UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|(Mark One)                                   |                                                                                         
|-------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                            | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2004 
|o                                            | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from            to

Commission File Number 000-50954

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NESS TECHNOLOGIES, INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of incorporation or organization) |  | 98-0346908(I.R.S. Employer
Identification Number)
|---------------------------------------------------------------------- |  | -------------------------------------------------

Ness Tower
Atidim High-Tech Industrial Park
Building 4
Tel Aviv 61580, Israel
Telephone: +972 (3) 766-6800

(Address of registrant's principal executive offices and registrant's telephone number, including area code)

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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.    ý  Yes    No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.    ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).    o  Yes    ý  No

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2003
is not applicable, as the registrant's common stock was not publicly traded as of the last business day of its most recently completed second quarter. As of March 10, 2005, 34,300,836 shares of
common stock, $0.01 par value per share, were outstanding.

The
registrant intends to file, not later than April 30, 2005, a definitive proxy statement pursuant to Regulation 14A, promulgated under the Securities Exchange Act of
1934, as amended, to be used in connection with the registrant's annual meeting of stockholders. The information required in response to Items 10-14 of Part III of this
Form 10-K is hereby incorporated by reference to such proxy statement.



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NESS TECHNOLOGIES, INC. AND SUBSIDIARIES

INDEX

|PART I                                     |                                                                                                                      | 3  
|------------------------------------------ | -------------------------------------------------------------------------------------------------------------------- | ---
|                                           | Item 1. Business                                                                                                     |    
|                                           | Item 2. Properties                                                                                                   |    
|                                           | Item 3. Legal Proceedings                                                                                            |    
|                                           | Item 4. Submission of Matters to a Vote of Security Holders                                                          |    
|PART II                                    |                                                                                                                      | 34 
|                                           | Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |    
|                                           | Item 6. Selected Financial Data                                                                                      |    
|                                           | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations                        |    
|                                           | Item 7A. Quantitative and Qualitative Disclosure about Market Risk                                                   |    
|                                           | Item 8. Financial Statements and Supplementary Data                                                                  |    
|                                           | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |    
|                                           | Item 9A. Controls and Procedures                                                                                     |    
|                                           | Item 9B. Other Information                                                                                           |    
|PART III                                   |                                                                                                                      | 51 
|                                           | Item 10. Directors and Executive Officers of the Registrant                                                          |    
|                                           | Item 11. Executive Compensation                                                                                      |    
|                                           | Item 12. Security Ownership of Certain Beneficial Owners and Management                                              |    
|                                           | Item 13. Certain Relationships and Related Transactions                                                              |    
|                                           | Item 14. Principal Accounting Fees and Services                                                                      |    
|PART IV                                    |                                                                                                                      | 52 
|                                           | Item 15. Exhibits, Financial Statements and Schedules                                                                |    
|SIGNATURES                                 |                                                                                                                      | 55 
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |                                                                                                                      | F-1
|EXHIBIT INDEX                              |                                                                                                                      |    

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PART I

Disclosure Statement

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") relating to our operations and our results of operations that are based on our current expectations, estimates and
projections. Words such as "expects," "intends," "plans," "projects," believes," "estimates" and similar expressions are used to identify these forward-looking statements. These statements are not
guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that may not
prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecast in these forward-looking statements. The reasons for these differences include changes in
general economic and political conditions, including fluctuations in exchange rates, and the factors discussed below under the section entitled "BusinessRisk Factors."

Available Information

Our website address is www.ness.com. We make available free of charge on the Investor Relations section of our website (investor.ness.com) our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable
after such material is electronically filed or furnished with the Securities and Exchange Commission (the "SEC") pursuant to Section 13(a) or 15(d) of the Exchange Act. We also make available
through our website other reports filed with or furnished to the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under Section 16(a) of
that Act, as well as our Code of Business Conduct and Ethics. We do not intend for information contained in our website to be part of this Annual Report on Form 10-K.

You
also may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC, 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the SEC.

In
this Annual Report on Form 10-K, we use the terms "Ness," "we," "our" and "us" to refer to Ness Technologies, Inc. and its subsidiaries.

Item 1. Business

General

We are a global provider of IT services and end-to-end business solutions designed to help clients improve their competitiveness and
effectiveness. End-to-end business solutions encompass all stages of a client's business process and incorporate all technologies and IT services related to that process. Our
portfolio of solutions and services includes outsourcing, system integration and application development, software and consulting, and quality assurance and training.

We
provide services to a significant number of clients in the commercial, industrial and government sectors. We have a highly skilled workforce of experienced IT employees and consulting
professionals across our key vertical markets. The primary industries, or verticals, we serve include government and defense, financial services, life sciences and healthcare, telecommunications and
utilities, and independent software vendors, or ISVs. We combine our knowledge of these vertical markets and our clients' businesses with our technical expertise to deliver tailored solutions to our
clients, many of whom are subject to rigorous regulatory requirements.

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We
have operations in 14 countries across North America, Europe and Asia. We combine our deep vertical expertise and strong technical capabilities to provide a complete range of high
quality services on a global scale. By integrating local and international personnel in focused business and project
teams, this global delivery model leverages our corporate knowledge and experience, intellectual property and global infrastructure to develop innovative solutions for clients across the geographies
and verticals we serve. We complement our global delivery model with our offshore delivery capabilities to achieve meaningful cost reductions or other benefits for our clients.

We
provide services to over 500 clients located throughout the world, including a number of Fortune 1000 and Global 2000 companies. We have achieved recurring revenues as a result of our
multi-year contracts and long-standing relationships with clients such as American Express, AT&T, Business Objects, Czech Telecom, Israel Aircraft Industries, Israel Discount
Bank, Orange and Pfizer, which are among the largest clients in each of our verticals, based on revenues. In 2004, existing clients from prior years generated more than 80% of our revenues, with no
single client accounting for more than 5% of our revenues.

Our
services and solutions offerings are strengthened by our strategic alliances and close relationships with leading global software and infrastructure vendors, which allow our clients
to benefit from a selection of technologies and innovation. We maintain the highest level of certification with many of our key partners, which allows us to influence their development of new products
and obtain and offer our clients early access to new product offerings. These certifications are awarded by major ISVs and service providers to those partners that demonstrate high levels of
professional and technical expertise. Some key alliances and partnerships that are applicable across multiple industry verticals and geographies, and with whom we conduct business and maintain high
levels of certification are BEA Systems, Documentum, EMC, IBM, Mercury Interactive, Microsoft, SAP and Unisys.

Our
revenues, including through acquisitions, have grown from $151.6 million in 2001 to $304.5 million in 2004, representing a compounded annual growth rate of
approximately 26%. During that time, our results of operations have also improved from a net loss of $18.5 million for 2001, to net income of $14.4 million for 2004.

For
2001, 2002, 2003 and 2004, the percentage of our revenues generated by public and private sector clients in Israel was 93%, 80%, 68% and 57%, respectively. The percentage of our
revenues derived, in aggregate, from agencies of the government of Israel for the same time periods was 16%, 17%, 14% and 12%, respectively, while our revenues from these agencies increased steadily
during the same periods.

Ness
Technologies, Inc. was incorporated in Delaware in March 1999 in connection with the acquisition between 1997 and 1999 of six Israeli IT companies, which collectively
average more than 20 years of IT experience. These companies and each company we subsequently acquired have been successfully integrated into our corporate structure, and the acquired
capabilities, know-how and staff have been assigned to our various business groups.

Our
principal executive office in the United States is located at 3 University Plaza, Suite 600, Hackensack, New Jersey 07601. Our telephone number there is
(201) 488-7222. Our
principal executive office in Israel is located at Ness Tower, Atidim High-Tech Industrial Park, Building 4, Tel Aviv 61580, Israel. Our telephone number there is +972
(3) 766-6800.

Ness
and V-Ness are our primary trademarks and trade names. All other trademarks, trade names and service marks used in this report are the property of their respective
owners.

Unless
otherwise noted, (1) all references to "dollars" or "$" are to United States dollars and all references to "NIS" are to New Israeli Shekels, (2) all of the
information provided on a pro forma basis assumes completion of our acquisition of Apar Holding Corp. on January 1, 2003 and (3) all

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references
to shares of our common stock and per share information have been adjusted to reflect the 0.7193 for one reverse stock split effected on September 20, 2004.

Service Offerings

We offer a broad suite of services, including outsourcing, system integration and application development, software and consulting, and quality assurance, or QA,
and training.



We have several specific offerings in this category, each of which represents the outsourcing of a core client IT function to us. We perform these services either
locally (at the client's facilities or our facilities) or at our offshore facilities. We offer the following outsourcing services:

Offshore Application Development and Maintenance.We believe our application development and maintenance services are
characterized by low cost, high quality and short time-to-market. We create, implement and integrate software applications through a global infrastructure, and we believe we
are well positioned to support virtually any client anywhere in the world through our global delivery model.

Our
offshore application development and maintenance services include a wide range of technologies and platforms. We customize our services according to each client's needs by employing
flexible service models drawn from our experience helping our clients outsource software services. Our offshore center in India is ISO 9001 certified and accredited at CMM Level 5, and enables us to
provide low cost, high quality and 24-hour development cycle capability. ISO 9001 is an international standard for quality management systems maintained by the International Organization
of Standardization. The CMM, or Capability Maturity Model, is a widely accepted set of practices developed by the Software Engineering Institute at Carnegie Mellon aimed at producing defect free
software by technical and management discipline, rather than by exhaustive testing. CMM Level 5 accreditation is reserved for organizations with the highest quality of disciplined and repeatable
software development practices.

To
date, we have provided most of our offshore application development services to clients in the financial services, retail and telecommunications verticals. Following development and
implementation, we provide services such as end-to-end application monitoring, scheduled downtime and maintenance, ad-hoc maintenance activities, application
upgrades and legacy application integration within and across company firewalls.

IT Outsourcing.We offer customized IT outsourcing services, both onsite and off-site. Through our
end-to-end service solution, we take responsibility for all or a portion of client operations and activities, including information security solutions, IT management,
application development and maintenance, infrastructure implementation and management, network management, computer and communications hardware, help desk support, and disaster recovery planning,
storage and backup solutions. We apply our proven methodologies, which cover every phase of a project's lifecycle, with strong project management, senior staff supervision and QA mechanisms to ensure
reliable delivery. We currently provide these services, including support on a 24-hour-a-day, seven-day-a-week basis, to over 30
clients in diverse fields, representing over 100,000 end-users, for single-site and multi-site enterprises and organizations.

Managed Labs for Independent Software Vendors.ISVs are increasingly faced with challenges, including pricing pressures,
lower license sales, increased competition and reduced development budgets. To address these challenges, we have developed a managed labs offering to provide ISVs with outsourced software product
research and development centers that supplement those of the client. These offerings include product development and maintenance, testing, release automation services and porting services. We have
experience in successfully providing management consulting, process

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transformation,
technology solutions and offshore production services. Our strong infrastructure and proven processes ensure that our solutions are developed and built offshore and deployed onsite in
an efficient and effective manner.

Our
expertise lies in the design and development of new software products, re-development, re-engineering, and maintenance of existing products, and global
implementation and rollout support for existing products. Our labs are specially designed to assist software product companies through all phases of a product's life cycle. We consider ourselves
custodians of our clients' intellectual property and accordingly offer them our build-operate-transfer model. We function as a partner with our clients to manage tactical needs at all phases of the
development process. During the "build" phase, we provide strategic consulting to address our clients' business challenges and investment goals. During the "operate" phase, we help our clients track
progress according to their plans. We report and advise our clients on the work in progress and refine the model in accordance with their business priorities. We have successfully executed this model
with over 15 companies worldwide. After 36 months of operation, we offer our clients the option of purchasing back the offshore development center assets in their entirety.



We offer a broad set of IT services to our clients in the area of system integration and application development, including the following:

Enterprise Resource Planning and Customer Relationship Management Solutions.Enterprise resource planning, or ERP, and
customer relationship management, or CRM, are integrated application software packages designed to support multiple business functions. For many organizations in the vertical markets we serve, ERP and
CRM systems are the backbone of business transactions and communications. We offer a wide range of ERP and CRM solutions and services, including needs analysis, product selection and differentiation
analysis, solution design, installation and administration, product adjustment and customization, data transfer from original information systems, integration with other systems, including business
partner systems, end-user and administrator training, manual production and routine operational support, including upgrades and ongoing development. Our client service teams provide
support activities such as localization, basis team infrastructure, training and delivery of complementary products. Our solutions and expertise include supply chain management, supplier relationship
management and life cycle management.

We
provide these services from many of our delivery centers for clients around the world. In Israel, we are the sole SAP product distributor, where we also implement SAP and operate the
Israeli SAP user group.

Enterprise Application Integration (EAI).We offer EAI solutions focused on building software infrastructure platforms that
simplify connectivity between diverse applications and dissimilar business systems. We integrate and leverage our clients' investments in current systems while improving business efficiency and
enabling the sharing of information across application boundaries.

Our
integration personnel are proficient in primary integration tools and standards, including webMethods, IBM's MQ Series, Tibco, SeeBeyond, Microsoft BizTalk, XML, Vitria, FileNet, BEA
WebLogic Integrator, EDI and SAP NetWeaver.

Command and Control and Real-Time Systems.We deliver high-end technical solutions for protecting the
safety of national borders, improving data gathering mechanisms, and enhancing communications channels for both military and civilian organizations. These services include:



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Geographic Information Systems (GIS).We have been active in the field of digital mapping since 1985, developing advanced GIS
that quickly and accurately process and transform large volumes of maps and photography into various digital and easily readable formats. For example, militaries are in critical need of accurate maps,
GIS data, and photographic intelligence for mission planning, operational command and control, and three dimensional mission rehearsal and training. Similarly, emergency response systems require
accurate road maps, current location display, shortest route determination and other GIS capabilities that we provide.

Some
of Israel's national (including military, civilian and commercial) geographic databases were created using software we developed. These systems cover all aspects of cartographic and
photogrammetric data collection, manipulation, storage and retrieval.

Telecommunications Systems.We provide industrial, government and defense organizations with turnkey solutions, including
complete systems and specifically tailored projects designed to facilitate the management of telecommunications systems and networks. We have developed a wide range of network management products,
including:



Knowledge Management.We offer a range of services and products designed to help our clients realize value from their
corporate knowledge, including information storage, retrieval and sharing. Our specific offerings include:



Business Intelligence (BI) and Data Warehousing.We enable organizations to develop what we believe to be complete
state-of-the-art information systems for turning data into business intelligence. Our end-to-end BI and data warehousing solutions are
designed to ensure accuracy, consistency and timeliness of information storage and retrieval to meet our clients' business requirements. Recent examples within the life sciences and healthcare
vertical include BI and data warehousing solutions in the following areas:

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Other
examples include:



We provide proprietary solutions that can be customized to our clients in certain verticals where we have developed substantial intellectual property and
experience, such as through our work on the national border control system of Israel. In addition, we offer a comprehensive range of strategic consulting services and are able to assess a client's
software needs and recommend and, in certain cases, resell, commercially available software products and systems.

Proprietary and Turnkey Solutions.We have developed software to market as proprietary turnkey solutions, which are
customized applications designed and modified to meet client needs. We provide end-to-end business solutions from design to maintenance and are able to provide specialization
according to the subtle differences within each specific industry. We retain certain intellectual property and rights which allow us to continue to exploit opportunities to market these products. Our
turnkey solutions include:



Product Representation.We select what we believe to be the best products for our clients by working closely with major
international vendors who specialize in software product development, integration, localization, marketing, service and maintenance. In this way, we are able to leverage the products and methodologies
supplied by our partners in order to provide our clients with comprehensive value added solutions. Through our partner relationships, we resell products for over 30 companies, including SAP,
Sybase, Information Builders, Genesys, Documentum, Merant, Sterling Commerce, SyncSort and Avaya.

Strategic Consulting.We leverage our proven methodologies to help our clients analyze, plan and achieve objectives at
various stages of the business lifecycle. Our expertise, coupled with product and

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technology
alliances, provides organizations with a one-stop solution. To deepen our specialization and understanding of our clients' business needs, we have established teams with core
competence in particular verticals. Our IT experience, combined with our technology independence, enables us to offer a range of IT solutions for combining business trends and company goals with IT
implementation. We believe that this blend of IT and business expertise is unique and enables us to unify IT and business needs to enhance our clients' competitive advantage and growth.



We offer a broad range of QA, testing, user interface engineering, training and user assimilation services, all designed to produce high quality business
solutions with broad and rapid user acceptance.

Quality Assurance, Testing and User Interface Engineering.As technology platforms have become more complex at each of the
application, operating system and hardware levels, there is a growing need to test, analyze and certify that software and hardware function as designed. Because of this growing complexity, together
with reduced IT budgets, many companies outsource the testing and QA process to third party vendors. We target this growing market with our independent V-Ness software testing and QA
service. In order to meet the needs of our client base, the V-Ness service provides a spectrum of solutions including: time to market QA methodology; system integration performance and
testing; user interface engineering and user experience engineering; validation and full traceability capabilities that allow us to verify that the end product meets the initial product
specifications; enterprise QA solutions, such as ERP, CRM and data warehousing; test automation; load testing; and quality consulting. Our professionals have extensive experience in QA and testing
using our documented and proven work methodologies.

Training and Assimilation.We offer clients comprehensive learning solutions by providing a wide range of training services.
Our staff provides training across a wide range of information, technology and communication applications. We customize our training programs based on advanced proprietary training methodologies and
evaluation tools satisfying our clients' needs in terms of content, target audience, level of knowledge and training times. We complement traditional learning methods with learning management systems,
e-learning platforms, and computer and web based self study kits, enabling end-users to learn at their own pace and level.

In
addition to training, we offer assimilation services, designed to help organizations deploy new solutions rapidly and effectively. We include these services as part of every project,
and also offer them separately to meet client needs.

Industry Overview

The IT services industry is highly fragmented and has evolved from simply supporting business functions to enabling their expansion and transformation. To succeed
in this transformation, companies must respond rapidly to market trends, create new business models and improve productivity. In this dynamic, competitive environment, decisions with respect to
technology have become increasingly important. Also, due to the recent global economic downturn and lack of compelling IT initiatives, such as Year 2000 and Euro conversion, companies have
substantially reduced their IT services spending, resulting in hardship for many IT service vendors. According to industry analysts, however, the IT
services market is now returning to a period of growth. Gartner Inc., an independent industry analyst, forecasted in its Gartner Dataquest Market Databook of June 2004 that the global IT
services market will grow from $569 billion in 2003 to $762 billion in 2008, a compound annual growth rate of approximately 6.0%.

Companies
are increasingly seeking cost effective alternatives to acquire high quality IT services. The use of offshore vendors is becoming increasingly common among larger corporations.
Based on our review of publicly available information, we believe IT services provided offshore totaled approximately

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$12 billion
in 2002, which represents less than 2% of the total IT services market, and India has captured the bulk of this revenue, around $10 billion. Other offshore IT service
countries are gaining market share. Based on our review of publicly available information, we project an annual growth rate for offshore IT services of 25% to 30%, making offshore IT services a
particularly high growth market. Offshore business processing outsourcing services are projected to grow even faster, with an estimated annual growth rate as high as 60%.

These
factors reflect a business opportunity for global IT services vendors with established vertical practices, effective global delivery mechanisms and limited reliance on
long-term staff relocation from offshore locations to client locations in the United States and around the world.

Competitive Strengths

We believe our competitive strengths include:

Our vertical expertise.Since our inception, we have achieved leading positions in a number of the verticals in which we
compete. We maintain a staff of highly skilled industry experts in each of these verticals and use this expertise on our engagements to provide a range of end-to-end business
solutions.

Our global delivery model.We have operations in 14 countries in North America, Europe and Asia. We provide services to our
clients through a comprehensive global delivery model that integrates both local and global resources in a cost-effective manner. Our fully operational offshore outsourcing centers,
including our CMM level 5 offshore facility in India, enable us to minimize the difficulties other outsourcing vendors now face in using foreign employees in the United States on a temporary basis due
to the tightening of immigration policies.

Our proven track record.By consistently providing high quality services, we have achieved a track record of project
successes through the completion of numerous engagements around the world. Part of our success is attributable to our focus on methodology and repeatable high quality practices, which are ISO 9001
certified.

Our focus on quality.We believe strongly in quality throughout our organization. We maintain independent quality assurance
capabilities in geographies where we operate. These groups provide QA, testing and audit services to our delivery organizations. We also provide these services to our clients on QA engagements through
our independent V-Ness subsidiary.

Our focus on innovation.Our employees possess a level of business and technical knowledge that enables us to be innovative
when on assignment. Utilizing both our practical understanding of our clients' needs and our technical expertise, we strive to provide innovative solutions to our clients' problems. An example of such
innovation is our proprietary clinical application integration solution, the winner of Microsoft's Best Enterprise Comprehensive Solution Award 2001, which enables on-line unified access
to medical data from decentralized information files for 3.7 million patients in and between hospitals, HMO facilities, individual physician's clinics, labs and suppliers. In addition, we were
among the first to offer a managed labs extended development center offering, which supplements and extends the research and development facilities of ISVs for core product development and other
activities.

Our breadth of service offerings.Our broad range of service offerings distinguishes us from many of our competitors. We
believe that with these offerings, we are a one-stop shop, providing robust and comprehensive business solutions to meet the needs of our clients in the key verticals we cover.

Our long-term relationships with a diverse client base.We have long-term relationships with many of
our clients, who frequently retain us for additional projects after an initial successful engagement. In 2004, existing clients from prior years generated more than 80% of our revenues. Moreover, our
client

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base
is diverse and we are not dependent on any single client. In 2004, no client accounted for more than 5% of our revenues and our largest twenty clients together accounted for approximately 37% of
our revenues. Agencies of the government of Israel, in aggregate, represented 12% of our revenues in 2004.

Our proven ability to scale.We have grown continuously and successfully since inception, and we have demonstrated the
ability to expand our teams and facilities to meet the needs of our clients. For example, over the past five quarters we have expanded our Bangalore, India delivery facility from
approximately 500 to over 1,000 employees in response to our clients' rapidly growing offshore development needs.

Our organizational and business flexibility.Our flexible organizational structure, business culture and technological
abilities have allowed us to adapt to rapidly changing economic conditions, as well as significant changes in our clients' needs, enabling us to continue to grow and improve our performance despite
the economic downturn of recent years. During this time we have increased our revenues, number of employees, geographic footprint and profitability. Additionally, our strong vertical alignment, the
industry and technical experience of our employees, our operational efficiency, our ability to secure and retain key clients and the effective use of our global delivery model have helped insulate us
from many of the hardships experienced by our competitors.

Our ability to integrate acquired companies.We have grown primarily through acquisitions since our inception. Due in part to
our significant focus on the abilities of the senior management of acquired firms, we have been able to retain the senior management of each of these companies. We have successfully integrated each
acquired company into our corporate structure and culture, working together with existing management, employees and clients to facilitate an efficient and productive transition.

Our ability to retain and educate employees.We have maintained a relatively low attrition rate despite traditionally high
turnover in the IT services industry. We believe that our ability to retain our employees is due in part to our commitment to rewarding qualified employees and to our advanced continuing education and
training courses.

Our well-established internal infrastructure.We utilize an enterprise resource planning system and a CRM system,
embodying our best practices, corporate methodologies and financial controls.

Business Strategy

Our goal is to further solidify and enhance our position as a global IT services and solutions provider on the basis of our quality, professionalism, vertical
expertise, reliability and technical innovation. We hold a leading market position in Israel based on revenues from IT services. We intend to extend that geographic and vertical reach through the
following strategic initiatives:

Further penetrate the North American market as well as emerging markets such as Eastern Europe and Asia.We were formed in
1999 and quickly established a leading market position in the Israeli IT services market. In the last three years we expanded outside Israel with acquisitions in North America, Europe and Asia, and
have achieved organic growth in each. We generated approximately 14% of our
revenues in North America in 2002, 21% in 2003 on a pro forma basis, and 25% in 2004. We intend to focus considerably on expanding our revenues in North America, both organically and through
acquisitions. In 2003, the North American market alone represented approximately 45% of total worldwide IT services spending, according to the Gartner Dataquest Market Databook of June 2004,
which concentration is expected to continue in the future. We intend to penetrate specific niches in that market utilizing our vertical products and technical expertise. Our acquisition strategy will
also target emerging markets in which we believe growth and potential profitability are higher, such as Eastern Europe and Asia. We may use a portion of the net proceeds we receive from our initial
public offering to fund some of those acquisitions, although we do not have any specific plans or commitments for any material acquisitions or joint ventures at the present time.

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Be a market leader in key verticals.In North America, we presently focus on several verticals: life
sciences, ISVs, defense,
financial services and retail. In Europe, we are focused on the financial services, media, retail, telecommunications and utilities verticals. In Israel, we have a strong focus on several verticals,
including government and defense. We intend to further solidify our position in each of these verticals through internal growth based on complementary offshore offerings and key partnerships, and
external growth through acquisitions. Our goal is to establish ourselves in North America as a leading provider in outsourcing and offshore services for life sciences, ISVs and defense.

Continue to grow long-term and recurring revenues through outsourcing and offshore services.We intend to
continue to expand the proportion of our revenues generated from long-term, recurring contracts by focusing on long-term engagements, outsourcing, life-cycle
services and other multi-year services, including offshore services. Our goal is to further increase our recurring revenue, both in North America and in Europe, where outsourcing and
offshore services are gaining acceptance.

Enhance brand visibility.We intend to continue to develop our brand identity including through the exposure provided by this
offering. Our efforts will include media and industry analyst events, sponsorship of and participation in targeted industry conferences, trade shows, recruiting efforts, community outreach and
investor relations.

Pursue strategic alliances.We intend to continue to develop alliances that complement our core competencies. Our alliance
strategy is targeted at leading business advisory companies and at leading technology providers, which allows us to take advantage of emerging technologies in a mutually beneficial and
cost-competitive manner.

Continue to strengthen our leading position in the Israeli IT services market.We intend to retain and enhance our leading
market position in Israel with internal growth from outsourcing and a continued focus on the defense, government, financial services and telecommunications verticals. We also intend to leverage our
ISV relationships to drive additional reselling and professional services revenues.

Vertical Focus

We operate in a significant number of commercial and industrial sectors and in many areas of government operations. As a result of our deep understanding of the
different markets and environments in which our clients operate, and our ability to understand our clients' needs and tailor solutions to meet those needs, we have developed a strong reputation for
delivering systems to businesses that are subject to regulatory supervision, government control or other rigorous operational requirements. We are active in all of the following sectors, each
influenced by fluctuating market conditions, as well as regulatory and oversight environments:

Government and Defense.Government agencies are increasingly required to modernize their traditional operating processes and
models in order to improve and accelerate delivery of services to citizens. We have developed a track record in the public sector for helping government agencies deliver IT services to the public more
effectively and efficiently. In Israel, we are a leading provider of solutions for security, integration, and design through consulting, implementation and support.

The
defense industry faces a multitude of challenges, including protecting the safety of national borders, improving command and control and intelligence gathering mechanisms, enhancing
communications channels throughout the military and performing scenario analysis. We possess extensive experience in delivering high-end technical solutions to the defense industry to help
surmount these challenges.

Financial Services.Financial services organizations must strategically employ advanced technology in order to maximize their
operational excellence and provide the best possible services to their clients. We combine advanced solutions, industry best practices, and the products and services of business

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partners
to help our clients streamline their business processes and ensure long-term success in this fast-paced environment. We provide services to a number of segments of
this vertical including: retail, private and investment banks; credit card companies; insurance and reinsurance companies; consumer finance organizations; and pension funds. Services we provide
include credit card processing systems, options plan management systems, IT outsourcing, offshore services, turnkey solutions, custom development, system integration and offshore services.

Telecommunications and Utilities.Competitive pressures are causing telecommunications companies to find ways to reduce costs
and make more informed decisions about their IT investments. We deliver reliable telecommunications systems and portals that help carriers reduce operating costs and increase revenue, while helping
telecommunications companies evaluate the impact of new technologies and make informed planning decisions about their IT investments. We offer innovative information system solutions for improving
time-to-market and enhancing
telecommunications service delivery, addressing the specific needs of operators of all sizes from traditional wireline to wireless, and internet service provider to broadband. Our services include ERP
solutions, internet protocol telephony, configuration management, contact centers, interactive voice response systems, management of common channel signaling systems, service assurance, mediation
devices and consulting services.

Globalization,
escalating market competition and deregulation throughout the world are forcing utility companies to modify their IT strategies and adopt advanced solutions. We provide
high-end e-business services in areas such as CRM, ERP, e-procurement, asset management and metering solutions.

Life Sciences and Healthcare.Effectively managing and improving the efficiency of a life sciences business requires
innovative cross functional information management solutions. Our expertise lies in improving time-to-market of new products through clinical trial optimization, safety and
adverse event tracking, knowledge management, BI and data warehousing, strategic planning and budgeting. We have been delivering business performance oriented data and document management solutions to
large pharmaceutical and biotechnology firms for approximately 20 years.

Increased
government regulations and rising costs require healthcare organizations to address complex patient information management needs and share information across various hospitals
and facilities more effectively. We help healthcare organizations remain competitive with services designed to simplify their administrative processes, reduce costs and improve the quality of care.

High-Tech and Independent Software Vendors.Software companies need to focus on their core competencies of
developing software and other technology products. By utilizing our offshore capabilities, expertise and experience in developing complementary IT solutions, we enable our clients to meet this need.

Manufacturing.We continually monitor emerging technologies to help clients evaluate the benefits and costs of adopting these
new technologies. Our services enable clients to improve supply chain management, enhance their partner and client relations, enhance enterprise resource planning and optimize product quality.

Retail.As the retailing industry moves through a period of significant transformation, with major chains expanding their
presence throughout the world and exposing their brands to new markets, retailers need to run their IT systems more cost effectively. Our services enable retailers to deliver consistent customer
service (through store sales, call centers and internet websites) and to develop and extend their technology infrastructures.

Transportation.Intelligent transportation systems use a variety of technologies in order to facilitate the movement of
people and goods via highways and public transportation systems. We have

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developed
a wide range of services specifically tailored for clients within the transportation industry, including emergency management systems, electronic toll collection and traffic management
solutions.

Media, Entertainment and Publishing.We have worked with a variety of media, entertainment and publishing companies to
develop systems for managing and protecting content and digital assets. We possess the implementation expertise required to gather, analyze and distribute information for delivering the technical
proficiency needed to develop new market opportunities. Our software solution for intellectual rights management has been chosen and implemented by some of the top market participants from the
entertainment, publishing and advertising industries.

Global Delivery Model

We have local and offshore delivery facilities in North America, Europe and Asia, with a range of industry expertise, software language and product focuses, and
also with varying costs. Each facility has a high level of management skill, vertical expertise, IT services capabilities and quality at each location.

In
each of the 14 countries in which we operate, we apply our expertise to serve both our local clients and our clients throughout the world as part of our global delivery model. As
expertise in certain technologies, skills or verticals is needed, we routinely assemble teams spanning several of our locations around the world. By doing this, we reduce or eliminate the need to
carry potentially non-billable staff at each location to handle unanticipated needs or surge capacity, which results in lower costs on average.

For
example, we recently completed a sophisticated web-based document management and workflow solution for a large, international bio-pharmaceutical firm based in
Switzerland. For this project we used teams from Switzerland, the United States and Israel. Similarly, we are providing SAP system integration and project services to a large, global law firm using
resources from the United Kingdom and India. In these and virtually all other projects staffed using our global delivery model, the teams work in their home locations except for periodic travel to the
client location for knowledge transfer, client meetings and implementation work. This model also means that we are substantially less affected by changing immigration regulations than other
well-known offshore vendors. In our model, the team that remains at the client site throughout the engagement comprises our local resources, complementing our local presence with our
strong vertical experience to the engagement from inception through completion. Our global delivery model is optimized by a worldwide proprietary knowledge management system that enables our employees
to communicate and share knowledge. In addition, we continually host internal training courses.

Other
benefits gained by clients from our global delivery model are 24-hour delivery and support capabilities; built-in redundancy, both in terms of people and
facilities; and the availability of a global knowledge base of business and technical information that is populated, maintained and leveraged by our employees around the globe.

As
of December 31, 2004, we employed approximately 5,025 employees worldwide, including approximately 2,615 in Israel, 1,315 in India, 360 in North America, 430 in Europe and 300
in the Asia Pacific region.

Sales and Marketing

We market our services to large corporations in North America, Europe and Asia. We have a leading market presence in Israel and a growing presence in North
America and Europe. We sell and market our services from sales offices located in 14 countries. We manage our business and results of operations as part of a global sales and marketing strategy. As of
December 31, 2004, we had approximately 200 direct sales persons and approximately 80 account managers.

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Our sales and marketing strategy focuses on increasing awareness of and gaining new business from target clients and promoting client loyalty and repeat business among existing clients.
We constantly seek to expand the nature and scope of our engagements with existing clients by increasing the volume of our business and extending the breadth of services offered. Members of our
executive management team are actively involved in business development and in managing key client relationships through targeted interaction with our clients' senior management.

For
each prospective project, we assemble a team of our senior employees, drawn from various disciplines within our company. The team members assume certain roles in a formalized
process, using their combined knowledge and experience to understand the client's needs, design a solution, identify key decision makers and maximize the strength of our bid. This approach allows for
a smooth transition to execution once the sale is completed. We typically bid against other IT services providers in response to requests for proposals.

Our
sales and marketing teams work with our technical team as the sales process moves closer to the client's selection of an IT service provider. The duration of the sales process varies
depending on the type of service, ranging from approximately two months to over one year. Throughout the process, the account manager or sales executive works with the technical team to:



Management
reviews and approves proposals, which are then presented to the prospective clients. Our sales and account management personnel remain actively involved in the project through
the execution phase. We focus our marketing efforts on businesses with extensive information processing needs. We maintain what we believe to be a state-of-the-art
prospect/client database that is continuously updated and used throughout the sales cycle from prospect qualification to close. As a result of this marketing system, we are able to
pre-qualify sales opportunities and direct sales representatives are able to minimize the time spent on prospect qualification. In addition, substantial emphasis is placed on client
retention and expansion of services provided to existing clients. In this regard, our account managers play an important marketing role by leveraging their ongoing relationships with each client to
identify opportunities to expand and diversify the type of services provided to that client.

Clients

We presently serve over 500 clients in a wide range of industries. Our clients vary in size and include a number of Fortune 1000 and Global 2000 companies. For
2004, no client represented more than 5% of our annual revenues, and our largest 20 clients together represented approximately 37% of our revenues. Agencies of the government of Israel, in aggregate,
represented 12% of our pro forma revenue in 2004.

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The
percentage of our revenues derived from Israeli clients has been steadily decreasing as we have expanded our global presence. Our revenues for the periods presented, broken down by
geographic area, are as follows:

|                      |  | Year ended December 31, |  
|--------------------- |  | ----------------------- | -
|
|Israel                |  | 93                      | %
|United States         |  | 3                       |  
|Europe                |  | 4                       |  
|Asia and the Far East |  |                        |  
|Others                |  |                        |  
|                      |  |                         |  
|Total                 |  | 100                     | %

---

The
percentage of our revenues derived from outsourcing (including offshore development) has been steadily increasing. Based on estimates derived from internal management operating data,
the proportion of our revenues by type of service for the periods presented is:

|                                               |  | Year ended December 31, |  
|---------------------------------------------- |  | ----------------------- | -
|
|System Integration and Application Development |  | 55                      | %
|Outsourcing (including offshore development)   |  | 17                      |  
|Software and Consulting                        |  | 19                      |  
|Quality Assurance and Training                 |  | 5                       |  
|Other                                          |  | 4                       |  
|                                               |  |                         |  
|Total                                          |  | 100                     | %

---

Our
client base includes leading worldwide and regional entities. The clients listed alphabetically below are among our largest clients, based on revenues, in each of our verticals:

Government and Defense



Financial Services



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Telecommunications and Utilities



Life Sciences and Healthcare



High-Tech and Independent Software Vendors



Retail, Media, Entertainment and Publishing



Manufacturing and Transportation



Business Partners and Alliances

We have strategic alliances and partnerships with leading global software, infrastructure and consulting vendors, thereby expanding the variety of technologies
and capabilities we offer to our clients. We continuously evaluate partnership opportunities and add new partners to ensure that we are positioned to deliver what we believe to be the most effective
and advanced solutions to our clients. We also maintain the highest level of certification with many of our key partners in order to obtain early access to new product offerings and to influence the
development of new products and offerings. We take great pride in being "technology independent" in that we approach each project we undertake with no preconceived notions regarding the technology
that will ultimately be deployed, and we recommend what we believe to be the most effective technology for our clients' needs.

We
have over 100 alliances and partnerships around the world. Some alliances are specific to certain verticals and others are specific to certain markets in which we operate. Some key
alliances and partnerships that are applicable across multiple industry verticals and across multiple geographies, and with whom we conduct business, are described in the chart below.

|Alliance Partner     |  | Alliance Description                                                                                                                                                          
|-------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Archstone Consulting |  | We partner with Archstone Consulting to provide a range of business consulting and solutions services to life sciences and healthcare clients in the United States and Europe.
|BEA Systems          |  | We work with BEA Systems around the world to deliver powerful, scalable solutions built on BEA's application server, portal and EAI platforms.                                
|                     |  |                                                                                                                                                                               

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|Capco                        |  | We partner with Capco to provide a combination of onsite and offshore services to Capco and its clients in the financial services sector throughout the world, including co-development of products, systems integration services and application managed
services.                                                      
|---------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Deloitte                     |  | We partner with Deloitte as a Tier 1 provider of IT services at locations across North America and Asia, spanning a range of verticals and service offerings.                                                                                                                                                            
|Documentum                   |  | We partner with Documentum worldwide to deliver robust, validated and high performing document and content management systems and workflow solutions to our clients.                                                                                                                                                     
|EMC                          |  | We are the main EMC business partner in Israel, providing customized storage solutions to enterprise clients.                                                                                                                                                                                                            
|IBM                          |  | We work with IBM around the world to offer a broad array of scalable solutions built on IBM software and hardware platforms. In addition, we have supplier agreements with IBM in the United States, Asia Pacific and Israel for services, software and
hardware.                                                        
|Interwise                    |  | We partner with Interwise to provide customized enterprise communication services to our clients. We also provide offshore extended development services to Interwise.                                                                                                                                                   
|Kurt Salmon Associates (KSA) |  | We support the retail and consumer products industries through a business alliance with KSA, a leading management consulting firm. We work as an integral component of KSA's teams at several North American and European consumer products retailers and
suppliers.                                                     
|Mercury Interactive          |  | We partner with Mercury Interactive as their certified partner for the implementation and deployment of testing and QA enterprise projects around the world.                                                                                                                                                             
|Microsoft                    |  | We work with Microsoft around the world to offer a broad array of scalable solutions built on Microsoft's.NET enterprise platform and other Microsoft platforms. We are a global Microsoft Gold Partner with certifications on many platforms and products,
 and we have won numerous Microsoft awards for our solutions.
|                             |  |                                                                                                                                                                                                                                                                                                                          

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|SAP    |  | We partner with SAP in Israel as the sole product and professional services arm of SAP in the country. We also partner with SAP worldwide to deliver innovative ERP solutions.                                           
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Unisys |  | We partner with Unisys as their sole distributor for the Unisys ES7000 enterprise server platform in Israel, providing solutions for server consolidation, business intelligence and disaster recovery planning projects.

While
we are not substantially dependent on any one of these partnerships, we believe they collectively represent a significant competitive advantage for us. Through these partnerships
and alliances, we:



In
addition to these benefits, the relationships enhance our ability to: deliver a broad range of IT services outsourcing; provide us a channel to sell additional services to our
clients, such as quality assurance and training; and make us a more attractive employer, based on our employees' use of these advanced platforms and access to our partners.

Some
of the certification levels our partners require are difficult to attain, requiring the demonstration of significant technical expertise, high levels of training and certification,
the influencing of a certain amount of product sales for the partner, certain levels of investment in the products and technologies of our partners, or other factors. Our relationships with these
partners are long-term, unlike typical vendor relationships.

We
have written agreements with some, but not all, of our partners and alliances. The terms of the agreements vary. In some cases our partners are restricted from using other companies
to provide similar services in certain markets. Some of our partners require that we achieve certain minimum sales levels to maintain our partner status level. We have oral contracts and working
arrangements with the remainder of our partners and alliances. Although these oral contracts and other arrangements may be
terminated by either party at any time without penalty, they also afford greater flexibility to our partners and alliances as well as to us.

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Competition

The IT services market has become increasingly competitive in recent years as a result of the economic downturn and associated decline in IT service spending.
While some vendors have not survived, others have become more aggressive and some low-cost offshore vendors have entered new markets traditionally dominated by large multinational
consultancy firms. The IT services vendors with whom we compete include:



Some
of these competitors are more established, enjoy greater market recognition and have significantly greater financial, technical and marketing resources than we do. Moreover, the IT
services industry is experiencing rapid changes, primarily consolidation, that are affecting the competitive landscape. These changes may result in a greater number of competitors with significantly
larger resources than ours. In addition, some of our competitors have added cost competitive offshore capabilities to their service offerings, which may adversely affect our ability to compete
successfully against these competitors. We expect competition to intensify in the future as current competitors enhance their service offerings and new competitors penetrate the market due to low
barriers to entry. Existing or future competitors may develop or offer services and products that provide significant performance, price or other advantages over those we offer.

Our
future success will depend in part on our ability to develop and market new or enhanced services that adequately address changes in technology, industry standards and client
requirements and gain commercial acceptance. Any delay or failure to develop new services or to adapt our services to technological change and market requirements could have a material adverse effect
on our competitive position. We believe that the principal competitive factors in our business include the ability to:



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We
believe we compete favorably based on these factors, and we possess significant competitive advantages. See "Competitive Strengths."

Intellectual Property

Our intellectual property rights are important to our business. We rely on a combination of copyright, trademark and design laws, trade secrets, confidentiality
procedures and contractual provisions to protect our intellectual property. We currently have no issued patents. We require employees, independent contractors and, whenever possible, vendors to enter
into confidentiality agreements upon the commencement of their relationships with us. These agreements generally provide that any confidential or proprietary information developed by us or on our
behalf be kept confidential. These agreements also provide that any confidential or proprietary information disclosed to third parties in the course of our business be kept confidential by such third
parties. However, our clients usually own the intellectual property in the software we develop for them.

We
regard our trade name, trademarks, service marks and domain names as important to our success. We rely on the law to protect our proprietary rights to them and we have taken steps to
enhance our rights by filing trademark applications where appropriate. We have registered our key brand "Ness" as a trademark in both Israel and in the United States.

Third
parties may assert infringement claims against us or claim that we have violated their intellectual property rights. We are obligated under some client contracts to indemnify our
clients if claims are made against us alleging that we infringe on the proprietary rights of third parties. These claims, regardless of merit or ultimate outcome, could result in significant legal and
other costs, harm to our reputation and a distraction to management. In particular, growth in the number of business method and software patents issued to others may greatly limit the solutions we are
able to offer our clients.

Employees

As of December 31, 2004, we employed approximately 5,025 employees, including approximately 4,345 IT professionals. None of our employees is represented by
a labor union and we have not experienced any strikes or work stoppages. We believe our relations with our employees are good.

Our
employees in Israel are subject to Israeli labor laws and regulations and other special practices and employment customs. The laws and regulations principally concern matters such as
paid annual vacation, paid sick days, the length of the workday, payment for overtime and severance pay. Israeli law generally requires severance pay equal to one month's salary for each year of
employment upon the retirement or death of an employee or termination of employment without a valid legal reason. Furthermore, Israeli employees and employers are required to pay predetermined sums to
the National Insurance Institute, which is similar to the U.S. Social Security Administration. Since January 1, 1995, these amounts also include payments for national health insurance. Our
payments to the National Insurance Institute amount to approximately 15% of wages up to a specified amount, of which the employee contributes two-thirds and the employer contributes
one-third.

In
addition, by order of the Israeli Ministry of Labor and Welfare, the provisions of a collective bargaining agreement between the Histadrut (the General Federation of Labor in Israel)
and the Industrialists Association in Israel may be applicable to our employees in Israel. This collective bargaining agreement principally concerns cost of living increases, vacation and holiday pay,
length of the workday, wage tariffs, termination and severance payments. We provide our employees with

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benefits
and working conditions that are at least as favorable as the conditions specified in the collective bargaining agreement.

Our
employees are our most important asset. We believe that the quality and level of service that our professionals deliver are among the highest in the global IT services industry. We
believe we provide a challenging, entrepreneurial and empowering work environment that demands dedication and a strong work ethic.

Our
training, continuing education and career development programs are primarily designed to ensure our IT professionals enhance their skill-sets in alignment with their
respective roles. We continually provide our IT professionals with challenging assignments and exposure to new skills, technologies and global opportunities. We have instituted an appraisal program
that incorporates a feedback system, recognizing high performers and providing constructive feedback and coaching to under performers. Leadership development is also a key part of our training
program.

We
believe that our IT professionals receive competitive salaries and benefits and are eligible to participate in our stock option plans. We have also adopted a performance linked
compensation program that links compensation to both the employee's and our performance.

Corporate History

Ness Technologies Inc. was incorporated in Delaware in March 1999 in connection with the acquisition of six Israeli IT companies and their
consolidation into a single operating structure. Compro Software Industries, a privately-held Israeli software consulting company founded in 1985, was acquired by our founders in
December 1997 and by us in April 1999. At the time of its acquisition, Compro had a staff of approximately 170 people.

We
subsequently acquired five Israeli IT services companies:



Following
completion of these acquisitions, all the acquired companies (six Israeli companies in total) were consolidated into a single operating structure. The consolidation, which
commenced in the second quarter of 2000 and was completed in the second quarter of 2001, involved a major reorganization effort and associated investment, including:



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Towards
the end of 2001, and after becoming a leading IT services company in Israel, we embarked on our global expansion strategy. The following material acquisitions were made as part
of that strategy:



The
acquired companies were integrated into our corporate structure, with capabilities and staff assigned to the various divisions and business groups.

We
are continuously seeking to acquire new companies and businesses in order to expand our global presence and improve our position in our current sites of operation.

Risk Factors

Investing in our common stock involves risks. You should carefully consider the following risk factors and other information in this
report before purchasing our common stock. Any of the risks described below could result in a material adverse effect on our business, results of operations and financial condition. The trading price
of our common stock may decline due to any of these risks, and you could lose all or part of your investment.

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If we fail to manage our growth, our business could be disrupted and our profitability will likely decline.

We have experienced rapid growth in recent periods through both acquisitions and organic growth. The number of our employees increased from approximately 2,240 as
of December 31, 2001 to approximately 5,025 as of December 31, 2004. We expect our growth to continue to significantly strain our management and other operational and financial
resources. In particular, continued growth increases the integration challenges involved in:



The
rapid execution necessary to exploit the market for our business model requires an effective planning and management process. Our systems, procedures or controls may not be adequate
to support the growth in our operations, and our management may not be able to achieve the rapid execution necessary to exploit the market for our business model. Our future operating results will
also depend on our ability to expand our development, sales and marketing organizations. If we are unable to manage growth effectively, our profitability will likely decline.

We may engage in acquisitions, strategic investments, partnerships, alliances or other ventures that are not successful, or fail to integrate acquired businesses into our
operations, which may adversely affect our competitive position and growth prospects.

We have in the past engaged in acquisitions, strategic investments, partnerships and alliances. We may acquire or make strategic investments in complementary
businesses, technologies, services or products, or enter into strategic partnerships or alliances with third parties in the future in order to expand our business. We may be unable to identify
suitable acquisition, strategic investment or strategic partnership candidates, or if we do identify suitable candidates, we may not complete those transactions on terms commercially favorable to us
or at all, which may adversely affect our competitive position and our growth prospects.

If
we acquire another business, we may face difficulties, including:



These
difficulties could disrupt our ongoing business and increase our expenses. As of the date of this report, we have no agreements to enter into any material acquisition, investment,
partnership, alliance or other joint venture transaction.

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Because we derive a significant portion of our revenues from the Israeli government, a reduction of government spending in Israel on IT services would reduce, possibly
materially, our revenues and profitability.

We perform work for a wide range of Israeli governmental agencies, including defense, education, justice and finance, which collectively represented approximately
12% of our revenues in 2004. In 2003, Israeli government spending was reduced generally, including IT services, adversely affecting our revenues. In 2004, Israeli government spending, including IT
services, remained steady. Any further reduction in Israeli government spending for political or economic reasons would reduce, possibly materially, our revenues and profitability. The Israeli economy
has experienced a recession over the last three years. Although our revenues derived from agencies of the Israeli government grew each year during that period, the size of the overall Israeli IT
services market decreased, putting pressure on our growth rates. As Israel re-enters a period of economic growth, we do not expect any additional short-term decrease.

Quarterly fluctuations in our results of operations could cause our stock price to decline or fluctuate.

We have experienced, and expect to continue to experience, significant fluctuations in our quarterly results of operations. During the past eight quarters, our
net income ranged from approximately $0.2 million to approximately $5.4 million. In future periods, our operating results could be below public expectations, which would likely cause the
market price of our common stock to decline. Numerous factors, some of which are beyond our control, may affect our quarterly results of operations, including:



During
recent periods, our quarterly results have fluctuated as a result of the number of working days in each period and the seasonality of client demand in the IT services industry.
Typically our fourth quarter is strongest, when client demand is greatest, and the second and third quarters are weakest, when the number of working days in the quarter is lowest in Israel, currently
our largest employee location. We expect these factors to continue to be significant in the future, although we believe that the impact of the number of working days on our results of operations will
decrease as our international business continues to grow.

Our
clients typically retain our services for set engagements pursuant to contracts that may be terminated by them with little or no notice and without termination fees. The termination,
cancellation or deferral of one or more significant projects could materially and adversely affect our operating results in any fiscal quarter. In addition, we base our current and future expense
levels on our internal operating plans and sales forecasts, and our near-term operating costs are, therefore, to a large extent, fixed. As a result, we may not be able to sufficiently
reduce our costs on a timely basis in any quarter to compensate for an unexpected near-term shortfall in revenues.

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If we fail to attract and retain highly skilled IT professionals, we may not have the necessary resources to properly staff projects.

Our success depends largely on the contributions of our employees and our ability to attract and retain qualified personnel, including technology, consulting,
engineering, marketing and management professionals. Competition for qualified personnel in the IT services industry, in the markets in which we operate, particularly in India and the United States,
is intense and, accordingly, we may not be able to retain or hire all of the personnel necessary to meet our ongoing and future business needs. If we are unable to attract and retain the highly
skilled IT professionals we need, we may have to forego projects for lack of resources or be unable to staff projects optimally. In addition, the competition for highly skilled employees may require
us to increase salaries of highly skilled employees, and we may be unable to pass on these increased costs to our clients, which would reduce our profitability.

If our clients terminate significant contracted projects or choose not to retain us for additional projects, or if we are restricted from providing services to our clients'
competitors, our revenues and profitability may be negatively affected.

Our clients typically retain us on a non-exclusive basis. Many of our client contracts, including those that are on a fixed price, fixed timeframe
basis, can be terminated by the client with or without cause upon 90 days' notice or less and generally without termination related penalties. Additionally, our contracts with clients are
typically limited to discrete projects without any commitment to a specific volume of business or future work and may involve multiple stages. In addition, the increased breadth of our service
offerings may result in larger and more complex projects for our clients that require us to devote resources to more thoroughly understanding their operations. Despite these efforts, our clients may
choose not to retain us for additional stages or may cancel or delay planned or existing engagements due to any number of factors, including:



These
potential terminations, cancellations or delays in planned or existing engagements could make it difficult for us to use our personnel efficiently. In addition, some of our client
contracts restrict us from engaging in business with certain competitors of our clients during the term of the agreements and for a limited period following termination of these agreements. Any of the
foregoing factors may negatively impact our revenues and profitability.

If we fail to meet our clients' performance expectations, our reputation may be harmed, causing us to lose clients or exposing us to legal liability.

As an IT services provider, our ability to attract and retain clients depends to a large extent on our relationships with our clients and our reputation for high
quality professional services and integrity. As a result, if a client is not satisfied with our services or solutions, including those of subcontractors we engage, our reputation may be damaged. In
addition, a number of our contracts provide for incentive based or other pricing terms pursuant to which some of our fees are contingent on our ability to meet revenue enhancement,
cost-saving or other contractually defined performance goals. Our failure to meet these goals or a client's expectations in such performance based contracts may result in a less profitable
or an unprofitable engagement. Moreover, if we fail to meet our clients' performance expectations, we may lose clients and be subject to legal liability, particularly if such failure has a
consequential adverse impact on our clients' businesses.

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In
addition, many of our projects are critical to the operations of our clients' businesses. Our exposure to legal liability may be increased in the case of outsourcing contracts in
which we become more involved in our clients' operations. While our contracts typically include provisions designed to limit our exposure to legal claims relating to our services and the solutions we
develop, these provisions may not adequately protect us or may not be enforceable in all cases. The general liability insurance coverage that we maintain, including coverage for errors or omissions,
is subject to important exclusions and limitations. We cannot be certain that this coverage will continue to be available on reasonable terms or will be available in sufficient amounts to cover one or
more large claims, or that the insurer will not disclaim coverage as to any future claim. A successful assertion of one or more large claims against us that exceeds our available insurance coverage or
changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect our profitability.

We may be required to be responsible for the performance of business partners we do not control, which could lower our margins and reduce profitability.

In connection with some of our more complex engagements, we have been required, and may in the future be required, to assume contingent responsibility for the
performance of business partners. Our being required to perform the third party obligations of these commitments could have a material adverse affect on our margins and profitability because we would
be required to incur additional costs, possibly without any corresponding recovery against the third parties. While we will continue to manage liabilities or risks through rigorous transaction review,
we expect that clients may require us to assume certain additional contractual obligations and potential liabilities when we are responsible for the performance of business partners we do not control.

If we fail to complete fixed price contracts on budget and on time, our reputation may be harmed, causing us to lose clients and negatively affecting our profitability.

We offer a portion of our services on a fixed price basis, rather than on a time-and-materials basis. In 2001, 2002, 2003 and 2004,
revenues from fixed price projects accounted for approximately 24%, 24%, 26% and 19% of our total revenues, respectively. Under these contractual arrangements, we bear the risk of cost overruns,
completion delays and wage inflation. If we fail to estimate accurately the resources and time required to complete a project or fail to complete our contractual obligations within the scheduled
timeframe, our profitability may suffer. Historically, we have not had any cost overruns that have had a material impact on our profitability. However, we cannot be certain that this will continue to
be the case.

Our success depends in part upon the senior members of our management team, and our inability to attract and retain them could have a negative effect on our ability to operate
our business.

We are highly dependent on the senior members of our management team, particularly Aharon Fogel, our chairman, Raviv Zoller, our president and chief executive
officer, and Tuvia Feldman, our chief operating officer. Mr. Fogel has a strong reputation and significant business experience in the public and private sectors in Israel. Mr. Zoller has
been with us since our inception, as our chief financial officer for two years and our president and chief executive officer since 2001, and has been instrumental in securing important client
contracts. Mr. Feldman has been managing our operations since 2000 and is in charge of many of our successful methodologies and best practices. We do not maintain key man life insurance for any
of the senior members of our management team. Competition for senior management in our industry is intense, and we may not be able to retain our senior management personnel or attract and retain new
senior management personnel in the future. The loss of one or more members of our senior management team could have a negative effect on our ability to

27

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attract
and retain clients, execute our business strategy and otherwise operate our business, which could reduce our revenues, increase our expenses and reduce our profitability.

Disruptions in our telecommunications infrastructure could harm our ability to operate and to deliver our services effectively, which could result in client dissatisfaction and
a reduction of our revenues and results of operations.

A significant element of our global delivery model is to continue to leverage and expand our global development centers. Our global development centers are linked
with a network architecture that uses multiple telecommunication service providers and various links with alternate routing, including some routing via virtual private networks on the internet. We may
not be able to maintain active voice and data communications between our various global development centers and between our global development centers and our clients' sites at all times. Any
significant loss or impairment of our ability to communicate could result in a disruption in our business, which could hinder our performance or our ability to complete client projects on time. This,
in turn, could lead to client dissatisfaction and have a material adverse effect on our operations.

Our inability to protect our intellectual property rights may force us to incur unanticipated costs.

Our success will depend, in part, on our ability to obtain and maintain protection in the United States and other countries for certain intellectual property
incorporated into our software solutions and our proprietary methodologies. We may be unable to obtain patents relating to our technology. Even if
issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to prevent competitors from marketing similar solutions that limit the effectiveness of our
patent protection and force us to incur unanticipated costs. In addition, existing laws of some countries in which we provide services or solutions may offer only limited protection of our
intellectual property rights.

While
we attempt to retain intellectual property rights arising from client engagements, our clients often have the contractual right to such intellectual property. For intellectual
property that we own, we rely upon a combination of trade secrets, confidentiality, nondisclosure and other contractual arrangements. These measures may not adequately prevent or deter infringement or
other misappropriation of our intellectual property, and we may not be able to detect unauthorized use of, or take appropriate and timely steps to enforce, our intellectual property rights.

If we are unable to secure necessary additional financing, we may not be able to fund our operations or strategic growth.

In order to achieve our strategic business objectives, we may be required to seek additional financing. For example, future acquisitions may require additional
equity and/or debt financing. In addition, we may require further capital to continue to develop our technology and infrastructure and for working capital purposes. These financings may not be
available on acceptable terms, or at all. Our failure to secure additional financing could prevent us from completing acquisitions, developing new technologies and competing effectively, all of which
would have a negative impact on our continued development and growth.

Our clients' complex regulatory requirements may increase our costs, which could negatively impact our profits.

Many of our clients, particularly those in the financial services, life sciences, healthcare and defense verticals, are subject to complex and constantly changing
regulatory requirements. On occasion, these regulatory requirements change unpredictably. These regulations may increase our potential liabilities if our services are found to contribute to a failure
by our clients to comply with the

28

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requirements
applicable to them and may increase compliance costs as regulatory requirements increase or change. These increased costs could negatively impact our profits.



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

We
currently operate in 14 countries and intend to further penetrate key markets, primarily in North America and Europe, while establishing offshore development centers in
lower-cost Asian markets. We expect to devote significant resources to this effort but may not be successful in this regard. Risks inherent in our international business activities
include:



One
or more of these factors may have a material adverse effect on our business, financial condition or results of operations.

If we fail to achieve planned growth in our offshore facilities, our ability to fulfill client commitments profitably or to fulfill them at all may be compromised.

Our growth strategy relies in part on the expansion of our offshore development centers. If we fail to retain needed employees in India and other offshore
locations, or to manage growth in these regions, our business, financial condition and results of operations may be adversely affected. Wage costs in India have historically been significantly lower
than wage costs in North America and Western Europe for comparably skilled professionals. However, wages in India are currently increasing at a faster rate than in North America and Western Europe,
which could result in increased costs for IT professionals, particularly project managers and other mid-level professionals. We may need to increase the levels of our employee compensation
more rapidly than in the past to remain competitive. Compensation increases may hinder our planned growth and could materially adversely affect our business, financial condition and results of
operations.

Regional instability in Israel and India may adversely affect business conditions in those regions, which may disrupt our operations and negatively affect our revenues and
profitability.

We generated approximately 57% of our revenues in Israel in 2004. In addition, our principal offices and a substantial portion of our employees are located in
Israel. Therefore, political, economic and military conditions in Israel directly affect our operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken
place between Israel and its Arab neighbors. Since September 2000, there has been a marked increase in hostilities between Israel and the Palestinians. We cannot predict the effect on our
business of any increase in the degree of violence by the Palestinians against Israel or the effect of military action elsewhere in the Middle East. The future

29

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of
peace efforts between Israel and its Arab neighbors remains uncertain. Any future armed conflicts or political instability in the region would likely negatively affect business conditions and
adversely affect our results of operations. Furthermore, several countries restrict or prohibit business with Israel or companies that do business in Israel. These restrictive laws and policies may
severely limit our ability to provide services in those countries.

Some
of our employees in Israel are currently obligated to perform up to 36 days, depending on rank and position, of military reserve duty annually and are subject to being called
for active duty at any time under emergency circumstances. If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time. Our
operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant number of other employees due to military service. Any
consequent disruption in our operations could adversely affect our profitability.

We
also generate revenues from services we deliver from India. India has from time to time experienced instances of civil unrest and hostilities with Pakistan. In recent years, there
have been military confrontations between India and Pakistan that have occurred in the region of Kashmir and along the India-Pakistan border. Although the relations between the two countries are
currently improving, military activity or terrorist attacks in the future could adversely affect the Indian economy by disrupting communications and making travel more difficult, which may have a
material adverse effect on our ability to deliver services from India.

Our international operations subject us to currency exchange fluctuations, which could negatively impact our profitability.

To date, most of our sales have been denominated in NIS and dollars, while a significant portion of our expenses, primarily labor expenses in India, is incurred
in the local currencies of countries in which we
operate. For financial reporting purposes, we translate all non-United States denominated transactions into dollars in accordance with United States generally accepted accounting
principles. As a result, we are exposed to the risk that fluctuations in the value of these currencies relative to the dollar could increase the dollar cost of our operations and therefore have an
adverse effect on our profitability.

Potential anti-outsourcing legislation could impair our ability to service our clients.

Over the past year, the issue of outsourcing of services abroad by American companies has become a topic of political discussions in the United States. Measures
aimed at limiting or restricting outsourcing by United States companies are under discussion in Congress and in as many as one-half of the state legislatures. While no substantive
anti-outsourcing legislation has been introduced to date, given the intensifying debate over this issue, the introduction of such legislation is possible. If introduced, such measures are
likely to fall within two categories: (1) measures that extend restrictions on outsourcing by federal government agencies and on government contracts with firms that outsource services directly
or indirectly, and (2) measures that affect private industry, such as tax disincentives or intellectual property transfer restrictions. If any of these measures become law, our ability to
service our clients could be impaired.

Terrorist attacks or a war could negatively affect our financial results and prospects.

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

30

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Restrictions on immigration may affect our ability to compete for and provide services in our clients' countries, which could hamper our growth and cause our revenues to
decline.

A portion of our revenues is derived from offshore outsourcing, which requires some personnel from our offshore locations in India and elsewhere to travel to
client sites for rotational assignments. The ability of those IT professionals to work in North America, Europe and in other countries depends on their ability to obtain the necessary visas and work
permits. The United States has recently reduced the
number of H-1B visas authorized annually, and has also increased the level of scrutiny in granting H-1B, L-1 and ordinary business visas. A number of European
countries are considering changes in immigration policies as well. The inability of key project personnel to obtain necessary visas could delay or prevent our fulfillment of client projects, which
could hamper our growth and cause our revenues to decline.

If the governments of India or Israel were to reduce or withdraw tax benefits and other incentives they provide to us, our net income will decrease.

Currently, we benefit from the tax benefits that India provides to the export of IT services. These benefits provide a complete exemption from corporate income
tax for exported IT services, compared to an ordinary corporate tax rate of approximately 36%. As a result of these incentives, our operations in India have been subject to relatively low tax rates.
When these tax benefits are eliminated on March 31, 2009 as scheduled, or if they are eliminated or reduced earlier as the result of political change in India, our tax expense will increase,
reducing our profitability.

Our
business operations in Israel benefit from a tax benefit granted to Israeli industrial companies, regarding the ability to file consolidated tax returns for our Israeli subsidiaries,
which allows us to offset gains with losses in our Israeli subsidiaries. If the ability to file consolidated tax returns is reduced or eliminated for Israeli industrial companies, the IT industry or
for our Israeli subsidiaries, our tax expense would increase, reducing our profitability. We currently have no reason to anticipate that this benefit will be withdrawn.



There has been limited market for our common stock. Our stock price is likely to be highly volatile and could drop unexpectedly.

Prior to our initial public offering that commenced on September 29, 2004, there was no public market for our common stock, and we cannot assure you that
an active trading market be sustained. The market price may fluctuate significantly in response to a number of factors, including the following, several of which are beyond our control:



In
the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We could be the target of
similar litigation in the future. Securities litigation, regardless of merit or ultimate outcome, would likely cause us to incur

31

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substantial
costs, divert management's attention and resources, harm our reputation in the industry and the securities markets and reduce our profitability.

Your ability to influence corporate decisions may be limited because our executive officers, directors and affiliated major stockholders beneficially own approximately 44.8% of
our common stock.

Our executive officers, directors and stockholders who beneficially own 5% or more of our outstanding common stock and are or were affiliated with Ness
beneficially own, in the aggregate, shares representing approximately 44.8% of our outstanding common stock. As a result of their stock ownership, if these stockholders were to choose to act together,
they would likely be able to control all matters submitted to our stockholders for approval, including the election of directors and approval of any merger, consolidation or sale of all or
substantially all of our assets. This concentration of voting
power could delay or prevent an acquisition of our company on terms that other stockholders may desire.

Provisions in our charter documents and under Delaware law may prevent or delay a change of control of us and could also limit the market price of our common stock.

Provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware corporate law, may discourage, delay or prevent a merger, acquisition
or other change in control of our company, even if such a change in control would be beneficial to our stockholders. These provisions may also prevent or frustrate attempts by our stockholders to
replace or remove our management. These provisions include:



We
are subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or more of our
outstanding voting stock that our board of directors has not approved. These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us
without negotiation. These provisions may apply even if some stockholders may consider the transaction beneficial to them.

These
provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition
proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock.

Item 2. Properties

Our principal executive office is located in leased premises of approximately 199,000 square feet in Tel Aviv, Israel. Our principal office in the United States
is located in leased premises of approximately 21,000 square feet in Hackensack, New Jersey. We have offices of various sizes at more than 30 additional locations in 14 countries, all of which are
leased.

We
recently completed construction of two leased state-of-the-art offshore centers containing an aggregate of approximately 180,000 square feet of
space in the Indian cities of Bangalore and Mumbai.

32

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Each
of these centers contains up-to-date technology infrastructure and communications capabilities. These two facilities will be able to accommodate approximately 1,700
employees.

We
believe that there is sufficient office space available at favorable leasing terms both to replace existing office space and to satisfy any additional needs we may have as a result of
future expansion.

Item 3. Legal Proceedings

We are periodically a party to routine litigation incidental to our business. We do not believe that we are a party to any pending legal proceeding that is likely
to have a material adverse effect on our business, financial condition or results of operations.

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

No matters were submitted to a vote of security holders during the fourth quarter of 2004.

33

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PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is quoted on The Nasdaq National Market under the symbol "NSTC." The following table shows the high and low per share closing sale prices of our
common stock, as reported on The Nasdaq National Market. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.

Price RangeHigh

Low2004Third Quarter (commencing September 29, 2004)

$
12.89

$
11.91Fourth Quarter

$
15.60

$
11.302005First Quarter (through March 30, 2005)

$
14.95

$
11.40


We
have never paid any cash dividends. We currently intend to retain our future earnings to finance the operation and expansion of our business and we do not anticipate paying cash
dividends on our common stock in the foreseeable future. Any future determination as to the payment of dividends will be at the discretion of our board of directors.

On
March 30, 2005, the last reported sale price per share of our common stock on the Nasdaq National Market was $11.81. As of March 30, 2005, there were approximately 175
holders of record of our common stock, although the number of beneficial shareholders was much larger. See "Recent Developments" in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a description of our use of the proceeds from our initial public offering.

Item 6. Selected Financial Data

You should read the following selected consolidated financial data together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this report.

The selected consolidated statement of operations data for the years ended December 31, 2002, 2003 and 2004 and the selected consolidated balance sheet
data as of December 31, 2003 and 2004 are derived from our audited consolidated financial statements included elsewhere in this report. The selected consolidated statement of operations data
for the years ended December 31, 2000 and 2001 and the selected consolidated balance sheet data as of December 31, 2000, 2001 and 2002 are derived from our audited consolidated financial
statements not included in this report. These financial statements have been prepared in accordance with U.S. generally accepted accounting principles. Our historical results may not be

34

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indicative of the operating results to be expected in any future period and our results for interim periods may not be indicative of results to be expected for the entire year.

|                                                                                          |                               | Year ended December 31,  |        
|----------------------------------------------------------------------------------------- | ----------------------------- | ------------------------ | -------
|
|
|Statement of Operations Data:                                                             |                               |                          |        
|Revenues                                                                                  |                               | $                        | 162,970
|Cost of revenues                                                                          |                               |                          | 114,117
|Provision for losses (reverse of losses) on uncompleted contracts, net                    |                               |                          | 740    
|                                                                                          |                               |                          |        
|Gross profit                                                                              |                               |                          | 48,113 
|                                                                                          |                               |                          |        
|Operating expenses:                                                                       |                               |                          |        
|                                                                                          | Selling and marketing         |                          |        
|                                                                                          | General and administrative    |                          |        
|                                                                                          | Research and development, net |                          |        
|                                                                                          | Goodwill amortization(1)      |                          |        
|                                                                                          | Other                         |                          |        
|                                                                                          |                               |                          |        
|                                                                                          |                               | Total operating expenses |        
|                                                                                          |                               |                          |        
|Operating income (loss)                                                                   |                               |                          | (17,990
|Financial income (expenses), net                                                          |                               |                          | (5,237 
|Other income (expenses), net                                                              |                               |                          | 108    
|                                                                                          |                               |                          |        
|Income (loss) before taxes on income                                                      |                               |                          | (23,119
|Taxes on income (tax benefit)                                                             |                               |                          | 1,713  
|Equity in net earnings (losses) of affiliates                                             |                               |                          | (291   
|Minority interests in losses (earnings) of subsidiary                                     |                               |                          | 26     
|                                                                                          |                               |                          |        
|Income (loss) from continuing operations                                                  |                               |                          | (25,097
|Loss from discontinued operations(2)                                                      |                               |                          |       
|                                                                                          |                               |                          |        
|Net income (loss)                                                                         |                               | $                        | (25,097
|                                                                                          |                               |                          |        
|Basic net earnings (loss) per share from continuing operations(3)                         |                               | $                        | (3.04  
|Basic net earnings (loss) per share(3)                                                    |                               | $                        | (3.38  
|Diluted net earnings (loss) per share from continuing operations(3)                       |                               | $                        | (3.04  
|Diluted net earnings (loss) per share(3)                                                  |                               | $                        | (3.38  
|Weighted average number of shares used in computing basic net earnings (loss) per share   |                               |                          | 8,247  
|Weighted average number of shares used in computing diluted net earnings (loss) per share |                               |                          | 8,247  

---

35

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|                                         |  | Year ended December 31,
|---------------------------------------- |  | -----------------------
|
|
|Balance Sheet Data:                      |  |                        
|Cash and cash equivalents                |  | $                      
|Short-term bank deposits                 |  |                        
|Working capital                          |  |                        
|Total assets                             |  |                        
|Total debt, including current maturities |  |                        
|Stockholders' equity                     |  |                        

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

You should read the following discussion and analysis together with our unaudited consolidated financial statements and the accompanying
notes. This discussion contains forward-looking statements, within the meaning of Section 27A of Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934,
as amended, and the Private Securities Litigation Reform Act of 1995, including statements regarding our expected financial position, business and financing plans. These statements involve risks and
uncertainties. Our actual results could differ materially from the results described in or implied by these forward-looking statements as a result of various factors, including those discussed below
and elsewhere in this report, particularly under the headings "Disclosure Statement" and "Risk Factors."

Overview

We are a global provider of information technology, or IT, services and end-to-end business solutions designed to help clients improve
their competitiveness and effectiveness. End-to-end business solutions encompass all stages of a client's business process and incorporate all technologies and IT services
related to that process. Our portfolio of solutions and services includes outsourcing, system integration and application development, software and consulting, and quality assurance and training. The
primary industries, or verticals, we serve include government and defense, financial services, life sciences and healthcare, telecommunications and utilities, and independent software vendors, or
ISVs.

We
have operations in 14 countries across North America, Europe and Asia. We combine our deep vertical expertise and strong technical capabilities to provide a complete range of high
quality services on a global scale. By integrating our local and international personnel in focused business and project teams, this global delivery model leverages our corporate knowledge and
experience, intellectual property and global infrastructure to develop innovative solutions for clients across the geographies and verticals we serve. We complement this global delivery model with our
offshore delivery capabilities to achieve meaningful cost reductions or other benefits for our clients.

36

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Our revenues increased to $304.5 million for 2004, from $225.8 million for 2003. Net income increased to $14.4 million for 2004, from $3.5 million for 2003.

Our
revenue growth is attributable to a number of factors, including acquisitions we made, increases in the number and size of projects for existing clients, and the addition of new
clients. Our client base is diverse, and we are not dependent on any single client. In 2004, no client accounted for more than 5% of our revenues and our largest twenty clients together accounted for
approximately 37% of our revenues. For 2004, the percentage of our revenues generated by public and private clients in Israel was 57%, and the percentage of our revenues derived, in aggregate, from
agencies of the government of Israel was 12%. Existing clients from prior years generated more than 80% of our revenues in 2004.

Our
backlog as of December 31, 2004 was $401 million compared to $238 million as of December 31, 2003. This $163 million increase in our backlog was
due exclusively to new bookings. We achieve backlog through new signings of IT services projects and outsourcing contracts, including for new and repeat customers. We recognize backlog as revenue when
we perform the services related to backlog.

For
2004, the impact of inflation and changing prices on net sales and revenues and on income from continuing operations was insignificant.

As
of December 31, 2004, we had approximately 5,025 employees, including approximately 4,345 IT professionals. Of the 5,025 employees, approximately 2,615 were in Israel, 1,315
were in India, 360 were in North America, 430 were in Europe and 300 were in the Asia Pacific region.

Recent Developments

In October 2004, we completed an initial public offering of shares of our common stock. In connection with the offering, we offered and sold 8,303,574
shares of our common stock and certain selling stockholders offered and sold an additional 5,119,226 shares at a price of $12.00 per share. Our net proceeds from the initial public offering, after
deducting underwriting discounts, commissions, and estimated offering related expenses payable by us were approximately $89.3 million. We used a portion of the proceeds of this offering in the
fourth quarter to reduce net debt, decreasing our net debt by $35.6 million, in line with our previously announced $40 million debt reduction plan, and we intend to apply the balance of
the proceeds to fund business growth and expansion and for working capital and
general corporate purposes. Our use of proceeds included $5.9 million for expansion of our infrastructure and facilities in India. We may also use a portion of the net proceeds for acquisitions
of additional businesses, assets and technologies or the establishment of joint ventures.

On
March 28, 2005, we announced that we have signed a definitive agreement to acquire Radix Company SA, a privately held leading provider of IT services and solutions based in
Romania. The purchase price, in the all cash transaction is €4 million, or approximately $5.2 million. In addition, should Radix achieve certain performance goals over
the next two years, Ness will pay an additional amount of up to €3 million, or approximately $3.9 million. The acquisition is expected to close by April 10, 2005
and is subject to customary closing conditions. For the full year 2004, Radix Company SA generated revenues in excess of $12 million and was profitable. Radix Company SA is one of the leading
Romanian IT services and solutions providers and is expected to provide synergies with Ness' current operations in Central and Eastern Europe. Upon completion of the acquisition, Radix Company SA will
change its name to Ness Romania and will operate as a wholly-owned subsidiary of Ness' Dutch subsidiary, Ness Technologies, B.V.

37

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Consolidated Results of Operations

The following table sets forth the items in our consolidated statement of operations as a percentage of revenues for the periods presented.

Year ended December, 312002

2003

2004Revenues

100.0
%
100.0
%
100.0
%Cost of revenues

62.8

70.4

69.6Provision for losses (reverse of losses) on uncompleted contracts, net

0.1

0.3

(0.1
)Gross profit

37.1

29.2

30.5Operating expenses:Selling and marketing

11.5

9.4

8.4General and administrative

18.1

16.0

15.1Research and development, net

0.9

0.7

Other

0.1

0.3

Total operating expenses

30.7

26.4

23.6Operating income

6.5

2.8

6.9Financial expenses, net

(5.3
)
(0.6
)
(1.1
)Other expenses, net

(0.2
)
(0.2
)
(0.0
)Income before taxes on income

1.0

2.0

5.7Taxes on income (tax benefit)

0.0

0.0

0.8Equity in net earnings (losses) of affiliate

0.0

0.0

(0.2
)Minority interests in losses (earnings) of subsidiary

(0.2
)
0.0

(0.1
)Income from continuing operations

0.8

2.0

4.7Loss from discontinued operations

(0.2
)
(0.5
)
Net income

0.5

1.5

4.7


2004 Compared to 2003

The following table summarizes certain line items from our consolidated statement of operations (dollars in thousands):

Year ended December 31,

Increase (Decrease)2003

2004

$

%Revenues

$
225,768

$
304,525

78,757

34.9Cost of revenues


158,987


212,034

53,047

33.4Provision for losses (reverse of losses) on uncompleted contracts, net


788


(309
)
(1,097
)
(139.2
)Gross profit

$
65,993

$
92,800

26,807

40.6Gross margin


29.2
%

30.5
%




Our revenues increased from $225.8 million in 2003 to $304.5 million in 2004, representing an increase of $78.8 million, or 34.9%. The
increase was due primarily to the inclusion of $40.0 million of revenues attributable to the acquisition of Apar, effective June 30, 2003, with the remaining

38

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$38.8 million
attributable to an increase in sales. The $38.8 million sales increase was primarily due to growth in outsourcing and offshore engagements, representing
$23.3 million, while $15.5 million was attributable to growth in our other offerings, comprised of system integration and application development, software and consulting, and quality
assurance and training. Revenues from outsourcing and offshore services increased as a result of volume growth due to our sales initiatives related to these offerings, including the hiring of key
personnel and aligning of our organizational structure, and expansion into geographical areas in which we currently do business but previously had not offered outsourcing and offshore services. There
was no significant change in our billing rates, or prices, from 2003 to 2004. We expect our revenues to grow in 2005 due to continued expansion into North American and European markets in key
verticals, possibly including through acquisitions, and the securing of contracts from new and existing clients.



Our cost of revenues, including salaries, wages and other direct costs, increased from $159.0 million in 2003 to $212.0 million in 2004,
representing an increase of $53.0 million, or 33.4%. The increase was due primarily to the acquisition of Apar, representing $28.4 million, and other costs of revenues, representing
$24.6 million. The other costs of revenues are attributable primarily to growth in delivery staff needed to support our increased revenues. In 2005, we expect our cost of revenues to increase,
primarily due to an increase in the number of IT professionals needed to support our expected revenue growth. In addition, our cost of revenues will likely increase due to increases in salaries,
especially in India, where there is strong demand for experienced IT professionals. We expect that this increase will be partially offset by our greater use of resources in lower cost regions. The
change in our provision for losses (reverse of losses) on uncompleted contracts, net, changed from $1.0 million in 2003 to ($0.3) million in 2004, as a result of net changes in our fixed price
project loss provisions.



Our gross profit (revenues less cost of revenues and provision for losses (reverse of losses) on uncompleted contracts, net) increased from $66.0 million
in 2003 to $92.8 million in 2004, representing an increase of $26.8 million, or 40.6%. The increase was primarily due to the inclusion of $11.6 million of gross profit from the
Apar acquisition, and the increase in our revenues along with an increase in our gross margin, together representing $15.2 million. Gross margin for 2004 was 30.5%, compared to 29.2% in 2003.
The increase in gross margin resulted primarily from an increase in billable utilization. We define billable utilization as the total billable hours in a period divided by the total available hours of
our professionals in that period. In 2005, we expect that gross profit will increase as a result of our anticipated revenue growth.

The
following table summarizes certain line items from our consolidated statement of operations (dollars in thousands):

Year ended December 31,

Increase
(Decrease)2003

2004

$

%Selling and marketing

$
21,287

$
25,706

4,419

20.8General and administrative


36,115


46,042

9,927

27.5Research and development, net


1,559




(1,559
)
(100.0
)Other


665




(665
)
(100.0
)Total operating expenses


59,626


71,748

12,122

20.3Operating income

$
6,367

$
21,052

14,685

230.6


39

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Selling and marketing expenses increased from $21.3 million in 2003 to $25.7 million in 2004, representing an increase of $4.4 million, or
20.8%. This increase was due primarily to the inclusion of $1.4 million of expenses attributable to the Apar acquisition, a $1.9 million increase in marketing expenses, increases in our
sales commissions and other sales expenses of $0.7 million, and a $0.4 million increase in client-based asset amortization. The increase in marketing expenses related primarily to our
efforts to enhance our brand recognition. The increase in client-based asset amortization was due primarily to an increased cumulative cost of amortization of client-based assets that we acquired in
connection with the Apar acquisition. In 2005, we expect selling and marketing expenses to increase to
support growth in new vertical markets and regions. In addition, we expect a modest increase in our marketing expenses to enhance our brand recognition.



General and administrative expenses increased from $36.1 million in 2003 to $46.0 million in 2004, representing an increase of $9.9 million,
or 27.5%. This increase was due primarily to inclusion of $8.3 million of expenses attributable to the Apar acquisition and other general and administrative expenses of $1.6 million.
These other general and administrative expenses were necessary to support our revenue growth. In 2005, we expect our general and administrative expenses to increase to support our anticipated revenue
growth. We also expect to incur certain additional expenses associated with being a public company, including implementation of compliance measures required by the Sarbanes-Oxley Act.



Research and development expenses decreased from $1.6 million in 2003 to no material expenses in 2004. These expenses were comprised solely of the
development of Ness ISI's dbMotion system. Following the January 1, 2004 issuance of preferred shares by Ness ISI that reduced our share ownership to a non-controlling interest, we
no longer consolidate Ness ISI's results in our financial statements.



Other expenses decreased from $0.7 million in 2003 to no expenses in 2004. The expense in 2003 resulted from the consolidation of certain corporate and
branch administrative services in the United States.

The
following table summarizes certain line items from our consolidated statement of operations (dollars in thousands):

Year ended December 31,

Increase (Decrease)2003

2004

$

%Operating income

$
6,367

$
21,052

14,685

230.6Financial expenses, net


(1,451
)

(3,461
)
(2,010
)
138.5Other expenses, net


(422
)

(91
)
331

(78.4
)Income before taxes on income


4,494


17,500

13,006

289.4Taxes on income (tax benefit)


(54
)

2,320

2,374

N/AEquity in net earnings (losses) of affiliates


11


(647
)
(658
)
N/AMinority interests in losses (earnings) of subsidiary





(156
)
(156
)
N/AIncome from continuing operations


4,559


14,377

9,818

215.4Loss from discontinued operations


(1,105
)



1,105

(100.0
)Net income

$
3,454

$
14,377

10,923

316.2


40

---





Financial expenses, net, increased from $1.5 million in 2003 to $3.5 million in 2004, representing an increase of $2.0 million, or 138.5%.
The increase was due primarily to the changes in the exchange rate for the dollar against the NIS. For 2005, we expect financial expenses to decline, as investment income from the proceeds of our
initial public offering and our reduced debt service expenses partially offset anticipated currency exchange-related expenses.



Other expenses, net, decreased from $0.4 million in 2003 to $0.1 million in 2004. Termination of property in 2003, which resulted in a capital loss,
representing an estimated $0.4 million, was the primary expense in 2003.



Our taxes on income (tax benefit) changed from a benefit of $54,000 in 2003 to taxes of $2.3 million in 2004. This change was due to the increase in our
income before taxes and the depletion of our net operating loss carry forwards in Israel and the United States. We expect that our effective tax rate in 2005 will benefit from net operating loss carry
forwards in Europe and will decrease slightly in each
subsequent year due to an increase in the proportion of services performed in India, where we benefit from a tax holiday. In 2009, the tax holiday will terminate, at which time we expect our effective
tax rate to increase significantly.



Equity in net earnings (losses) of affiliates changed from earnings of $11,000 for 2003 to losses of $0.6 million in 2004. This change was due to a
one-time capital loss related to our reduced ownership of our affiliate, Ness ISI (now known as dbMotion Ltd.), in 2004. Following the January 1, 2004 issuance of preferred
shares by Ness ISI that reduced our share ownership to a non-controlling interest, we no longer consolidate Ness ISI's results in our financial statements.



Minority interests in losses (earnings) of subsidiary changed from no earnings in 2003 to losses of $0.2 million in 2004. This change was insignificant. In
2005, we expect minority interest in losses of subsidiary to remain small, as we acquired substantially all of the minority interest in Ness U.S.A. on February 28, 2005, through the exchange
offer filed on November 12, 2004, as amended.



Income from continuing operations increased from $4.6 million in 2003 to $14.4 million in 2004, representing an increase of $9.8 million, or
215.4%. The increase in net income was due primarily to our increase in operating income of $14.7 million, partially offset by our increased financial expenses of $2.0 million, the
increase in our income taxes of $2.4 million and our decrease in equity in net earnings (losses) of affiliates of $0.7 million.



In 2003, we recognized a net loss after taxes of $1.1 million, compared to no loss for 2004. The loss was attributable to the closing of an insignificant
line of business.

41

---







Net income increased from $3.5 million in 2003 to $14.4 million in 2004, representing an increase of $10.9 million, or 316.2%. The increase
in net income was due primarily to our increase in operating income of $14.4 million and the retirement on December 31, 2003 of losses from discontinued operations of
$1.1 million, partially offset by our increased financial expenses of $2.0 million, the increase in our income taxes of $2.4 million and our decrease in equity in net earnings
(losses) of affiliates of $0.7 million.

2003 Compared to 2002

The following table summarizes certain line items from our consolidated statement of operations (dollars in thousands):

Year ended
December 31,

Increase
(Decrease)2002

2003

$

%Revenues

$
166,576

$
225,768

59,192

35.5Cost of revenues


104,541


158,987

54,446

52.1Provision for losses on uncompleted contracts, net


161


788

627

389.4Gross profit

$
61,874

$
65,993

4,119

6.7Gross margin


37.1
%

29.2
%




Our revenues increased from $166.6 million in 2002 to $225.8 million in 2003, representing an increase of $59.2 million, or 35.5%. The
increase was due primarily to the inclusion of $36.3 million representing six months of revenues for Apar, acquired effective as of June 30, 2003, the inclusion of $14.4 million
representing a full year of revenues for APP, acquired in September 2002, and an additional increase in revenues of $8.5 million. Based on internal management operating data, the
additional increase in revenues was due to an increase in sales to existing clients of an estimated $8.8 million, sales to new clients, representing an estimated $5.7 million, and
currency exchange effects of an estimated $2.9 million, partially offset by reduced spending by clients in our life sciences and healthcare vertical, representing an estimated ($5.4) million,
and other revenue decreases, representing ($3.5) million. These other revenue decreases were attributable to billing rate pressures in many of our verticals. In terms of our service offerings, based
on estimates derived from internal management operating data, our $59.2 million revenue increase was primarily due to growth in outsourcing and offshore engagements, representing
$38.6 million, while $20.6 million was due to growth in our other offerings. The growth in outsourcing and offshore engagements was the result of our sales initiatives related to these
offerings, including the hiring of key personnel and aligning of our organizational structure, and market demand for these services. In 2003, we implemented methodologies that allowed us to win large
scale outsourced engineering contracts, managed labs and reusable offerings. Our increased sales to new and existing clients in our other offerings, representing $20.6 million, was a result of
strong customer relationships and new sales initiatives. The billing rate, or price, pressure we experienced was due to increased competition resulting from the slowdown in the IT services market
during the 2002 & 2003 period, in response to which we lowered our billing rates, accounting for the ($3.5) million decrease noted above. IT services rates have subsequently stabilized, and we
do not currently expect additional pricing pressure in the near future. The life sciences and healthcare IT services market has also stabilized, and we currently do not foresee a decrease in the near
future.

42

---





Our cost of revenues, including salaries, wages and other direct costs, increased from $104.5 million in 2002 to $159.0 million in 2003,
representing an increase of $54.4 million, or 52.1%. The increase was due primarily to an increase in the number of IT professionals resulting from our September 2002 acquisition of APP,
representing $10.5 million, and the June 2003 acquisition of Apar, representing $25.7 million, an estimated $13.2 million of additional expense to support our organic
revenue growth, net, and an estimated $5.4 million in currency exchange effects, partially offset by compensation reductions among our billable staff, representing an estimated ($0.8) million.
The compensation reductions were both required and enabled by adverse market conditions. We had approximately 1,970 IT professionals at the end of 2002, which increased to approximately 3,480 at the
end of 2003. The
change in our provision for losses on uncompleted contracts, net, increased from $0.2 million in 2002 to $0.8 million in 2003, as a result of net changes in our fixed price project loss
provisions.



Our gross profit (revenues less cost of revenues and provision for losses on uncompleted contracts, net) increased from $61.9 million in 2002 to
$66.0 million in 2003, representing an increase of $4.1 million, or 6.7%. The increase was primarily due to the inclusion of $10.6 million of gross profit from the Apar
acquisition, offset partially by a decrease in our gross margin from 37.1% in 2002 to 29.2% in 2003. The decrease in gross margin resulted from the shift in our mix of business toward an increased
focus on outsourcing, representing an estimated ($2.0) million, pricing pressures in the IT services industry, representing an estimated ($3.5) million, and currency fluctuations, representing an
estimated ($2.5) million. The decrease was partially offset by our cost reductions and improvement in billable utilization, representing approximately $1.0 million. Our acquisition and
integration of Apar and APP did not significantly affect our gross margin, as each acquired company was operating at gross margins similar to ours prior to its acquisition. We decided to increase our
focus on outsourcing, despite its lower margin, to take advantage of a new revenue source and to increase our backlog by increasing our proportion of multi-year contracts.

The
following table summarizes certain line items from our consolidated statement of operations (dollars in thousands):

Year ended
December 31,

Increase
(Decrease)2002

2003

$

%Selling and marketing

$
19,192

$
21,287

2,095

10.9General and administrative


30,168


36,115

5,947

19.7Research and development, net


1,516


1,559

43

2.8Other


198


665

467

235.9Total operating expenses


51,074


59,626

8,552

16.7Operating income

$
10,800

$
6,367

(4,433
)
(41.0
)




Selling and marketing expenses increased from $19.2 million in 2002 to $21.3 million in 2003, representing an increase of $2.1 million, or
10.9%. This increase was due primarily to the inclusion of $1.2 million of selling and marketing expenses related to the Apar acquisition. Selling and marketing expenses include amortization of
client based assets, which was $29,000 in 2002 and $0.3 million in 2003. This increase in amortization was due primarily to the increased cumulative cost of amortization of client based assets
realized through the Apar acquisition.

43

---





General and administrative expenses increased from $30.2 million in 2002 to $36.1 million in 2003, representing an increase of $5.9 million,
or 19.7%. The increase was a result of the Apar acquisition representing $8.7 million, offset by a decrease in general and administrative expenses of $2.8 million. This decrease related
to our cost savings, consisting primarily of the consolidation of procurement arrangements and the more efficient use of our general and administrative overhead. General and administrative expenses
represented 18.1% of revenues in 2002 and decreased to 16.0% of revenues in 2003. This decrease as a percentage of revenues was due primarily to increased efficiency in our operations and to our
cost-management measures.



Research and development expenses, net, increased from $1.5 million in 2002 to $1.6 million in 2003. This increase was insignificant. These expenses
were comprised solely of the development of Ness ISI's dbMotion system and we do not expect significant research and development expenses in the future.



In 2002, we incurred non-recurring expenses of $0.2 million, compared to $0.7 million in 2003. These expenses resulted from the
consolidation of certain corporate and branch administrative services in the United States.

The
following table summarizes certain line items from our consolidated statement of operations (dollars in thousands):

Year ended
December 31,

Increase
(Decrease)2002

2003

$

%Operating income

$
10,800

$
6,367

(4,433
)
(41.0
)Financial expenses, net


(8,829
)

(1,451
)
7,378

(83.6
)Other expenses, net


(347
)

(422
)
(75
)
21.6Income before taxes on income


1,624


4,494

2,870

176.7Tax benefit


(48
)

(54
)
(6
)
12.5Equity in net earnings (losses) of affiliates


(35
)

11

46

N/AMinority interests in losses (earnings) of subsidiary


(377
)



377

(100.0
)Income from continuing operations


1,260


4,559

3,299

261.8Loss from discontinued operations


(395
)

(1,105
)
(710
)
179.7Net income

$
865

$
3,454

2,589

299.3




Financial expenses, net, decreased from $8.8 million in 2002 to $1.5 million in 2003, representing a decrease of $7.4 million, or 83.6%. The
reduction was due primarily to lower interest rates on our long-term and short-term loans and the lower exchange rate for the dollar against the NIS.



Other expenses, net, increased from $0.3 million in 2002 to $0.4 million in 2003, representing an increase of $0.1 million, or 21.6%. This
change was insignificant.

44

---





Our tax benefit was $48,000 in 2002 and $54,000 in 2003. This change was insignificant.



Equity in net earnings (losses) of affiliates increased from a loss of $35,000 in 2002 to earnings of $11,000 in 2003. This change was due to the increase in the
net earnings of our affiliate, Ness Matach.



Minority interests in earnings of subsidiary decreased from ($0.4) million in 2002 to zero in 2003. This decrease was due to the decrease in net earnings of our
subsidiary Ness U.S.A. Because we consolidate 100% of net losses for this subsidiary, there was no minority interest for 2003, when the subsidiary experienced a net loss.



Income from continuing operations increased from $1.3 million in 2002 to $4.6 million in 2003, representing an increase of $3.3 million, or
261.8%. This increase was due primarily to the decrease in our financial expenses offset by the decrease in our operating income.



In 2002, we recognized a net loss after taxes of $0.4 million compared to a net loss after taxes of $1.1 million for results of discontinued
operations in 2003. These losses were attributable to the closing of an insignificant line of business.



Net income increased from $0.9 million in 2002 to $3.5 million in 2003, representing an increase of $2.6 million, or 299.3%. The increase in
net income was due primarily to the decrease in financial expenses, offset by the decrease in operating income. Operating income decreased due primarily to the lower exchange rate of the dollar. The
lower exchange rate of the dollar caused a concurrent decrease in financial expenses, leading to an increase in net income.

Quarterly Results of Operations

The following table presents our unaudited quarterly results of operations for the eight quarters in the period ended December 31, 2004. You should read
the following table together with the consolidated financial statements and related notes contained elsewhere in this report. We have prepared the unaudited information on the same basis as our
audited consolidated financial statements. This table includes normal recurring adjustments that we consider necessary for fair presentation of our

45

---



financial
position and operating results for the quarters presented. Operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year.

|                                                                       |                               | Three months ended |       
|---------------------------------------------------------------------- | ----------------------------- | ------------------ | ------
|
|
|Revenues                                                               |                               | $                  | 47,574
|Cost of revenues                                                       |                               |                    | 32,605
|Provision for losses (reverse of losses) on uncompleted contracts, net |                               |                    | 162   
|                                                                       |                               |                    |       
|Gross profit                                                           |                               |                    | 14,807
|                                                                       | Operating expenses:           |                    |       
|                                                                       | Selling and marketing         |                    |       
|                                                                       | General and administrative    |                    |       
|                                                                       | Research and development, net |                    |       
|                                                                       | Other                         |                    |       
|                                                                       |                               |                    |       
|                                                                       | Total operating expenses      |                    |       
|                                                                       |                               |                    |       
|Operating income (loss)                                                |                               |                    | 2,749 
|Financial income (expenses), net                                       |                               |                    | (676  
|Other income (expenses), net                                           |                               |                    | (231  
|                                                                       |                               |                    |       
|Income before taxes on income                                          |                               |                    | 1,842 
|Taxes on income (tax benefit)                                          |                               |                    | (22   
|Equity in net earnings (losses) of affiliates                          |                               |                    | 19    
|Minority interests in losses (earnings) of subsidiary                  |                               |                    | 141   
|                                                                       |                               |                    |       
|Income from continuing operations                                      |                               |                    | 2,024 
|Loss from discontinued operations                                      |                               |                    | (460  
|                                                                       |                               |                    |       
|Net income                                                             |                               | $                  | 1,564 
|                                                                       |                               |                    |       

---

Liquidity and Capital Resources



As of December 31, 2004, we had cash and cash equivalents amounting to $104.2 million compared to $46.0 million as of December 31,
2003. The funds held at locations outside of the United States are for future operating expenses, and we have no intention of repatriating those funds. We are not, however, restricted in repatriating
those funds back to the United States, if necessary. While we expect that cash generated by our non-U.S. subsidiaries will be reinvested in their respective countries to support expansion
of our business, to the extent that funds were remitted to the United States in the form of dividend payments, those payments would be subject to a withholding tax.

46

---





The following table summarizes our cash flows for the periods presented (dollars in thousands):

Year ended
December 31,2003

2004Net cash provided by operating activities

$
4,894

$
15,568Net cash used in investing activities


(9,186
)

(9,041
)Net cash provided by financing activities


3,825


51,583Effect of exchange rate changes on cash and cash equivalents


2,977


115Increase in cash and cash equivalents


2,510


58,225Cash and cash equivalents at the beginning of the period


43,494


46,004Cash and cash equivalents at the end of the period

$
46,004


104,229


2004
compared to 2003

Net
cash provided by operating activities was $15.6 million in 2004, compared to $4.9 million in 2003. The major factor contributing to the change was an increase in our
net income, representing $10.9 million.

Net
cash used in investing activities was $9.0 million in 2004, compared with $9.2 million in 2003. This decrease was primarily due to higher capital spending on property
and equipment, mainly in India, representing $6.3 million, and an increase in capitalization of software development, representing $2.2 million, partially offset by a reduction in the
sale of short term bank deposits, representing $3.4 million.

Net
cash provided by financing activities was $51.6 million in 2004, compared to $3.8 million in 2003. The increase was primarily due to net proceeds from our initial
public offering, representing $89.3 million, partially offset by payment of long term and short term loans, net, representing $30.7 million.

The
effect of exchange rate changes on cash and cash equivalents was $0.1 million in 2004, compared to $2.5 million in 2003. The change was primarily due to the steady
exchange rate for the dollar during 2004 compared to the declining exchange rate for the dollar during 2003.



At December 31, 2004, we had aggregate short-term and long-term bank borrowings of $51.6 million, consisting of various
notes denominated in dollars and NIS with interest rates (in various currencies and linked to various indices) ranging from approximately 5% to 8% and a weighted average interest rate of approximately
6%, with maturities of two to five years. These aggregate bank borrowings included $25.0 million from Bank Hapoalim, with an interest rate of approximately 5.5% and maturity of three years;
$15.7 million from Israel Discount Bank, with interest rates of approximately 5% to 8% and maturities of two to four years; and $10.8 million from five other lenders, in amounts ranging
from $1.0 million to $3.1 million, with interest rates of approximately 5% to 7% and maturities of up to three years. The maximum interest rate for our dollar-linked borrowings is
approximately 5.5%, and for NIS-linked borrowings is approximately 8%.

47

---







We used a portion of the proceeds of this offering in the fourth quarter to reduce net debt, decreasing our net debt by $35.6 million, in line with our
previously announced $40 million debt reduction plan, and used an additional $5.9 million for expansion of our infrastructure and facilities in India. Following the use of proceeds, our
only material indebtedness is amounts owed by Ness Technologies Holdings Ltd., one of our subsidiaries, to Bank Hapoalim and Israel Discount Bank. The shares of two of our Israeli subsidiaries
are pledged to these banks as security for borrowings under the agreements. The relevant debt instruments contain customary restrictive covenants relating to the borrower and our wholly-owned
subsidiary Ness A.T. Ltd., including the following:



In
addition, the Israel Discount Bank agreement requires that the net cash and liquid assets of the borrower must not be lower than $18.0 million. As of December 31, 2004,
we are in compliance and expect to remain in compliance with all of our covenants. Our failure to comply with these covenants could lead to an event of default under the agreements governing some or
all of the indebtedness, permitting the applicable lender to accelerate all borrowings under the applicable agreement, and to foreclose on any collateral.



We intend to fund future growth through cash flow from operations, available bank borrowings and the net proceeds of our initial public offering. We believe the
proceeds of our initial public offering, together with borrowings and cash flow from operations, will be sufficient to fund continuing operations for the foreseeable future. In order to achieve our
strategic business objectives, we may be required to seek additional financing. For example, future acquisitions may require additional equity and/or debt financing. In addition, we may require
further capital to continue to develop our technology and infrastructure and for working capital purposes. These financings may not be available on acceptable terms, or at all.

Off-Balance Sheet Arrangements

We do not have any significant off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. In addition,
we have not entered into any derivative contracts or any synthetic leases.

Contractual Obligations

Our major outstanding contractual obligations relate to our long-term debt, operating leases and accrued severance pay. We have no
long-term obligations more than five years. We have summarized in

48

---



the
table below our fixed contractual cash obligations for long-term debt and operating leases as of December 31, 2004 (dollars in thousands).

|                 |       | Total |        | Less than
1 year |   | 1-3 years |        | 4 years
|---------------- | ----- | ----- | ------ | ---------------- | - | --------- | ------ | -------
|Long-term debt   |       | $     | 50,282 |                  | $ | 13,364    |        | $      
|Operating leases |       |       | 21,299 |                  |   | 5,158     |        |        
|                 |       |       |        |                  |   |           |        |        
|                 | Total |       | $      | 71,581           |   | $         | 18,522 |        

Our
obligation for accrued severance pay under Israel's Severance Pay Law as of December 31, 2004 was $36.8 million, of which $33.6 million was funded through
deposits into severance pay funds, leaving a net obligation of $3.2 million.

Recent Accounting Pronouncements

In March 2004, the Emerging Issues Task Force, or EITF, of the Financial Accounting Standards Board, or FASB, reached a consensus on Issue
No. 03-06, "Participating Securities and the Two-Class Method under FASB Statements No. 128" ("EITF 03-06"), related to "participating securities" and
the application of the "two-class method" under Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). EITF 03-06 provides
guidance in determining when a security participates in dividends such that the two-class method must be used to calculate earnings per share. The consensuses of EITF 03-06
should be applied retroactively beginning with the first reporting period (annual or interim) beginning after March 31, 2004. The adoption of EITF 03-06 did not have a significant
impact on our financial statements.

On
December 16, 2004, the FASB issued SFAS No. 123R (revised 2004), "Share-Based Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation." Generally, the approach in Statement 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123 permitted, but did not require, share-based payments
to employees to be recognized based on their fair values while SFAS 123R requires all share-based payments to employees to be recognized based on their fair values. SFAS 123R also
revises, clarifies and expands guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation cost to reporting periods. The
new standard is effective for companies in the first interim period beginning after June 15, 2005. We do not expect the adoption of SFAS 123R to have a significant effect on our results
of operations.

Item 7A. Quantitative and Qualitative Disclosure about Market Risk

We do not engage in trading market-risk instruments or purchasing hedging or "other than trading" instruments that are likely to expose us to market
risk, whether interest rate, commodity price or equity price risk. We have not purchased options or entered into swaps or forward or futures contracts. We do not use derivative financial instruments
for speculative trading purposes.

We
have direct operations in 14 different countries and relationships in many other parts of the world. Our foreign operations contract with clients in their applicable local currencies
or dollars. As a result, we are subject to adverse movements in foreign currency exchange rates in those countries where we conduct business. We may in the future enter into forward foreign currency
exchange or other derivatives contracts to hedge our exposure to foreign currency exchange rates. We do not currently hedge any foreign currency exposure to offset the effects of changes in exchange
rates.

In
the future, we may be subject to interest rate risk on our investments, which would affect the carrying value of our investments.

49

---



Item 8. Financial Statements and Supplementary Data

See the index included on page F-1, Index to Consolidated Financial Statements.

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

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on their evaluation of our disclosure controls
and procedures, our chief executive officer and chief financial officer, with the participation of our management, have concluded that our disclosure controls and procedures are effectively designed
to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's rules and forms and are operating in an effective manner.

Changes in Internal Control

As of the end of the period covered by this report, there were no significant changes in our internal controls over financial reporting or in other factors that
could significantly affect these controls.

Item 9B. Other Information

None.

50

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PART III

Item 10.    Directors and Executive Officers of the Registrant

The information required by this item is incorporated by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission not
later than April 30, 2005 in connection with our annual meeting of stockholders (the "Proxy Statement") under the headings "Executive Officers," "Election of Directors," "Corporate Governance
Principles and Board Matters," "Director Compensation" and "Compliance with Section 16(a) of the Exchange Act."

Item 11.    Executive Compensation

The information required by this item is incorporated by reference to the Proxy Statement under the heading "Executive Compensation."

Item 12.    Security Ownership of Certain Beneficial Owners and Management

The information required by this Item is incorporated by reference to the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and
Management."

Item 13.    Certain Relationships and Related Transactions

The information required by this item is incorporated by reference to the Proxy Statement under the heading "Certain Relationships and Related Transactions."

Item 14.    Principal Accounting Fees and Services

The information required by this item is incorporated by reference to the Proxy Statement under the heading "Principal Accounting Fees and Services."

51

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PART IV

Item 15.    Exhibits, Financial Statements and Schedules

(a)   List of documents filed as part of this report:

1.    Financial Statements as of December 31, 2004 and December 31, 2003 and for the three years ended December 31, 2004 included in
Part II of this Form 10-K:

Consolidated Balance Sheets

Consolidated
Statements of Income

Statements
of Changes in Stockholders' Equity

Consolidated
Statements of Cash Flows

Notes
to Consolidated Financial Statements

2.    Financial Statement Schedules:

Schedule IIValuation and Qualifying Accounts of Ness Technologies, Inc.

3.    Exhibit Index

The following is a list of exhibits filed as part of this Form 10-K:

|Exhibit Number |  | Description
|-------------- |  | -----------
|*              |  | 3.1        
|*              |  | 3.2        
|**             |  | 4.1        
|**             |  | 10.1       
|**             |  | 10.2       
|**             |  | 10.3       
|**             |  | 10.4       
|**             |  | 10.5       
|**             |  | 10.6       
|+**            |  | 10.7       
|+**            |  | 10.8       
|+**            |  | 10.9       
|               |  |            

52

---



|+** |  | 10.10 |  | Ness Technologies, Inc. 2003 Israeli Share Option Plan.                                                                                                                                                                                              
|--- |  | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|+** |  | 10.11 |  | Ness Technologies, Inc. 2003 Stock Option Plan.                                                                                                                                                                                                      
|+** |  | 10.12 |  | Agreement, dated as of August 1, 1999, between the Registrant and Aharon Fogel.                                                                                                                                                                      
|+** |  | 10.13 |  | Amendment to Agreement, dated as of May 31, 2001, between the Registrant and Aharon Fogel.                                                                                                                                                           
|+** |  | 10.14 |  | Services Agreement, dated as of July 1, 2003, between Ness Technologies Holdings Ltd. and GLY Technological Horizons Ltd. (English translation).                                                                                                    
|+** |  | 10.15 |  | Amended and Restated Employment Agreement, effective as of June 1, 2001, between the Registrant, Raviv Zoller and Ness Technologies Israel Ltd.                                                                                                      
|+** |  | 10.16 |  | Amendment to Amended and Restated Employment Agreement, effective as of January 1, 2004, between the Registrant, Raviv Zoller and Ness Technologies Israel Ltd.                                                                                      
|+** |  | 10.17 |  | Employment Agreement, dated as of May 14, 2004, between the Registrant and Yaron Garmazi.                                                                                                                                                            
|+** |  | 10.18 |  | Special Personal Employment Agreement, dated as of December 12, 1995, between Advanced Technology Ltd. and Tuvia Feldman (English translation).                                                                                                      
|+** |  | 10.19 |  | Addendum to Personal Employment Agreement, dated as of August 1, 1999, between Advanced Technology Ltd. and Tuvia Feldman (English translation).                                                                                                     
|+** |  | 10.20 |  | Addendum to Personal Employment Agreement, dated as of August 23, 1999, between Advanced Technology Ltd. and Tuvia Feldman (English translation).                                                                                                    
|+** |  | 10.21 |  | Employment Agreement Addendum, dated as of August 27, 2000, between the Registrant and Tuvia Feldman.                                                                                                                                                
|+** |  | 10.22 |  | Summary of Meeting, dated May 3, 2001, between Raviv Zoller and Tuvia Feldman (English translation).                                                                                                                                                 
|+** |  | 10.23 |  | Agreement, dated as of February 1, 1999, between Compro Software Industries (1997) Ltd. and Lea Atad (English translation).                                                                                                                          
|+** |  | 10.24 |  | Transition Agreement and Continuity of Rights, dated as of July 1, 1999, between Ness Technologies and Ventures Ltd. (formerly Compro Software Industries (1997) Ltd.), Ness B.S.G. Ltd. (formerly Contahal Ltd.) and Lea Atad (English
translation).
|+** |  | 10.25 |  | Offer Letter, dated January 29, 2004, between the Registrant and Ivan Hruska.                                                                                                                                                                        
|+** |  | 10.26 |  | Contract of Employment, effective as of March 1, 2004, between the Registrant and Ivan Hruska.                                                                                                                                                       
|+** |  | 10.27 |  | Special Personal Employment Agreement, dated as of December 12, 1995, between Advanced Technology Ltd. and Yoram Michaelis (English translation).                                                                                                    
|+** |  | 10.28 |  | Addendum to Personal Employment Agreement, dated as of August 1, 1999, between Advanced Technology Ltd. and Yoram Michaelis (English translation).                                                                                                   
|+** |  | 10.29 |  | Addendum to Personal Employment Agreement, dated as of August 23, 1999, between Advanced Technology Ltd. and Yoram Michaelis (English translation).                                                                                                  
|**  |  | 10.30 |  | Form of Indemnification Agreement by and between the Registrant and its officers and directors.                                                                                                                                                      
|    |  |       |  |                                                                                                                                                                                                                                                      

53

---



|** |  | 10.31 |  | Stock Purchase Agreement, dated as of August 30, 2002, among the shareholders of APP Group CEE B.V. listed therein and the Registrant.                                 
|-- |  | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** |  | 10.32 |  | Merger Agreement, dated as of May 12, 2003, among the Registrant, Ness Acquisition Corp., Apar Holding Corp. and the shareholders of Apar Holding Corp. listed therein.
|   |  | 14    |  | Code of Business Conduct and Ethics                                                                                                                                    
|** |  | 21    |  | Subsidiaries of the Registrant.                                                                                                                                        
|   |  | 23.1  |  | Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.                                                                                             
|** |  | 24    |  | Powers of Attorney.                                                                                                                                                    
|   |  | 31.1  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                    
|   |  | 31.2  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                    
|   |  | 32.1  |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                     
|   |  | 32.2  |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                     
|   |  | 99.1  |  | Consent of Gartner, Inc.                                                                                                                                               

---

54

---





SIGNATURES

Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized, in the City of Tel Aviv, State of Israel on the 30th day of March, 2005.

| |  | NESS TECHNOLOGIES, INC. (Registrant)
| |  | ------------------------------------
| |  | By:                                 

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Raviv Zoller and Yaron Garmazi as his true and lawful
attorney-in-fact, each acting alone, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any and all
amendments, including post-effective amendments to this report, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact or their substitutes, each acting along, may lawfully do or cause to be done by virtue hereof.

Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.

|Signature                             |  | Title                                                                         |  | Date          
|------------------------------------- |  | ----------------------------------------------------------------------------- |  | --------------
|                                      |  |                                                                               |  |               
|/s/AHARON FOGELAharon Fogel           |  | Chairman of the Board                                                         |  | March 30, 2005
|/s/RAVIV ZOLLERRaviv Zoller           |  | President, Chief Executive Officer and Director (principal executive officer) |  | March 30, 2005
|/s/YARON GARMAZIYaron Garmazi         |  | Chief Financial Officer (principal financial and accounting officer)          |  | March 30, 2005
|/s/RAJEEV SRIVASTAVARajeev Srivastava |  | Director                                                                      |  | March 30, 2005
|/s/HENRY KRESSELHenry Kressel         |  | Director                                                                      |  | March 30, 2005
|/s/MORRIS WOLFSONMorris Wolfson       |  | Director                                                                      |  | March 30, 2005
|                                      |  |                                                                               |  |               

55

---



|/s/HAGAI LAVIHagai Lavi                   |  | Director |  | March 30, 2005
|----------------------------------------- |  | -------- |  | --------------
|/s/SATYAM C. CHERUKURISatyam C. Cherukuri |  | Director |  | March 30, 2005
|/s/DAN SUESSKINDDan Suesskind             |  | Director |  | March 30, 2005

56

---





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                        |  | Page
|------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm |  | F-2 
|Consolidated Balance Sheets                             |  | F-3 
|Consolidated Statements of Income                       |  | F-5 
|Statements of Changes in Stockholders' Equity           |  | F-6 
|Consolidated Statements of Cash Flows                   |  | F-9 
|Notes to Consolidated Financial Statements              |  | F-11

F-1

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    To the Stockholders of    NESS TECHNOLOGIES INC.

We have audited the accompanying consolidated balance sheets of Ness Technologies, Inc. (the "Company") and its subsidiaries as of December 31, 2003
and 2004, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2004. Our audits included the
financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for purpose of
expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, based on our audits, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company
and its subsidiaries as of December 31, 2003 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles.

Also,
in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects
the information set forth therein.

|Tel-Aviv, Israel
March 1, 2005 |  | /s/ KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
|------------------------------ |  | -----------------------------------------------------------------

F-2

---





NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        U.S. dollars in thousands

|                            |                                                                                                                             | December 31,
|--------------------------- | --------------------------------------------------------------------------------------------------------------------------- | ------------
|
|ASSETS                      |                                                                                                                             |             
|CURRENT ASSETS:             |                                                                                                                             |             
|                            | Cash and cash equivalents                                                                                                   |             
|                            | Short-term bank deposits                                                                                                    |             
|                            | Marketable securities                                                                                                       |             
|                            | Trade receivables (net of allowance for doubtful accounts of $1,785 and $2,154 at December 31, 2003 and 2004, respectively) |             
|                            | Unbilled receivables                                                                                                        |             
|                            | Other accounts receivable and prepaid expenses                                                                              |             
|                            | Inventories                                                                                                                 |             
|                            | Total assets attributed to discontinued operations                                                                          |             
|                            |                                                                                                                             |             
|                            | Total current assets                                                                                                        |             
|                            |                                                                                                                             |             
|LONG-TERM ASSETS:           |                                                                                                                             |             
|                            | Long-term prepaid expenses                                                                                                  |             
|                            | Marketable securities                                                                                                       |             
|                            | Deferred income taxes                                                                                                       |             
|                            | Severance pay fund                                                                                                          |             
|                            |                                                                                                                             |             
|Total long-term assets      |                                                                                                                             |             
|                            |                                                                                                                             |             
|PROPERTY AND EQUIPMENT, NET |                                                                                                                             |             
|                            |                                                                                                                             |             
|INTANGIBLE ASSETS, NET      |                                                                                                                             |             
|                            |                                                                                                                             |             
|GOODWILL                    |                                                                                                                             |             
|                            |                                                                                                                             |             
|Total assets                |                                                                                                                             | $           
|                            |                                                                                                                             |             

The
accompanying notes are an integral part of the consolidated financial statements.

F-3

---





NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        U.S. dollars in thousands (except share and par value data)

|                                           |                                                         | December 31,                                                                                                                                                                                      |        
|------------------------------------------ | ------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------
|
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                         |                                                                                                                                                                                                   |        
|CURRENT LIABILITIES:                       |                                                         |                                                                                                                                                                                                   |        
|                                           | Short-term bank credit                                  |                                                                                                                                                                                                   | $      
|                                           | Current maturities of long-term debt                    |                                                                                                                                                                                                   |        
|                                           | Trade payables                                          |                                                                                                                                                                                                   |        
|                                           | Advances from customers                                 |                                                                                                                                                                                                   |        
|                                           | Other accounts payable and accrued expenses             |                                                                                                                                                                                                   |        
|                                           | Total liabilities attributed to discontinued operations |                                                                                                                                                                                                   |        
|                                           |                                                         |                                                                                                                                                                                                   |        
|Total current liabilities                  |                                                         |                                                                                                                                                                                                   | 119,942
|                                           |                                                         |                                                                                                                                                                                                   |        
|LONG-TERM LIABILITIES:                     |                                                         |                                                                                                                                                                                                   |        
|                                           | Long-term debt, net of current maturities               |                                                                                                                                                                                                   |        
|                                           | Excess of losses over investment in affiliate           |                                                                                                                                                                                                   |        
|                                           | Accrued severance pay                                   |                                                                                                                                                                                                   |        
|                                           | Minority interests                                      |                                                                                                                                                                                                   |        
|                                           |                                                         |                                                                                                                                                                                                   |        
|Total long-term liabilities                |                                                         |                                                                                                                                                                                                   | 93,186 
|                                           |                                                         |                                                                                                                                                                                                   |        
|COMMITMENTS AND CONTINGENT LIABILITIES     |                                                         |                                                                                                                                                                                                   |        
|STOCKHOLDERS' EQUITY:                      |                                                         |                                                                                                                                                                                                   |        
|                                           | Common stock of $0.01 par value                        |                                                                                                                                                                                                   |        
|                                           |                                                         | Authorized: 46,500,000 shares at December 31, 2003 and 76,500,000 shares at December 31, 2004; issued and outstanding: 16,460,138 shares at December 31, 2003 and 32,772,578 at December 31,
2004 |        
|                                           | Class B Convertible Preferred stock of $0.01 par value |                                                                                                                                                                                                   |        
|                                           |                                                         | Authorized: 4,676,986 shares at December 31, 2003 and no shares at December 31, 2004; issued and outstanding: 4,676,986 shares at December 31, 2003 and no shares at December 31, 2004            |        
|                                           | Class C Convertible Preferred stock of $0.01 par value |                                                                                                                                                                                                   |        
|                                           |                                                         | Authorized: 3,500,000 shares at December 31, 2003 and no shares at December 31, 2004; issued and outstanding: 3,352,654 shares at December 31, 2003 and no shares at December 31, 2004            |        
|                                           | Preferred stock of $0.01 par value                     |                                                                                                                                                                                                   |        
|                                           |                                                         | Authorized: 323,014 shares at December 31, 2003 and 8,500,000 shares at December 31, 2004; no shares issued and outstanding at December 31, 2003 and 2004                                         |        
|                                           | Additional paid-in capital                              |                                                                                                                                                                                                   |        
|                                           | Deferred stock compensation                             |                                                                                                                                                                                                   |        
|                                           | Accumulated other comprehensive loss                    |                                                                                                                                                                                                   |        
|                                           | Accumulated deficit                                     |                                                                                                                                                                                                   |        
|                                           |                                                         |                                                                                                                                                                                                   |        
|Total stockholders' equity                 |                                                         |                                                                                                                                                                                                   | 126,355
|                                           |                                                         |                                                                                                                                                                                                   |        
|Total liabilities and stockholders' equity |                                                         | $                                                                                                                                                                                                 | 339,483
|                                           |                                                         |                                                                                                                                                                                                   |        

The
accompanying notes are an integral part of the consolidated financial statements.

F-4

---





NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES    CONSOLIDATED STATEMENTS OF INCOME    U.S. dollars in thousands (except per share data)

|                                                                            |                               | Year ended December 31, |        
|--------------------------------------------------------------------------- | ----------------------------- | ----------------------- | -------
|
|Revenues                                                                    |                               | $                       | 166,576
|Cost of revenues                                                            |                               |                         | 104,541
|Provision for losses (reverse of losses) on uncompleted contracts, net      |                               |                         | 161    
|                                                                            |                               |                         |        
|Gross profit                                                                |                               |                         | 61,874 
|                                                                            |                               |                         |        
|Operating expenses:                                                         |                               |                         |        
|                                                                            | Selling and marketing         |                         |        
|                                                                            | General and administrative    |                         |        
|                                                                            | Research and development, net |                         |        
|                                                                            | Other                         |                         |        
|                                                                            |                               |                         |        
|Total operating expenses                                                    |                               |                         | 51,074 
|                                                                            |                               |                         |        
|Operating income                                                            |                               |                         | 10,800 
|Financial expenses, net                                                     |                               |                         | (8,829 
|Other expenses, net                                                         |                               |                         | (347   
|                                                                            |                               |                         |        
|Income (loss) before taxes on income                                        |                               |                         | 1,624  
|Taxes on income (tax benefit)                                               |                               |                         | (48    
|Equity in net earnings (losses) of affiliate                                |                               |                         | (35    
|Minority interests in earnings of subsidiary                                |                               |                         | (377   
|                                                                            |                               |                         |        
|Income from continuing operations                                           |                               |                         | 1,260  
|Loss from discontinued operations                                           |                               |                         | (395   
|                                                                            |                               |                         |        
|Net income                                                                  |                               | $                       | 865    
|                                                                            |                               |                         |        
|Allocation of undistributed earnings on Class B Convertible Preferred stock |                               | $                       | (2,780 
|                                                                            |                               |                         |        
|Net income (loss) after allocation of undistributed earnings                |                               | $                       | (1,915 
|                                                                            |                               |                         |        
|Net earnings (loss) per share:                                              |                               |                         |        
|Basic net earnings (loss) per share from continuing operations              |                               | $                       | (0.18  
|                                                                            |                               |                         |        
|Basic net loss per share from discontinued operations                       |                               | $                       | (0.05  
|                                                                            |                               |                         |        
|Basic net earnings (loss) per share                                         |                               | $                       | (0.23  
|                                                                            |                               |                         |        
|Diluted net earnings (loss) per share from continuing operations            |                               | $                       | (0.18  
|                                                                            |                               |                         |        
|Diluted net loss per share from discontinued operations                     |                               | $                       | (0.05  
|                                                                            |                               |                         |        
|Diluted net earnings (loss) per share                                       |                               | $                       | (0.23  
|                                                                            |                               |                         |        

The
accompanying notes are an integral part of the consolidated financial statements.

F-5

---



NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

U.S. dollars in thousands

|                                                                       |                                                                           |           |   |   |    | Class B
Convertible
Preferred stock |           | Class C
Convertible
Preferred stock |   |    |   |           |   |   |    |   |   |         |   |   |  
|---------------------------------------------------------------------- | ------------------------------------------------------------------------- | --------- | - | - | -- | ----------------------------------- | --------- | ----------------------------------- | - | -- | - | --------- | - | - | -- | - | - | ------- | - | - | -
|
|
|
|Balance as of January 1, 2002                                          |                                                                           | 8,247,861 |   | $ | 82 |                                     | 4,676,986 |                                     | $ | 47 |   | 3,352,654 |   | $ | 34 |   | $ | 102,134 |   | $ | 
|Issuance of Common stock related to Ness CEE and Ness USA acquisitions |                                                                           | 1,548,510 |   |   | 16 |                                     |          |                                     |   |   |   |          |   |   |   |   |   | 11,734  |   |   | 
|Exercise of options granted to an investor                             |                                                                           | 27,262    |   |   | *  |                                     |          |                                     |   |   |   |          |   |   |   |   |   | 385     |   |   | 
|Stock based compensation related to warrants granted to banks          |                                                                           |          |   |   |   |                                     |          |                                     |   |   |   |          |   |   |   |   |   | 45      |   |   | 
|Comprehensive loss:                                                    |                                                                           |           |   |   |    |                                     |           |                                     |   |    |   |           |   |   |    |   |   |         |   |   |  
|                                                                       | Foreign currency translation adjustments                                  |           |  |   |    |                                    |           |                                    |   |    |  |           |  |   |    |  |   |         |  |   |  
|                                                                       | Unrealized gain on available-for-sale marketable securities, net of taxes |           |  |   |    |                                    |           |                                    |   |    |  |           |  |   |    |  |   |         |  |   |  
|                                                                       | Net income                                                                |           |  |   |    |                                    |           |                                    |   |    |  |           |  |   |    |  |   |         |  |   |  
|                                                                       |                                                                           |           |   |   |    |                                     |           |                                     |   |    |   |           |   |   |    |   |   |         |   |   |  
|Total comprehensive loss                                               |                                                                           |           |   |   |    |                                     |           |                                     |   |    |   |           |   |   |    |   |   |         |   |   |  
|                                                                       |                                                                           |           |   |   |    |                                     |           |                                     |   |    |   |           |   |   |    |   |   |         |   |   |  
|Balance as of December 31, 2002                                        |                                                                           | 9,823,633 |   | $ | 98 |                                     | 4,676,986 |                                     | $ | 47 |   | 3,352,654 |   | $ | 34 |   | $ | 114,298 |   | $ | 
|                                                                       |                                                                           |           |   |   |    |                                     |           |                                     |   |    |   |           |   |   |    |   |   |         |   |   |  

---

The accompanying notes are an integral part of the financial statements.

F-6

---



NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

U.S. dollars in thousands

|                                                                                                  |  |            |  |   |     | Class B
Convertible
Preferred stock |           | Class C
Convertible
Preferred stock |   |    |  |           |  |   |    |  |   |         |   |   |     
|------------------------------------------------------------------------------------------------- |  | ---------- |  | - | --- | ----------------------------------- | --------- | ----------------------------------- | - | -- |  | --------- |  | - | -- |  | - | ------- | - | - | ----
|
|
|
|Balance as of December 31, 2002                                                                   |  | 9,823,633  |  | $ | 98  |                                     | 4,676,986 |                                     | $ | 47 |  | 3,352,654 |  | $ | 34 |  | $ | 114,298 |   | $ |    
|Issuance of Common stock and options related to Ness GSG and Ness CEE acquisition                 |  | 6,226,458  |  |   | 62  |                                     |          |                                     |   |   |  | 55,594    |  |   |   |  |   |         |   |   |     
|Exercise of warrants granted to banks                                                             |  | 113,192    |  |   | 1   |                                     |          |                                     |   |   |  | 210       |  |   |   |  |   |         |   |   |     
|Exercise of options granted to employees                                                          |  | 176,228    |  |   | 2   |                                     |          |                                     |   |   |  | 1,168     |  |   |   |  |   |         |   |   |     
|Exercise of options granted to investors                                                          |  | 120,627    |  |   | 1   |                                     |           |                                     |   |    |  | 1         |  |   |    |  |   |         |   |   |     
|Deferred stock compensation related to Ness GSG acquisition                                       |  |           |  |   |    |                                     |           |                                     |   |   |  |           |  |   |   |  |   | 548     |   |   | (548
|Reversal of deferred stock compensation in respect of forfeitures related to Ness GSG acquisition |  |           |  |   |    |                                     |           |                                     |   |   |  |           |  |   |   |  |   | (78     | ) |   | 78  
|Amortization of deferred stock compensation related to Ness GSG acquisition                       |  |           |  |   |    |                                     |           |                                     |   |   |  |          |  |   |   |  |   |        |   |   | 105 
|Stock based compensation related to warrants granted to banks                                     |  |           |  |   |    |                                     |           |                                     |   |   |  |          |  |   |   |  |   | 45      |   |   |    
|Comprehensive income:                                                                             |  |            |  |   |     |                                     |           |                                     |   |    |  |           |  |   |    |  |   |         |   |   |     
|Foreign currency translation adjustments                                                          |  |           |  |   |    |                                     |           |                                     |   |   |  |          |  |   |   |  |   |        |   |   |    
|Unrealized losses on available-for-sale marketable securities, net of taxes                       |  |           |  |   |     |                                     |          |                                     |   |   |  |          |  |   |   |  |   |        |   |   |    
|Net income                                                                                        |  |           |  |   |    |                                     |           |                                     |   |   |  |          |  |   |   |  |   |        |   |   |    
|                                                                                                  |  |            |  |   |     |                                     |           |                                     |   |    |  |           |  |   |    |  |   |         |   |   |     
|Total comprehensive income                                                                        |  |            |  |   |     |                                     |           |                                     |   |    |  |           |  |   |    |  |   |         |   |   |     
|                                                                                                  |  |            |  |   |     |                                     |           |                                     |   |    |  |           |  |   |    |  |   |         |   |   |     
|Balance as of December 31, 2003                                                                   |  | 16,460,138 |  | $ | 164 |                                     | 4,676,986 |                                     | $ | 47 |  | 3,352,654 |  | $ | 34 |  | $ | 171,786 |   | $ | (365
|                                                                                                  |  |            |  |   |     |                                     |           |                                     |   |    |  |           |  |   |    |  |   |         |   |   |     

---

The accompanying notes are an integral part of the financial statements.

F-7

---



NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

U.S. dollars in thousands

|                                                                                           |  |            |  |   |     | Class B
Convertible
Preferred stock |            | Class C
Convertible
Preferred stock |   |     |   |            |   |   |     |   |   |         |  |   |     
|------------------------------------------------------------------------------------------ |  | ---------- |  | - | --- | ----------------------------------- | ---------- | ----------------------------------- | - | --- | - | ---------- | - | - | --- | - | - | ------- |  | - | ----
|
|
|
|Balance as of December 31, 2003                                                            |  | 16,460,138 |  | $ | 164 |                                     | 4,676,986  |                                     | $ | 47  |   | 3,352,654  |   | $ | 34  |   | $ | 171,786 |  | $ | (365
|Initial Public Offering **                                                                 |  | 16,114,115 |  |   | 162 |                                     | (4,676,986 | )                                   |   | (47 | ) | (3,352,654 | ) |   | (34 | ) |   | 99,061  |  |   |    
|Exercise of warrants granted to investors                                                  |  | 175,078    |  |   | 2   |                                     |           |                                     |   |    |   |           |   |   |    |   |   |        |  |   |    
|Exercise of options granted to employees                                                   |  | 23,247     |  |   | *   |                                     |           |                                     |   |    |   |           |   |   |    |   |   | 41      |  |   |    
|Amortization of deferred stock compensation related to Ness GSG acquisition                |  |           |  |   |    |                                     |           |                                     |   |    |   |           |   |   |    |   |   |        |  |   | 213 
|Stock based compensation related to warrants granted to banks                              |  |           |  |   |    |                                     |           |                                     |   |    |   |           |   |   |    |   |   | 45      |  |   |    
|Stock based compensation related to options extended to terminated employees               |  |           |  |   |    |                                     |           |                                     |   |    |   |           |   |   |    |   |   | 34      |  |   |    
|Comprehensive income:                                                                      |  |           |  |   |     |                                     |            |                                     |   |     |   |            |   |   |     |   |   |         |  |   |     
|Foreign currency translation adjustments                                                   |  |           |  |   |    |                                     |           |                                     |   |    |   |           |   |   |    |   |   |        |  |   |    
|Unrealized losses on available-for-sale marketable securities, net of taxes                |  |           |  |   |    |                                     |           |                                     |   |    |   |           |   |   |    |   |   |        |  |   |    
|Net income                                                                                 |  |           |  |   |    |                                     |           |                                     |   |    |   |           |   |   |    |   |   |        |  |   |    
|                                                                                           |  |            |  |   |     |                                     |            |                                     |   |     |   |            |   |   |     |   |   |         |  |   |     
|Total comprehensive income                                                                 |  |            |  |   |     |                                     |            |                                     |   |     |   |            |   |   |     |   |   |         |  |   |     
|                                                                                           |  |            |  |   |     |                                     |            |                                     |   |     |   |            |   |   |     |   |   |         |  |   |     
|Balance as of December 31, 2004                                                            |  | 32,772,578 |  | $ | 328 |                                     |           |                                     | $ |    |   |           |   | $ |    |   | $ | 270,967 |  | $ | (152
|                                                                                           |  |            |  |   |     |                                     |            |                                     |   |     |   |            |   |   |     |   |   |         |  |   |     
|Accumulated unrealized losses from available- for-sale marketable securities, net of taxes |  |            |  |   |     |                                     |            |                                     |   |     |   |            |   |   |     |   |   |         |  |   |     
|Accumulated foreign currency translation adjustment                                        |  |            |  |   |     |                                     |            |                                     |   |     |   |            |   |   |     |   |   |         |  |   |     
|                                                                                           |  |            |  |   |     |                                     |            |                                     |   |     |   |            |   |   |     |   |   |         |  |   |     
|Accumulated other comprehensive loss as of December 31, 2004                               |  |            |  |   |     |                                     |            |                                     |   |     |   |            |   |   |     |   |   |         |  |   |     
|                                                                                           |  |            |  |   |     |                                     |            |                                     |   |     |   |            |   |   |     |   |   |         |  |   |     

---

The accompanying notes are an integral part of the consolidated financial statements.

F-8

---





NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        U.S. dollars in thousands

|                                                    |                                                                                                                              | Year ended December 31,                                                      |       
|--------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------
|
|Cash flows from operating activities:               |                                                                                                                              |                                                                              |       
|                                                    | Net income                                                                                                                   |                                                                              | $     
|                                                    | Adjustments required to reconcile net income to net cash provided by operating activities:                                   |                                                                              |       
|                                                    |                                                                                                                              | Amortization of deferred stock compensation related to Ness GSG acquisition  |       
|                                                    |                                                                                                                              | Stock based compensation related to warrants granted to banks                |       
|                                                    |                                                                                                                              | Stock-based compensation related to options extended to terminated employees |       
|                                                    |                                                                                                                              | Equity in net (earnings) losses of affiliates                                |       
|                                                    |                                                                                                                              | Minority interests in earnings of subsidiary                                 |       
|                                                    |                                                                                                                              | Currency fluctuation of long-term debt                                       |       
|                                                    |                                                                                                                              | Accrued interest on long-term debt                                           |       
|                                                    |                                                                                                                              | Depreciation and amortization                                                |       
|                                                    |                                                                                                                              | Deferred income taxes, net                                                   |       
|                                                    |                                                                                                                              | Loss on sale of property and equipment                                       |       
|                                                    |                                                                                                                              | Trading marketable securities, net                                           |       
|                                                    |                                                                                                                              | Decrease (increase) in trade receivables                                     |       
|                                                    |                                                                                                                              | Decrease (increase) in unbilled receivables                                  |       
|                                                    |                                                                                                                              | Decrease (increase) in other accounts receivable and prepaid expenses        |       
|                                                    |                                                                                                                              | Decrease (increase) in inventories                                           |       
|                                                    |                                                                                                                              | Decrease (increase) in long-term prepaid expenses                            |       
|                                                    |                                                                                                                              | Increase in trade payables                                                   |       
|                                                    |                                                                                                                              | Increase (decrease) in advances from customers                               |       
|                                                    |                                                                                                                              | Increase in other accounts payable and accrued expenses                      |       
|                                                    |                                                                                                                              | Increase (decrease) in accrued severance pay, net                            |       
|                                                    |                                                                                                                              |                                                                              |       
|Net cash provided by operating activities           |                                                                                                                              |                                                                              | 12,739
|                                                    |                                                                                                                              |                                                                              |       
|Cash flows from investing activities:               |                                                                                                                              |                                                                              |       
|                                                    | Net cash provided (paid) from acquisitions of consolidated subsidiaries(a)                                                   |                                                                              |       
|                                                    | Proceeds from decrease in investment in a subsidiary, net of cash in the subsidiary at the time it ceased being consolidated |                                                                              |       
|                                                    | Proceeds from sale of short-term bank deposits                                                                               |                                                                              |       
|                                                    | Proceeds from sale of property and equipment                                                                                 |                                                                              |       
|                                                    | Purchase of property and equipment and capitalization of software developed for internal use                                 |                                                                              |       
|                                                    | Capitalization of software development costs                                                                                 |                                                                              |       
|                                                    |                                                                                                                              |                                                                              |       
|Net cash provided by (used in) investing activities |                                                                                                                              |                                                                              | 950   
|                                                    |                                                                                                                              |                                                                              |       

The
accompanying notes are an integral part of the consolidated financial statements.

F-9

---





|                                                             |                                                                                   | Year ended December 31, |       
|------------------------------------------------------------ | --------------------------------------------------------------------------------- | ----------------------- | ------
|
|Cash flows from financing activities:                        |                                                                                   |                         |       
|                                                             | Issuance of Common stock in respect of the Company's Initial Public Offering      |                         | $     
|                                                             | Issuance costs in respect of the Company's Initial Public Offering                |                         |       
|                                                             | Exercise of options and warrants                                                  |                         |       
|                                                             | Short-term bank credit, net                                                       |                         |       
|                                                             | Proceeds from long-term debt                                                      |                         |       
|                                                             | Principal payment of long-term debt                                               |                         |       
|                                                             | Pre payment of long-term debt in respect of the Company's Initial Public Offering |                         |       
|                                                             |                                                                                   |                         |       
|Net cash provided by (used in) financing activities          |                                                                                   |                         | (7,065
|                                                             |                                                                                   |                         |       
|Effect of exchange rate changes on cash and cash equivalents |                                                                                   |                         | (4,486
|                                                             |                                                                                   |                         |       
|Increase in cash and cash equivalents                        |                                                                                   |                         | 2,138 
|Cash and cash equivalents at the beginning of the year       |                                                                                   |                         | 41,356
|                                                             |                                                                                   |                         |       
|Cash and cash equivalents at the end of the year             |                                                                                   | $                       | 43,494
|                                                             |                                                                                   |                         |       

| | Working capital (capital deficiency), net (excluding cash and cash equivalents) |  | $      | (900    | ) | $      | 16,598  |   |   |      
| | ------------------------------------------------------------------------------- |  | ------ | ------- | - | ------ | ------- | - | - | -----
| | Property and equipment                                                          |  |        | 347     |   |        | 2,401   |   |   |      
| | Long-term loans and convertible loan                                            |  |        | (2,000  | ) |        |        |   |   |      
| | Accrued severance pay                                                           |  |        | (450    | ) |        |        |   |   |      
| | Minority interests                                                              |  |        | 279     |   |        |        |   |   |      
| | Goodwill                                                                        |  |        | 12,882  |   |        | 44,308  |   |   |      
| | Customer related intangible assets                                              |  |        | 773     |   |        | 1,514   |   |   |      
| |                                                                                 |  |        |         |   |        |        
| |                                                                                 |  | 10,931 |         |   | 64,821 |         |   |  
| | Issuance of shares                                                              |  |        | (11,750 | ) |        | (55,656 | ) |   |      
| |                                                                                 |  |        |         |   |        |        
| | Net cash paid (provided) from acquisitions of consolidated subsidiaries         |  | $      | (819    | ) | $      | 9,165   |   |   |      
| |                                                                                 |  |        |         |   |        |        
| | Supplemental disclosures of cash flows information:                             |  |        |         |   |        |         |   |   |      
| | Cash paid during the year for:                                                  |  |        |         |   |        |         |   |   |      
| | Interest                                                                        |  | $      | 6,838   |   | $      | 4,449   |   | $ | 3,905
| |                                                                                 |  |        |         |   |       
| | Taxes                                                                           |  | $      | 892     |   | $      | 2,520   |   | $ | 862  
| |                                                                                 |  |        |         |   |       

The
accompanying notes are an integral part of the consolidated financial statements.

F-10

---





NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        U.S. dollars in thousands (except share and per share data)

NOTE 1GENERAL





F-11

---





At June 30,
2003Cash and cash equivalents

$
3,423Short-term investments


9,707Trade receivables


11,807Unbilled receivables


1,327Employee advances and other current assets


1,668Other long-term tangible assets


1,193Property and equipment


2,373Total tangible assets acquired


31,498Customer related intangible asset (five years useful life)


1,514Goodwill


43,524Total intangible assets acquired


45,038Total tangible and intangible assets acquired


76,536Accounts payable


(3,426
)Other account payable


(3,936
)Long-term debt


(1,524
)Total liabilities assumed


(8,886
)Net assets acquired

$
67,650




F-12

---





Year ended December 31,2002

2003(unaudited)Revenues

$
218,071

$
256,453Net income

$
4,179

$
1,979Allocation of undistributed earnings on Class B Convertible Preferred stock


(3,110
)

(1,180
)Net income after allocation of undistributed earnings

$
1,069

$
800Basic and diluted net earnings per share

$
0.06

$
0.04Weighted average number of shares of Common and Preferred stock used in computation of basic net earnings per share (in thousands)


17,108


18,490Weighted average number of shares of Common and Preferred stock used in computation of diluted net earnings per share (in thousands)


18,141


19,722






F-13

---





At September 30, 2002Cash and cash equivalents

$
1,024Trade receivables


2,226Other accounts receivable


393Other long-term tangible assets


95Property and equipment


301Total tangible assets acquired


4,039Customer related intangible assets (five years useful life)


583Goodwill


7,438Total intangible assets acquired


8,021Total tangible and intangible assets acquired


12,060Accounts payable


(695
)Other accounts payable


(1,923
)Long-term loan and convertible loan from stockholders


(2,000
)Other liabilities assumed


(162
)Total liabilities assumed


(4,780
)Net assets acquired

$
7,280




F-14

---







NOTE 1GENERAL



Year ended
December 31,
2002(unaudited)Revenues

$
174,052Net income (loss)

$
1,048Allocation of undistributed earnings on Class B Convertible Preferred stock


(2,780
)Net loss after allocation of undistributed earnings

$
(1,732
)Basic and diluted net loss per share

$
(0.19
)Weighted average number of shares of Common and Preferred stock used in computation of basic and diluted net loss per share (in thousands)


9,154






F-15

---





F-16

---





At December 27,
2002Cash and cash equivalents

$
1,290Trade receivables


830Other accounts receivable and prepaid expenses


230Property and equipment


21Total tangible assets acquired


2,371Customer related intangible assets (five years useful life)


190Goodwill


4,528Total intangible assets acquired


4,718Total tangible and intangible assets acquired


7,089Trade payable


(110
)Other accounts payable and accrued expenses


(1,805
)Long-term debt


(173
)Total liabilities assumed


(2,088
)Net assets acquired

$
5,001




F-17

---







F-18

---







NOTE 1GENERAL



Year ended December 31,2002

2003Revenues

$
1,659

$
1,150Cost of revenues


1,288


1,289Gross profit (loss)


371


(139
)Selling and marketing expenses


169


15General and administrative expenses


397


885Operating loss


(195
)

(1,039
)Other expenses


200


66Net loss from discontinued operations

$
(395
)
$
(1,105
)






NOTE 2SIGNIFICANT ACCOUNTING POLICIES







F-19

---









F-20

---







%Computers and peripheral equipment

20-33Motor vehicles

15Office furniture and equipment

6-15Leasehold improvements

By the shorter of the term of the lease and the life of the asset


F-21

---









F-22

---







F-23

---









F-24

---







2002

2003

2004Dividend yield

0
%
0
%
0
%Expected volatility

0.42

0.52

0.50Risk-free interest

3.1
%
2.5
%
2.5
%Expected life of up to (in years)

4

4

4


F-25

---





Year ended December 31,2002

2003

2004Net income (loss) available to Common stockas reported

$
(1,915
)
$
2,009

$
13,021Addallocation of undistributed earnings on Class B Convertible Preffered stock  as reported


2,780


1,445


1,356Deductproforma allocation of undistributed earnings on Class B Convertible Preferred stock


(2,780
)

(1,117
)

(1,022
)Addstock-based employee compensationintrinsic value





105


247Deductstock-based employee compensationfair value


(1,126
)

(1,931
)

(3,299
)Pro forma net income (loss)

$
(3,041
)
$
511

$
10,303Basic net earnings (loss) as reported

$
(0.23
)
$
0.13

$
0.58Diluted net earnings (loss) as reported

$
(0.23
)
$
0.12

$
0.53Pro forma basic net earnings (loss)

$
(0.36
)
$
0.03

$
0.46Pro forma diluted net earnings (loss)

$
(0.36
)
$
0.03

$
0.41






F-26

---











F-27

---







F-28

---







F-29

---







NOTE 3MARKETABLE SECURITIES



December 31, 2003

December 31, 2004Cost

Gross
unrealized
losses

Estimated
fair
value

Cost

Gross
unrealized
losses

Estimated
fair
valueAvailable-for-sale:Equity securities (a)

$
211

$
(67
)
$
144

$
211

$
(142
)
$
69


---



NOTE 4OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

December 31,2003

2004Government authorities

$
1,194

$
852Deferred income taxes (see also Note 12e)


2,108


3,653Employees (1)


1,327


823Prepaid expenses


3,483


2,224Others


330


1,570$
8,442

$
9,122


---

F-30

---



NOTE 5PROPERTY AND EQUIPMENT, NET



December 31,2003

2004Cost:Computers and peripheral equipment

$
21,649

$
26,961Motor vehicles


422


181Office furniture and equipment


5,152


5,422Leasehold improvements


6,721


9,74533,944


42,309Accumulated depreciation


19,508


23,430Depreciated cost

$
14,436

$
18,879




NOTE 6INTANGIBLE ASSETS, NET



December 31,2003

2004Cost:Capitalized software development costs

$
514

$
2,592Customer related intangible assets


2,287


2,2872,801


4,879Accumulated amortization:Customer related intangible assets


316


682Amortized cost

$
2,485

$
4,197




F-31

---





December 31,2005

$
4582006


4582007


4582008


231$
1,605


NOTE 7GOODWILL



TotalBalance as of January 1, 2003

$
96,579Goodwill acquired during the year


44,308Foreign currency translation adjustments


6,705Balance as of December 31, 2003


147,592Foreign currency translation adjustments


1,566Balance as of December 31, 2004

$
149,158




NOTE 8SHORT-TERM BANK CREDIT



Interest rate
December 31,

Amount
December 31,2003

2004

2003

2004%In, or linked to, NIS

5




5,817


In, or linked to, dollar

3

4


3,081


1,143In Euro



5





132$
8,898

$
1,275(1) Total authorized credit lines (including guarantees)





$
47,773

$
55,914(2) Weighted average interest rates during the year






4
%

4
%


F-32

---





NOTE 9OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

December 31,2003

2004Employees and payroll accruals

$
12,791

$
15,167Accrued vacation pay and employee benefits


6,011


7,333Government authorities


13,609


13,471Accrued expenses


16,939


17,085Deferred revenues


3,631


9,128Estimated losses on uncompleted contracts


949


640Promissory note with respect to acquisition cost (Note 1b3)





750Others


674


697$
54,604

$
64,271


NOTE 10LONG-TERM DEBT



December 31,2003

2004Banks (1)

$
78,805

$
48,292Loans from others





990Loan from stockholders (Note 1b2)


1,000


1,000Convertible loan from stockholders (Note 1b2)


1,000


80,805


50,282Lesscurrent maturities


21,703


13,36459,102


36,918Promissory note with respect to acquisition cost (Note 1b3) (2)


750


$
59,852

$
36,918


---

F-33

---





Interest rate
December 31,

Amount
December 31,2003

2004

2003

2004%In, or linked to dollar

3-5

5-8

$
47,514

$
7,507In NISlinked to CPI

6-8

6-8


33,291


42,775$
80,805

$
50,282




December 31,2005 (current maturity)

$
13,3642006


16,4382007


13,7002008


5,2432009


1,537$
50,282


NOTE 11COMMITMENTS AND CONTINGENT LIABILITIES





Year2005

$
5,1582006


4,7842007


4,1312008


3,6822009


3,544$
21,299




F-34

---











F-35

---





NOTE 12INCOME TAXES





Year ended December 31,2002

2003

2004Domestic

$
1,351

$
(2,486
)
$
2,178Foreign


273


6,980


15,322$
1,624

$
4,494

$
17,500




Year ended December 31,2002

2003

2004Current taxes

$
1,233

$
2,094

$
2,930Taxes in respect of prior years


349





Deferred income tax benefit


(1,630
)

(2,148
)

(610
)$
(48
)
$
(54
)
$
2,320Domestic

$
780

$
(591
)
$
276Foreign


(828
)

537


2,044$
(48
)
$
(54
)
$
2,320


F-36

---







December 31,2003

2004Deferred tax assets:Reserves and allowances

$
4,153

$
2,938Different depreciation rates





121Net operating loss carry forwards of subsidiaries


8,480


9,180Net deferred tax asset before valuation allowance


12,633


12,239Valuation allowance


(4,899
)

(3,764
)Net deferred tax asset

$
7,734

$
8,475Domestic

$
1,485

$
1,244Foreign


6,249


7,231$
7,734

$
8,475








F-37

---









Year ended December 31,2002

2003

2004Income before taxes, as reported in the consolidated
statements of income

$
1,624

$
4,494

$
17,500Statutory tax rate


35
%

35
%

35
%Theoretical tax expenses on the above amount at the federal statutory tax rate

$
568

$
1,573

$
6,125Tax adjustments in respect of foreign subsidiaries
different tax rate


(80
)

(270
)

(1,630
)Deferred taxes on losses for which valuation allowance
was provided


(1,007
)

(1,731
)

(2,674
)Amortization of intangible assets


14


224


134Non-deductible expenses


176


220


440Taxes in respect of prior years


349





Others


(68
)

(70
)

(75
)Actual tax expense (benefit)

$
(48
)
$
(54
)
$
2,320






NOTE 13RELATED PARTIES BALANCES

December 31,2003

2004Balances with related parties:Long-term loan, convertible loan and related maturities from related party (see also Note 1b2) (interest accumulated is included in other accounts payable)

$
2,079

$
1,007


NOTE 14STOCKHOLDERS' EQUITY





F-38

---





F-39

---





F-40

---









|                                           |           | Year ended December 31,
|------------------------------------------ | --------- | -----------------------
|
|
|Outstanding at the beginning of the year   |           | 3,875,774              
|                                           | Granted   |                        
|                                           | Exercised |                        
|                                           | Forfeited |                        
|                                           |           |                        
|Outstanding at the end of the year         |           | 4,323,719              
|                                           |           |                        
|Exercisable options at the end of the year |           | 1,963,109              
|                                           |           |                        

---

F-41

---





|Exercise price |  | Options
outstanding
as of
December 31,
2004 |  | Weighted
average
remaining
contractual
life |  | Weighted
average
exercise
price |       | Options
exercisable
as of
December 31,
2004 |           | Weighted
average
exercise
price of
options
exercisable
|-------------- |  | ------------------------------------------- |  | ------------------------------------------- |  | ------------------------------- | ----- | ------------------------------------------- | --------- | ------------------------------------------------------
|
|$  0.01        |  | 20,497                                      |  | 2.08                                        |  | $                               | 0.01  |                                             | 20,497    |                                                       
|0.58           |  | 86,316                                      |  | 1.58                                        |  |                                 | 0.58  |                                             | 86,316    |                                                       
|1.78           |  | 245,867                                     |  | 5.73                                        |  |                                 | 1.78  |                                             | 245,867   |                                                       
|3.49           |  | 283,895                                     |  | 1.39                                        |  |                                 | 3.49  |                                             | 283,895   |                                                       
|5.57           |  | 210,788                                     |  | 7.77                                        |  |                                 | 5.57  |                                             | 152,937   |                                                       
|7.45           |  | 106,655                                     |  | 1.41                                        |  |                                 | 7.45  |                                             | 106,655   |                                                       
|8.47           |  | 4,212,137                                   |  | 2.71                                        |  |                                 | 8.47  |                                             | 3,569,660 |                                                       
|11.82          |  | 1,101,981                                   |  | 6.03                                        |  |                                 | 11.82 |                                             |          |                                                       
|               |  |                                             |  |                                             |  |                                 |       |                                             |           |                                                       
|               |  | 6,268,136                                   |  |                                             |  | $                               | 8.32  |                                             | 4,067,023 |                                                       
|               |  |                                             |  |                                             |  |                                 |       |                                             |           |                                                       



|                                           |  | Exceeds market price |      | Less than market price
|------------------------------------------ |  | -------------------- | ---- | ----------------------
|
|
|Weighted average exercise prices           |  | $                    | 8.47 |                       
|Weighted average fair values on grant date |  | $                    | 3.88 |                       





Issuance date

Options for
Common stock

Exercise price
per share

Options
exercisableMay 2000

25,175

$
8.47

25,175March 2001

5,205

$
8.47

5,20530,380




30,380


F-42

---









F-43

---







F-44

---









NOTE 15BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE



|                                                                                                                               |  | Year ended December 31, |       
|------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ------
|
|
|Net income from continuing operations as reported                                                                              |  | $                       | 1,260 
|Allocation of undistributed earnings on Class B Convertible Preferred stock                                                    |  |                         | (2,780
|                                                                                                                               |  |                         |       
|Numerator for basic and diluted per share data:                                                                                |  |                         |       
|Net income (loss) from continuing operations after allocation of undistributed earnings on Class B Convertible Preferred stock |  |                         | (1,520
|Losses from discontinued operations                                                                                            |  |                         | (395  
|                                                                                                                               |  |                         |       
|Net income (loss) after allocation of undistributed earnings on Class B Convertible Preferred stock                            |  | $                       | (1,915
|                                                                                                                               |  |                         |       

F-45

---





|                                                                                                                                                 |  | Year ended December 31,
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----------------------
|
|
|Weighted average number of shares of Common stock                                                                                                |  | $                      
|Weighted average number of shares of Preferred stock                                                                                             |  |                        
|                                                                                                                                                 |  |                        
|Denominator for basic net earnings (loss) per share                                                                                              |  | $                      
|                                                                                                                                                 |  |                        
|Effect of dilutive securities:                                                                                                                   |  |                        
|Stock options and warrants                                                                                                                       |  |                        
|                                                                                                                                                 |  |                        
|Dilutive potential common shares                                                                                                                 |  | $                      
|                                                                                                                                                 |  |                        
|Denominator for diluted net earnings (loss) per shareadjusted weighted average shares, assumed conversions and exercise of options and warrants |  | $                      
|                                                                                                                                                 |  |                        

---

NOTE 16GEOGRAPHIC INFORMATION



|                                               |  | Year ended December 31,
|---------------------------------------------- |  | -----------------------
|
|Revenues from sales to unaffiliated customers: |  |                        
|Israel                                         |  | $                      
|United States                                  |  |                        
|Europe                                         |  |                        
|Asia and the Far East                          |  |                        
|Others                                         |  |                        
|                                               |  |                        
|                                               |  | $                      
|                                               |  |                        

F-46

---



|                      |  | December 31,
|--------------------- |  | ------------
|
|Long-lived assets:    |  |             
|Israel                |  | $           
|United States         |  |             
|Europe                |  |             
|Asia and the Far East |  |             
|Others                |  |             
|                      |  |             
|                      |  | $           
|                      |  |             

NOTE 17SELECTED STATEMENTS OF OPERATIONS DATA

Year ended December 31,2002

2003

2004a.

Research and development expenses, net:Total expenses

$
2,236

$
2,676

$
Lessgrants and participations


720


603


Lesscapitalized software development cost





514


$
1,516

$
1,559

$



Year ended December 31,2002

2003

2004b.

Financial expenses, net:Financial Expenses:Interest on short-term loans and bank credit

$
(577
)
$
(462
)
$
(451
)Interest on long-term bank loans


(5,587
)

(3,393
)

(3,863
)Losses from trading marketable securities


(47
)

(42
)

(32
)Foreign currency translation adjustments


(5,285
)




(11,496
)

(3,897
)

(4,346
)Financial income:Foreign currency translation adjustments





670


492Interest on short-term bank deposits


2,667


1,776


3932,667


2,446


885$
(8,829
)
$
(1,451
)
$
(3,461
)


F-47

---





NOTE 18SUBSEQUENT EVENTS



NOTE 19SUBSEQUENT EVENTS (UNAUDITED)

On March 28, 2005, the Company signed a definitive agreement to acquire Radix Company SA, a privately held leading provider of IT services and solutions
based in Romania. The purchase price, in
the all cash transaction is 4 million Euros, or approximately $5.2 million. In addition, should Radix achieve certain performance goals over the next two years, the Company will pay an
additional amount of up to 3 million Euros, or approximately $3.9 million. The acquisition is expected to close by April 10, 2005 and is subject to customary closing conditions.

F-48

---



EXHIBIT INDEX

|Exhibit Number |  | Description                                                                                                                                                                 
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*3.1           |  | Amended and Restated Certificate of Incorporation of the Registrant.                                                                                                        
|*3.2           |  | Amended and Restated Bylaws of the Registrant.                                                                                                                              
|**4.1          |  | Specimen Certificate for the Registrant's common stock.                                                                                                                     
|**10.1         |  | Registration Rights Agreement, dated as of March 26, 1999, among the Registrant and the other signatories listed therein.                                                   
|**10.2         |  | Registration Rights Agreement, dated as of May 13, 1999, between the Registrant and Velston Pte. Ltd.                                                                       
|**10.3         |  | Second Amended and Restated Registration Rights Agreement, dated as of June 30, 2003, among the Registrant and the other signatories listed therein.                        
|**10.4         |  | Amendment to Second Amended and Restated Registration Rights Agreement, dated as of September 2, 2004, by and among the Registrant and the other signatories listed therein.
|**10.5         |  | Loan Agreement, dated as of July 29, 1999, between Israel Discount Bank Ltd. and Nesstech Advanced Technologies (1999) Ltd.                                                 
|**10.6         |  | Loan Agreement, dated as of July 29, 1999, between Bank Hapoalim B.M. and Nesstech Advanced Technologies (1999) Ltd.                                                        
|+**10.7        |  | Apar Holding Corp. Employees' Equity Plan.                                                                                                                                  
|+**10.8        |  | Ness Technologies, Inc. 1999 Share Option Plan.                                                                                                                             
|+**10.9        |  | Ness Technologies, Inc. 2001 Stock Option Plan.                                                                                                                             
|+**10.10       |  | Ness Technologies, Inc. 2003 Israeli Share Option Plan.                                                                                                                     
|+**10.11       |  | Ness Technologies, Inc. 2003 Stock Option Plan.                                                                                                                             
|+**10.12       |  | Agreement, dated as of August 1, 1999, between the Registrant and Aharon Fogel.                                                                                             
|+**10.13       |  | Amendment to Agreement, dated as of May 31, 2001, between the Registrant and Aharon Fogel.                                                                                  
|+**10.14       |  | Services Agreement, dated as of July 1, 2003, between Ness Technologies Holdings Ltd. and GLY Technological Horizons Ltd. (English translation).                           
|+**10.15       |  | Amended and Restated Employment Agreement, effective as of June 1, 2001, between the Registrant, Raviv Zoller and Ness Technologies Israel Ltd.                             
|+**10.16       |  | Amendment to Amended and Restated Employment Agreement, effective as of January 1, 2004, between the Registrant, Raviv Zoller and Ness Technologies Israel Ltd.             
|+**10.17       |  | Employment Agreement, dated as of May 14, 2004, between the Registrant and Yaron Garmazi.                                                                                   
|+**10.18       |  | Special Personal Employment Agreement, dated as of December 12, 1995, between Advanced Technology Ltd. and Tuvia Feldman (English translation).                             
|+**10.19       |  | Addendum to Personal Employment Agreement, dated as of August 1, 1999, between Advanced Technology Ltd. and Tuvia Feldman (English translation).                            
|+**10.20       |  | Addendum to Personal Employment Agreement, dated as of August 23, 1999, between Advanced Technology Ltd. and Tuvia Feldman (English translation).                           
|+**10.21       |  | Employment Agreement Addendum, dated as of August 27, 2000, between the Registrant and Tuvia Feldman.                                                                       
|               |  |                                                                                                                                                                             

---



|+**10.22 |  | Summary of Meeting, dated May 3, 2001, between Raviv Zoller and Tuvia Feldman (English translation).                                                                                                                                                 
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|+**10.23 |  | Agreement, dated as of February 1, 1999, between Compro Software Industries (1997) Ltd. and Lea Atad (English translation).                                                                                                                          
|+**10.24 |  | Transition Agreement and Continuity of Rights, dated as of July 1, 1999, between Ness Technologies and Ventures Ltd. (formerly Compro Software Industries (1997) Ltd.), Ness B.S.G. Ltd. (formerly Contahal Ltd.) and
Lea Atad (English translation).
|+**10.25 |  | Offer Letter, dated January 29, 2004, between the Registrant and Ivan Hruska.                                                                                                                                                                        
|+**10.26 |  | Contract of Employment, effective as of March 1, 2004, between the Registrant and Ivan Hruska.                                                                                                                                                       
|+**10.27 |  | Special Personal Employment Agreement, dated as of December 12, 1995, between Advanced Technology Ltd. and Yoram Michaelis (English translation).                                                                                                    
|+**10.28 |  | Addendum to Personal Employment Agreement, dated as of August 1, 1999, between Advanced Technology Ltd. and Yoram Michaelis (English translation).                                                                                                   
|+**10.29 |  | Addendum to Personal Employment Agreement, dated as of August 23, 1999, between Advanced Technology Ltd. and Yoram Michaelis (English translation).                                                                                                  
|**10.30  |  | Form of Indemnification Agreement by and between the Registrant and its officers and directors.                                                                                                                                                      
|**10.31  |  | Stock Purchase Agreement, dated as of August 30, 2002, among the shareholders of APP Group CEE B.V. listed therein and the Registrant.                                                                                                               
|**10.32  |  | Merger Agreement, dated as of May 12, 2003, among the Registrant, Ness Acquisition Corp., Apar Holding Corp. and the shareholders of Apar Holding Corp. listed therein.                                                                              
|14       |  | Code of Business Conduct and Ethics                                                                                                                                                                                                                  
|**21     |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                      
|23.1     |  | Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.                                                                                                                                                                           
|**24     |  | Powers of Attorney.                                                                                                                                                                                                                                  
|31.1     |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                  
|31.2     |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                  
|32.1     |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                   
|32.2     |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                   
|99.1     |  | Consent of Gartner, Inc.                                                                                                                                                                                                                             

---

---



SCHEDULE IISCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS

|                                                             |  | Balance at
beginning of
period
accounts |       | Provision for
doubtful
accounts |   | Write-off of
previously
provided
accounts |   | Translation
adjustments |        | Balance at
end of
period
|------------------------------------------------------------ |  | --------------------------------------- | ----- | ------------------------------- | - | ----------------------------------------- | - | ----------------------- | ------ | ------------------------
|
|Year ended December 31, 2004 Allowance for doubtful accounts |  | $                                       | 1,785 |                                 | $ | 526                                       |   | $                       | (112   | )                       
|Year ended December 31, 2003 Allowance for doubtful accounts |  | $                                       | 1,486 |                                 | $ | 366                                       |   | $                       | (212   | )                       
|Year ended December 31, 2002 Allowance for doubtful accounts |  | $                                       | 4,923 |                                 | $ | (969                                      | ) | $                       | (2,320 | )                       

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