
            
            260Long-term
                capital lease obligations
            
            $
            399








**5.**
            **Commitments
                and contingencies**





**Line
      of Credit** - The
      Company has an uncommitted line of credit of $5 million which expires on
      May 31, 2008. Under the terms of the agreement any amounts drawn against this
      facility must be secured by a certificate of deposit of an equal amount.
      Additionally, any amounts drawn will bear interest at the bank’s alternate base
      rate plus 1⁄2% or LIBOR plus 3%. The Company has no outstanding obligations under
      this credit line as of December 31, 2007.





**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 expensed on a straight-line basis 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 2007 is
      approximately $1,519,000. For each of the three years in the period ended
      December 31, 2007, rent expense, principally for office and production
      space, totaled approximately $2,575,000, $2,163,000 and $1,956,000,
      respectively.





In
      addition, the Company leases certain equipment under short-term operating lease
      agreements. For each of the three years in the period ended December 31,
      2007, rent expense for equipment totaled approximately $207,000, $45,000 and
      $71,000, respectively.





Future
      minimum lease payments, by year and in the aggregate, under non-cancelable
      operating leases with initial or remaining terms of one year or more as of
      December 31, 2007 (in thousands) are as follows:


F-16


**INNODATA
        ISOGEN, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**Years
                Ending December 31,**2008
            
            $
            9802009
            
            
            8132010
            
            
            4802011
            
            
            1652012
            
            
            116**Total
                minimum lease payments**
            
            $
            2,554





In
      connection with the relocation of the Company’s Dallas office, the lessor agreed
      to pay approximately $246,000 as incentive to terminate the lease prior to
      its
      contractual expiration date. In connection with this transaction, the Company
      recognized income of approximately $246,000 in 2006 and in included in selling
      and administrative expenses.





**Litigation** - In
      connection with the cessation of operations in 2002 at certain Philippine
      subsidiaries, and the failure in 2001 to arrive at agreeable terms for a
      collective bargaining agreement with one of these subsidiaries, certain former
      employees and the Innodata Employee Association (IDEA) filed various actions
      against subsidiaries of Innodata Isogen, Inc., and also purportedly against
      Innodata Isogen, Inc. and certain of the Company’s officers and directors. The
      Supreme Court of the Philippines has refused to review a decision in these
      actions by a lower appellate court against one of these subsidiaries in the
      Philippines that is inactive and has no material assets, and purportedly also
      against Innodata Isogen, Inc., that orders the reinstatement of certain former
      employees to their former positions and payment of back wages and benefits
      that
      aggregate approximately $7.5 million. A motion filed by the Philippine
      subsidiary with the Supreme Court to reconsider the refusal of the Supreme
      Court
      to review the decision of the lower appellate court was denied by the Supreme
      Court, and the Philippine subsidiary has filed a second motion with the Supreme
      Court to reconsider the refusal of the Supreme Court to review the decision
      of
      the lower appellate court. All other Company affiliates were found by the lower
      appellate court to have no liability. Based on consultation with legal counsel,
      the Company believes that should the order of the lower appellate court be
      upheld, recovery against Innodata Isogen, Inc. would nevertheless be
      unlikely.




The
      Company is also subject to various legal proceedings and claims which arise
      in
      the ordinary course of business.





While
      management currently believes that the ultimate outcome of these proceedings
      will not have a material adverse effect on the Company’s financial position or
      overall trends in results of operations, litigation is subject to inherent
      uncertainties. Substantial recovery against the Company in the above referenced
      Philippines actions could have a material adverse impact on the Company, and
      unfavorable rulings or recoveries in the other proceedings could have a material
      adverse impact on the operating results of the period in which the ruling or
      recovery occurs. In addition, the Company’s estimate of 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.





**Indemnifications** -The
      Company is obligated under certain circumstances to indemnify directors, certain
      officers and employees 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 or fiduciary 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, 2007, the Company has not recorded a liability for any
      obligations arising as a result of these indemnifications.


F-17




**INNODATA
      ISOGEN, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**Liens** -In
      connection with the procurement of tax incentives at two 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, 2007, the
      net book value of the property and equipment were $859,000.





**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 $126,000 to the plan for the year
      ended December 31, 2007.  For the years ended December 31, 2006 and 2005,
      the Company’s matching contributions were approximately $131,000 and $71,000
      respectively.




**Non-U.S.
      Pension benefits** - In
      September 2006, the FASB issued Statement No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
      amendment of FASB Statements No. 87, 88, 106 and 132(R) (“FAS 158”). FAS
      158 requires an employer to recognize a net liability or asset and an offsetting
      adjustment to accumulated other comprehensive income to report the funded status
      of defined benefit pension and other postretirement benefit plans effective
      for
      the Company’s year ended December 31, 2006. As required, the Company has
      adopted this statement and applied it prospectively beginning with the Company’s
      fiscal year-end December 31, 2006. The adoption resulted in recognition of
      additional pension liabilities of $877,000, an increase of 117,000 to total
      assets and a decrease to stockholders equity of $760,000.





Most
      of
      the 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, 2007. Pension expense for foreign subsidiaries
      totaled approximately $667,000, $313,000 and $251,000 for each
      of
      the three years in the period ended December 31, 2007 .





Included
      in accrued salaries, wages and related benefits as of December 31, 2007 and
      2006
      are accrued pension liabilities related to the above unfunded plans totaling
      approximately $920,000 and $703,000.





The
      following table summarizes gain and (losses) net of taxes recognized in
      accumulated other comprehensive loss (in thousands):


F-18




**INNODATA
        ISOGEN, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **Years
                  Ended December 31,****2007**
              
              **2006**Amount
                  recognized on adoption of SFAS 158
              
              $
              —
              
              $
              (760
              )Amortization
                  of transition obligation
              
              
              83
              
              
              —Actuarial
                  gain (loss)
              
              
              466
              
              
              —Total
              
              $
              549
              
              $
              (760
              )**Amounts
                  in accumulated other comprehensive loss not yet **reflected
                  in net periodic benefit cost, net of
                  taxes:****Acturial
                  (gain) loss
              
              $
              (466
              )
              $
              —Transition
                  obligation
              
              
              677
              
              
              760Total
              
              $
              211
              
              $
              760**Amounts
                  in accumulated other comprehensive loss expected to **be
                  amortized in fiscal 2008 net periodic benefit cost, net of
                  taxes:****Acturial
                  (gain) loss
              
              $
              (46
              )Transition
                  obligation
              
              
              83Total
              
              $
              37




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.




**Benefit
      Obligations:**





**Change
                in the benefit obligation**
            
            **2007**
            
            **2006**
            
            **2005**Projected
                benefit obligation at beginning of the year
            
            $
            1,580
            
            $
            493
            
            $
            327Service
                cost
            
            
            404
            
            
            176
            
            
            129Interest
                cost
            
            
            121
            
            
            68
            
            
            34Actuarial
                loss (gain)
            
            
            (442
            )
            
            903
            
            
            54Foreign
                currency exchange rate changes
            
            
            259
            
            
            26
            
            
            -Benefits
                paid
            
            
            (62
            )
            
            (86
            )
            
            (51
            )Projected
                benefit obligation at end of year****
            
            $
            1,860
            
            $
            1,580
            
            $
            493





**Components
      of Net Periodic Pension Cost:**




**2007**
            
            **2006**
            
            **2005**Service
                cost
            
            $
            404
            
            $
            176
            
            $
            129Interest
                cost
            
            
            121
            
            
            68
            
            
            34Amortization
                for increase (decrease) in liability
            
            
            -
            
            
            -
            
            
            -Actuarial
                loss (gain) recognized
            
            
            142
            
            
            45
            
            
            54Net
                periodic pension cost
            
            $
            667
            
            $
            289
            
            $
            217


F-19


**INNODATA
        ISOGEN, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


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.





**2007**
            
            **2006**
            
            **2005**Discount
                rate
            
            
            8%-10%
            
            
            6.5%-10%
            
            
            7.5%-14%Rate
                of increase in compensation levels
            
            
            10-13%
            
            
            7%-10%
            
            
            7%-10%





**Estimated
      Future Benefit Payments:**





The
      following benefit payments (in thousands), which reflect expected future
      service, as appropriate, are expected to be paid:





**Years
                Ending December 31,**2008
            
            
            412009
            
            
            462010
            
            
            562011
            
            
            502012
            
            
            542013
                to 2017
            
            
            459





**7.**
            **RESTRUCTURING
                COST**





In
      September 2006, a s
      part of
      an overall cost reduction plan to reduce operating costs, the Company announced
      a worldwide workforce reduction of slightly under 300 employees, the majority
      of
      whom were based in Asia. Most employees were terminated prior to September
      2006,
      and the plan was substantially implemented by the end of 2006.





As
      a
      result, the Company recorded total charges of $604,000 in 2006 associated with
      the restructuring plan. The 2006 charge consisted of $531,000 of employee
      severance costs and $73,000 of costs to implement the plan. Of the total amount,
      $60,000 represents charges relating to stock option modifications.





In
      connection with the restructuring, the Company paid cash of $544,000 and
      recognized costs amounting to $60,000 for stock option modifications. The
      Company currently expects no future costs to be incurred associated with the
      restructuring plan.





As
      of
      December 31, 2006, accrued expenses included approximately $102,000 related
      to
      the restructuring charges, which were paid in 2007.





Relative
      to the restructuring, the Company modified the expiration date of an option
      held
      by a departing officer to purchase 100,000 shares of the Company’s common stock
      at an exercise price of $2.59. The option, which was scheduled to expire at
      a
      rate of 20,000 shares per year commencing on May 31, 2009, was modified wherein
      20,000 shares continue to expire on May 31, 2009, 20,000 shares continue to
      expire on May 31, 2010 and the remaining 60,000 shares will also expire on
      May 31, 2010. The modification also provided that the option will survive the
      termination of the officer’s employment with the Company. The Company
      recognized, as part of the restructuring cost, $60,000 related to the stock
      option modification.


F-20




**INNODATA
      ISOGEN, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**8.**  **CAPITAL
      STOCK**





**Common
      Stock -** T he Company is
      authorized to issue 75,000,000 shares of common stock. Each share of common
      stock has one vote. Subject to preferences that may be applicable to any
      outstanding shares of preferred stock, the holders of common stock are entitled
      to receive ratably such dividends, if any, as may be declared by the Board
      of
      Directors. No common stock dividends have been declared to date.





**Preferred
      Stock -** The
      Company is authorized to issue 5,00 0,000
      shares of preferred stock. The
      Board
      of Directors is authorized to fix the terms, rights, preferences and limitations
      of the preferred stock and to issue the preferred stock in series which differ
      as to their relative terms, rights, 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, 2007, the Company had reserved for issuance approximately
      5,534,000 shares of common stock pursuant to the Company’s stock option plans.





**Treasury
      Stock -** In
      August, 2006, the Board of Directors authorized the repurchase of up to $1.0
      million of its common stock of which approximately $681,000 remains available
      for repurchase under the program as of December 31, 2007. During the year ended
      December 31, 2007, the Company did not repurchase any shares of its common
      stock. During the year ended December 31, 2006, the Company had repurchased
      182,262 shares of its common stock at a cost of $319,000. There is no expiration
      date associated with the program.





**9.**  **STOCK
      OPTIONS**





The
      Company adopted, with stockholder approval, 1998, 2001, and 2002 Stock Option
      Plans (the “1998 Plan,” “2001 Plan,” and “2002 Plan”, and collectively the
“Plans”) which provide for the granting of options to purchase not more than an
      aggregate of 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 Plans 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 1998
      Plan after July 8, 2008; under the 2001 Plan after May 31, 2011; and
      under the 2002 Plan after June 30, 2012.


F-21




**INNODATA
      ISOGEN, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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 stock options is estimated on the date of grant using the Black-Scholes
      option pricing model. The weighted average fair values of the options granted
      and weighted average assumptions are as follows:





For
                the Years Ended December 31,2007
            
            2006
                (1)
            
            2005Weighted
                average fair value of options granted
            
            $
            2.99
            
            $
            —
            
            $
            3.28Risk-free
                interest rate
            
            
            4.61
            %
            
            —
            
            
            4.39
            %Expected
                life (years)
            
            
            8.00
            
            
            —
            
            
            8.00Expected
                volatility factor
            
            
            122
            %
            
            —
            
            
            150
            %Expected
                dividends
            
            
            None
            
            
            —
            
            
            None





(1)
      There
      were no options granted in 2006.





T he
      Company estimates the risk-free interest rate using the U.S. Treasury yield
      curve for periods equal to the expected term of the options in effect at the
      time of grant. The expected term of options granted is based on a combination
      of
      vesting schedules, term of the options and historical experience. Expected
      volatility was based on historical volatility of the Company’s common stock.
      T he
      Company uses an expected dividend yield of zero since it has never declared
      or
      paid any dividends on its capital stock.





A
      summary
      of option activity under the Plans as of December 31, 2007, and changes during
      the year then ended is presented below:




**Number
                of**
              **Shares**
            
            **Weighted-Average
                Exercise Price**
            
            **Weighted-Average Remaining**
              **Contractual
                Term (years)**
            
            **Aggregate Intrinsic**
              **Value**Outstanding
                as January 1, 2007
            
            
            4,548,950
            
            $
            2.14Granted
            
            
            105,000
            
            $
            3.21Exercised
            
            
            (1,418,937
            )
            $
            0.94Forfeited
            
            
            (65,000
            )
            $
            3.13Expired
            
            
            (1,750
            )
            $
            4.00Outstanding
                as December 31, 2007
            
            
            3,168,263
            
            $
            2.69
            
            
            5.6
            
            $
            8,423,669Exercisable
                at December 31, 2007
            
            
            3,089,335
            
            $
            2.67
            
            
            5.5
            
            $
            8,279,397




F-22


**INNODATA
        ISOGEN, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




The
      number and weighted-average grant-date fair value of non-vested stock options
      is
      as follows:




**Shares**
            
            **Weighted Average**
              **Grant-Date Fair Value**Non-vested
                January 1, 2007
            
            
            70,783
            
            $
            2.92Granted
            
            
            105,000
            
            
            2.99Forfeited
            
            
            (38,021
            )
            
            2.81Vested
            
            
            (58,834
            )
            
            2.25Non-vested
                December 31, 2007
            
            
            78,928
            
            $
            3.56





The
      total
      compensation cost related to non-vested stock options not yet recognized as
      of
      December 31, 2007 totaled approximately $227,000. These costs are
      expected to be recognized over a weighted- average term of 2.49
      years.





Because
      of the Company’s net operating loss carryforwards, no tax benefits resulting
      from the exercise of stock options have been recorded, thus there was no effect
      on cash flows from operating or financing activities.





The
      total
      intrinsic value of options exercised for each of the three years in the period
      ended December 31, 2007 was approximately $4,339,000, $1,131,000 and
      $1,728,000, respectively. The total fair value of stock options vested during
      the year ended December 31, 2007 was approximately $132,000.





The
      stock
      options granted have a maximum term of up to ten years and generally vest over
      a
      four year period. 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
      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


F-23


**INNODATA
        ISOGEN, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


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 was recognized 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,
      approximately $1.3 million of future non-compensation charges was not required
      effective January 1, 2006 because of the Company’s adoption of SFAS 123
      (R).





On
      September 12, 2007, the Company’s Chairman and CEO (the “CEO”) exercised
      1,139,160 stock options at a total exercise price of $882,844. The CEO paid
      the
      exercise price by surrendering to the Company 229,310 of the shares of common
      stock he would have otherwise received on the option exercise. In addition,
      the
      CEO surrendered 395,695 shares to the Company in consideration of the payment
      by
      the Company on his behalf of $1,523,426 of the Company’s minimum withholding tax
      requirement payable in respect of the option exercise. Because the payment
      value
      attributable to the surrendered shares upon settlement does not exceed the
      fair
      value of the option, no compensation cost was recognized at the date of
      settlement. In connection with this transaction, the Company issued a net total
      of 514,155 shares of common stock to the CEO.





**10.
      COMPREHENSIVE INCOME (LOSS)**





The
      components of comprehensive income (loss) are as follows (in
      thousands):




**December
                31,****2007**
            
            **2006**Net
                income (loss)
            
            $
            4,566
            
            
            ($7,323
            )Pension
                liability adjustment
            
            
            549
            
            
            (760
            )Comprehensive
                income (loss)
            
            $
            5,115
            
            
            ($8,083
            )




F-24


**INNODATA
          ISOGEN, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


Accumulated
      other comprehensive loss as reflected in the consolidated balance sheet consists
      of pension liability adjustments.





**11.**  **SEGMENT
      REPORTING AND CONCENTRATIONS**





In
      2007,
      the Company commenced a reorganization of its management and operating
      structure. Prior to 2007, the Company’s operations were classified into two
      operating segments: (1) content-related BPO and KPO services and (2) IT
      professional services. In this reorganization, management merged the
      content-related BPO services and IT professional services segments (ceasing
      to
      monitor its operations by these two segments). With this reorganization,
      t he
      Company consists of one business that generates revenues and expenses. The
      Company’s chief operating decision maker reviews the full operating results of the entire
      Company at the consolidated level. Thus, the Company's current operating segment
      structure reflects the way the chief operating decision maker looks at the
      overall Company to evaluate performance and makes executive decisions (including
      the allocation of resources) about the business. There is no end to end
      responsibility or management other than at the consolidated level and discrete
      financial information is available at the consolidated level. Thus,
      as
      of December 31, 2007, the Company has one operating segment.





The
      Company’s 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.





Long-lived
      assets as of December 31, 2007 and 2006, respectively by geographic region
      are
      comprised of:





**2007**
            
            **2006****(in
                thousands)**United
                States
            
            $
            1,643
            
            $
            1,928Foreign
                countries:Philippines
            
            
            3,785
            
            
            2,250India
            
            
            1,898
            
            
            626Sri
                Lanka
            
            
            509
            
            
            456Total
                foreign
            
            
            6,192
            
            
            3,332$
            7,835
            
            $
            5,260





The
      Company's top four clients generated approximately 61%, 54% and 53% of our
      revenues is the fiscal year ended December 31, 2007, 2006 and 2005,
      respectively. No other client accounted for 10% or more of revenues during
      these
      periods. Further, in the years ended December 31, 2007, 2006 and 2005,
      revenues to non-US clients accounted for 23%, 37% and 35%, respectively, of
      the
      Company's revenues.





Revenues
      for each of the three years in the period ended December 31, by geographic
      region (determined based upon customer’s domicile), are as follows:





**2007**
            
            **2006**
            
            **2005****(in
                thousands)**United
                States
            
            $
            52,017
            
            $
            25,951
            
            $
            27,243The
                Netherlands
            
            
            9,070
            
            
            10,200
            
            
            10,819Other
                - principally Europe
            
            
            6,644
            
            
            4,802
            
            
            3,990$
            67,731
            
            $
            40,953
            
            $
            42,052





F-25


**INNODATA
      ISOGEN, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




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, 2007, approximately 18% of the Company's accounts receivable
      was from foreign (principally European) clients and 50% of accounts receivable
      was due from one client. As of December 31, 2006, approximately 28% of the
      Company's accounts receivable was from foreign (principally European) clients
      and 21% of accounts receivable was due from one client.





**12.** **INCOME
          (LOSS) PER SHARE**




**2007**
            
            **2006**
            
            **2005****(in
                thousands, except per share amounts)**Net
                income (loss)
            
            $
            4,566
            
            $
            (7,323
            )
            $
            (1,651
            )Weighted
                average common shares outstanding
            
            
            24,142
            
            
            24,021
            
            
            23,009Dilutive
                effect of outstanding options
            
            
            1,185
            
            
            -
            
            
            -Adjusted
                for dilutive computation
            
            
            25,327
            
            
            24,021
            
            
            23,009Basic
                income (loss) per share
            
            $
            .19
            
            $
            (.30
            )
            $
            (.07
            )Diluted
                income (loss) per share
            
            $
            .18
            
            $
            (.30
            )
            $
            (.07
            )





Basic
      income (loss) per share is computed using the weighted-average number of common
      shares outstanding during the year. Diluted income (loss) per share is computed
      by considering the impact of the potential issuance of common shares, using
      the
      treasury stock method, on the weighted average number of shares outstanding.
      Options to purchase 2.8 million shares of common stock in 2006 and 3.1 million
      shares of common stock in 2005 were outstanding but not included in the
      computation of diluted income 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. In addition, diluted net loss per share
      does not include 0.8 million and 1.7 million potential common shares derived
      from stock options for the years ended December 31, 2006 and 2005, respectively because
      as a result of the Company incurring losses, their effect would have been
      antidilutive .





**13.**  **QUARTERLY
      FINANCIAL DATA (UNAUDITED)**





**The
      quarterly results of operations are summarized below:**




**First**
              **Quarter**
            
            **Second**
              **Quarter**
            
            **Third**
              **Quarter**
            
            **Fourth**
              **Quarter****(in
                thousands, except per share amounts)****2007**Revenues
            
            $
            12,729
            
            $
            16,347
            
            $
            18,138
            
            $
            20,517Net
                income (loss)
            
            $
            (643
            )
            $
            862
            
            $
            2,115
            
            $
            2,232Basic
                net income (loss) per share
            
            $
            (.03
            )
            $
            .04
            
            $
            .09
            
            $
            .09Diluted
                net income (loss) per share
            
            $
            (.03
            )
            $
            .03
            
            $
            .08
            
            $
            .09**2006**Revenues
            
            $
            10,285
            
            $
            9,721
            
            $
            10,400
            
            $
            10,547Net
                loss
            
            $
            (1,346
            )
            $
            (2,952
            )
            $
            (2,196
            )
            $
            (829
            )Basic
                net loss per share
            
            $
            (.06
            )
            $
            (.12
            )
            $
            (.09
            )
            $
            (.03
            )Diluted
                net loss per share
            
            $
            (.06
            )
            $
            (.12
            )
            $
            (.09
            )
            $
            (.03
            )




F-26





Exhibits
      which are indicated as being included in previous filings are incorporated
      herein by reference.


**Exhibit**
              
              **Description**
              
              **Filed
                  as Exhibit**3.1
                  (a)
              
              Restated
                  Certificate of Incorporation filed on April 29, 1993
              
              Filed
                  as Exhibit 3.1(a) to our Form 10-K for the year ended December
                  31,
                  20033.1
                  (b)
              
              Certificate
                  of Amendment of Certificate of Incorporation of Innodata Corporation
                  filed
                  on March 1, 2001
              
              Filed
                  as Exhibit 3.1(b) to our Form 10-K for the year ended December
                  31,
                  20033.1
                  (c)
              
              Certificate
                  of Amendment of Certificate of Incorporation of Innodata Corporation
                  Filed
                  on November 14, 2003
              
              Filed
                  as Exhibit 3.1(c) to our Form 10-K for the year ended December
                  31,
                  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 Series C Participating Preferred
                  Stock
              
              Filed
                  as Exhibit A to Exhibit 4.1 to Form 8-K dated 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 December 16, 2002 between Innodata
                  Corporation and American Stock Transfer & Trust Co., as Rights
                  Agent
              
              Exhibit
                  4.1 to Form 8-K dated December 16, 200210.1
              
              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 between us and our directors and one
                  of our
                  officers
              
              Filed
                  as Exhibit 10.3 to Form 10-K dated December 31, 200210.4
              
              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 January 1, 2004 with George
                  Kondrach
              
              Filed
                  as Exhibit 10.10 to our Form 10-K for the year ended December 31,
                  200310.11
              
              Letter
                  Agreement dated as of August 9, 2004, by and between us and The
                  Bank of
                  New York
              
              Filed
                  as Exhibit 10.2 to Form S-3 Registration statement No.
                  333-12184410.12
              
              Employment
                  Agreement dated as of December 22,2005 22, 2005, by and between
                  us and
                  Steven L. Ford
              
              Exhibit
                  10.1 to Form 8-K dated December 28, 200510.13
              
              Form
                  of 2001 Stock Option Plan Grant Letter, dated December 22, 2005Employment
                  Agreement dated as of December 22,2005 Dated December 22,
                  2005
              
              Filed
                  as Exhibit 10.2 to Form 8-K dated December 28, 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 Directors
              
              Exhibit
                  10.5 to Form 8-K dated December 15, 200510.16
              
              Form
                  of 1998 Stock Option Agreement for Officers
              
              Exhibit
                  10.6 to Form 8-K dated December 15, 2005


F-27


10.17
              
              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 each of Haig Bagerdjian,
                  Louise
                  Forlenza, John Marozsan and Todd Solomon
              
              Exhibit
                  10.8 to Form 8-K dated December 15, 200510.19
              
              Form
                  of new vesting and lock-up agreement for Jack Abuhoff
              
              Exhibit
                  10.9 to Form 8-K dated December 15, 200510.20
              
              Form
                  of new vesting and lock-up agreement for George Kondrach
              
              Exhibit
                  10.10 to Form 8-K dated December 15, 200510.21
              
              Form
                  of new vesting and lock-up agreement for Stephen Agress
              
              Exhibit
                  10.11 to Form 8-K dated December 15, 200510.22
              
              Form
                  of 2001 Stock Option Plan Grant Letter, dated December 31, 2005,
                  for
                  Messrs. Abuhoff, Agress and Kondrach
              
              Exhibit
                  10.2 to Form 8-K dated January 5, 200610.23
              
              Form
                  of 2001 Stock Option Plan Grant Letter, dated December 31, 2005,
                  for
                  Messrs. Bagerdjian and Marozsan and Ms. Forlenza
              
              Exhibit
                  10.3 to Form 8-K dated January 5, 200610.24
              
              Transition
                  Agreement Dated as of September 29, 2006 2006 with Stephen
                  Agress
              
              Exhibit
                  10.1 to Form 8-K dated October 3, 200610.25
              
              Form
                  of Stock Option Modification Agreement with With Stephen
                  Agress
              
              Exhibit
                  10.2 to Form 8-K dated October 3, 200610.26
              
              Employment
                  Agreement dated as of February 1, 2006 with Jack Abuhoff
              
              Exhibit
                  10.2 to Form 8-K dated April 27, 200610.27
              
              Employment
                  Agreement dated as of January 1, 2007 with Ashok
                  Mishra
              
              Filed
                  as Exhibit 10.1 to Form 10-Q dated June 30, 200710.28
              
              Innodata
                  Isogen Incentive Compensation Plan
              
              Exhibit
                  10.1 to Form 8-K dated February 13, 200821
              
              Significant
                  subsidiaries of the registrant
              
              Filed
                  herewith23
              
              Consent
                  of Grant Thornton LLP
              
              Filed
                  herewith31.1
              
              Certificate
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002
              
              Filed
                  herewith31.2
              
              Certificate
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.
              
              Filed
                  herewith32.1
              
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.
              
              Filed
                  herewith32.2
              
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.
              
              Filed
                  herewith




F-28




**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, 2007, 2006 and 2005 was as follows:





**Additions****Period**
            
            **Balance at****Beginning of Period**
            ****
            **Charged to**
              **Costs and**
              **Expenses**
            ****
            **Charged to**
                **Other Accounts**
            ****
            **Deductions**
            ****
            **Balance at**
              **End of Period**2007
            
            $
            70
            
            $
            108
            
            $
            -
            
            $
            (75
            )
            $
            1272006
            
            $
            111
            
            $
            (9
            )
            $
            -
            
            $
            (33
            )
            $
            702005
            
            $
            135
            
            $
            9
            
            $
            -
            
            $
            (33
            )
            $
            111