F-1 1 h04040fv1.htm FORM F-1 fv1
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As filed with the Securities and Exchange Commission on June 17, 2010
Registration No. 333-      
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
HiSoft Technology International Limited
(Exact name of Registrant as Specified in its Charter)
 
         
Cayman Islands
  7371   Not Applicable
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
 
 
 
33 Lixian Street
Qixianling Industrial Base
Hi-Tech Zone, Dalian 116023
People’s Republic of China
Telephone: +86-411-8455-6655
(Address and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
 
 
 
 
Law Debenture Corporate Services Inc.
400 Madison Avenue, 4th Floor
New York, New York 10017, United States
+1-212-750-6474
 
 
 
 
Copies to:
 
     
Leiming Chen, Esq.
Simpson Thacher & Bartlett LLP
35th Floor, ICBC Tower
3 Garden Road
Central, Hong Kong
+852-2514-7600
  Alan Seem, Esq.
Shearman & Sterling LLP
12th Floor, East Tower, Twin Towers
B-12 Jianguomenwai Dajie
Beijing 100022
People’s Republic of China
+86-10-5922-8000
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
CALCULATION OF REGISTRATION FEE
 
                         
            Proposed
           
            Maximum
    Proposed Maximum
     
Title of Each Class of
          Offering Price
    Aggregate Offering
    Amount of
Securities to be Registered (1)     Amount to be Registered (2)(3)     per Common Share (3)     Price (3)     Registration Fee
Common shares, par value $0.0001 per share
    161,690,000     $0.6842     $110,628,298     $7,888
                         
 
(1)      American depositary shares, or ADSs, evidenced by American depositary receipts issuable upon deposit of the common shares registered hereby will be registered under a separate registration statement on Form F-6. Each ADS represents 19 common shares.
 
(2)      Includes (a) common shares represented by ADSs that may be purchased by the underwriters pursuant to their over-allotment option and (b) all common shares represented by ADSs initially offered and sold outside the United States that may be resold from time to time in the United States either as part of the distribution or within 40 days after the later of the effective date of this registration statement and the date the securities are first bona fide offered to the public.
 
(3)      Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
 
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.
 


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The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling shareholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting any offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
Subject to Completion, Dated June 17, 2010
 
HiSoft Technology International Limited
 
(HISOFT LOGO)
 
 
7,400,000 American Depositary Shares
Representing 140,600,000 Common Shares
 
 
This is the initial public offering of HiSoft Technology International Limited, or HiSoft International. We are offering 6,400,000 American Depositary Shares, or ADSs, and the selling shareholders identified in this prospectus are offering an aggregate of 1,000,000 ADSs. Each ADS represents 19 common shares, par value $0.0001 per share. We will not receive any proceeds from the ADSs sold by the selling shareholders. We have applied for listing of our ADSs on the Nasdaq Global Market under the symbol “HSFT”. We expect that the initial public offering price of the ADSs will be between $11.00 and $13.00 per ADS.
 
Prior to this offering, there has been no public market for our ADSs or common shares.
 
Investing in our ADSs involves risk. See “Risk Factors” beginning on page 13.
 
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
         
    Per ADS   Total
 
         
Public offering price
  $             $               
Underwriting discounts and commissions
  $   $
Proceeds, before expenses, to HiSoft International
  $   $
Proceeds, before expenses, to selling shareholders
  $   $
 
 
 
The selling shareholders have granted the underwriters the right to purchase up to an aggregate of 1,110,000 additional ADSs to cover over-allotments.
 
Deutsche Bank Securities  
  UBS Investment Bank  
  Citi
 
Cowen and Company Thomas Weisel Partners LLC
 
The date of this prospectus is          , 2010.


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PROSPECTUS SUMMARY
 
This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our ADSs. You should carefully read the entire prospectus, including “Risk Factors” and the financial statements, before making an investment decision.
 
Overview
 
We are a leading China-based provider of outsourced information technology and research and development services, primarily for companies in the U.S. and Japan, including 25 Fortune Global 500 companies. In 2009, International Data Corporation, or IDC, a leading independent market research firm, ranked us as the second largest China-based provider of offshore, outsourced software development services by revenues. In addition to our strong market presence in the U.S. and Japan, we are leveraging our global capabilities to rapidly grow our business in China, which is benefiting from increased demand for China-based outsourced information technology, or IT, services from multinational and domestic corporations in China.
 
Our two service lines consist of IT services and research and development services. Our IT services include application development, testing and maintenance services for custom applications as well as implementation and support services for packaged software. Our research and development services include software and hardware testing as well as software globalization services. In 2009 and the three months ended March 31, 2010, IT services contributed 51.5% and 51.1% of our net revenues, respectively, while research and development services contributed 48.5% and 48.9% of our net revenues, respectively.
 
We focus primarily on clients in the technology industry and the banking, financial services and insurance, or BFSI, industry. These industries have historically represented a significant proportion of outsourcing spending and, we believe, will continue to represent the greatest market opportunity for us. In 2009 and the three months ended March 31, 2010, technology clients accounted for 61.5% and 60.9% of our net revenues, respectively. In 2009 and the three months ended March 31, 2010, BFSI clients accounted for 23.7% and 24.6% of our net revenues, respectively.
 
We primarily target global companies that already use outsourced technology service providers from other geographies. In 2009, approximately 155 of our clients were headquartered outside of China. We also actively seek to expand our service offerings to existing clients. From 2006 to 2009, we were successful in increasing the number of clients from whom we received between $1.0 million and $5.0 million in annual net revenues from five to 16, the number of clients from whom we receive between $5.0 million and $10.0 million in annual net revenues from one to four and the number of clients from whom we receive more than $10.0 million in annual net revenues from nil to one. In 2009, 93.2% of our net revenues were derived from clients that used our services in the prior year. Our top five clients in 2009, as measured by contribution to net revenues were subsidiaries of, in alphabetical order, General Electric Company, or General Electric, Microsoft Corporation, or Microsoft, Nomura Research Institute, Ltd., or Nomura Research Institute, UBS AG, or UBS, and a U.S.-based multinational IT company.
 
We provide our services through a combination of onshore and offshore delivery capabilities depending on the nature of the work and the client’s needs. As of the date of this prospectus, we had eight delivery centers of which seven were in China, located in Beijing, Chengdu, Dalian, Guangzhou, Shanghai, Shenzhen and Wuxi, and one was in Singapore. For our onshore delivery, we employ account managers and technology specialists with substantial experience in our focus industries of technology and BFSI. These employees are


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typically based in our offices in the U.S., Japan and Singapore to work directly with existing and target clients. We believe that having industry-focused account managers and key project delivery personnel onshore helps us better understand our clients’ needs and results in higher quality service delivery.
 
For clients that require dedicated resources, we also establish and manage client-centric offshore delivery centers within our facilities to provide our clients with greater control over staffing and service delivery. As of the date of this prospectus, we maintained dedicated offshore delivery centers for 13 of our clients.
 
In March 2003, we became one of the first China-based companies to receive the Capability Maturity Model, or CMM, Level 5 certification, the highest level of the Software Engineering Institute’s CMM categorization for measuring the maturity of software processes. In addition, we were the first China-based outsourced technology service provider to operate a General Electric certified global development center. Our security system framework is based on ISO 27001, a widely accepted standard for information security management. We have successfully met the stringent security requirements of our clients both at the initial qualification stage and on an on-going basis.
 
Our net revenues have grown from $17.5 million in 2005 to $91.5 million in 2009, representing a compound annual growth rate, or CAGR, of 51.2%. Our gross profit has increased at a CAGR of 54.2% from $5.8 million in 2005 to $32.7 million in 2009. We had a net loss of $1.1 million in 2005, compared to a net profit of $7.4 million in 2009. In the three months ended March 31, 2010, our net revenues, gross profit and net profit were $30.5 million, $11.1 million and $3.0 million, respectively. In 2009 and the three months ended March 31, 2010, respectively, 59.6% and 55.3% of our total net revenues were derived from clients headquartered in the U.S., 25.3% and 23.4% from Japan, 10.1% and 10.6% from Europe and 3.1% and 6.4% from China.
 
Industry Background
 
IT Services
 
Corporations today face a challenging environment with rapid changes in business and economic conditions as well as intense competitive pressures and increased globalization. Technology has become a critical element in companies’ efforts to achieve greater efficiency and create sustainable competitive advantage. At the same time, the growth of the Internet as a corporate communications and collaboration medium, coupled with the proliferation of new software platforms and tools, has resulted in a greater level of technological complexity for these companies. Specifically, the evaluation, deployment and maintenance of these technologies each require considerable expenditure of resources and, in many cases, the development of new skills.
 
Faced with the competing demands of upgrading and expanding technology platforms and systems while keeping fixed costs low and preserving flexibility, demand for external IT service providers that can understand companies’ business imperatives while providing scalable, reliable, high quality technology solutions at competitive prices has been increasing. By outsourcing many IT functions, companies can reduce the need for upfront and fixed investments while also benefiting from the greater levels of efficiency, flexibility and performance associated with outsourced IT services.
 
IDC estimates that, driven by the increasing acceptance of offshore delivery, the worldwide offshore IT services market grew from $13.1 billion in 2005 to $31.1 billion in 2009. IDC forecasts that the worldwide offshore IT services market will further grow at an estimated CAGR of 6.0% through 2013 to $39.3 billion.


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Research and Development Services
 
Outsourced testing.  Corporations are turning to independent specialist service providers for testing of new software products or for upgrades of previously launched versions. High accuracy and low cost are important criteria in outsourcing testing services and this has been an area of strength for China-based outsourced testing service providers.
 
Localization/globalization.  As major economies such as China, Japan and Korea have emerged as sizeable end markets for global software companies, the need for software localization and globalization has increased considerably.
 
IDC estimates that the worldwide offshore research and development/product engineering services market grew at a CAGR of 8.7% from 2005 through 2009 to reach $8.0 billion. This is forecasted to further grow at a CAGR of 19.0% from 2009 to 2013.
 
Growth of China as an Offshore Delivery Location
 
The widespread acceptance of the offshore delivery model has created significant opportunities for China-based providers. With 5.1 million university graduates in 2008, of which 1.8 million were engineering graduates, according to the National Bureau of Statistics of China, China represents a major employee pool and an alternative offshore location for IT outsourcing. Factors contributing to the growth of the offshore IT services industry in China include:
 
  •  highly developed infrastructure;
 
  •  government support in the form of preferential land availability, incentives for creating entry-level employment and lower taxes;
 
  •  lower labor costs than the U.S., Europe, Japan and other developed countries;
 
  •  geographic and cultural proximity to Japan and Korea; and
 
  •  the desire of corporations to diversify their use of offshore IT outsourcing services to multiple delivery locations and providers.
 
IDC estimates that China’s offshore software development services industry grew at a CAGR of 30.7% from 2005 to 2009 to reach $2.7 billion and that it will further grow at a CAGR of 25.6% through 2013 to reach $6.8 billion. IDC further estimates that 46.8% of this demand in 2009 was from U.S. and European markets and 44.8% was from Japan and Korea.
 
Growth of China’s Domestic Outsourcing Market
 
China’s economic expansion has led to a dramatic increase in the number of large domestic enterprises and to greater competition among them. This in turn has resulted in a growing number of Chinese companies looking to outsource their IT and other non-core activities. In addition, many multinational companies seeking growth outside their mature markets have established or are growing their operations in China and have increasing needs for technology services that they historically outsourced to domestic providers in their home countries. The total market for delivery of China-based outsourced IT services, including software deployment and support, to corporations headquartered in China has grown at 17.0% from 2008 to 2009 to reach $2.7 billion, and is estimated to further expand at a CAGR of 18.4% to $5.2 billion in 2013, according to IDC.


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Our Strengths
 
We believe that the following competitive strengths are critical to maintaining and enhancing our position as a leading China-based provider of outsourced technology services:
 
  •  dual-shore delivery model;
 
  •  excellence in service quality and security;
 
  •  strong human capital management with a focus on middle management development;
 
  •  highly reputable client base and strong expertise in BFSI; and
 
  •  ability to target key global markets.
 
Our Strategy
 
Our objective is to be the leading China-based provider of outsourced technology services to large multinational companies and leading Chinese corporations. Specific elements of our strategy include:
 
  •  increase business from existing clients;
 
  •  increase business from Chinese domestic clients;
 
  •  expand the scope and depth of our service offerings;
 
  •  capture new clients;
 
  •  continue to pursue strategic acquisitions; and
 
  •  expand delivery capabilities in tier two Chinese cities.
 
Our Challenges
 
We believe our primary challenges are:
 
  •  recessionary conditions in our key client geographies which would likely lead to a reduction in the IT and research and development outsourcing budgets of clients from those geographies;
 
  •  concentration in a limited set of industries and dependence on a limited number of clients;
 
  •  successful execution of our China domestic growth strategy and management of our growth generally;
 
  •  recruitment, training and retention of skilled professionals and middle management;
 
  •  intense competition from other outsourcing companies globally and in China; and
 
  •  successful integration and growth of our past and future acquired businesses and assets.
 
We also face other risks and uncertainties that may materially affect our business, financial conditions, results of operations and prospects. You should consider the risks discussed in “Risk Factors” and elsewhere in this prospectus before investing in our ADSs.
 
Our Corporate Structure
 
We began operations in November 1996 as Dalian Haihui Sci-Tech Co., Ltd., or Haihui Dalian. To enable us to raise equity capital from investors outside of China, we set up a holding company structure by establishing our current Cayman Islands holding company,


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HiSoft Technology International Limited, or HiSoft International, in May 2004. The following diagram illustrates our corporate structure and our significant subsidiaries as of the date of this prospectus. See “Our Corporate Structure—Our Subsidiaries” for more information on the operations of our corporate entities.
 
(CHART)
 
 
(1) Includes a series of contractual arrangements among HiSoft Technology (Dalian) Co., Ltd., or HiSoft Dalian, Haihui Dalian and certain shareholders of Haihui Dalian, including a strategic cooperation agreement, a voting rights agreement and an equity acquisition option agreement. See “Related Party Transactions—Agreements among HiSoft Dalian, Haihui Dalian, and the Shareholders of Haihui Dalian.”
 
Our Corporate Information
 
Our principal offices are located at 33 Lixian Street, Qixianling Industrial Base, Hi-Tech Zone, Dalian 116023, People’s Republic of China. Our telephone number at this address is 86-411-8455-6655 and our fax number is 86-411-8479-1350. Our registered office in the Cayman Islands is at Codan Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. Our web site is www.hisoft.com. The information contained on our web site does not constitute a part of this prospectus.
 
Investor inquiries should be directed to us at the address and telephone number of our principal offices set forth above. Our agent for service of process in the U.S. is Law Debenture Corporate Services Inc., located at 400 Madison Avenue, 4th Floor, New York, New York 10017, United States.


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Conventions That Apply to This Prospectus
 
Unless we indicate otherwise, references in this prospectus to “China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this prospectus only, Taiwan and the special administrative regions of Hong Kong and Macau. In addition, “we,” “us,” “our company” and “our” refer to HiSoft Technology International Limited and its subsidiaries and affiliated PRC entity, as the context requires.
 
Unless specifically indicated otherwise or unless the context otherwise requires, all references to our common shares (i) have been adjusted to give effect to the automatic conversion of all outstanding convertible redeemable preferred shares to common shares upon the closing of this offering, (ii) include 5,968,299 nonvested common shares awarded under our share incentive plan and (iii) exclude common shares issuable upon the exercise of outstanding options with respect to our common shares under our share incentive plan.
 
Our reporting currency is the U.S. dollar. In addition, this prospectus also contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of Renminbi into U.S. dollars were made at RMB 6.8258 to $1.00 and all translations of Japanese Yen into U.S. dollars were made at ¥93.40 to $1.00, the noon buying rate on March 31, 2010 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We make no representation that the Renminbi, Japanese Yen or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars, Japanese Yen or Renminbi, as the case may be, at any particular rate or at all. On June 11, 2010, the noon buying rate for Renminbi was RMB6.8320 to $1.00 and the noon buying rate for Japanese Yen was ¥91.72 to $1.00.


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THE OFFERING
 
ADSs Offered by Us 6,400,000 ADSs
 
ADSs Offered by the Selling Shareholders 1,000,000 ADSs
 
Price per ADS We estimate that the initial public offering price will be between $11.00 and $13.00 per ADS.
 
ADSs Outstanding Immediately After This Offering 7,400,000 ADSs (or 8,510,000 ADSs if the underwriters exercise in full the over-allotment option).
 
Common Shares Outstanding Immediately After This Offering 528,472,536 common shares after giving effect to the conversion of our convertible redeemable preferred shares and including 5,968,299 nonvested common shares awarded under our share incentive plan, but excluding common shares issuable upon the exercise of outstanding options with respect to our common shares under our share incentive plan.
 
Over-Allotment Option The selling shareholders have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 1,110,000 additional ADSs at the initial public offering price, less underwriting discounts and commissions, solely for the purpose of covering over-allotments.
 
The ADSs Each ADS represents 19 common shares. The ADSs will be evidenced by ADRs.
 
The depositary will be the holder of the common shares underlying the ADSs and you will have the rights of an ADR holder as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time.
 
You may surrender your ADSs to the depositary to withdraw the common shares underlying your ADSs. The depositary will charge you a fee for such an exchange.
 
We may amend or terminate the deposit agreement for any reason without your consent. Any amendment that imposes or increases fees or charges or which materially prejudices any substantial


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existing right you have as an ADS holder will not become effective as to outstanding ADSs until 30 days after notice of the amendment is given to ADS holders. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs.
 
To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus.
 
Use of Proceeds We estimate that we will receive net proceeds of approximately $66.4 million from this offering, assuming an initial public offering price of $12.00 per ADS, the mid-point of the estimated range of the initial public offering price, after deducting estimated underwriter discounts, commissions and estimated offering expenses payable by us. We anticipate using the net proceeds of this offering for general corporate purposes, including incremental costs associated with being a public company, and for potential acquisitions of, or investments in, other businesses or technologies that we believe will complement our current operations and expansion strategies.
 
We will not receive any of the proceeds from the sale of the ADSs by the selling shareholders.
 
Risk Factors See “Risk Factors” and other information included in this prospectus for a discussion of the risks relating to investing in our ADSs. You should carefully consider these risks before deciding to invest in our ADSs.
 
Listing We have applied to list our ADSs on the Nasdaq Global Market. Our common shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system.
 
Nasdaq Global Market Trading Symbol HSFT
 
Depositary Deutsche Bank Trust Company Americas


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Lock-up We, our officers and directors, and the holders of substantially all of our common shares have agreed with the underwriters not to sell, transfer or dispose of any ADSs, common shares or similar securities for a period of 180 days after the date of this prospectus. See “Underwriting.”


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SUMMARY CONSOLIDATED FINANCIAL DATA
 
The following summary consolidated financial data for the periods and as of the dates indicated are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are included elsewhere in this prospectus.
 
Our historical results for any prior period do not necessarily indicate our results to be expected for any future period.
 
                                                         
    Year Ended December 31,     Three Months Ended March 31,  
    2005     2006     2007     2008     2009     2009     2010  
    (dollars in thousands, except share data, per share data and per ADS data)  
 
Consolidated Statements of Operations Data
                                                       
Net revenues
  $ 17,483     $ 33,669     $ 63,051     $ 100,720     $ 91,456     $ 21,537     $ 30,537  
Cost of revenues (1)(2)
    11,696       25,334       47,435       70,295       58,759       13,792       19,418  
                                                         
Gross profit
    5,787       8,335       15,616       30,425       32,697       7,745       11,119  
                                                         
Operating expenses:
                                                       
General and administrative (2)
    4,538       12,454       12,617       19,010       18,981       5,651       5,859  
Selling and marketing (1)(2)
    1,591       4,176       5,599       8,345       5,968       1,103       1,991  
Offering expenses
                      3,782                    
Impairment of intangible assets
          2,480             5,760                    
Impairment of goodwill
                      4,784                    
                                                         
Total operating expenses
    6,129       19,110       18,216       41,681       24,949       6,754       7,850  
                                                         
(Loss) income from operations
    (342 )     (10,775 )     (2,600 )     (11,256 )     7,748       991       3,269  
Other (expenses) income (3)
    (430 )     (592 )     2,488       411       676       348       126  
Income tax (expense) benefit
    (293 )     760       (770 )     703       (1,061 )     (168 )     (428 )
Net (loss) income on discontinued operation
    10       31       (38 )     (569 )                  
                                                         
Net (loss) income
    (1,055 )     (10,576 )     (920 )     (10,711 )     7,363       1,171       2,967  
                                                         
Noncontrolling interest
    (63 )     654                                
Net (loss) income attributable to HiSoft Technology International Limited
  $ (1,118 )   $ (9,922 )   $ (920 )   $ (10,711 )   $ 7,363     $ 1,171     $ 2,967  
                                                         
Deemed dividend on series A-1, B and C convertible redeemable preferred shares
  $     $ (1,120 )   $ (5,762 )   $     $     $     $  
                                                         
Net (loss) income attributable to holders of common shares of HiSoft Technology International Limited
  $ (1,118 )   $ (11,042 )   $ (6,682 )   $ (10,711 )   $ 7,363     $ 1,171     $ 2,967  
                                                         


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    Year Ended December 31,     Three Months Ended March 31,  
    2005     2006     2007     2008     2009     2009     2010  
    (dollars in thousands, except share data, per share data and per ADS data)  
 
Net (loss) income per common share:
                                                       
Basic
  $ (0.02 )   $ (0.13 )   $ (0.07 )   $ (0.13 )   $ 0.02     $     $ 0.01  
Diluted
  $ (0.02 )   $ (0.13 )   $ (0.07 )   $ (0.13 )   $ 0.02     $     $ 0.01  
Net (loss) income per ADS attributable to holders of ADSs of HiSoft Technology International Limited:
                                                       
Basic
  $ (0.38 )   $ (2.47 )   $ (1.35 )   $ (2.47 )   $ 0.37     $ 0.06     $ 0.14  
Diluted
  $ (0.38 )   $ (2.47 )   $ (1.35 )   $ (2.47 )   $ 0.36     $ 0.06     $ 0.13  
Weighted average common shares used in calculating net (loss) income per common share:
                                                       
Basic
    66,058,582       82,176,358       94,237,854       82,279,610       86,148,324       85,189,211       89,933,268  
Diluted
    66,058,582       82,176,358       94,237,854       82,279,610       388,372,705       363,343,798       424,477,209  
Weighted average ADSs used in calculating net (loss) income per ADS:
                                                       
Basic
    3,476,767       4,325,071       4,959,887       4,330,506       4,534,122       4,483,643       4,733,330  
Diluted
    3,476,767       4,325,071       4,959,887       4,330,506       20,440,699       19,123,358       22,340,906  
 
 
(1) Includes acquisition-related amortization of intangible assets totaling $1.9 million, $1.6 million and $0.1 million in 2007, 2008 and 2009, respectively, and nil and $0.2 million in the three months ended March 31, 2009 and 2010, respectively, allocated as follows:
 
                                         
          Three Months
 
    Year Ended December 31,     Ended March 31,  
    2007     2008     2009     2009     2010  
    (dollars in thousands)  
 
Cost of revenues
  $ 152     $ 50     $ 16     $    —     $    47  
Operating expenses:
                                       
Selling and marketing
    1,716       1,565            60             116  
 
(2) Includes share-based compensation charges totaling $1.5 million, $1.8 million and $1.1 million in 2007, 2008 and 2009, respectively, and $0.2 million and $0.6 million in the three months ended March 31, 2009 and 2010, respectively, allocated as follows:
 
                                         
    Year Ended December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
    (dollars in thousands)  
 
Cost of revenues
  $ 268     $ 362     $ 321     $ 83     $ 233  
Operating expenses:
                                       
General and administrative
    1,214       1,405          720          124          339  
Selling and marketing
    8       35       56       10       17  
 
(3) Includes change in fair value of warrants of $2.4 million in the year ended 2007 resulting from our issuance in 2004 of warrants allowing the holders to acquire 2,000,000 shares of our series A convertible redeemable preferred shares and 36,000,000 series A-1 convertible redeemable preferred shares. The warrants were exercised in full in 2007 and no future charge will apply.

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    Year Ended December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
 
Other Consolidated Financial Data
                                       
Gross margin (1)
    24.8 %     30.2 %     35.8 %     36.0 %     36.4 %
Operating margin (2)
    (4.1 )%     (11.2 )%     8.5 %     4.7 %     10.7 %
Net margin (3)
    (1.5 )%     (10.6 )%     8.1 %     5.5 %     9.7 %
 
 
(1) Gross margin represents gross profit as a percentage of net revenues.
 
 
(2) Operating margin represents income (loss) from operations as a percentage of net revenues.
 
 
(3) Net margin represents net income (loss) before noncontrolling interest as a percentage of net revenues.
 
                                         
    As of December 31,     As of March 31, 2010  
    2007     2008     2009     Actual     Pro Forma (1)  
    (dollars in thousands)  
 
Consolidated Balance Sheet Data
                                       
Cash and cash equivalents
  $ 39,229     $ 46,881     $ 54,842     $ 52,863     $ 52,863  
Total assets
    96,668       86,100       104,242       108,989       108,989  
Total liabilities
    22,246       16,699       26,151       26,678       26,678  
Series A convertible redeemable preferred shares
    12,581       12,581       12,581       12,581        
Series A-1 convertible redeemable preferred shares
    9,900       9,900       9,900       9,900        
Series B convertible redeemable preferred shares
    30,800       30,800       30,800       30,800        
Series C convertible redeemable preferred shares
    35,750       35,750       35,750       35,750        
Total (deficit) equity
  $ (14,609 )   $ (19,630 )   $ (10,940 )   $ (6,720 )   $ 82,311  
 
 
(1) The pro forma balance sheet data as of March 31, 2010 assumes the conversion of our outstanding series A, A-1, B and C convertible redeemable preferred shares into common shares as of March 31, 2010.


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RISK FACTORS
 
Investing in our ADSs involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our ADSs. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us.
 
If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our ADSs could decline, and you may lose some or all of your investment.
 
Risk Factors Relating to Our Business
 
Our net revenues declined from 2008 to 2009 due in part to the recent global economic crisis. Continuing economic difficulties due to the global economic downturn or any future economic downturn, particularly in our key client geographies of the United States or Japan, could adversely affect our business.
 
As a result of the recent global economic crisis and downturn in business activities in Japan, the United States and other countries where our clients are located, we experienced a decrease in demand for outsourced technology services that have led to a decrease in our net revenues from 2008 to 2009. In 2009, 59.6% of our net revenues were derived from clients headquartered in the U.S. and 25.3% of our net revenues were derived from clients headquartered in Japan and we expect that a significant majority of our net revenues will continue to be derived from clients in these two geographic areas in the future. If the economies of the United States or Japan or other countries where our clients are located experience continuing difficulties in recovering from the global economic downturn, or if there is another general economic downturn or a recession in these countries, our clients and potential clients in these countries may substantially reduce their budgets for outsourced technology services and modify, delay or cancel plans to purchase our services. Additionally, if our clients’ operating and financial performance deteriorates, they may not be able to pay, or may delay payment of, amounts owed to us. Any or all of these events could cause a decline in our net revenues and materially and adversely affect our business and results of operations.
 
If we do not succeed in attracting new clients for our technology services and/or growing revenues from existing clients, we may not achieve our revenue growth goals.
 
We plan to significantly expand the number of clients we serve to diversify our client base and grow our revenues. Revenues from a new client often rise quickly over the first several years following our initial engagement as we expand the services that we provide to that client. Therefore, obtaining new clients is important for us to achieve rapid revenue growth. Our ability to attract new clients, as well as our ability to grow revenues from our existing clients, depends on a number of factors, including our ability to offer high quality technology services at competitive prices, the strength of our competitors and the capabilities of our marketing and sales teams to attract new clients and to sell additional services to existing clients. If we fail to attract new clients or to grow our revenues from existing clients in the future, we may not be able to grow our revenues as quickly as we anticipate or at all.


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If we are not successful in expanding our service offerings and managing increasingly large and complex projects, we may not achieve our financial goals and our results of operations may be adversely affected.
 
We have been expanding, and plan to continue to expand, the nature and scope of our service offerings. As part of this expansion, we plan to add new capabilities within our existing service lines, such as embedded systems testing. The success of our expanded service offerings is dependent, in part, upon demand for such services by new and existing clients and our ability to meet this demand in a cost-competitive and effective manner. To successfully market our expanded service offerings and obtain larger and more complex projects, we need to establish closer relationships with our clients and develop a thorough understanding of their operations. In addition, we may face a number of challenges managing larger and more complex projects, including:
 
  •  maintaining high quality control and process execution standards;
 
  •  maintaining high resource utilization rates on a consistent basis;
 
  •  maintaining productivity levels and implementing necessary process improvements;
 
  •  controlling costs; and
 
  •  maintaining close client contact and high levels of client satisfaction, while at the same time preserving continuity in personnel engaged in a particular project while also rotating personnel to ensure that periodic wage adjustments do not adversely impact our margins on a particular project.
 
Our ability to successfully manage large and complex projects depends significantly on the skills of our management personnel and professionals, some of whom do not have experience managing large-scale or complex projects. In addition, large and complex projects may involve multiple engagements or stages, and there is a risk that a client may choose not to retain us for additional stages or may cancel or delay additional planned engagements. Such cancellations or delays may make it difficult to plan our project resource requirements.
 
If we fail to successfully market our expanded service offerings or obtain engagements for large and complex projects, we may not achieve our revenue growth and other financial goals. Even if we are successful in obtaining such engagements, a failure by us to effectively manage these large and complex projects could damage our reputation, cause us to lose business, impact our net margins and adversely affect our results of operations.
 
If we are not successful in integrating and managing our past and future strategic acquisitions, our business and results of operations may suffer and we may incur exceptional expenses or write-offs.
 
We have completed several acquisitions in recent years, including, for example, our acquisitions of Daemoyrod Corp., or Daemoyrod, an Oracle application software implementation and support specialist with operations in the United States and Mexico, in December 2007, and AllianceSPEC Pte Ltd., or Alliance SPEC, a professional IT transaction system testing company based in Singapore, in December 2009. We have also completed several other recent acquisitions and may in the future continue to pursue strategic acquisitions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Acquisitions.” While we identified and may identify expected synergies and growth opportunities in connection with these acquisitions prior to their completion, we may not achieve, and have not always achieved, the expected benefits. For example, in 2006, we recorded an impairment of intangible assets of $2.5 million in relation to our acquisition of the business of Teksen Systems Holdings Limited, or Teksen Systems, due to the loss of one of their major clients and, in 2008, we recorded an impairment of intangible assets of $5.8 million


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and impairment of goodwill of $4.8 million due to lower than expected sales and profits in 2008 from several other businesses we had acquired.
 
If we acquire other companies in the future, we could have difficulty assimilating the target company’s personnel, operations, products, services and technology into our operations. The primary value of many potential targets in the outsourcing industry lies in their skilled professionals and established client relationships. Transitioning these types of assets to our business can be particularly difficult due to different corporate cultures and values, geographic distance and other intangible factors. Some newly acquired employees may decide not to work with us or to leave shortly after their move to our company and some acquired clients may decide to discontinue their commercial relationships with us. These difficulties could disrupt our ongoing business, distract our management and current employees and increase our expenses, including causing us to incur significant one-time expenses, impairment charges and write-offs. Furthermore, any acquisition or investment that we attempt, whether or not completed, or any media reports or rumors with respect to any such transactions, may adversely affect the value of our ADSs.
 
We may not succeed in identifying suitable acquisition targets, which could adversely affect our ability to expand our operations and service offerings and enhance our competitiveness.
 
We have pursued and may continue to pursue strategic acquisition opportunities to increase our scale and geographic presence, expand our service offerings and capabilities and enhance our industry and technical expertise. However, it is possible that we may not identify suitable acquisition or investment candidates, or, if we do identify suitable candidates, we may not complete those transactions on terms commercially favorable to us or at all. Any inability by us to identify suitable acquisition targets or investments or to complete such transactions could adversely affect our competitiveness and our growth prospects.
 
We face challenges hiring and retaining highly skilled professionals, especially senior engineers, project managers and mid-level technology professionals. Our results of operations and ability to effectively serve our clients may be negatively affected if we cannot attract and retain highly skilled professionals.
 
The success of our business is dependent to a significant degree on our ability to attract and retain highly skilled professionals. In China there is currently a shortage of, and significant competition for, professionals who possess the technical skills and experience necessary to act as senior engineers, project managers and middle managers for IT and research and development outsourcing projects, and we believe that such professionals are likely to remain a limited resource for the foreseeable future. Moreover, similar to India, the outsourced technology industry in China has experienced significant levels of employee attrition. The attrition rate among our employees who have worked for us for at least six months were 18.4%, 18.8% and 13.8% for 2007, 2008 and 2009, respectively, and 6.5% for the three months ended March 31, 2010. Due to the cost of hiring and training new professionals, high attrition rates can negatively affect our cost of revenues and net income. In addition, we may face increasing difficulties recruiting the talent we need to staff our outsourcing facilities in less developed cities in China with lower average wages and living standards. If we are unable to hire and retain highly skilled professionals, our ability to bid on, obtain and effectively execute new projects may be impaired, which would adversely affect our results of operations.
 
Any inability to manage the growth of our operations could disrupt our business and reduce our profitability.
 
We have experienced significant growth in recent years. Our net revenues have grown from $63.1 million in 2007 to $100.7 million in 2008 and decreased slightly to $91.5 million in


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2009. The total number of our employees grew from 2,951 as of December 31, 2007 and 2,781 as of December 31, 2008 to 3,819 as of December 31, 2009. As of April 30, 2010, we had a total of 4,097 employees. Our operations have also expanded in recent years through increases in our service delivery capabilities and acquisitions of complementary businesses. We expect our operations to continue to grow in terms of both headcount and geographic locations. Our rapid growth has placed and will continue to place significant demands on our management and our administrative, operational and financial infrastructure. Continued expansion increases the challenges we face in:
 
  •  recruiting, training and retaining a sufficient number of skilled technical, sales and management personnel;
 
  •  creating and capitalizing upon economies of scale;
 
  •  managing a larger number of clients in a greater number of industry sectors;
 
  •  managing our days of sales outstanding;
 
  •  maintaining effective oversight over personnel and offices;
 
  •  coordinating work among onshore and offshore sites and project teams and maintaining high resource utilization rates;
 
  •  integrating new management personnel and expanded operations while preserving our culture, values and entrepreneurial environment; and
 
  •  developing and improving our internal systems and infrastructure, particularly our financial, operational and communications systems.
 
We operate in an intensely competitive environment, which may lead to declining revenue growth or other circumstances that would negatively affect our results of operations.
 
The markets in which we compete are changing rapidly and we face intense competition from both global providers of outsourced technology services as well as those based in China. There are relatively low barriers to entry into our markets and we have faced, and expect to continue to face, additional competition from new market entrants. We believe that the principal competitive factors in our markets are breadth and depth of service offerings, reputation and track record, ability to tailor service offerings to client needs, industry expertise, ability to leverage offshore delivery platforms, service quality, price, scalability of infrastructure, financial stability, and sales and marketing skills. We face competition or competitive pressure primarily from:
 
  •  global offshore outsourced technology services companies such as Cognizant Technology Solutions, HCL Technologies, Infosys Technologies, Patni Computer Systems, Tata Consultancy Services and Wipro Technologies;
 
  •  China-based technology outsourcing service providers such as Beyondsoft, Chinasoft, Dalian Hi-think Computer (DHC), iSoftStone, Neusoft, SinoCom and VanceInfo;
 
  •  certain divisions of large multinational technology firms; and
 
  •  in-house IT departments of our clients and potential clients.
 
China-based outsourced technology services companies compete with us primarily in the Japan and China markets, while global offshore outsourced technology services companies compete with us primarily in the U.S. market. Many of our international competitors have significantly greater financial, human and marketing resources, a broader range of service offerings, greater technological expertise, more experienced personnel, longer track records, more recognizable brand names and more established relationships in industries that we serve


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or may serve in the future. Moreover, a number of our international competitors have established operations in China.
 
To compete successfully in our markets, we will need to develop new service offerings and enhance our existing service offerings while maintaining price competitiveness. If and to the extent we fail to develop value-adding service offerings that differentiate us from our competitors, we may need to compete largely on price, which may cause our operating margins to decline. Our ability to compete also depends in part on a number of factors beyond our control, including the ability of our competitors to attract, train, motivate and retain highly skilled professionals, the price at which our competitors offer comparable services and our competitors’ responsiveness to client needs. In particular, outsourcing of technology services by domestic Chinese companies is a relatively recent development and it is not yet clear how this industry may develop. Our inability to compete successfully against competitors and pricing pressures could result in lost clients, loss of market share and reduced operating margins, which would adversely impact our results of operations.
 
Our competitiveness depends significantly on our ability to keep pace with the rapid changes in information technology. Failure by us to anticipate and meet our clients’ technological needs could adversely affect our competitiveness and growth prospects.
 
The technology services market is characterized by rapid technological changes, evolving industry standards, changing client preferences and new product and service introductions. Our future success will depend on our ability to anticipate these advances and develop new service offerings to meet client needs. We may fail to anticipate or respond to these advances in a timely or cost-effective manner or, if we do respond, the services or technologies we develop may fail in the marketplace. Furthermore, services or technologies that are developed by our competitors may render our services less competitive or obsolete. In addition, new technologies may be developed that allow our clients to more cost-effectively perform the services that we provide, thereby reducing demand for our outsourced technology services. Our failure to address these developments could have a material adverse effect on our competitiveness and our ability to meet our growth targets.
 
Our revenues are highly dependent on a limited number of clients, and the loss of, or any significant decrease in business from, any one or more of our major clients could adversely affect our financial condition and results of operations.
 
We have in the past derived, and believe that we will continue to derive, a significant portion of our revenues from a limited number of clients. Microsoft and UBS accounted for 10.9% and 10.4%, respectively, of our net revenues in 2007, and 10.3% and 13.5%, respectively, of our net revenues in 2008. In 2009, Microsoft accounted for 13.7% of our net revenues and our ten largest clients accounted for a combined 61.4% of our net revenues. In the three months ended March 31, 2010, a U.S.-based multinational IT company and Microsoft accounted for 11.8% and 10.8% of our net revenues, respectively, and our ten largest clients accounted for a combined 60.7% of our net revenues.
 
The volume of work performed for specific clients is likely to vary from year to year, especially since we are generally not our client’s exclusive technology outsourcing service provider. A significant client in one year may not provide the same level of revenues for us in any subsequent year. The technology outsourcing services we provide to our clients, and the revenues and income from those services, may decline or vary as the type and quantity of technology outsourcing and other services we provide change over time. In addition, our reliance on any individual client for a significant portion of our revenues may give that client a certain degree of pricing leverage against us when negotiating contracts and terms of services with us.


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There are a number of factors that could cause us to lose major clients. Because many of our engagements involve functions that are critical to the operations of our clients’ businesses, any failure by us to meet a client’s expectations could result in cancellation or non-renewal of the engagement. In addition, our clients may decide to reduce spending on technology services from us due to a challenging economic environment or other factors, both internal and external, relating to their business such as corporate restructuring or changing their outsourcing strategy by moving more work in-house or to other providers. Furthermore, our clients, some of whom have experienced rapid changes in their business, substantial price competition and pressures on their profitability, may demand price reductions, automate some or all of their processes or reduce the services to be provided by us, any of which could reduce our profitability.
 
The loss of any of our major clients, or a significant decrease in the volume of work they outsource to us or the price at which we sell our services to them, could adversely affect our financial condition and results of operations.
 
The non-competition clauses contained in some of our business contracts with our existing clients may affect our ability to explore new business relationships and to procure new clients.
 
Some of our business contracts contain non-competition clauses which restrict our ability to provide services to competitors of our existing clients. Such clauses provide that, during the term of the contract or for a certain period of time after the completion of the service (typically 12 months), we or our employees who worked for a client may not provide similar services to such client’s competitors. In addition, some contracts restrict us from competing with the client in quoting, tendering or offering services or solutions, whether by ourselves or with others, directly or indirectly, to such client’s customers.
 
Our clients operate in a limited number of industries. Factors that adversely affect these industries or IT or research and development spending by companies within these industries may adversely affect our business.
 
We derive a large proportion of our revenues from clients which operate in a limited number of industries, including technology and BFSI. In 2009, we derived 61.5% and 23.7% of our revenues, respectively, from clients operating in these two industries. Our business and growth largely depend on continued demand for our services from clients and potential clients in these industries and those industries where we are focusing expansion efforts, such as manufacturing, telecommunications, Internet and life sciences. Demand for our services, and technology services in general, in any particular industry could be affected by multiple factors outside of our control, including a decrease in growth or growth prospects of the industry, a slowdown or reversal of the trend to outsource technological applications, or consolidation in the industry. In addition, serving a major client within a particular industry may effectively preclude us from seeking or obtaining engagements with direct competitors of that client if there is a perceived conflict of interest. Any significant decrease in demand for our services by clients in these industries, or other industries from which we derive significant revenues in the future, may reduce the demand for our services.
 
We enter into fixed-price contracts with some of our clients, and our failure to accurately estimate the resources and time required for these contracts could negatively affect our results of operations.
 
Some of our outsourced technology services are provided on a fixed-price basis that requires us to undertake significant projections and planning related to resource utilization and costs. Although our past project experience helps to reduce the risks associated with estimating, planning and performing fixed-price contracts, we bear the risk of cost overruns


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and completion delays in connection with these projects. Any failure to accurately estimate the resources and time required for a project, wage inflation or any other factors that may impact our costs to complete the project, could adversely affect our profitability and results of operations.
 
Many of our client contracts typically can be terminated by our clients without cause and with little or no notice or penalty. Any termination of our significant contracts could negatively impact our revenues and profitability.
 
Our clients typically retain us on a non-exclusive, project-by-project basis. Many of our client contracts can be terminated by our clients with or without cause, with less than three months’ notice and without penalty. Failure to meet contractual requirements could result in cancellation or non-renewal of a contract. There are a number of factors relating to our clients that are outside of our control which might lead them to terminate a contract or project with us, including:
 
  •  client financial difficulties;
 
  •  a change in strategic priorities resulting in elimination of the impetus for the project or a reduced level of technology spending;
 
  •  a change in outsourcing strategy resulting in moving more work to the client’s in-house technology departments or to our competitors;
 
  •  the replacement by our clients of existing software with other software packages supported by licensors; and
 
  •  mergers and acquisitions or significant corporate restructurings.
 
Any termination of significant contracts, especially if unanticipated, could have a negative impact on our future revenues and profitability.
 
Most of our engagements with clients are for a specific project only and do not necessarily provide for subsequent engagements. If we are unable to generate a substantial number of new engagements for projects on a continual basis, our business and results of operations will be adversely affected.
 
Our clients generally retain us on an engagement-by-engagement basis in connection with specific projects rather than on a recurring basis under long-term contracts. Although a substantial majority of our revenues are generated from repeat business, which we define as revenues from a client who also contributed to our revenues during the prior fiscal year, our engagements with our clients are typically for projects that are singular and often short-term in nature. Therefore, we must seek out new engagements when our current engagements are successfully completed or are terminated, and we are constantly seeking to expand our business with existing clients and secure new clients for our services. If we are unable to generate a substantial number of new engagements on a continual basis, our business and results of operations will be adversely affected.
 
Some of our client contracts contain provisions which, if triggered, could adversely affect our future profitability.
 
Our contracts with certain of our clients contain provisions that provide for downward revision of our prices under certain circumstances. For example, certain client contracts provide that if during the term of the contract we were to offer similar services to any other client on terms and conditions more favorable than those provided in the contract, we would be obliged to offer equally favorable terms and conditions to the client prospectively for future work performed. This may result in lower revenue and profits in future periods. Certain other


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contracts allow a client to request a benchmark study comparing our pricing and performance with that of other service providers for comparable services. Based on the results of the study and depending on the reasons for any unfavorable variance, we may be required to make improvements in the service we provide for the remaining term of the contract. While this has not happened in the past, the triggering of any of the provisions described above could adversely affect our future profitability.
 
Our success depends to a substantial degree upon our senior management and key personnel, and our business operations may be negatively affected if we fail to attract and retain highly competent senior management.
 
We depend to a significant degree on our senior management and key personnel such as project managers and other middle management. However, competition for senior management and key personnel in our industry is intense, and we may be unable to retain our senior management or key personnel or attract and retain new senior management or other key personnel in the future. If one or more members of our senior management team or key personnel resigns, it could disrupt our business operations and create uncertainty as we search for and integrate a replacement. If any member of our senior management leaves us to join a competitor or to form a competing company, any resulting loss of existing or potential clients to any such competitor could have a material adverse effect on our business, financial condition and results of operations. Additionally, there could be unauthorized disclosure or use of our technical knowledge, practices or procedures by such personnel. We have entered into employment agreements with our senior management and key personnel which contain non-competition, non-solicitation and nondisclosure covenants that survive for up to one year following termination of employment. We may not, however, be able to enforce the non-competition, non-solicitation and nondisclosure provisions of these agreements, and such agreements do not ensure the continued service of these senior management and key personnel. In addition, we do not maintain key man life insurance for any of the senior members of our management team or our key personnel.
 
We may be liable to our clients for damages caused by system failures or breaches of security obligations.
 
Many of our contracts involve projects that are critical to the operations of our clients’ businesses. Certain of our client contracts require us to comply with security obligations including maintaining network security and back-up data, ensuring our network is virus-free, maintaining business continuity planning procedures, and verifying the integrity of employees that work with the clients by conducting background checks. Any failure in a client’s system or breach of security relating to the services we provide to the client could damage our reputation or result in a claim for substantial damages against us. In some of our client contracts we limit our liability for damages arising from negligent acts in rendering our technology services. However, these contractual limitations of liability may be unenforceable or may fail to protect us from liability for damages in the event of a claim for breach of our obligations. In addition, our liability insurance is limited and may be insufficient to cover liabilities that we incur. Assertions of system failures or breaches of security obligations against us, if successful, could have a material adverse effect on our business, reputation, financial condition and results of operations. Even if such assertions against us are unsuccessful, we may incur reputational harm and substantial legal fees.


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If our clients’ proprietary intellectual property or confidential information is misappropriated by us or our employees in violation of applicable laws and contractual agreements, we could be exposed to protracted and costly legal proceedings and lose clients.
 
We and our employees are frequently provided with access to our clients’ proprietary intellectual property and confidential information, including source codes, software products, business policies and plans, trade secrets and personal data. We use network security technologies and other methods to prevent employees from making unauthorized copies, or engaging in unauthorized use, of such intellectual property and confidential information. We also require our employees to enter into non-disclosure arrangements to limit access to and distribution of our clients’ intellectual property and other confidential information as well as our own. However, the steps taken by us in this regard may not be adequate to safeguard our clients’ intellectual property and confidential information. Moreover, most of our client contracts do not include any limitation on our liability to them with respect to breaches of our obligation to keep the information we receive from them confidential. In addition, we may not always be aware of intellectual property registrations or applications relating to source codes, software products or other intellectual property belonging to our clients. As a result, if our clients’ proprietary rights are misappropriated by us or our employees, our clients may consider us liable for that act and seek damages and compensation from us. Assertions of infringement of intellectual property or misappropriation of confidential information against us, if successful, could have a material adverse effect on our business, financial condition and results of operations. Any such acts could also cause us to lose existing and future business and damage our reputation in the market. Even if such assertions against us are unsuccessful, they may cause us to incur reputational harm and substantial legal fees.
 
We face risks associated with having a long selling and implementation cycle for our services that requires us to make significant resource commitments prior to realizing revenues for those services.
 
We have a long selling cycle for our outsourced technology services, which requires significant investment of capital, human resources and time by both our clients and us. Before committing to use our services, potential clients often require us to expend substantial time and resources educating them as to the value of our services and our ability to meet their requirements. Therefore, our selling cycle, which frequently exceeds six months for new clients and three months for existing clients, is subject to many risks and delays over which we have little or no control, including our clients’ decision to choose alternatives to our services (such as other providers or in-house resources) and the timing of our clients’ budget cycles and approval processes. For certain engagements we may begin work and incur substantial costs prior to concluding the contract.
 
Implementing our services also involves a significant commitment of resources over an extended period of time from both our clients and us. Our clients may experience delays in obtaining internal approvals or delays associated with technology or system implementations, thereby further delaying the implementation process. Our current and future clients may not be willing or able to invest the time and resources necessary to implement our services, and we may fail to obtain contracts with potential clients to which we have devoted significant time and resources, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
 
Our profitability will suffer if we are not able to maintain our resource utilization levels and continue to improve our productivity levels.
 
Our gross margin and profitability are significantly impacted by our utilization levels of fixed-cost resources, including human resources as well as other resources such as computers


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and office space, and our ability to increase our productivity levels. We have expanded our operations significantly in recent years through organic growth and external acquisitions, which has resulted in a significant increase in our headcount and fixed overhead costs. In particular, largely as a result of our acquisition of Envisage Solutions Inc., or Envisage Solutions, in December 2006, we have substantially increased our onshore resources and fixed costs in the U.S., which are generally higher on a per unit basis than in China. We may face difficulties in maintaining high levels of utilization for our newly established or newly acquired businesses and resources. In addition, some of our professionals are specially trained to work for specific clients or on specific projects and some of our delivery center facilities are dedicated to specific clients or specific projects. Our ability to manage our utilization levels depends significantly on our ability to hire and train high-performing professionals and to staff projects appropriately, and on the mix of our onshore versus offshore services provided on a given project. If we experience a slowdown or stoppage of work for any client or on any project for which we have dedicated professionals or facilities, we may not be able to efficiently reallocate these professionals and facilities to other clients and projects to keep their utilization and productivity levels high. If we are not able to maintain high resource utilization levels without corresponding cost reductions or price increases, our profitability will suffer.
 
Wage increases in China may prevent us from sustaining our competitive advantage and may reduce our profitability.
 
Compensation expenses for our professionals and other employees form a significant part of our costs. Wage costs in China have historically been significantly lower than wage costs in Japan, the United States and other developed countries for comparably skilled professionals. However, because of rapid economic growth and increased competition for skilled employees in China, wages for highly skilled employees in China, in particular middle- and senior-level managers, are increasing at a higher rate than in Japan, the United States, Singapore and Europe. We may need to increase our levels of employee compensation more rapidly than in the past to remain competitive in attracting and retaining the quality and number of employees that our business requires. Increases in the wages and other compensation we pay our employees in China could reduce the competitive advantage we have enjoyed against onshore service providers in Japan, the United States and other countries.
 
If we fail to comply with the regulations of the various industries and the different jurisdictions in which our clients conduct their business or fail to adhere to the regulations that govern our business, our ability to perform services may be affected and may result in breach of obligation with our clients.
 
We serve clients across the United States, Japan, China and other countries and our clients are subject to various regulations that apply to specific industries. Therefore, we need to perform our services to satisfy the requirements for our clients to comply with applicable regulations. We are also required under PRC laws and regulations to obtain and maintain licenses and permits to conduct our business. If we fail to perform our services in such a manner that enables any client to comply with applicable regulations, we may be in breach of our obligations with such client and as a result, we may be required to pay the client penalties under the terms of the relevant contract with such client. In addition, if we cannot maintain the licenses or approval necessary for our business, there may be a material adverse effect on our business and results of operations.
 
Fluctuations in exchange rates could impact our competitiveness and results of operations.
 
The majority of our revenues are generated in Renminbi, Japanese yen and U.S. dollars, while the majority of our costs are denominated in Renminbi. Accordingly, changes in


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exchange rates, especially relative changes in exchange rates among the Renminbi, Japanese yen and U.S. dollar, may have a material adverse effect on our revenues, costs and expenses, gross and operating margins and net income. For example, because substantially all of our employees are based in China and paid in Renminbi, our employee costs as a percentage of revenues may increase or decrease significantly along with fluctuations in the exchange rates between the Renminbi, Japanese yen and U.S. dollar. The Japanese yen and U.S. dollar are freely floating currencies. However, the conversion of the Renminbi into foreign currencies, including the Japanese yen and the U.S. dollar, has been based on exchange rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi solely to the U.S. dollar. Under this revised policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Since July 2008, however, the Renminbi has traded within a narrow range against the U.S. dollar. As a consequence, the Renminbi has fluctuated significantly since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. It is difficult to predict how long the current situation may last and when and how the Renminbi exchange rates may change going forward. If the Renminbi appreciates significantly against the U.S. dollar or the Japanese yen and we are unable to correspondingly increase the proportion of our Renminbi-denominated revenues, our margins and profitability could decrease substantially. We have entered into a limited number of Renminbi-Japanese yen forward contracts to partially hedge our exposure to risks relating to fluctuations in the Renminbi-Japanese yen exchange rate, and we periodically review the need to enter into hedging transactions to protect against fluctuations in the Renminbi-Japanese yen and Renminbi-U.S. dollar exchange rates. However, only limited hedging transactions were available as of the date of this prospectus for Renminbi exchange rates, and the effectiveness of these hedging transactions in reducing the adverse effects on us of exchange rate fluctuations may be limited.
 
We have limited ability to protect our intellectual property rights, and unauthorized parties may infringe upon or misappropriate our intellectual property.
 
Our success depends in part upon our proprietary intellectual property rights, including certain methodologies, practices, tools and technical expertise we utilize in designing, developing, implementing and maintaining applications and processes used in providing our services. We rely on a combination of copyright, trademark and patent laws, trade secret protections and confidentiality agreements with our employees, clients and others to protect our intellectual property, including our brand identity. Nevertheless, it may be possible for third parties to obtain and use our intellectual property without authorization. The unauthorized use of intellectual property is common and widespread in China and enforcement of intellectual property rights by PRC regulatory agencies is inconsistent. As a result, litigation may be necessary to enforce our intellectual property rights. Litigation could result in substantial costs and diversion of our management’s attention and resources, and could disrupt our business, as well as have a material adverse effect on our financial condition and results of operations. Given the relative unpredictability of China’s legal system and potential difficulties enforcing a court judgment in China, there is no guarantee that we would be able to halt any unauthorized use of our intellectual property in China through litigation.
 
We may be subject to third-party claims of intellectual property infringement.
 
Although there were no material pending or threatened intellectual property claims against us as of the date of this prospectus, and we believe that our intellectual property rights do not infringe on the intellectual property rights of others, infringement claims may be asserted against us in the future. For example, we may be unaware of intellectual property registrations or applications that purport to relate to our services, which could give rise to potential


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infringement claims against us. Parties making infringement claims may be able to obtain an injunction to prevent us from delivering our services or using technology containing the allegedly infringing intellectual property. In addition, our contracts contain broad indemnity clauses in favor of our clients, and under most of our contracts, we are required to provide specific indemnities relating to third-party intellectual property rights infringement. In some instances, the amount of these indemnities may be greater than the revenues we receive from the client. If we become liable to third parties for infringing their intellectual property rights, we could be required to pay a substantial damage award. Although we carry limited professional liability insurance, such insurance may not cover some claims and may not be sufficient to cover all damages that we may be required to pay. Furthermore, we may be forced to develop non-infringing technologies or obtain a license to provide the services that are deemed infringing. We may be unable to develop non-infringing processes, methods or technologies or to obtain a license on commercially reasonable terms or at all. We may also be required to alter our processes or methodologies so as not to infringe others’ intellectual property, which may not be technically or commercially feasible and may cause us to expend significant resources. Any claims or litigation in this area, whether we ultimately win or lose, could be time-consuming and costly and could damage our reputation.
 
Our business operations and financial condition could be adversely affected by negative publicity about offshore outsourcing or anti-outsourcing legislation in the United States, Japan or other countries in which our clients are based.
 
Concerns that offshore outsourcing has resulted in a loss of jobs and sensitive technologies and information to foreign countries have led to negative publicity concerning outsourcing in some countries, including the United States. Current or prospective clients may elect to perform services that we offer themselves or may be discouraged from transferring these services to offshore providers to avoid any negative perception that may be associated with using an offshore provider. These trends could harm our ability to compete effectively with competitors that operate primarily out of facilities located in these countries.
 
Offshore outsourcing has also become a politically sensitive topic in many countries, including the United States. A number of U.S. states have passed legislation that restricts state government entities from outsourcing certain work to offshore service providers. Other federal and state legislation has been proposed that, if enacted, would provide tax disincentives for offshore outsourcing or require disclosure of jobs outsourced abroad. Similar legislation could be enacted in Japan and other countries in which we have clients. Any expansion of existing laws or the enactment of new legislation restricting or discouraging offshore outsourcing by companies in the United States, Japan or other countries in which we have clients could adversely impact our business operations and financial results.
 
We may need additional capital and any failure by us to raise additional capital on terms favorable to us, or at all, could limit our ability to grow our business and develop or enhance our service offerings to respond to market demand or competitive challenges.
 
Capital requirements are difficult to plan in our rapidly changing industry. As of the date of this prospectus, we expect that we will need capital to fund:
 
  •  acquisitions of assets, technologies or businesses;
 
  •  the development and expansion of our technology service offerings;
 
  •  the expansion of our operations and geographic presence; and
 
  •  our marketing and business development costs.


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We may require additional capital resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financing covenants that would restrict our operations. Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:
 
  •  investors’ perception of, and demand for, securities of outsourced technology services companies;
 
  •  conditions in the U.S. and other capital markets in which we may seek to raise funds;
 
  •  our future results of operations and financial condition;
 
  •  PRC government regulation of foreign investment in China;
 
  •  economic, political and other conditions in China; and
 
  •  PRC government policies relating to the borrowing and remittance outside China of foreign currency.
 
Financing may not be available in amounts or on terms acceptable to us or at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to grow our business and develop or enhance our product and service offerings to respond to market demand or competitive challenges.
 
Because there is limited business and litigation insurance coverage available in China, any business disruption or litigation we experience might result in our incurring substantial costs and diverting significant resources to handle such disruption or litigation.
 
While business disruption insurance may be available to a limited extent in China, we have determined that the risks of disruption and the difficulties and costs associated with acquiring such insurance render it commercially impractical for us to have such insurance. As a result, we do not have any business liability or business disruption coverage for our operations in China. Although we carry limited professional liability insurance, such insurance may not cover some claims and may not be sufficient to cover all damages that we may be required to pay due to such claims. As a result, any business disruption or litigation might result in our incurring substantial costs and the diversion of resources.
 
Natural disasters may lead to damages to our equipment and facilities and may affect our ability to perform services for our clients.
 
Natural disasters such as earthquakes, floods, fires, heavy rains, sand storms, tsunamis and cyclones could damage certain of our infrastructure or facilities and may disrupt our information systems or telephone service. Such damages and disruptions could affect our ability to perform services for our clients in accordance with the contractual provisions and may cause us to incur additional expenses to repair or to reinvest in equipment or facilities. In addition, the damages and additional expenses caused by natural disasters may not be fully covered by our insurance and our failure to perform services for our clients due to such natural disasters may affect our reputation and may damage our relationships with our clients.


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Our net revenues, expenses and profits are subject to fluctuation, which make them difficult to predict and may negatively affect the market price of our ADSs.
 
Our operating results and growth rate may vary significantly from quarter to quarter. Therefore, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as an indication of our future performance. It is possible that in the future some of our quarterly results of operations may be below the expectations of market analysts and our investors, which could lead to a significant decline in the market value of our ADSs. As a large part of any quarter’s revenues are derived from existing clients, revenue growth can vary due to project starts and stops and client-specific situations.
 
Additional factors which affect the fluctuation of our net revenues, expenses and profits include:
 
  •  variations in the duration, size, timing and scope of our engagements, particularly with our major clients;
 
  •  impact of new or terminated client engagements;
 
  •  timing and impact of acquisitions, including how quickly and effectively we are able to integrate the acquired business, its service offerings and employees, and retain acquired clients;
 
  •  changes in our pricing policies or those of our clients or competitors;
 
  •  start-up expenses for new engagements;
 
  •  progress on fixed-price engagements, and the accuracy of estimates of resources and time frames required to complete pending assignments;
 
  •  the proportion of services that we perform onshore versus offshore;
 
  •  the proportion of fixed-price contracts versus time-and-materials contracts;
 
  •  unanticipated employee turnover and attrition;
 
  •  the size and timing of expansion of our facilities;
 
  •  unanticipated cancellations, non-renewal of our contracts by our clients, contract terminations or deferrals of projects;
 
  •  changes in our employee utilization rates;
 
  •  changes in relevant exchange rates; and
 
  •  our ability to implement productivity and process improvements, and maintain appropriate staffing to ensure cost-effectiveness on individual engagements.
 
A significant portion of our expenses, particularly those related to personnel and facilities, are fixed in advance of any particular quarter. As a result, unanticipated variations in the number and timing of our projects or employee utilization rates may cause significant variations in our operating results in any particular quarter. Fluctuations in our operating results may result in sharp unpredictable fluctuations in the market price of our ADSs. Such sharp fluctuations may be viewed negatively by the market and result in a lower market price than our ADSs would have in the absence of such fluctuations.
 
Our net revenues and results of operations are affected by seasonal trends.
 
Our net revenues and results of operations are affected by seasonal trends. In particular, as most of our net revenues are derived from contracts priced on a time-and-materials basis, we typically experience lower total net revenues during holiday periods, particularly during the


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Chinese New Year holidays in the first quarter of every year and during the week-long National Day holiday in October of every year, when our delivery centers in the PRC operate with reduced staffing. However, during periods of high growth in our net revenues as well as during periods of quarterly fluctuations in net revenues due to other factors, such as the recent economic crisis, any seasonal impact on our quarterly results may not be apparent. We believe that our net revenues and results of operations will continue to be affected in the future by seasonal trends. As a result, you may not be able to rely on period to period comparisons of our net revenues and results of operations as an indication of our future performance.
 
The international nature of our business exposes us to risks that could adversely affect our financial condition and results of operations.
 
We have operations in China, Japan, the United States and Singapore and we serve clients across North America, Europe and Asia. Our corporate structure also spans multiple jurisdictions, with our parent holding company incorporated in the Cayman Islands and intermediate and operating subsidiaries incorporated in the British Virgin Islands, China, Hong Kong, Japan, Singapore and the United States. As a result, we are exposed to risks typically associated with conducting business internationally, many of which are beyond our control. These risks include:
 
  •  significant currency fluctuations among the Renminbi, Japanese yen, U.S. dollar and other currencies in which we transact business;
 
  •  legal uncertainty owing to the overlap of different legal regimes, problems in asserting contractual or other rights across international borders, and the burden and expense of complying with the laws and regulations of various jurisdictions;
 
  •  potentially adverse tax consequences, such as scrutiny of transfer pricing arrangements by authorities in the countries in which we operate;
 
  •  current and future tariffs and other trade barriers, including restrictions on technology and data transfers;
 
  •  obtaining visas and other travel documents, especially for our employees who are PRC citizens;
 
  •  unexpected changes in regulatory requirements; and
 
  •  terrorist attacks and other acts of violence, regional conflicts or war, including any escalation of recent events involving South Korea and North Korea.
 
The occurrence of any of these events could have a material adverse effect on our financial condition and results of operations.
 
We may cease to enjoy financial incentives and subsidies from certain PRC government agencies.
 
Certain of our PRC subsidiaries have in the past been granted financial incentives and subsidies from certain local government agencies in support of the continued expansion of our business locally and globally. These government agencies may decide to reduce or eliminate such financial incentives and subsidies at any time. Therefore, we cannot assure you of the continued availability of such financial incentives and subsidies. The discontinuation of these financial incentives and subsidies could potentially increase our operating and other expenses and adversely affect our financial condition and results of operation.


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We rely on technological infrastructure and telecommunications systems in providing our services to our clients, and any failures by, or disruptions to, the infrastructure and systems we use could adversely affect our business and results of operations.
 
To provide effective offshore outsourced technology services for our clients, we must maintain active voice and data communications among our main operations centers in China, our onshore centers in Japan, the United States and Singapore, and our clients’ offices. Disruptions to our communications systems could result from, among other things, technical breakdowns, computer glitches and viruses, and natural or man-made disasters. For example, the May 2008 earthquake centered in China’s Sichuan province caused disruptions in the operations of our Chengdu delivery center, including interruptions in communications, temporary closure and lost staff productivity. We also depend on certain significant vendors for facility storage and related maintenance of our main technology equipment and data at our technology hubs. Any failure by these vendors to perform those services, any temporary or permanent loss of our equipment or systems, or any disruptions to basic infrastructure like power and telecommunications could impede our ability to provide services to our clients, have a negative impact on our reputation, cause us to lose clients and otherwise adversely affect our business and results of operations.
 
Restrictions on visa issuances by Japan, the United States or other countries may affect our ability to compete for and provide services to clients in those countries, which could adversely affect our business and results of operations.
 
Our business depends to a limited extent on the ability of our PRC employees to obtain the necessary visas and entry permits to do business in the countries where our clients and our onshore delivery centers are located. Historically, the process for obtaining visas for PRC nationals to certain countries, including Japan and the United States, has been lengthy and cumbersome. We have in the past experienced delays and rejections when applying for business visas to the United States for some of our personnel. Moreover, in response to terrorist attacks and global unrest, immigration authorities generally, and those in the United States in particular, have increased the level of scrutiny in granting visas. If further terrorist attacks occur, obtaining visas for our personnel may become even more difficult. Local immigration laws may also require us to meet certain other legal requirements as a condition to obtaining or maintaining entry visas. In addition, immigration laws are subject to legislative change and varying standards of application and enforcement due to political forces, economic conditions or other events, including terrorist attacks. If we are unable to obtain the necessary visas for our personnel who need to travel internationally, if the issuance of such visas is significantly delayed, or if the length of stay permitted under such visas is shortened, we may not be able to provide services to our clients on a timely and cost-effective basis or manage our onshore delivery centers as efficiently as we otherwise could, any of which could adversely affect our business and results of operations.
 
We may be unable to establish and maintain an effective system of internal control over financial reporting and, as a result, we may be unable to accurately report our financial results or prevent fraud.
 
Upon completion of this offering, we will become a public company in the United States that is, or will be subject to, the U.S. Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act, or Section 404, will require that we include a report from management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2011. In addition, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude


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that our internal controls are not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may disagree and may decline to attest to our management’s assessment or may issue an adverse opinion. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our reporting processes, which could adversely affect the trading price of our ADSs.
 
Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may identify control deficiencies as a result of the assessment process we will undertake in compliance with Section 404, including but not limited to, internal audit resources and formalized and documented closing and reporting processes. We plan to remediate control deficiencies identified in time to meet the deadline imposed by the requirements of Section 404 but we may be unable to do so. Our failure to establish and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial reporting processes, which in turn could harm our business and negatively impact the trading price of our ADSs.
 
Compliance with rules and requirements applicable to public companies may cause us to incur increased costs, which may negatively affect our results of operations.
 
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and Nasdaq, have required changes in corporate governance practices of public companies. We expect these rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. Complying with these rules and requirements may be especially difficult and costly for us because we may have difficulty locating sufficient personnel in China with experience and expertise relating to U.S. GAAP and U.S. public company reporting requirements, and such personnel may command higher salaries relative to what similarly experienced personnel would command in the United States. If we cannot employ sufficient personnel to ensure compliance with these rules and regulations, we may need to rely more on outside legal, accounting and financial experts, which may be very costly. In addition, we will incur additional costs associated with our public company reporting requirements. We are evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
 
Risk Factors Relating to China
 
Our operations may be adversely affected by changes in China’s political, economic and social conditions or a deterioration in China’s relations with Japan or the United States.
 
As a substantial portion of our business operations are conducted in China, changes to the economic, political and social conditions in China could have an adverse effect on our business. Although substantially all of our revenues are derived from services provided to clients located outside of China, a significant downturn in the PRC economy could indirectly harm our business by deterring non-PRC companies from engaging in business in China. In addition, any significant increase in China’s inflation rate could increase our costs and have a negative impact on our operating margins. Although the PRC economy has been transitioning from a planned economy to a more market-oriented economy since the late 1970s, the PRC government continues to exercise significant control over China’s economic growth through the allocation of resources, controlling the incurrence and payment of foreign currency-


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denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. From late 2003 to mid-2008, the PRC government implemented a number of measures, such as increasing the People’s Bank of China’s statutory deposit reserve ratio and imposing commercial bank lending guidelines, that had the effect of slowing the growth of credit availability. In response to the recent global and Chinese economic downturn, the PRC government has promulgated several measures aimed at expanding credit and stimulating economic growth. Since August 2008, the People’s Bank of China has decreased the statutory deposit reserve ratio and lowered benchmark interest rates several times in response to the global downturn. However, since January 2010, the People’s Bank of China has begun to increase the statutory reserve ratio in response to rapid domestic growth, which may have a negative impact on the Chinese economy. It is unclear whether PRC economic policies will be effective in sustaining stable economic growth in the future. Changes in any of these policies could adversely affect the overall economy in China or the prospects of the outsourced technology services industry.
 
Any sudden changes to China’s political system or the occurrence of widespread social unrest could have negative effects on our business and results of operations. In addition, any significant deterioration in China’s relations with Japan or the United States could discourage some of our clients in those countries from engaging in business with us or could lead to legislation in China, Japan or the United States that could have an adverse impact on our business interests.
 
The discontinuation of any of the preferential tax treatments available to us in China could materially and adversely affect our results of operations and financial condition.
 
Under PRC tax laws and regulations, certain of our operating subsidiaries in China enjoyed, or are qualified to enjoy, certain preferential income tax benefits.
 
On March 16, 2007, the National People’s Congress of China enacted a new Enterprise Income Tax Law, or New EIT Law, which became effective on January 1, 2008. In addition, the Implementation Rules of the New Enterprise Income Tax Law, or the Implementation Rules, were promulgated by the PRC State Council on December 6, 2007 and the Notice on Implementation of Transitional Arrangements for Preferential Policies of Enterprise Income Tax, or the Transitional Arrangements Notice, was promulgated by the PRC State Council on December 26, 2007. The New EIT Law significantly curtails tax incentives granted to foreign-invested enterprises. The New EIT Law, however (i) reduces the statutory rate of enterprise income tax from 33% to 25%, (ii) permits companies established before March 16, 2007 to continue to enjoy their existing tax incentives, subject to transitional rules as stipulated in the Transitional Arrangements Notice, and (iii) introduces new tax incentives, subject to various qualification criteria. For example, the New EIT Law permits certain “high and new technology enterprises strongly supported by the state” to enjoy a reduced enterprise tax rate of 15%. According to the relevant administrative measures, to qualify as “high and new technology enterprises strongly supported by the state,” our PRC subsidiaries must meet certain financial and non-financial criteria and complete verification procedures with the administrative authorities. Continued qualification as a “high and new technology enterprise” is subject to a three-year review by the relevant government authorities in China, and in practice certain local tax authorities also require annual evaluation of the qualification.
 
In the event the preferential tax treatment for any of our PRC subsidiaries is discontinued or is not verified by the local tax authorities, and the affected entity fails to obtain preferential income tax treatment based on other qualifications such as Advanced Technology Service Enterprise, it will become subject to the standard PRC enterprise income tax rate of 25%. We cannot assure you that the tax authorities will not, in the future, discontinue any of our preferential tax treatments, potentially with retroactive effect. In addition, prior to the issuance


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of the Circular Regarding Further Clarification on Implementation of Preferential EIT Rate during Transition Periods, or Circular 157, by the State Administration of Taxation on April 21, 2010, we understood that HiSoft Beijing, due to its status as a high and new technology enterprise, or HNTE, under the New EIT Law, was entitled to pay tax at the rate of 7.5% for 2009 and 2010, and in practice, HiSoft Beijing has paid its tax for 2009 at the rate of 7.5% as approved by the local tax authorities. Depending on the interpretation of Circular 157, the preferential tax rate enjoyed by HiSoft Beijing during its 50% tax reduction period (2009-2010) may be either 10% or 12.5% for 2009 and 11% or 12.5% for 2010 rather than 7.5% which is the rate we had used prior to the issuance of Circular 157. We are currently seeking to determine the appropriate interpretation with the relevant tax authority. The discontinuation of our preferential tax treatments or the change of the applicable preferential tax rate could materially increase our tax obligations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Income Taxes.”
 
In addition, our PRC subsidiaries are exempt from business tax with respect to the software development business and related technology consulting services in which they engage, both-of which fall within the definition of technology development business. Our PRC subsidiaries are required to sign and submit business contracts under specific requirements under current PRC tax laws to obtain the exemption and we cannot assure you that each of our clients will cooperate with us to comply with the specific requirements for the purpose of the exemption. Furthermore, we cannot assure you that the PRC regulators will not change the tax laws to cancel the tax exemption. Expiration of or changes to the tax exemption may have a material adverse effect on our tax obligations and operating results.
 
Under the New EIT Law, we may be classified as a “resident enterprise” of China. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders.
 
Under the New EIT Law and the Implementation Rules, both of which became effective on January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and is subject to enterprise income tax at the rate of 25% on its global income. The Implementation Rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those invested in by PRC individuals, like our company, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or controlled by or invested in by PRC individuals. While we do not believe we should be considered a resident enterprise, if the PRC authorities were to subsequently determine that we should be so treated, a 25% enterprise income tax on our global income could significantly increase our tax burden and materially and adversely affect our financial condition and results of operations.
 
Pursuant to the New EIT Law, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. We are a Cayman Islands


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holding company and substantially all of our income may come from dividends from our PRC subsidiaries. To the extent these dividends are subject to withholding tax, the amount of funds available to us to meet our cash requirements, including the payment of dividends to our shareholders and ADS holders, will be reduced.
 
In addition, because there remains uncertainty regarding the interpretation and implementation of the New EIT Law and the Implementation Rules, it is uncertain whether, if we are regarded as a PRC resident enterprise, any dividends to be distributed by us to our non-PRC shareholders and ADS holders would be subject to any PRC withholding tax. If we are required under the New EIT Law to withhold PRC income tax on our dividends payable to our non-PRC corporate shareholders and ADS holders, your investment in our ADSs or common shares may be materially and adversely affected.
 
Furthermore, the State Administration of Taxation promulgated the Notice on How to Understand and Determine the Beneficial Owners in Tax Agreement in October 2009, or Circular 601, which provides guidance for determining whether a resident of a contracting state is the “beneficial owner” of an item of income under China’s tax treaties and tax arrangements. According to Circular 601, a beneficial owner generally must be engaged in substantive business activities. An agent or conduit company will not be regarded as a beneficial owner and, therefore, will not qualify for treaty benefits. The conduit company normally refers to a company that is set up for the purpose of avoiding or reducing taxes or transferring or accumulating profits. We cannot assure you that any dividends to be distributed by us to our non-PRC shareholders and ADS holders whose jurisdiction of incorporation has a tax treaty with China providing for a different withholding arrangement will be entitled to the benefits under the relevant withholding arrangement.
 
The strengthened scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on our acquisition strategy.
 
In connection with the New EIT Law, the Ministry of Finance and State Administration of Taxation jointly issued, on April 30, 2009, the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59. On December 10, 2009, the State Administration of Taxation issued the Notice on Strengthening the Management on Enterprise Income Tax for Non-resident Enterprises Equity Transfer, or Circular 698. Both Circular 59 and Circular 698 became effective retroactively on January 1, 2008. Under the two circulars, HiSoft Holdings Limited, or HiSoft Holdings BVI, HiSoft International, and HiSoft Systems Holdings Limited, or HiSoft Systems BVI, may be subject to income tax on capital gains generated from their respective transfers to us and other subsidiaries of our company of equity interests in HiSoft Services (Beijing) Limited, or HiSoft Beijing, and HiSoft Technology (Chengdu) Co., Ltd., or HiSoft Chengdu, in 2008 and equity interests in HiSoft Systems (Shenzhen) Limited, or HiSoft Shenzhen, in 2009. The PRC tax authorities have the discretion under Circular 59 and Circular 698 to make adjustments to the taxable capital gains based on the difference between the fair value of the equity interests transferred and the cost of investment. If the PRC tax authorities make such adjustment, our income tax costs will be increased.
 
In addition, by promulgating and implementing the circulars, the PRC tax authorities have strengthened their scrutiny over the direct or indirect transfer of equity interests in a PRC resident enterprise by a non-resident enterprise. For example, Circular 698 specifies that the PRC State Administration of Taxation is entitled to redefine the nature of an equity transfer where offshore vehicles are interposed for tax-avoidance purposes and without reasonable commercial purpose. Since we consistently pursue acquisitions as one of our growth strategies, and have conducted and may conduct acquisitions involving complex corporate structures, the PRC tax authorities may, at their discretion, adjust the capital gains or request


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us to submit additional documentation for their review in connection with any of our acquisitions, thus causing us to incur additional acquisition costs.
 
The enforcement of the Labor Contract Law and other labor-related regulations in China may adversely affect our business and our results of operations.
 
On June 29, 2007, the National People’s Congress of China enacted the Labor Contract Law, which became effective on January 1, 2008. The Labor Contract Law establishes more restrictions and increases costs for employers to dismiss employees under certain circumstances, including specific provisions related to fixed-term employment contracts, non-fixed-term employment contracts, task-based employment, part-time employment, probation, consultation with the labor union and employee representative’s council, employment without a contract, dismissal of employees, compensation upon termination and for overtime work, and collective bargaining. According to the Labor Contract Law, unless otherwise provided by law, an employer is obliged to sign a labor contract with a non-fixed term with an employee if the employer continues to hire the employee after the expiration of two consecutive fixed-term labor contracts or if the employee has worked for the employer for ten consecutive years. Severance pay is required if a labor contract expires without renewal because the employer refuses to renew the labor contract or provides less favorable terms for renewal. In addition, under the Regulations on Paid Annual Leave for Employees, which became effective on January 1, 2008, employees who have served more than one year for an employer are entitled to a paid vacation ranging from 5 to 15 days, depending on the number of the employee’s working years at the employer. Employees who waive such vacation time at the request of employers are entitled to compensation equal to three times their regular daily salary for each waived vacation day. As a result of these new measures designed to enhance labor protection, our labor costs are expected to increase, which may adversely affect our business and our results of operations. In addition, the PRC government in the future may enact further labor-related legislation that increases our labor costs and restricts our operations.
 
The PRC legal system embodies uncertainties which could limit the legal protections available to you and us.
 
As our main operating entities and a substantial majority of our assets are located in China, PRC laws and the PRC legal system in general may have a significant impact on our business operations. Although China’s legal system has developed over the last several decades, PRC laws, regulations and legal requirements remain underdeveloped relative to the United States. Moreover, PRC laws and regulations change frequently and their interpretation and enforcement involves uncertainties. For example, the interpretation or enforcement of PRC laws and regulations may be subject to government rules or policies, some of which are not published on a timely basis or at all. In addition, the relative inexperience of China’s judiciary in some cases may create uncertainty as to the outcome of litigation. These uncertainties could limit our ability to enforce our legal or contractual rights or otherwise adversely affect our business and operations. Furthermore, due to the existence of unpublished rules and policies, and since newly issued PRC laws and regulations may have a retroactive effect, we may not be aware of our violation of certain PRC laws, regulations, policies or rules until after the fact.
 
If the China Securities Regulatory Commission, or CSRC, or another PRC regulatory agency, determines that CSRC approval is required in connection with this offering, this offering may be delayed or cancelled, or we may become subject to penalties.
 
On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006 and were amended on June 22, 2009. Under these regulations, the prior approval of the CSRC is required for the overseas listing of offshore


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special purpose vehicles that are directly or indirectly controlled by PRC companies or individuals and used for the purpose of listing PRC onshore interests on an overseas stock exchange. We believe, based on the opinion of our PRC legal counsel, Fangda Partners, that we are not required to obtain CSRC approval for the listing and trading of our ADSs on the Nasdaq Global Market because we completed our restructuring and established our current offshore holding structure before September 8, 2006, the effective date of these regulations. However, there remains some uncertainty as to how these regulations will be interpreted or implemented. If the CSRC or another PRC regulatory agency subsequently determines that the CSRC’s approval is required for this offering, we may face sanctions by the CSRC or another PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into China, restrict or prohibit payment or remittance of dividends by our PRC subsidiaries to us, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or another PRC regulatory agency may also take actions requiring us, or making it advisable for us, to delay or cancel this offering before settlement and delivery of the ADSs being offered by us.
 
The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors could make it more difficult for us to make future acquisitions or dispose of our business operations or assets in China.
 
The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors also established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including a requirement that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if either threshold under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings issued by the State Council on August 3, 2008 is triggered. Since 2005 we have expanded our operations through a series of acquisitions and investments. Complying with the requirements of the new regulation in order to complete any future transactions could be time-consuming, and any required approval processes, including approval from the Ministry of Commerce, may delay or inhibit our ability to complete any future transactions, which could affect our ability to expand our business or maintain our market share. In addition, such additional procedures and requirements could make it more difficult or time-consuming for us to dispose of any of our business operations or assets in China.
 
A failure by our shareholders or beneficial owners who are PRC citizens or residents in China to comply with certain PRC foreign exchange regulations could restrict our ability to distribute profits, restrict our overseas and cross-border investment activities or subject us to liability under PRC laws, which could adversely affect our business and financial condition.
 
In October 2005, China’s State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE Circular 75 states that PRC citizens or residents must register with the relevant local SAFE branch or central SAFE in connection with their establishment or control of an offshore entity established for the purpose of overseas equity financing involving a roundtrip investment whereby the offshore entity acquires or controls onshore assets or equity interests held by the PRC citizens or residents. In addition, such PRC citizens or residents must amend their SAFE registrations when the offshore special purpose company undergoes material events relating to increases or decreases in investment amount, transfers or


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exchanges of shares, mergers or divisions, long-term equity or debt investments, external guarantees, or other material events that do not involve roundtrip investments. Since May 2007, SAFE has issued guidance to its local branches regarding the operational procedures for such registration, which provides more specific and stringent requirements on the registration relating to SAFE Circular 75. The guidance imposes obligations on onshore subsidiaries of the offshore special purpose company to coordinate with and supervise the beneficial owners of the offshore entity who are PRC citizens or residents to complete the SAFE registration process. If the beneficial owners fail to comply, the onshore subsidiaries are required to report the non-compliance to the local branch of SAFE.
 
We are committed to complying, and to ensuring that our shareholders and beneficial owners who are PRC citizens or residents comply, with SAFE Circular 75 requirements. We understand that our PRC citizen or resident beneficial owners have completed initial registration with the local counterpart of SAFE in Dalian and are in the process of completing amendment registration under SAFE Circular 75. We are also in the process of amending the foreign exchange registrations of our PRC subsidiaries located in cities other than Dalian with the relevant local counterparts of SAFE to update the information on beneficial ownership of our PRC citizen or resident beneficial owners. However, we may not be fully informed of the identities of all our beneficial owners who are PRC citizens or residents, and we cannot compel our beneficial owners to comply with SAFE Circular 75 requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC citizens or residents have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE Circular 75 or other related regulations. Failure by such shareholders or beneficial owners to comply with SAFE Circular 75, or failure by us to amend the foreign exchange registrations of our relevant PRC subsidiaries, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects. See “—Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our businesses.”
 
A failure to comply with PRC regulations regarding the registration of shares and share options held by our employees who are PRC citizens may subject such employees or us to fines and legal or administrative sanctions.
 
Pursuant to the Implementation Rules of the Administrative Measures on Individual Foreign Exchange, or the Individual Foreign Exchange Rules, promulgated on January 5, 2007 by SAFE and a relevant guidance issued by SAFE in March 2007, PRC citizens who are granted shares or share options by an overseas-listed company according to its employee share option or share incentive plan are required, through the PRC subsidiary of such overseas-listed company or other qualified PRC agents, to register with SAFE and complete certain other procedures related to the share option or other share incentive plan. In addition, the overseas-listed company or its PRC subsidiary or other qualified PRC agent is required to appoint an asset manager or administrator and a custodian bank, and open special foreign currency accounts to handle transactions relating to the share option or other share incentive plan. Under the Foreign Currency Administration Rules, as amended in 2008, the foreign exchange proceeds of domestic entities and individuals can be remitted into China or deposited abroad, subject to the terms and conditions to be issued by SAFE. However, the implementation rules in respect of depositing the foreign exchange proceeds abroad have not been issued by SAFE. Currently, the foreign exchange proceeds from the sales of stock or dividends distributed by the overseas-listed company can be converted into Renminbi or transferred to such individuals’ foreign exchange savings account after the proceeds have been remitted back to the special foreign currency account opened at a PRC domestic bank. If stock options are


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exercised in a cashless exercise, the PRC domestic individuals are required to remit the proceeds to special foreign currency accounts. We and our PRC citizen employees who have been granted share options, or PRC option holders, will be subject to these rules upon the listing and trading of our ADSs on the Nasdaq Global Market. If we or our PRC option holders fail to comply with these rules, we or our PRC option holders may be subject to fines and legal or administrative sanctions. See “Regulations — Regulations on Foreign Exchange.”
 
PRC government restrictions on the convertibility of Renminbi may limit our ability to effectively utilize our revenues and funds.
 
A majority of our net revenues are generated in Japanese yen or U.S. dollars, while most of our costs are denominated in Renminbi. In order for us to effectively utilize our revenues and the funds raised in this offering, we need to conduct currency exchanges between Renminbi and other currencies. Under PRC regulations as of the date of this prospectus, Renminbi is convertible for “current account transactions,” which include, among other things, dividend payments and payments for the import of goods and services. Our PRC subsidiaries may also retain foreign exchange in their respective current account bank accounts for use in payment of international current account transactions. Although the Renminbi has been fully convertible for current account transactions since 1996, we cannot assure you that the relevant PRC government authorities will not limit or eliminate our ability to purchase and retain foreign currencies for current account transactions in the future. Conversion of Renminbi into foreign currencies, and of foreign currencies into Renminbi, for payments relating to “capital account transactions,” which principally include investments and loans, generally requires the approval of SAFE and other relevant PRC governmental authorities.
 
On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular 142, a notice regulating the conversion by a foreign-invested company of foreign currency into Renminbi by restricting how the converted Renminbi may be used. SAFE Circular 142 requires that Renminbi converted from the foreign currency-denominated registered capital of a foreign-invested company may only be used for purposes within the company’s business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise in its business scope. In addition, SAFE strengthened its oversight of the flow and use of Renminbi funds converted from the foreign currency-denominated registered capital of a foreign-invested company. The use of such Renminbi may not be changed without approval from SAFE, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not yet been used. Violations of SAFE Circular 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Regulations. As a result, SAFE Circular 142 may significantly limit our ability to transfer the net proceeds from this offering to our PRC subsidiaries in the PRC, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC, and we may not be able to convert the net proceeds from this offering into Renminbi to invest in or acquire any other PRC companies.
 
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds we receive from this offering, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
 
In utilizing the proceeds we receive from this offering in the manner described in “Use of Proceeds,” as an offshore holding company of our PRC subsidiaries, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries. Any loans to our PRC subsidiaries are subject to PRC regulations and approvals. For example,


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loans by us to our wholly owned subsidiaries in China to finance their activities cannot exceed statutory limits and must be registered with SAFE or its local counterparts. We may also decide to finance our PRC subsidiaries by means of capital contributions. These capital contributions must be approved by China’s Ministry of Commerce or its local counterparts. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, or at all. If we fail to receive such registrations or approvals, our ability to use the proceeds we receive from this offering and to capitalize our PRC operations may be negatively affected, which could materially adversely affect our liquidity and our ability to fund and expand our business.
 
Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our businesses.
 
A majority of our revenues are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent company. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Each of our PRC subsidiaries is also required under PRC laws and regulations to allocate at least 10% of its annual after-tax profits determined in accordance with PRC accounting standards to a statutory general reserve fund until the cumulative amount in such fund reaches 50% of the company’s registered capital. Each of our PRC subsidiaries is also required to set aside a certain amount of its after-tax profits each year, if any, to fund a public welfare fund. Also, each of our PRC subsidiaries that is a Chinese-foreign equity joint venture is required to set aside a certain amount of its after-tax profits each year, if any, to fund an enterprise expansion fund. However, the specific amounts of the public welfare fund or enterprise expansion fund are subject to the discretion of the board of directors of the relevant subsidiary. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances or dividends. As of December 31, 2009, our PRC subsidiaries had allocated $2.4 million to these statutory reserve funds. The total amount of our restricted net assets was $35.8 million as of December 31, 2009. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
 
Any future outbreak of a severe form of H1N1 influenza, severe acute respiratory syndrome or avian flu in China, or any similar adverse public health developments, may disrupt our business and operations.
 
Adverse public health epidemics or pandemics could disrupt businesses operations and economic activities in China. For example, from December 2002 to June 2003, China and certain other countries experienced an outbreak of a new and highly contagious form of atypical pneumonia now known as severe acute respiratory syndrome, or SARS. During May and June of 2003, many businesses in China were temporarily closed by the PRC government to prevent transmission of SARS. The World Health Organization has announced that there is a high likelihood of an outbreak of avian flu in Asia, with the potential to be as disruptive as if not more disruptive than SARS. In 2009, occurrences of H1N1 influenza were reported throughout the world, including in China. Any recurrence of the SARS outbreak, an avian flu outbreak, a severe H1N1 influenza outbreak, or the development of a similar health hazard in China, may disrupt our business and operations and prevent us from providing our services in a timely manner.


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Risk Factors Relating to Our ADSs and This Offering
 
An active trading market for our common shares or our ADSs may not develop and the trading price for our ADSs may fluctuate significantly.
 
Prior to this offering, there has been no public market for our ADSs or our common shares underlying the ADSs. If an active public market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs may be adversely affected. We have applied to list our ADSs on the Nasdaq Global Market. A liquid public market for our ADSs may not develop. The initial public offering price for our ADSs will be determined by negotiation between us and the underwriters based upon several factors, including prevailing market conditions, our historical performance, estimates of our business potential and earnings prospects, and the market valuations of similar companies. The price at which the ADSs are traded after this offering may decline below the initial public offering price, meaning that you may experience a decrease in the value of your ADSs regardless of our operating performance or prospects. In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class action litigation against that company. If we were involved in a class action suit, it could divert the attention of senior management, and, if adversely determined, could have a material adverse effect on our results of operations.
 
Future sales or perceived sales of our ADSs or common shares by existing shareholders could cause our ADSs price to decline.
 
If our existing shareholders sell, indicate an intention to sell, or are perceived to intend to sell, substantial amounts of our common shares in the public market after the 180-day contractual lock-up period and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common shares could decline. Upon closing of this offering, we will have 528,472,536 outstanding common shares including 5,968,299 nonvested common shares awarded under our share incentive plan, but excluding common shares issuable upon the exercise of outstanding options with respect to our common shares under our share incentive plan. Of these shares, only ADSs sold in this offering will be freely tradable, without restriction, in the public market. The representatives of the underwriters may, in their sole discretion, permit our officers, directors, employees and current option holders and shareholders to sell shares prior to the expiration of the lock-up agreements. After the lock-up agreements pertaining to this offering expire (180 days or more from the date of this prospectus), all of our outstanding shares will be eligible for sale in the public market, but they will be subject to volume limitations under Rule 144 under the U.S. Securities Act of 1933, as amended, or the Securities Act. In addition, common shares subject to outstanding options under our share incentive plan will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our common shares could decline.
 
Because the initial public offering price is substantially higher than our pro forma net tangible book value per ADS, you will incur immediate and substantial dilution.
 
If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by existing shareholders for their common shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately $7.10 per ADS (assuming the conversion of all outstanding convertible redeemable preferred shares into common shares and no exercise of outstanding options to acquire common shares), representing the difference between our pro forma net tangible book value per ADS as of March 31, 2010, after giving


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effect to this offering and the assumed initial public offering price of $12.00 per ADS (the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus). In addition, you may experience further dilution to the extent that our common shares are issued upon the exercise of outstanding share options. Substantially all of the common shares issuable upon the exercise of currently outstanding share options will be issued at a purchase price on a per ADS basis that is less than the initial public offering price per ADS in this offering.
 
We may become a passive foreign investment company, or PFIC, which could result in adverse U.S. tax consequences to U.S. holders.
 
Based on our financial statements, relevant market data, and the projected composition of our income and valuation of our assets, including goodwill, we do not expect to be a passive foreign investment company, or PFIC, for 2010, and we do not expect to become one in the future, although there can be no assurance in this regard. If we become a PFIC, United States Holders, as defined under “Taxation—Material United States Federal Income Tax Considerations”, of our common shares or ADSs may become subject to increased tax liabilities under U.S. federal income tax laws and regulations and will become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, for any taxable year we will be classified as a PFIC for U.S. federal income tax purposes if either (i) 75% or more of our gross income in that taxable year is passive income or (ii) the average percentage of our assets (which includes cash) by value in that taxable year which produce or are held for the production of passive income is at least 50%. The calculation of the value of our assets will be based, in part, on the quarterly market value of our ADSs, which is subject to change. See “Taxation—Material United States Federal Income Tax Considerations—Passive Foreign Investment Company.”
 
You may not be able to participate in rights offerings and may experience dilution of your holdings in relation to any such offerings.
 
We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.
 
The trading price of our ADSs may be volatile, which could result in substantial losses to investors.
 
The trading price of our ADSs may be volatile and could fluctuate widely in response to factors relating to our business as well as external factors beyond our control. Factors such as variations in our financial results, announcements of new business initiatives by us or by our competitors, recruitment or departure of key personnel, changes in the estimates of our financial results or changes in the recommendations of any securities analysts electing to follow our securities or the securities of our competitors could cause the market price for our ADSs to change substantially. At the same time, securities markets may from time to time experience significant price and volume fluctuations that are not related to the operating


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performance of particular companies. For example, in late 2008 and early 2009, the securities markets in the United States, China and other jurisdictions experienced the largest decline in share prices since September 2001. These market fluctuations may also have a material adverse effect on the market price of our common shares.
 
In addition, the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States may affect the volatility in the price of and trading volumes for our ADSs. In recent years, a number of PRC companies have listed their securities, or are in the process of preparing for listing their securities, on U.S. stock markets. Some of these companies have experienced significant volatility, including significant price declines in connection with their initial public offerings. The trading performances of these PRC companies’ securities at the time of or after their offerings may affect the overall investor sentiment towards PRC companies listed in the United States and consequently may impact the trading performance of our ADSs. These broad market and industry factors may significantly affect the market price and volatility of our ADSs, regardless of our actual operating performance. Any of these factors may result in large and sudden changes in the trading volume and price for our ADSs.
 
Anti-takeover provisions in our charter documents may discourage a third party from acquiring us, which could limit our shareholders’ opportunities to sell their shares at a premium.
 
Our amended and restated memorandum and articles of association include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change-of-control transactions. For example, our board of directors will have the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix the powers and rights of these shares, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our common shares. Preferred shares could thus be issued quickly with terms calculated to delay or prevent a change in control or make removal of management more difficult. In addition, if our board of directors issues preferred shares, the market price of our common shares may fall and the voting and other rights of the holders of our common shares may be adversely affected. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of us in a tender offer or similar transaction.
 
We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you may have less protection of your shareholder rights than you would under U.S. law.
 
Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law (2009 Revision) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by noncontrolling shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have


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more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.
 
The Cayman Islands courts are unlikely:
 
  •  to recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or
 
  •  to entertain original actions brought against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.
 
There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the Cayman Islands will generally recognize as a valid judgment, a final and conclusive judgment in personam obtained in the federal or state courts in the United States under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that (i) such courts had proper jurisdiction over the parties subject to such judgment; (ii) such courts did not contravene the rules of natural justice of the Cayman Islands; (iii) such judgment was not obtained by fraud; (iv) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (v) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (vi) there is due compliance with the correct procedures under the laws of the Cayman Islands. You should also read “Description of Share Capital—Differences in Corporate Law” for some of the differences between the corporate and securities laws in the Cayman Islands and the United States.
 
You will have limited ability to bring an action against us or against our directors and officers, or to enforce a judgment against us or them, because we are incorporated in the Cayman Islands, because we conduct a majority of our operations in China and because the majority of our directors and officers reside outside the United States.
 
We are incorporated in the Cayman Islands and conduct our operations primarily in China. A substantial majority of our assets are located outside the United States and most of our directors and officers reside outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the applicable securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforcement of Civil Liabilities.”
 
Unlike many jurisdictions in the United States, Cayman Islands law does not specifically provide for shareholder appraisal rights on a merger or consolidation of a company. This may make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation or to require that the offeror give you additional consideration if you believe the consideration offered is insufficient.
 
Shareholders of Cayman Islands exempted companies such as ourselves have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our amended and restated articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.


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As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a U.S. company.
 
Your ability to protect your rights as shareholders through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law.
 
Cayman Islands companies may not have standing to initiate a derivative action in a federal court of the United States. As a result, your ability to protect your interests if you are harmed in a manner that would otherwise enable you to sue in a United States federal court may be limited to direct shareholder lawsuits.
 
We have not determined a specific use for the net proceeds from this offering and we may use these proceeds in ways with which you may not agree.
 
We have not determined a specific use for the net proceeds of this offering. Our management will have considerable discretion in the application of these proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate or other purposes with which you do not agree or that do not improve our profitability or increase our ADS price. The net proceeds from this offering may also be placed in investments that do not produce income or that lose value.
 
The voting rights of holders of ADSs are limited in several significant ways by the terms of the deposit agreement.
 
Holders of our ADSs may only exercise their voting rights with respect to the underlying common shares in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions from a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to vote the underlying common shares in accordance with these instructions. Under our sixth amended and restated memorandum and articles of association and Cayman Islands law, the minimum notice period required for convening a general meeting is 10 days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your common shares to allow you to cast your vote with respect to any specific matter at the meeting. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your common shares are not voted as you requested.
 
The depositary of our ADSs will, except in limited circumstances, grant to us a discretionary proxy to vote the common shares underlying your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests and the ability of our shareholders as a group to influence the management of our company.
 
Under the deposit agreement for the ADSs, the depositary will give us a discretionary proxy to vote our common shares underlying your ADSs at shareholders’ meetings if you do not vote, unless:
 
  •  we have failed to timely provide the depositary with our notice of meeting and related voting materials;


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  •  we have instructed the depositary that we do not wish a discretionary proxy to be given;
 
  •  we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;
 
  •  a matter to be voted on at the meeting would have a material adverse impact on shareholders; or
 
  •  voting at the meeting is made on a show of hands.
 
The effect of this discretionary proxy is that you cannot prevent our common shares underlying your ADSs from being voted, absent the situations described above, and it may make it more difficult for holders of ADSs to influence the management of our company. Holders of our common shares are not subject to this discretionary proxy.
 
You may not receive distributions on our common shares or any value for them if it is unlawful or impractical for us to make them available to you.
 
The depositary of our ADSs has agreed to pay you the cash dividends or other distributions it or the custodian for our ADSs receives on our common shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our common shares your ADSs represent. However, the depositary is not responsible if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration is required for such distribution. We have no obligation to take any other action to permit the distribution of our ADSs, common shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we make on our common shares or any value for them if it is unlawful or impractical for us to make them available to you. These restrictions may have a material and adverse effect on the value of your ADSs.
 
You may be subject to limitations on the transfer of your ADSs.
 
Your ADSs, represented by American depositary receipts, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our books or the books of the depositary are closed, or at any time if we think or the depositary thinks it is necessary or advisable to do so in connection with the performance of its duty under the deposit agreement, including due to any requirement of law or any government or governmental body, or under any provision of the deposit agreement.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about us and our industry. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business.” These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. The forward-looking statements included in this prospectus relate to, among others:
 
  •  our goals and strategies;
 
  •  our prospects, business development, growth of our operations, financial condition and results of operations;
 
  •  our ability to introduce successful new services and attract new clients;
 
  •  the expected demand for IT and research and development outsourced technology services in our principal target markets of the U.S., Japan and China;
 
  •  our expectations regarding maintaining and strengthening relationships with our key clients;
 
  •  our ability to attract and retain skilled and experienced professionals;
 
  •  our ability to pursue, integrate and manage our strategic acquisitions;
 
  •  trends in our service offerings mix;
 
  •  changes in the IT industry in China, including changes in the policies and regulations of the PRC government governing the IT industry;
 
  •  our planned use of proceeds; and
 
  •  fluctuations in general economic and business conditions in China.
 
This prospectus also contains market data relating to the outsourced technology services industry in China and worldwide, that includes projections based on a number of assumptions. The outsourced technology services industry in China or worldwide may not grow at the rates projected by market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.
 
The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we have referred to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.


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USE OF PROCEEDS
 
We estimate that we will receive net proceeds from this offering of approximately $66.4 million after deducting underwriting discounts and the estimated offering expenses payable by us and based upon an assumed initial offering price of $12.00 per ADS (the mid-point of the estimated public offering price range shown on the front cover of this prospectus). A $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per ADS would increase (decrease) the net proceeds to us from this offering by $5.9 million, after deducting the estimated underwriting discounts and commissions and estimated aggregate offering expenses payable by us and assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus. We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.
 
We anticipate using the net proceeds of this offering for general corporate purposes, including incremental costs associated with being a public company, and for potential acquisitions of, or investments in, other businesses or technologies that we believe will complement our current operations and expansion strategies.
 
In addition, the purposes of this offering also include the retention of employees by providing them with equity incentives and the creation of a public market for our common shares represented by the ADSs for the benefit of our shareholders. We did not have any agreements or understandings to make any material acquisitions of, or investments in, other businesses as of the date of this prospectus.
 
The foregoing represents our intentions as of the date of this prospectus with respect of the use and allocation of the net proceeds of this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in applying the net proceeds of the offering. The occurrence of unforeseen events or changed business conditions may result in application of the proceeds of this offering in a manner other than as described in this prospectus.
 
To the extent that the net proceeds we receive from this offering are not immediately applied for the above purposes, we intend to invest our net proceeds in short-term, interest bearing, debt instruments or bank deposits. These investments may have a material adverse effect on the U.S. federal income tax consequences of your investment in our ADSs. It is possible that we may become a PFIC for U.S. federal income tax purposes, which could result in negative tax consequences for you. These consequences are described in more detail in “Risk Factors — Risk Factors Relating to Our ADSs and This Offering — We may become a passive foreign investment company, or PFIC, which could result in adverse U.S. tax consequences to U.S. holders” and “Taxation — Material United States Federal Income Tax Considerations — Passive Foreign Investment Company.”
 
In utilizing the proceeds of this offering, we, as an offshore holding company, are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions and to other entities only through loans. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our PRC subsidiaries or make additional capital contributions to our PRC subsidiaries to fund their capital expenditures or working capital. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors — Risk Factors Relating to China — PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds we receive from this offering to make loans or additional capital contributions to our PRC operating subsidiaries and affiliated entities, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”


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DIVIDEND POLICY
 
Since our inception, we have not declared or paid any dividends on our common shares. We have no present plan to pay any dividends on our common shares in the foreseeable future. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
 
Any future determination to pay dividends will be made at the discretion of our board of directors and may be based on a number of factors, including our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our common shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our common shares, if any, will be paid in U.S. dollars.
 
We are a holding company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders and ADS holders, we will rely on dividends distributed by our PRC subsidiaries. Certain payments from our PRC subsidiaries to us are subject to PRC taxes, such as withholding income tax. In addition, regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated distributable after-tax profits as determined in accordance with its articles of association and the accounting standards and regulations in China. Each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profit based on PRC accounting standards every year to a statutory common reserve fund until the aggregate amount of such reserve fund reaches 50% of the registered capital of such subsidiary. Such statutory reserves are not distributable as loans, advances or cash dividends. Each of our PRC subsidiaries is also required to set aside a certain amount of its after-tax profits each year, if any, to fund a public welfare fund. Also, each of our PRC subsidiaries which is a Chinese-foreign equity joint venture is required to set aside a certain amount of its after-tax profits each year, if any, to fund an enterprise expansion fund. The specific size of the public welfare fund or enterprise expansion fund is at the discretion of the board of directors of the relevant entity. These reserve funds can only be used for specific purposes and are not transferable to the company’s parent in the form of loans, advances or dividends. See “Risk Factors—Risks Relating to China—Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our businesses.”


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CAPITALIZATION
 
The following table sets forth our capitalization as of March 31, 2010 presented on:
 
  •  an actual basis;
 
  •  a pro forma basis to give effect to the automatic conversion of all of our outstanding series A, series A-1, series B and series C convertible redeemable preferred shares into common shares upon closing of this offering; and
 
  •  a pro forma as adjusted basis to give effect to (i) the automatic conversion of all of our series A, series A-1, series B and series C convertible redeemable preferred shares into common shares upon closing of this offering, and (ii) the issuance and sale of the common shares in the form of ADSs offered hereby at an assumed initial public offering price of $12.00 per ADS, the mid-point of the estimated public offering price range shown on the front cover of this prospectus, after deducting underwriting discounts, commissions and estimated offering expenses payable by us and assuming no exercise of the underwriters’ over-allotment option.
 
The pro forma and pro forma as adjusted information below is illustrative only and our capitalization following the closing of this offering is subject to adjustment based on the initial public offering price of our ADSs and other terms of this offering determined at pricing. You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.
 
                         
    As of March 31, 2010  
                Pro Forma as
 
    Actual     Pro Forma     Adjusted (1)  
    (dollars in thousands, except for share and per share data)  
 
Convertible redeemable preferred shares, $0.0001 par value, including:
                       
Series A convertible redeemable preferred shares; 57,000,000 shares authorized; 57,000,000 shares issued and outstanding
  $ 12,581     $     $  
Series A-1 convertible redeemable preferred shares; 36,000,000 shares authorized; 36,000,000 shares issued and outstanding
    9,900              
Series B convertible redeemable preferred shares; 112,000,000 shares authorized; 112,000,000 shares issued and outstanding
    30,800              
Series C convertible redeemable preferred shares; 60,000,000 shares authorized; 59,090,910 shares issued and outstanding
    35,750              
HiSoft Technology International Limited shareholders’ (deficit) equity:
                       
Common shares, $0.0001 par value; 607,000,000 shares authorized; 91,895,573 shares issued and outstanding
    9       40       52  
Additional paid-in capital
    8,410       97,410       163,760  
Statutory reserve
    2,447       2,447       2,447  
Accumulated deficit
    (23,749 )     (23,749 )     (23,749 )
Accumulated other comprehensive income
    6,163       6,163       6,163  
                         
Total HiSoft Technology International Limited shareholders’ (deficit) equity
    (6,720 )     82,311       148,673  
                         
Total capitalization
  $ 82,311     $ 82,311     $ 148,673  
                         
 
 
(1) Assumes that the underwriters do not exercise their over-allotment option to purchase additional ADSs.


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DILUTION
 
Our net tangible book value as of March 31, 2010 was approximately $68.4 million, or $0.17 per common share, after giving effect to the automatic conversion of all outstanding convertible redeemable preferred shares to common shares upon the closing of this offering and excluding 5,968,299 nonvested common shares awarded under our share incentive plan. Net tangible book value per common share is determined by dividing our net tangible book value by the number of outstanding common shares. Our net tangible book value is determined by subtracting the value of our acquired net intangible assets, goodwill, total liabilities and noncontrolling interests from our total assets. Dilution is determined by subtracting net tangible book value per common share from the assumed public offering price per common share.
 
Without taking into account any other changes in such net tangible book value after March 31, 2010, other than to give effect to (i) the conversion of all of our convertible redeemable preferred shares into common shares that will occur upon the consummation of this offering, and (ii) our sale of the 6,400,000 ADSs offered in this offering at the assumed initial public offering price of $12.00 per ADS, which is the mid-point of our estimated initial public offering price range as set forth on the cover of this prospectus, with estimated net proceeds of $66.4 million after deducting underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value as of March 31, 2010 would have been $134.7 million, $0.26 per outstanding common share, including common shares underlying our outstanding ADSs, and $4.90 per ADS. This represents an immediate increase in pro forma net tangible book value of $0.09 per common share, or $1.66 per ADS, to existing shareholders and an immediate dilution in pro forma net tangible book value of $0.37 per common share, or $7.10 per ADS, to new investors in this offering. The following table illustrates such per common share dilution:
 
         
Assumed initial public offering price per common share
  $ 0.63  
Net tangible book value per common share as of March 31, 2010 (1)
  $ 0.17  
Increase in net tangible book value per common share attributable to price paid by new investors
  $ 0.09  
Pro forma net tangible book value per common share after the offering
  $ 0.26  
Dilution in net tangible book value per common share to new investors in the offering
  $ 0.37  
Dilution in net tangible book value per ADS to new investors in the offering
  $ 7.10  
 
 
(1) After giving effect to the automatic conversion of all outstanding convertible redeemable preferred shares to common shares upon the closing of this offering and excluding 5,968,299 nonvested common shares awarded under our share incentive plan.
 
A $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per ADS would increase (decrease) our pro forma net tangible book value after giving effect to the offering by $5.9 million, the pro forma net tangible book value per common share and per ADS after giving effect to this offering by $0.01 per common share and $0.21 per ADS and the dilution in pro forma net tangible book value per common share and per ADS to new investors in this offering by $0.04 per common share and $0.78 per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other expenses of the offering. The pro forma information discussed above is illustrative only. Our net tangible book value following the closing of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.


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The following table summarizes on a pro forma basis the differences as of March 31, 2010 between the shareholders at March 31, 2010 and the new investors with respect to the number of common shares purchased from us, the total consideration paid and the average price per common share paid. The total common shares do not include ADSs issuable if any of the options to purchase our common shares outstanding as of March 31, 2010 are exercised and exclude 5,968,299 nonvested common shares awarded under our share incentive plan. The information in the following table is illustrative only and the total consideration paid and the average price per common share equivalent and per ADS equivalent is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.
 
                                                 
    Common Shares
    Total
    Average Price per
       
    Purchased     Consideration     Common Share
    Average Price per
 
    Number     Percent     Amount     Percent     Equivalent     ADS Equivalent  
 
Existing shareholders
    400,574,809       77%     $ 92,776,701       55%     $ 0.24     $ 4.40  
New investors
    121,600,000       23%       76,800,000       45%       0.63       12.00  
                                                 
Total
    522,174,809       100%     $ 169,576,701       100%     $ 0.33     $ 6.17  
                                                 
 
A $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per ADS would increase (decrease) total consideration paid by new investors, total consideration paid by all shareholders and the average price per ADS paid by all shareholders by $6.4 million, $6.4 million and $0.23, respectively, assuming no change in the number of ADSs sold by us as set forth on the cover page of this prospectus and without deducting underwriting discounts and commissions and other expenses of this offering.


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EXCHANGE RATE INFORMATION
 
This prospectus contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this prospectus were made at a rate of RMB6.8258 to $1.00, the noon buying rate in effect as of March 31, 2010. The noon buying rate as of June 11, 2010 was RMB6.8320 to $1.00. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all.
 
The following table sets forth information concerning exchange rates between Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you.
 
                                 
    Noon Buying Rate  
Period (1)
  Period End     Average (2)     Low     High  
    (RMB per $1.00)  
 
2005
    8.0702       8.1826       8.2765       8.0702  
2006
    7.8041       7.9579       8.0702       7.8041  
2007
    7.2946       7.5806       7.8127       7.2946  
2008
    6.8225       6.9193       7.2946       6.7800  
2009
    6.8259       6.8307       6.8470       6.8176  
2010 (through June 11)
    6.8320       6.8271       6.8330       6.8229  
Most recent six months:
                               
December 2009
    6.8259       6.8275       6.8299       6.8244  
January 2010
    6.8268       6.8269       6.8295       6.8258  
February 2010
    6.8258       6.8285       6.8330       6.8258  
March 2010
    6.8258       6.8262       6.8270       6.8254  
April 2010
    6.8247       6.8256       6.8275       6.8229  
May 2010
    6.8305       6.8275       6.8310       6.8245  
June 2010 (through June 11)
    6.8320       6.8294       6.8322       6.8268  
 
 
 
(1) For all dates through December 31, 2008, exchange rates between Renminbi and U.S. dollars are presented at the noon buying rate in the City of New York for cable transfers in Renminbi per U.S. dollars as certified for customs purposes by the Federal Reserve Bank of New York. For January 1, 2009 and all later dates and periods, the exchange rate refers to the noon buying rate as set forth in the H.10 statistical release of the U.S. Federal Reserve Board.
 
(2) Annual averages are calculated using the average of the rates on the last business day of each month during the relevant year. Monthly averages are calculated using the average of the daily rates during the relevant month.


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ENFORCEMENT OF CIVIL LIABILITIES
 
We are registered under the laws of the Cayman Islands as an exempted company with limited liability. We are registered in the Cayman Islands because of certain benefits associated with being a Cayman Islands corporation, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws as compared to the United States and provides protections for investors to a significantly lesser extent. In addition, Cayman Islands companies may not have standing to sue before the federal courts of the United States.
 
A substantial portion of our assets are located in China. In addition, most of our directors and officers and our PRC legal counsel, Fangda Partners, are residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. It may also be difficult for you to enforce in United States courts judgments obtained in United States courts based on the civil liability provisions of the United States federal securities laws against us, our officers and directors and Fangda Partners.
 
We have appointed Law Debenture Corporate Services Inc. as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any state in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.
 
Conyers Dill & Pearman, our counsel as to Cayman Islands law, and Fangda Partners, our counsel as to PRC law, have advised us that there is uncertainty as to whether the courts of the Cayman Islands or the PRC would, respectively, (1) recognize or enforce judgments of United States courts obtained against us or our directors or officers or Fangda Partners predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (2) entertain original actions brought in the Cayman Islands or the PRC against us or our directors or officers or Fangda Partners predicated upon the securities laws of the United States or any state in the United States.
 
Conyers Dill & Pearman has informed us that the uncertainty with regard to Cayman Islands law relates to whether a judgment obtained from the United States courts under civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman company. Because the courts of the Cayman Islands have yet to rule on whether such judgments are penal or punitive in nature, it is uncertain whether they would be enforceable in the Cayman Islands. Conyers Dill & Pearman has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, may be subject to enforcement proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of obligation.


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Fangda Partners has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. Fangda Partners has advised us further that under PRC law, a foreign judgment, which does not otherwise violate basic legal principles, state sovereignty, safety or social public interest, may be recognized and enforced by a PRC court, based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. As there existed no treaty or other form of reciprocity between China and the United States governing the recognition and enforcement of judgments as of the date of this prospectus, including those predicated upon the liability provisions of the United States federal securities laws, there is uncertainty whether and on what basis a PRC court would enforce judgments rendered by United States courts.


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OUR CORPORATE STRUCTURE
 
The following diagram illustrates our corporate structure as of the date of this prospectus. See “—Our Subsidiaries” for more information on the operations of our corporate entities. For additional information on risks relating to the countries in which our subsidiaries operate, see “Risk Factors — Risk Factors Relating to Our Business — The international nature of our business exposes us to risks that could adversely affect our financial condition and results of operations,” “Risk Factors — Risk Factors Relating to Our Business — Our business operations and financial condition could be adversely affected by negative publicity about offshore outsourcing or anti-outsourcing legislation in the United States, Japan or other countries in which our clients are based” and “Risk Factors — Risk Factors Relating to China.”
 
(CHART)
 
 
(1) Includes a series of contractual arrangements among HiSoft Technology (Dalian) Co., Ltd., or HiSoft Dalian, Haihui Dalian and certain shareholders of Haihui Dalian, including a strategic cooperation agreement, a voting rights agreement and an equity acquisition option agreement. See “Related Party Transactions—Agreements among HiSoft Dalian, Haihui Dalian, and the Shareholders of Haihui Dalian.”
 
Our Shareholders
 
Our principal shareholders include, as of the date of this prospectus:
 
  •  Granite Global Ventures and its affiliated entities, which together beneficially own 22.6% of our outstanding shares;
 
  •  International Finance Corporation, which beneficially owns 11.9% of our outstanding shares;


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  •  JAFCO Asia Technology Fund, which beneficially owns 8.2% of our outstanding shares;
 
  •  Draper Fisher Jurvetson and its affiliated entities, which together beneficially own 8.2% of our outstanding shares;
 
  •  Tian Hai International Limited, which beneficially owns 7.8% of our outstanding shares;
 
  •  Intel Capital (Cayman) Corporation, which beneficially owns 7.8% of our outstanding shares;
 
  •  GE Capital Equity Investments Ltd., which beneficially owns 7.2% of our outstanding shares; and
 
  •  Kaiki Inc., which beneficially owns 5.5% of our outstanding shares.
 
All percentages in the list above assume the conversion of all of our convertible redeemable preferred shares into common shares. The aggregate holdings of the principal shareholders listed above represented 79.3% of our outstanding shares as of the date of this prospectus. See “Principal and Selling Shareholders” for further information on our shareholding structure.
 
Our History
 
We commenced operations in November 1996 as Haihui Dalian. In August 2002, Haihui Dalian established Haihui Sci-Tech Japan Co., Ltd., which we have recently renamed hiSoft Japan Co., Ltd., or HiSoft Japan, in Tokyo, Japan as a wholly owned subsidiary. In September 2003, Haihui Dalian established DMK International, Inc., or DMK International, in Delaware as a wholly owned subsidiary.
 
To enable us to raise equity capital from investors outside of China, we set up a holding company structure by establishing our current Cayman Islands holding company, HiSoft Technology International Limited, or HiSoft International, in May 2004. In connection with this restructuring, HiSoft International established a wholly owned subsidiary, HiSoft Dalian, in Dalian, China and HiSoft Dalian entered into a series of contractual arrangements with Haihui Dalian and its shareholders to acquire effective control over Haihui Dalian.
 
Since 2005, we have expanded our operations through a series of acquisitions and investments described below.
 
  •  In December 2005, we acquired 51% of the business of Beijing Tianhai Hongye International Software Co. Ltd., or Tianhai International, a Beijing-based software outsourcing provider, and in December 2006, we acquired the remaining 49%. To effect the Tianhai International business acquisition, HiSoft Holdings BVI, a BVI holding company, and its wholly owned PRC subsidiary, HiSoft Beijing, were formed to hold and operate the underlying business. We acquired our interest in the business by acquiring shares of the offshore holding company, HiSoft Holdings BVI.
 
  •  In December 2005, we acquired 55% of the business of Teksen Systems, a Hong Kong and Guangzhou-based IT services provider, and in January 2007 we acquired the remaining 45% of the business. To effect the Teksen Systems business acquisition, HiSoft Systems BVI, a BVI holding company, and its wholly owned subsidiaries, HiSoft Systems Hong Kong Limited, or HiSoft Hong Kong, and HiSoft Shenzhen were formed to hold and operate the underlying business.
 
  •  In December 2006, we established HiSoft Envisage Inc., or HiSoft Envisage, in Delaware to acquire Envisage Solutions, a U.S.-based provider of packaged software services. This acquisition was completed in December 2006.


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  •  In April 2007, we established HiSoft Chengdu and, in June 2007, we established HiSoft Technology (Singapore) Pte. Ltd., which was subsequently dissolved in June 2009.
 
  •  In November 2007, we completed our acquisition of Shanghai Shinko Computer Technology Co., Ltd., an outsourcing technology center for a new key client, Kobe Steel Ltd., and renamed it as HiSoft Technology (Shanghai) Co., Ltd., or HiSoft Shanghai.
 
  •  In December 2007, we acquired T-est Pte Ltd, or T-est, a Singapore-based research and development services provider, which we renamed HiSoft Singapore Pte. Ltd., or HiSoft Singapore.
 
  •  In December 2007, we acquired 100% of Daemoyrod, an Oracle application software implementation and support specialist with operations in the United States and Mexico, by merging it into HiSoft Wave, Inc., our wholly owned subsidiary, or HiSoft Wave.
 
  •  In January 2009, we established Wuxi HiSoft Services Limited, or Wuxi HiSoft, and, in December 2009, we established Wuxi Training Centre through Wuxi HiSoft.
 
  •  In August 2009, we acquired a business process support team from AIA Information Technology (Guangzhou) Co. Ltd.
 
  •  In October 2009, we acquired the testing business of MG Digital Pte Ltd., a Singapore-based research and development services provider.
 
  •  In December 2009, we acquired 100% of AllianceSPEC, a professional IT transaction system testing company based in Singapore.
 
  •  In February 2010, we acquired 100% of Beijing Horizon Information & Technology Co., Ltd., or Horizon Information, a professional IT testing company based in China.
 
  •  In April 2010, we acquired 100% of Echo Lane, Inc., or Echo Lane, a professional consulting services firm in the U.S. with expertise in cloud computing. The consideration for this acquisition consisted of (i) cash consideration of US$1.2 million that was paid on closing and (ii) cash consideration of US$1.9 million, to be paid when the financial statements of Echo Lane for fiscal year 2011 have been audited by independent auditors. The consideration in (ii) will be subject to adjustment based on certain financial conditions of Echo Lane.
 
  •  We have entered into an agreement to acquire 100% of Insurance Systems Laboratory CO., LTD, or ISL, a Japanese consulting firm with expertise in planning, development, maintenance and management of information technology systems for insurance companies. The acquisition is expected to close on July 1, 2010 for a consideration of ¥200 million ($2.1 million) which may be adjusted downwards if certain financial conditions are not met by ISL.
 
  •  We are currently in discussions to acquire 100% of a China-based IT services firm specialized in providing SAP consulting and implementation services. Subject to further due diligence, the execution of a definitive agreement and satisfaction of customary closing conditions, we expect the acquisition to be completed in the third quarter of 2010.
 
Our Subsidiaries
 
As of the date of this prospectus, we had the following significant subsidiaries:
 
Non-PRC Subsidiaries
 
  •  AllianceSPEC, our wholly owned subsidiary incorporated in Singapore that primarily provides application testing services to BFSI clients;


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  •  DMK International, our wholly owned subsidiary incorporated in Delaware that primarily provides IT outsourcing services, including application development and maintenance services;
 
  •  Echo Lane, our wholly owned subsidiary incorporated in California that primarily provides consulting services for cloud computing solutions and related applications;
 
  •  HiSoft Envisage, our wholly owned subsidiary incorporated in Delaware that primarily provides consulting services, including enterprise resource planning, customer relationship management and business intelligence consulting, and serves as our front office for the U.S. market;
 
  •  HiSoft Hong Kong, our wholly owned subsidiary incorporated in Hong Kong that primarily provides IT outsourcing services, including application development and maintenance services, to BFSI clients;
 
  •  HiSoft Japan, our wholly owned subsidiary incorporated in Japan that primarily provides IT outsourcing services, including application development and maintenance services, to clients in the BFSI and technology industries and serves as our front office for the Japan market;
 
  •  HiSoft Singapore, our wholly owned subsidiary incorporated in Singapore that primarily provides IT outsourcing services, including hardware and software testing services, to clients in the technology industry and serves as our front office for the Singapore market;
 
PRC Subsidiaries
 
  •  HiSoft Beijing, our wholly owned subsidiary incorporated in the PRC that primarily provides IT outsourcing services, including testing and localization services;
 
  •  HiSoft Chengdu, our wholly owned subsidiary incorporated in the PRC that primarily provides IT outsourcing services, including application development and maintenance services;
 
  •  Haihui Dalian, our variable interest entity that had no material operations as of the date of this prospectus;
 
  •  HiSoft Dalian, our wholly owned subsidiary incorporated in the PRC that primarily provides IT outsourcing services, including application development and maintenance services;
 
  •  HiSoft Shanghai, our wholly owned subsidiary incorporated in the PRC that primarily provides IT outsourcing services, including application development and maintenance services;
 
  •  HiSoft Shenzhen, our wholly owned subsidiary incorporated in the PRC that primarily provides IT outsourcing services, including application development and maintenance services, for clients in the BFSI industry;
 
  •  Horizon Information, our wholly owned subsidiary incorporated in the PRC that primarily provides application testing services, including application development and maintenance services, for clients in the telecom industry;


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  •  Wuxi HiSoft, our wholly owned subsidiary incorporated in the PRC that primarily provides IT outsourcing services, including application development and maintenance, testing and localization testing services; and
 
  •  Wuxi Training Centre, our wholly owned subsidiary incorporated in the PRC that had no material operations as of the date of this prospectus but is expected to provide IT training programs for university graduates as part of our resource planning strategy.


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SELECTED CONSOLIDATED FINANCIAL DATA
 
The following selected consolidated financial data for the periods and as of the dates indicated are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are included elsewhere in this prospectus.
 
The selected consolidated statements of operations data for 2007, 2008 and 2009, and the selected consolidated balance sheet data as of December 31, 2008 and 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of operations data for the three months ended March 31, 2009 and 2010 and the selected consolidated balance sheet data as of March 31, 2010 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our audited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and have been audited by Deloitte Touche Tohmatsu CPA Ltd., or Deloitte, an independent registered public accounting firm. The report of Deloitte on those consolidated financial statements is also included elsewhere in this prospectus. The unaudited financial information includes all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented. The selected consolidated statements of operations data for 2005 and 2006 and the selected consolidated balance sheet data as of 2005, 2006 and 2007 have been derived from our audited consolidated financial statements not included in this prospectus.
 
Our historical results for any prior period do not necessarily indicate our results to be expected for any future period.
 
                                                         
    Year Ended December 31,     Three Months Ended March 31,  
    2005     2006     2007     2008     2009     2009     2010  
    (dollars in thousands, except share, per share and per ADS data)  
 
Selected Consolidated Statements of Operations Data
                                                       
Net revenues
  $ 17,483     $ 33,669     $ 63,051     $ 100,720     $ 91,456     $ 21,537     $ 30,537  
Cost of revenues (1)(2)
    11,696       25,334       47,435       70,295       58,759       13,792       19,418  
                                                         
Gross profit
    5,787       8,335       15,616       30,425       32,697       7,745       11,119  
                                                         
Operating expenses:
                                                       
General and administrative (2)
    4,538       12,454       12,617       19,010       18,981       5,651       5,859  
Selling and marketing (1)(2)
    1,591       4,176       5,599       8,345       5,968       1,103       1,991  
Offering expenses
                      3,782                    
Impairment of intangible assets
          2,480             5,760                    
Impairment of goodwill
                      4,784                    
                                                         
Total operating expenses
    6,129       19,110       18,216       41,681       24,949       6,754       7,850  
                                                         
(Loss) income from operations
    (342 )     (10,775 )     (2,600 )     (11,256 )     7,748       991       3,269  
Other (expenses) income (3)
    (430 )     (592 )     2,488       411       676       348       126  
Income tax (expense) benefit
    (293 )     760       (770 )     703       (1,061 )     (168 )     (428 )
Net (loss) income on discontinued operation
    10       31       (38 )     (569 )                  
                                                         
Net (loss) income
    (1,055 )     (10,576 )     (920 )     (10,711 )     7,363       1,171       2,967  
                                                         
Noncontrolling interest
    (63 )     654                                
                                                         
Net (loss) income attributable to HiSoft Technology International Limited
  $ (1,118 )   $ (9,922 )   $ (920 )   $ (10,711 )   $ 7,363     $ 1,171     $ 2,967  
                                                         


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    Year Ended December 31,     Three Months Ended March 31,  
    2005     2006     2007     2008     2009     2009     2010  
    (dollars in thousands, except share, per share and per ADS data)  
 
Deemed dividend on Series A, A-1, B and C convertible redeemable preferred shares
          (1,120 )     (5,762 )                        
                                                         
Net (loss) income attributable to holders of common shares
  $ (1,118 )   $ (11,042 )     (6,682 )   $ (10,711 )   $ 7,363     $ 1,171     $ 2,967  
                                                         
Net (loss) income per common share:
                                                       
Basic
  $ (0.02 )   $ (0.13 )   $ (0.07 )   $ (0.13 )   $ 0.02     $     $ 0.01  
Diluted
  $ (0.02 )   $ (0.13 )   $ (0.07 )   $ (0.13 )   $ 0.02     $     $ 0.01  
Net (loss) income per ADS:
                                                       
Basic
  $ (0.38 )   $ (2.47 )   $ (1.35 )   $ (2.47 )   $ 0.37     $ 0.06     $ 0.14  
Diluted
  $ (0.38 )   $ (2.47 )   $ (1.35 )   $ (2.47 )   $ 0.36     $ 0.06     $ 0.13  
Weighted average common shares used in calculating (loss) income per common share:
                                                       
Basic
    66,058,582       82,176,358       94,237,854       82,279,610       86,148,324       85,189,211       89,933,268  
Diluted
    66,058,582       82,176,358       94,237,854       82,279,610       388,372,705       363,343,798       424,477,209  
Weighted average ADSs used in calculating net (loss) income per ADS:
                                                       
Basic
    3,476,767       4,325,071       4,959,887       4,330,506       4,534,122       4,483,643       4,733,330  
Diluted
    3,476,767       4,325,071       4,959,887       4,330,506       20,440,699       19,123,358       22,340,906  
 
 
(1) Includes acquisition-related amortization of intangible assets totaling $1.9 million, $1.6 million and $0.1 million in 2007, 2008 and 2009, respectively, and nil and $0.2 million in the three months ended March 31, 2009 and 2010, respectively, allocated as follows:
 
                                         
          Three Months
 
    Year Ended December 31,     Ended March 31,  
    2007     2008     2009     2009     2010  
    (dollars in thousands)  
 
Cost of revenues
  $ 152     $ 50     $    16     $   —     $   47  
Operating expenses:
                                       
Selling and marketing
    1,716       1,565       60             116  
 
(2) Includes share-based compensation charges totaling $1.5 million, $1.8 million and $1.1 million in 2007, 2008 and 2009, respectively, and $0.2 million and $0.6 million in the three months ended March 31, 2009 and 2010, respectively, allocated as follows:
 
                                         
    Year Ended December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
    (dollars in thousands)  
 
Cost of revenues
  $ 268     $ 362     $   321     $ 83     $ 233  
Operating expenses:
                                       
General and administrative
    1,214       1,405          720          124          339  
Selling and marketing
    8       35       56       10       17  
 
(3) Includes change in fair value of warrants of $2.4 million in the year ended 2007 resulting from our issuance in 2004 of warrants allowing the holders to acquire 2,000,000 shares of our series A convertible redeemable preferred shares and 36,000,000 shares of our series A-1 convertible redeemable preferred shares. The warrants were exercised in full in 2007 and no future charge will apply.

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    Year Ended December 31,     Three Months Ended March 31,  
    2005     2006     2007     2008     2009     2009     2010  
 
Other Consolidated Financial Data
                                                       
Gross margin (1)
    33.1 %     24.8 %     24.8 %     30.2 %     35.8 %     36.0 %     36.4 %
Operating margin (2)
    (2.0 )%     (32.0 )%     (4.1 )%     (11.2 )%     8.5 %     4.7 %     10.7 %
Net margin (3)
    (6.0 )%     (31.4 )%     (1.5 )%     (10.6 )%     8.1 %     5.5 %     9.7 %
 
 
(1) Gross margin represents gross profit as a percentage of net revenues.
 
(2) Operating margin represents income (loss) from operations as a percentage of net revenues.
 
(3) Net margin represents net income (loss) before noncontrolling interest as a percentage of net revenues.
 
                                                         
    As of December 31,     As of March 31, 2010  
    2005     2006     2007     2008     2009     Actual     Pro Forma (1)  
    (dollars in thousands)  
 
Consolidated Balance Sheet Data
                                                       
Cash and cash equivalents
  $ 7,731     $ 10,889     $ 39,229     $ 46,881     $ 54,842     $ 52,863     $ 52,863  
Total assets
    27,679       40,774       96,668       86,100       104,242       108,989       108,989  
Total liabilities
    10,073       20,217       22,246       16,699       26,151       26,678       26,678  
Noncontrolling interest
    1,956       181                                
Series A convertible redeemable preferred shares
    12,100       12,100       12,581       12,581       12,581       12,581        
Series A-1 convertible redeemable preferred shares
                9,900       9,900       9,900       9,900        
Series B convertible redeemable preferred shares
          12,320       30,800       30,800       30,800       30,800        
Series C convertible redeemable preferred shares
                35,750       35,750       35,750       35,750        
Total equity (deficit)
  $ 3,550     $ (4,044 )   $ (14,609 )   $ (19,630 )   $ (10,940 )   $ (6,720 )   $ 82,311  
 
 
(1) The pro forma balance sheet data as of March 31, 2010 assumes the conversion of our outstanding series A, A-1, B and C convertible redeemable preferred shares into common shares as of March 31, 2010.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the sections entitled “Summary Consolidated Financial Data” and “Selected Consolidated Financial Data” and our audited consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
 
Overview
 
We are a leading China-based provider of IT and research and development services, primarily for companies in the U.S. and Japan, including 25 Fortune Global 500 companies.
In 2009, IDC ranked us as the second largest China-based provider of offshore, outsourced software development services by revenues. In addition to our strong market presence in the U.S. and Japan, we are leveraging our global capabilities to rapidly grow our business in China, which is benefiting from increased demand for China-based outsourced IT services from multinational and domestic corporations in China.
 
Our two service lines consist of IT services and research and development services. Our range of IT services include application development, testing and maintenance services for custom applications as well as implementation and support services for packaged software. Our research and development services include software and hardware testing as well as software globalization services.
 
We focus primarily on clients in the technology and BFSI industries. These industries have historically represented a significant proportion of outsourcing spending and, we believe, will continue to represent the greatest market opportunity for us. For the year ended December 31, 2009 and the three months ended March 31, 2010, technology clients accounted for 61.5% and 60.9% of our net revenues, respectively. For the year ended December 31, 2009 and the three months ended March 31, 2010, BFSI clients accounted for 23.7% and 24.6% of our net revenues, respectively.
 
We began our operations in 1996 and have expanded rapidly in recent years, driven by increases in our service delivery capabilities and acquisitions of complementary businesses. Our net revenues were $63.1 million in 2007, $100.7 million in 2008 and $91.5 million in 2009. We had net losses of $0.9 million and $10.7 million in 2007 and 2008, respectively, and we had net income of $7.4 million in 2009. In the three months ended March 31, 2010, our net revenues, gross profit and net profit were $30.5 million, $11.1 million and $3.0 million, respectively.
 
Our business is managed as a single operating segment. For the purpose of the following discussion regarding our financial performance from 2007 to 2009 and for the three months ended March 31, 2010, we have also presented net revenues generated by our service offerings.
 
Factors Affecting Our Results of Operations
 
We have benefited significantly from growth in the global outsourced technology services industry and, more specifically, the emergence of China as a major participant in this industry. Growth in the industry is driven by the needs of major corporations to maintain and upgrade the technology and services that enable their operations in a cost-effective manner. Software companies are also increasingly outsourcing work to service providers in order to streamline


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and reduce the cost of the software development process. China’s outsourced technology services market is growing rapidly due to its large pool of skilled professionals, highly developed infrastructure, strong government support and incentives, the geographic and cultural proximity between China and other Asian countries, the desire of outsourcing clients to diversify their use of offshore IT outsourcing services to multiple delivery locations and the size and growth of China’s domestic economy.
 
Key macro-level factors affecting our results of operations include:
 
  •  Market demand.  Our net revenues are significantly affected by changes in demand for outsourced technology services by multinational corporations and software companies, especially demand for China-based outsourced technology service providers. For example, a decline in a client’s technology budget may have an adverse effect on the amount and types of services they seek from us. As a result of the recent global economic crisis and a slowdown in business activities, we experienced a decrease in demand for outsourced technology services in general that has led to a decrease in our net revenues from 2008 to 2009. However, in the second half of 2009 and continuing into the first quarter of 2010, we experienced increased work order demand due in part to the recovery in the global economy.
 
  •  Economic growth rates in our key client industries and locations.  Our net revenues are significantly affected by economic growth rates in the industries and countries in which our main clients operate, including the technology and the BFSI industries in Japan, the United States and other parts of the world where our clients are based.
 
  •  Competition.  Competition from China-based and non-China-based outsourced technology service providers may affect our ability to gain new clients and maintain and increase business from existing clients and, as a result, can have an adverse effect on our results of operations and financial condition.
 
  •  Wage rates.  Our cost of revenues and operating expenses, and therefore gross margins and operating margins, may be affected by changes in wage rates in countries where we operate, particularly in China where most of our employees are based. As a result of the rapid economic growth in China and the increased competition for skilled employees in China, we have experienced a general increase in wages in China, both in more developed cities such as Beijing, Dalian, Shanghai and Shenzhen and, to a lesser extent, in other cities such as Wuxi and Chengdu. We believe wages in China will continue to increase in the future while wage inflation in other countries in which we operate will remain relatively stable.
 
  •  Government policies.  Our results of operations may be affected by government policies and regulations, such as the Chinese government’s policies on preferential tax treatment as well as any policies or regulations affecting demand for offshore outsourced technology services in our key client locations.
 
  •  Relevant exchange rates.  Changes in exchange rates, especially relative changes in exchange rates against the Renminbi, in which most of our costs are denominated, and the Japanese yen and U.S. dollar, in which a large percentage of our revenues is denominated, may have a significant effect on our gross margins and operating margins.
 
Our results of operations in any given period are also directly affected by company-specific factors, including:
 
  •  Our ability to obtain new clients and repeat business from existing clients.  Revenues from individual clients typically grow over time as we seek to increase the number and scope of services provided to each client and as clients increase the complexity and scope of the work outsourced to us. Therefore, our ability to obtain new clients, as well


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  as our ability to maintain and increase business from our existing clients, will have a significant effect on our results of operations and financial condition.
 
  •  Our ability to expand our portfolio of service offerings.  Our ability to grow revenue from new and existing clients is impacted by the breadth of our service offerings. Services we recently began to offer, including following recent acquisitions, include business process outsourcing services, consulting service in cloud computing solutions and testing.
 
  •  Impact of business acquisitions.  We have entered into several business acquisitions in recent years and plan to pursue selective business acquisitions in the future as a means of growing our business. Our ability to identify, acquire, effectively manage and integrate new businesses into our existing operations can have a significant effect on our results of operations.
 
  •  Billing rates.  Our billing rates are a key factor impacting our revenues and gross margins. Billing rates vary by service offering and location of service delivery, and aggregate billings per engagement are driven by a number of factors, including the mix of onshore versus offshore delivered services and the mix of experience levels of personnel on a particular project.
 
  •  Proportion of services performed onshore versus offshore.  Services performed at a client site or onshore typically generate higher revenues but lower gross margins than services performed at our offshore delivery centers in China due to a higher cost base for onshore services. As a result, our gross margin fluctuates based on the relative proportion of work performed inside and outside China. The proportion of work performed at client sites, onshore in the client’s home country or offshore in China varies depending on client needs and the maturity or stage of engagement with a client. The proportion of work performed at our service delivery centers in China is typically greater for research and development services than for IT services. IT services generally have a higher proportion of onshore-delivered work early in an engagement, with the proportion of offshore-delivered work increasing over the term of the engagement.
 
  •  Employee utilization.  We make hiring decisions and manage employee utilization based on our assessment of our project pipeline and staffing requirements. Employee utilization is typically higher for longer-term engagements due to increasing predictability of client needs over the course of the engagement. Our ability to effectively manage employee utilization will have an effect on our gross margin and our results of operations.
 
Net Revenues
 
Our net revenues represent our total revenues from operations, less business taxes. The following table sets forth our net revenues by type of service offering for the periods indicated:
 
                                                                                 
    Year Ended December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
          % of
          % of
          % of
          % of
          % of
 
    Net
    Total Net
    Net
    Total Net
    Net
    Total Net
    Net
    Total Net
    Net
    Total Net
 
    Revenues     Revenues     Revenues     Revenues     Revenues     Revenues     Revenues     Revenues     Revenues     Revenues  
    (dollars in thousands, except for percentages)  
 
IT services
  $ 40,682       64.5%     $ 62,009       61.6%     $ 47,139       51.5%     $ 12,477       57.9%     $ 15,605       51.1%  
Research and development services
    22,369       35.5%       38,711       38.4%       44,317       48.5%       9,060       42.1%       14,932       48.9%  
                                                                                 
Total net revenues
  $ 63,051       100.0%     $ 100,720       100.0%     $ 91,456       100.0%     $ 21,537       100.0%     $ 30,537       100.0%  
                                                                                 
 
Historically, IT services have contributed the substantial majority of our net revenues. Our net revenues from IT services increased significantly from 2007 to 2008 as a result of our


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continued ability to increase the number and scope of our engagements with our major IT services clients and the strong demand for outsourced technology services in 2007 and the beginning of 2008. However, starting from the third quarter of 2008, we started to experience a decrease in demand for outsourced technology services in general as a result of the global economic crisis, which also adversely affected demand for outsourced technology services during 2009.
 
Our net revenues from research and development services, on the other hand, have continued to increase steadily from 2007 to 2009 and represented 48.5% and 48.9% of our total net revenues in 2009 and the three months ended March 31, 2010, respectively. This increase was primarily driven by the rise in the number of multi-national corporations outsourcing research and development work to technology services providers based in China. Demand for research and development services is also in general less adversely affected by economic downturns as such services are typically tied to clients’ multi-year product development cycles, which are usually not subject to short-term adjustments. Furthermore, in order to achieve greater cost-efficiency in adverse economic conditions, clients typically outsource additional research and development services to technology services providers and consolidate the number of outsourced service providers used, which we believe contributed favorably to the growth of our net revenues from research and development services in 2009.
 
Prior to 2006, we generated most of our revenues from clients located in Japan. From 2006 to 2009 and continuing into the first quarter of 2010, we successfully expanded our target geographies to service clients in the U.S., Europe, China and other parts of the world. The following table sets forth our net revenues based on our clients’ headquarters for the periods indicated:
 
                                                                                 
    Year Ended December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
          % of
          % of
          % of
          % of
          % of
 
    Net
    Total Net
    Net
    Total Net
    Net
    Total Net
    Net
    Total Net
    Net
    Total Net
 
    Revenues     Revenues     Revenues     Revenues     Revenues     Revenues     Revenues     Revenues     Revenues     Revenues  
    (dollars in thousands, except for percentages)  
 
U.S.
  $ 37,066       58.8%     $ 58,738       58.3%     $ 54,541       59.6%     $ 12,790       59.4%     $ 16,895       55.3%  
Japan
    15,741       25.0%       23,156       23.0%       23,160       25.3%       5,597       26.0%       7,146       23.4%  
Europe
    7,571       12.0%       15,759       15.6%       9,280       10.1%       2,204       10.2%       3,241       10.6%  
China (including Hong Kong)
    2,283       3.6%       2,269       2.3%       2,865       3.1%       532       2.5%       1,959       6.4%  
Others
    390       0.6%       798       0.8%       1,610       1.9%       414       1.9%       1,296       4.3%  
                                                                                 
Total net revenues
  $ 63,051       100.0%     $ 100,720       100.0%     $ 91,456       100.0%     $ 21,537       100.0%     $ 30,537       100.0%  
                                                                                 
 
We expect our net revenues from China domestic clients to continue to grow as a percentage of our total net revenues as we expand our client base in China. We also expect net revenues from clients headquartered in the U.S. to grow as a percentage of our total net revenues as the United States economy recovers from the recent economic crisis.


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Many of our clients are multinational corporations with local subsidiaries in jurisdictions outside of the jurisdiction of their headquarters, such as Japan and the U.S. The following table sets forth our net revenues based on the location of our clients’ contracting entities for the periods indicated:
 
                                                                                 
    Year Ended December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
          % of
          % of
          % of
          % of
          % of
 
    Net
    Total Net
    Net
    Total Net
    Net
    Total Net
    Net
    Total Net
    Net
    Total Net
 
    Revenues     Revenues     Revenues     Revenues     Revenues     Revenues     Revenues     Revenues     Revenues     Revenues  
    (dollars in thousands, except for percentages)  
 
U.S. 
  $ 17,268       27.4%     $ 16,714       16.6%     $ 22,960       25.1%     $ 5,347       24.8%     $ 6,371       20.9%  
Japan
    20,715       32.9%       26,052       25.9%       24,694       27.0%       6,105       28.3%       8,384       27.5%  
Europe
    1,190       1.9%       1,040       1.0%       2,410       2.6%       395       1.8%       724       2.4%  
China (including Hong Kong)
    23,250       36.9%       48,914       48.6%       32,999       36.1%       8,028       37.3%       10,180       33.3%  
Singapore
    628       0.9%       8,000       7.9%       8,393       9.2%       1,662       7.8%       4,878       15.9%  
                                                                                 
Total net revenues
  $ 63,051       100.0%     $ 100,720       100.0%     $ 91,456       100.0%     $ 21,537       100.0%     $ 30,537       100.0%  
                                                                                 
 
The following table sets forth our net revenues by client industry for the periods indicated:
 
                                                                                 
    Year Ended December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
          % of
          % of
          % of
          % of
          % of
 
    Net
    Total Net
    Net
    Total Net
    Net
    Total Net
    Net
    Total Net
    Net
    Total Net
 
    Revenues     Revenues     Revenues     Revenues     Revenues     Revenues     Revenues     Revenues     Revenues     Revenues  
    (dollars in thousands, except for percentages)  
 
Technology
  $ 31,820       50.5%     $ 54,646       54.3%     $ 56,222       61.5%     $ 12,695       58.9%     $ 18,590       60.9%  
BFSI
    17,528       27.8%       29,210       29.0%       21,697       23.7%       5,307       24.6%       7,516       24.6%  
Others (1)
    13,703       21.7%       16,864       16.7%       13,537       14.8%       3,535       16.5%       4,431       14.5%  
                                                                                 
Total net revenues
  $ 63,051       100.0%     $ 100,720       100.0%     $ 91,456       100.0%     $ 21,537       100.0%     $ 30,537       100.0%  
                                                                                 
 
 
(1) Includes manufacturing, telecommunications and life sciences.
 
We are primarily focused on clients in the technology and BFSI industries. Our growth in net revenues from these two industries in 2008 was driven by the increase in demand for outsourced technology services. Beginning in the second half of 2008 and continuing into 2009, we experienced a significant decrease in work order demand from clients in the BFSI industry, mostly as a result of the global economic crisis and its pronounced effect on financial institutions. As a result, net revenues from clients in the BFSI industry decreased by 25.7% from 2008 to 2009. On the other hand, net revenues generated from clients in the technology industry continued to increase in 2009 despite the global economic crisis. This increase was mainly due to the fact that research and development services are typically provided to clients in the technology industry and such services are less adversely affected by economic downturns.
 
We aim to continue to strengthen our expertise in the technology and BFSI industries to leverage our existing industry knowledge to serve more clients within these industries and to penetrate additional sub-segments within these industries.
 
We typically enter into a master services agreement with our clients which provides a framework for services that is then supplemented by statements of work, which specify the particulars of individual engagements, including the services to be performed, pricing terms and performance criteria. Our selling cycle for concluding master services agreements with new clients frequently exceeds six months. We usually then start providing a limited set of services to the client to demonstrate our capabilities, including, if required, gaining certification by that client as an approved outsourced services provider. We then gradually expand the scope and range of services provided to the client over a period of months or years. Based on


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our experience, it often takes two to three years working with a client before we develop a significant revenue stream, which we define as more than $1.0 million per year in net revenues, from that client.
 
Most of our contracts are priced on a time-and-materials basis, with the remainder priced on a fixed-price basis. Net revenues from time-and-materials contracts accounted for 83.8%, 84.5% and 86.3% of our total net revenues in 2007, 2008 and 2009, respectively, and 81.1% of our total net revenues in the three months ended March 31, 2010.
 
We derive our net revenues from a combination of onshore and offshore delivery. We categorize revenues from onshore work in the U.S. and Japan as onshore revenues. For the year ended December 31, 2007, 2008 and 2009, our onshore revenues accounted for 39.6%, 29.8% and 22.3% of our net revenues, respectively, and 16.3% of our total net revenues in the three months ended March 31, 2010.
 
Cost of Revenues, Gross Profit and Gross Margin
 
The following table sets forth our total net revenues, cost of revenues, gross profit and gross margin for the periods indicated:
 
                                                                                 
    Year Ended December 31,   Three Months Ended March 31,
    2007   2008   2009   2009   2010
        % of
      % of
      % of
      % of
      % of
        Total Net
      Total Net
      Total Net
      Total Net
      Total Net
    Total   Revenues   Total   Revenues   Total   Revenues   Total   Revenues   Total   Revenues
    (dollars in thousands, except for percentages)
 
Total net revenues
  $ 63,051       100.0%     $ 100,720       100.0%     $ 91,456       100.0%     $ 21,537       100.0%     $ 30,537       100.0%  
Cost of revenues
    47,435       75.2%       70,295       69.8%       58,759       64.2%       13,792       64.0%       19,418       63.6%  
Gross profit and gross margin
    15,616       24.8%       30,425       30.2%       32,697       35.8%       7,745       36.0%       11,119       36.4%  
 
Cost of Revenues
 
The principal components of our cost of revenues are salaries and other compensation expenses, including share-based compensation expenses, for employees directly responsible for the performance of client services. Salary and compensation expenses for senior management employees who are not directly responsible for the performance of client services, business development personnel and other personnel involved in support functions are included in operating expenses. Salaries and other compensation expenses of our professionals are allocated to cost of revenues regardless of whether they are actually performing services during a given period.
 
Wage levels for our professionals in China are generally lower than those in client locations such as the U.S. and Japan. Moreover, wage levels vary across different regions of China, with wage levels generally being higher in more developed cities such as Beijing, Dalian, Shanghai and Shenzhen. As a result, our cost of revenues is significantly affected by the location from which we deliver services. We have begun to develop, and plan to continue developing, offshore delivery centers in cities with relatively lower wage levels, such as in Wuxi, and have increased the proportion of our professionals in offshore delivery centers in cities with lower wage levels.
 
Other expenses included in cost of revenues include travel expenses, facilities and depreciation and overhead cost related to the delivery of services, as well as costs of technical subcontractors, computer and data communications equipment maintenance costs and amortization of intangible assets acquired in business acquisitions.


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Gross Profit and Gross Margin
 
Gross profit is equal to net revenues less cost of revenues. Gross margin is equal to gross profit as a percentage of net revenues. Our gross profit and gross margin are affected by factors which affect our net revenues, such as overall demand for outsourced technology services, and cost of revenues, such as wage levels. Changes in our gross profit and gross margin are also driven by factors such as, but are not limited to, our ability to efficiently implement the delivery process improvements to optimize the mix of services delivered onshore versus offshore and maintain the appropriate staffing levels, changes in pricing terms and variation in the duration, type, size, timing and scope of our engagements.
 
Our gross margin for both IT services and research and development services has generally improved from 2007 to 2009 and into the first quarter of 2010. This is primarily due to our continued efforts to improve our service delivery processes. Our total net revenues from services provided offshore, which generate higher gross margin due to the lower cost base, increased from 60.4% in 2007 to 70.2% in 2008, to 77.7% in 2009 and to 83.7% in the three months ended March 31, 2010. Our efforts to develop offshore delivery centers in China, especially in cities with relatively lower wage levels, has allowed us to decrease the overall compensation expenses related to our professionals. We have also implemented more stringent cost control measures to control the number of employees that are not assigned on client projects, thereby improving the efficiency of our operations.
 
We experienced a slight decrease in billing rates in 2009 as a result of the global economic crisis. However, we were able to adjust the scope of our engagement with clients to support their operations during the global economic crisis that partially offset the effect of such decrease in billing rates, such as in the mix of our onshore and offshore delivered services and the mix of experience levels of employees on the engagement. Our overall gross margin was also favorably affected by an increase in the portion of our net revenues derived from research and development services, which generally generate higher gross margin than our IT services.
 
Operating Expenses
 
Our operating expenses principally consist of selling and marketing expenses and general and administrative expenses. The following sets forth our general and administrative expenses and selling and marketing expenses for the periods indicated:
 
                                                                                 
    Year Ended December 31,   Three Months Ended March 31,
    2007   2008   2009   2009   2010
        % of
      % of
      % of
      % of
      % of
        Total Net
      Total Net
      Total Net
      Total Net
      Total Net
    Total   Revenues   Total   Revenues   Total   Revenues   Total   Revenues   Total   Revenues
    (dollars in thousands, except for percentages)
 
General and administrative expenses
  $ 12,617       20.0%     $ 19,010       18.9%     $ 18,981       20.8%     $ 5,651       26.2%     $ 5,859       19.2%  
Selling and marketing expenses
    5,599       8.9%       8,345       8.3%       5,968       6.5%       1,103       5.1%       1,991       6.5%  
 
General and Administrative Expenses
 
General and administrative expenses consist primarily of salaries and other compensation expenses of management, legal and audit fees, utilities, ongoing information technology, telecommunications and other systems costs, and other administrative costs not related to the delivery of services. General and administrative expenses also include an allocation of our share-based compensation charges based on the nature of work that certain employees were assigned to perform.
 
Our general and administrative expenses have increased primarily as a result of our expanding operations and the hiring of a number of senior executive and management staff to support our growth. We expect our general and administrative expenses to continue to


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increase in absolute terms as our business expands but will generally remain steady or slightly decrease as a percentage of our net revenues.
 
Selling and Marketing Expenses
 
Selling and marketing expenses consist primarily of salaries, commissions and other compensation expenses relating to our sales and marketing personnel, travel, brand building, and other expenses relating to our marketing activities. Our selling and marketing expenses have risen significantly in the past due to our increased business development and marketing activities, as well as our expansion into research and development services.
 
Our selling and marketing expenses in 2007, 2008 and 2009 and the three months ended March 31, 2010 included amortization of intangible assets acquired in our recent acquisitions of $1.7 million, $1.6 million, $60,000 and $0.1 million, respectively. The intangible assets primarily consist of the value of the acquired client base. As a result of intangible asset and goodwill impairment charges that were recognized in 2008, non-cash amortization of intangible assets included in selling and marketing expenses decreased significantly in 2009 as compared to 2008. Our selling and marketing expenses excluding amortization of intangible assets were $3.9 million, $6.8 million and $5.9 million in 2007, 2008 and 2009, respectively, and $1.9 million for the three months ended March 31, 2010.
 
We anticipate our sales and marketing expenses will continue to increase as we continue to build sales and marketing teams in our target markets, primarily in China.
 
Other Income and Expenses
 
Other income and expenses consists primarily of interest income and expenses and changes in the fair values of warrants and foreign currency forward contracts. The change in fair value of warrants of $2.4 million in 2007 resulted from our issuance in 2004 of warrants allowing the holders to acquire an aggregate of 2,000,000 of our series A convertible redeemable preferred shares and 36,000,000 of our Series A-1 convertible redeemable preferred shares upon payment of an exercise price $0.05 per share and $0.25 per share, respectively. The warrants were financial liabilities and are reported separately at fair value upon initial recognition and subsequently marked to market with the change in fair value recognized in earnings. These warrants were exercised in full in 2007 and, as a result, no charge was recognized after 2007.
 
Acquisitions
 
Historically, business acquisitions allow us to acquire additional expertise and capabilities and expand our client base and presence in key client locations, such as the United States. The financial results for our acquired businesses are consolidated in our operating results for periods after the acquisition. Therefore, our financial results in corresponding prior periods may not be directly comparable. Our acquisitions in 2007 occurred in late 2007 and contributed $0.6 million and $10.6 million to our net revenues in 2007 and 2008, respectively. Our acquisitions in 2009 occurred in the second half of the year and contributed $1.4 million to our net revenues in 2009.
 
Our acquisitions since 2007 include:
 
  •  Shanghai Shinko Computer Technology Co., Ltd., an outsourcing technology center for a new key client, Kobe Steel Ltd.;
 
  •  T-est, a Singapore-based research and development services provider;
 
  •  Daemoyrod, an Oracle application software implementation and support specialist with operations in the United States and Mexico;


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  •  a business process support team from AIA Information Technology (Guangzhou) Co., Ltd.;
 
  •  the testing business of MG Digital Pte Ltd., a Singapore-based research and development services provider;
 
  •  AllianceSPEC, a professional IT transaction system testing company based in Singapore;
 
  •  Horizon Information, a professional IT testing company based in China; and
 
  •  Echo Lane, a professional consulting services firm in the U.S. with expertise in cloud computing.
 
For additional information on these and other acquisitions, see “Our Corporate Structure — Our History.”
 
We anticipate that selective acquisitions will increase our scale, geographic presence and service offerings, expand our capabilities, and continue to be a significant source of revenue growth. Acquisition-related challenges include quickly and effectively integrating the acquired business and services into our existing business and service offerings and retaining acquired clients and employees. As a result, we may not realize the benefits of our acquisitions as soon as anticipated or at all. Also, these challenges become more difficult as we expand our business from primarily operating in China to operating on a global basis.
 
We had goodwill of $10.3 million, $5.9 million, $10.2 million and $11.3 million as of December 31, 2007, 2008 and 2009 and March 31, 2010, respectively. We had acquisition-related intangible assets of $6.9 million, nil, $1.9 million and $2.6 million as of December 31, 2007, 2008 and 2009 and March 31, 2010, respectively. We have and will continue to incur amortization expenses as we amortize acquired intangible assets over their estimated useful life. For additional information, see notes 7 and 8 to our audited consolidated financial statements included elsewhere in this prospectus. We do not amortize our goodwill but test it periodically for impairment. Impairment to our intangible assets and goodwill may adversely affect our results of operations. For example, in 2008, we recorded an impairment charge of $5.8 million in 2008 on acquired intangible assets and $4.8 million on goodwill. For additional information, see “— Operating Expenses — Impairment of Intangible Assets and Goodwill” and “Risk Factors — Risk Factors Relating to Our Business — If we are not successful in integrating and managing our past and future strategic acquisitions, our business and results of operations may suffer and we may incur exceptional expenses or write-offs.”


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Income Taxes
 
The current and deferred components of income tax expense (benefit) were as follows for the periods indicated:
 
                         
    Year Ended December 31,  
    2007     2008     2009  
    (dollars in thousands)  
 
Current
                       
- PRC and Hong Kong income tax expense
  $ 262     $ 464     $ 1,692  
- Japan income tax expense
    27       128       50  
- U.S. income tax expense
    878              
- Singapore income tax expense
    8       8       107  
Deferred
                       
- PRC and Hong Kong income tax expense (benefit)
    121       (287 )     (100 )
- Japan income tax expense (benefit)
    29       15       (222 )
- U.S. income tax benefit
    (576 )     (872 )     (420 )
- Singapore income tax expense (benefit)
    21       (159 )     (46 )
                         
Income tax expense (benefit)
  $ 770     $ (703 )   $ 1,061  
                         
 
Under the current laws of the Cayman Islands, our listed company, which was incorporated in the Cayman Islands, is not subject to taxation on its income or capital gains. However, there is a risk that we may be treated as resident in the PRC for tax purposes. See “Risk Factors — Risk Factors Relating to China — Under the New EIT Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.”
 
DMK International, HiSoft Envisage and HiSoft Wave are established in the U.S. and are subject to U.S. federal income taxes at graduated rates ranging from 15% to 39% and state income taxes of 6%, 8.84% and 1%, respectively.
 
Our PRC subsidiaries were subject to standard income tax rates of 33% for 2007 and 25% for 2008 and 2009. However, a number of our PRC subsidiaries enjoy various preferential treatments that have resulted in lower tax rates. See note 13 to our audited consolidated financial statements for additional information. Also see “Risk Factors — Risk Factors Relating to China — The discontinuation of any of the preferential tax treatments available to us in China could materially and adversely affect our results of operations and financial condition.”
 
On April 21, 2010, the State Administration of Taxation issued Circular 157 that seeks to provide additional guidance on the interaction of certain preferential tax rates under the transitional rules of the New EIT Law. Prior to Circular 157, we interpreted the law to mean that if an entity was in a period where it was entitled to a 50% reduction in the tax rate and was also entitled to a 15% rate of tax due to HNTE status under the New EIT Law then it was entitled to pay tax at the rate of 7.5%. Circular 157 appears to have the effect that such an entity is entitled to pay tax at either 15% or 50% of the applicable PRC tax rate. The effect of Circular 157 is retrospective and would apply to 2008 and 2009.
 
Circular 157 can be interpreted differently as to which would be the applicable PRC tax rate. Depending on the appropriate interpretation, the preferential tax rate enjoyed by HiSoft Beijing which qualified as a HNTE during its 50% tax reduction period (2009-2010) will be either 10% or 12.5% for 2009 and either 11% or 12.5% for 2010 rather than 7.5% which is the rate we had used prior to the issuance of Circular 157. We are currently seeking to determine the appropriate interpretation with the relevant tax authority. We believe that Circular 157 is similar to a change in tax law, the cumulative effect of which should be reflected in the period


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of the change. As a result, we will adjust our deferred tax asset as of March 31, 2010 and will recognize an additional tax liability in respect of 2009 and the quarter ended March 31, 2010. The resulting additional tax charge would be in the range of $240,000 to $495,000.
 
Our effective tax rate increased from 6.5% in 2008 (when we recorded a net loss and had a significant charge in respect of the impairment of goodwill that was non-tax deductible) to 12.6% in 2009. Assuming we continue to enjoy certain preferential tax rates for our PRC subsidiaries, we expect a substantially similar effective tax rate for 2010.
 
Results of Operations
 
The following table sets forth a summary of our consolidated results of operations for the years ended December 31, 2007, 2008 and 2009 and the three months ended March 31, 2010. This information should be read together with our audited consolidated financial statements and related notes included elsewhere in this prospectus. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.


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    Year Ended December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
    (dollars in thousands, except for percentages)  
 
Summary Consolidated Statements of Operating Data
                                                                               
Net revenues
  $ 63,051       100.0%     $ 100,720       100.0%     $ 91,456       100.0%     $ 21,537       100.0%     $ 30,537       100.0%  
Cost of revenues (1)(2)
    47,435       75.2%       70,295       69.8%       58,759       64.2%       13,792       64.0%       19,418       63.6%  
                                                                                 
Gross profit
    15,616       24.8%       30,425       30.2%       32,697       35.8%       7,745       36.0%       11,119       36.4%  
                                                                                 
Operating expenses:
                                                                               
General and administrative (2)
    12,617       20.0%       19,010       18.9%       18,981       20.8%       5,651       26.2%       5,859       19.2%  
Selling and marketing (1)(2)
    5,599       8.9%       8,345       8.3%       5,968       6.5%       1,103       5.1%       1,991       6.5%  
Offering expenses
                3,782       3.8%                                      
Impairment of intangible assets
                5,760       5.7%                                      
Impairment of goodwill
                4,784       4.7%                                      
                                                                                 
Total operating expenses
    18,216       28.9%       41,681       41.4%       24,949       27.3%       6,754       31.3%       7,850       25.7%  
                                                                                 
(Loss)/income from operations
    (2,600)       (4.1)%       (11,256)       (11.2)%       7,748       8.5%       991       4.7%       3,269       10.7%  
                                                                                 
Other income (expenses):
                                                                               
Interest expense
    (493)       (0.8)%       (58)       (0.1)%       (57)       (0.1)%       (7)       (0.0)%       (6)       (0.0)%  
Interest income
    493       0.8%       722       0.7%       567       0.6%       181       0.8%       115       0.4%  
Change in fair value of warrant
    2,387       3.8%                                                  
Change in fair value of foreign-currency forward contract
    101       0.1%       (253)       (0.2)%       166       0.2%       174       0.8%       17       0.0%  
                                                                                 
Total other income
    2,488       3.9%       411       0.4%       676       0.7%       348       1.6%       126       0.4%  
                                                                                 
Net (loss)/income from continuing operations before income tax (expense) benefit
    (112)       (0.2)%       (10,845)       (10.8)%       8,424       9.2%       1,339       6.3%       3,395       11.1%  
Income tax (expense) benefit
    (770)       (1.2)%       703       0.7%       (1,061)       (1.2)%       (168)       (0.8)%       (428)       (1.4)%  
                                                                                 
Net (loss)/income from continuing operations
    (882)       (1.4)%       (10,142)       (10.1)%       7,363       8.1%       1,171       5.5%       2,967       9.7%  
                                                                                 
Net loss on discontinued operation
    (38)       (0.1)%       (569)       (0.6)%                                      
                                                                                 
Net (loss)/income
  $ (920)       (1.5)%     $ (10,711)       (10.6)%     $ 7,363       8.1%     $ 1,171       5.5%     $ 2,967       9.7%  
                                                                                 
 
 
(1) Includes acquisition-related amortization of intangible assets totaling $1.9 million, $1.6 million and $0.1 million in 2007, 2008 and 2009, respectively, and nil and $0.2 million in the three months ended March 31, 2009 and 2010, respectively, allocated as follows:
 
                                         
          Three Months
 
    Year Ended December 31,     Ended March 31,  
    2007     2008     2009     2009     2010  
    (dollars in thousands)  
 
Cost of revenues
  $ 152     $ 50     $    16     $    —     $    47  
Operating expenses:
                                       
Selling and marketing
    1,716       1,565       60             116  


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(2) Includes share-based compensation charges totaling $1.5 million, $1.8 million and $1.1 million in 2007, 2008 and 2009, respectively, and $0.2 million and $0.6 million in the three months ended March 31, 2009 and 2010, respectively, allocated as follows:
 
                                         
    Year Ended December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
    (dollars in thousands)  
 
Cost of revenues
  $ 268     $ 362     $   321     $    83     $   233  
Operating expenses:
                                       
General and administrative
    1,214       1,405       720       124       339  
Selling and marketing
    8       35       56       10       17  
 
Comparison of Three Months Ended March 31, 2009 and Three Months Ended March 31, 2010
 
Net Revenues
 
Total net revenues increased by $9.0 million, or 41.8%, from $21.5 million in the three months ended March 31, 2009 to $30.5 million in the three months ended March 31, 2010, primarily due to increased business activity as a result of improved macroeconomic conditions since the global economic crisis. The economic crisis that began in late 2008 had resulted in a slowdown of business activity and lower demand for technology outsourcing services, especially for IT services from our clients in the BFSI industry, in the first half of 2009. The increase in net revenues was also partially due to total net revenues of $1.7 million contributed by AllianceSPEC and Horizon, which we acquired in December 2009 and February 2010, respectively.
 
Cost of Revenues
 
Total cost of revenues increased by $5.6 million, or 40.8%, from $13.8 million in the three months ended March 31, 2009 to $19.4 million in the three months ended March 31, 2010. The increase was in line with the growth in our net revenues for the same periods and was primarily due to an increase in our compensation expenses for our professionals and other employees as a result of increased headcount at our delivery centers. Cost of revenues as a percentage of our total net revenues decreased from 64.0% in the three months ended March 31, 2009 to 63.6% for the three months ended March 31, 2010.
 
Gross Profit and Gross Margin
 
As a result of the foregoing, gross profit increased by $3.4 million, or 43.6%, from $7.7 million in the three months ended March 31, 2009 to $11.1 million in the three months ended March 31, 2010. We enjoyed increased economies of scale in line with revenue growth, resulting in an improvement in our gross margin from 36.0% to 36.4% in the same period.
 
Operating Expenses
 
Our total operating expenses increased by $1.1 million, or 16.2%, from $6.8 million in the three months ended March 31, 2009 to $7.9 million in the three months ended March 31, 2010.
 
General and administrative expenses.  Our general and administrative expenses increased by $0.2 million, or 3.7%, from $5.7 million in the three months ended March 31, 2009 to $5.9 million in the three months ended March 31, 2010, largely due to an additional $0.2 million in share-based compensation expense incurred in the first quarter of 2010. General and administrative expenses as a percentage of our total net revenues decreased from 26.2% in the three months ended March 31, 2009 to 19.2% in the three months ended March 31, 2010.
 
Selling and marketing expenses.  Our selling and marketing expenses increased by $0.9 million, or 80.5%, from $1.1 million in the three months ended March 31, 2009 to


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$2.0 million in the three months ended March 31, 2010. This increase was primarily due to an enlarged sales force, particularly in China, as macro-economic conditions improved and demand for our services recovered. Selling and marketing expenses as a percentage of our total net revenues increased from 5.1% in the three months ended March 31, 2009 to 6.5% in the three months ended March 31, 2010.
 
Other Income
 
Other income is $0.1 million in the three months ended March 31, 2010 compared to $0.3 million in the three months ended March 31, 2009. The decrease was primarily due to a $0.2 million gain from foreign-currency forward contracts in the three months ended March 31, 2009.
 
Income Tax (Expense) Benefit
 
We incurred an income tax expense of $0.4 million in the three months ended March 31, 2010 compared to an income tax expense of $0.2 million in the three months ended March 31, 2009. This increase in our income tax expense was primarily due to an increase in our net income from continuing operations before income tax in the three months ended March 31, 2010.
 
Net Income
 
As a result of the foregoing, our net income increased to $3.0 million in the three months ended March 31, 2010 from a net income of $1.2 million in the three months ended March 31, 2009.
 
Comparison of 2008 and 2009
 
Net Revenues
 
Total net revenues decreased by $9.2 million, or 9.2%, from $100.7 million in 2008 to $91.5 million in 2009, primarily due to the global economic crisis that began in late 2008, which resulted in a slowdown of business activity and lower demand for technology outsourcing services, especially for IT services from our clients in the BFSI industry. This decrease was partially offset by a continued increase in demand for research and development services, which is tied to clients’ product development cycles and was less affected by the economic downturn in 2009.
 
Cost of Revenues
 
Total cost of revenues decreased by $11.5 million, or 16.4%, from $70.3 million in 2008 to $58.8 million in 2009. Cost of revenues as a percentage of our total net revenues decreased from 69.8% in 2008 to 64.2% in 2009. The decrease in our cost of revenues and in our cost of revenues as a percentage of our total net revenues during this period was primarily due to continued improvement in our service delivery processes, as a result of (i) a higher portion of services performed offshore in China in 2009 as compared to 2008, (ii) a decrease in our overall compensation expenses consistent with the decrease in our net revenues, and (iii) a larger portion of professionals employed in delivery centers located in cities in China with relatively lower wages and reduced headcount at delivery centers located in cities with relatively higher wages.
 
Gross Profit and Gross Margin
 
As a result of the foregoing, gross profit increased by $2.3 million, or 7.5% from $30.4 million in 2008 to $32.7 million in 2009.


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Operating Expenses
 
Our total operating expenses decreased by $16.8 million, or 40.1%, from $41.7 million in 2008 to $24.9 million in 2009. This decrease was primarily due to impairment of intangible assets in 2008 of $5.8 million and impairment of goodwill expense in 2008 of $4.8 million related to the global economic downturn that began in 2008, which negatively affected the carrying value of acquired intangible assets and goodwill that we did not experience in 2009. The decrease in operating expenses was also due to $3.8 million in offering expenses in 2008 that we did not incur in 2009 and a decrease of $2.3 million in selling and marketing expenses in 2009 as compared to 2008.
 
General and administrative expenses.  Our general and administrative expenses remained relatively stable at $19.0 million in 2008 and 2009. The number of general and administrative personnel increased in 2009 but was offset by cost controls implemented in response to the global economic downturn. General and administrative expenses as a percentage of our total net revenues increased from 18.9% in 2008 to 20.8% in 2009.
 
Selling and marketing expenses.  Our selling and marketing expenses decreased by $2.3 million, or 28.5%, from $8.3 million in 2008 to $6.0 million in 2009. This decrease was primarily due to a decrease in amortization of intangible assets from $1.6 million in 2008 to $58,000 in 2009 and, to a lesser extent, a decrease in business activity. Selling and marketing expenses as a percentage of our total net revenues decreased from 8.3% in 2008 to 6.5% in 2009. Excluding amortization of intangible assets, selling and marketing expenses as a percentage of our total net revenues decreased from 6.7% in 2008 to 6.5% in 2009.
 
Offering expenses.  We recorded offering expenses of $3.8 million in 2008. The preparation of our initial public offering, which began in 2007, was postponed in 2008 due to the change in market conditions. Costs incurred to that time which had been deferred were then recorded as an expense in 2008. We did not incur any offering expenses in 2009.
 
Impairment of intangible assets.  We recorded an impairment of intangible assets in 2008 of $5.8 million but did not record such impairment in 2009. The impairment was recorded due to lower than expected sales and profits in 2008 from our acquisition of HiSoft Beijing, Envisage Solutions, Wave and T-est, as a result of the global economic downturn that began in 2008.
 
Impairment of goodwill.  We recorded an impairment of goodwill in 2008 of $4.8 million but did not record such impairment in 2009. The impairment was recorded due to the economic downturn that began in 2008 and decreased the fair value of certain acquired entities.
 
Other Income
 
Other income increased by $0.3 million, or 64.5%, from $0.4 million in 2008 to $0.7 million in 2009. This increase was primarily attributable to a loss of $0.3 million resulting from foreign-currency forward contracts in 2008 as compared to a gain of $0.2 million in 2009.
 
Income Tax (Expense) Benefit
 
We incurred an income tax expense of $1.1 million in 2009 compared to our income tax benefit of $0.7 million in 2008. We recognized tax benefits in 2008 primarily as a result of impairment charges on intangible assets and goodwill incurred in 2008.
 
Net (Loss) Income from Continuing Operations
 
As a result of the foregoing, we generated a net income of $7.4 million from continuing operations in 2009 while we incurred a net loss of $10.1 million in 2008.


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Net Loss on Discontinued Operations
 
In 2008, we sold our entire equity interest in Dalian Haihui Software Training Center, or the Training Center, to an entity designated by Mr. Yuanming Li, our former chairman. We recorded a net loss of $0.6 million on the disposal of the Training Center in 2008.
 
Net (Loss) Income
 
As a result of the foregoing, we generated a net income of $7.4 million in 2009 while we incurred a net loss of $10.7 million in 2008.
 
Comparison of 2007 and 2008
 
Net Revenues
 
Total net revenues increased by $37.6 million, or 59.7%, from $63.1 million in 2007 to $100.7 million in 2008, primarily due to growth in the number of our clients, including the addition of a new major IT services client in the last quarter of 2007, increase in the size of our engagements with existing clients, and revenue contribution from T-est and Daemoyrod, which we acquired at the end of 2007. Total net revenues contributed by T-est and HiSoft Wave in 2008 were $10.6 million. The increase in total net revenues was partially offset by the global economic crisis that began in late 2008, which resulted in a downturn in business activity and lower demand for technology outsourcing services.
 
Cost of Revenues
 
Total cost of revenues increased by $22.9 million, or 48.2%, from $47.4 million in 2007 to $70.3 million in 2008. Growth in our cost of revenues during this period was primarily due to an increase in overall compensation expenses as a result of an increase in the volume of services we provided in 2008, including as a result of our acquisitions of T-est and Daemoyrod. Cost of revenues as a percentage of our total net revenues decreased from 75.2% in 2007 to 69.8% in 2008. This decrease was primarily due to the continued improvement in our service delivery processes, including a higher portion of services performed offshore in China in 2008 as compared to 2007.
 
Gross Profit and Gross Margin
 
As a result of the foregoing, gross profit increased by $14.8 million, or 94.9%, from $15.6 million in 2007 to $30.4 million in 2008. Our gross margin increased from 24.8% in 2007 to 30.2% in 2008.
 
Operating Expenses
 
Operating expenses increased by $23.5 million, or 128.8%, from $18.2 million in 2007 to $41.7 million in 2008. This increase was due in part to increases in general and administrative expenses and selling and marketing expenses in connection with the expansion of our operations in 2008. The increase in operating expenses was also partially due to an impairment of intangible assets in 2008 of $5.8 million and an impairment of goodwill expense in 2008 of $4.8 million related to the global economic downturn that began in 2008 and negatively affected the carrying value of the acquired intangible assets and goodwill. In addition, we recorded offering expenses of $3.8 million in 2008.
 
General and administrative expenses.  Our general and administrative expenses increased by $6.4 million, or 50.7%, from $12.6 million in 2007 to $19.0 million in 2008, primarily due to the expansion of our management and support operations, as well as an increase in the number of our overseas offices due to the acquisition of T-est in Singapore and HiSoft Wave in


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the U.S. General and administrative expenses as a percentage of our total net revenues decreased from 20.0% in 2007 to 18.9% in 2008.
 
Selling and marketing expenses.  Our selling and marketing expenses increased by $2.7 million, or 49.0%, from $5.6 million in 2007 to $8.3 million in 2008. This increase was primarily due to the expansion of our sales and marketing team and the increased travel, both international and domestic, for business development purposes. Selling and marketing expenses as a percentage of our total net revenues decreased from 8.9% in 2007 to 8.3% in 2008. Selling and marketing expenses in 2007 and 2008 included amortization of intangible assets charges of $1.7 million and $1.6 million, respectively, primarily related to amortization of intangible assets following our acquisition of Envisage Solutions, T-est and Daemoyrod. After deducting the amortization of intangible assets charges, selling and marketing expenses as a percentage of our total net revenues increased from 6.2% in 2007 to 6.7% in 2008.
 
Offering expenses.  We recorded offering expenses of $3.8 million in 2008. The preparation of our initial public offering, which began in 2007, was postponed in 2008 due to the change in market conditions, and costs incurred were recorded as an expense.
 
Impairment of intangible assets.  We recorded an impairment of intangible assets in 2008 of $5.8 million but did not record such impairment in 2007. The impairment was recorded due to lower than expected sales and profits in 2008 from our acquisition of HiSoft Beijing, Envisage Solutions, Wave and T-est, as a result of the global economic downturn that began in 2008.
 
Impairment of goodwill.  We recorded an impairment of goodwill in 2008 of $4.8 million but did not record such impairment in 2007. The impairment was recorded due to the economic downturn that began in 2008 and the decrease in the fair value of certain acquired entities.
 
Other Income
 
Other income decreased by $2.1 million, or 83.5%, from $2.5 million in 2007 to $0.4 million in 2008. This decrease was primarily due to income of $2.4 million in 2007 relating to a change in fair value of warrants to purchase our series A and series A-1 preferred shares that we did not experience in 2008. In August 2007, these warrants were exercised in their entirety.
 
Income Tax (Expense) Benefit
 
We incurred income tax expense of $0.8 million in 2007 as compared to an income tax benefit of $0.7 million in 2008, primarily due to tax benefits recognized as a result of impairment charges on intangible assets and goodwill incurred in 2008.
 
Net Loss from Continuing Operations
 
As a result of the foregoing, net loss from continuing operations increased to $10.1 million in 2008 from $0.9 million in 2007.
 
Net Loss on Discontinued Operations
 
We recorded a net loss of $0.6 million on the disposal of the Training Center in 2008, an increase from the $38,000 recorded in 2007.
 
Net Loss
 
As a result of the foregoing, our net loss increased to $10.7 million in 2008 from a net loss of $0.9 million in 2007.


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Selected Quarterly Results
 
The following tables set forth our unaudited consolidated quarterly results for the nine quarters in the period from January 1, 2008 to March 31, 2010. You should read the following tables in conjunction with our audited consolidated financial statements and related notes contained elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial statements for the quarters presented on the same basis as our audited consolidated financial statements. The consolidated quarterly results information includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented. These quarterly operating results are historical and may not be indicative of future results.
 
                                                                 
    Three Months Ended  
    March 31, 2008     June 30, 2008     September 30, 2008     December 31, 2008  
          % of Net
          % of Net
          % of Net
          % of Net
 
    Amount     Revenues     Amount     Revenues     Amount     Revenues     Amount     Revenues  
                      (In thousands of U.S. dollars)              
 
Net revenues:
                                                               
IT services
  $ 16,985       67.4 %   $ 15,083       62.4 %   $ 14,837       57.2 %   $ 15,104       59.5 %
Research and development services
    8,233       32.6 %     9,104       37.6 %     11,090       42.8 %     10,284       40.5 %
                                                                 
Total net revenues
    25,218       100.0 %     24,187       100.0 %     25,927       100.0 %     25,388       100.0 %
Cost of revenues
    18,861       74.8 %     16,232       67.1 %     18,212       70.2 %     16,990       66.9 %
                                                                 
Gross profit
    6,357       25.2 %     7,955       32.9 %     7,715       29.8 %     8,398       33.1 %
                                                                 
Operating expenses:
                                                               
General and administrative
    3,953       15.7 %     4,172       17.2 %     6,850       26.4 %     4,035       15.9 %
Selling and marketing
    2,213       8.8 %     2,419       10.0 %     2,154       8.3 %     1,559       6.1 %
Offering expenses
                            3,782       14.6 %            
Impairment of intangible assets
                            5,760       22.2 %            
Impairment of goodwill
                            4,784       18.5 %            
                                                                 
Total operating expenses
    6,166       24.5 %     6,591       27.2 %     23,330       90.0 %     5,594       22.0 %
                                                                 
Income (loss) from operations
    191       0.7 %     1,364       5.7 %     (15,615 )     (60.2 )%     2,804       11.1 %
Other (expenses) income
    (129 )     (0.5 )%     334       1.4 %     159       0.6 %     47       0.2 %
Income (loss) before income tax benefit (expenses) from continuing operations
    62       0.2 %     1,698       7.1 %     (15,456 )     (59.6 )%     2,851       11.3 %
Income tax (expense) benefit
    3       0.0 %     77       0.3 %     494       1.9 %     129       0.5 %
Loss from discontinued operation
    (455 )     (1.8 )%     (114 )     (0.5 )%                        
                                                                 
Net (loss) income
  $ (390 )     (1.6 %)   $ 1,661       6.9 %   $ (14,962 )     (57.7 %)   $ 2,980       11.8 %
                                                                 
 


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Table of Contents

                                                                                 
    Three Months Ended  
    March 31, 2009     June 30, 2009     September 30, 2009     December 31, 2009     March 31, 2010  
          % of Net
          % of Net
          % of Net
          % of Net
          % of Net
 
    Amount     Revenues     Amount     Revenues     Amount     Revenues     Amount     Revenues     Amount     Revenues  
    (In thousands of U.S. dollars)  
 
Net revenues:
                                                                               
IT services
  $ 12,477       57.9 %   $ 10,786       51.0 %   $ 11,497       50.5 %   $ 12,379       47.6 %   $ 15,605       51.1 %
Research and development services
    9,060       42.1 %     10,382       49.0 %     11,254       49.5 %     13,621       52.4 %     14,932       48.9 %
                                                                                 
Total net revenues
    21,537       100.0 %     21,168       100.0 %     22,751       100.0 %     26,000       100.0 %     30,537       100.0 %
Cost of revenues
    13,792       64.0 %     13,583       64.2 %     14,749       64.8 %     16,635       64.0 %     19,418       63.6 %
                                                                                 
Gross profit
    7,745       36.0 %     7,585       35.8 %     8,002       35.2 %     9,365       36.0 %     11,119       36.4 %
                                                                                 
Operating expenses:
                                                                               
General and administrative
    5,651       26.2 %     4,215       19.9 %     4,218       18.5 %     4,897       18.8 %     5,859       19.2 %
Selling and marketing
    1,103       5.1 %     1,476       7.0 %     1,601       7.0 %     1,788       6.9 %     1,991       6.5 %
                                                                                 
Total operating expenses
    6,754       31.3 %     5,691       26.9 %     5,819       25.5 %     6,685       25.7 %     7,850       25.7 %
Income from operations
    991       4.7 %     1,894       8.9 %     2,183       9.7 %     2,680       10.3 %     3,269       10.7 %
Other income
    348       1.6 %     47