Vanceinfo 20F 2009 Annual report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 20-F

(Mark One)


o		Registration statement pursuant to Section 12(b) or 12 (g) of the Securities Exchange Act of 1934


þ		Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2009.


o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to


o		Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of event requiring this shell company report

For the transition period from to

Commission file number: 001-33857

VanceInfo Technologies Inc.

(Exact name of Registrant as Specified in Its Charter)

N/A
(Translation of Registrant’s Name Into English)

Cayman Islands
(Jurisdiction of Incorporation or Organization)

3/F Building 8, Zhongguancun Software Park, Haidian District
Beijing 100193, People’s Republic of China
(Address of Principal Executive Offices)
Sidney Xuande Huang, +86(10) 8282-5266,
shuang@vanceinfo.com,
3/F Building 8, Zhongguancun Software Park, Haidian District
Beijing 100193, People’s Republic of China

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange On Which Registered

American Depositary Shares, each		New York Stock Exchange
representing one ordinary share, par
value US$0.001 per share

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)

Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

39,888,092 ordinary shares, par value US$0.001 per share, as of December 31, 2009.

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

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yeso Noþ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filero		Accelerated filerþ		Non-accelerated filero

Indicate by check mark which basis of accounting the registrant has been to prepare the financial statements included in this filing:

U.S. GAAPþ

International Financial Reporting Standards as issued by the International Accounting Standards Boardo

Othero

If “other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17o

Item 18o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS.)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yeso Noo

Table of Contents


	Page

INTRODUCTION		1

Part I		2

Item 1. Identity of Directors, Senior Management and Advisers		2

Item 2. Offer Statistics and Expected Timetable		3

Item 3. Key Information		3

Item 4. Information on the Company		27

Item 4A. Unresolved Staff Comments		48

Item 5. Operating and Financial Review and Prospects		48

Item 6. Directors, Senior Management and Employees		71

Item 7. Major Shareholders and Related Party Transactions		81

Item 8. Financial Information		82

Item 9. The Offer and Listing		83

Item 10. Additional Information		84

Item 11. Quantitative and Qualitative Disclosures about Market Risk		92

Item 12. Description of Securities other than Equity Securities		93

Part II		95

Item 13. Defaults, Dividend Arrearages and Delinquencies		95

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds		95

Item 15. Controls and Procedures		96

Item 16A. Audit Committee Financial Expert		98

Item 16B. Code of Ethics		98

Item 16C. Principal Accountant Fees and Services		98

Item 16D. Exemptions from the Listing Standards for Audit Committees		98

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers		99

Item 16F. Change in Registrant’s Certifying Accountant		99

Item 16G. Corporate Governance		100

Part III		100

Item 17. Financial Statements		100

Item 18. Financial Statements		100

Item 19. Exhibits		100

Exhibit 8.1
Exhibit 12.1
Exhibit 12.2
Exhibit 13.1
Exhibit 13.2
Exhibit 15.1
Exhibit 15.2
Exhibit 15.3

INTRODUCTION

In this annual report, except where the context otherwise requires and for purposes of this annual report only:

•

“attrition rate”, with respect to an information technology, or IT service company or its business unit during a specified period, refers to the ratio of the number of professionals that have left that company during the period, excluding employees employed for less than six months, to the number of full-time professionals that were on that company’s payroll at the ending date of the same period;

•

“China” or “PRC” refers to the People’s Republic of China, excluding, for purposes of this annual report only, Taiwan, Hong Kong and Macau;

•

“Greater China” refers to the People’s Republic of China, including, for purposes of this annual report only, Taiwan and Hong Kong;

•

“Huawei” refers to Huawei Technologies Co., Ltd. and certain of its affiliates;

•

“IBM” refers to International Business Machine China Company Limited, IBM Global Services (China) Company Limited and IBM Solution and Services (Shenzhen) Co., Ltd.;

•

“Microsoft” refers to Microsoft Corporation and Microsoft (China) Co., Ltd.;

•

“professionals”, with respect to an IT service company, refer to employees executing IT services for its clients;

•

“Sequoia” refers to Sequoia Capital China I, L.P. and Sequoia Capital Growth Fund III, L.P., each of which is a holder of our ordinary shares, and their affiliates;

•

“TIBCO” refers to TIBCO Software Inc.;

•

“US$,” “U.S. dollar” or “$” refers to the legal currency of the United States; and

•

“we,” “us,” “our company,” “our” and “VanceInfo” refer to VanceInfo Technologies Inc. (CHINESE CHARACTER)

, a Cayman Islands company, its predecessor, the IT services business of Beijing Wensi Chuangyi Software Technology Co., Ltd., its subsidiaries and its variable interest entity, Shanghai Megainfo Tech Co., Ltd., before its liquidation in January 2009.

Our financial statements are expressed in the U.S. dollar, which is our reporting and functional currency. However, a majority of the revenues and expenses of our consolidated operating subsidiaries and variable interest entity are denominated in Renminbi, or RMB, the legal currency of China. This annual report contains translations of certain Renminbi amounts into U.S. dollars at specified rates. With respect to amounts not recorded in our consolidated financial statements, all translations from Renminbi to U.S. dollars were made at the noon buying rate in the City of New York for cable transfers in Renminbi per U.S. dollar, as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise noted, all translations from Renminbi to U.S. dollars have been made at a rate of RMB6.8259 to US$1.00, the noon buying rate in effect as of December 31, 2009. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted to U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all. On April 23, 2010, the noon buying rate was RMB6.8270 to US$1.00.

This annual report on Form 20-F includes our audited consolidated statements of operations for the years ended December 31, 2007, 2008 and 2009, and consolidated balance sheet data as of December 31, 2008 and 2009.

We and certain selling shareholders of our company completed the initial public offering of 8,797,500 ADSs, each representing one ordinary share, par value US$0.001 per share, on December 17, 2007. In December 2007, we listed our ADSs on the New York Stock Exchange, or NYSE, under the symbol “VIT.”

FORWARD-LOOKING INFORMATION

This annual report on Form 20-F contains statements of a forward-looking nature. These statements relate to events involving 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. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as “may,” “will,” “expects,” “anticipates,” “future,” “intend,” “plan,” “believe,” “estimate,” “is/are likely to” or other and similar expressions. The accuracy of these statements may be impacted by a number of risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but are not limited to, the following:

•

our expansion plans;

•

our anticipated growth strategy;

•

our plans to recruit more employees;

•

our plans to invest in research and development to enhance our service lines;

•

our future business development, results of operations and financial condition;

•

expected changes in our net revenues and certain cost or expense items;

•

our ability to attract and retain clients; and

•

trends and competition in the offshore IT services industry.

These risks are not exhaustive. We operate in an emerging and evolving environment. New risk factors emerge from time to time and it is impossible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.

We would like to caution you not to place undue reliance on forward-looking statements and you should read these statements in conjunction with the risk factors disclosed in Item 3 of this annual report, “Key Information—Risk Factors.” We do not undertake any obligation to update or revise the forward-looking statements except as required under applicable law.

PART I

ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

ITEM 3. KEY INFORMATION

A.Selected Financial Data

The following table presents selected consolidated financial information for our company. You should read the following information in conjunction with Item 5, “Operating and Financial Review and Prospects” below.

The selected consolidated statement of operations data for the years ended December 31, 2007, 2008 and 2009 and the consolidated balance sheet data as of December 31, 2008 and 2009, reflecting the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810-10-65,Transition Related to FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51(“ASC 810-10-65”), have been derived from our audited consolidated financial statements, which are included in this annual report. The selected consolidated statement of operations data for the year ended December 31, 2005 and 2006, except for the impact of adoption of ASC Topic 810-10-65 which were reflected in this annual report, have been derived from our audited financial statements for 2005 and 2006, which are not included in this annual report. The selected consolidated balance sheet data as of December 31, 2005, 2006 and 2007, except for the impact of adoption of ASC Topic 810-10-65 which were reflected in this annual report, have been derived from our audited financial statements for 2005, 2006 and 2007, which are not included in this annual report. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. The historical results are not necessarily indicative of results to be expected in any future period.


	VanceInfo
	For the Year Ended December 31,
	2005			2006
	As adjusted⁽¹⁾			As adjusted⁽¹⁾			2007			2008			2009
	(in US$ thousands, except percentage, share, per share and per ADS data)
Consolidated Statement of Operations Data
Net revenues		15,481			29,051			62,714			102,663			148,066
Cost of revenues⁽²⁾		(9,125	)		(17,961	)		(38,544	)		(62,911	)		(92,171	)

Gross profit		6,356			11,090			24,170			39,752			55,895

Selling, general and administrative expenses⁽²⁾		(3,296	)		(6,821	)		(16,180	)		(25,905	)		(34,710	)

Change in fair value of contingent consideration liability arising from business acquisitions		—			—			—			—			(62	)
Other operating income		102			54			860			858			1,754

Income from operations		3,162			4,323			8,850			14,705			22,877
Net income		3,259			4,411			9,621			16,089			21,508
Net (income)/loss attributable to noncontrolling interest		(24	)		(35	)		(52	)		84			—
Deemed dividend on Series A convertible redeemable preferred shares — accretion of redemption premium		(462	)		(611	)		(632	)		—			—

Income attributable to VanceInfo Technologies Inc. shareholders		2,773			3,765			8,937			16,173			21,508

Income per ordinary share:
Basic		0.13			0.08			0.22			0.43			0.56
Diluted		0.13			0.07			0.19			0.40			0.52
Income per ADS:
Basic		0.13			0.08			0.22			0.43			0.56
Diluted		0.13			0.07			0.19			0.40			0.52
Weighted average ordinary shares used in calculating net income per ordinary share:
Basic		11,530,684			9,605,507			11,426,183			37,276,306			38,389,495
Diluted		11,530,684			10,205,449			13,446,087			40,695,982			41,576,217


	VanceInfo
	For the Year Ended December 31,
	2005			2006
	As adjusted⁽¹⁾			As adjusted⁽¹⁾			2007			2008			2009
	(in US$ thousands, except percentage, share, per share and per ADS data)

Other Consolidated Financial Data
Gross margin⁽³⁾		41.1	%		38.2	%		38.5	%		38.7	%		37.8	%
Operating margin⁽⁴⁾		20.4			14.9			14.1			14.3			15.5
Net margin⁽⁵⁾		21.1			15.2			15.3			15.7			14.5


(1)		We adopted ASC Topic 810-10-65 regarding accounting for noncontrolling interest in consolidated financial statements on January 1, 2009, retrospectively.

(2)		Includes share-based compensation expenses as follows:


	VanceInfo
	For the Year Ended December 31,
	2005			2006			2007			2008			2009
	(in US$ thousands)
Share-based compensation expenses included in:
Cost of revenues		—			(45	)		(111	)		(265	)		(313	)
Selling, general and administrative expenses		(67	)		(668	)		(885	)		(1,126	)		(1,252	)


(3)		Gross margin represents gross profit as a percentage of net revenues.

(4)		Operating margin represents income from operations as a percentage of net revenues.

(5)		Net margin represents net income as a percentage of net revenues.


	As of December 31,
	2005		2006		2007
	As adjusted⁽¹⁾		As adjusted⁽¹⁾		As adjusted⁽¹⁾		2008		2009
	(in US$ thousands)

Consolidated Balance Sheet Data:
Cash and cash equivalents		4,437		20,565		76,835		79,963		64,057
Term Deposits and Short-term Investments		—		—		1,371		1,466		22,122
Accounts receivable		5,774		11,815		24,708		36,827		60,524
Total assets		15,700		42,044		129,076		155,451		205,191
Total liabilities		2,171		5,583		18,068		23,948		42,629


	As of December 31,
	2005		2006		2007
	As adjusted⁽¹⁾		As adjusted⁽¹⁾		As adjusted⁽¹⁾		2008		2009
	(in US$ thousands)
Consolidated Balance Sheet Data:
Convertible redeemable preferred shares		7,226		31,648		—		—		—
Shareholders’ equity		6,303		4,813		110,008		131,503		162,562
Total liabilities, convertible redeemable preferred shares and shareholders’ equity		15,700		42,044		129,076		155,451		205,191


(1)		We adopted ASC Topic 810-10-65 regarding accounting for noncontrolling interest in consolidated financial statements on January 1, 2009, retrospectively.

B. Capitalization and Indebtedness

Not Applicable.

C. Reasons for the Offer and Use of Proceeds

Not Applicable.

D. Risk Factors

Risks Related to Our Company and Industry

Because our business depends significantly on clients headquartered in Greater China, the United States, Europe and Japan, any economic slowdown in these regions or other factors that affect IT offshore outsourcing from the United States, Europe or Japan could have a material adverse effect on our business and operating results.

As of December 31, 2009, substantially all of our net revenues were derived from clients headquartered in Greater China, the United States, Europe and Japan. These economies continue to be impacted by the recent global economic downturn, which have had some adverse effects on our business and results of operations in 2009, including increased pricing pressures from some of our clients and some delays in obtaining new projects from existing clients. If the impact of the global economic downturn continues or there are other adverse changes to the macro-economic conditions of our or our key clients’ key markets, our clients may cancel, reduce or defer their IT spending or change their IT outsourcing strategy, and our utilization and billing rates for our professionals could decline, which could have a material adverse effect on our business and operating results.

Furthermore, IT offshore outsourcing is becoming an increasingly politically sensitive issue in the United States, Europe and Japan. For example, many organizations and public figures in the United States and Europe have publicly expressed concern about a perceived association between offshore outsourcing providers and the loss of jobs in their home countries. As a result, current or prospective clients may elect to perform such services themselves or may be discouraged from transferring these services from onshore to offshore providers. Any slowdown or reversal of existing industry trends towards offshore outsourcing in response to political pressure would harm our ability to compete effectively with competitors that operate out of onshore facilities and adversely affect our business and financial results.

We depend on a limited number of clients for a significant portion of our revenues and any loss of business from these clients could reduce our revenues and significantly harm our business.

We have derived, and believe that in the foreseeable future we will continue to derive, a significant portion of our revenues from a limited number of clients. In 2007, each of Microsoft and IBM accounted for 10% or more of our net revenues, and in the aggregate accounted for 34.6% of our net revenues. In 2008, each of Microsoft, IBM and Huawei accounted for 10% or more of our net revenues, and in the aggregate accounted for 38.8% of our net revenues. In 2009, each of Huawei, Microsoft and a European mobile handset manufacturer accounted for 10% or more of our net revenues, and in the aggregate accounted for 47.0% of our net revenues. Our top five clients accounted for approximately 53.7%, 53.8% and 56.3% of our net revenues in 2007, 2008 and 2009, respectively. Our ability to maintain close relationships with these clients is essential to the growth and profitability of our business. A number of factors other than our performance could cause the loss of or reduction in business or revenue from a client and these factors are not predictable.

For example, a client may demand price reductions, change its outsourcing strategy, switch to another IT outsourcing service provider or return work in-house. We generally do not have long-term commitments from any of our clients to purchase our services. Although we usually enter into master service agreements, or MSAs, with clients, these MSAs are not commitments to purchase our services, and statements of work, or SOWs, from clients are required for specific orders to purchase our services. In addition, the MSAs and SOWs typically may be terminated by our clients on short notice. If we fail to enter into or renew MSAs with one or more of our major clients in any particular period, if major clients reduce their service volumes under SOWs, or if any existing MSAs or SOWs with major clients are terminated, some or all of the business of our major clients could be lost or reduced, which could have a material adverse effect on our business, results of operations and financial condition.

Our revenues are highly dependent on a limited number of industries and any decrease in demand for outsourced services in these industries could reduce our revenues and adversely affect our results of operations.

For the years ended December 31, 2007, 2008 and 2009, a majority of our net revenues were derived from clients in the technology and telecommunications industries. Our business growth largely depends on continued demand for our services from clients in these industries and other industries that we may target in the future, as well as on trends in these industries to outsource research and development services, or R&D services, enterprise solutions, application development and maintenance, or ADM, quality assurance and testing, globalization and localization and other IT services. A downturn in any of our targeted industries, particularly the technology and telecommunications industries, a slowdown or reversal of the trend to outsource IT services in any of these industries or the introduction of regulations which restrict or discourage companies from outsourcing could result in a decrease in the demand for our services and adversely affect our results of operations.

Other developments may also lead to a decline in the demand for our services in these industries. For example, consolidation in any of these industries or acquisitions, particularly involving our clients, may decrease the potential number of buyers of our services.

Any significant reduction in or the elimination of the use of the services we provide within any of these industries would result in reduced revenues and harm our business. Our clients may experience rapid changes in their prospects, substantial price competition and pressure on their profitability. This, in turn, may result in increasing pressure on us from clients in these key industries to lower our prices, which could negatively affect our business, results of operations and financial condition.

We face intense competition from onshore and offshore IT outsourcing companies and, if we are unable to compete effectively, we may lose clients and our revenues may decline. Our clients may also choose to use internal resources to provide the IT services they need, thereby causing us to lose revenues.

The market for IT services is highly competitive and we expect competition to increase due to a number of factors. We believe that the principal competitive factors in our markets are industry experience, quality of the services offered, reputation, marketing and selling skills, as well as price. We face significant competition from various competitors, including:

•

other Chinese IT services companies, such as, Chinasoft International Ltd., or Chinasoft International, HiSoft Technology International Limited, or Hisoft, Neusoft Group Ltd., or Neusoft, and SinoCom Software Group Limited, or SinoCom, iSoftStone Information Technology (Group) Co., Ltd, or iSoftStone;

•

Indian IT services companies, such as Cognizant Technology Solutions Corp., or Cognizant, HCL Technologies Ltd., or HCL, Infosys Technologies Ltd., or Infosys, Tata Consultancy Services Ltd., or TCS, and Wipro Technologies, or Wipro;

•

in-house IT departments of large corporations; and

•

offshore IT service providers in emerging outsourcing destinations with low wage costs such as Southeast Asia, Latin America and Eastern Europe.

In addition, the trend towards offshore outsourcing, international expansion by foreign and domestic competitors and continuing technological changes will result in new and different competitors entering our markets. These competitors may include entrants from the communications, software and data networking industries or entrants in geographic locations with lower costs than those in which we operate. Some of these existing and future competitors have greater financial, human and other resources, longer operating histories, greater technological expertise, more recognizable brand names and more established relationships in the industries that we currently serve or may serve in the future. In addition, some of our competitors may enter into strategic or commercial relationships among themselves or with larger, more established companies in order to increase their ability to address client needs, or enter into similar arrangements with potential clients. Clients tend to engage multiple IT services outsourcing providers instead of using an exclusive service provider, which could reduce our revenues to the extent that clients obtain services from other providers. Clients may prefer service providers that have facilities located globally or that are based in countries more cost-competitive than China.

Therefore, we cannot assure you that we will be able to retain our clients while competing against such competitors. Increased competition, our inability to compete successfully against competitors, pricing pressures or loss of market share could harm our business, financial condition and results of operations.

We do not have long-term commitments from our clients, and our clients may terminate contracts before completion or choose not to renew contracts, which could adversely affect our business and reduce our revenues.

Our clients are not obligated for any long-term commitments to us. Many of our MSAs are either renewable for one-year period or have no fixed terms, and our SOWs are typically project-based and are generally valid for not more than one year. In addition, our clients can terminate many of our MSAs and SOWs with or without cause, and in most cases without any cancellation charge. Some of our MSAs specify that if a change of control of our company occurs during the term of the contract, the client has the right to terminate the contract. If any future event triggers any change-of-control provision in our client contracts, these contracts may be terminated, which would result in our loss of revenues. Most of the MSAs we have entered into with our clients

require us to purchase and maintain specified insurance coverage during the terms of the MSAs, including commercial general insurance or public liability insurance, umbrella insurance, product liability insurance, and workmen’s compensation insurance. As the insurance industry in China is still in an early stage of development, a number of these types of insurance are not available on reasonable terms in China. We have purchased general commercial liability insurance for our facilities in China for the period from October 13, 2009 to October 13, 2010, and we have also purchased information and network technology errors or omissions liability insurance for our facilities in China for the period from October 13, 2009 to October 13, 2010, but we still do not satisfy the contractual requirement of certain of our key clients. Although to date no client has brought any claims against us for such failure, our clients have the right to terminate these MSAs.

Failure to perform or observe any contractual obligations could result in cancellation or non-renewal of a contract, which could cause us to experience a higher than expected number of unassigned employees and an increase in our cost of revenue as a percentage of revenue, until we are able to reduce or reallocate our headcount. The ability of our clients to terminate MSAs makes our future revenues uncertain. We may not be able to replace any client that elects to terminate or not renew its contract with us, which would adversely affect our business and revenues.

Furthermore, in some of our MSAs, our clients are also entitled to request us to transfer, to them or their designees, the assets of our offshore development centers in China, or CDCs, that serve them and all of the operating relationships, including leases for the premises of the CDCs, employment relationships with the employees dedicated to the CDCs and contracts with subcontractors, at a pre-agreed transfer price which is generally a multiple of our monthly service fees from the relevant client for CDC services prior to the transfer. This transfer fee will either be reduced ratably based on the elapsed operation term of the CDC or subject to a maximum amount. In addition to the above amounts, the relevant client is also required to pay the lower of fair market value or net book value for the assets to be transferred that have not already been charged to the client. If our clients exercise these rights, we may lose some of our business and key employees, or may be required to transfer our assets and employees to a third party, and our losses may not be fully covered by the contractual payment.

Our quarterly operating results are difficult to predict and could fall below investor expectations or estimates by securities research analysts, which may cause the trading price of our ADSs to decline.

Our revenues and operating results can vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control, such as variations in the volume of business from clients resulting from changes in our clients’ operations, the business decisions of our clients regarding the use of our services, delays or difficulties in expanding our operational facilities and infrastructure, changes to our pricing structure or that of our competitors, inaccurate estimates of resources and time required to complete ongoing projects and currency fluctuations. For example, some of our MSAs permit our clients to reduce or modify the volume of services under any SOW at any time. As many of our employees take long vacations during the Chinese New Year in the first quarter, our revenues in that quarter are relatively low compared to the other quarters. Moreover, our results may vary depending on our clients’ business needs and IT spending patterns. Due to the annual budget cycles of most of our clients, we may not be able to estimate accurately the demand for our services beyond the immediate calendar year, which could adversely affect our business planning and may have a material adverse effect on our business, results of operations and financial condition. In addition, the volume of work performed for specific clients is likely to vary from year to year, particularly since we typically are not the exclusive outside service provider to our clients. Thus, a major client in one year may not provide the same amount or percentage of our revenues in any subsequent year.

The long sales cycle for our services, which typically ranges from three to twelve months, and the internal budget and approval processes of our prospective clients make it difficult to predict the timing of new client engagements. Accordingly, the financial benefit of gaining a new client may be delayed due to delays in the implementation of our services. In addition, some of our testing projects and ADM projects last several months. Due to the foregoing and other factors, our operating results have fluctuated significantly from quarter to quarter.

These fluctuations are likely to continue in the future and operating results for any period may not be indicative of our performance in any future period. If our operating results for any quarterly period fall below investor expectations or estimates by securities research analysts, the trading price of our ADSs may decline.

We may face difficulties in offering new and existing service lines and managing increasingly large and complex projects, which could lead to clients discontinuing their work with us, thereby reducing our revenues and adversely affecting our ability to implement our growth plans.

We have been expanding the scope of our services by offering additional industry practices and service lines. The success of these new and expanded practices and service lines is dependent, in part, upon demand for such services by our existing and new clients and our ability to meet this demand in a cost-competitive and effective manner. We cannot be certain that we will be able to attract existing and new clients for such new services or effectively meet our clients’ needs.

We intend for the expansion of our practices and service lines to result in larger and more complex projects for our clients. To achieve this result, we need to establish closer relationships with our clients and develop a thorough understanding of their operations. Our ability to establish such relationships will depend on the proficiency of our management personnel, professionals and, if necessary, subcontractors, as well as other competitive factors such as our performance and delivery capabilities. Larger and more 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 make it difficult to plan for project resource requirements, and failure to plan appropriately may have a negative impact on our business, results of operations and financial condition.

We may be unable to effectively manage our rapid growth, which could place significant strain on our management personnel, systems and resources. We may not be able to achieve anticipated growth, which could materially and adversely affect our business and prospects.

We have experienced rapid growth and significantly expanded our business recently. Our net revenues grew to 148.1 million in 2009 from US$15.5 million in 2005. Since 2005, we have completed a number of acquisitions and established or acquired a number of offices in Greater China, the United States, Europea, Japan and Malaysia. We have also set up a number of CDCs. As of December 31, 2009, we had 7,542 professionals, as compared to 1,015 professionals as of December 31, 2005. We are actively looking at additional locations to establish new offices and expand our current offices and CDCs. We intend to continue expansion in the foreseeable future to pursue existing and potential market opportunities.

This rapid growth places significant strain on our management personnel, systems and resources. To accommodate our growth, we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting, human resources and other internal management systems, all of which require substantial management efforts. We also will need to continue to expand, train, manage and motivate our workforce and manage our client relationships. Moreover, as we introduce new services or enter into new markets, we may face new market, technological and operational risks and challenges with which we are unfamiliar. All of these endeavors will involve risks and require substantial management effort and skill. As a result of any of these problems associated with expansion, our business, results of operations and financial condition could be materially and adversely affected. Furthermore, we may not be able to achieve anticipated growth, which could materially and adversely affect our business and prospects.

If we fail to integrate acquired companies efficiently, or if the acquired companies do not perform to our expectations, we may not be able to realize the benefits envisioned for such acquisitions, and our overall profitability and growth plans may be adversely affected.

Historically, we have expanded our service capabilities and gained new clients through selective acquisitions such as our acquisitions of Shanghai VanceInfo Technologies Limited, or Shanghai VanceInfo, Beijing Chosen Technology Co., Ltd., or Chosen, Wireless Info Tech, Ltd., or WIT, TP Teleservices Limited, TP Consultants Limited, TP (Taiwan) Limited, TP (Hong Kong) Limited, or TP Hong Kong, and TP Software Technology (Shanghai) Co., Ltd., or TP Shanghai (together with TP Teleservices Limited, TP Consultants Limited, TP (Taiwan) Limited and TP Hong Kong, the “TP Companies”), in the past several years. Our growth strategy involves gaining new clients and expanding our service lines, both organically and through strategic acquisitions. Our ability to successfully integrate an acquired entity and its operations may be adversely affected by a number of factors. These factors include:

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diversion of management’s attention;

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difficulties in retaining clients of acquired companies;

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difficulties in retaining personnel of acquired companies;

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entry into unfamiliar markets;

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unanticipated problems or legal liabilities; and

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tax and accounting issues.

Furthermore, the acquired companies may not perform to our expectations for various reasons, including legislative or regulatory changes that affect the products or services in which a company specializes, and the loss of key clients and personnel, any of which could have a material adverse effect on our business and results of operations. If we are not able to realize the benefits envisioned for such acquisitions, our overall profitability and growth plans may be adversely affected.

We expect that a portion of our income may in the future be generated on a project basis with a fixed price; we may fail to accurately estimate costs and determine resource requirements in relation to our projects, which would reduce our margins and profitability.

We expect that a portion of our income may continue to be generated from fees we receive for our projects with a fixed price. Our projects often involve complex technologies and must often be completed within compressed timeframes and meet increasingly sophisticated client requirements. We may be unable to accurately assess the time and resources required for completing projects and to price our projects profitably. An underestimation of required time and resources may result in cost overruns and mismatches in project staffing. Conversely, an overestimation of our costs may result in our submitting uncompetitive bids and loss of business. Furthermore, any failure to complete a project within the stipulated timeframe could also expose us to contractual or other liabilities and may damage our reputation. These and other factors could adversely affect our business, results of operations and financial condition.

Due to intense competition for highly skilled personnel, we may fail to attract and retain enough sufficiently trained employees to support our operations; our ability to bid for and obtain new projects may be negatively affected and our revenues could decline as a result.

The IT services industry relies on skilled employees, and our success depends to a significant extent on our ability to attract, hire, train and retain qualified employees. The IT services industry experiences high employee turnover. We may encounter higher attrition rates in the future. There is significant competition in China for professionals with the skills necessary to perform the services we offer to our clients. Increased competition for these professionals, in the IT services industry or otherwise, could have an adverse effect on us. A significant increase in the attrition rate among employees with specialized skills could decrease our operating efficiency and productivity and could lead to a decline in demand for our services.

In addition, our ability to maintain and renew existing engagements and obtain new business will depend, in large part, on our ability to attract, train and retain skilled personnel that enable us to keep pace with growing demands for outsourcing, evolving industry standards and changing client preferences. Our failure to attract, train and retain personnel with the qualifications necessary to fulfill the needs of our existing and future clients or to assimilate new employees successfully could have a material adverse effect on our business, financial condition and results of operations. Our failure to retain our key personnel on client projects or find suitable replacements of the key personnel upon their departure may lead to termination of some of our MSAs or cancellation of some of our SOWs, which could materially adversely affect our business.

Increases in wages for professionals could prevent us from sustaining our competitive advantage and could reduce our profit margins.

Wage costs for professionals in China are lower than comparable wage costs in more developed countries and India. However, the wage costs in China’s IT services industry may increase at a faster rate than in the past. In the long term, wage increases may make us less competitive unless we are able to increase the efficiency and productivity of our professionals as well as the prices we can charge for our services. Increases in wage costs, may reduce our profit margins. In addition, the issuance of equity-based compensation to our professionals would also result in additional dilution to our shareholders.

Our business depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lose their services.

Our future success heavily depends upon the continued services of our senior executives and other key employees. In particular, we rely on the expertise and experience of Chris Shuning Chen, our founder, chairman and chief executive officer. In addition, we rely on David Lifeng Chen, our director and president, Sidney Xuande Huang, our chief operating officer and chief financial officer, Stanley Ying Zhou, our chief administrative officer, and our four executive vice presidents, Junbo Liu, Gerry Jianxin Lu, Jeff Jian Wu and Kevin Zhong Liu, to run our business operations. If one or more of our senior executives or key employees are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all. We may incur additional expenses to recruit, train and retain personnel, our business may be severely disrupted, and our financial condition and results of operations may be materially adversely affected.

If any of our senior executives or key employees joins a competitor or forms a competing company, we may lose clients, suppliers, know-how and key professionals and staff members to them. Also, if any of our business development managers who keeps a close relationship with our clients joins a competitor or forms a competing company, we may lose clients, and our revenues may be materially adversely affected. Each of our senior executives has entered into employment agreements with us that contain non-competition provisions. However, if any dispute arises between our executive officers and us, such non-competition provisions may not be enforceable, especially in China, where most of these executive officers and key employees reside, in light of the uncertainties with China’s legal system. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

The growth and success of our business depends on our ability to anticipate and respond in a timely manner to the evolving demands for IT services.

The IT services market is characterized by rapid technological change, evolving industry standards, changing customer preferences and new product and service introductions. Our future growth and success depend significantly on our ability to anticipate developments in IT services, and offer and develop new product and service lines to meet our clients’ evolving needs. We may not be successful in anticipating or responding to these developments in a timely manner, or if we do respond, the services or technologies we develop may not be successful in the marketplace. Further, products, services or technologies that are developed by our competitors may render our services non-competitive or obsolete.

Moreover, the emergence of new national and international industry standards could render our products or those of our clients unmarketable or obsolete and may require us to incur substantial unanticipated costs to comply with any such new standards. Should we fail to adapt to the rapidly changing IT services market or if we fail to develop suitable services to meet the evolving and increasingly sophisticated requirements of our clients in a timely manner, our business and operating results could be materially and adversely affected.

Some of our client contracts contain provisions which, if triggered, could result in lower future revenues and have an adverse effect on our results of operations.

Some of our MSAs provide that, if during the term of such MSAs, we offer or accept lower prices for our services that are similar to those we provide under these MSAs, to or from any other clients while all other terms and conditions are similar, we will be obligated to offer equally favorable prices to the clients under these MSAs. Such provisions, if triggered, would result in lower future revenues and profits to us under these MSAs. Certain other contracts of ours allow clients in certain circumstances to request a semi-annual benchmarking report comparing our direct costs and operating costs, measured as a percentage of revenues, with those of an agreed list 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 to future services we provide or there may be reduction in new business from the clients. The triggering of any of these contractual provisions could have an adverse effect on our business, results of operations and financial condition.

Our ability to expand our business and procure new contracts or enter into beneficial business arrangements may be affected by non-competition clauses in our agreements with existing clients.

Certain of our existing MSAs and other agreements have non-competition clauses, which restrict us from providing services to customers of our existing clients. Many of our MSAs contain clauses that restrict our employees working for a particular client from providing services to a competitor of that client. Such clauses may restrict our ability to offer services to different clients in a specific industry or market.

Our MSAs with some of our clients provide that, during the term of the MSA and for a twelve-month period thereafter and under specified circumstances, we may not accept any assignments from, or render similar services to, those clients’ customers. Some of our contracts also provide that, although we are free to render other services to clients’ customers prior to the receipt of SOWs from our clients, such services may not create any conflicts of interest with the services we provide to those clients, and we must obtain our clients’ prior written consent to continue providing services to their customers before we begin rendering similar services to our clients.

Moreover, we may not compete with our clients, or bid for or accept any assignment which our client is bidding for or is negotiating. These restrictions may hamper our ability to compete for and provide services to other clients in a specific industry or market in which we have expertise and may adversely affect our revenues and future profitability.

If we cause disruptions to our clients’ businesses or provide inadequate service, our clients may have claims for substantial damages against us, and as a result our profits may be substantially reduced.

Most of our contracts with clients contain performance requirements. Failure to consistently meet service requirements of a client or errors made by our professionals in the course of delivering services to our clients could disrupt the client’s business and result in a reduction in revenues or a claim for substantial damages against us. In addition, a failure or inability to meet a contractual requirement could seriously damage our reputation and affect our ability to attract new business.

The services we provide are often critical to our clients’ businesses, and any failure to provide those services could result in a reduction in revenues or a claim for substantial damages against us, regardless of whether we are responsible for that failure. Our CDC methodology requires us to maintain active data and voice communications between our main development centers in China and our international clients’ offices. Any significant failure of our equipment or systems, or any major disruption to basic infrastructure like power and telecommunications in the locations in which we operate, could impede our ability to provide services to our clients, have a negative impact on our reputation, cause us to lose clients, reduce our revenues and harm our business.

Under our contracts with our clients, our liability for breach of our obligations is generally limited to actual damages suffered by the client. To the extent that our contracts contain limitations on liability, such limitations may be unenforceable or otherwise may not protect us from liability for damages. In addition, certain liabilities, such as claims of third parties for which we may be required to indemnify our clients, are generally not limited under our contracts. Although we have purchased general commercial liability insurance for our facilities in China for the period from October 13, 2009 to October 13, 2010, and we have also purchased information and network technology errors or omissions liability insurance for our facilities in China for the period from October 13, 2009 to October 13, 2010, the successful assertion of one or more large claims against us could still have a material adverse effect on our business, reputation, results of operations, financial condition and cash flows.

We may be liable to our clients for damages caused by unauthorized disclosure of sensitive and confidential information, whether through our employees or otherwise.

We are typically required to manage, utilize and store sensitive or confidential client data in connection with the services we provide. Under the terms of our client contracts, we are required to keep such information strictly confidential. We seek to implement specific measures to protect sensitive and confidential client data. We require our employees and subcontractors to enter into non-disclosure arrangements to limit access to and distribution of our clients’ sensitive and confidential information as well as our own trade secrets. We can give no assurance that the steps taken by us in this regard will be adequate to protect our clients’ confidential information. If our clients’ proprietary rights are misappropriated by our employees or our subcontractors or their employees, in violation of any applicable confidentiality agreements or otherwise, our clients may consider us liable for that act and seek damages and compensation from us. However, we currently do not have any insurance coverage for mismanagement or misappropriation of such information by our subcontractors or employees. Any litigation with respect to unauthorized disclosure of sensitive and confidential information might result in substantial costs and diversion of resources and management attention.

We may not be able to prevent others from unauthorized use of intellectual property of our clients, which could harm our business and competitive position.

We rely on software licenses from our clients with respect to certain individual projects. To protect proprietary information and other intellectual property of our clients, we require our employees to enter into confidentiality agreements with us. These agreements may not provide meaningful protection for trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. Implementation of intellectual property-related laws in China has historically been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, protection of intellectual property rights and confidentiality in China may not be as effective as that in the United States or other developed countries. Policing unauthorized use of proprietary technology is difficult and expensive. The steps we have taken may be inadequate to prevent the misappropriation of proprietary technology of our clients. Reverse engineering, unauthorized copying or other misappropriation of proprietary technologies of our clients could enable third parties to benefit from our or our clients’ technologies without paying us for doing so, and our clients may hold us liable for that act and seek damages and compensation from us, which could harm our business and competitive position.

We may face intellectual property infringement claims that could be time-consuming and costly to defend. If we fail to defend ourselves against such claims, we may lose significant intellectual property rights and may be unable to continue providing our existing services.

It is critical that we use and develop our technology and services without infringing the intellectual property rights of third parties, including patents, copyrights, trade secrets and trademarks. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our business. A successful infringement claim against us, whether with or without merit, could, among others things, require us to pay substantial damages, develop non-infringing technology, or re-brand our name or enter into royalty or license agreements that may not be available on acceptable terms, if at all, and cease

making, licensing or using products that have infringed a third party’s intellectual property rights. Protracted litigation could also result in existing or potential clients deferring or limiting their purchase or use of our products until resolution of such litigation, or could require us to indemnify our clients against infringement claims in certain instances. Also, we may be unaware of intellectual property registrations or applications relating to our services that may give rise to potential 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. Any intellectual property litigation could have a material adverse effect on our business, results of operations or financial condition.

We may be unsuccessful in identifying and acquiring suitable acquisition candidates, which could impede our growth and negatively affect our revenues and net income.

We expect a portion of our future growth to come from acquisitions of high-quality IT services companies. It is possible that in the future we may not succeed in identifying suitable acquisition candidates. Even if we identify suitable candidates, we may not be able to consummate an acquisition on terms commercially acceptable to us. Many of our competitors are likely to be seeking to acquire the same targets that we are looking to acquire. Such competitors may have substantially greater financial resources than we do and may be able to outbid us for the targets. If we are unable to complete suitable acquisitions, our growth strategy may be impeded and our revenues and net income could be negatively affected.

We may face certain risk with respect to our proposed purchase of land use right.

In November 2009, we entered into agreements with a Beijing-based developer regarding our proposed acquisition of the use right to two parcels of land with 37,492 square meters of permitted floor space in Zhongguancun Software Park, Haidian District, Beijing. Under the agreements, we will pay approximately RMB119.3 million (or US$17.5 million) relating to the land use right, and we have deposited RMB6.0 million (or US$0.9 million) as of March 31, 2010. Currently, the necessary governmental permits are being applied for and we will need to pay additional amounts to the government before we are granted the land use right certificates. Given this initial application stage, there is significant uncertainty regarding whether or when these governmental permits will be obtained. If we fail to timely acquire the land use right, we may not be able to timely build our office premises on these parcels of land as planned and our expansion plan may be affected. Furthermore, the developer’s breach of the agreements may expose us to the developer’s credit risk, and we may not be able to recover our advance payment and may suffer loss should the developer fail to fulfill its obligation under the agreements. In addition, we plan to move our headquarters and research and development center to the new office premises built on these parcels of land in the future. Due to the concentration of our operations, any future problem in our facilities such as loss of power or earthquake may limit our ability to conduct our business.

If we fail to maintain an effective system of internal control over financial reporting, we may lose investor confidence in the reliability of our financial statements, which could adversely affect the market price of our ADSs.

We are subject to the reporting obligations under the U.S. securities laws following our initial public offering in December 2007. The Securities and Exchange Commission, or the SEC, as required under Section 404 of the Sarbanes-Oxley Act, has adopted rules requiring every public company to include a report of management on the effectiveness of such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, an independent registered public accounting firm must issue an attestation report on the effectiveness of the company’s internal control over financial reporting. These requirements apply to this annual report on Form 20-F for the fiscal year ending December 31, 2009.

Our management has concluded that our internal control over financial reporting was effective as of December 31, 2009. Our independent registered public accounting firm has issued an audit report, which has concluded that we maintained, in all material aspects, effective internal control over financial reporting as of December 31, 2009. See “Item 15. Controls and Procedures.” However, if we fail to maintain effective internal control over financial reporting in the future, our management and our independent registered public accounting firm may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. This could negatively affect the reliability of our financial information and result in the loss of investors’ confidence in our reported financial information, which in turn could negatively impact the trading price of our ADSs. Furthermore, we have incurred and anticipate that we will continue to incur considerable costs, management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

Failure to adhere to the regulations that govern our business could result in our being unable to effectively perform our services. Failure to adhere to regulations that govern our clients’ businesses could result in breaches of contracts with our clients.

Our clients’ business operations are subject to certain rules and regulations in China or otherwise. Our clients may contractually require that we perform our services in a manner that would enable them to comply with such rules and regulations. Some of our contracts concluded with clients headquartered in the United States and elsewhere provide that we shall comply with the United States export regulations while handling any information, process, product or service and that we shall adhere to regulations that apply to our clients’ businesses. Some of our IT services provided to certain banking clients for their Japanese operations are required to comply with the regulations promulgated by Japanese regulators. Failure to perform our services in such a manner could result in breaches of contract with our clients and, in some limited circumstances, civil fines and criminal penalties for us. In addition, we are required under various Chinese laws to obtain and maintain permits and licenses for the conduct of our business. If we do not maintain our licenses or other qualifications to provide our services, we may not be able to provide services to existing clients or be able to attract new clients and could lose revenues, which could have a material adverse effect on our business and results of operations.

The financial soundness of our clients and vendors could affect our business and results of operations.

As a result of the disruptions in the financial markets and other macro-economic challenges currently affecting the economy of the United States and other parts of the world, our clients, subcontractors, suppliers and other vendors may experience cash flow concerns. As a result, clients may modify, delay or cancel plans to purchase our services and vendors may reduce their output, change terms of sales, or stop providing goods or services to us. Additionally, if clients’ or vendors’ operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, clients may not be able to pay, or may delay payment of, accounts receivable owed to us and vendors may restrict credit or impose different payment terms, or stop providing goods or services to us. Any inability of current or potential clients to pay us for our services or any demands by vendors for different payment terms may adversely affect our earnings and cash flow. Furthermore, if one or more of our vendors stops providing goods or services to us, or interrupts its provision of goods or services to us, our business could be disrupted and we may incur higher costs.

We may incur losses resulting from business interruptions resulting from occurrence of natural disasters, health epidemics and other outbreaks or events, and we have limited insurance coverage.

Our CDCs and other operational facilities may be damaged in natural disasters such as earthquakes, floods, heavy rains, sand storms, tsunamis and cyclones, or other events such as fires. Such natural disasters or other events may lead to disruption of information systems and telephone service for sustained periods. Damage or destruction that interrupts our provision of outsourcing services could damage our relationships with our clients and may cause us to incur substantial additional expenses to repair or replace damaged equipment or facilities.

We may also be liable to our clients for disruption in service resulting from such damage or destruction. We have purchased general commercial liability insurance for our facilities in China for the period from October 13, 2009 to October 13, 2010, and we have also purchased information and network technology errors or omissions liability insurance for our facilities in China for the period from October 13, 2009 to October 13, 2010, but our insurance coverage may not be sufficient. Prolonged disruption of our services as a result of natural disasters or other events would also entitle our clients to terminate their contracts with us.

Our business could be adversely affected by the effects of H1N1, or swine flu, avian flu, severe acute respiratory syndrome, or SARS, or another epidemic or outbreak. From 2005 to early 2010, there have been reports of avian flu in various parts of China and elsewhere in Asia, including a few confirmed human cases and deaths. In 2009 and early 2010, there were outbreaks of swine flu in certain regions of the world, including China. Any prolonged occurrence of swine flu, avian flu, SARS or other adverse public health developments in China may have a material adverse effect on our business operations. Our operations may be impacted by a number of health-related factors, including, among other things, quarantines or closures of our facilities which could severely disrupt our operations, the sickness or death of our key officers and employees, and a general slowdown in the Chinese economy. Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our business and results of operations. We have not adopted any written preventive measures or contingency plans to combat any future outbreak of swine flu, avian flu, SARS or any other epidemic.

Fluctuations in exchange rates could adversely affect our business.

The value of the Renminbi against the U.S. dollar, Euro and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy caused the Renminbi to appreciate approximately 21.5% against the U.S. dollar over the following three years. Since reaching a high against the U.S. dollar in July 2008, however, the Renminbi has traded within a narrow band against the U.S. dollar, remaining within 1% of its July 2008 high. As a consequence, the Renminbi has fluctuated sharply since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. For example, the Renminbi depreciated approximately 9% against the Japanese Yen, or JPY, between July 2008 and November 2008. During the same period, the Renminbi appreciated approximately 27% against the Euro. It is difficult to predict how long the current situation may last and when and how it may change again.

As a majority of our costs and expenses are denominated in Renminbi, a resumption of the appreciation of the Renminbi against the U.S. dollar would further increase our costs in U.S. dollar terms. In addition, as our operating subsidiaries in China receive revenues primarily in Renminbi, any significant depreciation of the Renminbi against the U.S. dollar may have a material adverse effect on our revenues in U.S. dollar terms and financial condition, and the value of, and any dividends payable on, our ordinary shares. For example, to the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. We also receive a portion of our revenues in Japanese Yen and Euro. Any significant depreciation of the Japanese Yen or Euro against the Renminbi or U.S. dollar would adversely affect our revenues in Renminbi or U.S. dollar terms, respectively.

We incurred net foreign exchange losses of US$32,000, US$93,000 and US$119,000 in 2005, 2006 and 2009, respectively. As very limited types of hedging transactions are available in the PRC to reduce our exposure to exchange rate fluctuations, we have not entered into any such hedging transactions, except for a forward exchange contract to purchase US$5 million for JPY448.75 million in October 2010. Accordingly, we still cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign exchange losses in the future. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currencies. See “—Risks Related to Doing Business in China—Restrictions on currency exchange may limit our ability to receive and use our revenues or financing effectively.”

If tax benefits currently available to our subsidiaries are reduced or repealed, our business and results of operations could suffer.

Prior to January 1, 2008, companies established in China were generally subject to a state and local enterprise income tax, or EIT, at statutory rates of 30% and 3% respectively. Under the applicable PRC rules and policies, an enterprise qualified as a “high and new technology enterprise” located in the Beijing New Industry Development Pilot Zone was entitled to a preferential EIT rate of 15% and was further entitled to a three-year EIT exemption from either its first year of operation or, if it was incorporated in the second half of a calendar year, its second year of operation if so selected, and a 50% reduction of its applicable EIT rate for the succeeding three years. VanceInfo Creative Software Technology Ltd., or VanceInfo Beijing, Beijing Prosoft Software Technology Co., Ltd., or Prosoft, which was liquidated in December 2008, and Beijing Innovation Technology Co., Ltd., or ITC, which was sold in February 2008, were qualified as “high and new technology enterprises” located in the Beijing New Industry Development Pilot Zone, and enjoyed preferential tax treatment as a result of this status. VanceInfo Beijing was incorporated in the second half of 2004, and elected to be exempted from EIT from 2005 to 2007 and be subject to a 7.5% EIT rate from 2008 to 2010. Prosoft and ITC were incorporated in June 2004, and had been entitled to be exempted from EIT from 2004 to 2006 and be subject to a 7.5% EIT rate from 2007 to 2009. In addition, under the PRC rules and policies then effective, an enterprise qualified as a “software enterprise” was entitled to an exemption from EIT for the first two profitable years and a 50% reduction of its applicable EIT rate for the subsequent three years. Shanghai VanceInfo, one of our subsidiaries, was incorporated in 2002 and was recognized as a “software enterprise” in 2003, therefore, it was entitled to be exempted from EIT in 2003 and 2004, and was subject to a 16.5% EIT rate from 2005 to 2007. Furthermore, Shanghai VanceInfo was recognized as a “key software enterprise under the State plan” in 2007, which entitled it to a 10% preferential income tax rate in 2007. Chosen was incorporated in 2006 and was subject to a 33% EIT prior to January 1, 2008.

On March 16, 2007, the National People’s Congress of China enacted a new EIT Law, which took effect beginning January 1, 2008. On December 6, 2007, the State Council also adopted the Implementing Rules for the Enterprise Income Tax Law, or the Implementing Rules, which also took effect beginning January 1, 2008. Moreover, on December 26, 2007, the State Council circulated the Notice on Implementation of the Transitional Preferential Policies in respect of Enterprise Income Tax, which took effect beginning December 26, 2007. On February 22, 2008, the Ministry of Finance and the State Administration of Taxation issued the Notice of the Ministry of Finance and State Administration of Taxation on Several Preferential Policies in respect of Enterprise Income Tax, which took effect beginning February 22, 2008. Under the new EIT Law, foreign invested enterprises, or FIEs, such as VanceInfo Beijing, and Chinese domestic companies are subject to EIT at a uniform rate of 25%. Preferential tax treatments will continue to be granted to entities that are classified as “high and new technology enterprises strongly supported by the State” or that conduct business in encouraged sectors, whether FIEs or domestic companies. On April 14, 2008, Ministry of Science and Technology, Ministry of Finance and State Administration of Taxation enacted the Administrative Measures for Certifying High and New Technology Enterprises, which retroactively became effective on January 1, 2008. Under the new EIT Law, enterprises that had been established and already enjoyed then applicable preferential tax treatment prior to March 16, 2007 will continue to enjoy it subject to the following qualifications: (i) in the case of preferential tax rates, for a period of five years from January 1, 2008, or (ii) in the case of a preferential tax exemption or reduction for a specified term, until the expiration of such term. In addition, certain qualified high-technology companies may still benefit from a preferential tax rate of 15% if they own their core intellectual properties and are classified into certain industries strongly supported by the State set forth by certain departments of the State Council.

subject to a review every three years by the relevant government authorities in China, and in practice certain local tax authorities also require annual evaluation of the qualification; continued qualification as a “key software enterprise under the State plan” is subject to an annual assessment by the relevant government authorities in China. Consequently, there is no assurance that our subsidiaries will continue to meet the qualifications or that the relevant government authorities will not revoke our subsidiaries’ “high and new technology enterprises” or “key software enterprise under the State plan” statuses in the future. Any increase in our PRC subsidiaries’ EIT rate pursuant to the new EIT law may have a material adverse effect on our results of operations.

In addition, pursuant to relevant tax rules, each of VanceInfo Beijing, Shanghai VanceInfo, VanceInfo Technologies Limited, or VanceInfo Tianjin, and Shanghai VanceInfo Creative Software Technology Limited, or VanceInfo Shanghai Creative, may enjoy exemption from business tax with respect to the software development business and related technology consultancy services that it engages in, which falls under the definition of technology development business. Expiration of, or changes to, these tax benefits or treatments will have a material adverse effect on our operating results.

Restrictions on immigration may affect our ability to compete for and provide services to customers in the United States or other countries, which could hamper our growth and cause our revenues to decline.

The vast majority of our employees are Chinese nationals. Some of our projects require a portion of the work to be undertaken at our clients’ facilities which are sometimes located outside China. The ability of our professionals to work in the United States, Europe, Japan and other countries outside China depends on their ability to obtain the necessary visas and work permits. Immigration laws in the United States and in other countries are subject to legislative change, as well as to variations in standards of application and enforcement due to political forces and economic conditions. It is difficult to predict the political and economic events that could affect immigration laws, or the restrictive impact they could have on obtaining or monitoring business visas for our employees. Our reliance on visas for a number of employees makes us vulnerable to such changes and variations as it affects our ability to staff projects with professionals who are not citizens of the country where the work is to be performed. As a result, we may not be able to obtain a sufficient number of visas for our employees or we may encounter delays or additional costs in obtaining or maintaining such visas.

Our corporate actions are substantially controlled by our principal shareholders, who can cause us to take actions in ways you may not agree with.

As of December 31, 2009, our principal shareholders who acquired our securities prior to our initial public offering, and their affiliated entities own approximately 33.9% of our outstanding ordinary shares and voting power. These shareholders, acting individually or as a group, could exert control and substantial influence over matters such as electing directors and approving acquisitions, mergers or other business combination transactions. This concentration of ownership and voting power may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase shares in our public offerings.

Risks Related to Doing Business in China

Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our services and materially and adversely affect our competitive position.

Substantially all of our business operations are currently conducted in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. Since the late 1970s, the PRC government has been reforming the economic system in China. These reforms have resulted in significant economic growth. However, we cannot predict the future direction of economic reforms or the effects such measures may have on our business, financial position or results of operations. Furthermore, while the economy of China has experienced significant growth in the past twenty years, growth has been uneven, both geographically and among various sectors of the economy. In addition, the looser controls on credit recently adopted by the PRC government may cause rising inflation, which may also have an adverse impact on our profitability. Furthermore, the current global economic crisis is adversely affecting the economy in the

U.S. and many other countries and regions around the world. As the PRC economy has become increasingly linked with the global economy, China is affected in various respects by downturns and recessions of major economies around the world. The various economic and policy measures enacted by the PRC government to forestall economic downturns or bolster China’s economic growth could materially affect our business. Any adverse change in the economic conditions in China, in policies of the PRC government or in laws and regulations in China, could have a material adverse effect on the overall economic growth of China and market demand for our IT services. Such developments could adversely affect our businesses, lead to reduction in demand for our services and adversely affect our competitive position.

Uncertainties with respect to the PRC legal system could adversely affect us.

We are a holding company, and we conduct our business primarily through our subsidiaries incorporated in China. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

Our global income and the dividends we receive from our PRC subsidiary may be subject to PRC tax under the new EIT Law, which would have a material adverse effect on our results of operations.

Under the new EIT Law and the Implementing Rules, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered as a resident enterprise and will be subject to a PRC income tax on its global income. According to the Implementing Rules, “de facto management bodies” refer to “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” Accordingly, our holding company, VanceInfo Technologies Inc. (CHINESE CHARACTER)

, may be considered a resident enterprise and may therefore be subject to a PRC income tax on our global income. 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. We do not believe our holding company and our subsidiaries located outside of the PRC are PRC resident enterprises. However, if we are considered a resident enterprise and earn income other than dividends from our PRC subsidiary, such PRC income tax on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.

Hong Kong. TP Hong Kong, our wholly owned subsidiary and the direct holder of a 100% equity interest in TP Shanghai, is incorporated in Hong Kong. According to the Arrangement between Mainland China and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion in August 2006, or the Mainland and the Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of the shares of the foreign-invested enterprise). Under the New EIT Law and the Implementing Rules, if each of VanceInfo Hong Kong and TP Hong Kong is regarded as a resident enterprise, the dividends payable to VanceInfo Hong Kong from VanceInfo Tianjin and VanceInfo Shenzhen and dividends payable to TP Hong Kong from TP Shanghai will be exempt from PRC income tax. If each of VanceInfo Hong Kong and TP Hong Kong is regarded as a non-resident enterprise, subject to the confirmation of the local tax authorities, a 5% withholding tax will be imposed for any dividends payable to VanceInfo Hong Kong from VanceInfo Tianjin and VanceInfo Shenzhen and any dividends payable to TP Hong Kong from TP Shanghai.

In addition, because there remains uncertainty regarding the interpretation and implementation of the new EIT Law and its Implementation Rules, if we are regarded as a PRC resident enterprise, then any dividends to be distributed by us to our non-PRC shareholders or any gains realized by non-PRC shareholders or ADS holders from transfer of our shares or ADSs may be subject to PRC withholding tax. If we are required under the new EIT Law to withhold PRC income tax on the above dividends or gains, the investment in our shares or ADSs 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 on October 27, 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 order to strengthen its scrutiny over the direct or indirect transfer of equity interest in a PRC resident enterprise by a non-resident enterprise, the State Administration of Taxation issued, on December 10, 2009, the Notice on Strengthening the Management on Enterprise Income Tax for Non-resident Enterprises Equity Transfer, or Circular 698, which became effective retroactively on January 1, 2008. Under Circular 698, 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 us to submit additional documentation for their review in connection with any of our acquisitions, thus causing us to incur additional acquisition costs.

Restrictions on currency exchange may limit our ability to receive and use our revenues or financing effectively.

A majority of our revenues and expenses are denominated in Renminbi. If our revenues denominated in Renminbi increase or expenses denominated in Renminbi decrease in the future, we may need to convert a portion of our revenues into other currencies to meet our foreign currency obligations, including, among others, payment of dividends declared, if any, in respect of our ordinary shares or ADSs. Under China’s existing foreign exchange regulations, VanceInfo Beijing is able to pay dividends in foreign currencies, without prior approval from the State Administration of Foreign Exchange, or the SAFE, by complying with certain procedural requirements. However, we cannot assure you that the PRC government will not take further measures in the future to restrict access to foreign currencies for current account transactions.

Foreign exchange transactions by our PRC subsidiaries under capital accounts continue to be subject to significant foreign exchange controls and require the approval of, or registration with, PRC governmental authorities. In particular, if our PRC subsidiaries borrow foreign currency loans from us or other foreign lenders, these loans must be registered with or approved by the SAFE, and if we finance them by means of additional capital contributions using, for instance, proceeds from a public offering, these capital contributions must be approved or registered by certain government authorities including the SAFE, the Ministry of Commerce or their local counterparts. These limitations could affect the ability of our PRC subsidiaries to obtain foreign exchange through debt or equity financing, and could affect our business and financial condition.

On August 29, 2008, the 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, the 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 the 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 a public 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 a public offering into Renminbi to invest in or acquire any other PRC companies.

Our failure to obtain prior approval of the China Securities Regulatory Commission, or CSRC, of the listing and trading of our ADSs on the New York Stock Exchange could have a material adverse effect on our business, operating results, reputation and trading price of our ADSs.

On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC and the SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which became effective on September 8, 2006. This regulation, among other things, includes provisions that purport to require that an offshore special purpose vehicle formed for the purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC and it would take several months to complete the approval process.

The application of this new PRC regulation remains unclear with no consensus currently existing among leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement.

We completed the initial listing and trading of our ADSs on the New York Stock Exchange in December 2007. We did not seek CSRC approval in connection with our initial public offering. Our PRC counsel, Fangda Partners, has advised us that, based on their understanding of the current PRC laws and regulations as well as the procedures announced on September 21, 2006:

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The CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like our public offerings are subject to this new procedure;

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In spite of the above, given that we have completed our restructuring before September 8, 2006, the effective date of the new regulation, this regulation does not require an application to be submitted to the CSRC for its approval of the issuance and sale of our ADSs and ordinary shares, or the listing and trading of our ADSs on the New York Stock Exchange; and

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The issuance and sale of our ADSs and ordinary shares and the listing and trading of the ADSs on the New York Stock Exchange do not conflict with or violate this new PRC regulation.

However, if the CSRC or another PRC regulatory agency subsequently determines that CSRC approval was required for our public offerings, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from our initial public offering into the PRC, 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. Also, if later the CSRC requires that we obtain its approval, we may be unable to obtain a waiver of the CSRC approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding this CSRC approval requirement could have a material adverse effect on the trading price of our ADSs.

Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders and beneficial owners to personal liability and limit our ability to inject capital into our PRC subsidiary, limit our subsidiary’s ability to increase its registered capital, distribute profits to us, or otherwise adversely affect us.

On October 21, 2005, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1, 2005. According to Notice 75, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing that offshore company with assets or equity interests in an onshore enterprise located in the PRC, or offshore special purpose company. An amendment to registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore special purpose company or overseas funds raised by such offshore company, or any other material change involving a change in the capital of the offshore special purpose company. Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore special purpose companies that have made onshore investments in the PRC in the past are also required to make relevant registration procedures with the local SAFE branch. To further clarify the implementation of Notice 75, the SAFE issued Notice 106 on May 29, 2007. Under Notice 106, PRC subsidiaries of an offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders or beneficial owners who are PRC residents in a timely manner. If these shareholders or beneficial owners fail to comply, the PRC subsidiaries are required to report to the local SAFE branches.

We have urged our shareholders and beneficial owners who are PRC residents to make the necessary applications and filings as required under Notice 75 and other related rules. Mr. Chris Shuning Chen, our founder, chairman and chief executive officer, Mr. Stanley Ying Zhou, our chief administrative officer, and Mr. Kevin Zhong Liu, our executive vice president, have made the requisite SAFE registration with respect to their investment and beneficial ownership in us. However, due to uncertainty concerning the reconciliation of Notice 75 with other approval or registration requirements, it remains unclear how Notice 75, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We will attempt to comply, and attempt to ensure that our shareholders and beneficial owners who are subject to these rules comply, with the relevant requirements. However, we cannot provide any assurances that all of our shareholders and beneficial owners who are PRC residents will comply with our request to make or obtain any applicable registrations or comply with other requirements required by Notice 75 or other related rules.

The failure or inability of our PRC resident shareholders or beneficial owners to make any required registrations or comply with other requirements may subject such shareholders or beneficial owners to fines and legal sanctions and may also limit our ability to contribute additional capital into or provide loans to (including using the proceeds from our public offerings) our PRC subsidiary, VanceInfo Beijing, limit VanceInfo Beijing’s ability to pay dividends or otherwise distribute profits to us, or otherwise adversely affect us.

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 the Operating Procedures on Administration of Foreign Exchange for PRC Individuals’ Participation in Employee Share Ownership Plans and Employee Share Option Plans of Overseas Listed Companies, or the Share Option Rules, 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.

We and the participants of our employee stock option plan who are PRC citizens are subject to these rules, and we will attempt to comply with the relevant requirements under such rules. Failure to comply with such rules may subject us and the participants of our employee stock option plan who are PRC citizens to fines and legal sanctions and prevent us from further granting options and restricted share units, also known as nonvested shares, under our employee stock option plan to our employees, which could adversely affect our business operations.

New labor laws in the PRC may adversely affect our results of operations.

As of March 31, 2010, we had approximately 9,000 employees in the PRC. On June 29, 2007, the PRC Government promulgated a new labour law, namely, the Labour Contract Law of the PRC, or the Labour 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 shall be compensated for three times their regular salaries 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.

Risks Related to Our Shares and ADSs

The trading price of our ADSs has been volatile and may continue to be volatile regardless of our operating results.

The trading price of our ADSs has been and may continue to be subject to wide fluctuations. During the period from December 12, 2007, the first day on which our ADSs were traded on the NYSE, until April 29, 2010, the trading price of our ADSs has ranged from US$4.20 to US$26.48 per ADS and the closing sale price on April 29, 2010 was US$23.92 per ADS. The market price for our ADSs may continue to be volatile and subject to wide fluctuations in response to factors including the following:

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actual or anticipated fluctuations in our quarterly operating results;

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changes in financial estimates by securities research analysts;

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changes in the economic performance or market valuations of other IT services companies;

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announcements by us or our competitors of new services, acquisitions, strategic partnerships, joint ventures or capital commitments;

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technological breakthroughs in the IT services industry;

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potential litigation or administrative investigations;

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addition or departure of key personnel;

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fluctuations of exchange rates between the RMB and U.S. dollar or other foreign currencies;

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release of lock-up or other transfer restrictions on our outstanding ADSs or ordinary shares or sales of additional ADSs; and

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general economic and market conditions or other developments affecting us, our industry, our markets or the global economy.

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our ADSs.

Substantial future sales of our ADSs or ordinary shares in the public market, or the perception that these sales could occur, could cause the price of our ADSs to decline.

Additional sales of our ADSs or ordinary shares, including ADSs or ordinary shares issuable upon the exercise of our outstanding stock options, in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. If our shareholders sell substantial amounts of our ADSs, including those issued upon the exercise of outstanding options, in the public market, the market price of our ADSs could fall. Such sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. If any existing shareholder or shareholders sell a substantial amount of ordinary shares, the prevailing market price for our ADSs could be adversely affected.

In addition, we may issue additional ordinary shares or ADSs for future acquisitions. If we pay for our future acquisitions in whole or in part with additionally issued ordinary shares or ADSs, your ownership interests in our company would be diluted and this, in turn, could have a material adverse effect on the price of our ADSs.

You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.

Except as described in this report, holders of our ADSs will not be able to exercise voting rights attaching to the ordinary shares evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the ordinary shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.

You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act of 1933, as amended, or exempt from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. The depositary may, but is not required to, sell such undistributed rights to third parties in this situation. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

You may be subject to limitations on transfer of your ADSs.

Your ADSs represented by the ADRs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands law, conduct most of our operations in China and most of our officers and directors reside outside the United States.

We are incorporated in the Cayman Islands, and conduct most of our operations in China through our subsidiaries in China. Most of our officers and directors reside outside the United States and some or all of the assets of those persons are located outside of the United States. It may be difficult or impossible for you to bring an original action against us or against these individuals in a Cayman Islands or Chinese court in the event that you believe that your rights have been infringed under the U.S. federal 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. You would also find it difficult to enforce a U.S. court judgment based on the civil liability provisions of the U.S. federal securities laws, in the United States, the Cayman Islands or China, against us or our officers and directors.

Our corporate affairs are governed by our memorandum and articles of association and by the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised) and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority 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 precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against us or our management, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. Holders of our ADSs or ordinary shares.

Based on the market price of our ADSs, the value of our assets, and the composition of our income and assets, we do not believe we were a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our taxable year ended December 31, 2009. However, the application of the PFIC rules is subject to uncertainty in several respects, including how the contractual arrangements between us and our affiliated entities will be treated for purposes of the PFIC rules. In addition, we must make a separate determination after the close of each taxable year as to whether we were a PFIC for that year. Accordingly, we cannot assure you that we will not be a PFIC for any future taxable year. A non-U.S. corporation will be a PFIC for any taxable year if either (i) at least 75% of its gross income for such year is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income. Because the value of our assets for purposes of the PFIC test will generally be determined by reference to the market price of our ADSs and ordinary shares, our PFIC status will depend in large part on the market price of the ADSs and ordinary shares, which may fluctuate significantly. In addition, changes in the composition of our income or assets may cause us to become a PFIC. If we are a PFIC for any taxable year during which a U.S. Holder (as defined in Item 10, “Additional Information—Taxation—United States Federal Income Taxation”) holds an ADS or a ordinary share, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder. See Item 10, “Additional Information—Taxation—United States Federal Income Taxation—Passive Foreign Investment Company.”

ITEM 4. INFORMATION ON THE COMPANY

A.History and Development of the Company

We commenced operations in 1995 through the IT services business of Beijing Wensi Chuangyi Software Technology Co., Ltd., or Wensi Chuangyi, Wensi Chuangyi, a limited liability company established in China. In 1999 and 2002, two subsidiaries of Wensi Chuangyi, Shanghai Wensi Chuangyi Technology Co., Ltd., or Shanghai Wensi Chuangyi and Wuhan Wensi Chuangyi Technology Co., Ltd., or Wuhan Wensi Chuangyi, were incorporated in China as part of the expansion of our IT services businesses.

Our holding company, VanceInfo, was incorporated under the laws of the British Virgin Islands in April 2004. In July 2004, we formed VanceInfo Beijing, a wholly owned subsidiary of VanceInfo, in China. In August 2004, VanceInfo Beijing acquired the IT services business and related assets of Wensi Chuangyi, including those of Shanghai Wensi Chuangyi and Wuhan Wensi Chuangyi. In October 2005, VanceInfo was redomiciled to the Cayman Islands, and is currently an exempted company with limited liability operating under the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised).

In June and July 2004, we issued an aggregate of 100,000 ordinary shares to Inno Global Technology Limited, Team Dragon International Limited and Button Software Ltd. for US$3.0 million.

In March 2005, we issued in a private placement an aggregate of 7,175,000 shares of Series A preferred shares to LC Fund II, DCM IV, L.P., DCM Affiliates Fund IV, L.P. and Harper Capital for US$7.0 million and certain finance consulting services provided by a shareholder of Harper Capital.

In May 2006, we issued in a private placement an aggregate of 2,990,000 shares of Series B-1 preferred shares and 6,380,188 shares of Series B-2 preferred shares together with certain warrants to acquire Series B-3 preferred shares to Sequoia Capital China I, L.P., Sequoia Capital China Partners Fund I, L.P., Sequoia Capital China Principals Fund I, L.P., Sequoia Capital Growth Fund III, L.P., Sequoia Capital Growth Partners III, L.P., Sequoia Capital Growth III Principals Fund, LC Fund II, DCM IV, L.P., and DCM Affiliates Fund IV, L.P. The proceeds we received from this private placement were US$25.1 million.

In December 2007, we completed our initial public offering of our ADSs and listed our ADSs on the NYSE. In July 2009, we completed a follow-on public offering of our ADSs.

Since 2007, we have acquired a number of businesses. The following are our recent acquisitions:

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In March 2007, we acquired ITC, an IT service provider primarily focusing on R&D services, from Mr. Hao Yu and Mr. Wei Wei.

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In March 2007, we entered into certain contractual arrangements with Megainfo through which we gained effective control over the operations of Megainfo.

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In May 2007, we acquired a 75% equity interest in Shanghai VanceInfo, an IT service provider primarily focusing on ADM services, from Mr. Jilun Zhang and Mr. Rongbin Shi. In July 2008, we completed the acquisition of an additional 10% equity interest in Shanghai VanceInfo from NEC System Technologies Ltd., a Japanese company. In August 2008, we completed the acquisition of the remaining 15% of Shanghai VanceInfo from Mr. Jilun Zhang and Mr. Rongbin Shi.

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In May 2007, we acquired an additional 48.99% of the equity interest of VanceInfo Japan Inc., or VanceInfo Japan, from Mr. Jinsong Tang.

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In July 2007, we acquired Chosen, an IT service provider primarily focusing on SAP consulting and implementation services, from Mr. Gang Li, Mr. Tong Liu and Mr. Bin Huang.

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In May 2008, we acquired a team of engineers from Shenzhen Tianchuang Software Development Co., Ltd., or Tianchuang, a small-sized supplier to Huawei, one of our major clients. The acquisition was accounted for as a business combination.

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In October 2008, we completed the acquisition of a 33% equity interest in Link Result Limited, or Link Result, a China-based company providing IT outsourcing services to multinational financial institutions, from A-IT Software Services PTE Ltd. The investment was accounted for using the equity method of accounting.

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In October 2008, we completed the acquisition of 100% of the equity interest in WIT, a U.S. based mobile testing and application development services provider, from Wireless Info Tech Limited.

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In January 2009, we acquired from Guangzhou Kernel Technology Limited, or Kernel, a small China-based supplier providing customized application development services to Huawei, its software outsourcing service business with Huawei, together with a team of engineers and other employees. Over 150 IT professionals from Kernel’s offices in Guangzhou, Shenzhen and Nanjing joined us in connection with the transaction. The acquisition was accounted for as a business combination.

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In July 2009, we acquired the operating subsidiaries, i.e. TP Companies, of TP Corporation Limited, a Hong Kong-headquartered provider of customer relationship management, or CRM, solutions and system integration.

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In October 2009, we acquired a team of engineers together with the smart phone software testing business and the related assets from a China-based mobile service provider which provides research and development services to a leading global handset manufacturer. Over 150 professionals joined us in connection with the transaction.

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In February 2010, we made a strategic investment in Beijing Viatt Information Technology Co. Ltd, or Viatt, an IT services and solution provider for Chinese domestic financial institutions. Under the terms of the agreements, we made a loan of approximately RMB3.0 million (US$0.4 million), which is convertible into a 20% equity interest in Viatt with an exclusive right to acquire the remaining 80% of the equity in the next 12 to 18 months at our sole discretion.

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In March 2010, we acquired a team of engineers together with the cell phone software development outsourcing business and the related assets from Beijing Mobitech Software Co., Ltd., or Mobi, a small China-based company providing mobile software development service. Over 50 professionals of Mobi joined us in connection with the transaction.

We sold 100% of our equity interest in ITC in February 2008 after integrating its business and employees into our other entities. Prosoft and Megainfo were liquidated in December 2008 and January 2009, respectively, after integrating their business and employees into our other entities. We are in the process of completing the tax clearance procedures of Prosoft. In December 2007, we completed our initial public offering and trading of our ADSs on the New York Stock Exchange.

Our principal executive offices are located at 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China. Our telephone number at this address is +86(10) 8282-5266. Our registered office in the Cayman Islands is located at the offices of Codan Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, P.O. Box 2681, George Town, Grand Cayman, KY1-1111, Cayman Islands. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.

B.Business Overview

We are an IT service provider and one of the leading offshore software development companies in China. Our comprehensive range of IT services includes R&D services, enterprise solutions, ADM, quality assurance and testing, as well as globalization and localization. We provide these services primarily to corporations headquartered in Greater China, the United States, Europe and Japan, targeting selected industries with high growth potential for IT services such as technology, telecommunications, financial services, manufacturing, retail and distribution.

We offer our services through our globally integrated network of onsite and offsite delivery locations, primarily in China, to enable our clients to focus on their core competencies and improve operating efficiencies. With appropriately 8,300 professionals as of March 31, 2010, we operate a number of CDCs, each with dedicated project teams and facilities designed to provide tailored solutions to individual clients. We believe that these dedicated CDCs provide our clients with differentiated services and enhance their confidence in our capabilities. We also deliver our services at clients’ facilities or via our offices in major cities across Greater China and in the United States, Europea, Japan and Malaysia.

Our major clients include Expedia, Huawei, Microsoft, TIBCO, and a European mobile handset manufacturer. The number of our clients increased significantly from 98 for 2005 to 272 for 2009. We deploy our sales and marketing teams in several of our key target markets and in close proximity to our clients, which enables us to better understand our clients’ needs, effectively cross-sell our services and develop new client relationships.

In recent years, we have experienced significant organic growth, complemented by selective strategic acquisitions. Since 2005, we have made a number of acquisitions to strengthen our service lines and industry expertise, diversify our client base, and expand our sales network and delivery platform. Our net revenues grew from US$62.7 million in 2007 to US$148.1 million in 2009, representing a compound annual growth rate, or CAGR, of 53.7%. Our net income grew from US$9.6 million to US$21.5 million over the same period, representing a CAGR of 50.0%.

Service Lines

We categorize our services into three broad sets: (i) R&D Outsourcing Services, which include two service lines, R&D services and globalization and localization, (ii) IT Services, which include three service lines, enterprise solutions, ADM and quality assurance and testing, and (iii) other solutions and services, which include business process outsourcing service and other services.

Set forth below is our net revenues breakdown by service lines for the periods indicated:


	Year Ended December 31,
	2007				2008				2009
	(in US$ thousands, except for percentages)
R&D Outsourcing Services
R&D services		36,013	57.4	%		60,808	59.2	%		90,581	61.2	%
Globalization and localization		3,886	6.2			4,259	4.2			5,118	3.5
IT Services
Enterprise solutions		8,748	14.0			13,542	13.2			14,429	9.7
ADM		9,348	14.9			17,061	16.6			26,373	17.8
Quality assurance and testing		4,719	7.5			6,717	6.5			7,807	5.3
Other Solutions and Services		—	—			276	0.3			3,758	2.5

Total net revenues		62,714	100.0	%		102,663	100.0	%		148,066	100	%

We are capable of offering each of our service lines to clients in a variety of industries, including the technology, telecommunications, financial services, manufacturing, retail and distribution industries.

Research and Development Services

We provide product development services for software systems that are implemented in computers and embedded systems. We typically market these services to the chief technology officers, engineering vice presidents or outsourcing project heads of technology product development companies, ranging from independent software vendors to telecommunications equipment developers.

We have accumulated a variety of skill sets from over 14 years of experience in the outsourced development of computer software and hardware products. We provide R&D services in all phases of development, from requirements analysis, concept generation, product realization, to quality assurance and testing and technology and information transfer to the client. We offer our services over a broad spectrum of technology areas and are able to provide our clients complete subsystems or entire products.

We develop various software products, including middlewares, Internet protocols and other software. We also focus on embedded software technologies that involve the design and development of software solutions embedded in the hardware of a particular device. In addition, we provide cost-effective testing services to help technology product development companies improve their hardware and software. Our research and development resources allow us to serve clients that seek highly skilled product development services, including services for their core technologies. Our timely delivery capabilities help our clients to gain a time-to-market advantage during their product development process. We also employ advanced processes and tools to ensure a high level of protection of clients’ intellectual property.

The following case studies describe the R&D services we provide to three of our clients:

TIBCO(a Nasdaq-listed software company with over 3,000 customers)

Client’s Project Requirements. TIBCO, which we have served since 2005, sought to improve the operating efficiency, price competitiveness and time-to-market of its core products to remain competitive. To achieve its goals, TIBCO sought to lower its software research and development costs through outsourcing. TIBCO chose us as a partner to assist with the full development cycle of several of its product lines. One such product line was TIBCO’s B2B suite, which is a standards-based business-to-business integration platform for secure transmission of business documents and messages among disparate partner systems.

Our Solutions. Our team worked closely with the managers and engineers at TIBCO’s global headquarters to understand the client’s requirements, which included the development of several new B2B protocols. We performed extensive studies and analyses to meet the following technical requirements of TIBCO’s B2B suite project:

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understanding of leading industry standard B2B protocols;

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Extensible Markup Language, or XML, processing and parsing;

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security and authentication based on product key infrastructure, or PKI platform;

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TIBCO infrastructure products; and

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Java language for platform independence.

During the course of the B2B suite project, our TIBCO CDC actively worked in every key aspect of the structuring and formation of the B2B platform, including framework design, concrete coding, quality assurance and testing, and particularly, the documentation of the development process, which enables TIBCO to access critical know-how for the buildup of the B2B platform in the future and thus enhances the operation efficiency of the platform. The new product was released in January 2007, and is now widely used by TIBCO’s customers.

Current Relationship with Client. We are the only Chinese service provider to help TIBCO to develop software products. Since 2005, we have been involved in a wide range of research and development services for this client on over 50 products. Currently, we have more than 200 staff at our TIBCO CDC dedicated to product development for TIBCO. We recently have been appointed by TIBCO to develop more technically challenging products.

We have a team of approximately 20 professionals dedicated to the B2B suite project. Following the release of the new version of the B2B suite, our B2B team continues to play a significant role in building up additional B2B protocols. Additionally, due to our experience working with TIBCO products, we have also had the opportunity to work on additional professional services for local TIBCO customers under separately billed assignments.

A Fortune 100 multinational software company

Client’s Project Requirements.Some of the client’s main products are operating systems that run on personal computers, server computers, and embedded devices. Compatibility with existing and new applications is typically a critical concern for personal computer users and enterprises when upgrading to a new version of an operating system, and may significantly affect the acceptance of the client’s product in the marketplace.

In an important release, this client needed to develop a software component and conduct extensive testing to ensure applications under the older version operating system would be compatible with the new version. It decided to appoint an independent service provider to help with this specific issue due to a tight schedule and budget concerns. The task required not only in-depth knowledge of both the old and new versions of this operating system, but also rich experience in software development and testing work.

Our team was selected to provide this service, and our in-depth knowledge and expertise is highly valuable to the client.

Our Solutions.We assembled a highly qualified and experienced development and testing team, and dispatched them to the client’s premises to work closely with its development personnel. During the four-month development process, our professionals designed various transition programs of the software component for over 80 types of applications, and automated over 70 tests covering approximately 160 Application Programming Interfaces, or APIs. Our understanding of the two versions of the operating system, know-how across development and testing processes, and outstanding communications and coordination capabilities enabled us to deliver the work on time, facilitating the client’s successful launch of the upgraded operating system.

Current Relationship with Client.We were one of the first Chinese service providers to help this software company resolve technically challenging and strategically important issues. Since then, we have been involved in a wide range of R&D services for this client on over 150 projects. We are one of the largest Chinese service providers working with this software company in terms of revenues and the number of dedicated professionals. Currently, we are working to expand our service scope with this client and to provide services on more challenging projects such as end to end business intelligence, or BI, solutions and embedded devices solutions.

Huawei(A global leading telecommunication solutions provider)

Client’s Project Requirements. In 2004, Huawei appointed us to develop label switch protocol management system, or LSPM, version 1.0, for network management of Internet communications. As Huawei’s customers, who are mainly telecommunications carriers, were in urgent need of this system, we were required to deliver LSPM version 1.0 within a tight timeframe.

Our Solutions. We assembled a project team consisting of an experienced project manager and 10 professionals, each with a background in the telecommunications industry, to facilitate our completion of this project within the required deadline. Since LSPM was designed for the provision of an integrated platform for all network switch elements, our team devoted extensive efforts to making the system compatible with switch equipment manufactured by various vendors. Our LSPM version 1.0 also provides Huawei’s customers with a user-friendly interface to efficiently manage network communications and shorten their response time to telecommunication service subscribers. In addition, we adhered to high standards of quality control, risk management and progress control in performing our work for this project.

Current Relationship with Client. Historically, Huawei was reluctant to outsource software development due to quality concerns. Recognizing the quality of our services for LSPM version 1.0, Huawei further engaged us to develop LSPM version 2.0 and version 3.0 under subsequently negotiated assignments, which had a project scale much larger than that of version 1.0. Currently, we are one of the major R&D service and IT service providers of Huawei. The services we provide to the client range from R&D services in BSS/OSS systems, mobile applications, embedded systems and 3G and NGN applications development and testing, to IT system integration and engineering services. Furthermore, we have collaborated with the client in call center solutions to help the client further penetrate into the market of carriers and large enterprises.

Enterprise Solutions

We provide clients with a full spectrum of services in enterprise solutions, including enterprise resource planning, or ERP, CRM, supply chain management, enterprise application integration, or EAI, and system support and maintenance. We provide implementation and maintenance services for major enterprise resource planning systems, including SAP, Siebel, Peoplesoft, JD Edwards, Microsoft Dynamics and Oracle E-Business Suite. We provide comprehensive management and ongoing optimization of customer enterprise solutions. Our offerings, which are usually billed separately on a time-and-material basis, include:

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packaged evaluation and selection;

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packaged implementation;

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customization;

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regional rollout;

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enhancement, maintenance and product support;

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version upgrades; and

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business intelligence/data warehouse, or BI/DW.

Our enterprise solutions are intended to help our clients focus on their core competencies and significantly reduce the clients’ expenses by taking advantage of our IT expertise. We focus on providing customized enterprise implementation that is both innovative and seamless, offering clients cost-effective solutions for consistent results.

The following case study describes the enterprise solutions services we provide to one of our clients:

A Fortune 100 company in the wireless and broadband communications business

Client’s Project Requirements. Facing intense competition from other industry players, the communications company was under pressure to improve the efficiency and effectiveness of its channel management. The Mobile Devices Business Unit of the communications company intended to introduce a system based on the Siebel platform with the following defined targets:

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accurate sales forecast by model and retail shop;

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operation performance evaluation by volume and profitability by retail shops; and

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sales and competition analysis to outline promotion and incentive plan.

Our Solutions. We have worked closely with the communications company’s other service providers on this project since February 2006. Our team actively participated in the full life cycle of Siebel implementation from business requirements analysis, system design analysis, system structuring, implementation, testing, release to production, post production support and post-production change requests and enhancements and operation. As of March 2010, we had devoted over 550 man-months to this project. We performed extensive studies and interviews to better understand the client’s specific needs and designed solutions by tailoring the Siebel system to meet the client’s business needs and technical requirements. Since the launch of the system, the communications company has significantly improved its retail channel management.

Current Relationship with Client. Following the operation of the above project, we continue to provide supporting services for the client’s system on an on-going basis under separately billed assignments. We are also responsible for the installation and maintenance of the system under various operating environments.

Furthermore, this client chose us to be one of its preferred service providers in Siebel implementation.

Application Development and Maintenance

We design, develop and implement software solutions to meet a variety of client requirements. We also provide maintenance services for large software systems, which may include modifications and enhancements to the system and product support. Unlike our R&D services that target research and development spending by technology product development companies, our ADM services target our clients’ other IT spending, which is generally controlled by their chief information officers. We perform application design, programming, testing and maintenance either in our delivery offices or at our clients’ sites. Our projects include new development and significant functional enhancements to existing software applications. We have developed expertise in mainframe, customer-server, Internet and mobile software technologies and on emerging platforms such as Windows series, Linux, Unix, IBM Mainframe and Symbian. Our major programming language tools include C/C++, Java/J2EE/J2ME, JSP and .NET.

We offer a wide spectrum of ADM services to our clients, designed to help them manage their IT outsourcing spending. The following case studies describe the ADM services we provide to two of our clients:

NEC System(a subsidiary of NEC Corporation, a multinational technology company headquartered in Japan)

Client’s Project Requirements. NEC System positions itself as a key supplier of application solutions to governments, telecommunications carriers and enterprises and has built up its core competencies in this sector. Facing intensive competition from other industry players, declining project prices and climbing labor costs, as well as customers’ constantly changing demands and increasing requests for customization, NEC System decided to outsource development work to lower-cost locations, such as China. However, NEC System has always had concerns about outsourcing, particularly in the following aspects:

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quality assurance, which is critical for NEC System to serve its customers in Japan;

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on-time delivery; and

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understanding the demands of end users.

Our Solutions. Shanghai VanceInfo, which we acquired in 2007, built up a team to assist NEC System in 2002. Currently, we maintain a dedicated development team of over 60 engineers for NEC System. Our strict cost control, project management experience and economies of scale brought cost advantages to NEC System in the Japanese market. To meet the quality requirements of NEC System’s customers, we designed a set of development processes and a quality control system which meet NEC System’s own standards. We have also strengthened NEC System’s confidence in our quality control through stringent internal inspection and continual improvements. Through our real-time Web-based monitoring and communications system, we are able to control the work progress and better understand the demand and feedback from NEC System and its customers. In addition, our in-depth industry expertise has enabled NEC System to better serve its customers in a short timeframe.

Current Relationship with Client. We set up a WEB Application System Development Center in Shanghai for NEC System with approximately 60 engineers, and have devoted over 50 man-months for NEC System’s projects every month. Our partnership with NEC System has enabled it to sustain a competitive position in the Japanese market. For instance, due to our delivery capability, NEC System won a project of 1,500 man-months from COREPLUS, lasting from 2004 to 2007.

One of the largest gaming companies in Asia

Client’s Project Requirements. The client is one of the largest gaming companies in Asia. To shorten the time-to-market of their services and fulfill their unique current and future business needs, the client planned to construct an online betting system with high efficiency and flexibility. This highly customized system needs to be re-designed and migrated from its previously existing platform.

Our Solutions. We assembled a dedicated team with over 50 experienced engineers in a short timeframe. We utilized our expertise in online e-commerce services to understand the client’s business processes and requirements. Following an in-depth analysis, our team proposed a technical solution that would enhance the system’s flexibility and ability to adapt to future business needs.

During the delivery process, our team designed a set of development processes and a rigorous quality control system to minimize defects and improve project execution efficiency. As a result, the project was completed ahead of schedule following strict quality controls. The successful project completion supported the client’s quick launch of new online betting business lines and enabled its geographic expansion.

Current Relationship with Client. We are the major service provider in mainland China to help the client develop IT systems and applications. Due to the success of the online betting system, the client authorized us to set up two CDCs. By the end of 2009, we have more than 90 staff at our dedicated CDCs working for this client in a wide range of application development and maintenance services.

Quality Assurance and Testing

Businesses rely on quality assurance and testing to reduce defects and enhance IT applications. As testing is relatively independent from the development process, many clients outsource testing to third-party service providers, which also mitigates conflicts of interest faced by their internal testing department and enhances the neutrality and accuracy of testing. Our testing services help clients successfully and cost-effectively realize their goals. Our advanced testing skills, cost-effective testing approaches, and proven testing methodologies help clients improve their hardware and software.

We offer customized and automated testing practices according to clients’ business needs, including functional testing, globalization and localization testing, automation testing, performance testing, remote testing and test process consulting. Our testing engineers are well trained in several test management tools such as Performance Studio, WinRunner/LoadRunner and TestDirector.

The following case study describes the quality assurance and testing services we provide to one of our clients:

A Fortune 100 financial services company

Client’s Project Requirements. In 2006, a European subsidiary of the financial services company decided to adopt a new system to manage its banking businesses ranging from retail banking, credit cards to capital markets services. Due to the complexity of the project and its importance to our client’s business, rigorous tests must be conducted before the launch of this new system. The client required that the service provider have:

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extensive experience in testing;

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solid knowledge of financial services industry practice;

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clear understanding of relevant local regulations; and

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cost effective and timely delivery capabilities.

Our Solutions. We set up a joint testing center with the client in 2003, where we established well-defined testing processes, methodologies and project management procedures for the client’s projects. For this specific testing project, we formulated a comprehensive testing plan together with the client’s software developers. We deployed, on short notice, a dedicated testing team of over 100 engineers. We participated in the testing work during each phase of the project, from system integration testing during system development to customer acceptance testing during implementation. The project proceeded smoothly and was completed in 2008.

Current Relationship with Client. Since 2006, we have also been retained by the client’s Asia-Pacific research headquarters and other branches for various testing projects under separately billed assignments.

Globalization and Localization

We started our business in 1995 by offering globalization and localization services to help clients penetrate local markets. We also started our engagement for several of our key clients, such as IBM, by providing quality globalization and localization services. Our globalization and localization services consist of a multi-step process to create the specific language versions of our clients’ software and hardware, including software applications, printed documents, communications materials, website contents, desktop publishing, E-learning and training content. Our globalization and localization services are generally billed on a time-and-material basis. Our customized solutions include:

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software and content localization;

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localization engineering;

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localization testing;

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internationalization engineering; and

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internationalization testing.

We provide these services to meet our clients’ cultural, linguistic, legal, technical and marketing requirements in a specific country or region. Currently, we provide high-quality globalization and localization services at significant cost savings and offer translation services into over 65 languages, including Asian languages, EMEA (Europe, the Middle East and Africa) languages, Nordic languages and North and South American languages. Our superior project management capability enables us to maintain long-term relationships with our clients as they generally continue to work with us for upgraded versions or updates of existing products, under separately negotiated and billed contracts or SOWs entered into subsequently.

The following case study describes the globalization and localization services we provide to one of our clients:

A Fortune 100 international mobile and Internet technology company

Client’s Project Requirements.In 2008 and 2009, the leading mobile and Internet technology company looked for a company which could perform linguistic quality assurance, covering more than 85 languages for the devices applications and internet services applications. This project required not only globalization and localization expertise, but also quick turnaround and ability to ram up a multinational team to fulfill the ongoing tasks on a daily basis.

Our Solutions.We had accumulated in-depth knowledge and experience with respect to the client’s products and services through previous cooperation. We set up a team consisting of localization and testing experts to provide quality assurance services covering up to 95 languages. In particular, leveraging our localization services expertise and localization project management experience, we designated a senior project manager to control the working process, coordinate different service stages and plan an elaborate timetable in order to shorten the overall turnaround time. Within the planned budget, our localization services achieved quality delivery of the localized versions testing in a timely and cost-efficient manner.

Current Relationship with Client. As one of the global top 10 suppliers of this leading mobile and Internet service company, we have established and maintained a long-term collaboration with the client and have been providing services for most of its major product lines. We have teams with over 800 dedicated professionals providing a full-spectrum of services to this client, including quality assurance and testing, field testing, automation testing, application development, etc, wherein more than 150 professionals are working on its localization testing and localization projects.

Delivery of Our Services

In addition to providing services from our facilities, we offer our clients flexible delivery alternatives through our CDCs and through onsite teams operating on our clients’ premises.

CDCs

We currently operate a number of CDCs with dedicated project teams and facilities designed to tailoring solutions for individual clients. The professionals in our CDCs work with clients to develop and deliver business operational improvements with the goal of achieving higher performance at lower costs. We typically lease premises, purchase or lease relevant equipment and facilities, in some cases reimbursed by our clients, and hire engineering professionals as required by our clients. All of our CDCs have high-speed broadband connections to the clients’ facilities via dedicated lines. Our CDCs employ advanced technology and process-based methods to ensure a high level of security. The intellectual property rights in relation to the software products we develop for our clients are generally owned by our clients. These approaches successfully address our clients’ concerns in terms of security and intellectual property protection when selecting outsourcing service providers. The resources committed to our clients at our various CDCs also help to inspire our clients’ confidence in our competencies and capabilities, thus enhancing customer loyalty. CDCs comprise an important platform for China-based IT services companies, like us, to deliver their services.

To address clients’ concerns with respect to security and intellectual property rights, we occasionally grant clients an option to acquire our CDCs, which options we believe are rarely exercised due to cost and other considerations associated with changing the operators of CDCs. We believe that the transfer fees agreed between our clients and us for our clients to acquire our CDCs are generally no less than the carrying value of our assets in the relevant CDCs.

The following case studies describe our relationship with two of our CDC clients.

TIBCO

We first offered CDC services to TIBCO after it migrated certain research and development work from India to us in October 2005.

Our TIBCO CDC is located on leased premises and is equipped with more than 500 computers and ancillary equipment and furniture. The CDC is connected to TIBCO’s facilities through a dedicated virtual private network, or VPN. The intellectual property rights in relation to the software products we develop for TIBCO are owned by TIBCO. We have deployed advanced technology and process-based methods to ensure a consistently high level of security. We have granted an option to TIBCO to acquire this CDC, including the facilities, employment relationships with our professionals working in the CDC and certain operating relationships such as the lease for the premises, in consideration of an agreed transfer fee.

We believe our in-depth experience in developing TIBCO products via our CDC and our commitment to real-time response have played an important role in TIBCO’s marketing efforts. In 2006, we successfully helped TIBCO win several important bids. Furthermore, our presence in major Chinese cities and our deep understanding of the Chinese culture and the local market dynamics help us provide prompt technical support to TIBCO’s Chinese sales force. For instance, we assisted TIBCO in successfully securing two Chinese banking customers in 2007. Our dedicated professional team for TIBCO in China does not face the distance, time and cultural differences encountered by TIBCO’s U.S. team with its Asian customers. We believe that our participation in TIBCO’s sales and marketing activities presents new opportunities to further develop our relationship, and will contribute to our revenue growth while creating additional value for TIBCO.

As of March 31, 2010, we maintained a high-quality research and development team of professionals for TIBCO, all of whom hold undergraduate and graduate degrees, with approximately 15% of them having completed part or all of their education in the United States, Europe, Australia or Singapore.

Client’s Project Requirements.Our client has an online purchase platform in the United States with the core engine designed and deployed in a mainframe system for more than eight years. The primary goal for this project is to migrate the engine out of the mainframe and rebuild the platform into a more cost effective solution. With no documentation support for any business logic and most of the engineers who had participated in the project relocated to other teams, the biggest challenge to deliver this project is to make sure that our development team had the ability to understand the mainframe language, migrate into different platforms with performance improvement, and deliver the project in a short timeframe.

Our Solutions.We formed a strong development team and learned the mainframe language within a week of time. After we spent approximately two months for knowledge sharing and clarification with the subject master expert, or SME, in the United States, the final solution was determined and we completed the migration within an aggregate of nine months. The new solution brought the cost saving benefit to the client, and we also introduced a lot of automated process to replace the manual process and increase the simplicity and accuracy of the outcome.

Current Relationship with Client. The 3M CDC was formed since March 2008 to manage all the 3M China IT development request and provide wide range of services, including Java application development, quality assurance and ongoing application support and maintenance. Outside the CDC, we also have a team of BI and IBM Lotus Notes developers serving on site. In July 2008, we had the first opportunity to cooperate with 3M’s U.S. headquarters and successfully delivered a project with recognition within six months. In May 2009, we and 3M officially announced the establishment of a global development center for 3M eBusiness applications in Shanghai. Recently, our services further expanded and included ASP development, U.S. business hour support, Data Steward and Web Construction.

Onsite Teams

Some clients require the presence of our project teams on their or their customers’ premises. We maintain a certain portion of our professionals on our clients’ or their customers’ premises, in order to ensure optimal collaboration and close interaction between the clients’ teams and our project team and to provide a comprehensive range of IT services that meet our clients’ expectations. For clients to whom we provide CDC services such as TIBCO, we usually rotate 6% to 10% of our project team members to our clients’ sites. In other cases, a higher proportion of our professionals may work onsite based on the confidentiality and technical requirements of our clients.

Quality and Process Management

One of the crucial factors in our success has been our efforts to pursue the highest quality standards in all aspects of our business. We have invested heavily in the customization and application of the VanceInfo Technical Delivery Platform, or VTDP, incorporating a technical process management system developed by Digite, a leading provider of collaborative enterprise application software for process and portfolio management. We broadly apply VTDP in our services in various industries to streamline our delivery process and project management. On this platform, we are able to define various project processes, monitor the project schedule and workforce allocation, and improve our requirements management, testing management, defect management, risk management and resource management. We believe our VTDP has greatly improved our global delivery capability, process maturity and timely decision-making.

We typically follow the standard process requested by our clients and have devoted substantial efforts to obtaining certification under certain generally recognized quality control systems. We are ISO 9001 certified and one of our subsidiaries, Shanghai VanceInfo is ISO 27001 certified. We achieved Level-Five certification under the Capability Maturity Model Integration, or CMMI, an industry recognized rating system for systems engineering developed by Carnegie Mellon University, at one of our key development centers. CMMI is graded in five levels of increasing maturity and capability, with Level 5 representing the highest certification.

Sales and Marketing

Our sales and marketing strategy seeks to increase clients’ awareness of our service lines, generate new and repeat business from target clients, promote client loyalty and enhance brand recognition. We promote our services directly through our business development, or BD, team. Members of our executive management team are also actively involved in managing key client relationships through targeted interaction with our clients’ senior management. We also assign midlevel managers with service line expertise to assist our BD team in exploring business opportunities.

Sales and Marketing Organization. As of December 31, 2009, our BD team consisted of 59 full-time sales personnel, including 35 sales managers, each of whom is responsible for a designated sales region, a specific service line or an industry. We have sales offices in major cities in China and in Silicon Valley, Seattle, San Diego, London, Tokyo and Hong Kong. We plan to enhance our sales efforts by recruiting more sales professionals and setting up additional sales offices overseas.

New Business Development. We use a cross-functional, integrated sales approach under which our executives, sales personnel and midlevel management analyze potential projects and collaboratively develop strategies to promote our expertise to potential clients. This approach allows for a smooth transition to execution once a sale is secured. For larger projects, we typically bid against other IT service providers in response to requests for proposals. Clients often cite the following as reasons for awarding us contracts: our flexible delivery model, comprehensive outsourcing services, ability to scale, superior quality and process execution, industry expertise, experienced management team, talented professionals, strong track record and competitive pricing. In addition, client referrals and cross-selling provide objective validation of our competitive strengths. We often gain new business opportunities through referrals from existing clients to new clients or the different departments of our existing clients.

Enhancing Brand Visibility. We also devote substantial efforts to public relations, attendance at global exhibitions and conferences, governmental relations and advertising. For example, we attended various forums and exhibitions organized in the United States and China in 2009, including Gartner Symposium/ITExpo 2009, Gartner Outsourcing & Vendor Management Summit 2009, IAOP 2009 Outsourcing World Summit, Marcus Evans CIO Summit 2009, China International Software & Information Service Fair 2009, Hong Kong International Computer Conference 2009 and China Computer World CEO & CIO Summit 2009. We believe our marketing team’s efforts have enhanced our company’s corporate image and brand name.

Our Clients

Our clients include large corporations headquartered in Greater China, the United States, Europe and Japan. We have a strong market share of Greater China-based companies and U.S. and European corporations operating in China. The number of our clients increased significantly from 98 for 2005 to 272 for 2009.

The following table sets forth our net revenues by geographic breakdown based on the location of our clients’ headquarters for the periods indicated.


	For the Year Ended December 31,
	2007				2008				2009
	(in US$ thousands, except for percentages)
Greater China⁽¹⁾		7,329	11.7	%		22,045	21.5	%		59,373	40.1	%
United States⁽¹⁾		43,153	68.8			56,175	54.7			56,634	38.3
Europe⁽¹⁾		6,284	10.0			14,991	14.6			23,148	15.6
Japan⁽¹⁾		5,828	9.3			9,157	8.9			8,466	5.7
Others		120	0.2			295	0.3			445	0.3

Total net revenues		62,714	100.0	%		102,663	100.0	%		148,066	100.0	%


(1)		Countries or regions where the headquarters of our clients are located.

In 2007, each of Microsoft and IBM accounted for 10% or more of our net revenues, and in the aggregate accounted for 34.6% of our net revenues. In 2008, each of Microsoft, IBM and Huawei accounted for 10% or more of our net revenues, and in the aggregate accounted for 38.8% of our net revenues. In 2009, each of Huawei, Microsoft and a European mobile handset manufacturer accounted for 10% or more of our net revenues, and in the aggregate accounted for 47.0% of our net revenues. Our top five clients accounted for approximately 53.7%, 53.8%, and 56.3% of our net revenues in 2007, 2008 and 2009, respectively. The volume of work we perform for specific clients is likely to vary from year to year, as we typically are not their exclusive external IT service provider. Accordingly, a major client in one year may not contribute the same amount or percentage of our net revenues in a subsequent year.

We typically enter into MSAs with our clients, which are either renewable for successive one-year periods, or have no fixed terms. These agreements typically stipulate our general responsibilities and obligations, the service quality standard, a confidentiality undertaking and the ownership of intellectual property rights. The MSAs are not commitments to purchase our services, and generally may be terminated without cause on short notice or when there are no outstanding SOWs under them.

For each specific project, clients place service orders with us from time to time through SOWs. We usually bill our clients a time-based fee or a fixed price according to clients’ requirements and our negotiations with clients. Our SOWs with Microsoft mainly describe our work scope and specifications, the performance and acceptance criteria, the delivery schedule and price and payment terms. Similarly, our SOWs with IBM typically describe our work scope, the delivery schedule, the acceptance methods, quality schedules, and price and payment terms. Under the SOWs, IBM has the right to audit our charges and invoices and to inspect our performances. Our clients typically have a right to terminate their SOWs on short notice without any cancellation charge.

Competition

The offshore IT services market is highly competitive. Competition in the offshore IT services market depends in large part on industry experience, quality of the services offered, reputation, marketing and selling skills as well as price. No single participant or group of participants dominates the entire market or any of the segments, and we expect competition to intensify. We compete in the offshore IT services market primarily with:

•

Chinese IT services companies, such as Chinasoft International, Hisoft, Neusoft, SinoCom, and iSoftStone;

•

Indian IT services companies, such as Cognizant, HCL, Infosys, TCS and Wipro; and

•

Offshore IT service providers in emerging outsourcing destinations with low wage costs such as the Southeast Asia, Latin America and Eastern Europe.

Our international competitors are either setting up operations in China or are increasing their presence in China as offshore operations in China are increasingly becoming an important element of their delivery strategy. This has resulted in increased employee attrition among Chinese IT service providers and increased wage pressure to retain IT service professionals. We believe, however, that price alone is not a sustainable competitive advantage in an environment where IT solutions are becoming increasingly critical to clients’ core corporate strategies. We have, therefore, built our competitive position primarily on our ability to leverage our industry specific knowledge and experience in a broad range of IT services, manage and maintain key customer relationships, continually monitor and improve our delivery excellence and attract and retain highly skilled professionals.

Intellectual Property

Our intellectual property rights are important to our business. We rely on a combination of trademarks, domain names, trade secrets, confidentiality procedures and contractual provisions to protect our intellectual property. We have proprietary know-how in software development and testing methodologies. We hold trademark registrations for one or both of “VANCEINFO” and (CHINIESE CHARACTER)

in China, the United States, Europe, Australia, Singapore and Hong Kong, and have additional trademark registration applications pending in China, the United States and Japan for one or both of these marks. We have registered our domain names, www.vanceinfo.com, www.vanceinfo.net, www.vanceinfo.com.cn, www.vanceinfo.net.cn, and www.vanceinfo.cn. Our subsidiary, Shanghai VanceInfo, has also registered its domain name, www.solutions.sh.

We require our employees and subcontractors to enter into non-disclosure agreements to limit access to and distribution of our clients’ proprietary and confidential information as well as our own. These agreements generally provide that any confidential or proprietary information developed by us or on our behalf must be kept confidential. These agreements also provide that any confidential or proprietary information disclosed to third parties in the course of our business must be kept confidential by such third parties. However, our clients usually own the intellectual property rights in the software we develop for them. We are responsible to our clients for complying with certain security obligations, including maintaining network security, backing-up data and maintaining a virus free network. We cannot assure you that we will be able to comply with all such obligations without incurring any liabilities.

In addition, the terms of our contracts with clients often impose particular confidentiality and security standards. We have established a system of security measures to protect our computer systems from security breaches and computer viruses. We have employed advanced technology and process-based methods to ensure a high level of security, such as clustered and multi-level firewalls, intrusion detection mechanisms, vulnerability assessments, content filtering, antivirus software and access control mechanisms. We use encryption techniques as required.

We control and limit access to client-specific project areas, particularly at our CDCs.

Technology, Facilities and Infrastructure

A key component of our global delivery model is the telecommunications linkage between client sites and our sites and among our various sites in China and overseas. We have designed a high-quality, scalable and secure network architecture that provides client connectivity, CDC connectivity and broadband connectivity. This network provides seamless access and uses high capability networks and advanced routing protocols for redundancy. Although we rely on third parties such as telecommunications providers and Internet service providers to provide such services, we ensure that we have multiple service providers using multiple routes and media to attain high levels of redundancy, availability and performance.

Our clients operate in multiple jurisdictions and have a variety of voice and data systems. Our in-house solution architecture team has the capability to understand and integrate our clients’ voice and data networks with our networks, support procedures, security environment and reporting procedures to create a homogeneous environment for consistent service delivery.

We have a technology operations team which provides IT support to our employees to ensure that our employees face minimal loss in time and efficiency in their work processes. In addition, we have an enterprise wide “Centralized Service Desk” where our employees can log their requests or report any malfunctions.

Government Regulations

Information Service Industry Regulations

On June 24, 2000, the State Council promulgated theCertain Policies in Encouraging the Development of Software and Integrated Circuit Industry(the “Encouraging Policy”) to promote the development of the software and integrated circuit industries in China. Pursuant to the Encouraging Policy, the software enterprises in China are entitled to preferential treatment, including financing support, tax preferential treatment, export incentives, discretion and flexibility in determining employees’ welfare benefits and remuneration. For example, a recognized software enterprise is entitled to an exemption from EIT for its first two profitable years and a 50% reduction of its applicable EIT rate for the subsequent three years. A key software enterprise under the State plan is entitled to a 10% EIT rate. All of the above qualifications are subject to an annual assessment by the relevant government authority in China. Enterprises which fail to meet the annual examination standards are not entitled to the favorable EIT treatments.

On October 16, 2000, the Ministry of Information Industry, Ministry of Education, Ministry of Science and Technology and the State Administration of Taxation promulgated theCertifying Standards and Administration Measures for Software Enterprises (Trial Implementation)(the “Certifying Standards”). The Certifying Standards further elaborated the provisions of the Encouraging Policy by establishing the specific standards and procedures for the recognition and annual assessment of software enterprises.

On January 4, 2001, the Ministry of Foreign Trade and Economic Cooperation, Ministry of Information Industry, State Administration of Taxation, General Administration of Customs, State Administration of Foreign Exchange and the State Statistics Bureau promulgated the CircularConcerning Relevant Issues about Software Export(the “Circular”). Pursuant to the Circular, enterprises exporting software are entitled to preferential treatment including governmental financial support, preferential interest rate of export credit and tax preferential treatment. Software enterprises engaging in software export (including research and development services) must conduct online registration of software export contracts with the administration center jointly established by the Ministry of Commerce, the Ministry of Science and Technology, the Ministry of Industry and Information Technology, the State Statistics Bureau, SAFE, and the Export-Import Bank of China and apply for Software Export Contract Registration Certificates in order to be entitled to tax refunds.

On February 22, 2008, the Ministry of Finance and State Administration of Taxation promulgated theNotice of the Ministry of Finance and State Administration of Taxation on Several Preferential Policies in Respect of Enterprise Income Tax, which emphasizes that a recognized software enterprise is entitled to an exemption from EIT for its first two profitable years and a 50% reduction of its applicable EIT rate for the subsequent three years. A key software enterprise under the State plan is entitled to a 10% EIT rate.

On December 28, 2009, the Ministry of Commerce and the Ministry of Industry and Information Technology promulgated theCertain Provisions on Protection of Information of Service Outsourcing Business Undertaken by Domestic Enterprises, which became effective as of February 1, 2010. According to these provisions, enterprises engaged in the information technology outsourcing and technology business process outsourcing businesses shall establish an information protection system and take various measures to keep clients’ confidential information secret, including causing their employees to sign confidentiality agreements and non-competition agreements and third parties who have access to clients’ confidential information to sign confidentiality agreements.

Intellectual Property Rights

The State Council and the State Copyright Bureau have promulgated various regulations and rules relating to protection of software in China. Under these regulations and rules, software owners, licensees and transferees may register their rights in software with the State Copyright Bureau or its local branches and obtain software copyright registration certificates. We have registered our Wensi Load management system, Octiga distribution resource management system, and Pu Te Lei En computer translation system with the State Copyright Bureau. Although such registration is not mandatory under PRC law, software owners, licensees and transferees are encouraged to go through the registration process and registered software rights may receive better protections.

The PRC Trademark Law, adopted in 1982 and revised in 2001, with its implementation rules adopted in 2002, protects registered trademarks. The Trademark Office of the State Administration of Industry and Commerce, or the SAIC, handles trademark registrations and grants a protection term of 10 years to registered trademarks. We have filed trademark registration applications for our trademarks, “VANCEINFO” and (CHINESE CHARACTER)

, with the Trademark Office of the SAIC. The registration applications for these trademarks are still pending and, according to PRC law, we therefore do not enjoy proprietary rights to these trademarks in China at this time.

Tax

See Item 5, “Operating and Financial Review and Prospects—Taxes—PRC Enterprises Income Tax, or EIT, and PRC Business Tax.”

Regulation of Foreign Currency Exchange and Dividend Distribution

Foreign Currency Exchange.The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations (1996), as amended. Under the regulations, the RMB is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for capital account items, such as direct investment, loan, repatriation of investment and investment in securities outside China, unless the prior approval of the SAFE is obtained.

In addition, any loans to our operating subsidiaries in China, each a foreign invested enterprise, cannot, in the aggregate, exceed the difference between their respective approved total investment amount and their respective approved registered capital amount. Furthermore, any foreign loan must be registered with SAFE or its local counterparts for the loan to be effective. Any increase in the amount of the total investment and registered capital must be approved by the PRC Ministry of Commerce or its local counterpart. We may not be able to obtain these government approvals or registrations on a timely basis, if at all, which could result in a delay in the process of making these loans.

The dividends generated on or after January 1, 2008 and paid by the subsidiary to its foreign shareholders are deemed income of the foreign shareholders and are taxable in China if the foreign shareholders are considered as non-resident enterprises without any establishment or place within China or if the dividends payable have no connection with the establishment or place of the foreign shareholders within China. Pursuant to the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in China may purchase or remit foreign exchange, subject to a cap approved by the SAFE, for settlement of current account transactions without the approval of the SAFE. Foreign exchange transactions under the capital account are still subject to limitations and require approvals from, or registration with, the 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, the 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 the SAFE, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not yet been used.

Dividend Distribution.The principal regulations governing distribution of dividends of foreign holding companies include the Wholly Foreign Owned Enterprise Law (1986), as amended, and the Administrative Rules under the Wholly Foreign Owned Enterprise Law (1990), as amended.

Under these regulations, FIEs in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, FIEs in China are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of the registered capital of the enterprises, and to set aside a certain amount of its after-tax profits each year, if any, to fund its staff welfare fund. These reserves are not distributable as cash dividends. Future dividend distributions by VanceInfo Beijing to our company are subject to these regulations.

Notice 75.On October 21, 2005, the SAFE issued Notice 75, which became effective as of November 1, 2005. According to Notice 75, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing that offshore company with assets or equity interests in an onshore enterprise located in the PRC, or offshore special purpose company. An amendment to registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore special purpose company or overseas funds raised by such offshore company, or any other material change involving a change in the capital of the offshore special purpose company.

Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore special purpose companies that have made onshore investments in the PRC in the past are also required to make relevant registration procedures with their local SAFE branch. To further clarify the implementation of Notice 75, the SAFE issued Notice 106 on May 29, 2007. Under Notice 106, PRC subsidiaries of an offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders or beneficial owners who are PRC residents in a timely manner.

Under the relevant rules, failure to comply with the registration procedures set forth in Notice 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the increase of its registered capital, the payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations.

Employee Stock Option Plans.On March 28, 2007, SAFE promulgated the Operating Procedures on Administration of Foreign Exchange for PRC Individuals’ Participation in Employee Share Ownership Plans and Employee Share Option Plans of Overseas Listed Companies, or the Share Option Rules. Under the Share Option Rules, 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 any 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. Failure to comply with such rules may subject such overseas-listed company and the participants of its employee stock option plan who are PRC citizens to fines and legal sanctions and prevent the overseas-listed company from further granting options under its employee stock option plan to its employees.

New M&A Regulations and Overseas Listings

On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC and the SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became effective on September 8, 2006. This New M&A Rule, among other things, includes provisions that purport to require that an offshore special purpose vehicle formed for purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange.

On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC and it would take several months to complete the approval process. The application of this new PRC regulation remains unclear with no consensus currently existing among leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement.

Our PRC counsel, Fangda Partners, has advised us that, based on their understanding of the current PRC laws and regulations as well as the procedures announced on September 21, 2006:

•

The CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like our initial public offering are subject to this new procedure;

•

In spite of the above, given that we had completed our restructuring before September 8, 2006, the effective date of the new regulation, this regulation does not require an application to be submitted to the CSRC for its approval of the listing and trading of our ADSs on the New York Stock Exchange; and

•

The issuance and sale of our ADSs and ordinary shares and the listing and trading of the ADSs on the New York Stock Exchange do not conflict with or violate this new PRC regulation.

C.Organizational Structure

The following diagram illustrates our corporate structure:


(1)		VanceInfo Japan Inc., or VanceInfo Japan, formerly named Worksoft Japan Inc., has 1,400,000 outstanding shares, with 1,399,900 shares owned by VanceInfo, 100 shares owned by Mr. Xiaolai Wang, a Chinese citizen.

(2)		VanceInfo Creative Software Technology Ltd., or VanceInfo Beijing, a Chinese limited liability company, 100% owned by VanceInfo.

(3)		VanceInfo Technologies Inc., or VanceInfo US, formerly named Worksoft Creative Software Technology Inc., a corporation incorporated under the laws of the State of Delaware in the United States, 100% owned by VanceInfo.

(4)		VanceInfo Creative Software Technology Ltd., or VanceInfo BVI, formerly named Worksoft Creative Software Technology Ltd., a holding company incorporated under the laws of the British Virgin Islands, 100% owned by VanceInfo.

(5)		Nanjing VanceInfo Creative Software Technology Limited, or Nanjing VanceInfo, a Chinese limited liability company, 100% owned by VanceInfo Beijing.

(6)		Shanghai VanceInfo Creative Software Technology Limited, or VanceInfo Shanghai Creative, a Chinese limited liability company, 100% owned by VanceInfo Beijing.

(7)		Beijing Chosen Technology Co., Ltd., or Chosen, a Chinese limited liability company, 100% owned by VanceInfo Beijing.

(8)		Shanghai VanceInfo Technologies Limited, or Shanghai VanceInfo, formerly named Shanghai Solutions Software Co., Ltd., a Chinese limited liability company, 100% owned by VanceInfo Beijing.


(9)		Wireless Info Tech, Ltd., or WIT, a corporation incorporated under the laws of the California in the United States, 100% owned by VanceInfo US.

(10)		VanceInfo Malaysia Inc. Sdn. Bhd., or VanceInfo Malaysia, a corporation incorporated under the laws of Malaysia, 100% owned by VanceInfo BVI.

(11)		VanceInfo Technologies Limited, or VanceInfo Hong Kong, formerly named Worksoft Information Technology Service Limited, a company incorporated under the laws of Hong Kong, 100% owned by VanceInfo BVI.

(12)		TP Teleservices Limited, a company incorporated under the laws of Hong Kong, 100% owned by VanceInfo BVI.

(13)		TP (Hong Kong) Limited, or TP Hong Kong, a company incorporated under the laws of Hong Kong, 100% owned by VanceInfo BVI.

(14)		TP Consultants Limited, a company incorporated under the laws of Hong Kong, 100% owned by VanceInfo BVI.

(15)		TP (Taiwan) Limited, a company incorporated under the laws of Hong Kong, 100% owned by VanceInfo BVI.

(16)		VanceInfo Technologies Limited, or VanceInfo Tianjin, a Chinese limited liability company, 100% owned by VanceInfo Hong Kong.

(17)		Shenzhen VanceInfo Creative Software Technology Limited, or VanceInfo Shenzhen, a Chinese limited liability company, 100% owned by VanceInfo Hong Kong.

(18)		TP Software Technology (Shanghai) Co., Ltd., or TP Shanghai, a Chinese limited liability company, 100% owned by TP Hong Kong.

D.Property, Plants and Equipment

Our principal executive offices are located on premises comprising approximately 8,000 square meters in an office building in Zhongguancun Software Park, Beijing, China. We have leased all of our facilities from unrelated parties, and most of our leases are renewable at our option.

We have maintained a number of offices in Greater China, the United States, Europe, Japan and Malaysia under leases with terms ranging from one to six years.

The following table describes each of the leases for our headquarters and other major delivery centers as of December 31, 2009.


	Space (in
	square
Location	meters)			Usage of Property
Beijing		27,209	*	Headquarters, General Administration Globalization and Localization ADM, R&D Services
Shanghai		11,178	*	ADM, Quality Assurance and Testing, R&D Services
Nanjing		10,738	*	R&D Services, Training
Hangzhou		814		R&D Services
Shenzhen		8,353	*	General Administration, ADM, R&D Services
Chengdu		1,368		R&D Services
Hong Kong		1,354		ADM, R&D Services


*		The sum of space under multiple leases.

As of December 31, 2009, we had capacity for nearly 8,000 professionals and general and administrative personnel at these facilities and we used approximately 82% of our existing office space for our operations.

In November 2009, we entered into agreements regarding our proposed acquisition of the use right to two parcels of land with 37,492 square meters of permitted floor space in Zhongguancun Software Park, Haidian District, Beijing. Under the agreements, we will pay approximately RMB119.3 million (or US$17.5 million) relating to the land use right, and we have deposited RMB6.0 million (or US$0.9 million) as of March 31, 2010, with US$14.9 million and the remaining expected to be paid in 2010 and 2011, respectively. The new office complex built on this premises will be used as our new headquarters and research and development center to meet the demand arising from our current and anticipated business expansion and headcount increase.

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not Applicable.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included in this annual report on Form 20-F. This report contains forward-looking statements. See “Introduction—Forward-Looking Information.” In evaluating our business, you should carefully consider the information provided under the caption “Risk Factors” in this annual report on Form 20-F. We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.

A.Operating Results

Overview

We are an IT service provider and one of the leading offshore software development companies in China. We deliver a comprehensive range of IT services through our globally integrated network of onsite and offsite delivery locations, primarily in China, to enable our clients to focus on their core competencies and improve operating efficiencies. Our IT services include R&D services, enterprise solutions, ADM, quality assurance and testing, as well as globalization and localization. We provide these services primarily to corporations headquartered in Greater China, the United States, Europe and Japan, targeting selected industries with high growth potential for IT services such as technology, telecommunications, financial services, manufacturing, retail and distribution. We have a team of over 7,542 professionals as of December 31, 2009 and operate a number of CDCs, and also deliver our services at clients’ facilities or via our offices in major cities across China and in the United States, and in Japan. Our net revenues grew from US$62.7 million in 2007 to US$148.1 in 2009, representing a CAGR of 53.7%. Our net income grew from US$9.6 million in 2007 to US$21.5 million in 2009, representing a CAGR of 50.0%.

Factors Affecting Our Results of Operations

We believe the most significant factors that affect our business and results of operations are:

•

the overall economic conditions in our principal geographic markets, which may affect market demand for offshore IT services;

•

the quality and portfolio of our service lines and industry expertise compared with those of our competitors;

•

the billing rates and utilization rates of our professionals, our compensation and benefit expenses and other operating costs and expenses;

•

the availability of a large talent pool in China and supply of qualified professionals; and

•

the PRC government’s investment in infrastructure construction and adoption of various incentives in the IT services industry.

Our management evaluates our results of operations by examining financial and operating data in a variety of categories, including service lines, clients, and geographic markets. We manage and market our business according to our service lines and industry practices. Our IT services include R&D services, enterprise solutions, ADM, quality assurance and testing, globalization and localization, as well as other solutions and services. We provide these services primarily to corporations headquartered in Greater China, the United States, Europe and Japan.

Net Revenues

Our net revenues are net of business tax and other sales tax. In recent years, we have experienced rapid growth and significantly expanded our business. Our net revenues grew from US$62.7 million in 2007 to US$102.7 million in 2008 and US$148.1 million in 2009.

We discuss below the breakdown of our net revenues by service lines, clients, and geographic markets.

Net Revenues by Service Lines

We derive net revenues from the provision of our IT services, including R&D services, enterprise solutions, ADM, quality assurance and testing, globalization and localization, as well as other solutions and services.

Set forth below is our net revenue breakdown by service lines for the periods indicated:


	Year Ended December 31,
	2007				2008				2009
	(in US$ thousands, except for percentages)
R&D Outsourcing Services
R&D services		36,013	57.4	%		60,808	59.2	%		90,581	61.2	%
Globalization and localization		3,886	6.2			4,259	4.2			5,118	3.5
IT Services
Enterprise solutions		8,748	14.0			13,542	13.2			14,429	9.7
ADM		9,348	14.9			17,061	16.6			26,373	17.8
Quality assurance and testing		4,719	7.5			6,717	6.5			7,807	5.3
Other Solutions and Services		—	—			276	0.3			3,758	2.5

Total net revenues		62,714	100.0	%		102,663	100.0	%		148,066	100	%

R&D services have accounted for a majority of our net revenues in recent years. On the other hand, our net revenues from ADM increased most significantly from 2007 to 2009 as we increased our efforts in these service lines. Our net revenues from globalization and localization, enterprise solutions, and quality assurance and testing services also increased in absolute numbers, but decreased as a percentage of our total net revenues in 2009 compared to 2008.

Net Revenues by Clients

We have achieved strong revenue growth by focusing on select, long-term client relationships that we refer to as strategic accounts. Currently, our strategic accounts include Expedia, Huawei, Microsoft, TIBCO, and a European mobile handset manufacturer, and we commenced our relationships with them in 2009, 2004, 1997, 2005 and 2007, respectively, and we have steadily expanded our business and service offerings to these clients since then. Net revenues from these clients grew from US$23.2 million, or 37.0% of our total net revenues, in 2007, to US$78.9 million, or 53.3% of our total net revenues, in 2009.

As illustrated in the table below, a significant proportion of our net revenues has been derived from a limited number of clients. In 2007, each of Microsoft and IBM accounted for 10% or more of our net revenues, and in the aggregate accounted for 34.6% of our net revenues. In 2008, each of Microsoft, IBM and Huawei accounted for 10% or more of our net revenues, and in the aggregate accounted for 38.8% of our net revenues. In 2009, each of Huawei, Microsoft and a European mobile handset manufacturer accounted for 10% or more of our net revenues, and in the aggregate accounted for 47.0% of our net revenues.

We initially developed relationships with certain divisions of Microsoft and Huawei, based on which we have cross-sold our wide range of services to their other departments and regional offices. The increases in net revenues from Microsoft and Huawei were primarily attributable to cross-selling and enhanced relationships.

In recent years, we have been diversifying our client base by implementing various initiatives, including adding new strategic accounts, expanding our industry practices and increasing our service lines. The number of our clients with at least US$1 million in annual revenue increased significantly from 11 for 2007 to 22 for 2009. The percentage of our net revenues derived from our top five clients remained essentially constant at 53.8% in 2008 compared with 53.7% in 2007 and increased slightly to 56.3% in 2009. The percentage of our net revenues derived from our top ten clients decreased from 69.4% in 2007 to 68.6% in 2008 and 67.5% in 2009.


	For the Year Ended December 31,
	2007				2008				2009
	(in US$ thousands, except for percentages)
Clients accounting for 10% or more of our net revenues		21,678	34.6	%		39,880	38.8	%		69,633	47.0	%
Top five clients		33,707	53.7			55,240	53.8			83,300	56.3
Top 10 clients		43,523	69.4			70,449	68.6			99,936	67.5

The volume of work we perform for specific clients is likely to vary from year to year, as we typically are not their exclusive external IT service provider. Accordingly, a major client in one year may not contribute the same amount or percentage of our net revenues in a subsequent year.

Net Revenues by Geographic Markets

We record our net revenues based on the geographic regions in which the headquarters of our clients are located irrespective of the location of the specific client entity which we serve or the locations at which our services are delivered or the invoice is rendered. We classify our net revenues primarily into four geographic markets: Greater China, the United States, Europe and Japan. We typically provide IT services to our clients to enhance and facilitate their operations in Greater China. As the table below illustrates, a significant portion of our net revenues is derived from clients headquartered in Greater China and the United States.


	For the Year Ended December 31,
	2007				2008				2009
	(in US$ thousands, except for percentages)
Greater China⁽¹⁾		7,329	11.7	%		22,045	21.5	%		59,373	40.1	%
United States⁽¹⁾		43,153	68.8			56,175	54.7			56,634	38.3
Europe⁽¹⁾		6,284	10.0			14,991	14.6			23,148	15.6
Japan⁽¹⁾		5,828	9.3			9,157	8.9			8,466	5.7
Others		120	0.2			295	0.3			445	0.3

Total net revenues		62,714	100.0	%		102,663	100.0	%		148,066	100.0	%


(1)		Countries or regions where the headquarters of our clients are located.

While we expect that a substantial portion of our net revenues will continue to be derived from strategic clients headquartered in Greater China and the United States, we expect that, as a result of our business development efforts, we will derive an increasing portion of our net revenues from clients headquartered in Europe.

Cost of Revenues

Cost of revenues represented 61.5%, 61.3% and 62.2% of our net revenues for the years ended December 31, 2007, 2008, and 2009, respectively. Our cost of revenues largely consists of compensation and benefit expenses of our professionals, including share-based compensation expenses, subcontracting costs, travel expenses, rental expenses, depreciation expenses relating to computers and equipment used by our professionals, telecommunications expenses and office expenses.

The principal component of our cost of revenues is the compensation and benefit expenses of our professionals. A majority of our professionals are located in China, where labor costs in the IT services industry are relatively low. In 2009, our compensation and benefit expenses, excluding share-based compensation expenses, were US$71.7 million, compared to US$46.0 million in 2008 and US$27.7 million in 2007. As wages in China continue to increase, we may experience increases in our compensation and benefit expenses, particularly expenses for project managers and other mid-level professionals. To control our compensation cost, we will continue to recruit professionals from outside the major cities in China where compensation tends to be lower. We seek to maintain compensation levels in accordance with prevailing trends in our industry in China.

The utilization rates of our professionals also affect our gross profits. We define professionals’ utilization rate as the proportion of total billed man-months or man-hours to total available man-months or man-hours, including professionals in training, during holidays and on vacation. We manage utilization by monitoring project requirements and timetables. The number of professionals assigned to a project varies according to the size, complexity, duration and demands of the project. An unanticipated termination of a significant project could also cause us to experience lower professional utilization resulting from a higher than expected number of unassigned professionals. In addition, we do not fully utilize our professionals when they are enrolled in training programs.

Our subcontractor cost includes expenses we incur for hiring subcontractors and freelancers from time to time. We use subcontractors and freelancers primarily to perform short-term assignments in certain specialty areas in connection with large projects. In 2009, we incurred a subcontracting cost of US$11.6 million, compared to US$10.4 million in 2008 and US$6.1 million in 2007.

We incur travel expenses primarily due to our professionals’ traveling to perform onsite work for projects. In 2009, our travel expenses were US$4.3 million, compared to US$3.2 million in 2008 and US$3.1 million in 2007. We expect our travel expenses to increase as our overseas onsite services and enterprise solutions services provided to domestic clients grow. We plan to explore opportunities to establish additional overseas delivery offices and expand into second-tier cities in China according to market demand and client preferences, which will also increase our professionals’ travel expenses overseas and in China.

We expect our cost of revenues to increase in line with the growth of our business.

Operating Expenses

Selling, General and Administrative Expenses

Selling, general and administrative expenses represented 25.8%, 25.2% and 23.4%, of our net revenues for the years ended December 31, 2007, 2008 and 2009, respectively. Selling, general and administrative expenses consist primarily of compensation and benefit expenses, including share-based compensation expenses, relating to our personnel, rental expenses, depreciation and amortization expenses and overhead expenses, travel and advertising expenses, selling and marketing-related office expenses. Selling, general and administrative expenses also include legal and other professional fees and miscellaneous administrative costs. Depreciation and amortization expenses as a component of selling, general and administrative expenses excluded those included in cost of revenues. We expect our selling, general and administrative expenses to increase as we hire additional personnel, increase our sales efforts and target new markets, establish new sales offices both in China and overseas, initiate additional marketing programs to further build our brand, and incur additional expenses to support our operations as a public company, including compliance-related costs.

Share-based Compensation Expenses

We adopted our 2005 Stock Plan in November 2005 and amended the plan in April and May 2006 to increase the total number of ordinary shares underlying the options issuable under the plan. We adopted our 2007 Share Incentive Plan in July 2007 and amended the plan in August 2007. Under the 2005 Stock Plan, we have reserved 4,267,500 ordinary shares for issuance upon exercise of awards granted thereunder. Under the 2007 Share Incentive Plan, we have authorized the issuance of up to 1,100,000 ordinary shares plus an annual increase of 3% of then total outstanding shares on the first business day of each calendar year beginning in 2008, upon exercise of awards granted thereunder. We granted options to purchase and restricted share units for up to 2,488,050, 1,353,680 and 235,874 ordinary shares to our directors, officers and other employees in 2007, 2008 and 2009. As of December 31, 2009, there were 2,830,249 ordinary shares issuable upon exercise of outstanding options under our 2005 Stock Plan, as amended, and 1,675,716 ordinary shares issuable upon exercise of outstanding options and restricted share units under our 2007 Share Incentive Plan, as amended. We recorded share-based compensation expenses for the fair value of options at the grant dates and recognized such share-based compensation expenses using a graded-vesting attribution method over the vesting period of the options.


	For the Year Ended December 31,
	2007		2008		2009
	(in US$ thousands)
Share-based compensation expenses:
Cost of revenues		111		265		313
Selling, general and administrative expenses		885		1126		1252

Total		996		1,391		1,565

As of December 31, 2009, the unamortized compensation expenses in connection with our outstanding options and restricted share units were US$1.5 million.

Other Operating Income

Other operating income primarily relates to subsidies received from the PRC local government for meeting the conditions required by various incentive policies, such as our office location in the Haidian district in Beijing and our passing certain technological certification. Our continued eligibility for such subsidies is subject to the discretion of the PRC local government. Moreover, the PRC central government or local government could determine at any time to immediately eliminate or reduce these government subsidies. Upon expiration of these government subsidies, we will consider available options, in accordance with applicable laws, that would enable us to qualify for further government subsidies to the extent they are then available to us.

Taxes

Under the current laws of the Cayman Islands, the Company is not subject to tax on its income or capital gains. In addition, payment of dividends by us to our shareholders is not subject to withholding tax in the Cayman Islands.

United States

VanceInfo US was subject to a progressive federal income tax rate from 15% to 35% depending on the income level and a state income tax rate at 8.84% for the years of 2007, 2008 and 2009. WIT was subject to a progressive federal income tax rate from 15% to 35% depending on the income level and a state income tax rate at 8.84% in 2008 and 2009.

British Virgin Islands

Under the current laws of the British Virgin Islands, VanceInfo BVI is not subject to British Virgin Islands tax on income or capital gains. In addition, payment of dividends is not subject to withholding tax in the British Virgin Islands.

Hong Kong

TP Hong Kong, TP (Taiwan) Limited and TP Teleservices Limited were subject to profits tax rate of 16.5% for 2009.

PRC Enterprise Income Tax, or EIT

Prior to January 1, 2008, PRC EIT was generally assessed at the rate of 33% of taxable income. Under the applicable PRC rules and policies, an enterprise qualified as a “high and new technology enterprise” located in the Beijing New Industry Development Pilot Zone was entitled to a preferential EIT rate of 15% and was further entitled to a three-year EIT exemption from either its first year of operation or, if it was incorporated in the second half of a calendar year, its second year of operation if so selected, and a 50% reduction of its applicable EIT rate for the succeeding three years. VanceInfo Beijing, Prosoft, and ITC were qualified as “high and new technology enterprises” located in the Beijing New Industry Development Pilot Zone, and enjoyed preferential tax treatment as a result of this status. VanceInfo Beijing was incorporated in the second half of 2004, and elected to be exempted from EIT from 2005 to 2007 and be subject to a 7.5% EIT rate from 2008 to 2010. Prosoft and ITC were incorporated in June 2004, and had been entitled to be exempted from EIT from 2004 to 2006 and be subject to a 7.5% EIT rate from 2007 to 2009. In addition, under the PRC rules and policies then effective, an enterprise qualified as a “software enterprise” was entitled to an exemption from EIT for the first two profitable years and a 50% reduction of its applicable EIT rate for the subsequent three years. Shanghai VanceInfo was incorporated in 2002 and was recognized as a “software enterprise” in 2003, therefore, it was entitled to be exempted from EIT in 2003 and 2004, and was subject to a 16.5% EIT rate from 2005 to 2007. Furthermore, Shanghai VanceInfo was recognized as a “key software enterprise under the State plan” in 2007, which entitled it to a 10% preferential income tax rate in 2007. Chosen was incorporated in 2006 and was subject to a 33% EIT prior to January 1, 2008.

On March 16, 2007, the National People’s Congress of China enacted a new EIT Law, which took effect beginning January 1, 2008. On December 6, 2007, the State Council also adopted the Implementing Rules, which also took effect beginning January 1, 2008. Moreover, on December 26, 2007, the State Council circulated the Notice on Implementation of the Transitional Preferential Policies in respect of Enterprise Income Tax, which took effect beginning December 26, 2007. On February 22, 2008, the Ministry of Finance and the State Administration of Taxation issued the Notice of the Ministry of Finance and State Administration of Taxation on Several Preferential Policies in respect of Enterprise Income Tax, which took effect beginning February 22, 2008. Under the new EIT Law, foreign invested enterprises, or FIEs, such as VanceInfo Beijing, and Chinese domestic companies are subject to EIT at a uniform rate of 25%. Preferential tax treatments will continue to be granted to entities that are classified as “high and new technology enterprises strongly supported by the State” or that conduct business in encouraged sectors, whether FIEs or domestic companies. On April 14, 2008, Ministry of Science and Technology, Ministry of Finance and State Administration of Taxation enacted the Administrative Measures for Certifying High and New Technology Enterprises, which retroactively became effective on January 1, 2008. Under the new EIT Law, enterprises that had been established and already enjoyed then applicable preferential tax treatment prior to March 16, 2007 will continue to enjoy it subject to the following qualifications: (i) in the case of preferential tax rates, for a period of five years from January 1, 2008, or (ii) in the case of a preferential tax exemption or reduction for a specified term, until the expiration of such term. In addition, certain qualified high-technology companies may still benefit from a preferential tax rate of 15% if they own their core intellectual properties and are classified into certain industries strongly supported by the State set forth by certain departments of the State Council.

VanceInfo Beijing was qualified as a “high and new technology enterprise” in December 2008 and is entitled to the preferential tax rate of 7.5% from 2008 to 2010. Shanghai VanceInfo was qualified as a “high and new technology enterprise” in December 2008, which entitled it to a 15% preferential income tax rate in 2008, and was further recognized as a “key software enterprise under the State plan” in December 2009, which entitled it to a 10% preferential income tax rate in 2009. TP Shanghai was qualified as a “high and new technology enterprise” in December 2008 and is entitled to the preferential tax rate of 15% in 2009 and 2010. However, continued qualification as a “high and new technology enterprise” is subject to a review every three years by the relevant government authorities in China, and in practice certain local tax authorities also require annual evaluation of the qualification; continued qualification as a “key software enterprise under the State plan” is subject to an annual assessment by the relevant government authorities in China. Consequently, there is no assurance that our subsidiaries will continue to meet the qualifications or that the relevant government authorities will not revoke our subsidiaries’ “high and new technology enterprises” or “key software enterprise under the State plan” statuses in the future. Any increase in our PRC subsidiaries’ EIT rate pursuant to the new EIT law may have a material adverse effect on our results of operations. Our other subsidiaries located in the PRC were subject to a 25% EIT rate for the year ended December 31, 2008 and 2009.

Moreover, under the new EIT Law and the Implementing Rules, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered as a resident enterprise and will be subject to a PRC income tax on its global income. According to the Implementing Rules, “de facto management bodies” refer to “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” Accordingly, our holding company may be considered a resident enterprise and may therefore be subject to a PRC income tax on our global income. We do not believe our holding company and our subsidiaries located outside of the PRC are PRC resident enterprises. However, if we are considered a resident enterprise and earn income other than dividends from our PRC subsidiary, such PRC income tax on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.

Under the applicable PRC tax laws in effect before January 1, 2008, dividend payments to foreign investors made by foreign-invested enterprises such as our PRC subsidiary, VanceInfo Beijing, were exempt from PRC withholding tax. Pursuant to the new EIT Law and the Implementing Rules which are effective as of January 1, 2008, however, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise to its foreign investors will be subject to a 10% withholding tax if the foreign investors are considered as non-resident enterprises without any establishment or place within China or if the dividends payable have no connection with the establishment or place of the foreign investors within China, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. The Cayman Islands, where our holding company is incorporated, does not have such a tax treaty with China. VanceInfo Hong Kong, our wholly owned subsidiary and the direct holder of a 100% equity interest in VanceInfo Tianjin and VanceInfo Shenzhen is incorporated in Hong Kong. According to the Mainland and the Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of the shares of the foreign-invested enterprise). Under the New EIT Law and the Implementing Rules, if VanceInfo Hong Kong is regarded as a resident enterprise, the dividends payable to VanceInfo Hong Kong from VanceInfo Tianjin and VanceInfo Shenzhen will be exempt from PRC income tax. If VanceInfo Hong Kong is regarded as a non-resident enterprise, it will be subject to a 5% withholding tax for any dividends payable to it from VanceInfo Tianjin and VanceInfo Shenzhen.

We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future and intend to retain most of our available funds and any future earnings for use in the operation and expansion of our business. As such, the aggregate undistributed earnings of our subsidiaries located in the PRC that are available for distribution to us of approximately US$39.6 million at December 31, 2009 are considered to be indefinitely reinvested, and accordingly, no provision has been made for the Chinese dividend withholding taxes as of December 31, 2009.

PRC Business Tax

Taxpayers providing taxable services in China are required to pay a business tax at a statutory tax rate of 5% of their revenues. According to applicable tax rules, each of VanceInfo Beijing, Shanghai VanceInfo, VanceInfo Tianjin, and VanceInfo Shanghai Creative, may enjoy exemption from business tax with respect to the technology development services that they engage in that fall under the definition of technology development business.

Deemed Dividends

We issued our Series A preferred shares in March 2005. The Series A preferred shares, unless previously converted, were redeemable at a premium at the option of the holders 60 days after we have redeemed our Series B preferred shares. We recognized accretion to the redemption value of our Series A preferred shares as deemed dividends for the year ended December 31, 2007.

Critical Accounting Policies

Our consolidated financial information has been prepared in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, and revenue and expenses in the financial statements and accompanying notes. We continually evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates.

Some of our accounting policies require a higher degree of judgment than others in their application.

When reviewing our financial statements, you should consider (1) our selection of critical accounting policies, (2) the judgment and other uncertainties affecting the application of those policies, and (3) the sensitivity of reported results to changes in conditions and assumptions. We believe that the following accounting policies involve the most significant judgment and estimates used in the preparation of our financial statements.

Revenue recognition

Our revenue recognition policy is significant because our revenue is a key component of our results of operations. We follow very specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue recognition policy.

Research and development outsourcing services and IT services

We primarily derive revenues from provision of research and development outsourcing services and IT services. The majority of our contracts are for the provision of services performed on a time-and-material basis. Revenues from this type of contracts are recognized as billable services are rendered. The client is billed for related services based on pre-agreed billing rates. There are no significant assumptions related to time-and-material arrangements.

The remaining revenues are earned from fixed-price services contracts. Fixed-price contracts require us to perform services throughout the contractual period, which is generally less than one year. Revenues from fixed-price contracts are generally recognized using a proportional performance method. The use of this method requires management to exercise judgment and careful consideration. Our contracts refer to milestones related to the completion of specific tasks such as planning documentation and testing reports. We estimate the man-hours required to achieve each of these milestones and, when the milestone is achieved, we recognize a proportion of the total revenue under the contract based on the hours incurred in achieving that milestone against our latest estimate of the total man-hours to be incurred to complete the contract.

Some of our contracts with customers include provision for inspection, test, acceptance or rejection in accordance with the acceptance or completion criteria as specified in the relevant SOW and/or work authorization. We do not believe that there is uncertainty about customer acceptance once the services have been rendered. We are able to reliably demonstrate that the criteria specified in the acceptance provisions and all other revenue recognition criteria are met prior to formal customer sign-off. We believe that we would be successful in enforcing a claim for payment even in the absence of formal sign-off.

Reimbursable out-of-pocket expenses and material costs are recognized as revenues when billed. The discount terms in our arrangements with clients generally entitle the client to discounts if the client completes a specified cumulative level of revenue transactions. The discounts are passed on to the client either as cash payments or as a reduction of payments due from the client. We have recorded the revenue rebate as reduction in revenues.

Other solutions

We, through TP Companies, derive revenues from providing system integration solutions, which normally include the procurement of hardware on behalf of clients and customized software licenses, implementation of the software and hardware, and post contract customer support, or PCS, including telephone support, on-site support and regular maintenance services.

We have established the vender-specific objective evidence, or VSOE, of fair value of the PCS based on standalone sales on regular basis and therefore treat the arrangements as two units of accounting, which are (1) hardware and software implementation and (2) PCS. Revenues of the hardware and software implementation are primarily recognized using percentage-of-completion method measured based on the relationship of costs already incurred to the total estimated costs to be incurred. We consider labor costs and other direct contract costs in calculating the percentage of completion. Revenues of the PCS are recognized ratably over the PCS period.

In an arrangement with a software deliverable, we have considered whether the software is more than incidental to the arrangement as a whole. As the software deliverable is essential to the functionality of other deliverables as well as the system as a whole, we believe software deliverables in our multiple-element arrangements are more than incidental, and therefore authoritative accounting literatures in relation to software revenue recognition apply. We treat the non-software deliverables (i.e., third-party hardware) as software related elements because the software deliverable is essential to the functionality of the non-software deliverables and the acceptance of the non-software deliverables by customers are subject to the acceptance of software deliverables.

In addition, we performed a few contracts which involved initial IT services, software resale, and maintenance service for the three years period ended December 31, 2009. Since we did not establish the VSOE of the fair value of each element of these contracts, the contract amounts were recognized as revenues ratably over the period of PCS, which was the last undelivered element in the arrangements.

Income taxes

Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant tax authorities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.

The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. We classify interest and penalties, if any, as a component of our income tax provision.

Share-based compensation

In 2007, 2008 and 2009, we entered into award agreements pursuant to our 2005 Stock Plan and 2007 Share Incentive Plan, or plans. Under the award agreements, we had outstanding options to purchase 4,397,895 ordinary shares and had 108,070 restricted share units as of December 31, 2009. See Item 6, “Directors, Senior Management and Employees—Compensation— Share Incentive Plans.”

We recognize share-based compensation as compensation expense in our statement of operations based on the fair value of equity awards on the grant date. With compensation expense recognized over the period in which the recipient is required to provide service in exchange for the award (usually the vesting period). For options and restricted share units granted to employees, we measure share-based compensation expenses or the fair value of the options and restricted share units at the grant date. We recognize such share-based compensation expenses over the vesting period of the options and restricted share units. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change.

Prior to the IPO in December 2007, when estimating the fair value of the ordinary shares on the grant date, we considered a number of factors, including our financial condition, financial and operating prospects with reference to our equity transactions at that time. After our IPO, we used the prior day closing market price of our ordinary shares as the fair value of our ordinary shares at the date of grant.

The fair value of the option award was estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions including the fair value of the ordinary shares underlying the options, expected term, expected volatility, expected risk free interest rate and expected dividend yield. As we did not have sufficient historical share option exercise experience, we estimated the expected term as the average between the vesting term of the options and the original contractual term. The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price volatility of listed comparable companies over a period comparable to the expected term of the options because we did not have sufficient historic volatility data of our own ordinary shares, which commenced public trading after our IPO. The risk-free interest rate was estimated based on the yield to maturity of China international government bonds with a maturity period close to the expected term of the options. The dividend yield was estimated by us based on our expected dividend policy over the expected term of the options. We are required to estimate forfeitures at the time of grant and record share-based compensation expenses only for those awards that are expected to vest. If actual forfeitures differ from these estimates, we may need to revise those estimates used in subsequent periods.

Accounts receivable and allowance for doubtful accounts

Our accounts receivable as of December 31, 2007, 2008 and 2009 were US$24.7 million, US$36.8 million and US$60.5 million, respectively. Our advance from customers as of December 31, 2007, 2008 and 2009 were US$0.7 million, US$0.7 million and US$0.6 million, respectively. Our deferred revenues as of December 31, 2007, 2008 and 2009 were nil, nil and US$2.7 million, respectively. Our days of sales outstanding in 2007, 2008 and 2009 were 103, 104 and 112 days, respectively. We calculate our days of sales outstanding by dividing the average accounts receivable, net of advance from customers and deferred revenues, by gross revenues before business tax in a year, multiplied by 365.

We conduct credit evaluations of clients and generally do not require collateral or other security from our clients. We establish an allowance for doubtful accounts based upon estimates, historical experience and other factors surrounding the credit risk of specific clients. The amount of receivables ultimately not collected by us has generally been consistent with our expectations and the allowance established for doubtful accounts. In 2007, 2008 and 2009, the provision made for doubtful accounts was US$0.3 million, US$0.6 million and US$1.0 million, respectively. If the frequency and amount of customer defaults change due to our clients’ financial condition or general economic conditions, our allowance for uncollectible accounts may require adjustment. As a result, we continuously monitor outstanding receivables and adjust allowances for accounts where collection may be in doubt.

The following table presents a profile of our accounts receivable in terms of days for which accounts receivable were outstanding:


	As of December 31,
	2007		2008		2009
	(in US$ thousands)
Period in days
0 – 90		23,508		35,351		47,505
91 – 180		668		1,066		11,893
More than 180		532		410		1,126

Total		24,708		36,827		60,524

Purchase price allocation in business combinations and impairment of goodwill

We account for acquired businesses using the purchase method of accounting. On January 1, 2009, we adopted a new accounting pronouncement with prospective application which made certain changes to the previous authoritative literature on business combinations. From January 1, 2009, the assets acquired, the liabilities assumed, and any noncontrolling interest of the acquiree at the acquisition date, if any, are measured at their fair values as of that date. Goodwill is recognized and measured as the excess of the total consideration transferred plus the fair value of any noncontrolling interest of the acquiree, if any, at the acquisition date over the fair values of the identifiable net assets acquired. Previously, any non-controlling interest was reflected at historical cost. Common forms of the consideration made in acquisitions include cash and common equity instruments. Consideration transferred in a business acquisition is measured at the fair value as at the date of acquisition. For shares issued in a business combination, we have estimated the fair value as of the date of acquisition.

Where the consideration in an acquisition includes contingent consideration, the payment of which depends on the achievement of certain specified conditions post-acquisition, from January 1, 2009, the contingent consideration is recognized and measured at its fair value at the acquisition date and if recorded as a liability, it is subsequently carried at fair value with changes in fair value reflected in earnings. For periods prior to January 1, 2009, contingent consideration was not recorded until the contingency was resolved.

The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations. Accordingly, for significant items, we typically obtain assistance from third party valuation specialists. The valuations are based on information available near the acquisition date and are based on expectations and assumptions that have been deemed reasonable by management.

There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically use the income method. This method starts with a forecast of all of the expected future net cash flows. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or other methods include the amount and timing of projected future cash flows; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry. Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.

Specifically, goodwill impairment is determined using a two-step process. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow. We perform annual goodwill impairment assessments on December 31 of each year. As of December 31, 2009, we have determined that the fair value of each of our two reporting units was substantially higher than its carrying amount, and therefore, no goodwill impairment was recorded by us.

Some of the more significant estimates and assumptions inherent in the goodwill impairment estimation process using the market approach include the selection of appropriate comparable companies, the determination of market value multiples for the comparable companies, the subsequent selection of an appropriate market value multiple for the business based on a comparison of the business to the comparable companies, the determination of applicable premiums and discounts based on any differences in marketability between the business and the comparable companies and, when considering the income approach, include the required rate of return used in the discounted cash flow method, which reflects capital market conditions and the specific risks associated with the business. Other estimates inherent in the income approach include long-term growth rates and cash flow forecasts for the business.

Estimates of fair value result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions at a point in time. The judgments made in determining an estimate of fair value can materially impact our results of operations. The valuations are based on information available as of the impairment review date and are based on expectations and assumptions that have been deemed reasonable by management. Any changes in key assumptions, including unanticipated events and circumstances, may affect the accuracy or validity of such estimates and could potentially result in an impairment charge.

Recently issued accounting standards

In June 2009, the FASB issued an authoritative pronouncement that changes how a company determines whether an entity should be consolidated when such entity is insufficiently capitalized or is not controlled by the company through voting (or similar rights). The determination of whether a company is required to consolidate an entity is based on, among other things, the entity’s purpose and design and the company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The pronouncement retains the scope of previously issued pronouncements but added entities previously considered qualifying special purpose entities, since the concept of these entities was eliminated by FASB. The pronouncement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2009. We do not expect the adoption of this pronouncement to have a significant impact on our financial condition or results of operations.

In September 2009, the FASB issued an authoritative pronouncement regarding revenue arrangements with multiple deliverables. This pronouncement was issued in response to practice concerns related to accounting for revenue arrangements with multiple deliverables under the existing pronouncement. Although the new pronouncement retains the criteria from the existing pronouncement for when delivered items in a multiple-deliverable arrangement should be considered separate units of accounting, it removes the separation criterion under the existing pronouncement that objective and reliable evidence of the fair value of any undelivered items must exist for the delivered items to be considered a separate unit or separate units of accounting. The new pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply this pronouncement prospectively to new or materially modified arrangements after the pronouncement’s effective date or retrospectively for all periods presented. Early application is permitted; however, if the entity elects prospective application and early adopts this pronouncement after its first interim reporting period, it must also retrospectively apply this pronouncement as of the beginning of that fiscal year and disclose the effect of the retrospective adjustments on the prior interim periods’ revenue, income before taxes, net income, and earnings per share. We are in the process of evaluating the effect of adoption of this pronouncement.

In September 2009, the FASB issued an authoritative pronouncement regarding software revenue recognition for arrangements with multiple deliverables. The pronouncement addresses how consideration should be allocated to different units of accounting and removes the previous criterion that entities must use objective and reliable evidence of fair value in separately accounting for deliverables. The pronouncement provides that products containing both software and non-software components that function together to deliver the product’s essential functionality are excluded from the scope of current revenue recognition guidance for software products. The pronouncement includes factors that entities should consider when determining whether the software and non-software components function together to deliver the product’s essential functionality. The pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply this pronouncement prospectively to new or materially modified arrangements after the pronouncement’s effective date, or retrospectively for all periods presented. Early application is permitted. However, if the entity elects prospective application and early adopts this pronouncement after its first interim reporting period, it must also retrospectively apply this pronouncement as of the beginning of that fiscal year and disclose the effect of the retrospective adjustments on the prior interim periods’ revenue, income before taxes, net income, and earnings per share. We are in the process of evaluating the effect of adoption of this pronouncement.

In January 2010, the FASB issued authoritative guidance to improve disclosures about fair value measurements. This guidance amends previous guidance on fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurement on a gross basis rather than on a net basis as currently required. This guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This guidance is effective for annual and interim periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activities of purchases, sales, issuances, and settlements on a gross basis, which will be effective for annual and interim periods beginning after December 15, 2010. Early application is permitted and, in the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. We do not expect the adoption of this pronouncement to have a significant impact on our financial condition or results of operations.

In April 2010, the FASB issued an authoritative pronouncement regarding milestone method of revenue recognition. The scope of this pronouncement is limited to arrangements that include milestones relating to research or development deliverables. The pronouncement specifies guidance that must be met for a vendor to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The guidance applies to milestones in arrangements within the scope of this pronouncement regardless of whether the arrangement is determined to have single or multiple deliverables or units of accounting. The pronouncement will be effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early application is permitted. Companies can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior periods is also permitted. We are in the process of evaluating the effect of adoption of this pronouncement.

In April 2010, FASB issued an authoritative pronouncement regarding the effect of denominating the exercise price of a share-based payment award in the currency of the market in which the underlying equity securities trades and that currency is different from (1) entity’s functional currency, (2) functional currency of the foreign operation for which the employee provides services, and (3) payroll currency of the employee. The guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should be considered an equity award assuming all other criteria for equity classification are met. The pronouncement will be effective for interim and annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. We are in the process of evaluating the effect of adoption of this pronouncement.

Results of Operations

The following table sets forth a summary of our consolidated statements of operations for the periods indicated.


	For the Year Ended December 31,
	2007			2008			2009
	(in US$ thousands)
Consolidated Statement of Operations Data
Net revenues		62,714			102,663			148,066
Cost of revenues		(38,544	)		(62,911	)		(92,171	)

Gross profit		24,170			39,752			55,895

Selling, general and administrative expenses		(16,180	)		(25,905	)		(34,710	)

Change in fair value of contingent consideration liability arising from business acquisitions		—			—			(62	)
Other operating income		860			858			1,754

Income from operations		8,850			14,705			22,877
Interest income		1,032			2,028			856
Interest expense		(47	)		(69	)		(86	)
Exchange differences		317			703			(119	)
Change in fair value of the warrants		(357	)		—			—

Income before income taxs and earnings in equity method investment		9,795			17,367			23,528
Income tax expense		(174	)		(1,298	)		(2,089	)

Income before earnings in equity method investment		9,621			16,069			21,439
Earnings in equity method investment		—			20			69

Net income		9,621			16,089			21,508
Net (income)/loss attributable to noncontrolling interest		(52	)		84			—
Deemed dividend on Series A convertible redeemable preferred shares—accretion of redemption premium		(632	)		—			—

Income attributable to VanceInfo Technologies Inc. shareholders		8,937			16,173			21,508

The following table sets forth certain financial information as a percentage of our net revenues:


	For the Year Ended December 31,
	2007			2008			2009
Consolidated Statement of Operations Data
Net revenues		100.0	%		100.0	%		100.0	%
Cost of revenues		(61.5	)		(61.3	)		(62.2	)

Gross profit		38.5			38.7			37.8

Selling, general and administrative expenses		(25.8	)		(25.2	)		(23.4	)

Change in fair value of contingent consideration liability arising from business acquisitions		—			—			(*	)

Other operating income		1.4			0.8			1.2

Income from operations		14.1			14.3			15.5
Interest income		1.6			2.0			0.6


	For the Year Ended December 31,
	2007			2008			2009
Interest expense		(0.1	)		(0.1	)		(0.1	)
Exchange differences		0.5			0.7			(0.1	)
Change in fair value of the warrants		(0.5	)		—			—
Income before income taxs and earnings in equity method investment		15.6			16.9			15.9
Income tax expense		(0.3	)		(1.2	)		(1.4	)

Income before earnings in equity method investment		15.3			15.7			14.5
Earnings in equity method investment		—			*			*

Net income		15.3			15.7			14.5
Net (income)/loss attributable to noncontrolling interest		(*	)		0.1			—
Deemed dividend on Series A convertible redeemable preferred shares—accretion of redemption premium		(1.0	)		—			—

Income attributable to VanceInfo Technologies Inc. shareholders		14.3			15.8			14.5


*		less than 0.1%

(1)		We adopted ASC Topic 810-10-65 regarding accounting for noncontrolling interest in consolidated financial statements on January 1, 2009, retrospectively.

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Our results of operations for the year ended December 31, 2009 compared to the year ended December 31, 2008 were impacted by the inclusion in the operating results for 2009 of our acquisition of TP Companies, which we acquired in July 2009.

Net Revenues

Our net revenues were US$148.1 million in 2009, representing an increase of 44.2% from our net revenues of US$102.7 million in 2008. The growth in our net revenues was primarily due to an increase in sales volumes, which was due primarily to a US$31.1 million increase in our sales to our existing clients as of December 31, 2008, as a result of our enhanced relationships with these clients, and US$14.3 million of sales to new clients. The number of our clients increased to 272 for 2009 from 241 for 2008. In addition, the total number of clients that individually accounted for over US$1 million of our net revenues on an annualized basis increased to 22 for 2009 from 18 for 2008.

We hired approximately 230 professionals through our acquisition of TP Companies in 2009. This acquisition strengthened our capabilities and expertise in call center CRM solutions and call center services.

Cost of Revenues

In 2009, our cost of revenues was US$92.2 million, representing an increase of 46.5% from US$62.9 million in 2008. Cost of revenues represented 61.3% and 62.2% of our net revenues in 2008 and 2009, respectively. The increase was primarily due to an increase in compensation and benefit expenses of our professionals as explained further below.

In 2009, our compensation and benefit expenses in respect of our professionals, excluding share-based compensation expenses, increased by 55.8% to US$71.7 million from US$46.0 million in 2008, primarily due to an increase in our number of professionals. Our cost of revenues in 2009 and 2008 also included US$0.3 million and US$0.3 million, respectively, of share-based compensation expenses arising from share options and restricted share units granted to our professionals.

Our subcontracting costs increased to US$11.6 million in 2009 from US$10.4 million 2008, primarily due to increases in business volumes and project scale. Our travel expenses in cost of revenues increased to US$4.3 million in 2009 from US$3.2 million in 2008, primarily due to the growth in our overseas onsite services and enterprise solutions services provided to domestic clients.

Our depreciation and amortization expenses included in cost of revenues increased to US$1.5 million in 2009 from US$0.9 million in 2008, primarily due to increased depreciation expenses relating to computers and equipment used by our professionals and depreciation of the leasehold improvements.

Gross Profit

Our gross profit in 2009 was US$55.9 million, representing an increase of 40.6% from US$39.8 million in 2008. Gross profit as a percentage of our net revenues decreased slightly to 37.8% in 2009 from 38.7% in 2008.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses were US$34.7 million in 2009, representing an increase of 34.0% from US$25.9 million in 2008.

Compensation and benefit expenses in respect of selling, general and administrative employees, excluding share-based compensation expenses, increased by 38.4% to US$14.3 million in 2009 from US$10.3 million in 2008, primarily as we hired more selling, general and administrative employees and their average salary increased. Our selling, general and administrative expenses in 2009 also included US$1.3 million of share-based compensation expenses arising from share options granted to our selling, general and administrative employees compared to US$1.1 million of share-based compensation expenses in 2008. Rental and utilities expenses increased to US$6.5 million in 2009 from US$4.5 million in 2008, primarily due to our entering into new leases in major cities across China. Our amortization and depreciation expenses increased to US$4.5 million in 2009 from US$3.0 million in 2008 as a result of increase in our capital expenditures in 2009 and our acquisitions in 2008 and 2009. Our travel and advertising expenses also increased in 2009 compared to 2008 primarily due to enhanced marketing efforts.

Other Operating Income

Other operating income was generated primarily from government subsidies. In 2009, our government subsidies were US$1.5 million, an increase from US$0.8 million in 2008. In 2008 and 2009, we were granted government subsidies for obtaining certain technical certifications, improving our internal process management system and hiring and training new employees with college degrees.

Income from Operations

Our income from operations was US$22.9 million in 2009, representing an increase of 55.6% from US$14.7 million in 2008. The increase was due to our higher net revenues in 2009 compared to 2008, partly offset by the increases in our cost of revenues and operating expenses during the same period. Income from operations as a percentage of net revenues increased to 15.5% in 2009 from 14.3% in 2008.

Interest Income

Our interest income decreased to US$0.9 million in 2009 from US$2.0 million in 2008. The decrease was primarily due to decrease of the bank interest rate in 2009 compared to 2008.

Foreign Exchange Gain (Loss)

For 2009, we incurred foreign exchange loss of US$0.1 million, as compared to foreign exchange gain of US$0.7 million for 2008. Our foreign exchange loss in 2009 was largely due to the fluctuation of the Japanese yen.

Income Tax Expense

Our income tax expense increased to US$2.1 million for 2009 from US$1.3 million for 2008, primarily due to an increase in effective tax rate from 7.5% in 2008 to 8.9% in 2009 and an increase in taxable income.

Earnings in equity investment

We invested in Link Result in 2008 and account for our investment in Link Result under the equity method. For 2009, we shared earnings in Link Result in the amount of US$69,000.

Net Income

As a result of the foregoing, our net income was US$21.5 million in 2009, representing an increase of 33.7% from US$16.1 million in 2008. Net income as a percentage of our net revenues decreased to 14.5% in 2009 from 15.7% in 2008.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Our results of operations for the year ended December 31, 2008 compared to the year ended December 31, 2007 were impacted by the inclusion in the operating results for 2008 of our acquisition of WIT, which we acquired in October 2008.

Net Revenues

Our net revenues were US$102.7 million in 2008, representing an increase of 63.7% from our net revenues of US$62.7 million in 2007. The growth in our net revenues was primarily due to an increase in sales volumes, which was due primarily to a US$35.6 million increase in our sales to our existing clients as of December 31, 2007, as a result of our enhanced relationships with these clients, and to US$4.4 million of sales to new clients. The number of our clients increased to 241 for 2008 from 205 for 2007. In addition, the total number of clients that individually accounted for over US$1 million of our net revenues on an annualized basis increased to 18 for 2008 from 11 for 2007.

We hired approximately 30 professionals through our acquisition of WIT in 2008. This acquisition strengthened our capabilities and expertise in mobile testing and application development services.

Cost of Revenues

In 2008, our cost of revenues was US$62.9 million, representing an increase of 63.2% from US$38.5 million in 2007. Cost of revenues represented 61.5% and 61.3% of our net revenues in 2007 and 2008, respectively. The increase was primarily due to increases in compensation and benefit expenses of our professionals and our subcontracting costs, as explained further below.

In 2008, our compensation and benefit expenses in respect of our professionals, excluding share-based compensation expenses, increased by 66.4% to US$46.0 million from US$27.7 million in 2007, primarily due to an increase in our number of professionals. Our cost of revenues in 2008 and 2007 also included US$0.3 million and US$0.1 million of share-based compensation expenses arising from share options and restricted share units granted to our professionals.

Our subcontracting costs increased by 69.1% to US$10.4 million in 2008 from US$6.1 million 2007, primarily due to increases in business volumes and project scale.

Our depreciation expenses included in cost of revenues increased to US$0.9 million in 2008 from US$0.6 million in 2007, primarily due to increased depreciation expenses relating to computers and equipment used by our professionals and depreciation of the leasehold improvements.

Gross Profit

Our gross profit in 2008 was US$39.8 million, representing an increase of 64.5% from US$24.2 million in 2007. Gross profit as a percentage of our net revenues was maintained at 38.7% in 2008 compared to 38.5% in 2007.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses were US$25.9 million in 2008, representing an increase of 60.1% from US$16.2 million in 2007.

Compensation and benefit expenses in respect of selling, general and administrative employees, excluding share-based compensation expenses, increased by 94.9% to US$10.3 million in 2008 from US$5.3 million in 2007, primarily as we hired more selling, general and administrative employees and their average salary increased. Our selling, general and administrative expenses in 2008 also included US$1.1 million of share-based compensation expenses arising from share options granted to our selling, general and administrative employees compared to US$0.9 million of share-based compensation expenses in 2007. Rental and utilities expenses increased to US$4.5 million in 2008 from US$3.2 million in 2007, primarily due to our entering into new leases in major cities across China. Our amortization and depreciation expenses increased to US$3.0 million in 2008 from US$1.9 million in 2007 primarily due to increase in our capital expenditures in 2008 and our acquisitions in 2007 and 2008. Our travel and advertising expenses also increased in 2008 compared to 2007 primarily due to enhanced marketing efforts.

Other Operating Income

Other operating income was generated primarily from government subsidies. In 2008, our government subsidies were US$0.8 million, a decrease from US$0.9 million in 2007. In 2008, we were granted government subsidies for obtaining certain technical certifications, improving our internal process management system, successfully completing our initial public offering and hiring and training interns. In 2007, we were granted government subsidies for obtaining certain technical certifications, improving our internal process management system and for part of the Company’s training costs incurred in 2007.

Income from Operations

Our income from operations was US$14.7 million in 2008, representing an increase of 66.2% from US$8.9 million in 2007. The increase was due to our higher net revenues in 2008 compared to 2007, partly offset by the increases in our cost of revenues and operating expenses during the same period. Income from operations as a percentage of net revenues was maintained at 14.3% in 2008 compared to 14.1% in 2007.

Interest Income

Our interest income increased to US$2.0 million in 2008 from US$1.0 million in 2007. The increase was due to an increase in our cash balances in 2008 compared to 2007.

Foreign Exchange Gain (Loss)

For 2008, we incurred foreign exchange gain of US$0.7 million, as compared to foreign exchange gain of US$0.3 million for 2007. Our foreign exchange gain in 2008 was largely due to the fluctuation of the Japanese yen.

Income Tax Expense

Our income tax expense increased to US$1.3 million for 2008 from US$0.2 million for 2007, primarily due to the expiration of VanceInfo Beijing’s three-year tax exemption, which was in effect from 2005 to 2007. In 2008, VanceInfo Beijing, our major operating entity, was entitled to a 50% reduction in its 15% preferential tax rate due to its recognition as a “new and high-technology enterprise” located in the Beijing New Industry Development Pilot Zone.

Earnings in equity investment

We invested in Link Result in 2008 and account for our investment in Link Result under the equity method. For 2008, we shared earnings in Link Result in the amount of US$20,000.

Net Income

As a result of the foregoing, our net income was US$16.1 million in 2008, representing an increase of 67.2% from US$9.6 million in 2007. Net income as a percentage of our net revenues increased to 15.7% in 2008 from 15.3% in 2007.

B.Liquidity and Capital Resources

Cash Flows and Working Capital

Our operations and growth have been financed by cash generated from operations, from private placements of our preferred shares and from our public offering proceeds. As of December 31, 2009, we had US$ 64.1 million in cash and cash equivalents, compared to US$80.0 million as of December 31, 2008 and US$76.8 million as of December 31, 2007. The decrease in our cash and cash equivalents from December 31, 2008 to December 31, 2009 was primarily due to the short-term investments in marketable debt securities. The increase in our cash and cash equivalents from December 31, 2007 to December 31, 2008 was primarily due to cash flows from our expanded operation in 2008.

Our working capital as of December 31, 2007, 2008 and 2009 was US$91.7 million, US$99.6 million and US$121.5 million, respectively. We had US$1.2 million, US$1.5 million and nil in outstanding bank borrowings as of such dates.

The following table shows our cash flows with respect to operating activities, investing activities and financing activities in 2007, 2008 and 2009:


	For the Year Ended December 31,
	2007			2008			2009
	(in US$ thousands)
Net cash provided by operating activities		7,479			15,404			12,804
Net cash used in investing activities		(9,275	)		(10,128	)		(31,362	)
Net cash provided by (used in) financing activities		57,741			(2,826	)		2,673
Effect of exchange rate changes		325			678			(21	)
Net increase in cash and cash equivalents		55,945			2,450			(15,885	)
Cash and cash equivalents at the beginning of the year		20,565			76,835			79,963
Cash and cash equivalents at the end of the year		76,835			79,963			64,057

Operating Activities

Net cash provided by operating activities for 2009 amounted to US$12.8 million. Net cash provided by operating activities for 2009 was primarily attributable to net income of US$21.5 million; partially offset by an increase of the net working capital requirement as a result of an increase in the scale of our business. Our growing business generated substantial net cash inflow as our net revenues increased from US$102.7 million for 2008 to US$148.1 million for 2009, while cost of revenues and operating expenses, after deducting non-cash items and items that did not affect our operating cash flow, increased to US$116.8 million for 2009 from US$83.5 million for 2008. As of December 31, 2009, our days of sales outstanding were 112 days, as compared to 104 days at the end of the year 2008.

Net cash provided by operating activities for 2008 amounted to US$15.4 million. Net cash provided by operating activities for 2008 was primarily attributable to net income of US$16.1 million; partially offset by an increase of the net working capital requirement as a result of an increase in the scale of our business. Our growing business generated substantial net cash inflow as our net revenues increased from US$62.7 million for 2007 to US$102.7 million for 2008, while cost of revenues and operating expenses, after deducting non-cash items and items that did not affect our operating cash flow, increased to US$83.5 million for 2008 from US$51.2 million for 2007. As of December 31, 2008, our days of sales outstanding were 104 days, as compared to 103 days at the end of the year 2007.

Net cash provided by operating activities for 2007 amounted to US$7.5 million. Net cash provided by operating activities for the 2007 was primarily attributable to net income of US$9.6 million; depreciation and amortization of property and equipment of US$1.8 million and share-based compensation expenses of US$1.0 million, which did not affect our operating cash flow; and an increase of US$1.9 million in accrued expenses and other payables; partially offset by an increase of US$7.9 million in accounts receivable as a result of an increase in sales, particularly sales in the fourth quarter of 2007 for which payment had not been received by the end of the quarter, and an increase of US$1.0 million in prepaid expenses and other current assets incurred by us, including expenses for purchases of computers for our clients, advances to our employees for their travel expenses and prepayments to service providers, which negatively affected operating cash flow. Our growing business generated substantial net cash inflow as our net revenues increased from US$29.1 million for 2006 to US$62.7 million for 2007, while cost of revenues and operating expenses, after deducting non-cash items and items that did not affect our operating cash flow, increased to US$51.2 million for 2007 from US$23.2 million for 2006.

Investing Activities

Net cash used in investing activities was US$31.4 million for 2009, primarily attributable to US$12.1 million for purchase of short-term investment, US$8.5 million for purchase of term deposit, US$7.3 million for purchase of property and equipment and US$3.5 million of consideration paid for business acquisitions. Net cash used in purchase of property and equipment was primarily due to purchase of fixed assets and improvement of leased premises as we set up new offices in major cities across China in 2009. Net cash paid for business acquisitions was primarily for our acquisitions of Kernel and a professional team of engineers and certain business and assets from a China-based mobile service provider and additional consideration paid in relation to our acquisitions of WIT, Tianchuang and Chosen.

Net cash used in investing activities was US$10.1 million for 2008, primarily attributable to US$6.7 million of consideration paid for business acquisitions, US$6.1 million for purchase of property and equipment, partly offset by US$3.6 million in repayments of loans to shareholders. Loans to shareholders were made in connection with some of our acquisitions, all of which were repaid in 2008. Net cash used in purchase of property and equipment was primarily due to purchase of fixed assets and improvement of leased premises as we set up new offices in major cities across China in 2008. Net cash paid for business acquisitions was primarily for our acquisitions of WIT and Tianchuang and additional consideration paid in relation to our acquisitions of Shanghai VanceInfo, Megainfo, VanceInfo Japan and Chosen.

Net cash used in investing activities was US$9.3 million for 2007, primarily attributable to US$3.7 million for purchase of property and equipment, US$3.9 million of consideration paid for business acquisitions, and US$4.1 million of loans to shareholders, partly offset by US$3.7 million repayments of loans to shareholders. Loans to shareholders were made in connection with some of our acquisitions, which are generally due within 12 months. Net cash used in purchase of property and equipment was primarily due to purchase of fixed assets and improvement of leased premises as we set up new offices in major cities across China and in Seattle in 2007. Net cash paid for business combinations was primarily for acquisitions of ITC, Megainfo and Chosen.

Financing Activities

Net cash provided by financing activities was US$2.7 million for 2009, compared to net cash used in financing activities of US$2.8 million for 2008. Net cash provided by financing activities for 2009 was primarily due to US$3.6 million of proceeds from exercise of options and US$2.9 million of proceeds from our follow-on public offering in July 2009, partially offset by repayment of short-term borrowings of US$3.9 million.

Net cash used in financing activities was US$2.8 million for 2008, compared to net cash provided by financing activities of US$57.7 million for 2007. Net cash used in financing activities for 2008 was primarily due to our repurchase of ordinary shares of US$2.0 million, repayment of government subsidized short-term loans of US$1.3 million and our payment of IPO-related expenses of US$1.1 million, partially offset by our receipt of a government subsidized short-term loan of US$1.5 million.

Net cash provided by financing activities was US$57.7 million for 2007, compared to net cash provided by financing activities of US$17.4 million for 2006. Net cash provided by financing activities for 2007 was primarily due to US$55.8 million of net proceeds we received from our initial public offering in December 2007, US$1.8 million of proceeds we received upon exercising warrants to purchase Series B-3 preferred shares by warrant holders, and a government subsidized short-term loan of US$1.2 million, partially offset by repayment of US$0.5 million loans of Prosoft and Shanghai VanceInfo that we assumed after we acquired these two companies and payments of US$0.5 million to certain shareholders to repurchase their shares during 2007.

Capital Expenditures

Our capital expenditures in 2007, 2008 and 2009 were US$3.7 million, US$6.1 million and US$7.3 million, respectively. Our capital expenditures related primarily to purchase of computers and improvement of leased premises. We expect our capital expenditures to increase in the future as we expand our business to implement our growth strategy.

We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next 12 months. We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we may seek to sell additional equity securities, debt securities or borrow from lending institutions. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. The sale of additional equity securities, including convertible debt securities, would dilute our shareholders. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.

We are a holding company, and we may rely substantially on dividends from our subsidiaries in China for our cash requirements, including any debt we may incur. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside a certain amount of its after-tax profits each year, if any, to fund certain statutory reserves. These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. These regulations have not had a material adverse impact on our ability to meet our cash obligations and we do not expect them to have a material adverse impact in the future.

The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive a substantial portion of our revenues in RMB. Under our current structure, our income will be substantially derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency dominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, for most capital account items, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. These controls have not had a material adverse impact on our ability to meet our cash obligations and we do not expect them to have a material adverse impact in the future.

C.Research and Development, Patents and Licenses, Etc.

We focus on developing and refining our methodologies, tools and techniques, implementing metrics, improving estimation processes, ensuring the quality of our product and managing the project delivery process. Our professionals conduct short-term and long-term research in the areas of knowledge management, performance testing, and education and training methodologies. Our professionals compile training materials for our on-campus programs from time to time.

D.Trend Information

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2007 to December 31, 2009 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

E.Off-Balance Sheet Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

F.Tabular Disclosure of Contractual Obligations

Contingent Acquisition Payments

As of December 31, 2009, in connection with our recent acquisitions, we agreed to make contingent payments of up to US$13.4 million in a mix of cash and our ordinary shares, of which up to US$7.6 million may be paid with cash, and up to US$5.8 million may be paid with our ordinary shares, in each case subject to the achievement of certain financial performance targets from 2009 to 2011.

Contractual Obligations

The following table sets forth our contractual obligations and commercial commitments as of December 31, 2009:


	Payment Due by Period
			Less than						More than
	Total		1 Year		1-3 Years		3-5 Years		5 Years

Operating leases		12,168		5,129		6,534		337		168
Purchase obligations		17,548		14,922		2,626		—		—

Total contractual obligations		29,716		20,051		9,160		337		168

Other than non-current deferred tax liabilities, the obligations set fo rth above, and the contingent payments described under “—Contingent Acquisition Payments,” we did not have any long-term debt obligations, operating lease obligations, purchase obligations or other long-term liabilities as of December 31, 2009.

G.Safe Harbor

This annual report on Form 20-F contains statements of a forward-looking nature. 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. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as “may,” “will,” “expects,” “anticipates,” “future,” “intend,” “plan,” “believe,” “estimate,” “is/are likely to” or other and similar expressions. The accuracy of these statements may be impacted by a number of risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but are not limited to, the following:

•

our expansion plans;

•

our anticipated growth strategy;

•

our plans to recruit more employees;

•

our plans to invest in research and development to enhance our service lines;

•

our future business development, results of operations and financial condition;

•

expected changes in our net revenues and certain cost or expense items;

•

our ability to attract and retain clients; and

•

trends and competition in the offshore IT services industry.

This annual report on Form 20-F also contains estimates, projections and statistical data related to the IT services market in China. You should not place undue reliance on these forward-looking statements. We would like to caution you not to place undue reliance on forward-looking statements and you should read these statements in conjunction with the risk factors disclosed in Item 3 of this annual report, “Key Information—Risk Factors.” We do not undertake any obligation to update or revise the forward-looking statements except as required under applicable law.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.Directors and Senior Management

The following table sets forth information regarding our executive officers and directors as of the date of this report.


Directors and Executive Officers	Age		Position/Title
Chris Shuning Chen		46	Chairman and Chief Executive Officer
David Lifeng Chen		41	Director and President
Hao Chen		43	Director
Ruby Lu		39	Director
Kui Zhou		42	Director
Daniel Mingdong Wu		43	Director
Samuelson S.M. Young		58	Director
Sidney Xuande Huang		44	Chief Operating Officer and Chief Financial Officer
Junbo Liu		47	Executive Vice President and Chief Business Development Officer
Gerry Jianxin Lu		43	Executive Vice President
Jeff Jian Wu		42	Executive Vice President and Chief Globalization Officer
Kevin Zhong Liu		38	Executive Vice President
Stanley Ying Zhou		47	Executive Vice President and Chief Administrative Officer

Biographical Information

Directors

Mr. Chris Shuning Chenis our founder, chairman and chief executive officer. He co-founded our company in 1995, served as a managing director from 1995 to 1999 and became the chief executive officer in 1999. Prior to founding our company, Mr. Chen worked as a senior software developer at Great Wall Computer Software & System Co., Ltd., a Chinese company specializing in computer software and system integration, from 1989 to 1995, and spent two years on an assignment in the United States. He also participated in the development of the IBM OS/2 operating system from 1994 to 1995. Mr. Chen received his master’s degree in engineering from Huazhong University of Science & Technology and his bachelor’s degree in mechanical engineering from Tsinghua University.

Mr. David Lifeng Chenis our president and has been working with us since 2001. He also has been a director of our company since 2008. He co-founded Heteng Software in 2001. Mr. Chen served as a development manager at Asera, a leading B2B software company based in California in the United States, from 1999 to 2001. He worked for IBM Crossworlds as a product manager, a management consultant at KPMG Consulting, from 1997 to 1999. He served as a software engineer of the ERP development group at Oracle, a leading provider of enterprise resources planning software based in the United States, from 1995 to 1997. Mr. Chen received his master’s of science degree in computer engineering from the University of California, Irvine and his bachelor’s of science degree in electrical engineering from Tongji University.

Mr. Hao Chenhas been a director of our company since 2005. Mr. Chen is a co-founder of Legend Capital, a China based private investment fund, and has served as its managing director and head of investment since 2001. He also serves as a director of Spreadtrum Communications, Inc., a company listed on Nasdaq Global Market, Beijing Kaiotne Information Technologies Co., Ltd., Beijing Zhongsou Online Software Limited, EYANG Technology Development Co., Ltd., a company listed on the Hong Kong Stock Exchange, Beijing Dianji Technology Co., Ltd., KML Company Ltd. and Boke Company Ltd., all of which are technology companies in which Legend Capital has invested. From 2000 to 2001, Mr. Chen served as a deputy director of Corporate Planning Department and Human Resource General Manager of Legend Group, which was renamed as Lenovo Group Limited in 2004, a Chinese leading IT product manufacturer. From 1992 to 2000, Mr. Chen was general manager of Legend Advanced System Ltd., a subsidiary of Legend Group specializing in system integration. From 1988 to 1992, Mr. Chen worked as manager in Shenzhen Electronics Group Co., Ltd., a Chinese company that is engaged in manufacture and sales of computer and electronics equipment. Mr. Chen received his bachelor’s degree in computer and application from Huazhong University of Science & Technology.

Ms. Ruby Luhas been a director of our company since May 2007. Ms. Lu is a partner at DCM, a venture capital investment company headquartered in Silicon Valley. Ms. Lu also serves on the board of directors of other DCM portfolio companies, including Dang Dang, a leading e-commerce retailer in China; Bitauto, a media player focusing on auto industry; and Wikinvest, Inc., a user generated financial information website in the United States. Prior to joining DCM in 2003, Ms. Lu was a vice president in the technology, media and telecommunications investment banking group of Goldman Sachs & Co. During her tenure at Goldman Sachs & Co. from 1996-2003, Ms. Lu advised clients on projects ranging from privatization restructuring, corporate finance, mergers and acquisitions. Ms. Lu received her Bachelor’s degree in Economics with honors from the University of Maryland and Master’s degree in International Economics as well as Energy, Environment, Science and Technology from Johns Hopkins University, School of Advanced International Studies.

Mr. Kui Zhouhas been a director of our company since 2006. Mr. Zhou has been a principal of Sequoia Capital China since 2005 and a partner of Sequoia Capital China since May 2007. He is also a director of HDT Holding Technologies Inc., a China- based online advertising and marketing company; Hangzhou Sky Network Technologies Co., Ltd, a China-based mobile application company; Xiamen Changelight Co., Ltd., a China-based LED and solar cell research and manufacturing company; Shanghai Hintsoft Software Co., Ltd., a China-based Internet cafe software provider; Beijing Speedpay Technology Co., Ltd., a high-tech company committed to wireless payment and mobile e-commerce business; Beijing Zhijinleye Education & Technology Co., Ltd., a company specializing in providing China’s medical industry with distance education training and technical services; and E.T. Xun Holding Inc., a China-based mobile application company, all of which are invested by Sequoia Capital China. Prior to joining Sequoia Capital China, Mr. Zhou served as a senior vice president at Legend Capital from 2001 to 2005. From 1999 to 2001, he served as a manager of corporate business development department of Legend Holdings Ltd. He was a deputy general manager of manufacture department of Zhongshan Telecom Device Limited, a Chinese company specializing in telecom device manufacture, from 1992 to 1997. From 1989 to 1992, Mr. Zhou worked as a director of power workshop for Southeast Tungsten Metallurgy, a Chinese metallurgy company. Mr. Zhou received his bachelor’s degree in electrical automation from Wuhan Technology University and his master’s of business administration degree from Tsinghua University.

Mr. Daniel Mingdong Wuhas been our director since October 2007. Mr. Wu has been a venture partner at SAIF Partners, a private equity fund focusing on growth investment opportunities in China and other Asian countries, since 2009. Prior to that, Mr. Wu served as chief financial officer of Focus Media Holdings Limited, a China-based advertising company listed on the Nasdaq Global Market, from 2005. Mr. Wu was chief financial officer and a director of Harbour Networks Ltd. from 2004 until 2005. Prior to that, Mr. Wu was a partner of Bridgecross Ltd. from 2001 until 2003 and acted as chief financial officer of Wi-Comm United Communications Inc. from 2003 until 2004. From 2000 to 2001, Mr. Wu was a vice president for technology investment banking at Merrill Lynch (Asia Pacific) Ltd. From 1996 to 2000, Mr. Wu worked in the global communications group of Lehman Brothers Inc. Mr. Wu holds a bachelor’s degree from the State University of New York at Buffalo and a master’s of business administration degree from Columbia Business School.

Mr. Samuelson S. M. Younghas been our director since December 2007. Mr. Young has years of experience in information technology, financial services and business management. Mr. Young has been the Chairman of Ebridge Investments Limited, a China-based investment firm, since 2006. He is also the founding partner of Xanadu Ventures and has been with Xanadu Partners since 2007. He also has served as a director of International Integrated Systems Inc., a Taiwan-based software development and IT services provider, since 2007. He served as a senior advisor for the Greater China region of Silver Lake Partners, a U.S.-based private equity firm, from 2006 to 2008. From 1978 to 2005, Mr. Young worked in various business divisions of IBM in Taiwan, Tokyo, and Hong Kong, and also in a joint venture of IBM in Tianjin, and was promoted to vice president of the Financial Services Sector of IBM Asia Pacific in 2001. From 1995 to 1997, Mr. Young was a member of the General Committee of the Hong Kong Arts Festival Association and a consultant to The Hong Kong University of Science & Technology’s master of business administration program. Mr. Young received his bachelor’s degree in Applied Mathematics from the National Chung Hsing University, Taiwan.

Executive Officers

Mr. Sidney Xuande Huanghas been our chief financial officer since 2006 and our chief operating officer since 2008. Prior to joining us, he was the chief financial officer of Longtop Financial Technologies Limited, a China-based software development and IT services provider, from 2005 to 2006. From 2004 to 2005, he served as the chief financial officer of 800 buy China Limited, an e-commerce company in China. Mr. Huang was an investment banker with Citigroup Global Markets Inc. in New York from 2002 to 2004. He served as an audit manager of KPMG LLP from 1996 to 2000 and is a Certified Public Accountant in the State of New York. Mr. Huang serves as a director of Etonkids Educational Group, a China-based education services provider, since 2008. Mr. Huang obtained his master’s of business administration with distinction from the Kellogg School of Management at Northwestern University as an Austin Scholar. He received his bachelor’s degree in accounting from Bernard M. Baruch College in New York City, where he graduated as class valedictorian.

Mr. Junbo Liuis our executive vice president and chief business development officer in charge of our business development. He has been working with us since 2005. Prior to working with us, Mr. Liu served as a senior vice president of Beijing SureKAM Technologies Co., Ltd., a Chinese IT services company. Mr. Liu served as a member of the selection committee of the California NGI program in 2002. He obtained a U.S. Air Force software award for his outstanding work in building a high performance resource allocation system in 1999. Mr. Liu received his Ph.D. degree in computer science from the University of Bremen.

Mr. Gerry Jianxin Luis our executive vice president in charge of our financial services group. He was the general manager of our Shanghai operations from 2005 to 2009 and has been working with us since 1999. Mr. Lu received his bachelor’s degree in materials engineering from Tongji University.

Mr. Jeff Jian Wuis our executive vice president and chief globalization officer in charge of our globalization initiatives and our software services group. Prior to joining us in 2004, he served as the vice president of marketing at Wenditel Inc., an e-commerce company specializing in online payment in the United States from 2002 to 2004. He served as the chief technology officer of Ospect Inc, a US-based CRM software company, from 2000 to 2002. Previously, Mr. Wu worked for Cambridge Technology Partners, EDS, Chordiant and Ariba in various leading roles of product development, professional services and business line management. Mr. Wu received his master’s degree in computer science from the University of Southern California and his bachelor’s degree in computer science from Tongji University.

Mr. Kevin Zhong Liuis our executive vice president in charge of human resources and corporate training. He has been working with us since 1998. From 1996 to 1998, Mr. Liu was a software engineer, and then a project manager of Hong Kong Royton Technologies, a Hong Kong company engaged in computer data storage system integration and service. Mr. Liu worked for Great Wall Software Co., Ltd., a Chinese company specializing in computer software and system integration, as a software engineer in the localization project of the OS/2 kernel, from 1995 to 1996. He was a software engineer of Yige Software Co., Ltd., a Chinese company specializing in computer system integration, from 1994 to 1995. Mr. Liu received his bachelor’s degree in computer science from Xi’an Jiaotong University.

Mr. Stanley Ying Zhouis our executive vice president and chief administrative officer and has been working with us since 1999. Mr. Zhou founded the localization business division of Shanghai Science and Technology University Development Co., Ltd., a Chinese technology company, in 1995. Prior to that, Mr. Zhou was an associate professor in the computer science department at the Shanghai University of Science and Technology, from 1984 to 1999. Mr. Zhou received his bachelor’s degree in Computer Science from Shanghai University of Science and Technology.

There is no family relationship between any of our directors or executive officers.

B.Compensation

For the fiscal year ended December 31, 2009, we paid an aggregate of approximately US$1.1 million in cash to our senior executive officers, and we did not pay any cash compensation to our non-executive directors. For the fiscal year ended December 31, 2009, we paid an aggregate of approximately US$20,000 for the pension and other social insurance contributions for our executives. For options and restricted share units granted to our officers and directors, see Item 6, “ — Share Incentive Plan.”

Employment Agreements

We have entered into employment agreements with each of our senior executive officers. We may terminate a senior executive officer’s employment for cause, at any time, without prior notice or remuneration, for certain acts of the officer, including, but not limited to, material violation of our regulations, failure to perform agreed duties or embezzlement that cause material damage to us and conviction of a crime. A senior executive officer may terminate his or her employment at any time by 60-day prior written notice. Each senior executive officer is entitled to certain benefits upon termination, including a severance payment equal to a certain specified number of months of his or her then salary, if he or she resigns for certain good reasons specified by the agreement or the relevant rules or if we terminate his or her employment without any of the above causes.

Pursuant to the employment agreement between us and our chief financial officer, Mr. Sidney Xuande Huang, in the case of termination of employment or removal from the current position due to a change-in-control event, all options granted to Mr. Huang shall become vested immediately and remain exercisable for a period of 12 months. In addition, Mr. Huang will be entitled to a severance payment in an amount equal to his then three-month base salary. For the purpose of this clause, a change-in-control event refers to acquisition by a third party of 51% or more beneficial ownership or voting securities of our company, a change in a majority of the incumbent directors resulted from a tender offer, proxy contest, merger or similar transaction, or liquidation, sale or otherwise disposition of all or substantially all of our total assets.

Share Incentive Plans

Grants Under 2005 Stock Plan

In November 2005, we adopted our 2005 Stock Plan and supplemented and amended the plan in April and May 2006, respectively. As of March 31, 2010, there are 2,619,761 ordinary shares issuable upon exercise of outstanding options under our 2005 Stock Plan.

2007 Share Incentive Plan

We have adopted a 2007 Share Incentive Plan to motivate, attract and retain employees and directors and promote the success of our business. Our board of directors has authorized the issuance of up to 1,100,000 ordinary shares plus an annual increase of 3% of then total outstanding shares on the first business day of each calendar year beginning in 2008, upon exercise of awards granted under our 2007 share incentive plan. As of March 31, 2010, there are 1,898,660 ordinary shares issuable upon exercise of our outstanding options and restricted share units under our 2007 Share Incentive Plan.

Plan Administration. Our board of directors, or our compensation committee will administer the 2007 Share Incentive Plan. The compensation committee or the full board of directors, as appropriate, will determine the provisions and terms and conditions of our awards.

Types of Awards.The following briefly describe the principal features of the various awards that may be granted under our 2007 Share Incentive Plan.

•

Options.Options provide for the right to purchase our ordinary shares at a specified price, and usually will become exercisable at the discretion of our plan administrator in one or more installments after the date of grant. The option exercise price may be paid in cash, by check, our ordinary shares which have been held by the optionholder for such time as may be required to avoid adverse accounting treatment, other property with a value equal to the exercise price, through a broker assisted cash-less exercise or such other methods as our plan administrator may approve from time to time.

•

Restricted Shares.A restricted share award is the grant of our ordinary shares at a price determined by our plan administrator. A restricted share is nontransferable, unless otherwise determined by our plan administrator at the time of award and may be repurchased by us upon termination of employment or service during a restricted period. Our plan administrator shall also determine in the award agreement whether the participant will be entitled to vote the restricted shares or receive dividends on such shares.

•

Restricted Share Units.Restricted share units represent the right to receive our ordinary shares at a specified date in the future, subject to forfeiture of such right. If the restricted share unit has not been forfeited, then on the date specified in the award agreement we shall deliver to the holder unrestricted ordinary shares which will be freely transferable.

Termination of the Share Incentive Plan.Unless terminated earlier, the 2007 Share Incentive Plan will expire in 2016. Our board of directors has the authority to amend or terminate the 2007 Share Incentive Plan subject to shareholder approval with respect to certain amendments. However, no such action may impair the rights of any recipient of the awards unless agreed by the recipient.

We did not grant any options or restricted share units to our directors and officers under our share incentive plans in 2009. For options granted to our directors and officers prior to 2009, please refer to the previous years’ annual reports.

The following table summarizes, from January 1, 2010 to March 31, 2010, the outstanding restricted share units that we granted to our directors and officers under our 2007 Share Incentive Plan.


	Restricted Shares
Name	Granted		Grant Date	End of Vesting Period
Chris Shuning Chen		7,961	February 23, 2010	February 23, 2014
David Lifeng Chen		5,789	February 23, 2010	February 23, 2014
Hao Chen		*	February 23, 2010	February 23, 2014
Ruby Lu		*	February 23, 2010	February 23, 2014
Kui Zhou		*	February 23, 2010	February 23, 2014
Sidney Xuande Huang		*	February 23, 2010	February 23, 2014
Junbo Liu		*	February 23, 2010	February 23, 2014
Gerry Jianxin Lu		*	February 23, 2010	February 23, 2014
Jeff Jian Wu		*	February 23, 2010	February 23, 2014
Kevin Zhong Liu		2,533	February 23, 2010	February 23, 2014
Stanley Ying Zhou		3,474	February 23, 2010	February 23, 2014
Directors and Executive officers as a group		47,717


*		Each of these directors and officers beneficially owns less than 1% of our outstanding ordinary shares.

C.Board Practices

In 2009, most of our directors attended all the meetings of our board and its committees on which they served after becoming members of our board. No director is entitled to any severance benefits upon termination of his directorship with us.

Board of Directors

Our board of directors currently consists of seven directors. A director is not required to hold any shares in the company by way of qualification. A director may vote with respect to any contract, proposed contract or arrangement in which he is materially interested, provided he has declared his interest in accordance with our Articles of Association. Our board of directors may exercise all the powers of the company to borrow money, mortgage its undertaking, property and uncalled capital and issue debentures or other securities whenever money is borrowed or as security for any obligation of the company or of any third party. There is no contract between us or any of our directors providing for benefits upon termination of employment.

Committees of the Board of Directors

We have established three committees under the board of directors: the audit committee, the compensation committee and the corporate governance and nominating committee. We also adopted a charter for each of the three committees. Each committee’s members and functions are described below.

Audit Committee

Our audit committee consists of Mr. Daniel Mingdong Wu, Mr. Samuelson S. M. Young and Ms. Ruby Lu. Mr. Wu is the chairman of our audit committee. Mr. Wu is a director with accounting and financial management expertise as required by the Corporate Governance Rules of the New York Stock Exchange, or the NYSE Rules. Messrs. Wu and Young and Ms. Lu satisfy the “independence” requirements of Section 303A of the NYSE Rules and Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The audit committee will oversee our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee will be responsible for, among other things:

•

selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors;

•

reviewing with the independent auditors any audit problems or difficulties and management’s response;

•

reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the Securities Act;

•

discussing the annual audited financial statements with management and the independent auditors;

•

reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies;

•

annually reviewing and reassessing the adequacy of our audit committee charter;

•

meeting separately and periodically with management and the independent auditors; and

•

reporting regularly to the board of directors.

Compensation Committee

Our compensation committee consists of Mr. Kui Zhou, Ms. Ruby Lu, Mr. Hao Chen and Mr. Daniel Mingdong Wu. Mr. Zhou is the chairman of our compensation committee. Messrs. Zhou, Chen and Wu and Ms. Lu satisfy the “independence” requirements of Section 303A of the NYSE Rules. The compensation committee will assist the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee will be responsible for, among other things:

•

reviewing and recommending to the board with respect to the total compensation package for our three most senior executives;

•

approving and overseeing the total compensation package for our executives other than the three most senior executives;

•

reviewing and recommending to the board with respect to the compensation of our directors; and

•

reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.

Corporate Governance and Nominating Committee

Our corporate governance and nominating committee consists of Mr. Hao Chen, Mr. Daniel Mingdong Wu and Mr. Samuelson S. M. Young. Mr. Chen is the chairman of our corporate governance and nominating committee. Messrs. Chen, Wu and Young satisfy the “independence” requirements of Section 303A of the NYSE Rules. The corporate governance and nominating committee will assist the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The corporate governance and nominating committee will be responsible for, among other things:

•

selecting and recommending to the board nominees for election or re-election to the board, or for appointment to fill any vacancy;

•

reviewing annually with the board the current composition of the board with regards to characteristics such as independence, age, skills, experience and availability of service to us;

•

selecting and recommending to the board the names of directors to serve as members of the audit committee and the compensation committee, as well as the corporate governance and nominating committee itself;

•

advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedial action to be taken; and

•

monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.

Duties of Directors

Under Cayman Islands law, our directors have a duty of loyalty to act honestly in good faith with a view to the best interests of our company. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. Our directors must ensure compliance with our memorandum and articles of association.

Terms of Directors and Officers

Our shareholders have designated our directors into three classes, namely Class A directors, Class B directors and Class C directors, who shall retire from office and be eligible for re-election at the first, second and third annual general meeting after our initial public offering, respectively. Mr. Chris Shuning Chen and Mr. David Lifeng Chen have been designated as Class A directors. Mr. Hao Chen, Mr. Kui Zhou and Ms. Ruby Lu have been designated as Class B directors. Mr. Daniel Mingdong Wu and Mr. Samuelson S.M. Young have been designated as Class C directors. At each subsequent annual general meeting after the third annual general meeting after our initial offering, the directors of the class who have been longest in office shall retire and shall be eligible for re-election. A director may only be removed by the shareholders. Officers are elected by and serve at the discretion of the board of directors.

D. Employees

We view our employees as critical to our business operations and future prospects. We are committed to remaining among the industry’s preferred employers in China. As of December 31, 2007, 2008 and 2009, we employed 3,675, 5,457 and 8,347 employees, including 3,224, 4,841 and 7,542 professionals, respectively. As of December 31, 2009, we employed 8,347 employees, including 7,542 professionals.

E.Share Ownership

The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of the date of March 31, 2010, by:

•

each of our directors and executive officers who are also our shareholders; and

•

each person known to us to own beneficially more than 5.0% of our ordinary shares.


	Share Beneficially Owned
	Number⁽¹⁾		%⁽²⁾
Directors and Executive Officers:
Chris Shuning Chen⁽³⁾		3,759,170		9.3
David Lifeng Chen⁽⁴⁾		440,169		1.1
Hao Chen⁽⁵⁾		956,500		2.4
Ruby Lu⁽⁶⁾		*		*
Kui Zhou⁽⁷⁾		2,199,089		5.5
Daniel Mingdong Wu⁽⁸⁾		*		*
Samuelson S.M. Young⁽⁹⁾		*		*
Sidney Xuande Huang⁽¹⁰⁾		*		*
Junbo Liu⁽¹¹⁾		*		*
Gerry Jianxin Lu⁽¹²⁾		*		*
Jeff Jian Wu⁽¹³⁾		*		*
Kevin Zhong Liu⁽¹⁴⁾		466,790		1.2
Stanley Ying Zhou⁽¹⁵⁾		467,353		1.2
All Directors and Executive Officers as a Group⁽¹⁶⁾		8,751,828		21.4

Principal Shareholders:
Sequoia⁽¹⁷⁾		2,863,033		7.2
Button Software Ltd.⁽¹⁸⁾		3,230,420		8.1
Inno Global Technology Limited and affiliates⁽¹⁹⁾		2,016,200		5.1
FMR LLC and affiliates⁽²⁰⁾		3,364,874		8.4


*		Less than 1%

(1)		Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment owner with respect to the securities.


(2)		For each person and group included in this table, percentage ownership was calculated by dividing the number of shares beneficially owned by such person or group by the sum of 39,860,320, being the number of ordinary shares outstanding as of March 31, 2010, and the number of ordinary shares underlying share options held by such person or group that are exercisable within 60 days after March 31, 2010.

(3)		Represents 2,630,420 ordinary shares held by Button Software Ltd., a British Virgin Islands company, and 528,750 ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 beneficially owned by Mr. Chris Shuning Chen. In addition, Button Software Ltd. entered into certain agreements with Credit Suisse Capital LLC (the “Button VPF”) in November 2009. Pursuant to the Button VPF, Button Software Ltd. pledged and monetized 600,000 ADSs held by it. Button Software Ltd. is ultimately owned by Mr. Chris Shuning Chen’s family trust. Mr. Chen is the sole director of Button Software Ltd. and, as such, exercises voting power on behalf of this shareholder on all matters of VanceInfo requiring shareholder approval. The business address for Mr. Chen is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China.

(4)		Represents 293,400 ordinary shares and 16,000 ADSs held by Mr. David Lifeng Chen’s family trust, and 130,769 ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by Mr. Chen. The business address for Mr. Chen is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China.

(5)		Represents 951,500 ADSs held by LC Fund II and 5,000 ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by Mr. Hao Chen. Mr. Chen disclaims beneficial ownership with respect to the shares held by LC Fund II except to the extent of his pecuniary interest therein. The business address for Mr. Chen is the 10/F, Tower A, Raycom Info Tech Park, No. 2 Kexueyuan Nanlu Zhongguancun, Haidian District, Beijing 100080, People’s Republic of China.

(6)		Represents ADSs held by Ms. Ruby Lu. The business address for Ms. Lu is 2420 Sand Hill Road, Suite 200 Menlo Park, CA 94025, United States of America.

(7)		Represents 63,895 ADSs held by Kui Zhou, 1,201,032 ordinary shares held by Sequoia Capital China I, L.P., Sequoia Capital China Partners Fund I, L.P., and Sequoia Capital China Principals Fund I, L.P., and 934,162 ordinary shares held by Sequoia Capital Growth Fund III, L.P., Sequoia Capital Growth III Principals Fund and Sequoia Capital Growth Partners III, L.P. Mr. Kui Zhou disclaims beneficial ownership with respect to the shares held by Sequoia Capital China I, L.P., Sequoia Capital China Partners Fund I, L.P., Sequoia Capital China Principals Fund I, L.P., Sequoia Capital Growth Fund III, L.P., Sequoia Capital Growth III Principals Fund and Sequoia Capital Growth Partners III, L.P. except to the extent of his pecuniary interest therein. The business address for Mr. Zhou is Room 3606, Tower 3, China Central Place, No 77 Jianguo Road, Chaoyang District, Beijing 100025, People’s Republic of China.

(8)		Represents ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by held by Mr. Daniel Mingdong Wu. The business address for Mr. Wu is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China.

(9)		Represents ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by held by Mr. Samuelson S.M. Young. The business address for Mr. Young is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China.

(10)		Represents ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by held by Mr. Sidney Xuande Huang. The business address for Mr. Huang is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China.

(11)		Represents ordinary shares and ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by Mr. Junbo Liu. The business address for Mr. Liu is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China.

(12)		Represents ordinary shares and ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by Newrise Investments limited, a British Virgin Islands company wholly owned and controlled by Mr. Gerry Jianxin Lu. The business address for Mr. Lu is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China.

(13)		Represents ordinary shares and ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by Mr. Jeff Jian Wu. The business address for Mr. Wu is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China.

(14)		Represents 306,065 ordinary shares, 100,000 ADSs, and 60,725 ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by Longsea Management Limited, a British Virgin Islands company wholly owned and controlled by Mr. Kevin Zhong Liu. The business address for Mr. Liu is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China.


(15)		Represents 406,065 ordinary shares and 61,288 ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by Charlene Limited, a British Virgin Islands company wholly owned and controlled by Mr. Stanley Ying Zhou. The business address for Mr. Zhou is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China.

(16)		Represents ordinary shares held by all of our directors and executive officers as a group and ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by all of our directors and executive officers as a group.

(17)		Represents 945,945, 146,395, 108,692, 881,325, 43,135 and 9,702 ordinary shares held by Sequoia Capital China I, L.P., Sequoia Capital China Principals Fund I, L.P., Sequoia Capital China Partners Fund I, L.P., Sequoia Capital Growth Fund III, L.P., Sequoia Capital Growth III Principals Fund and Sequoia Capital Growth Partners III, L.P., respectively, and 139,868, 63,895, 234,316, 141,827, 72,695 and 75,238 ADSs held by Nanpeng Shen, Kui Zhou, Michael J. Moritz, Douglas M. Leone, James Goetz and Roelof Botha, respectively.

		Sequoia Capital China Management I, L.P. is the general partner of Sequoia Capital China I, L.P., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China Partners Fund I, L.P. The general partner of Sequoia Capital China Management I, L.P. is SC China Holding Limited, which in turn is ultimately controlled by its managing directors, Nanpeng Shen and Kui Zhou. Each of Mr. Shen and Mr. Zhou disclaims beneficial ownership with respect to the shares held by Sequoia Capital China I, L.P., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China Partners Fund I, L.P. except to the extent of their pecuniary interest therein. The business address for Sequoia Capital China I, L.P., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China Partners Fund I, L.P., each of which is a limited partnership incorporated in the Cayman Islands, is 3000 Sand Hill Road, 4-250, Menlo Park, CA 94025, United States of America.

		SCGF III Management, LLC is the general partner of Sequoia Capital Growth Fund III, L.P. and Sequoia Capital Growth Partners III, L.P., and is the managing member of Sequoia Capital Growth III Principals Fund. The managing members of SCGF III Management, LLC are Michael J. Moritz, Douglas M. Leone, Michael Goguen, James Goetz, J. Scott Carter and Roelof Botha. These management members disclaim beneficial ownership with respect to the shares held by Sequoia Capital Growth Fund III, L.P., Sequoia Capital Growth III Principals Fund and Sequoia Capital Growth Partners III, L.P. except to the extent of their pecuniary interest therein. The business address for Sequoia Capital Growth Fund III, L.P., Sequoia Capital Growth III Principals Fund and Sequoia Capital Growth Partners III, L.P., each of which is an investment fund incorporated in the state of Delaware, USA, is 3000 Sand Hill Road, 4-250, Menlo Park, CA 94025, United States of America.

(18)		Represents 2,630,420 ordinary shares held by Button Software Ltd., a British Virgin Islands company ultimately owned by Mr. Chris Shuning Chen’s family trust. In addition, pursuant to the Button VPF, Button Software Ltd. pledged and monetized 600,000 ADSs held by it. The registered address for Button Software Ltd. is OMC Chambers, P.O. Box 3152, Road Town, Tortola, British Virgin Islands.

(19)		Represents 40,200 ADSs beneficially owned by Mr. Baoguo Zhu, 1,776,000 ordinary shares held by Inno Global Technology Limited, a British Virgin Islands company wholly owned and controlled by Mr. Zhu, and 200,000 ADSs held by Deep Prime Limited, a British Virgin Islands company wholly owned and controlled by Mr. Zhu’s wife. The registered address for Inno Global Technology Limited is P.O. Box 957, Offshore Incorporation Centre, Road Town, Tortola, British Virgin Islands.

(20)		Based on Schedule 13G jointly filed by FMR LLC, Edward C. Johnson 3d and Fidelity Management & Research Company on February 16, 2010.

None of our existing shareholders has different voting rights from other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

Immediately prior to our initial public offering, Sequoia, LC Fund II and Button Software Ltd. held 25.0%, 16.4% and 13.6%, respectively, of our ordinary shares and as of March 31, 2010, each of them held 7.5%, 2.4% and 8.1%, respectively, of our ordinary shares. Immediately prior to our initial public offering, DCM IV, L.P. and DCM Affiliates Fund IV, L.P., or collectively “DCM Funds”, collectively held 21.3% of our ordinary shares and as of March 31, 2010, DCM Funds, to our knowledge, do not hold any shares of us.

As of March 31, 2010, 39,860,320 of our ordinary shares were issued and outstanding. To our knowledge, approximately 82.3% of our total outstanding ordinary shares were held by seven record shareholders in the United States, including approximately 76.9% held by JPMorgan Chase Bank, N.A., the depositary of our ADS program. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our ordinary shares in the United States.

For the options and restricted share units granted to our directors, officers and employees, please refer to “—B. Compensation.”

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.Major Shareholders

See Item 6, “Directors, Senior Management and Employees¾ Share Ownership.”

B.Related Party Transactions

Transactions with Certain Directors, Shareholders and Affiliates

From time to time we provide various IT services to Lenovo (Beijing) Co., Ltd., Beijing Lenovo Software Co., Ltd. and Shanghai Lenovo Electronic Co., Ltd., affiliates of LC Fund II, one of our shareholders. The terms and pricing of the transaction was determined on an arms’-length basis between the contractual parties and we believe the terms are comparable to terms that could have been obtained from independent third parties.

Other Share Issuances

In October 2009, we issued 106,820 ordinary shares to each of Cypress Hill Holdings Limited, Fortune Sea International Limited, and Million International Limited, respectively, as a part of the consideration for the acquisition of Chosen. In the same month, we issued 95,590 ordinary shares to Wireless Info Tech Limited as a part of the consideration for the acquisition of WIT. Also in the same month, we issued 6,163 ordinary shares to Xiang Liu as a part of the consideration for the acquisition of Kernel.

Contractual Arrangements with Megainfo and Its Shareholder

Megainfo was liquidated in January 2009 and was our variable interest entity before its liquidation. Our previous relationships with Megainfo and its shareholder were governed by certain contractual arrangements. Under PRC laws, each of VanceInfo Beijing and Megainfo was then an independent legal person and neither of them was liable for debts incurred by the other party. Other than pursuant to the contractual arrangements between VanceInfo Beijing and Megainfo, Megainfo did not transfer any other funds generated from its operations to VanceInfo Beijing.

On March 31, 2007, VanceInfo Beijing entered into an exclusive technology development and consultation agreement with Megainfo and Mr. Ming Zhao, its shareholder. The term of the exclusive technology development and consultation agreement was 10 years, unless terminated by VanceInfo Beijing by giving of a thirty days’ written notice. Mr. Zhao also executed a power of attorney in favor of Mr. Chris Shuning Chen. We were able to control Megainfo and the economic benefits of Megainfo through the following arrangements:

Equity Pledge.Mr. Zhao pledged his 100% equity interest in Megainfo to guarantee the performance of Mr. Zhao and Megainfo’s obligations under the exclusive technology development and consultation agreement. If Megainfo or Mr. Zhao breached its respective contractual obligations under the exclusive technology development and consultation agreement, VanceInfo Beijing, as pledgee, would be entitled to certain rights, including the right to sell the pledged equity interests. Mr. Zhao agreed not to transfer, sell, pledge, dispose of or otherwise create any new encumbrance on his equity interest in Megainfo without the prior written consent of VanceInfo Beijing.

Call Option.Mr. Zhao irrevocably granted VanceInfo Beijing or its designated person an option to purchase, all or part of the equity interests in Megainfo. Subject to PRC laws then in effect, the exercise price for purchasing all of the share capital of Megainfo was RMB1.00. Pursuant to this call option, without the prior written consent of VanceInfo Beijing:

•

neither Mr. Zhao nor Megainfo may sell, transfer, pledge or otherwise dispose of, or permit any security interests to be imposed on Megainfo’s any assets, business or income;

•

except for the indebtedness created in the ordinary course of business, neither Mr. Zhao nor Megainfo may borrow or lend to any third party, or provide security to any third party;

•

Megainfo may not distribute any profits or dividends;

•

neither Mr. Zhao nor Megainfo may change any director, supervisor or executive manager of Megainfo; and

•

neither Mr. Zhao nor Megainfo may make any material decision or alteration with respect to Megainfo’s operations or financial management.

Power of Attorney.Mr. Zhao executed a power of attorney in favor of Mr. Chris Shuning Chen irrevocably authorizing Mr. Chen to vote as his attorney-in-fact on all of the matters regarding Megainfo requiring shareholder approval, as long as Mr. Zhao was a shareholder of Megainfo.

Exclusive Technology Development and Consultation Services.VanceInfo Beijing had the exclusive and irrevocable right to provide Megainfo with IT consulting services in regard to its IT solutions as well as related technical consulting services. Megainfo agreed to pay monthly service fees to VanceInfo Beijing according to the actual services VanceInfo Beijing had provided in each month. In addition, from time to time VanceInfo Beijing may, at its sole discretion, from time to time adjust the services fees according to its actual service scope and content.

Employment Agreements

See Item 6, “Directors, Senior Management and Employees — Compensation— Employment Agreements.”

Stock Option Grants

See Item 6, “Directors, Senior Management and Employees — Compensation— Share Incentive Plan.”

C.Interests of Experts and Counsel

Not applicable.

ITEM 8. FINANCIAL INFORMATION

A.Consolidated Statements and Other Financial Information

We have appended consolidated financial statements filed as part of this annual report.

Legal Proceedings

From time to time, we may be subject to legal proceedings, investigations and claims incidental to the conduct of our business. We are not currently a party to any legal proceeding or investigation that, in the opinion of our management, is likely to have a material adverse effect on our business or financial condition.

In August 2004, VanceInfo Beijing, our wholly owned subsidiary, acquired the IT services business and related assets from our predecessor, Wensi Chuangyi and its subsidiaries. On December 3, 2007, we received a letter from a law firm in California purporting to set forth a notice of claim on behalf of Mr. Jonathan Jianguo Jiang. Among others, this letter alleged that Mr. Jiang is a shareholder of Octiga, Inc., or Octiga, a dissolved California corporation; Octiga owns more than a 40% interest in the joint venture, Beijing Heteng Software Technology Co., Ltd., or Heteng Software; and Heteng Software owns 100% of Wensi Chuangyi, our predecessor. Valuable (but unspecified) proprietary information owned by Wensi Chuangyi and/or its subsidiaries as well as all its employees were transferred to VanceInfo Beijing not in good faith and without adequate consideration to Heteng Software and its joint venture partners. This unspecified proprietary information allegedly has been utilized by Worksoft California and continues to be used by a Delaware subsidiary of VanceInfo. The letter stated that Mr. Jiang is considering commencing litigation on all legal theories available to him as well as for the benefit of other investors in Heteng Software to recover the value of the assets that were allegedly improperly transferred by Wensi Chuangyi and its subsidiaries to VanceInfo Beijing as well as other damages and costs. The letter did not specify the amount of any claimed damages or costs. In late 2009 and early 2010, we and our directors and officers received additional emails and letters from Mr. Jiang, asserting claims with respect to the above and other alleged wrongdoings and claiming for certain settlement payment. Mr. Jiang also stated that he is filing a lawsuit against us and certain of our officers, though we were not aware of any service of documents yet.

We believe that the above claims are without merit. We have been advised by our PRC counsel, Fangda Partners, that the August 2004 transaction in which we acquired the IT services business and related assets of our predecessor was duly authorized and approved by both the seller, Wensi Chuangyi and its subsidiaries, and the buyer, VanceInfo Beijing, in accordance with PRC law, and that the transaction was effected in compliance with all applicable PRC laws and regulations. In addition, we believe that the level of share ownership in Octiga claimed by Mr. Jiang is substantially overstated.

Dividend Policy

We have no present plan to declare and pay any dividends on our shares or ADSs in the near future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

We are a holding company incorporated in the Cayman Islands. We rely on dividends from VanceInfo Beijing, our subsidiary in China. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our subsidiary in China is required to set aside a certain amount of its accumulated after-tax profits each year, if any, to fund certain statutory reserves. These reserves may not be distributed as cash dividends. Further, if our subsidiary in China incurs debt on its own behalf, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us.

Our board of directors has complete discretion as to whether to pay dividends. Our company may also authorize the payment of dividends but the amount cannot exceed the amount recommended by our board of directors. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon 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 ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our ADSs and ordinary shares, if any, will be paid in U.S. dollars.

B.Significant Changes

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

ITEM 9. THE OFFER AND LISTING

A.Offer and Listing Details

Our ADSs, each representing one ordinary share, have been listed on the NYSE since December 2007. Our ADSs trade under the symbol “VIT.”

For the period from December 12, 2007 to April 29, 2010, the trading price of our ADSs on the NYSE has ranged from US$4.20 to US$26.48 per ADS. For the year ended December 31, 2009, the trading price ranged from US$4.20 to US$21.07 per ADS.

The following table sets forth, for the periods indicated, the high and low trading prices on the NYSE for our ADSs.


	Trading Price ($)
	High		Low
2007 (from December 12, 2007 to December 31, 2007)		10.95		8.51
2008		13.98		4.28
First quarter		9.25		4.90
Second quarter		13.98		6.45
Third quarter		10.19		5.80
Fourth quarter		8.28		4.28
2009		21.07		4.20
First quarter		6.00		4.20
Second quarter		15.50		4.95
Third quarter		19.60		10.54
Fourth quarter		21.07		14.50
October		21.07		14.62
November		19.80		14.50
December		20.50		16.70
2010		26.48		14.79
First quarter		23.85		14.79
January		21.83		16.00
February		19.79		14.79
March		23.85		19.90
April (through April 29, 2010)		26.48		22.00

B.Plan of Distribution

Not applicable.

C.Markets

Our ADSs, each representing one ordinary share, have been listed on the NYSE since December 2007 and have been trading under the symbol “VIT.”

D.Selling Shareholders

Not applicable.

E.Dilution

Not applicable.

F. Expenses of the Issues

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A.Share Capital

Not applicable.

B.Memorandum and Articles of Association

We incorporate by reference into this annual report the description of our amended and restated memorandum of association contained in our F-1 registration statement (File No. 333-147601) originally filed with the SEC on November 23, 2007.

C.Material Contracts

We have not entered into any material contracts other than in the ordinary course of business and other than those described in Item 4, “Information on the Company” or elsewhere in this annual report on Form 20-F.

D.Exchange Controls

China’s government imposes control over the convertibility of RMB into foreign currencies. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates announced by the People’s Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy caused the Renminbi to appreciate approximately 21.5% against the U.S. dollar over the following three years. Since reaching a high against the U.S. dollar in July 2008, however, the Renminbi has traded within a narrow band against the U.S. dollar, remaining within 1% of its July 2008 high. As a consequence, the Renminbi has fluctuated sharply since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. For example, the Renminbi depreciated approximately 9% against the Japanese Yen between July 2008 and November 2008. During the same period, the Renminbi appreciated approximately 27% against the Euro. It is difficult to predict how long the current situation may last and when and how it may change again.

Pursuant to the Foreign Exchange Control Regulations issued by the State Council on January 29, 1996, and effective as of April 1, 1996 (and amended on January 14, 1997 and August 5, 2008 respectively) and the Administration of Settlement, Sale and Payment of Foreign Exchange Regulations which came into effect on July 1, 1996 regarding foreign exchange control, or the Regulations, conversion of RMB into foreign exchange by foreign investment enterprises for current account items, including the distribution of dividends and profits to foreign investors of joint ventures, is permissible. Foreign investment enterprises are permitted to remit foreign exchange from their foreign exchange bank account in China on the basis of, inter alia, the terms of the relevant joint venture contracts, articles of association and the board resolutions declaring the distribution of the dividend and payment of profits. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important provision, as Article 5 provides that the State shall not impose restrictions on recurring international current account payments and transfers. Conversion of RMB into foreign currencies and remittance of foreign currencies for capital account items, including direct investment, loans, security investment, is still subject to the approval of the SAFE, in each such transaction. On August 29, 2008, the 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, the 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 the SAFE, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not yet been used.

Under the Regulations, foreign investment enterprises are required to open and maintain separate foreign exchange accounts for capital account items (but not for other items). In addition, foreign investment enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business upon the production of valid commercial documents and, in the case of capital account item transactions, document approval from the SAFE.

Currently, foreign investment enterprises are required to apply to the SAFE for “foreign exchange registration certificates for foreign investment enterprises” (which are granted to foreign investment enterprises, upon fulfilling specified conditions and which are subject to review and renewal by the SAFE on an annual basis). With such foreign exchange registration certificates and required underlying transaction documents, or with approval documents from the SAFE if the transactions are under capital account (which are obtained on a transaction-by-transaction basis), foreign-invested enterprises may enter into foreign exchange transactions at banks authorized to conduct foreign exchange business to obtain foreign exchange for their needs.

E.Taxation

The following summary of the material Cayman Islands and United States federal income tax consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this report, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences under state, local and other tax laws. To the extent that the discussion relates to matters of Cayman Islands tax law, it represents the opinion of Conyers Dill & Pearman, our Cayman Islands counsel.

Cayman Islands Taxation

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.

United States Federal Income Taxation

The following discussion describes certain material U.S. federal income tax consequences to U.S. Holders (as defined below) under present law of an investment in the ADSs or ordinary shares. This discussion applies only to U.S. Holders that hold the ADSs or ordinary shares as capital assets and that have the U.S. dollar as their functional currency. This discussion is based on the tax laws of the United States in effect as of the date of this annual report and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below.

The following discussion does not deal with the tax consequences to any particular investor or to persons in special tax situations such as:

•

banks;

•

financial institutions;

•

insurance companies;

•

regulated investment companies;

•

real estate investment trusts;

•

broker-dealers;

•

traders that elect to mark to market;

•

U.S. expatriates;

•

tax-exempt entities;

•

persons liable for alternative minimum tax;

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persons holding an ADS or ordinary share as part of a straddle, hedging, conversion or integrated transaction;

•

persons that actually or constructively own 10% or more of the total combined voting power of all classes of our voting stock;

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persons who acquired ADSs or ordinary shares pursuant to the exercise of any employee share option or otherwise as compensation; or

•

persons holding ADSs or ordinary shares through partnerships or other pass-through entities.

INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, NON-U.S. AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR ORDINARY SHARES.

The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are the beneficial owner of ADSs or ordinary shares and you are, for U.S. federal income tax purposes,

•

an individual who is a citizen or resident of the United States;

•

a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States, any State thereof or the District of Columbia;

•

an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

•

a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement have been and will be complied with in accordance with their terms. If you hold ADSs, you should be treated as the holder of the underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes.

The U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of an ADS and the issuer of the security underlying the ADS may be taking actions that are inconsistent with the beneficial ownership of the underlying security (for example, pre-releasing ADSs to persons that do not have the beneficial ownership of the securities underlying the ADSs). Accordingly, the availability of the reduced tax rate for dividends received by certain non-corporate U.S. Holders, including individuals U.S. Holders (as discussed below), could be affected by actions taken by intermediaries in the chain of ownership between the holders of ADSs and our company if as a result of such actions the holders of ADSs are not properly treated as beneficial owners of underlying ordinary shares.

Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares

Subject to the PFIC rules discussed below, the gross amount of any distributions we make to you with respect to the ADSs or ordinary shares generally will be includible in your gross income as dividend income on the date of receipt by the depositary, in the case of ADSs, or by you, in the case of ordinary shares, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations. To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), such excess amount will be treated first as a tax-free return of your tax basis in your ADSs or ordinary shares, and then, to the extent such excess amount exceeds your tax basis in your ADSs or ordinary shares, as capital gain. We currently do not, and we do not intend to, calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will generally be reported as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above. In addition, an additional 3.8% tax may apply to dividends received by certain U.S. Holders, including individuals, estates and trusts, during taxable years beginning on or after January 1, 2013.

With respect to certain non-corporate U.S. Holders, including individual U.S. Holders, for taxable years beginning before January 1, 2011, dividends may be taxed at the lower capital gains rate applicable to “qualified dividend income,” provided that (1) either (a) the ADSs or ordinary shares, as applicable, are readily tradable on an established securities market in the United States or (b) we are eligible for the benefits of a qualifying income tax treaty with the United States that includes an exchange of information program, (2) we are neither a PFIC nor treated as such with respect to you (as discussed below) for the taxable year in which the dividend was paid and the preceding taxable year, and (3) certain holding period requirements are met. Under U.S. Internal Revenue Service authority, ADSs will be considered for purposes of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on the New York Stock Exchange, as are our ADSs. However, based on existing guidance, it is not entirely clear whether dividends that you receive with respect to the ordinary shares will be taxed as qualified dividend income, because the ordinary shares are not themselves listed on a U.S. exchange. If we are treated as a “resident enterprise” for PRC tax purposes under the New EIT Law, we may be eligible for the benefits of the income tax treaty between the United States and the PRC. You should consult your tax advisors regarding the availability of the lower capital gains rate applicable to qualified dividend income for dividends paid with respect to our ADSs or ordinary shares.

Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will in general be limited to the gross amount of the dividend, multiplied by the reduced tax rate applicable to qualified dividend income and divided by the highest tax rate normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to the ADSs or ordinary shares will generally constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”

If PRC withholding taxes apply to dividends paid to you with respect to our ADSs or ordinary shares, subject to certain conditions and limitations, such PRC withholding taxes may be treated as foreign taxes eligible for credit against your U.S. federal income tax liability. The rules relating to the determination of the foreign tax credit are complex and you should consult your tax advisors regarding the availability of a foreign tax credit in your particular circumstances, including the effects of any applicable income tax treaties.

Taxation of Disposition of ADSs or Ordinary Shares

Subject to the PFIC rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of an ADS or ordinary share equal to the difference between the amount realized (in U.S. dollars) for the ADS or ordinary share and your tax basis (in U.S. dollars) in the ADS or ordinary share. The gain or loss generally will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, that has held the ADS or ordinary share for more than one year, you may be eligible for reduced tax rates. In addition, an additional 3.8% tax may apply to gains recognized by certain U.S. Holders, including individuals, estates and trusts, upon the sale or other disposition of stock occurring during taxable years beginning on or after January 1, 2013. The deductibility of capital losses is subject to limitations.

Any gain or loss that you recognize on a disposition of ADSs or ordinary shares will generally be treated as U.S. source income or loss for foreign tax credit limitation purposes. However, if we are treated as a “resident enterprise” for PRC tax purposes, we may be eligible for the benefits of the income tax treaty between the United States and the PRC. In such event, if PRC tax were to be imposed on any gain from the disposition of the ADSs or ordinary shares, a U.S. Holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may elect to treat the gain as PRC source income. You should consult your tax advisors regarding the proper treatment of gain or loss in your particular circumstances, including the effects of any applicable income tax treaties.

Passive Foreign Investment Company

Based on the market price of our ADSs, the value of our assets, and the composition of our income and assets, we do not believe we were a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, 2009. However, the application of the PFIC rules is subject to uncertainty in several respects, including how the contractual arrangements between us and our affiliated entities will be treated for purposes of the PFIC rules, and we cannot assure you that the U.S. Internal Revenue Service will not take a contrary position. A non-U.S. corporation will be a PFIC for U.S. federal income tax purposes for any taxable year if either:

•

at least 75% of its gross income for such year is passive income; or

•

at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income.

For this purpose, we will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, more than 25% (by value) of the stock. In applying this rule, however, it is not clear whether the contractual arrangements between us and our affiliated entities will be treated as ownership of stock.

We must make a separate determination after the close of each taxable year as to whether we were a PFIC for that year. Because the value of our assets for purposes of the PFIC test will generally be determined by reference to the market price of our ADSs and ordinary shares, our PFIC status will depend in large part on the market price of the ADSs and ordinary shares, which may fluctuate significantly.

If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, we generally will continue to be treated as a PFIC with respect to you for all succeeding years during which you hold ADSs or ordinary shares, unless we cease to be a PFIC and you make a “deemed sale” election with respect to the ADSs or ordinary shares. If such election is made, you will be deemed to have sold ADSs or ordinary shares you hold at their fair market value and any gain from such deemed sale would be subject to the consequences described below. After the deemed sale election, your ADSs or ordinary shares with respect to which the deemed sale election was made will not be treated as shares in a PFIC unless we subsequently become a PFIC.

For each taxable year that we are treated as a PFIC with respect to you, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the ADSs or ordinary shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as an excess distribution. Under these special tax rules:

•

the excess distribution or gain will be allocated ratably over your holding period for the ADSs or ordinary shares;

•

the amount allocated to the current taxable year, and any taxable years in your holding period prior to the first taxable year in which we were a PFIC, will be treated as ordinary income; and

•

the amount allocated to each other taxable year will be subject to the highest tax rate in effect for individuals or corporations, as applicable, for each such year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

The tax liability for amounts allocated to taxable years prior to the year of disposition or excess distribution cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale or other disposition of the ADSs or ordinary shares cannot be treated as capital, even if you hold the ADSs or ordinary shares as capital assets.

If we are treated as a PFIC with respect to you for any taxable year, to the extent any of our subsidiaries are also PFICs, you may be deemed to own shares in such lower-tier PFICs that are directly or indirectly owned by us in that proportion which the value of the ADSs or ordinary shares you own bears to the value of all of our ADSs and ordinary shares, and you may be subject to the adverse tax consequences described above with respect to the shares of such lower-tier PFICs that you would be deemed to own. You should consult your tax advisors regarding the application of the PFIC rules to any of our subsidiaries.

A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above. If you make a mark-to-market election for the ADSs or ordinary shares, you will include in income for each year that we are treated as a PFIC with respect to you an amount equal to the excess, if any, of the fair market value of the ADSs or ordinary shares as of the close of your taxable year over your adjusted basis in such ADSs or ordinary shares. You will be allowed a deduction for the excess, if any, of the adjusted basis of the ADSs or ordinary shares over their fair market value as of the close of the taxable year. However, deductions will be allowable only to the extent of any net mark-to-market gains on the ADSs or ordinary shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the ADSs or ordinary shares, will be treated as ordinary income. Ordinary loss treatment will also apply to the deductible portion of any mark-to-market loss on the ADSs or ordinary shares, as well as to any loss realized on the actual sale or disposition of the ADSs or ordinary shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such ADSs or ordinary shares. Your basis in the ADSs or ordinary shares will be adjusted to reflect any such income or loss amounts. The tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that the lower capital gains rate applicable to qualified dividend income (discussed above under “—Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares”) would not apply.

The mark-to-market election is available only for “marketable stock,” which is stock that is regularly traded on a qualified exchange or other market, as defined in applicable U.S. Treasury regulations. Our ADSs are listed on the New York Stock Exchange, which is a qualified exchange or other market for these purposes. Consequently, if the ADSs continue to be listed on the New York Stock Exchange and are regularly traded, and you are a holder of ADSs, we expect that the mark-to-market election would be available to you if we were to become a PFIC. Because a mark-to-market election cannot be made for equity interests in any lower-tier PFICs that we own, a U.S. Holder may continue to be subject to the PFIC rules with respect to its indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes. You should consult your tax advisors as to the availability and desirability of a mark-to-market election, as well as the impact of such election on interests in any lower-tier PFICs.

Alternatively, if a non-U.S. corporation is a PFIC, a U.S. Holder of shares in that corporation may avoid taxation under the rules described above by making a “qualified electing fund” election to include in income its share of the corporation’s income on a current basis. However, you may make a qualified electing fund election with respect to your ADSs or ordinary shares only if we agree to furnish you annually with certain tax information, and we currently do not intend to prepare or provide such information.

Under newly enacted legislation, unless otherwise provided by the U.S. Treasury, each U.S. shareholder of a PFIC is required to file an annual report containing such information as the U.S. Treasury may require. Prior to such legislation, a U.S. shareholder of a PFIC was required to file U.S. Internal Revenue Service Form 8621 only for each taxable year in which such shareholder received distributions from the PFIC, recognized gain on a disposition of the PFIC stock, or made a “reportable election.” If we are or become a PFIC, you should consult your tax advisors regarding any reporting requirements that may apply to you.

You are strongly urged to consult your tax advisor regarding the application of the PFIC rules to your investment in ADSs or ordinary shares.

Information Reporting and Backup Withholding

Dividend payments with respect to ADSs or ordinary shares and proceeds from the sale, exchange or redemption of ADSs or ordinary shares may be subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not apply, however, to a U.S. Holder that furnishes a correct taxpayer identification number and makes any other required certification or that is otherwise exempt from backup withholding. U.S. Holders that are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. Under newly enacted legislation, certain individuals holding the ADSs or ordinary shares other than in an account at a financial institution may be subject to additional information reporting requirements. U.S. Holders should consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.

Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required information in a timely manner.

F.Dividends and Paying Agents

Not Applicable.

G. Statement by Experts

Not Applicable.

H.Documents on Display

We previously filed with the SEC our registration statement on Form F-1 (Registration No. 333-147601, as amended) and our registration statement on Form F-3 (Registration No. 333-160287, as amended), with respect to our ordinary shares. We have also filed with the SEC a related registration statement on F-6 (Registration No. 333-147602) to register the ADSs.

We are currently subject to periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F: (1) within six months after the end of each fiscal year, which is December 31 for us, for fiscal years ending before December 15, 2011; and (2) within four months after the end of each fiscal year for fiscal years ending on or after December 15, 2011. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of this information by mail from the Public Reference Section of the SEC at prescribed rates. Further information on the operation of the SEC’s Public Reference Room in Washington, D.C. can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements and other information about registrants, such as us, who file electronically with the SEC. The address of that site is http://www.sec.gov.

Our Internet website is www.vanceinfo.com. We make available free of charge on our website our annual reports on Form 20-F and any amendments to such reports as soon as reasonably practicable following the electronic filing of such report with the SEC. In addition, we provide electronic or paper copies of our filings free of charge upon request. The information contained on our website is not part of this or any other report filed with or furnished to the SEC.

As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.

Our financial statements have been prepared in accordance with U.S. GAAP.

We will furnish our shareholders with annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP.

I.Subsidiary Information

For a listing of our subsidiaries, see Item 4, “Information on the Company — Organizational Structure.”

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to interest rate risk primarily relates to interest income generated by excess cash invested in money market securities or demand deposits with original maturities of three months or less. Interest earning instruments carry a degree of interest rate risk. A 1% decrease in each applicable interest rate would deduct US$0.1 million from our interest income in 2009. We have not used derivative financial instruments to manage our interest rate risk exposure. Most of our borrowings bear fixed interest rates.

We have not been exposed to material risks due to changes in market interest rates. However, our future interest expense may increase and interest income may fall due to changes in market interest rates.

Foreign Exchange Risk

A majority of our revenues and expenses are denominated in Renminbi, while a significant portion of our revenues and expenses are denominated in U.S. dollars. The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy caused the Renminbi to appreciate approximately 21.5% against the U.S. dollar over the following three years. Since reaching a high against the U.S. dollar in July 2008, however, the Renminbi has traded within a narrow band against the U.S. dollar, remaining within 1% of its July 2008 high. As a consequence, the Renminbi has fluctuated sharply since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. For example, the Renminbi depreciated approximately 9% against the Japanese Yen between July 2008 and November 2008. During the same period, the Renminbi appreciated approximately 27% against the Euro. It is difficult to predict how long the current situation may last and when and how it may change again.

The results of our operations could be adversely affected by appreciation of the Renminbi against the U.S. dollar. Our exchange rate risk primarily arises from our foreign currency revenues, receivables, costs and expenses, payables and other foreign currency assets and liabilities. To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. As of December 31, 2009, we had a Renminbi denominated cash balance of RMB98.5 million and a U.S. dollar denominated cash balance of US$48.8 million. Assuming we had converted the U.S. dollar denominated cash balance of US$48.8 million as of December 31, 2009 into Renminbi at the exchange rate of US$1.00 for RMB6.8259 as of December 31, 2009, this cash balance would have been RMB333.2 million. Assuming a further 1% appreciation of the Renminbi against the U.S. dollar, this cash balance would have decreased to RMB329.9 million as of December 31, 2009. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. We also receive a portion of our revenues in Japanese Yen and Euro. Any significant depreciation of Japanese Yen or Euro against the Renminbi or U.S. dollar would adversely affect our revenues in Renminbi or U.S. dollar terms, respectively. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk, except for a forward exchange contract to purchase US$5 million for JPY448.75 million in October 2010. While the use of such foreign currency forward contract provides us with protection from certain fluctuations in foreign currency exchange, we potentially forgo the benefits that might result from favorable fluctuations in foreign currency exchange. In addition, any default by the counterparties to these transactions could adversely affect our financial condition and results of operations.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A.Debt Securities

Not Applicable.

B.Warrants and Rights

Not Applicable.

C.Other Securities

Not Applicable.

D.American Depository Shares

Fees and Charges Payable by ADS Holders

According to the deposit agreement between us and the depositary, JPMorgan Chase Bank N.A., our ADR holders may have to pay the following fees and charges to JPMorgan Chase Bank N.A. in connection with ownership of the ADR:


Category	Depositary actions	Associated fee
(a) Depositing or substituting the underlying shares	Each person to whom ADSs are issued against deposits of shares, including deposits and issuances in respect of: • Share distributions, stock dividend, stock split, merger • Exchange of securities or any other transaction or event affecting the ADSs or the deposited securities	US$5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs issued

(b) Receiving or distributing dividends	Distribution of cash dividends	US$0.02 or less per ADS


Category	Depositary actions	Associated fee
(c) Selling or exercising rights	Distribution or sale of securities, the fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities	Up to US$5.00 for each 100 ADSs (or portion thereof)

(d) Withdrawing an underlying security	Acceptance of ADRs surrendered for withdrawal of deposited securities	US$5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs surrendered

(e) Transferring, splitting or grouping receipts	Transfers of depositary receipts	US$1.50 per ADS

(f) General depositary services, particularly those charged on an annual basis	Services performed by the depositary in administering the ADRs	US$0.02 per ADS (or portion thereof) not more than once each calendar year and payable at the sole discretion of the depositary by billing ADR Holders or by deducting such charge from one or more cash dividends or other cash distributions

(g) Expenses of the Depositary	Expenses incurred on behalf of ADR Holders in connection with: • Compliance with foreign exchange control regulations or any law or regulation relating to foreign investment • The depositary’s or its custodian’s compliance with applicable law, rule or regulation • Stock transfer or other taxes and other governmental charges • Cable, telex and facsimile transmission and delivery charges • fees for the transfer or registration of deposited securities in connection with the deposit or withdrawal of deposited securities • Expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency) • Any other charge payable by depositary or its agents in connection with the servicing of the shares or the deposited securities	Expenses payable at the sole discretion of the depositary by billing ADR Holders or by deducting such charges from one or more cash dividends or other cash distributions

We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the depositary. The fees described above may be amended from time to time.

Fees and Payments from the Depositary to Us

In January 2009, we received from the depositary a reimbursement of approximately US$0.7 million for certain expenses we incurred in 2008 that were related to establishment and maintenance of the ADR program, including investor relationship service fees and audit service fees.

In addition, for year 2009, we were entitled to receive approximately US$0.9 million from the depositary as reimbursement for certain fees and expenses including legal fees, audit service fees, NYSE listing fees, investor relations expenses, Financial Industry Regulatory Authority filing fees and SEC registration fees. We received US$0.4 million thereof in 2009, and received the remaining US$0.5 million in January 2010.

The depositary has agreed to reimburse us for our expenses incurred in connection with our ADR programs in the future. There are limits on the amount of expenses for which the depositary will reimburse us. We recognize the reimbursable amounts in other income on our consolidated statements of operations on a straight-line basis over the contract term with the depositary.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

See “Item 10. Additional Information” for a description of the rights of securities holders, which remain unchanged.

The effective date of the registration statement on Form F-1 (File number: 333-147601) for which use of proceeds information is being disclosed was December 11, 2007. We offered our ordinary shares, in the form of ADSs, in our initial public offering in December 2007. We registered and sold 6,300,000 ADSs, representing 6,300,000 ordinary shares, at US$8.50 per ADS and issued additional 1,147,500 ADSs, representing 1,147,500 ordinary shares, upon exercise of over-allotments by the underwriters. We received net proceeds of approximately US$55.8 million from our initial public offering.

We used the net proceeds received from our initial public offering as follows:

•

approximately US$13.4 million to establish new offices and to fund other capital expenditures; and

•

approximately US$10.2 million to fund strategic acquisitions.

As of December 31, 2009, approximately US$14.8 million of the offering proceeds from our initial public offering had been applied and paid to others, including consultants and advisors. Proceeds from our initial public offering that have yet to be applied have been invested in money market funds or bank deposits. Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated were the managing underwriters for our initial public offering.

The effective date of the registration statement on Form F-3 (File number: 333-160287) for which use of proceeds information is being disclosed was July 8, 2009. We offered our ordinary shares, in the form of ADSs, in our follow-on offering in July 2009. We registered and sold 300,000 ADSs, representing 300,000 ordinary shares, at US$11.00 per ADS and issued additional 45,000 ADSs, representing 45,000 ordinary shares, upon exercise of over-allotments by the underwriters. We received net proceeds of approximately US$2.9 million from follow-on offering.

We have not used the proceeds received from our follow-on offering as of the date of this annual report. As of December 31, 2009, approximately US$0.7 million of the offering proceeds from this offering had been applied and paid to others, including consultants and advisors. Proceeds from our follow-on offering that have yet to be applied have been invested in money market funds or bank deposits. Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. were the managing underwriters for our follow-on offering.

ITEM 15. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this annual report, our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures within the meaning of Rules 13a-15(e) and 15d-15(e) of the Exchange Act. They have concluded that, as of the end of the fiscal year covered by this annual report, our disclosure controls and procedures were designed, and were effective, to give reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and were also effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of its published consolidated financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, it used the criteria established within the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, which excluded TP Companies as discussed in the paragraph below, our management has concluded that, as of December 31, 2009, our internal control over financial reporting was effective.

In view of the limited timeframe between date of acquisition and December 2009, management has excluded from our assessment for internal control over financial reporting that of the TP Companies, which were acquired in July 2009, as the time available was inadequate to complete an effective assessment of the internal control of TP Companies as well as insufficient to effectively implement and roll out any meaningful changes. Management was also of the view that any potential risk from the TP Companies is manageable and should not be a key concern for the year. TP Companies in aggregate had total assets (including goodwill and intangible assets acquired) of US$ 15.6 million, net assets (including goodwill and intangible assets acquired) of US$10.4 million, net revenues of US$5.3 million and net income of US$0.7 million, which accounted for 7.6% of our total assets, 6.4% of our net assets, 3.6% of our net revenues and 3.1% of our net income on a consolidated basis, as of and for the year ended December 31, 2009.

Our independent registered public accounting firm, Deloitte Touche Tohmatsu CPA Ltd., who also audited our consolidated financial statements, independently assessed the effectiveness of our internal control over financial reporting as of December 31, 2009, as stated in their report which is included in this annual report.

Report of Independent Registered Public Accounting Firm

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF VANCEINFO TECHNOLOGIES INC.

We have audited the internal control over financial reporting of VanceInfo Technologies Inc., its subsidiaries and its variable interest entity (collectively the “Group”) as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at TP Teleservices Limited, TP Consultants Limited, TP (Taiwan) Limited, TP (Hong Kong) Limited and TP Software Technology (Shanghai) Co., Ltd., which were acquired in July 2009 and whose financial statements constitute, in aggregate, 7.6% of total assets, 6.4% of net assets, 3.6% of net revenues and 3.1% of net income of the Group’s consolidated financial statement amounts as of and for the year ended December 31, 2009. Accordingly, our audit did not include the internal control over financial reporting at TP Teleservices Limited, TP Consultants Limited, TP (Taiwan) Limited, TP (Hong Kong) Limited and TP Software Technology (Shanghai) Co., Ltd. The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2009 of the Group and our report dated April 30, 2010 expressed an unqualified opinion on those financial statements.

/s/ Deloitte Touche Tohmatsu CPA Ltd.

Beijing, the People’s Republic of China

April 30, 2010

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our board of directors has determined that Mr. Daniel Mingdong Wu, a member of our audit committee, is our audit committee financial expert.

ITEM 16B. CODE OF ETHICS

Our board of directors has adopted a code of ethics that applies to our directors, officers, employees and agents, including certain provisions that specifically apply to our chief executive officer, chief financial officer, and any other persons who perform similar functions for us. We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten working days after we receive such person’s written request.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Deloitte Touche Tohmatsu CPA Ltd., our principal external auditors, for the periods indicated.


	2008		2009
	(in US$ thousands)
Audit fees⁽¹⁾		1,185		1,120
Tax fees⁽²⁾		14		—


(1)		“Audit fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for the audit of our annual financial statements, the review of our interim financial statements, and also other assurance services rendered in connection with our follow-on offering in 2009 and filing of various registration statements.

(2)		“Tax fees” means fees billed for tax compliance, tax advice, and tax planning services.

The policy of our audit committee is to pre-approve all audit and non-audit services provided by Deloitte Touche Tohmatsu CPA Ltd., including audit services, audit-related services, tax services and other services as described above, other than those for de minimis services which are approved by our audit committee prior to the completion of the audit.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

None.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.


					Total Number of		Approximate
					ADSs Purchased		Dollar Value of
					as Part of Publicly		ADSs that May
	Total Number of		Average Price		Announced		Yet Be Purchased
Period	ADS Purchased⁽¹⁾		Paid Per ADS		Program⁽²⁾		Under the Program⁽¹⁾

February 21, 2009 – February 28, 2009		0		N/A		0	$	10,000,000

March 1, 2009 – March 31, 2009		2,800	$	4.6914		2,800	$	9,986,864

April 1, 2009 – April 30, 2009		0		N/A		0	$	9,986,864

May 1, 2009 – May 31, 2009		0		N/A		0	$	9,986,864

June 1, 2009 – June 30, 2009		0		N/A		0	$	9,986,864

July 1, 2009 – July 31, 2009		0		N/A		0	$	9,986,864

August 1, 2009 – August 31, 2009		0		N/A		0	$	9,986,864

September 1, 2009 – September 30, 2009		0		N/A		0	$	9,986,864

October 1, 2009 – October 31, 2009		0		N/A		0	$	9,986,864

November 1, 2009 – November 30, 2009		0		N/A		0	$	9,986,864

December 1, 2009 – December 31, 2009		0		N/A		0	$	9,986,864

January 1, 2010 – January 31, 2010		0		N/A		0	$	9,986,864

February 1, 2010 – February 20, 2010		0		N/A		0	$	0

Total		2,800	$	4.6914		2,800	$	0


(1)		Each of our ADS represents one ordinary share.

(2)		We publicly announced a share repurchase program on February 21, 2009, pursuant to which we are authorized to repurchase up to US$10 million worth of our outstanding ADSs within the next 12 months following February 21, 2009 (the program’s approval date). This share repurchase program expired on February 20, 2010.

In March 2010, we repurchased 27,772 shares of our ordinary shares from Global Mission Limited for nominal consideration.


ITEM 16F.		CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

ITEM 16G.CORPORATE GOVERNANCE

The New York Stock Exchange requires companies with listed shares to comply with its corporate governance standards. As a foreign private issuer, we are not required to comply with all of the rules that apply to listed U.S. companies. However, we have generally chosen to comply with the New York Stock Exchange’s corporate governance rules as though we were a U.S. company. Accordingly, we do not believe there are any significant differences between our corporate governance practices and those that would typically apply to a U.S. domestic issuer under the New York Stock Exchange corporate governance rules.

PART III

ITEM 17. FINANCIAL STATEMENTS

We have elected to provide financial statements pursuant to Item 18.

ITEM 18. FINANCIAL STATEMENTS

The consolidated financial statements of VanceInfo and its subsidiaries are included at the end of this annual report.

ITEM 19. EXHIBITS


Exhibit Number		Description of Document
	1.1	Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated by reference to Exhibit 3.2 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	2.1	Registrant’s Specimen American Depositary Receipt (incorporated by reference to Exhibit 4.3 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	2.2	Registrant’s Specimen Certificate for Ordinary shares (incorporated by reference to Exhibit 4.2 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	2.3	Form of Deposit Agreement among the Registrant, the depositary and holder of the American Depositary Receipts (incorporated by reference to Exhibit 4.3 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.1	Shareholders Agreement among the Registrant and other parties thereto dated as of April 28, 2006, as amended as of July 30, 2007 (incorporated by reference to Exhibit 4.7 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.2	Series A Preferred Share Purchase Agreement among the Registrant and other parties thereto dated as of February 3, 2005 (incorporated by reference to Exhibit 4.4 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.3	Series B Preferred Share Purchase Agreement among the Registrant and other parties thereto dated as of April 28, 2006, as amended as of July 30, 2007 (incorporated by reference to Exhibit 4.6 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.4	Stock Plan dated as of November 3, 2005, as amended in April and May 2006, including form of Award Agreement (incorporated by reference to Exhibit 10.1 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

100


Exhibit Number		Description of Document
	4.5	Share Incentive Plan dated as of July 30, 2007, as supplemented and amended on August 1, 2007, including form of Award Agreement (incorporated by reference to Exhibit 10.2 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.6	Form of Indemnification Agreement with the Registrant’s directors(incorporated by reference to Exhibit 10.3 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.7	Form of Employment Contract between the Registrant and a Senior Executive Officer of the Registrant (incorporated by reference to Exhibit 10.4 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.8	English Translation of Form of Employment Contract between Worksoft Creative Software Technology Ltd. and a Senior Executive Officer of it (incorporated by reference to Exhibit 10.5 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.9	English Translation of Asset Transfer Agreement between Worksoft Creative Software Technology Ltd. and SureKAM Co., Ltd. as of September 6, 2005 (incorporated by reference to Exhibit 10.6 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.10	English Translation of Equity Transfer Contract among Worksoft Creative Software Technology Ltd. and other parties thereto dated as of September 15, 2006 (incorporated by reference to Exhibit 10.7 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.11	English Translation of Asset Transfer Agreement between Worksoft Creative Software Technology Ltd. and Beijing SunBridges Technologies Development Co., Ltd. dated as of December 1, 2006. (incorporated by reference to Exhibit 10.8 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.12	English Translation of Equity Transfer Contract among Worksoft Creative Software Technology Ltd., Hao Yu and Wei Wei dated as of March 15, 2007 (incorporated by reference to Exhibit 10.9 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.13	English Translation of Power of Attorney between Ming Zhao and Chris Shuning Chen dated March 31, 2007 (incorporated by reference to Exhibit 10.10 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.14	English Translation of Exclusive Technology Development and Consultancy Agreement among Worksoft Creative Software Technology Ltd., Shanghai Megainfo Tech Co., Ltd. and Ming Zhao dated as of March 31, 2007 (incorporated by reference to Exhibit 10.11 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.15	English Translation of Loan Agreement among the Registrant, Airland International Limited and Bizexpress Limited dated March 31, 2007 (incorporated by reference to Exhibit 10.12 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.16	English Translation of Equity Transfer Contract among Worksoft Creative Software Technology Ltd., Jilun Zhang and Rongbin Shi dated as of April 1, 2007 (incorporated by reference to Exhibit 10.13 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

101


Exhibit Number			Description of Document
	4.17		English Translation of Equity Transfer Contract between the Registrant and Jinsong Tang dated as of May 31, 2007 (incorporated by reference to Exhibit 10.14 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.18		English Translation of Equity Transfer Contract between Worksoft Creative Software Technology Ltd. and parties thereto dated as of July 29, 2007 (incorporated by reference to Exhibit 10.15 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.19		English Translation of Loan Agreement among the Registrant, Hao Yu, Wei Wei and other parties thereto dated as of March 15, 2007 (incorporated by reference to Exhibit 10.16 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.20		Master Services Agreement and Intellectual Property Assignment between Worksoft Creative Software Technology Ltd. and Microsoft (China) Co., Ltd. dated as of November 1, 2005 (incorporated by reference to Exhibit 10.17 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.21		Technical Service Agreement between Worksoft Creative Software Technology Ltd. and International Business Machine China Company Limited dated as of September 13, 2004 (incorporated by reference to Exhibit 10.18 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	4.22		English Translation of Premises Lease Contract between VanceInfo Creative Software Technology Ltd. and Beijing Zhongguancun Huaxia Sci-Tech Co., Ltd. dated as of February 25, 2008 (incorporated by reference to Exhibit 4.22 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on May 15, 2009).

	8.1	*	Subsidiaries of the Registrant.

	11.1		Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 99.1 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007).

	12.1	*	CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	12.2	*	CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	13.1	*	CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	13.2	*	CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	15.1	*	Consent of Conyers Dill & Pearman.

	15.2	*	Consent of Fangda Partners.

	15.3	*	Consent of Deloitte Touche Tohmatsu CPA Ltd.


*		Filed with this Annual Report on Form 20-F.

102

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.


	VANCEINFO TECHNOLOGIES INC.
	By:		/s/ Chris Shuning Chen
			Name: Chris Shuning Chen
			Title: Chairman and Chief Executive Officer

Date: April 30, 2010

VANCEINFO TECHNOLOGIES INC.

Report of Independent Registered Public Accounting Firm
For the years ended December 31, 2007, 2008 and 2009

VANCEINFO TECHNOLOGIES INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009


CONTENTS	PAGE(S)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		F-1

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2009		F-2

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009		F-3

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009		F-4

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009		F-5

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS		F-7

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF

DIRECTORS AND SHAREHOLDERS OF VANCEINFO TECHNOLOGIES INC.

We have audited the accompanying consolidated balance sheets of VanceInfo Technologies Inc., its subsidiaries and its variable interest entity (collectively, the “Group”) as of December 31, 2008 and 2009 and the related consolidated statements of operations and comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2008 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Group’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 30, 2010 expressed an unqualified opinion on the Group’s internal control over financial reporting.

/s/ Deloitte Touche Tohmatsu CPA Ltd.

Beijing, the People’s Republic of China
April 30, 2010

F-1

VANCEINFO TECHNOLOGIES INC.

CONSOLIDATED BALANCE SHEETS
(In U.S. dollars in thousands, except share data)


	As of December 31,
	2008		2009
Assets

Current assets:
Cash and cash equivalents		79,963		64,057
Term deposit		1,466		10,000
Short term investments — held to maturity securities		—		12,122
Accounts receivable, net of allowance for doubtful accounts of $587 in 2008 and $1,018 in 2009		36,827		60,524
Prepaid expenses and other current assets		3,084		6,026
Deferred income tax assets — current		285		1,473

Total current assets		121,625		154,202

Rental deposits and prepaid rentals		2,010		1,658
Property and equipment, net		11,260		15,000
Acquired intangible assets, net		4,158		7,739
Goodwill		15,537		24,783
Long-term investment		861		930
Deposit for land development project		—		879

Total assets		155,451		205,191


Liabilities

Current liabilities:
Accounts payable		3,203		702
Accrued expenses and other payables		16,452		24,200
Income tax payable		2,275		4,863
Deferred income-current		132		260
Deferred revenue-current		—		2,634

Total current liabilities		22,062		32,659

Deferred income tax liabilities-non current		737		1,328
Deferred income-non-current		1,149		1,778
Deferred revenue -non-current		—		97
Contingent consideration payable for business acquisition		—		6,767

Total liabilities		23,948		42,629

Commitments and contingencies (Notes 22, 23 and 24)

Equity:
Ordinary shares ($0.001 par value, 70,000,000 shares authorized; 39,120,879 and 39,888,092 shares issued and outstanding in 2008 and 2009, respectively)		39		40
Additional paid-in capital		101,184		111,680
Shares issuable in connection with business acquisitions		1,527		520
Accumulated other comprehensive income		4,863		4,924
Statutory reserves		1,316		2,307
Retained earnings		22,574		43,091

Total equity		131,503		162,562

Total liabilities and equity		155,451		205,191

The accompanying notes are an integral part of these consolidated financial statements.

F-2

VANCEINFO TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In U.S. dollars in thousands, except share and share related data)


	For the year ended December 31,
	2007			2008			2009

Revenues		64,458			105,556			152,065
Business tax		(1,744	)		(2,893	)		(3,999	)

Net revenues		62,714			102,663			148,066
Cost of revenues (including share-based compensation of $111, $265 and $313 in 2007, 2008 and 2009, respectively)		(38,544	)		(62,911	)		(92,171	)

Gross profit		24,170			39,752			55,895

Selling, general and administrative expenses (including share-based compensation of $885, $1,126 and $1,252 in 2007, 2008 and 2009, respectively)		(16,180	)		(25,905	)		(34,710	)

Change in fair value of contingent consideration payable for business acquisition		—			—			(62	)
Other operating income		860			858			1,754

Income from operations		8,850			14,705			22,877
Interest income		1,032			2,028			856
Interest expense		(47	)		(69	)		(86	)
Exchange differences		317			703			(119	)
Change in fair value of warrants		(357	)		—			—

Income before income taxes and earnings in equity method investment		9,795			17,367			23,528
Income tax expense		(174	)		(1,298	)		(2,089	)

Income before earnings in equity method investment		9,621			16,069			21,439
Earnings in equity method investment		—			20			69

Net income		9,621			16,089			21,508
Net (income) loss attributable to noncontrolling interest		(52	)		84			—
Deemed dividend on Series A convertible redeemable preferred shares-accretion of redemption premium		(632	)		—			—

Income attributable to VanceInfo Technologies Inc. shareholders		8,937			16,173			21,508

Net income		9,621			16,089			21,508

Other comprehensive income, net of tax:
Foreign currency translation adjustments		1,710			2,578			(48	)
Unrealized gains on foreign currency exchange forward contract recognized in other comprehensive income		—			—			145
Gains on foreign currency exchange forward contract reclassified to earnings		—			—			(36	)

Total other comprehensive income, net of tax		1,710			2,578			61


Comprehensive income		11,331			18,667			21,569
Comprehensive income attributable to the noncontrolling interest		(52	)		84			—

Comprehensive income attributable to VanceInfo Technologies Inc.		11,279			18,751			21,569

Net income per share
Basic-ordinary share		0.22			0.43			0.56
Basic-Series A convertible redeemable preferred share		0.40			N/A			N/A
Basic-Series B-1 convertible redeemable preferred share		0.40			N/A			N/A
Basic-Series B-2 convertible redeemable preferred share		0.51			N/A			N/A
Basic-Series B-3 convertible redeemable preferred share		0.22			N/A			N/A
Diluted-ordinary share		0.19			0.40			0.52

Weighted average shares used in calculating net income per share
Basic-ordinary share		11,426,183			37,276,306			38,389,495
Basic-Series A convertible redeemable preferred share		6,860,247			N/A			N/A
Basic-Series B-1 convertible redeemable preferred share		2,867,123			N/A			N/A
Basic-Series B-2 convertible redeemable preferred share		6,117,988			N/A			N/A
Basic-Series B-3 convertible redeemable preferred share		77,704			N/A			N/A
Diluted-ordinary share		13,446,087			40,695,982			41,576,217

The accompanying notes are an integral part of these consolidated financial statements.

F-3

VANCEINFO TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In U.S. dollars in thousands, except share data)


									Shares issuable			Accumulated
									in connection			other											Total
	Ordinary shares					Additional			with business			comprehensive			Statutory		Retained			Noncontrolling			shareholders’
	Shares			Amount		paid-in capital			acquisitions			income			reserves		earnings			interest			equity

Balance as of January 1, 2007		8,696,219			9		3,279			—			575			55		722			173			4,813
Repurchase of ordinary shares		(86,219	)		—		(127	)		—			—			—		(304	)		—			(431	)
Repurchase of Series A convertible redeemable preferred shares		—			—		—			—			—			—		(60	)		—			(60	)
Issuance of ordinary shares in connection with business acquisitions		2,369,569			2		4,525			—			—			—		—			—			4,527
Deemed dividend on Series A convertible redeemable preferred shares-accretion of redemption premium		—			—		—			—			—			—		(632	)		—			(632	)
Removal of redemption rights of Series B-3 convertible redeemable preferred shares		—			—		1,260			—			—			—		—			—			1,260
Conversion of preferred shares upon the initial public offering (“IPO”)		18,771,838			19		33,993			—			—			—		—			—			34,012
Issuance of ordinary shares upon IPO		7,447,500			7		54,780			—			—			—		—			—			54,787
Share-based compensation		—			—		996			—			—			—		—			—			996
Provision for statutory reserve		—			—		—			—			—			869		(869	)		—			—
Foreign currency translation adjustment		—			—		—			—			1,710			—		—			—			1,710
Net income		—			—		—			—			—			—		9,569			52			9,621
Noncontrolling interest acquired in business combination																					405			405

Balance as of December 31, 2007		37,198,907			37		98,706			—			2,285			924		8,426			630			111,008
Issuance of ordinary shares in connection with business acquisitions		148,594			—		1,174			—			—			—		—			—			1,174
Shares issuable in connection with Chosen acquisition (Note 4)		—			—		—			1,527			—			—		—			—			1,527
Ordinary shares issued for share-based compensation		2,000,000			2		300			—			—			—		—			—			302
Repurchase of ordinary shares		(226,622	)		—		(387	)		—			—			—		(1,633	)		—			(2,020	)
Share-based compensation		—			—		1,391			—			—			—		—			—			1,391
Provision for statutory reserve		—			—		—			—			—			392		(392	)		—			—
Foreign currency translation adjustment		—			—		—			—			2,578			—		—			—			2,578
Net income		—			—		—			—			—			—		16,173			(84	)		16,089
Acquisition of further interest in subsidiary																					(546	)		(546	)

Balance as of December 31, 2008		39,120,879			39		101,184			1,527			4,863			1,316		22,574			—			131,503
Issuance of ordinary shares in connection with business acquisitions		422,213			1		2,088			(1,527	)		—			—		—			—			562
Shares issuable in connection with TP acquisition (Note 4)		—			—		—			520			—			—		—			—			520
Repurchase of ordinary shares		(2,800	)		—		(13	)		—			—			—		—			—			(13	)
Issuance of ordinary shares upon share offering		345,000			—		2,648			—			—			—		—			—			2,648
Ordinary shares issued for share-based compensation		2,800			—		4,208			—			—			—		—			—			4,208
Share-based compensation		—			—		1,565			—			—			—		—			—			1,565
Provision for statutory reserve					—											991		(991	)		—			—
Unrealized gain on foreign currency exchange forward contract recognized in other comprehensive income		—			—		—			—			145			—		—			—			145
Reclassification of gain on foreign currency exchange forward contract to earnings		—			—		—			—			(36	)		—		—			—			(36	)
Foreign currency translation adjustment		—			—		—			—			(48	)		—		—			—			(48	)
Net income		—			—		—			—			—			—		21,508			—			21,508

Balance as of December 31, 2009		39,888,092			40		111,680			520			4,924			2,307		43,091			—			162,562

The accompanying notes are an integral part of these consolidated financial statements.

F-4

VANCEINFO TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. dollars in thousands)


	For the year ended December 31,
	2007			2008			2009
Cash flows from operating activities:
Net income		9,621			16,089			21,508
Adjustments to reconcile net income to net cash provided by operating activities:
Share-based compensation		996			1,391			1,565
Depreciation and amortization of property and equipment		1,776			2,896			4,078
Amortization of intangible assets		761			823			1,668
Gain on a foreign currency exchange forward contract recognized in earnings		—			—			(52	)
Loss on disposal of property and equipment		189			219			282
Allowance for doubtful accounts		287			210			445
Change in fair value of loans to shareholders		(83	)		—			—
Change in fair value of warrants		357			—			—
Change in fair value of contingent consideration payable for business acquisition		—			—			62
Earnings in equity method investment		—			(20	)		(69	)
Changes in operating assets and liabilities:
Rental deposits and prepaid rentals		(107	)		(1,321	)		430
Accounts receivable		(7,910	)		(9,580	)		(22,446	)
Accrued interest income of loan to shareholders		(96	)		(100	)		—
Prepaid expenses and other current assets		(968	)		(323	)		(1,063	)
Deferred tax assets-current		(18	)		(257	)		(1,156	)
Accounts payable		734			192			(2,485	)
Deferred revenue		—			—			30
Accrued expenses and other payables		1,815			4,258			7,016
Income tax payable		30			1,470			2,479
Deferred income		—			—			757
Deferred tax liability-current		132			(145	)		—
Deferred tax liability-non current		(37	)		(398	)		(245	)

Net cash provided by operating activities		7,479			15,404			12,804

Cash flows from investing activities:
Purchase of property and equipment		(3,681	)		(6,144	)		(6,416	)
Purchase of long-term investment		—			(841	)		—
Purchase of short-term investment		—			—			(12,104	)
Loans to shareholders		(4,086	)		—			—
Repayments from shareholders for loans advanced		3,713			3,579			—
Consideration paid for business acquisitions (net of cash acquired of $2,214, $891 and $1,730 in 2007, 2008 and 2009, respectively)		(3,852	)		(6,738	)		(3,462	)
Proceeds from disposal of property and equipment		2			15			34
Term deposit		(1,371	)		(1,463	)		(10,000	)
Cash received upon maturity of term deposit		—			1,464			1,465
Deposit paid for land development project		—			—			(879	)

Net cash used in investing activities		(9,275	)		(10,128	)		(31,362	)

Cash flows from financing activities:
Proceeds from exercise of options		—			302			3,625
Repayments of loans assumed in business acquisitions		(517	)		(200	)		(2,386	)
Proceeds from issuance of Series B-1, B-2 and B-3 convertible redeemable preferred shares and warrants		1,761			—			—
Proceeds from issuance of common stock upon IPO (net of $7,469 and $1,054 issuance costs paid in 2007 and 2008, respectively)		55,835			(1,054	)		—
Repurchase of ordinary shares		(431	)		(2,020	)		(13	)
Repurchase of Series A convertible redeemable preferred shares		(90	)		—			—
Proceeds from issuance of common stock upon share offering in 2009 (net of $712 issuance costs paid in 2009)		—			—			2,912
Proceeds from short-term borrowings		1,183			1,463			—
Repayments of short-term borrowings		—			(1,317	)		(1,465	)

Net cash provided by (used in) financing activities		57,741			(2,826	)		2,673

F-5

VANCEINFO TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — continued
(In U.S. dollars in thousands)


	For the year ended December 31,
	2007		2008		2009
Effect of exchange rate changes		325		678		(21	)
Cash and cash equivalents at beginning of year		20,565		76,835		79,963
Net increase (decrease) in cash and cash equivalents		55,945		2,450		(15,885	)

Cash and cash equivalents at end of year		76,835		79,963		64,057

Supplemental disclosures of cash flow information
Income tax paid		26		343		1,055

Interest paid		39		96		80

Non-cash investing activities:
Acquisition of businesses:
Value of ordinary shares issued and to be issued		4,528		2,701		549
Cash consideration paid		6,066		3,645		1,377
Outstanding consideration payable		3,867		3,106		8,187
Change in fair value of contingent consideration		—		—		(62	)

Net assets acquired (including intangible assets of $254, $3,203 and $5,258, in 2007, 2008 and 2009, respectively)		14,461		9,452		10,051

Payable for purchase of property and equipment		96		181		1,233

Removal of redemption rights of Series B-3 convertible redeemable preferred shares (Note 18)		1,260		—		—

Accrued issuance costs related to offerings		1,048		—		264

The accompanying notes are an integral part of these consolidated financial statements.

F-6

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

ORGANIZATION AND PRINCIPAL ACTIVITIES

VanceInfo Technologies Inc. (“VanceInfo” or the “Company”), formerly known as Thinkplus Investments Limited, was incorporated under the laws of the British Virgin Islands (“BVI”) on April 19, 2004 and was re-domiciled to the Cayman Islands on October 10, 2005. VanceInfo, together with its subsidiaries and variable interest entity, are hereinafter referred to as the “Group”.

On August 31, 2004, through VanceInfo Creative Software Technology Ltd. (“VanceInfo Beijing”), VanceInfo acquired the information technology services (“IT services”) business and related assets of Beijing Wensi Chuangyi Software Technology Co., Ltd. (“Wensi Chuangyi”) and its subsidiaries, the predecessor of VanceInfo. Wensi Chuangyi was established under the laws of the People’s Republic of China (“PRC”) in 1995 and engaged in the provision of localization and quality assurance testing services. The acquisition of Wensi Chuangyi was accounted for as a purchase business combination with net assets recorded at their fair value at the date of acquisition. Before the acquisition of Wensi Chuangyi, the Group did not have significant operations.

The Group is principally engaged in the provision of IT services that mainly include quality assurance testing, application development and maintenances, research and development, globalization and localization, and enterprise solutions in the PRC.

As of December 31, 2009, the Group’s subsidiaries were as follows:


	Date of	Place of	Percentage
	acquisition/	establishment/	of beneficial
Subsidiaries	incorporation	incorporation	ownership

VanceInfo Beijing	July 2, 2004	PRC		100	%
VanceInfo Japan Inc. (“VanceInfo Japan”)	November 25, 2004	Japan		99.9	%
VanceInfo Creative Software Technology Ltd. (“VanceInfo BVI”)	August 6, 2004	BVI		100	%
VanceInfo Technologies Inc. (“VanceInfo US”)	November 29, 2005	United States of America (“US”)		100	%
VanceInfo Technologies Limited	March 27, 2007	Hong Kong		100	%
VanceInfo Technologies Limited	November 15, 2007	PRC		100	%
Shanghai VanceInfo Technologies Limited (“Solutions”)	May 29, 2007	PRC		100	%
Beijing Chosen Technology Co., Ltd. (“Chosen”)	July 31, 2007	PRC		100	%
Shanghai VanceInfo Creative Software Technology Limited	September 9, 2008	PRC		100	%
Wireless Info Tech, Ltd. (“WIT”)	October 1, 2008	US		100	%
VanceInfo Malaysia Inc. Sdn. Bhd.	October 9, 2008	Malaysia		100	%
Shenzhen VanceInfo Creative Software Technology Limited	October 28, 2008	PRC		100	%
Nanjing VanceInfo Creative Software Technology Limited	December 19, 2008	PRC		100	%
TP Teleservices Limited (“TP Teleservices”)	July 2, 2009	Hong Kong		100	%
TP (Hong Kong) Limited (“TP HK”)	July 2, 2009	Hong Kong		100	%
TP Consultants Limited (“TP Consultant”)	July 2, 2009	Hong Kong		100	%
TP (Taiwan) Limited (“TP Taiwan”)	July 2, 2009	Hong Kong		100	%
TP Software Technology (Shanghai) Co., Ltd.(“TP Shanghai”)	July 2, 2009	PRC		100	%

F-7

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

		Basis of presentation

		The consolidated financial statements of the Group are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

		Basis of consolidation

		The consolidated financial statements include the financial statements of VanceInfo, its subsidiaries and its variable interest entity. All inter-company transactions and balances have been eliminated upon consolidation.

		Use of estimates

		The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenue and expenses in the financial statements and accompanying notes. Significant accounting estimates reflected in the Group’s financial statements include revenue recognition, share-based compensation expenses, allowance for doubtful accounts, impairment of goodwill, purchase price allocation in business combinations, and valuation allowance for deferred tax assets. Actual results could differ from those estimates.

		Significant risks and uncertainties

		The Group participates in a dynamic industry and believes that changes in any of the following areas could have a material adverse effect on the Group’s future financial position, results of operations, or cash flows: advances and trends in new technologies and industry standards; competition from other competitors; regulatory or other PRC related factors; risks associated with the Group’s ability to attract and retain employees necessary to support its growth; risks associated with the Group’s growth strategies; and general risks associated with the IT services industry.

		Cash and cash equivalents

Cash and cash equivalents consist of cash on hand and highly liquid investments, which are unrestricted as to withdrawal or use, and which have maturities of three months or less when purchased.

F-8

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

		Fair value

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

		Authoritative literature provides a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement as follows:

		Level 1

		Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

		Level 2

		Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

		Level 3

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The Group’s financial instruments include cash and cash equivalents, held to maturity short term investments, accounts receivable and accounts payable, the carrying values of which approximate their fair value due to their short-term maturities.

F-9

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

Fair value— continued

Level 3— continued

The Group’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 include a foreign currency exchange forward contract based on level 2 inputs and contingent consideration payable in connection with a business acquisition based on level 3 inputs. The Company did not carry any financial assets or liabilities measured at fair value on recurring basis as of December 31, 2008.

The Group’s financial assets and liabilities measured at fair value on a non-recurring basis include acquired assets and liabilities based on level 3 inputs in connection with business acquisitions.

It is not practicable to estimate the fair value of the Group’s equity method long-term investment because of lack of quoted market prices and the inability to estimate fair value without incurring excessive costs.

Short term investments

Short term investments are comprised of marketable debt and equity securities, which are classified as held to maturity, trading, or available for sale. Short term investments are classified as held-to-maturity when the Group has the positive intent and ability to hold the securities to maturity. All of the Group’s held to maturity securities are classified as short term investments on the consolidated balance sheets based on their contractual maturity dates which are less than one year and are stated at their amortized costs. Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings. The Group did not purchase or sell any trading securities historically. Short term investments classified as available for sale are carried at their fair values and the unrealized gains or losses from the changes in fair values are included in accumulated other comprehensive income. Available for sale securities are classified as current assets on the accompanying consolidated balance sheets because they are available for immediate sale. The Group did not hold any available for sale securities historically.

The Group reviews its short-term investments for other-than-temporary impairment based on the specific identification method. The Group considers available quantitative and qualitative evidence in evaluating potential impairment of its short-term investments. If the cost of an investment exceeds the investment’s fair value, the Group considers, among other factors, general market conditions, government economic plans, the duration and the extent to which the fair value of the investment is less than the cost, and the Group’s intent and ability to hold the investment. The Group did not recognize any other-than-temporary impairment on short term investments historically.

F-10

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

		Derivatives and hedge accounting

The Group’s risk management strategy includes the use of derivative and non-derivative financial instruments as hedges of foreign currency exchange risk, whenever management determines their use to be reasonable and practical. This strategy does not permit the use of derivative financial instruments for trading purposes, nor does it allow for speculation.

The Group uses foreign currency forward exchange contracts to hedge the exposure to foreign currency risk, primarily Japanese Yen (“JPY”). The purpose of the Group’s foreign currency derivative activities is to protect the Group from the risk that the functional currencies net cash flows of the Group’s operating entities resulting from forecasted JPY denominated revenue transactions will be negatively affected by the fluctuation in exchange rates. The Group uses foreign currency forward exchange contracts to offset changes in the amount of future cash flows associated with certain third-party sales expected to occur within the next twelve months. These contracts, which are designated and documented as cash flow hedges, qualify for hedge accounting treatment. The effectiveness of the cash flow hedge contracts is assessed quarterly using regression analysis as well as other timing and probability criteria. To receive special hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge and the hedges are expected to be highly effective in offsetting changes to future cash flows generated from hedged transactions.

The Group carries these contracts as either assets or liabilities at fair value. The Group excludes from its assessment of hedge effectiveness the portion of changes in fair value of the forward contracts attributable to the changes in difference between the spot exchange rate and the forward exchange rate (“spot-forward difference”), which is recognized in the exchange differences account in the statement of operations when incurred. The Group recognizes the effective portion of the gains and losses on these contracts, which represents the changes in fair values of these contracts excluding the changes in relation to spot-forward difference, in other comprehensive income and reclassifies such gains and losses subsequently in the exchange differences account in the statement of operations when the forecasted revenue is recognized.

F-11

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

		Accounts receivable

Accounts receivable represents those receivables derived in the ordinary course of business. The Group conducts credit evaluations of customers and generally do not require collateral or other security from their customers. The Group establishes an allowance for doubtful accounts based upon estimates, historical experience and other factors surrounding the credit risk of specific customers.

Movement of allowance for doubtful accounts is as follows:


	Balance as of							Balance as of
	beginning of		Charge to		Exchange			end of
	the year		expense		adjustment			the year

2008		342		210		35			587
2009		587		445		(14	)		1,018

Property and equipment, net

Property and equipment, net, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives:


Furniture and office equipment		5 years
Motor vehicles		5 years
Computers and software		5 years
Leasehold improvements		Shorter of the term of the lease or the estimated useful lives of the assets

Business combinations

Business combinations are recorded using the purchase method of accounting. On January 1, 2009, the Group adopted a new accounting pronouncement with prospective application which made certain changes to the previous authoritative literature on business combinations. From January 1, 2009, the assets acquired, the liabilities assumed, and any noncontrolling interest of the acquiree at the acquisition date, if any, are measured at their fair values as of that date. Goodwill is recognized and measured as the excess of the total consideration transferred plus the fair value of any noncontrolling interest of the acquiree, if any, at the acquisition date over the fair values of the identifiable net assets acquired. Previously, any non-controlling interest was reflected at historical cost. Common forms of the consideration made in acquisitions include cash and common equity instruments. Consideration transferred in a business acquisition is measured at the fair value as at the date of acquisition. For shares issued in a business combination, the Group has estimated the fair value as of the date of acquisition.

F-12

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

Business combinations— continued

Where the consideration in an acquisition includes contingent consideration, the payment of which depends on the achievement of certain specified conditions post-acquisition, from January 1, 2009 the contingent consideration is recognized and measured at its fair value at the acquisition date and if recorded as a liability, it is subsequently carried at fair value with changes in fair value reflected in earnings. For periods prior to January 1, 2009 contingent consideration was not recorded until the contingency was resolved.

Acquired intangible assets, net

Acquired intangible assets with finite lives are carried at cost less accumulated amortization. Amortization of customer base and relationship is computed using the estimated attrition pattern of the acquired customers or straight-line method. Amortization of other finite-lived intangible assets is computed using the straight-line method. The estimated economic lives of acquired intangible assets with finite lives are as follows:


Contract backlog		0.17- 1 year
Customer base and relationship		3-10 years
Non-compete agreement		2-5 years
Software Technology		2 years

Acquired intangible assets with indefinite lives are carried at cost without amortization recognized.

Long-term investment

Investee companies over which the Group has the ability to exercise significant influence, but does not have a controlling interest are accounted for using the equity method. Significant influence is generally considered to exist when the Group has an ownership interest in the voting stock of the investee between 20% and 50%, and other factors, such as representation in the investee’s Board of Directors, voting rights and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate.

An impairment charge is recorded when the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary.

F-13

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

		Impairment of long-lived assets

The Group reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Group measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Group would recognize an impairment loss based on the fair value of the assets.

Impairment of goodwill and indefinite-lived intangible assets

The Group annually, or more frequently if the Group believes indicators of impairment exist, reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist.

Specifically, goodwill impairment is determined using a two-step process. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of the affected reporting unit’s goodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow.

The impairment test for other intangible asset not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The estimates of fair value of intangible assets not subject to amortization are determined using various discounted cash flow valuation methodologies. Significant assumptions are inherent in this process, including estimates of discount rates. Discount rate assumptions are based on an assessment of the risk inherent in the respective intangible assets.

The Group has determined to perform the annual impairment tests on December 31 of each year. The Group did not incur any impairment loss on goodwill or other intangible assets not subject to amortization for the years ended December 31, 2007, 2008 or 2009.

F-14

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

		Revenue recognition

		Research and development outsourcing services and IT services

The majority of the contracts are for the provision of services performed on a time-and-material basis. For time-and-material contracts, the Group may render initial development and maintenance services, typically for a period of less than one year and are subject to the terms of the master agreement which fixes the billing rates for man-hours based on level of experience of the engineers regardless of the type of engaged services. The Group bills customers for related service performance based on pre-agreed charge rates. Customers may terminate contracts before completion and revenue is considered to be realizable and earned when all of the following criteria are met: persuasive evidence of a sales arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured. Thus, the revenues from this type of contract are recognized as the billable services are rendered. Software developed by the Group on behalf of its customers is transferred in its entirety to the customer. Revenues recognized for time-and-material contracts amounted to $58,361, $93,525 and $107,866 for the years ended December 31, 2007, 2008 and 2009, respectively.

The remaining revenues are earned from fixed-price service contracts. Revenue from fixed-price contracts require the Group to perform services throughout the contractual period, which is generally less than one year. Revenues from fixed-price contracts are generally recognized as per the proportional performance method using an output measure determined by achievement of milestones which include planning documentation and testing reports. The Group estimates the man-hours involved in achieving each of these milestones and when the milestone is achieved the Group recognizes a proportion of the total revenue under the contract based on the hours incurred in achieving that milestone against its latest estimate of the total man-hours to be incurred in performing the contract. Revenues recognized for fixed-price contracts amounted to $6,097, $12,031 and $40,426 for the years ended December 31, 2007, 2008 and 2009, respectively.

Reimbursable out-of-pocket expenses and material costs are recognized as revenues when billed.

The discount terms in the Group’s arrangements with customers generally entitle the customer to discounts if the customer completes a specified cumulative level of revenue transactions. The discounts are passed to the customer either as cash payments or as a reduction of payments due from the customer. The Group has recorded its revenue rebate as reduction in revenues appropriately at the time of sales.

F-15

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

		Revenue recognition— continued

		Other solutions

The Group, through TP acquired in 2009 (see Note 4), derives revenues from providing system integration solutions, which normally includ the procurement of hardware on behalf of customers and customized software licenses, implementation of the software and hardware, and post contract customer supports (“PCS”) including telephone supports, on-site supports and regular maintenance services.

The Group has established the vender-specific objective evidence (“VSOE”) of fair value of the PCS based on standalone sales on regular basis and therefore treats the arrangements as two units of accounting, which are (1) hardware and software implementation and (2) PCS. Revenues of the hardware and software implementation are primarily recognized using percentage-of-completion method measured based on the relationship of costs already incurred to the total estimated costs to be incurred. The Group considers labor costs and other direct contract costs in calculating the percentage of completion. Revenues of the PCS are recognized ratably over the PCS period.

In addition, the Group, through certain subsidiary, performed a few other projects which involved initial IT services, software resale, and maintenance service. Since the Group did not establish the VSOE of the fair value of each element of these projects, the contract amounts were recognized as revenues ratably over the period of PCS, which was the last undelivered element in the arrangements.

Revenues recognized in excess of billings are recorded as unbilled receivables and are included in accounts receivable. Amounts billed but not yet collected are recorded as billed receivables and are included in accounts receivable. Billings in excess of revenues recognized are recorded as deferred revenue.

Business tax

The Group’s PRC subsidiaries are subject to business tax at rate of 5% of total revenues for certain types of contracts. Certain contracts under specific formalities are exempted from business tax in accordance with the PRC tax laws. Business tax is recorded as a reduction in revenues when incurred.

F-16

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

		Government subsidies

The Group receives non-repayable subsidies from PRC local government agencies after meeting certain conditions, such as locating their office in certain districts or obtaining certain technological certification. The subsidies are recorded in other operating income of the consolidated statements of operations in the period in which the right to receive such subsidies is established.

Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the lease periods.

Advertising costs

The Group expenses advertising costs as incurred. Total advertising expenses were $52, $8 and $62 for the years ended December 31, 2007, 2008 and 2009, respectively, and have been included as part of selling, general and administrative expenses.

Income taxes

The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Group classifies interest and penalties, if any, as a component of its income tax provision.

F-17

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

		Foreign currency translation

The functional and reporting currency of VanceInfo and VanceInfo BVI are the United States dollar (“U.S. dollar”). The financial records of the Company’s other subsidiaries and variable interest entity are maintained in their local currencies, which are the functional currencies of these entities.

Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year are converted into functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses are recognized in the statements of operations.

		The Group’s entities with functional currency other than U.S. dollar translate their operating results and financial position into the U.S. dollar, the Company’s reporting currency. Assets and liabilities are translated using the exchange rates in effect on the balance sheet date. Revenues, expenses, gains and losses are translated using the average rate for the year. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income.

		Comprehensive income

		Comprehensive income includes net income, unrealized gains on foreign currency forward exchange contracts for effective portion and foreign currency translation adjustments. Comprehensive income is reported in the consolidated statements of operations and comprehensive income.

		Concentration of credit risk

Financial instruments that potentially expose the Group to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Group places their cash and cash equivalents with authorized financial institutions.

Details of customers accounting for 10% or more of total revenues are as follows:


	For the year ended December 31,
	2007		2008		2009
	%		%		%

Customer
A		14		11		5
B		20		18		13
C		3		10		23
D		6		9		11

F-18

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

Concentration of credit risk— continued

Details of customers accounting for 10% or more of accounts receivable are as follows:


	As of December 31,
	2008		2009
	%		%

Customer
A		13		3
B		9		6
C		19		39

Share-based payments

		Share-based payment transactions with employees and non-employee directors are measured based on the grant date fair value of the equity instrument issued and recognized as compensation expense net of a forfeiture rate over the requisite service period based on a graded vesting attribution method, with a corresponding impact reflected in additional paid-in capital. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change.

		Net income per share

The Group has determined that its convertible redeemable preferred shares are participating securities as the preferred shares participate in undistributed earnings on an as-if-converted basis. Accordingly, the Group has used the two-class method of computing net income per share, for ordinary and preferred shares according to participation rights in undistributed earnings. Under this method, undistributed net income is allocated on a pro rata basis to the ordinary and preferred shares to the extent that each class may share income for the period; whereas undistributed net loss is allocated to ordinary shares because preferred shares are not contractually obligated to share the loss.

Ordinary shares to be issued contingent upon the attainment of specified earnings levels in future periods by the acquired businesses are recorded when the contingency is resolved and additional share consideration is issuable.

The Group had convertible redeemable preferred shares, stock options, warrants, nonvested shares, and ordinary shares to be issued contingent upon the satisfaction of certain conditions in connection with business acquisitions, which could potentially dilute basic earnings per share in the future. To calculate the number of shares for diluted income per share, the effect of the convertible redeemable preferred shares is computed using the if-converted method; the effect of the warrants, stock options and nonvested shares is computed using the treasury stock method. If all necessary conditions have not been satisfied by the end of the period, the number of contingently issuable shares included in diluted income per share is based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period and if the result would be dilutive.

F-19

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

		Recently issued accounting standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued an authoritative pronouncement that changes how a company determines whether an entity should be consolidated when such entity is insufficiently capitalized or is not controlled by the company through voting (or similar rights). The determination of whether a company is required to consolidate an entity is based on, among other things, the entity’s purpose and design and the company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The pronouncement retains the scope of previously issued pronouncements but added entities previously considered qualifying special purpose entities, since the concept of these entities was eliminated by FASB. The pronouncement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2009. The Company does not expect the adoption of this pronouncement to have a significant impact on its financial condition or results of operations.

In September 2009, the FASB issued an authoritative pronouncement regarding revenue arrangements with multiple deliverables. This pronouncement was issued in response to practice concerns related to accounting for revenue arrangements with multiple deliverables under the existing pronouncement. Although the new pronouncement retains the criteria from the existing pronouncement for when delivered items in a multiple-deliverable arrangement should be considered separate units of accounting, it removes the separation criterion under the existing pronouncement that objective and reliable evidence of the fair value of any undelivered items must exist for the delivered items to be considered a separate unit or separate units of accounting. The new pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply this pronouncement prospectively to new or materially modified arrangements after the pronouncement’s effective date or retrospectively for all periods presented. Early application is permitted; however, if the entity elects prospective application and early adopts this pronouncement after its first interim reporting period, it must also retrospectively apply this pronouncement as of the beginning of that fiscal year and disclose the effect of the retrospective adjustments on the prior interim periods’ revenue, income before taxes, net income, and earnings per share. The Company is in the process of evaluating the effect of adoption of this pronouncement.

F-20

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

Recently issued accounting standards— continued

In September 2009, the FASB issued an authoritative pronouncement regarding software revenue recognition for arrangements with multiple deliverables. The pronouncement addresses how consideration should be allocated to different units of accounting and removes the previous criterion that entities must use objective and reliable evidence of fair value in separately accounting for deliverables. The pronouncement provides that products containing both software and non-software components that function together to deliver the product’s essential functionality are excluded from the scope of current revenue recognition guidance for software products. The pronouncement includes factors that entities should consider when determining whether the software and non-software components function together to deliver the product’s essential functionality. The pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply this pronouncement prospectively to new or materially modified arrangements after the pronouncement’s effective date, or retrospectively for all periods presented. Early application is permitted. However, if the entity elects prospective application and early adopts this pronouncement after its first interim reporting period, it must also retrospectively apply this pronouncement as of the beginning of that fiscal year and disclose the effect of the retrospective adjustments on the prior interim periods’ revenue, income before taxes, net income, and earnings per share. The Company is in the process of evaluating the effect of adoption of this pronouncement.

In January 2010, the FASB issued authoritative guidance to improve disclosures about fair value measurements. This guidance amends previous guidance on fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurement on a gross basis rather than on a net basis as currently required. This guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This guidance is effective for annual and interim periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activities of purchases, sales, issuances, and settlements on a gross basis, which will be effective for annual and interim periods beginning after December 15, 2010. Early application is permitted and, in the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. The Company does not expect the adoption of this pronouncement to have a significant impact on its financial condition or results of operations.

In April 2010, the FASB issued an authoritative pronouncement regarding milestone method of revenue recognition. The scope of this pronoucement is limited to arrangements that include milestones relating to research or development deliverables. The pronoucement specifies guidance that must be met for a vendor to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The guidance applies to milestones in arrangements within the scope of this pronoucement regardless of whether the arrangement is determined to have single or multiple deliverables or units of accounting. The pronoucement will be effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early application is permitted. Companies can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior periods is also permitted. The Company is in the process of evaluating the effect of adoption of this pronouncement.

In April 2010, FASB issued an authoritative pronouncement regarding the effect of denominating the exercise price of a share-based payment award in the currency of the market in which the underlying equity securities trades and that currency is different from (1) entity's functional currency, (2) functional currency of the foreign operation for which the employee provides services, and (3) payroll currency of the employee. The guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should be considered an equity award assuming all other criteria for equity classification are met. The pronoucement will be effective for interim and annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. The Company is in the process of evaluating the effect of adoption of this pronouncement.

F-21

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

SEGMENT INFORMATION

		The Group’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Group. The Group has only one operating segment.

		Geographic information

The Group major operating entities’ country of domicile is Greater China which refers to the PRC, including, for purposes of the accompanying financial statements only, Taiwan and Hong Kong.

The following tables summarize the Group’s long-lived assets and net revenues in different geographic locations:


	As of December 31,
Long-lived assets	2008		2009

Greater China		31,895		47,277
US		646		2,388
Others		1,285		1,324

Total		33,826		50,989


	For the year ended December 31,
Net revenues (1)	2007		2008		2009

US		43,153		56,175		56,634
Greater China		7,329		22,045		59,373
Europe		6,284		14,991		23,148
Japan		5,828		9,157		8,466
Others		120		295		445

Total		62,714		102,663		148,066


(1)		Based on the countries in which the customers’ headquarters are located. In determining the geographic information, customers under common control, such as subsidiary and its parent entity, are treated as a single customer.

F-22

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

The following table summarizes the Group’s net revenue by service lines:


	For the year ended December 31,
	2007		2008		2009

Research and Development
Outsourcing Services
Research & development services		36,013		60,808		90,581
Globalization & localization		3,886		4,259		5,118
IT Services:
Enterprise solutions		8,748		13,542		14,429
Application development & maintenance		9,348		17,061		26,373
Quality assurance & testing		4,719		6,717		7,807
Other Solutions and Services		—		276		3,758

Total		62,714		102,663		148,066

F-23

VANCEINFO TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)

ACQUISITIONS

The Group had the following acquisitions in 2007, 2008 and 2009:

Acquisition of ITC’s equity interest

On March 19, 2007, the Group acquired a 100% equity interest in Beijing Innovation Technology Co., Ltd. (“ITC”), a professional outsourcing service provider, for an initial equity consideration of 793,548 ordinary shares of VanceInfo at a fair value of $1.71 per ordinary share as of the date of acquisition. The fair value of VanceInfo ordinary shares was determined by the Company after considering a number of factors, including the result of an appraisal by a third party appraiser. The transaction was considered an acquisition of a business and accordingly the purchase method of accounting has been applied. $1,810 of contingent consideration, which represents the lesser of the maximum amount of contingent consideration and the amount of negative goodwill, was recognized as of the date of acquisition.

The acquired net assets were recorded at their fair value at the date of acquisition. The aggregate purchase price consisted of the following:


Value of ordinary shares			1,357
Contingent consideration recognized			1,810
Cost of transaction			76

Total			3,243

The purchase price was allocated as follows:


			Amortization
			period

Cash acquired	226
Loans to shareholders	1,313
Other current assets	810
Property and equipment	158
Intangible assets:
Contract backlog	103		0.3 year
Customer base and relationship	1,153		7.8 years
Non-compete agreement	282		3.8 years
Deferred income tax liabilities	(252	)
Current liabilities	(550	)

Total	3,243

F-24

ACQUISITIONS — continued

Acquisition of ITC’s equity interest— continued

Pursuant to the terms of original purchase agreement, in addition to the initial share consideration, an additional cash consideration, based on the earnings of ITC for 2007, was determined to be $4,649, of which $3,456 was paid as of December 31, 2007, and $1,193 was paid in 2008. The additional cash consideration, after netting off the $1,810 contingent consideration recorded as of the date of acquisition, was recorded as an addition to the goodwill in 2007.

The following unaudited pro forma information summarizes the results of operations for the year ended December 31, 2007 of the Group as if the acquisition had occurred on January 1, 2007. The following pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisition been completed at the beginning of the period indicated, nor is it indicative of future operating results:


	For the year
	ended December 31,
	2007
	(unaudited)

Pro forma net revenue		65,171
Pro forma net income		9,658
Pro forma net income per ordinary share-basic		0.23
Pro forma net income per Series A convertible redeemable preferred share-basic		0.40
Pro forma net income per Series B-1 convertible redeemable preferred share-basic		0.40
Pro forma net income per Series B-2 convertible redeemable preferred share-basic		0.52
Pro forma net income per Series B-3 convertible redeemable preferred share-basic		0.23
Pro forma net income per ordinary share-diluted		0.19

In February 2008, to simplify the corporate structure, the Group transferred all equity interest in ITC, after integration of all the operating net assets and business of ITC into another operating entity of the Group, to two third parties. No significant gain or loss and cash flow were resulted from the transfer.

F-25

ACQUISITIONS — continued

Acquisition of Solutions’ equity interest

On April 1, 2007, the Group entered into an equity transfer agreement to acquire a 75% equity interest in Solutions, a professional outsourcing service provider, for an initial equity consideration of 913,393 ordinary shares of VanceInfo at a fair value of $1.71 per ordinary share on April 1, 2007, the date of the share issuance. The fair value of VanceInfo ordinary shares was determined by the Company after considering a number of factors, including the result of an appraisal by a third party appraiser. The transaction was considered an acquisition of a business and accordingly the purchase method of accounting has been applied. The $394 of contingent consideration, which represents the lesser of the maximum amount of contingent consideration and the amount of negative goodwill, was recognized as of the date of acquisition.

The transaction was closed on May 29, 2007, which was determined as the date of acquisition.

The acquired net assets were recorded at their fair value at the date of acquisition. The aggregate initial purchase price of $2,014 consisted of the following:


Value of ordinary shares			1,562
Contingent consideration recognized			394
Cost of transaction			58

Total			2,014

The purchase price was allocated as follows:


			Amortization
			period

Cash acquired	1,804
Other current assets	1,328
Property and equipment	277
Intangible assets:
Customer base and relationship	187		9.6 years
Non-compete agreement	21		3.8 years
Deferred income tax liabilities	(51	)
Short-term loan	(261	)
Other current liabilities	(672	)
Noncontrolling interest	(619	)

Total	2,014

F-26

ACQUISITIONS — continued

Acquisition of Solutions’ equity interest— continued

Pursuant to the terms of original purchase agreement, an additional cash consideration was determined, based on the operating results of Solutions in 2007, to be $62, which was paid in 2008. Since $394, the contingent consideration recognized as of the date of acquisition was more than $62, the determined additional cash consideration, the excess of $332 was allocated as a pro rata reduction of the carrying amounts of acquired non-current assets.


	For the year
	ended December 31,
	2007
	(unaudited)

Pro forma net revenue		65,890
Pro forma net income		9,505
Pro forma net income per ordinary share-basic		0.22
Pro forma net income per Series A convertible redeemable preferred share-basic		0.39
Pro forma net income per Series B-1 convertible redeemable preferred share-basic		0.40
Pro forma net income per Series B-2 convertible redeemable preferred share-basic		0.51
Pro forma net income per Series B-3 convertible redeemable preferred share-basic		0.22
Pro forma net income per ordinary share-diluted		0.19

On July 23, 2008, the Group acquired an additional 10% equity interest in Solutions for a consideration of $58 in cash and 58,348 ordinary shares of Vanceinfo at a fair value of $7.06 per ordinary share. On August 13, 2008, the Group acquired the remaining 15% equity interest in Solutions for a consideration of $869 in cash which was paid in 2008. The aggregate purchase price of $1,348 consisted of the following:


Cash consideration			927
Value of ordinary shares			412
Cost of transaction			9

Total			1,348

F-27

4.		ACQUISITIONS — continued

		Acquisition of Solutions’ equity interest— continued

		The purchase price was allocated as follows:


		Amortization
		period

Intangible assets:
Contract Backlog	1	0.17 year
Non-compete agreement	6	2.4 years
Goodwill	795
Noncontrolling interest	546

Total	1,348

Acquisition of Megainfo

Megainfo is a professional outsourcing service provider. On March 31, 2007, the Group entered into a series of agreements with Megainfo and the shareholder of Megainfo, through which Megainfo became the consolidated variable interest entity of the Group. The acquisition was accounted for as a business combination.

Megainfo and its shareholder entered into an exclusive technology development and consulting agreement with VanceInfo Beijing on March 31, 2007:

•

Service fees:VanceInfo Beijing provides exclusive technology development and consulting services to Megainfo. Megainfo pays VanceInfo Beijing monthly service fees in the amount determined by VanceInfo Beijing.

•

Call option:The shareholder of Megainfo irrevocably granted VanceInfo Beijing or its designated third party an exclusive option to purchase from Megainfo’s shareholder, to the extent permitted under the laws of the PRC, all or part of the equity interests in Megainfo, for consideration of RMB1.

•

Equity pledge:Under the equity pledge, the shareholder of Megainfo pledged all of his equity interests, including the right to receive declared dividends, in Megainfo to Vanceinfo Beijing to guarantee Megainfo and its shareholder’s performance of their obligations under the exclusive technology development and consulting agreement.

The term of the exclusive technology development and consultation agreement is ten years, unless terminated by VanceInfo Beijing by giving a thirty days’ written notice.

Further, the shareholder of Megainfo also signed an authorization letter on March 31, 2007, according to which the shareholder has executed a power of attorney in favor of a designee of Vanceinfo Beijing irrevocably authorizing the designee to vote as his attorney-in-fact on all of the matters regarding Megainfo requiring shareholder approval, as long as he is a shareholder of Megainfo.

F-28

ACQUISITIONS — continued

Acquisition of Megainfo— continued

Through the above contractual arrangements, the Group has obtained a 100% shareholders’ voting interest in Megainfo and may receive substantially all of the net income of Megainfo through the service fees as determined by the Group. As a result, the Group receives substantially all of Megainfo’s expected residual returns and is the primary beneficiary of Megainfo. The Group consolidated Megainfo as of March 31, 2007, the date of acquisition.

Other than the contractual arrangements described above, the Group did not provide significant financial or other supports to Megainfo for the years ended December 31, 2007, 2008 and 2009, respectively, except that, for Group management purpose, certain employees of the Group also served in Megainfo. The financial position and operating result of Megainfo are insignificant to the Group.

The Group acquired Megainfo with an initial cash consideration of $776 and 147,272 ordinary shares of VanceInfo at a fair value of $1.71 per ordinary share as of the date of acquisition. The fair value of VanceInfo ordinary shares was determined by the Company after considering a number of factors, including the result of an appraisal by a third party appraiser. The transaction was considered an acquisition of a business and accordingly the purchase method of accounting has been applied. $79 of contingent consideration, which represents the lesser of the maximum amount of contingent consideration and the amount of negative goodwill, was recognized as of the date of acquisition.

The acquired net assets were recorded at their fair value at the date of acquisition. The aggregate purchase price of $1,165 consisted of the following:


Cash consideration			776
Value of ordinary shares			252
Contingent consideration recognized			79
Cost of transaction			58

Total			1,165

The purchase price was allocated as follows:


				Amortization period

Property and equipment	220
Intangible assets:
Contract backlog	5		0.3 year
Customer base and relationship	534		4.8 years
Non-compete agreement	43		3 years
Deferred income tax liabilities	(154	)
Other net assets acquired	517

Total	1,165

F-29

ACQUISITIONS — continued

Acquisition of Megainfo— continued


	For the year
	ended December 31,
	2007
	(unaudited)

Pro forma net revenue		65,070
Pro forma net income		9,244
Pro forma net income per ordinary share-basic		0.21
Pro forma net income per Series A convertible redeemable preferred share-basic		0.38
Pro forma net income per Series B-1 convertible redeemable preferred share-basic		0.39
Pro forma net income per Series B-2 convertible redeemable preferred share-basic		0.50
Pro forma net income per Series B-3 convertible redeemable preferred share-basic		0.21
Pro forma net income per ordinary share-diluted		0.18

Pursuant to the terms of original purchase agreement, in addition to the initial consideration, an additional consideration, based on the earnings of Megainfo for the twelve months ended March 31, 2008, was determined to be $1,262 in cash and 87,045 ordinary shares of Vanceinfo at a fair value of $8.42 per share, which were paid and issued as of December 31, 2008. The total additional consideration of $1,995, after netting off the $79 contingent consideration recorded as of the date of acquisition, was recorded as an addition to the goodwill in 2008.

In January 2009, to simplify the corporate structure, the Group deregistered Megainfo, after integration of all the operating net assets and business of Megainfo into another operating entity of the Group, to two third parties. No significant gain or loss and cash flow were resulted from the transfer.

F-30

ACQUISITIONS — continued

Acquisition of Additional Equity Interest of VanceInfo Japan

On May 31, 2007, the Group acquired an additional 48.99% equity interest in VanceInfo Japan, a subsidiary of the Company, for an initial consideration of $111 in cash and 49,141 ordinary shares of VanceInfo at a fair value of $1.99 per ordinary share as of the date of acquisition. The fair value of VanceInfo ordinary shares was determined by the Company after considering a number of factors, including the result of an appraisal by a third party appraiser. Upon the completion of the transaction, the Group’s total equity interest in VanceInfo Japan increased from 51% to 99.99%. The acquired net assets were recorded at their fair value at the date of acquisition. The aggregate purchase price of $217 consisted of the following:


Cash consideration			111
Value of ordinary shares			98
Cost of transaction			8

Total			217

The purchase price was allocated as follows:


		Amortization
		period

Intangible assets:
Customer base and relationship	7	5.6 years
Non-compete agreement	6	3.6 years
Goodwill	16
Noncontrolling interest	188

Total	217

Pursuant to the terms of original purchase agreement, in addition to the initial consideration, an additional consideration, based on the earnings of Vanceinfo Japan for the twelve months ended May 31, 2008, was determined to be $138 in cash and 3,201 ordinary shares of Vanceinfo at a fair value of $9.1 per share, which were paid and issued as of December 31, 2008. The total additional consideration of $167 was recorded as an addition to the goodwill in 2008.

F-31

ACQUISITIONS — continued

Acquisition of Chosen’s equity interest

On July 31, 2007, the Group acquired a 100% equity interest in Chosen, a company engaged in SAP consulting and implementation services, for an initial consideration of $858 in cash and 307,983 ordinary shares of VanceInfo at a fair value of $3.21 per ordinary share as of the date of acquisition. The fair value of VanceInfo ordinary shares was determined by the Company after considering a number of factors, including the result of an appraisal by a third party appraiser. The transaction was considered an acquisition of a business and accordingly the purchase method of accounting has been applied. The acquired net assets were recorded at their fair value at the date of acquisition. The aggregate purchase price of $1,897 consisted of the following:


Cash consideration			858
Value of ordinary shares			989
Cost of transaction			50

Total			1,897

The purchase price was allocated as follows:


			Amortization
			period

Cash acquired	82
Other current assets	1,185
Property and equipment	62
Intangible assets:
Customer base and relationship	1,061		5.4 years
Non-compete agreement	132		4 years
Goodwill	354
Current liabilities	(674	)
Deferred income tax liabilities	(305	)

Total	1,897

F-32

ACQUISITIONS — continued

Acquisition of Chosen’s equity interest— continued


	For the year
	ended December 31,
	2007
	(unaudited)

Pro forma net revenue		66,885
Pro forma net income		10,073
Pro forma net income per ordinary share-basic		0.24
Pro forma net income per Series A convertible redeemable preferred share-basic		0.41
Pro forma net income per Series B-1 convertible redeemable preferred share-basic		0.42
Pro forma net income per Series B-2 convertible redeemable preferred share-basic		0.53
Pro forma net income per Series B-3 convertible redeemable preferred share-basic		0.24
Pro forma net income per ordinary share-diluted		0.21

Pursuant to the terms of original purchase agreement, in addition to the initial share and cash consideration, an additional cash consideration, based on earnings of Chosen for the six-month period ended December 31, 2007, was determined to be $2,533, which was paid in 2008. The additional cash consideration was recorded as an addition to the goodwill in 2007.

Further, an additional consideration, based on earnings of Chosen for the twelve-month period ended December 31, 2008, was determined to be $4,616 and recorded as an addition to the goodwill in 2008, of which $2,822 in cash and 320,460 ordinary shares of Vanceinfo at a fair value of $4.77 per share were paid and issued in 2009, with the remaining $266 to be paid in cash in 2010.

F-33

ACQUISITIONS — continued

Acquisition of Tianchuang’s business

On May 1, 2008, the Group acquired the operating business of Tianchuang Software Development Co., Ltd., (“Tianchuang”), an outsourcing service company, for an initial cash consideration of $243 which was paid in 2008. The transaction was considered an acquisition of a business and accordingly the purchase method of accounting has been applied. The acquired net assets were recorded at their fair value at the date of acquisition. The purchase price was allocated as follows:


		Amortization
		period

Intangible assets:
Contract backlog	1	0.67 year
Non-compete agreement	2	2 years
Goodwill	203
Other net assets acquired	37

Total	243

Pursuant to the terms of the original purchase agreement, in addition to the initial cash consideration, an additional cash consideration, based on the attrition rate of the core team members of Tianchuang from the date of acquisition to December 31, 2008, was determined to be $15, which was paid in 2009. The additional consideration was recorded as an addition to the goodwill in 2008.

The unaudited pro forma information of the Tianchuang acquisition as if the acquisition had occurred on January 1, 2007 and 2008 is not presented because the Group believes it is impracticable to do so.

F-34

ACQUISITIONS — continued

Acquisition of WIT’s equity interest

On October 1, 2008, the Group acquired a 100% equity interest in WIT, a professional outsourcing service provider, for an initial consideration of $1,080 in cash. Additional cash and share contingent consideration to be determined based on specified earnings objectives predefined for the six-month period ended March 31, 2009 and twelve-month period ending March 31, 2010 will be paid in 2009 and 2010, respectively. The transaction was considered an acquisition of a business and accordingly the purchase method of accounting has been applied. The acquired net assets were recorded at their fair value at the date of acquisition. The aggregate purchase price of $1,147 consisted of the following:


Cash consideration			1,080
Cost of transaction			67

Total			1,147

The purchase price was allocated as follows:


			Amortization
			period

Cash acquired	891
Other current assets	858
Property and equipment	285
Rental deposits	33
Intangible assets:
Non-compete agreement	48		5 years
Goodwill	214
Short-term loan	(200	)
Current liabilities	(861	)
Deferred income tax liabilities	(121	)

Total	1,147

F-35

4.		ACQUISITIONS — continued

		Acquisition of WIT’s equity interest— continued

The following unaudited pro forma information summarizes the results of operations for the years ended December 31, 2007 and 2008 of the Group as if the acquisition had occurred on January 1, 2007 and 2008. The following pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisition been completed at the beginning of the periods indicated, nor is it indicative of future operating results:


	For the year
	ended December 31,
	2007		2008
	(unaudited)		(unaudited)

Pro forma net revenue		63,053		106,115
Pro forma net income		9,664		16,963
Pro forma net income per ordinary share-basic		0.23		0.45
Pro forma net income per Series A convertible redeemable preferred share-basic		0.40		N/A
Pro forma net income per Series B-1 convertible redeemable preferred share-basic		0.40		N/A
Pro forma net income per Series B-2 convertible redeemable preferred share-basic		0.52		N/A
Pro forma net income per Series B-3 convertible redeemable preferred share-basic		0.23		N/A
Pro forma net income per ordinary share-diluted		0.19		0.42

Pursuant to the terms of original purchase agreement, in addition to the initial share and cash consideration, an additional cash consideration, based on earnings of WIT for the six-month period ended March 31, 2009, was determined to be $1,506, of which $974 was in cash and $532 in ordinary shares of the Company. The additional consideration was paid and issued in 2009 and the number of ordinary shares to be issued was determined based on the average closing market price of VanceInfo’s ordinary shares of the last ten trading days in March 2009, which was $5.56 per share. The additional consideration of $1,506 was recorded as an addition to the goodwill in 2009.

F-36

ACQUISITIONS — continued

Acquisition of Kernel’s business

On January 1, 2009, the Group acquired a business from Guangzhou Kernel Technology Limited (“Kernel”), a China-based supplier providing customized application development services, for a cash consideration of $206 and 6,163 ordinary shares of VanceInfo at a fair value of $4.75 per ordinary share as of the acquisition date. The transaction was considered an acquisition of a business and accordingly the purchase method of accounting has been applied. The acquired net assets were recorded at their fair value at the date of acquisition. The purchase price consisted of the following:


Cash consideration			206
Value of ordinary shares			29

Total			235

The purchase price was preliminarily allocated as follows:


		Amortization
		period

Intangible assets:
Contract backlog	2	1 year
Non-compete agreement	2	2 years
Goodwill	173
Other net assets acquired	58

Total	235

The unaudited pro forma information of the Kernel acquisition as if the acquisition had occurred on January 1, 2008 is not presented because the Group believes it is impracticable to do so.

F-37

ACQUISITIONS — continued

Acquisition of TP’s equity interest

On July 2, 2009, the Group acquired 100% equity interests in TP (Taiwan) Limited, TP Teleservices Limited, TP (Hong Kong) Limited, TP Software Technology (Shanghai) Co., Ltd.(“TP Shanghai”) and TP Consultants Limited (collectively, “TP”), providers of CRM solutions and system integration. The transaction was considered an acquisition of a business. Accordingly, the purchase method of accounting has been applied. The cash and share contingent consideration, based on specified earnings objectives predefined for the six-month period ended December 31, 2009 and twelve-month period ending December 31, 2010, will be paid in 2010 and 2011, respectively. The acquired net assets were recorded at their fair value at the date of acquisition. The purchase price consisted of the following:

Fair value of contingent consideration as of date of acquisition:


Cash consideration			4,856
Equity consideration			3,788

Total			8,644

The purchase price was preliminarily allocated as follows:


			Amortization
			period

Cash	1,730
Other current assets	2,926
Property and equipment	248
Rental deposits	82
Intangible assets:
Customer base and relationship	2,163		5 years
Tradename	1,645		Indefinite
Non-compete agreement	332		5 years
Contract backlog	743		1.5 years
Software Technology	323		2 years
Goodwill	6,277
Deferred tax assets — non-current	43
Current liabilities	(4,607	)
Deferred tax liabilities	(875	)
Short term loans	(2,386	)

Total	8,644

F-38

ACQUISITIONS — continued

Acquisition of TP’s equity interest— continued

The change in fair value of the contingent consideration from the date of acquisition to December 31, 2009 was $62 and was recognized in the statement of operations.

The following unaudited pro forma information summarizes the results of operations for the years ended December 31, 2008 and 2009 of the Group as if the acquisition had occurred on January 1, 2008 and 2009. The following pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisition been completed at the beginning of the periods indicated, nor is it indicative of future operating results:


	For the year
	ended December 31,
	2008		2009
	(unaudited)		(unaudited)

Pro forma net revenue		108,995		151,068
Pro forma net income		16,019		21,869
Pro forma net income per ordinary share-basic		0.43		0.57
Pro forma net income per ordinary share-diluted		0.39		0.53

Pursuant to the terms of original purchase agreement, a consideration, based on the earnings of TP for the six-month period ended December 31, 2009, was determined to be $1,337, of which $817 was in cash and $520 in ordinary shares of the Company. The consideration will be paid and issued in 2010 and the number of ordinary shares to be issued was determined based on the average closing market price of VanceInfo’s ordinary shares of the last ten trading days in December 2009 and the first ten trading days in 2010, which was $19.66 per share.

F-39

ACQUISITIONS — continued

Acquisition of mobile service business

On October 1, 2009, Vanceinfo Creative Software Technology Ltd. entered into a purchase agreement with a mobile service provider to acquire its business of smart phone software testing for a cash consideration of $1,172. The transaction was considered an acquisition of a business and accordingly the purchase method of accounting has been applied. The acquired net assets were recorded at their fair value at the date of acquisition.

The purchase price was preliminarily allocated as follows:


			Amortization
			period

Intangible assets:
Customer base and relationship	26		5 years
Non-compete agreement	22		2 years
Goodwill	1,306
Property and equipment	148
Prepaid rental	44
Other current liabilities	(374	)

Total	1,172

The unaudited pro forma information of the acquisition as if the acquisition had occurred on January 1, 2008 and 2009 is not presented because the Group believes it is impracticable to do so.

Fair value measurements in business acquisitions

The Group measured the fair value of the purchased intangible assets using the “cost,” “income approach-excess earnings” and “with & without” valuation method. The Group measured the fair value of the contingent consideration considering, among other factors, forecasted financial performance of the acquired business, market performance, and the market potential of the acquired business in China. These purchased intangible assets and contingent consideration are considered Level 3 assets and liabilities because the Group used unobservable inputs, reflecting the Group’s assessment of the assumptions market participants would use in valuing these assets and liabilities.

F-40

SHORT TERM INVESTMENTS

The Group’s marketable securities include floating rate notes and corporate notes as of December 31, 2009. These securities are classified as held to maturity investments by the Group and carried at costs, which approximates to their fair value due to the short term nature.

As of December 31, 2009, the Company held following held to maturity securities:


	Costs		Maturity dates

Floating rate notes		4,271	January 15, 2010 to May 18, 2010
Corporate notes		7,851	January 15, 2010 to September 27, 2010

Total		12,122

The Group’s floating rate notes are purchased from authorized financial institutions.

Included in the carrying amount of the Group held to maturity securities is interest income of $193 from these securities.

ACCOUNTS RECEIVABLE

Accounts receivable consists of:


	As of December 31,
	2008			2009

Billed accounts receivable		16,900			26,077
Unbilled accounts receivable		20,514			35,465
Less: allowance for doubtful accounts		(587	)		(1,018	)

Total accounts receivable, net		36,827			60,524

F-41

PREPAID EXPENSES AND OTHER CURRENT ASSETS


	As of December 31,
	2008		2009

Advances to employees		536		853
Prepaid rentals		1,054		1,090
Receivable from transfer agent		—		966
Performance guarantee deposit		—		734
Advance to suppliers		89		280
Interests receivable		68		291
Incentive from American Depositary Shares (“ADS”) depositary bank		664		514
Prepaid insurance premium		—		150
Assets resulted from change in fair value of foreign currency forward contract		—		161
Other prepaid expenses		673		987

Total		3,084		6,026

Receivable from transfer agent represented proceeds from exercises of the Company’s stock options receivable from the stock transfer agent, which was subsequently received by the Company.

Performance guarantee deposit represented an IT services contract performance deposit paid at the request of one of the customers, which is expected to be returned when the related contract is completed in 2010.

Other prepaid expenses primarily consisted of prepaid miscellaneous general and administrative expenses.

Foreign currency forward exchange contract

On September 30, 2009, the Group entered into a forward contract to purchase $5,000 with JPY448.75 million on October 1, 2010. The Group is qualified for foreign currency cash flow hedge accounting with respect to this foreign currency forward exchange contract, to hedge, for accounting purposes, changes in the cash flow of forecasted JPY denominated revenue transactions attributable to fluctuation in foreign currency exchange rates during the term of the forward contract. The assets resulted from the change in fair value of the forward contract was $161 as of December 31, 2009. The fair value of the foreign exchange forward was estimated with the consideration of, among other factors, discount rate, timing and amount of cash flow and counterparty credit risk and is reported under Level 2 of the fair value hierarchy.

F-42

PREPAID EXPENSES AND OTHER CURRENT ASSETS — continued

During the year 2009, the Group recorded the following gains in other comprehensive income related to the contract:


Unrealized gains recognized for effective portion	145
Gains reclassified to earnings	(36	)

Total	109

During the year 2009, the Group recorded the following gains in the exchange differences account in the statement of operations related to the contract:


Gains reclassified from other comprehensive income			36
Gains recognized due to changes in spot-forward difference			16

Total			52

An unrealized gain of $109 for the effective portion associated with the forward contract was recorded in accumulated other comprehensive income as of December 31, 2009. The unrealized gain will be reclassified into earnings within the next 12 months when the underlying forecasted revenue is recognized. All hedging relationships under cash flow hedges were evaluated to be highly effective as of December 31, 2009.

F-43

PROPERTY AND EQUIPMENT, NET


	As of December 31,
	2008			2009

Furniture and office equipment		2,300			3,820
Motor vehicles		691			1,187
Computers and software		8,241			12,037
Leasehold improvements		5,802			7,783

		17,034			24,827
Less: Accumulated depreciation and amortization		(5,774	)		(9,827	)

Property and equipment, net		11,260			15,000

Depreciation and amortization expenses recorded for the years ended December 31, 2007, 2008 and 2009 were $1,776, $2,896 and $4,078, respectively.

ACQUIRED INTANGIBLE ASSETS, NET


	As of December 31,
	2008			2009
Intangible assets not subject to amortization:
Trade name		732			2,376
Intangible assets subject to amortization:
Contract backlog		156			900
Customer base and relationship		4,524			6,708
Non-compete agreement		594			949
Software Technology		—			322

		6,006			11,255


Less: Accumulated amortization Contract backlog		(156	)		(591	)
Customer base and relationship		(1,443	)		(2,405	)
Non-compete agreement		(249	)		(439	)
Software Technology		—			(81	)

		(1,848	)		(3,516	)

Acquired intangible assets, net		4,158			7,739

The Group recorded amortization expenses of $761, $823 and $1,668 for the years ended December 31, 2007, 2008 and 2009, respectively. The Group expects to record amortization expenses of $1,902, $1,318, $975, $694, $448 and $26 for 2010, 2011, 2012, 2013, 2014 and thereafter, respectively.

F-44

10.

GOODWILL

The movement of the goodwill for the years ended December 31, 2008 and 2009 is as follows:


	As of December 31,
	2008		2009

As of January 1,		7,083		15,537
Goodwill recognized in connection with acquisitions of:
Further interest in VanceInfo Japan		167		—
Chosen upon additional consideration payment		4,616		—
Further interest in Solutions		795		—
Megainfo upon additional consideration payment		1,916		—
Tianchuang’s business upon initial consideration payment		203		—
Tianchuang’s business upon additional consideration payment		15		—
WIT upon initial consideration payment		214		—
WIT upon additional consideration payment		—		1,506
Kernel’s business		—		173
TP		—		6,277
Mobile services business		—		1,306
Exchange differences		528		(16	)

As of December 31		15,537		24,783

11.

LONG-TERM INVESTMENT

On October 1, 2008, the Group completed the purchase of a 33% equity interest in Link Result Limited, a China-based company providing IT outsourcing services to multinational financial institutions, with investment cost of $841, including $330 of cash consideration paid to selling shareholders, $495 of capital injection to the investee in the form of an indefinite-lived interest-free loan and $16 of acquisition costs. The Group accounted for the investment using equity method of accounting because the Group has the ability to exercise significant influence over the investee.

The investment earnings generated from equity method investment was $20 and $69 for the years ended December 31, 2008 and 2009.

F-45

12.

DEPOSIT FOR LAND DEVELOPMENT PROJECT

The Company has commenced the process to obtain land use rights for two pieces of land in Beijing, on which the Company plans to construct a building for use as its new corporate headquarter and research and development center. In November 2009, the Company entered into certain agreements with Zhongguancun Software Park Development Co., Ltd. (“ZSPD”), pursuant to which ZSPD agreed to develop the land in preparation for construction of the building, for an aggregate consideration of $17,473. As of December 31, 2009, the Company paid a deposit of $879 to ZSPD and expected to pay further amounts of $14,852 and $2,621 in 2010 and 2011, respectively.

13.

ACCRUED EXPENSES AND OTHER PAYABLES


	As of December 31,
	2008		2009

Accrued payroll and employee welfare		6,172		10,217
Accrued professional fees		735		1,525
Accrued subcontracting costs and reimbursable operating costs		1,788		5,963
Business tax payable		1,238		1,789
Outstanding cash consideration in connection with business acquisitions		3,105		1,686
Other taxes payable		382		1,192
Advance from customers		664		584
Short-term bank loan		1,466		—
Other accrued liabilities		902		1,244

Total		16,452		24,200

Short-term bank loan as of December 31, 2008 was borrowed from a PRC bank with a guarantee provided by China National Investment & Guaranty Co., Ltd. and pledge of a term deposit of $1,466 of Solutions. The loan had an annual interest rate of 5.31% and was fully repaid in 2009.

F-46

14.

INCOME TAXES

VanceInfo and VanceInfo BVI are tax exempted companies incorporated in the Cayman Islands and the British Virgin Islands, respectively.

In 2007 and 2008, the income tax provision of the Group was made for the operations of the subsidiaries located in the PRC, VanceInfo Japan, VanceInfo US and WIT. In 2009, the income tax provision of the Group was made for the operations of the subsidiaries located in the PRC, Vanceinfo Japan, Vanceinfo US, WIT, TP HK, TP Taiwan and TP Teleservices.

Pursuant to the relevant tax rules and regulations applicable to VanceInfo Japan, VanceInfo Japan was required to provide income tax of $2, $26 and $1 for 2007, 2008 and 2009, respectively,

TP HK, TP Taiwan and TP Teleservices were subject to profits tax rate of 16.5% for the year of 2009.

Prior to January 1, 2008, companies established in the PRC were generally subject to a State and local enterprise income tax, or EIT, at statutory rates of 30% and 3% respectively. Under the applicable PRC rules and policies, an enterprise qualified as a “high and new technology enterprise” located in the Beijing New Industry Development Pilot Zone was entitled to a preferential EIT rate of 15% and was further entitled to a three-year EIT exemption from either its first year of operation or, if it was incorporated in the second half of a calendar year, its second year of operation if so selected, and a 50% reduction of its applicable EIT rate for the succeeding three years. VanceInfo Beijing, Prosoft (a former subsidiary of the Company)and ITC(a former subsidiary of the Company) were then qualified as “high and new technology enterprises” located in the Beijing New Industry Development Pilot Zone, and enjoying preferential tax treatment as a result of this status. VanceInfo Beijing was incorporated in the second half of 2004, and elected to be exempted from EIT from 2005 to 2007. Prosoft and ITC were incorporated in June 2004, and have been entitled to be exempted from EIT from 2004 to 2006 and be subject to a 7.5% EIT rate in 2007. In addition, under the PRC rules and policies then effective, an enterprise qualified as a “software enterprise” was entitled to an exemption from EIT for the first two profitable years and a 50% reduction of its applicable EIT rate for the subsequent three years. Solutions was incorporated in 2002 and was recognized as a “key software enterprise” in 2003, and therefore, it was entitled to be exempted from EIT in 2003 and 2004, and subject to a 16.5% EIT rate from 2005 to 2007.

The other PRC subsidiaries were subject to 33% EIT for the year of 2007.

F-47

14.

INCOME TAXES — continued

On March 16, 2007, the National People’s Congress of China enacted a new EIT law, which has taken into effect from January 1, 2008. Under the new EIT law, foreign invested enterprises, or FIEs, such as VanceInfo Beijing, and Chinese domestic companies are subject to EIT at a uniform rate of 25%. In addition, certain enterprises may still benefit from a preferential tax rate of 15% under the new EIT law if they qualify as “high and new technology enterprises strongly supported by the State”. According to the EIT Law and relevant implementation rules, the “high and new technology enterprises strongly supported by the State” shall refer to an enterprise that owns the core proprietary intellectual property rights and fulfills all of the conditions stipulated therein.

VanceInfo Beijing obtained the certificate on high and new technology enterprises in 2008 and is entitled to the preferential tax rate of 7.5% from 2008 to 2010. Solutions obtained the certificate of high and new technology enterprises and was subject to 15% in 2008. Solutions was also recognized as a “key software enterprise” and therefore was subject to preferential tax rate of 10% in 2009. TP Shanghai obtained the certificate on high and new technology enterprises and was subject to 15% in 2009.

The applicable EIT rate for the other PRC subsidiaries was 25% in 2008 and 2009.

The high and new technology enterprise status is valid for three years and qualifying enterprises can then apply to renew for an additional three years provided the company’s business operations continue to qualify for high and new technology enterprise status. The Group believes it is highly likely that its qualifying entities will continue to obtain the renewal in the future. Accordingly, in calculating deferred tax assets and liabilities, the Group has assumed its qualifying entities will continue to renew the high and new technology enterprise status at the conclusion of the initial three year period. If the Group’s qualifying entities failed to obtain such renewals, then the net deferred tax assets balance would increase by $1,110 and the net deferred liability balance would increase by $342, as of December 31, 2009, which would be an decrease to the income tax expenses.

Due to the changes in the new EIT law in March 2007, the Group’s deferred tax balances were calculated based on the newly enacted tax rate to be effective January 1, 2008. The impact on the deferred taxes resulting from the rate change as of January 1, 2007 was an adjustment to the deferred tax liabilities of $129, representing an increase in deferred tax expense.

F-48

14.

INCOME TAXES — continued

Uncertainties exist with respect to how the current income tax law in the PRC applies to the Group’s overall operations, and more specifically, with regard to tax residency status. EIT Law includes a provision specifying that legal entities organized outside of the PRC will be considered residents for Chinese Income tax purposes if the place of effective management or control is within the PRC. The implementation rules to the EIT law provide that non-resident legal entities will be considered China residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc, occurs within the PRC. Despite the present uncertainties resulting from the limited PRC tax guidance on the issue, the Group does not believe that the legal entities organized outside of the PRC within the Group should be treated as residents for EIT law purposes. If the PRC tax authorities subsequently determine that the Company and its subsidiaries registered outside the PRC should be deemed a resident enterprise, the Company and its subsidiaries registered outside the PRC will be subject to the PRC income tax at a rate of 25%.

On the basis that Company is determined to be non-resident for PRC tax purpose, any dividends paid to it out of profits earned by the Company’s subsidiaries located in the PRC, which are tax resident in the PRC, after January 1, 2008 is subject to a withholding tax of 10%.

Aggregate undistributed earnings of the Company’s subsidiaries located in the PRC available for distribution to the Company are $39,617 as of December 31, 2009. The Group does not have any present plan to pay any cash dividends on its ordinary shares in the foreseeable future. It intends to retain most of its available funds and any future earnings for use in the operation and expansion of its business. As such, the undistributed earnings of the Company’s PRC subsidiaries are considered to be indefinitely reinvested and accordingly, no provision has been made for the Chinese dividend withholding taxes as of December 31, 2009.

Income tax expenses are as follows:


	For the year ended December 31,
	2007		2008			2009

Income taxes expenses:
Current		57		2,078			3,533
Deferred		117		(780	)		(1,444	)

Total		174		1,298			2,089

F-49

14.		INCOME TAXES — continued

		The principal components of deferred income taxes are as follows:


	As of December 31,
	2008			2009

Current deferred tax assets:
Allowance for doubtful accounts		34			96
Accrued compensation related		251			1,301
Net operating loss carry forwards		—			76

		285			1,473

Non-current deferred tax assets:
Net operating loss carry forwards		219			172
Property and equipment		70			130
Valuation allowance		(219	)		(172	)

		70			130

Net deferred tax assets		355			1,603

Non-current deferred tax liabilities:
Intangible assets		(673	)		(1,322	)
Property and equipment		(134	)		(136	)

		(807	)		(1,458	)

Net deferred tax liabilities		(807	)		(1,458	)

F-50

14.

INCOME TAXES — continued

For the purpose of balance sheet presentation, certain deferred tax assets and liabilities attributable to the same tax-paying components of the Group and within the same tax jurisdictions have been offset. The following is the analysis of the deferred tax balances for financial reporting purposes:


	As of December 31,
	2008			2009

Current deferred tax assets:
Allowance for doubtful accounts		34			96
Accrued compensation related		251			1,301
Net operating loss carry forwards		—			76

Total current deferred tax assets		285			1,473

Non-current deferred tax assets:
Net operating loss carry forwards		219			172
Property and equipment		70			130
Valuation allowance		(219	)		(172	)

Total non-current deferred tax assets		70			130

Non-current deferred tax liabilities:
Intangible assets acquired in business acquisitions		(673	)		(1,322	)
Property and equipment		(134	)		(136	)


Total non-current deferred tax liabilities		(807	)		(1,458	)


Non-current deferred tax liabilities, net		(737	)		(1,328	)

A valuation allowance has been recognized for net operating losses carry forwards of certain subsidiaries and the variable interest entity of the Group, because the Group does not believe these entities can generate future taxable income to recognize the income tax benefit. Net operating losses totaled $902 as of December 31, 2008 which included $831 expiring on various dates throughout 2013 and the remaining amounts will carry forward indefinitely. Net operating losses totaled $1,265 as of December 31, 2009 will be expired on various dates throughout 2014.

The valuation allowance decreased in 2009 from 2008 following the deregistration of Magainfo in January 2009.

F-51

14.

INCOME TAXES — continued

A reconciliation between the statutory PRC enterprise income tax rate and the effective tax rate is as follows:


	For the year ended December 31,
	2007			2008			2009
	%			%			%

Statutory tax rate in PRC		33.00			25.00			25.00
Changes in valuation allowances		2.05			(0.45	)		(0.20	)
Effect of income tax rate differences of subsidiaries operating with different tax jurisdictions		(12.32	)		(10.30	)		(8.57	)
Effect of change in enacted tax rate in PRC		1.32			—			—
Effect of tax holidays enjoyed by PRC subsidiaries		(22.27	)		(6.79	)		(7.38	)

Effective tax rate		1.78			7.46			8.85

During the years ended December 31, 2007, 2008 and 2009, if the Company’s subsidiaries and variable interest entity in the PRC were neither in the tax holiday period nor had they been specifically allowed special tax concessions, additional income tax expense and the effect on net income per share amounts would be as follows:


	For the year ended December 31,
	2007		2008		2009

Increases in income tax expense		2,181		1,180		1,735
Reduction in net income per ordinary share-basic		0.07		0.03		0.05
Reduction in net income per Series A convertible redeemable preferred share-basic		0.08		N/A		N/A
Reduction in net income per Series B-1 convertible redeemable preferred share-basic		0.08		N/A		N/A
Reduction in net income per Series B-2 convertible redeemable preferred share-basic		0.09		N/A		N/A
Reduction in net income per Series B-3 convertible redeemable preferred share-basic		0.07		N/A		N/A
Reduction in net income per ordinary share-diluted		0.06		0.03		0.04

The Group did not identify any significant unrecognized tax benefits or incur any interest or penalties related to potential underpaid income tax expenses for each of the three years ended December 31, 2009. The Group does not expect to have a significant increase or decrease on unrecognized tax benefits within 12 months from December 31, 2009, except for new acquisitions, if any, occur in the period.

The Group has various tax years from 2003 to 2009 which remain open in various tax jurisdictions.

F-52

15.

NET INCOME PER SHARE

The calculation of the net income per share is as follows:


	For the year ended December 31,
	2007			2008			2009

Net income attributable to holders of ordinary shares		8,937			16,173			21,508
Deemed dividend on Series A convertible redeemable preferred shares-accretion of redemption premium		(632	)		—			—

Numerator used in basic and diluted net income per share:
Net income allocated for computing net income per ordinary share-basic		2,558	(i)		16,173			21,508

Net income allocated for computing net income per Series A convertible redeemable preferred share-basic		2,716	(i)		N/A			N/A

Net income allocated for computing net income per Series B-1 convertible redeemable preferred share-basic		1,147	(i)		N/A			N/A

Series B-2 convertible redeemable preferred share-basic		3,131	(i)		N/A			N/A

Series B-3 convertible redeemable preferred share-basic		17	(i)		N/A			N/A

Net income allocated for computing net income per ordinary share-diluted		2,558			16,173			21,508


Shares (denominator):
Weighted average ordinary shares outstanding used in computing net income per ordinary share-basic		11,426,183		37,276,306(ii)			38,389,495(ii)

Weighted average shares outstanding used in computing net income per Series A convertible redeemable preferred share-basic		6,860,247			N/A			N/A

Weighted average shares outstanding used in computing net income per Series B-1 convertible redeemable preferred share-basic		2,867,123			N/A			N/A

Weighted average shares outstanding used in computing net income per Series B-2 convertible redeemable preferred share-basic		6,117,988			N/A			N/A

Weighted average shares outstanding used in computing net income per Series B-3 convertible redeemable preferred share-basic		77,704			N/A			N/A

Weighted average ordinary shares outstanding used in computing net income per ordinary share-diluted	13,446,087		(iii)	40,695,982		(iii)	41,576,217		(iii)

Net income per ordinary share-basic		0.22			0.43			0.56

Net income per Series A convertible redeemable preferred share-basic		0.40			N/A			N/A

Net income per Series B-1 convertible redeemable preferred share-basic		0.40			N/A			N/A

Net income per Series B-2 convertible redeemable preferred share-basic		0.51			N/A			N/A

Net income per Series B-3 convertible redeemable preferred share-basic		0.22			N/A			N/A

Net income per ordinary share-diluted		0.19			0.40			0.52

F-53

15.

NET INCOME PER SHARE — continued

(i)

The net income attributable to holders of ordinary shares was allocated between ordinary shares and preferred shares on a pro rata basis on the dividend participating right. The net income allocated for computing net income per Series A convertible redeemable preferred share-basic also contained the deemed dividend for accretion of the redemption premium.

(ii)

In June 2008, the Company issued 2,000,000 ordinary shares for future delivery to employees and non-employees upon exercise of vested stock options or grant of nonvested shares. 219,196 and 1,211,897 shares were transferred to the relevant employees in 2008 and 2009 respectively. Accordingly, the remaining shares outstanding during the years were excluded in computation of basic net income per share in 2008 and 2009.

(iii)

The Group had securities outstanding which could potentially dilute basic net income per share in the future, but which were excluded from the computation of diluted net income per share in the years ended December 31, 2007, 2008 and 2009 as their effects would have been anti-dilutive. For year 2007, such outstanding securities consisted of Series A convertible redeemable preferred shares of a weighted average number of 6,860,247, Series B-1 and B-2 convertible redeemable preferred shares of a weighted average number of 8,985,111, warrants to purchase a weighted average number of 190,570 Series B-3 convertible redeemable preferred shares and stock options of a weighted average number of 1,045,027. For year 2008 and 2009, such outstanding securities consisted of stock options of a weighted average number of 562,717 and 661,234.

A weighted average number of 78,928, 319,584 and 36,493 contingently issuable ordinary shares in connection with business acquisitions were included in the computation of diluted net income per share in year 2007, 2008 and 2009, respectively.

The calculation of the weighted average number of ordinary shares in 2007, 2008 and 2009 for the purpose of diluted net income per share has included the effect of stock options and nonvested shares of a weighted average number of 3,025,849, 4,909,091 and 4,406,820 which gives rise to an incremental weighted average number of 1,793,342, 3,100,092 and 3,150,229 ordinary shares from the assumed conversion of these stock options and nonvested shares using the treasury stock method, respectively.

F-54

16.

SHARES-BASED COMPENSATION

On November 3, 2005, the Group adopted the 2005 Stock Option Plan, which allows the Group to grant options to its employees and directors to purchase 1,867,500 ordinary shares subject to vesting requirement. In April and May 2006, additional options to purchase 2,400,000 ordinary shares were authorized with the approval from shareholders. No options shall be exercisable after ten years from the date of grant. The options will vest first 1/4 on a date specified in the option award agreement, which is usually a date approximately 9 months or one year from the date of grant, and thereafter, 1/48 on each of the monthly anniversaries or 1/16 on each of the quarterly anniversaries from the first vesting date.

On July 30, 2007, the board of directors and shareholders adopted the 2007 Share Incentive Plan as amended on August 1, 2007, which authorizes to grant to employee and non-employees options to purchase ordinary shares or nonvested shares up to a total of 1,100,000 ordinary shares of the Company with an annual increase up to 3% of the number of ordinary shares outstanding as of the first day of each year beginning 2008. The plan will expire on the tenth anniversary of the effective date of the plan. The term of any option granted under the 2007 Share Incentive Plan shall not exceed ten years. The options and nonvested shares will vest first 1/4 on the first anniversary of the date of grant and thereafter, 1/16 on each of the quarterly anniversaries from of the first vesting date.

I. Stock Options

Termination of option

If the grantee ceases to be employed by or ceases to provide services to the Group, (a) the grantee will have until the date that is 30 days after his or her severance date to exercise the options (or portion thereof) to the extent that they were vested on the severance date; (b) the options to the extent not vested on the severance date, shall terminate on the severance date; (c) the options, to the extent exercisable for the 30-day period following the severance date and not exercised during such period, shall terminate at the close of the business on the last day of the 30-day period.

Option exercise

The option shall be exercisable by the delivery of a written notice to the Company, in the form approved by the Company, stating the number of ordinary shares to be purchased pursuant to the option and payment in full for the exercise price of the shares to be purchased in cash, by check or by electronic funds transfer to the Company.

F-55

16.

SHARES-BASED COMPENSATION — continued

I. Stock Options— continued

Options to employees and non-employee directors

During the years ended December 31, 2007, 2008 and 2009, the Company granted a total of 2,468,050, 1,336,200 and 146,000 share options to employees and non-employee directors at an exercise price ranging from $3.00 to $9.00 per share, $4.70 to $8.92 and $4.58 to $14.69 per share, respectively.

The following table summarizes information regarding the stock options granted:


					Weighted		Weighted
					average		average
			Weighted		fair value		intrinsic
			average		per ordinary		value per
	Options		exercise price		share at the		option at the
Quarter ended	granted		per option		grant dates		grant dates

March 31, 2007		777,570		3.32		1.65		—
June 30, 2007		622,016		4.44		1.92		—
September 30, 2007		631,464		7.22		3.87		—
December 31, 2007		437,000		9.00		6.50		—
March 31, 2008		540,000		5.44		5.44		—
June 30, 2008		60,200		6.68		6.68		—
September 30, 2008		162,000		8.58		8.58		—
December 31, 2008		574,000		4.94		4.94		—
March 31, 2009		48,000		4.58		4.58		—
June 30, 2009		15,000		5.00		5.00		—
September 30, 2009		39,500		11.00		11.00		—
December 31, 2009		43,500		14.69		14.69		—

Total		3,950,250


						Weighted
				Weighted		average fair value
				average		per option
	Number of			exercise price		at the
	options			per option		grant dates

Outstanding at January 1, 2007		2,875,350			0.86		0.76
Granted		2,468,050			5.61		0.78
Forfeited		(217,843	)		4.43		1.10

Outstanding at December 31, 2007		5,125,557			3.00		0.73
Granted		1,336,200			5.70		1.70
Forfeited		(307,018	)		5.66		1.06
Exercised		(215,696	)		1.40		0.80

Outstanding at December 31, 2008		5,939,043			3.51		0.93
Granted		146,000			9.37		3.32
Forfeited		(482,868	)		5.60		0.98
Exercised		(1,204,280	)		3.49		0.93

Outstanding at December 31, 2009		4,397,895			3.49		1.01

F-56

16.

SHARES-BASED COMPENSATION — continued

I. Stock Options— continued

Options to employees and non-employee directors- continued

The following table summarizes information with respect to stock options outstanding as of December 31, 2009:

Options outstanding

Options exercisable

Weighted

Aggregate

Weighted

Aggregate

average

intrinsic

average

intrinsic

remaining

exercise

value as of

exercise

value as of

Number

contractual

price per

December 31,

Number

price per

December 31,

outstanding

life

option

2009

exercisable

option

2009

Ordinary shares

4,397,895

5.40

3.49

69,155

2,523,605

2.19

42,962

The total intrinsic value of options exercised during the years ended December 31, 2007, 2008 and 2009 was nil, $1,617 and $12,527, respectively.

The range of fair value of the options as of their respective grant dates is as follows:


	For the year ended December 31,
	2007		2008		2009

Options		0.25-2.48		1.43-2.55		1.60-5.30

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants during the applicable periods.


	For the year ended December 31,
	2007			2008			2009

Risk-free interest rate of return		4.39%-5.36	%		3.18%-4.15	%		2.62%-3.62	%
Expected term	4.1-6.1 years			2.72-3.61 years			3.61 years
Volatility		38.9%-50.3	%		36.0%-40.8	%		40.8%-44.7	%
Dividend yield		—			—			—

(1)

Volatility

The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price volatility of listed comparable companies over a period comparable to the expected term of the options.

(2)

Risk-free interest rate

Risk-free interest rate was estimated based on the yield to maturity of China international government bonds with a maturity period close to the expected term of the options.

F-57

16.

SHARES-BASED COMPENSATION — continued

I. Stock Options— continued

Options to employees and non-employee directors— continued

(3)

Expected term

As the Company did not have sufficient historical share option exercise experience, it estimated the expected term as the average between the vesting term of the options and the original contractual term.

(4)

Dividend yield

The dividend yield was estimated by the Company based on its expected dividend policy over the expected term of the options.

(5)

Exercise price

The exercise price of the options was determined by the Company’s board of directors.

(6)

Fair value of underlying ordinary shares

When estimating the fair value of the ordinary shares on the grant dates before the IPO of the Company, management considered a number of factors, including the result of equity transactions of the Company, while taking into account standard valuation methods and the achievement of certain events. After the IPO, the closing market price of the ordinary shares of the Company as of the grant date was used as the fair value of the ordinary shares on that date.

The Group recorded share-based compensation of $996, $1,308 and $1,311 for options granted to employees and non-employee directors for the year ended December 31, 2007, 2008 and 2009, respectively, using the graded vesting attribution method.

There was $1,110 of total unrecognized compensation expense related to unvested share options granted as of December 31, 2009. The expense is expected to be recognized over a weighted-average period of 1.34 years according to the graded vesting schedule.

F-58

16.

SHARES-BASED COMPENSATION — continued

II. Nonvested Shares

In 2007, 2008 and 2009, the Company granted 20,000, 17,480 and 89,874 nonvested ordinary shares, respectively, to employees under 2007 Share Incentive Plan. The nonvested shares will vest first 1/4 on the first anniversary of the vesting commencement date and thereafter the remaining 3/4 will vest on a pro-rata basis after the expiration of each of the 12 quarters after the first vesting date.

A summary of the nonvested shares activity is as follows:


					Weighted
		Weighted			average fair value
		number of			per ordinary
		nonvested			share at the
		shares			grant dates
Outstanding at January 1, 2007			—			—
Granted			20,000			8.73

Outstanding at December 31, 2007			20,000			8.73
Granted			17,480			5.83
Vested			(3,500	)		8.56
Forfeited			(6,000	)		9.15


Outstanding at January 1, 2009			27,980			7.80
Granted			89,874			7.89
Vested			(7,617	)		7.08
Forfeited	��		(2,167	)		9.80

Outstanding at December 31, 2009			108,070			7.64

The total fair value of nonvested shares vested during the years ended December 31, 2007, 2008 and 2009 was nil, $18 and $128, respectively.

The Company recorded compensation expenses based on the fair value of nonvested shares on the grant dates over the requisite service period of award using the graded vesting attribution method. The fair value of the nonvested shares on the grant date was the closing market price of the ordinary shares as of the date. For nonvested share granted in 2007, 2008 and 2009, the fair value at the date of grant ranged from $4.75 to $14.69. The related compensation expense in 2007 is insignificant and the Company recorded $83 and $254 related compensation expenses in 2008 and 2009 respectively.

There was $430 of total unrecognized compensation expense related to nonvested shares granted as of December 31, 2009. The expense is expected to be recognized over a weighted-average period of 3.18 years according to the graded vesting schedule.

F-59

17.

ORDINARY SHARES ISSUANCE AND REPURCHASE

As of January 1, 2007, the Company had 8,696,219 ordinary shares issued and outstanding.

In March 2007, the Company issued 396,774 and 396,774 ordinary shares to Ultra Link Holding Limited and Space Link Holding Limited, respectively, as part of the consideration for the acquisition of ITC as set out in Note 4.

In April 2007, the Company issued 667,386 and 246,007 ordinary shares to Airland and Bizexpress, respectively, as part of the consideration for the acquisition of Solutions as set out in Note 4.

In April 2007, the Company issued 147,272 ordinary shares to One Silver as part of the consideration for the acquisition of Megainfo as set out in Note 4.

In April 2007, the Company issued 155,901 ordinary shares as part of the additional payment for the acquisition of Prosoft in 2006.

In April 2007 the Company issued 2,331 ordinary shares as part of the additional payment for the acquisition of the operating business of SunBridges in 2006.

In June 2007, the Company issued 49,141 ordinary shares to Global Mission Limited as part of the consideration for the acquisition of additional equity interest of VanceInfo Japan as set out in Note 4.

In June 2007, the Company repurchased and cancelled 86,219 ordinary shares from an ordinary shareholder at a total consideration of $431. The excess, amounting to $304, of repurchase price over the initial issuance price was recorded as a reduction in retained earnings of the Group. These ordinary shares were cancelled upon repurchase.

In July 2007, the Company issued 102,661, 102,661, 102,661 ordinary shares to Cypress Hill Holdings Limited, Fortune Sea International Limited and Million International Limited respectively as part of the consideration for the acquisition of Chosen as set out in Note 4.

In December 2007, the Company completed its IPO of ADSs and listed ADSs on the New York Stock Exchange. Each ADS represent one ordinary share of the Company. 7,447,500 ordinary shares were issued for total proceeds of $54,787, net of offering costs of $8,517. In addition, all Series A, B-1, B-2, and B-3 convertible redeemable preferred shares were automatically converted into 18,771,838 ordinary shares upon the IPO.

In June 2008, the Company issued 2,000,000 ordinary shares for future delivery to the employees and non-employees upon exercises of vested stock options or grant of nonvested shares as set out in Note 16.

In June 2008, the Company issued 58,348 ordinary shares to NEC System Technology Limited as part of the consideration for the acquisition of the additional equity interest of Solutions as set out in Note 4.

F-60

17.

ORDINARY SHARES — continued

In September 2008, the Company repurchased and cancelled 172,919 and 53,703 ordinary shares from Airland and Bizexpress respectively at a total consideration of $2,020. The excess, amounting to $1,633, of repurchase price over the initial issuance price was recorded as a reduction in retained earnings of the Group. These ordinary shares were cancelled upon repurchase.

In September 2008, the Company issued 87,045 ordinary shares to One Silver Development Limited as a part of the additional consideration for the acquisition of Megainfo as set out in Note 4.

In September 2008, the Company issued 3,201 ordinary shares to Global Mission Limited as a part of the additional consideration for the acquisition of Vanceinfo Japan as set out in Note 4.

On February 21, 2009, the Company’s board of directors approved a share repurchase program authorizing the Company to acquire up to $10,000 worth of the Company’s outstanding ADSs within the next 12 months.

In March 2009, ADSs representing 2,800 shares were repurchased for a total consideration of $13 from the open market. The repurchased ADSs were to be used for subsequent delivery to the employees and non-employees upon exercises of vested stock options or grant of nonvested shares.

In July 2009, the Company completed a share offering of 345,000 ordinary shares for total proceeds of $3,624, net of offering costs of $976.

In October 2009, the Company issued 106,820, 106,820, 106,820 ordinary shares to Cypress Hill Holdings Limited, Fortune Sea International Limited and Million International Limited respectively as a part of the additional consideration for the acquisition of Chosen as set out in Note 4.

In October 2009, the Company issued 95,590 ordinary shares to Wireless Info Tech Limited as a part of the additional consideration for the acquisition of WIT as set out in Note 4.

In October 2009, the Company issued 6,163 ordinary shares to Xiang Liu as a part of the consideration for the acquisition of Kernel as set out in Note 4.

F-61

18.

CONVERTIBLE REDEEMABLE PREFERRED SHARES

Series A Convertible Redeemable Preferred Shares

On March 10, 2005, the Company issued 717,500 Series A Shares to three third party investors for $7,175 (after issuance cost, net proceeds of $6,764), at $10 per share. In the same month, the Company had a one-to-ten share split and accordingly it became 7,175,000 Series A Shares with par value of $0.001 and original issue price of $1.

In April 2007, the Company repurchased and cancelled 30,000 Series A Shares from one of the Series A share holders at total consideration of $90.

The rights, preferences and privileges with respect to the Series A Shares were as follows:

Voting right

Holders of the Series A Shares have voting rights equal to the number of ordinary shares then issuable upon its conversion into ordinary shares. The Series A Shares generally vote together with the ordinary shares and not as a separate class.

Dividends

Holders of Series A Shares are entitled to receive dividends at the rate of eight percent (8%) of its issue price after dividend payment on Series B Shares (set out below in Note 18). Dividend is payable upon declaration by the board of directors and is noncumulative.

After payment of dividends on all preferred shares, the holders of Series A Shares participates in dividend payment with other participative preferred shares and ordinary shares on a pro rata and as-converted basis.

Liquidation preference

In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, after the full Series B-1, B-2 and B-3 preference amount on all outstanding Series B-1 Shares, B-2 Shares and B-3 Shares has been paid, prior to any distribution of any of the assets or surplus funds of the Company to other classes of the Company, the holders of Series A Shares are entitled to receive, the full amount of the original issue price. After such payment has been made to holders of the Series A Shares, any remaining assets or proceeds of the Company will be distributed pro rata to holders of ordinary shares on an if-converted basis.

F-62

18.

CONVERTIBLE REDEEMABLE PREFERRED SHARES — continued

Series A Convertible Redeemable Preferred Shares— continued

Redemption

The Series A Shares are redeemable at the option of the holders 60 days after the Company has redeemed Series B Shares, if not previously converted, for an amount equal to (original issue price of Series A Shares x 108% N) plus all declared but unpaid dividends. N refers to a fraction the numerator of which is the number of calendar days between March 10, 2005 and the redemption date and the denominator of which is 365.

The Group accrued the 8% premium over the redemption period as deemed dividends for the years ended December 31, 2005, 2006 and 2007, respectively.

Conversion

The Series A Shares are convertible into ordinary shares of the Company on a one-for-one basis, at the option of the holder anytime after issuance. Each automatically converts into ordinary shares of the Company upon majority of the class of shareholders’ written consent or an IPO on an internationally recognized stock exchange with market value of the Group immediately after the IPO of no less than $300,000, including the ordinary shares converted from the Group’s preferred shares.

As the effective conversion price exceeded the fair value of ordinary shares on commitment day of November 10, 2005, there was no beneficial conversion feature upon issuance of Series A Shares.

In December 2007, all Series A Shares were automatically converted into 7,145,000 ordinary shares upon the IPO of the Company.

Series B-1, B-2 and B-3 Convertible Redeemable Preferred Shares

On May 2, 2006, the Company issued 2,990,000 Series B-1 convertible redeemable preferred shares (“Series B-1 Shares”), 6,380,188 Series B-2 convertible redeemable preferred shares (“Series B-2 Shares”) and warrants (Note 19) to purchase Series B-3 convertible redeemable preferred shares (“Series B-3 Shares”) to a group of third party investors for a total amount of $25,078 (after issuance cost, net proceeds of $24,309). The group of investors had identical shareholding percentages in Series B-1 and Series B-2 Shares.

The Company had also authorized 1,000,000 Series B-3 Shares for the warrants set out in Note 19. Series B-1, Series B-2 and Series B-3 Shares are jointly referred as “Series B Shares” with the same terms unless otherwise noted. Series B Shares had par value of $0.001, while Series B-1 Shares issuance price was $2.20 and Series B-2 Shares issuance price was $2.8996.

F-63

18.

CONVERTIBLE REDEEMABLE PREFERRED SHARES — continued

Series B-1, B-2 and B-3 Convertible Redeemable Preferred Shares- continued

The rights, preferences and privileges with respect to the Series B Shares were as follows:

Voting rights

Holders of the Series B Shares have voting rights equal to the number of ordinary shares then issuable upon its conversion into ordinary shares. The Series B Shares generally vote together with the ordinary shares and not as a separate class.

Dividends

Holders of Series B Shares are entitled to receive dividends at the rate of eight percent (8%) of its respective issue price prior and in preference to any dividend on any other class, classes or series of shares. Dividend is payable upon declaration by the Board of Directors and is noncumulative. After payment of dividends on all preferred shares, the holders of Series B participates in dividend payment with other participative preferred shares and ordinary shares on a pro rata and as-converted basis.

Liquidation preference

In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, prior to any distribution of any of the assets or surplus funds of the Company to other classes of the Company, the holders of Series B Shares are entitled to receive the full amount of the original issue price. After such payment has been made to holders of the Series A Shares, any remaining assets or proceeds of the Company will be distributed pro rata to holders of ordinary shares on an if-converted basis.

Redemption

The Series B Shares are redeemable at the option of the holders of the Series B any time after the fourth anniversary of issuance date, if not previously converted, for an amount equal to the greater of: (x) one hundred percent (100%) of the applicable Series B-1/B-2/B-3 Shares issue price, plus all dividends accrued but unpaid and (y) the fair value of the Series B-1/B-2/B-3 Shares to be determined by an independent appraisal.

F-64

18.

CONVERTIBLE REDEEMABLE PREFERRED SHARES — continued

Series B-1, B-2 and B-3 Convertible Redeemable Preferred Shares— continued

Conversion

The Series B Shares are convertible into ordinary shares of the Company on a one-for-one basis except the Series B-2 Shares has a conversion ratio of 0.8 to 1, at the option of the holder anytime after issuance. Each automatically converts into ordinary shares of the Company upon majority of the class of shareholders’ written consent or an IPO with market value of the Group immediately after the IPO of no less than $300,000, including the ordinary shares converted from the Group’s preferred shares.

As the effective conversion price exceeded the fair value of ordinary shares on commitment day of May 2, 2006, there was no beneficial conversion feature upon issuance of Series B-1 and B-2 Shares.

In December 2007, all Series B-1/B-2/B-3 Shares were automatically converted into 2,990,000, 7,975,235, and 661,603 ordinary shares, respectively, upon the IPO of the Company.

19.

WARRANTS

In May 2006, in connection with the issuance of Series B-1 Shares and Series B-2 Shares, the Company granted warrants to Series B-1 and B-2 investors to purchase up to $2,000 of Series B-3 Shares at the exercise price of $2.8996 per share, which represented 689,750 Series B-3 Shares. Key terms of Series B-3 Shares are set out in 18. Other than exercising for cash, the investor also had an option to receive a reduced number of shares in direct proportion to the fair value of Series B-3 Shares (“Net Settlement Option”). The warrants were exercisable upon issuance and were void upon the Company’s completion of IPO.

Management had classified the warrants as a liability because exercise of the warrants would result in the delivery of redeemable preferred shares.

Therefore, the warrants were initially accounted for at the fair value of $498 ($0.722 per warrant) on the date of grant and subsequently reported at fair value as of each reporting date. As of December 31, 2006, the fair value of the warrants was $903 ($1.309 per warrant).

The fair value of the warrants was determined by the Group after considering an appraisal by a third party appraiser and was determined using the Black-Scholes option pricing model with assumptions as follows:


	As of
	date of grant

Risk-free rate of return		5.24	%
Expected remaining life of the warrants	2.17 year
Volatility		38.0	%
Expected dividend yield		0	%

F-65

19.

WARRANTS — continued

(1)

Volatility

The volatility of the underlying ordinary shares during the life of the warrants was estimated based on the historical stock price volatility of listed comparable companies over a period comparable to the expected term of the warrants.

(2)

Risk-free rate of return

Risk-free interest rate was estimated based on the yield to maturity of China international government bonds with a maturity period close to the expected term of the warrants.

(3)

Expected remaining life of the warrants

The expected remaining life of the warrants was estimated by the Company based on the expected IPO date of the Company which was the expected exercise date of the warrants.

(4)

Expected dividend yield

The expected dividend yield was estimated by the Company based on its expected dividend policy over the expected term of the warrants.

(5)

Exercise price

The exercise price of the warrants was determined by the Company’s board of directors.

(6)

Fair value of underlying ordinary shares

On August 3, 2007, the Company’s shareholders passed a resolution of amendments to the Company’s amended and restated memorandum and Articles of Association to remove the redemption rights of Series B-3 Shares as set out in Note 18. Therefore, as of August 3, 2007 the warrants no longer qualified as a liability and the carrying amount of $1,260, which was the fair value of the warrant as of the date, was transferred to shareholders equity.

The change in fair value of $405 and $357 was recorded in the condensed consolidated statements of operations for the years ended December 31, 2006 and 2007, respectively.

In November 2007, certain holders exercised their warrants to purchase an aggregate of 607,238 Series B-3 preference shares at an exercise price of US$2.8996 per share as set out in Note 18.

The remaining holder of the warrants exercised all of their warrants with Net Settlement Option to acquire Series B-3 preference shares of 54,365 in December 2007 immediately before the IPO.

F-66

20.

MAINLAND CHINA CONTRIBUTION PLAN

Full time employees of the Group in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require the Group to accrue for these benefits based on certain percentages of the employees’ salaries. The total provisions for such employee benefits were $3,009, $4,780 and $7,219 for the years ended December 31, 2007, 2008 and 2009, respectively.

21.

STATUTORY RESERVES

PRC legal restrictions permit payments of dividends by the Group’s PRC entities only out of their retained earnings, if any, determined in accordance with PRC regulations. Prior to payment of dividends, pursuant to the laws applicable to the PRC Foreign Investment Enterprises, the Group’s PRC subsidiaries must make appropriations from after-tax profit to non-distributable reserve funds as determined by the board of directors of the Group’s PRC subsidiaries. These reserve funds include one or more of the following (i) a general reserve (ii) an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund requires annual appropriations of 10% of after-tax profit (as determined under accounting principles generally accepted in the PRC at each year-end), and the other fund appropriations are at the management’s discretion. These statutory reserve funds can only be used for purposes of general enterprise expansion and staff bonus and welfare and are not distributable as cash dividends. Appropriations to these reserves by the Group’s PRC subsidiaries were $869, $392 and $991 for the years ended December 31, 2007, 2008 and 2009, respectively.

22.

CONTINGENT CONSIDERATIONS FOR BUSINESS ACQUISITIONS

In connection with the acquisition of WIT, other than the initial consideration of $1,080 in cash, and the second consideration of $974 in cash and $532 in ordinary shares of the Company, the Company agreed to pay additional considerations up to $2,896 in cash and ordinary shares with a value of up to $2,168 contingent upon the attainment of the earnings objectives for the thirty-month period ending March 31, 2011.

In connection with the acquisition of TP, other than the consideration of $817 in cash and $520 in ordinary shares recorded by the Company during 2009, the Company agreed to pay additional considerations up to $4,679 in cash and $3,675 in ordinary shares which are contingent upon the attainment of the earnings objectives for the twenty-four-month period ending December 31, 2011.

F-67

23.

LITIGATION THREAT AGAINST THE COMPANY

In August 2004, through VanceInfo Beijing, a wholly owned subsidiary of the Company, the Company acquired the IT services business and related assets of Wensi Chuangyi and its subsidiaries, the predecessor of the Company. On December 3, 2007, Chris Chen, chairman and chief executive officer of the Company, and David Chen, chief operating officer of the Company received a letter from a law firm in California purporting to set forth a notice of claim on behalf of Mr. Jonathan Jianguo Jiang against Chris Chen, David Chen, the Company, and two subsidiaries of the Company and VanceInfo Creative Software Technology Ltd., or VanceInfo California, a dissolved California corporation controlled by Wensi Chuangyi. The letter alleges the following:

•

Mr. Jiang is a shareholder of Octiga, Inc., or Octiga, a dissolved California corporation; Octiga owns more than a 40% interest in the joint venture, Beijing Heteng Software Technology Co., Ltd (“Heteng”); and Heteng owns 100% of Wensi Chuangyi, the predecessor of the Company.

•

Valuable (but unspecified) proprietary information owned by Wensi Chuangyi and/or its subsidiaries as well as all its employees were transferred to VanceInfo Beijing not in good faith and without adequate consideration to Heteng and its joint venture partners. This unspecified proprietary information allegedly has been utilized by VanceInfo California and continues to be used by a Delaware subsidiary of the Company.

•

In connection with these transactions, Chris Chen was an officer, director, beneficial owner or in control of the relevant entities that caused the transfer to be executed not in good faith and without adequate consideration or the receiving entity that obtained the valuable proprietary information not in good faith and without adequate consideration, all in breach of his fiduciary responsibilities to Octiga, Heteng and their shareholders and/or joint venture partners.

•

The letter also alleges that Mr. Jiang will be able to demonstrate the role and responsibility of various other parties in these alleged improper transactions, including Wensi Chuangyi and/or its subsidiaries, VanceInfo Beijing, VanceInfo California and other subsidiaries of the Company.

The letter states that Mr. Jiang is considering commencing litigation on all legal theories available to him as well as for the benefit of other investors in Heteng, including Long March Launch Vehicle Technology Co., Ltd., or Long March, to recover the value of the assets that were allegedly improperly transferred by Wensi Chuangyi and its subsidiaries to VanceInfo Beijing as well as other damages and costs. The Company believes that Long March owned a 70% equity interest in Heteng in August 2004. The letter does not specify the amount of any claimed damages or costs. As of the date of December 31, 2009, the Company had not received any notices of claims from any other investors in Heteng, including Long March.

The Company has been advised by the Company’s PRC counsel that the August 2004 transaction in which the Company acquired the IT services business and related assets of the predecessor of the Company was duly authorized and approved by both the seller, Wensi Chuangyi and its subsidiaries, and the buyer, VanceInfo Beijing, in accordance with PRC law, and that the transaction was effected in compliance with all applicable PRC laws and regulations. In addition, the Company believes that the level of share ownership in Octiga claimed by Mr. Jiang is substantially overstated.

F-68

23.

LITIGATION THREAT AGAINST THE COMPANY — continued

It is possible that Mr. Jiang or other shareholders of Heteng or Octiga will institute litigation as threatened in the notice of claim, including litigation against the Company, the Company’s subsidiaries, Chris Chen and David Chen. The Company believes that Mr. Jiang’s purported claims are without merit and, if any such claims are asserted against the Company, the Company intends to vigorously defend against the claims. The Company believes that the outcome of any such litigation will not have a material adverse effect on the results of operations or financial condition of the Company, although litigation is inherently uncertain and the Company cannot give any assurances in this regard. In addition, regardless of the outcome, defending any such litigation could result in material costs and diversion of management resources and attention.

24.

COMMITMENTS

(i)

Operating lease commitments

The Group has entered into operating lease agreements principally for its office spaces. These leases expire through 2014 and are renewable upon negotiation. Rental expense under operating leases was $2,840, $4,865 and $6,573 for the years ended December 31, 2007, 2008 and 2009, respectively.

Future minimum lease payments under such non-cancelable leases as of December 31, 2009 are as follows:


2010			5,129
2011			3,536
2012			1,956
2013			1,042
2014			337
2015			168

			12,168

(ii)

Purchase commitments

As of December 31, 2009, $75 was contractually committed by the Group for purchases of equipment and leasehold improvements, $70 in 2010 and $5 in 2012.

As set out in Note 12, the Company has committed to pay $14,852 and $2,621 in 2010 and 2011, respectively, pursuant certain land development agreements.

F-69

25.

RELATED PARTY TRANSACTIONS

The Group had the following significant transactions with related parties in addition to the disclosures in Notes 16, 17, 18 and 19:

The Group provided system development services to Shenzhen Taitai Pharmaceutical Co., Ltd (“Taitai”), an affiliate of Inno Global Investment Limited, a principal shareholder of the Company. The Group recognized $38, nil and nil revenue for these transactions for the years ended December 31, 2007, 2008 and 2009, respectively. The accounts receivable balances from Taitai were nil as of December 31, 2007, 2008 and 2009, respectively.

The Group provided various IT services to Lenovo (Beijing) Co., Ltd., Beijing Lenovo Software Co., Ltd., Shanghai Lenovo Electronic Co., Ltd. and Lenovo (Dalian) Technologies Service Co., Ltd. (collectively “Lenovo”), affiliates of LC Fund III, a principal shareholder of the Company. The Group recognized $940, $1,750 and $2,357 revenue for these transactions for the years ended December 31, 2007, 2008 and 2009, respectively. The accounts receivable balances from Lenovo were $363 and $1,043 as of December 31, 2008 and 2009, respectively. The advance from customer balances from Lenovo were nil and $7 as of December 31, 2008 and 2009, respectively.

The Group provided system testing services to A-IT (Shanghai) Software Services Co., Ltd. (“AIT”), a subsidiary of Link Result Limited, an equity method investment of the Company. The Group recognized nil, $40 and nil revenue for these transactions for the years ended December 31, 2007, 2008 and 2009, respectively. The accounts receivable balances from AIT were nil, $40 and nil as of December 31, 2007, 2008 and 2009, respectively.

26.

SUBSEQUENT EVENTS

The Group has evaluated all events subsequent to December 31, 2009 through the date of issuance of these consolidated financial statements, April 30, 2010.

Strategic Investment in Financial Service Solutions Provider

In February 2010, VanceInfo, through one of its subsidiaries, made an investment in Beijing Viatt Information Technology Co. Ltd (“Viatt”), an IT services and solution provider for Chinese domestic financial institutions. Under the terms of the investment agreement, VanceInfo made a loan of approximately $400, which is convertible into a 20% equity interest in Viatt with an exclusive right to acquire the remaining 80% of the equity in the next 12 to 18 months at VanceInfo’s sole discretion.

Acquisition of Mobi business

In March 2010, the Group acquired the business from Beijing Mobitech Software Co. Ltd., a China-based mobile software development service provider, with a consideration of $281.

F-70

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Vanceinfo Inactive 20-F2009 FY Annual report (foreign)

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