UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-Q





(Mark
One)




x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the quarterly period ended June 30, 2010




 ̈
            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







NESS
TECHNOLOGIES, INC.


(Exact
name of registrant as specified in its charter)





Delaware
                98-0346908(State
      or other jurisdiction of
                (I.R.S.
      Employerincorporation
      or organization)
                Identification
      Number)Ness
      Tower
                Ness
      TechnologiesAtidim
      High-Tech Industrial Park, Building 4
                3
      University Plaza, Suite 600Tel
      Aviv 61580, Israel
                Hackensack,
      NJ 07601Telephone:
      +972 (3) 766-6800
                Telephone:
      (201) 488-7222


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








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.  x Yes   ̈ No




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).   ̈ Yes   ̈ No




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.


Large
accelerated filer  ̈              Accelerated
filer x            Non-accelerated
filer  ̈Smaller reporting company  ̈




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   ̈ Yes  x No




As of
July 30, 2010, 38,001,090 shares of the issuer’s common stock, $0.01 par value
per share, were outstanding.












NESS
TECHNOLOGIES, INC. AND SUBSIDIARIES





INDEX




PART
      I – FINANCIAL INFORMATION
                                          3Item
      1. Financial Statements
                                          3Consolidated
      Balance Sheets – December 31, 2009 and June 30, 2010
      (Unaudited)
                                          3Consolidated
      Statements of Income – Three and six months ended June 30, 2009 and 2010
      (Unaudited)
                                          5Consolidated
      Statements of Cash Flows – Six months ended June 30, 2009 and 2010
      (Unaudited)
                                          6Notes
      to Interim Consolidated Financial Statements – June 30, 2010
      (Unaudited)
                                          8Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                                          24Forward-Looking
      Statements
                                          24Overview
                                          24Consolidated
      Results of Operations
                                          25Three
      Months Ended June 30, 2010 Compared to the Three Months Ended June 30,
      2009
                                          26Six
      Months Ended June 30, 2010 Compared to the Six Months Ended June 30,
      2009
                                          28Results
      by Business Segment
                                          31Liquidity
      and Capital Resources
                                          32Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                                          35Item
      4. Controls and Procedures
                                          35Evaluation
      of Disclosure Controls and Procedures
                                          35Changes
      in Internal Control Over Financial Reporting
                                          36PART
      II – OTHER INFORMATION
                                          37Item
      1. Legal Proceedings
                                          37Item
      1A. Risk Factors
                                          37Item
      2. Unregistered Sales of Equity Securities and Use of Proceeds
                                          37Item
      3. Defaults upon Senior Securities
                                          37Item
      4. (Removed and Reserved)
                                          38Item
      5. Other Information
                                          38Item
      6. Exhibits
                                          38SIGNATURES
                                          39EXHIBIT
      INDEX
                                          40





PART
I – FINANCIAL INFORMATION




Item
1. Financial Statements




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Interim
Consolidated Balance Sheets


U.S.
dollars in thousands





December
                  31,
      2009
              
              
              June
      30,
                  2010(Unaudited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              40,218
              
              
              $
              35,093Restricted
      cash
              
              
              2,470
              
              
              
              2,474Short-term
      bank deposits
              
              
              25,939
              
              
              
              15,556Trade
      receivables, net of allowance for doubtful accounts of $2,789 at December
      31, 2009 and $2,519 at June 30, 2010
              
              
              131,452
              
              
              
              136,725Unbilled
      receivables
              
              
              28,012
              
              
              
              32,625Other
      accounts receivable and prepaid expenses
              
              
              27,832
              
              
              
              26,677Work
      in progress
              
              
              9,690
              
              
              
              7,111Total
      assets attributed to discontinued operations
              
              
              43,212
              
              
              
              28,391Total
      current assets
              
              
              308,825
              
              
              
              284,652LONG-TERM
      ASSETS:Long-term
      prepaid expenses and other assets
              
              
              6,083
              
              
              
              6,575Unbilled
      receivables
              
              
              4,654
              
              
              
              4,417Deferred
      income taxes, net
              
              
              3,608
              
              
              
              2,442Severance
      pay fund
              
              
              53,145
              
              
              
              53,726Property
      and equipment, net
              
              
              35,739
              
              
              
              34,019Intangible
      assets, net
              
              
              10,016
              
              
              
              11,672Goodwill
              
              
              263,541
              
              
              
              265,039Total
      long-term assets
              
              
              376,786
              
              
              
              377,890Total
      assets
              
              $
              685,611
              
              
              $
              662,542





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


– 3
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Interim
Consolidated Balance Sheets


U.S.
dollars in thousands (except share and par value data)





December
                  31,
      2009
              
              
              June
      30,
                  2010(Unaudited)LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Short-term
      bank credit
              
              $
              500
              
              
              $
              8,792Current
      maturities of long-term debt
              
              
              21,332
              
              
              
              24,035Trade
      payables
              
              
              30,914
              
              
              
              40,573Advances
      from customers and deferred revenues
              
              
              40,639
              
              
              
              36,134Other
      accounts payable and accrued expenses
              
              
              99,464
              
              
              
              94,256Total
      liabilities attributed to discontinued operations
              
              
              25,461
              
              
              
              14,561Total
      current liabilities
              
              
              218,310
              
              
              
              218,351LONG-TERM
      LIABILITIES:Long-term
      debt, net of current maturities
              
              
              50,836
              
              
              
              46,965Other
      long-term liabilities
              
              
              6,689
              
              
              
              7,276Deferred
      income taxes
              
              
              2,045
              
              
              
              2,489Accrued
      severance pay
              
              
              56,443
              
              
              
              57,311Total
      long-term liabilities
              
              
              116,013
              
              
              
              114,041COMMITMENTS
      AND CONTINGENT LIABILITIESSTOCKHOLDERS’
      EQUITY:Preferred
      stock of $0.01 par value –
                Authorized:
      8,500,000 shares at December 31, 2009 and at June 30, 2010;
                Issued
      and outstanding: none at December 31, 2009 and June 30,
    2010
              
              
              —
              
              
              
              —Common
      stock of $0.01 par value –
                Authorized:
      76,500,000 shares at December 31, 2009 and at June 30, 2010;
                Issued:
      39,628,994 at December 31, 2009 and at June 30, 2010;
                Outstanding:
      38,399,290 at December 31, 2009 and 38,001,090 at June 30,
      2010
              
              
              396
              
              
              
              396Additional
      paid-in capital
              
              
              332,928
              
              
              
              334,528Accumulated
      other comprehensive income
              
              
              16,176
              
              
              
              253Retained
      earnings
              
              
              6,476
              
              
              
              1,830Treasury
      stock, at cost (1,229,704 shares at December 31, 2009 and 1,627,904 at
      June 30, 2010)
              
              
              (4,688
              )
              
              
              (6,857
              )Total
      stockholders’ equity
              
              
              351,288
              
              
              
              330,150Total
      liabilities and stockholders’ equity
              
              $
              685,611
              
              
              $
              662,542





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


– 4
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Interim
Consolidated Statements of Income


U.S.
dollars in thousands (except per share data)





Three months ended
                  June 30,
              
              
              Six months ended
                  June 30,2009
              
              
              2010
              
              
              2009
              
              
              2010(Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)Revenues
              
              $
              126,887
              
              
              $
              139,701
              
              
              $
              253,168
              
              
              $
              273,034Cost
      of revenues
              
              
              92,542
              
              
              
              102,275
              
              
              
              186,901
              
              
              
              198,796Gross
      profit
              
              
              34,345
              
              
              
              37,426
              
              
              
              66,267
              
              
              
              74,238Selling
      and marketing
              
              
              9,681
              
              
              
              9,838
              
              
              
              18,893
              
              
              
              19,891General
      and administrative
              
              
              21,233
              
              
              
              24,551
              
              
              
              44,818
              
              
              
              48,893Insurance
      settlement related to 2007 arbitration expense, net of related
      expenses
              
              
              —
              
              
              
              —
              
              
              
              (2,610
              )
              
              
              —Commissions
      related to the sale of Israeli SAP sales and distribution
      operations
              
              
              —
              
              
              
              —
              
              
              
              (2,534
              )
              
              
              —Total
      operating expenses
              
              
              30,914
              
              
              
              34,389
              
              
              
              58,567
              
              
              
              68,784Operating
      income
              
              
              3,431
              
              
              
              3,037
              
              
              
              7,700
              
              
              
              5,454Financial
      expenses, net
              
              
              (666
              )
              
              
              (442
              )
              
              
              (1,822
              )
              
              
              (651
              )Income
      before taxes on income
              
              
              2,765
              
              
              
              2,595
              
              
              
              5,878
              
              
              
              4,803Taxes
      on income
              
              
              537
              
              
              
              1,707
              
              
              
              1,179
              
              
              
              3,217Net
      income from continuing operations
              
              $
              2,228
              
              
              $
              888
              
              
              $
              4,699
              
              
              $
              1,586Net
      loss from discontinued operations
              
              
              (1,186
              )
              
              
              (845
              )
              
              
              (2,129
              )
              
              
              (6,232
              )Net
      income (loss)
              
              $
              1,042
              
              
              $
              43
              
              
              $
              2,570
              
              
              $
              (4,646
              )Basic
      net earnings per share from continuing operations
              
              $
              0.06
              
              
              $
              0.02
              
              
              $
              0.12
              
              
              $
              0.04Diluted
      net earnings per share from continuing operations
              
              $
              0.06
              
              
              $
              0.02
              
              
              $
              0.12
              
              
              $
              0.04Basic
      and diluted net loss per share from discontinued
operations
              
              $
              (0.03
              )
              
              $
              (0.02
              )
              
              $
              (0.05
              )
              
              $
              (0.16
              )Basic
      net earnings (loss) per share
              
              $
              0.03
              
              
              $
              0.00
              
              
              $
              0.07
              
              
              $
              (0.12
              )Diluted
      net earnings (loss) per share
              
              $
              0.03
              
              
              $
              0.00
              
              
              $
              0.07
              
              
              $
              (0.12
              )


(*)
              Includes
      stock-based compensation, as
follows:




Three months ended
                  June 30,
              
              
              Six months ended
                  June 30,2009
              
              
              2010
              
              
              2009
              
              
              2010(Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)Cost
      of revenues
              
              $
              57
              
              
              $
              102
              
              
              $
              120
              
              
              $
              155Selling
      and marketing
              
              
              46
              
              
              
              41
              
              
              
              103
              
              
              
              85General
      and administrative
              
              
              725
              
              
              
              188
              
              
              
              1,533
              
              
              
              920





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


– 5
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Interim
Consolidated Statements of Cash Flows


U.S.
dollars in thousands





Six months ended
                    June 30,2009
                
                
                2010(Unaudited)
                
                
                (Unaudited)Cash flows from operating
      activities:Net
      income (loss)
                
                $
                2,570
                
                
                $
                (4,646
                )Adjustments
      required to reconcile net income (loss) to net cash provided by (used in)
      operating activities:Net
      loss from discontinued operations
                
                
                2,129
                
                
                
                6,232Stock-based
      compensation
                
                
                1,756
                
                
                
                1,600Currency
      fluctuation of restricted cash and short-term bank
deposits
                
                
                —
                
                
                
                (415
                )Depreciation
      and amortization
                
                
                8,423
                
                
                
                8,631Loss
      (gain) on sale of property and equipment and impairment and sale of cost
      investments
                
                
                (205
                )
                
                
                79Commissions
      related to the sale of Israeli SAP sales and distribution
      operations
                
                
                (2,534
                )
                
                
                —Decrease
      (increase) in trade receivables, net
                
                
                38,709
                
                
                
                (6,719
                )Decrease
      (increase) in unbilled receivables
                
                
                894
                
                
                
                (5,680
                )Decrease
      (increase) in other accounts receivable and prepaid
    expenses
                
                
                (1,949
                )
                
                
                1,423Decrease
      (increase) in work-in-progress
                
                
                (343
                )
                
                
                1,393Increase
      in long-term prepaid expenses
                
                
                (346
                )
                
                
                (540
                )Deferred
      income taxes, net
                
                
                513
                
                
                
                847Increase
      (decrease) in trade payables
                
                
                (13,387
                )
                
                
                11,473Decrease
      in advances from customers and deferred revenues
                
                
                (1,200
                )
                
                
                (2,851
                )Decrease
      in other accounts payable and accrued expenses
                
                
                (14,810
                )
                
                
                (8,369
                )Increase
      in other long-term liabilities
                
                
                472
                
                
                
                882Increase
      (decrease) in accrued severance pay, net
                
                
                (1,384
                )
                
                
                266Net
      cash used in discontinued operations
                
                
                (1,853
                )
                
                
                (3,712
                )Net
      cash provided by (used in) operating activities
                
                
                17,455
                
                
                
                (106
                )Cash flows from investing
      activities:Consideration
      from sale of a consolidated subsidiary
                
                
                —
                
                
                
                1,711Net
      cash paid for acquisition of a consolidated subsidiary
                
                
                —
                
                
                
                (16,259
                )Cash
      paid for acquisition of intangible assets
                
                
                —
                
                
                
                (513
                )Additional
      payments in connection with acquisitions of subsidiaries in prior
      periods
                
                
                (14,395
                )
                
                
                (1,330
                )Proceeds
      from maturity of (investment in) short-term bank deposits,
    net
                
                
                (15,778
                )
                
                
                10,791Proceeds
      from sale of property and equipment
                
                
                703
                
                
                
                —Purchase
      of property and equipment and capitalization of software developed for
      internal use
                
                
                (4,864
                )
                
                
                (5,287
                )Net
      cash used in discontinued operations
                
                
                (1,808
                )
                
                
                —Net
      cash used in investing activities
                
                
                (36,142
                )
                
                
                (10,887
                )Cash flows from financing
      activities:Repurchase
      of shares
                
                
                (2,037
                )
                
                
                (2,169
                )Acquired
      subsidiary’s dividend to its former shareholder
                
                
                (683
                )
                
                
                —Short-term
      bank loans and credit, net
                
                
                (4,560
                )
                
                
                6,361Proceeds
      from long-term debt
                
                
                15,000
                
                
                
                13,364Principal
      payments of long-term debt
                
                
                (2,161
                )
                
                
                (8,701
                )Net
      cash provided by financing activities
                
                
                5,559
                
                
                
                8,855





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


– 6
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Interim
Consolidated Statements of Cash Flows


U.S.
dollars in thousands





Six months ended
                  June 30,2009
              
              
              2010(Unaudited)
              
              
              (Unaudited)Effect
      of exchange rate changes on cash and cash equivalents
              
              
              (1,101
              )
              
              
              (2,987
              )Decrease
      in cash and cash equivalents
              
              
              (14,229
              )
              
              
              (5,125
              )Cash
      and cash equivalents at the beginning of the period
              
              
              44,585
              
              
              
              40,218Cash
      and cash equivalents at the end of the period
              
              $
              30,356
              
              
              $
              35,093





Non-cash
      activityGain
      (loss) from mark-to-market of foreign exchange forward contracts and
      interest rate swap
                
                $
                326
                
                
                $
                (333
                )




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


– 7
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


U.S.
dollars in thousands (except share and per share data) (Unaudited)




Note
1: General




Ness
Technologies, Inc. (“we,” “our,” “us” or “the Company”) was incorporated under
the laws of the State of Delaware in March 1999. We operate through our
subsidiaries in North America, Europe, Israel and Asia Pacific.




We are a
global provider of IT and business services and solutions with specialized
expertise in software product engineering; and system integration, application
development, consulting and software distribution. We deliver our portfolio of
solutions and services using a global delivery model combining offshore,
near-shore and local teams. The primary verticals we serve include high-tech
companies and independent software vendors; utilities and government; financial
services; defense and homeland security; and life sciences and
healthcare.




Note
2: Significant Accounting Policies




a.
            Unaudited Interim
      Financial Information




The
accompanying consolidated balance sheet as of June 30, 2010, consolidated
statements of income for the three and six months ended June 30, 2009 and 2010
and consolidated statements of cash flows for the six months ended June 30, 2009
and 2010 are unaudited. These unaudited interim consolidated financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles for interim financial information. In the opinion of
management, the unaudited interim consolidated financial statements include all
adjustments of a normal recurring nature necessary for a fair presentation of
our consolidated financial position as of June 30, 2010, our consolidated
results of operations for the three and six months ended June 30, 2009 and 2010
and our consolidated cash flows for the six months ended June 30, 2009 and
2010.




The
balance sheet at December 31, 2009 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements.




These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes for the year ended
December 31, 2009 included in our Annual Report on Form 10-K filed with the U.S.
Securities and Exchange Commission (“SEC”) on March 15, 2010.




Results
for the three and six months ended June 30, 2010 are not necessarily indicative
of results that may be expected for the year ending December 31,
2010.




Unless
otherwise noted, all references to “dollars” or “$” are to United States dollars
and all references to “NIS” are to New Israeli Shekels.




b.
            Reclassification




Certain
prior period amounts have been reclassified to conform to the current period
presentation.




c.
            Use of
      estimates




The
preparation of financial statements in conformity with United States generally
accepted accounting principles requires our management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Our management believes that the estimates, judgments and
assumptions used are reasonable based upon information available at the time
they are made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.


– 8
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


U.S.
dollars in thousands (except share and per share data) (Unaudited)




d.
            Principles of
      consolidation




Our
consolidated financial statements include the accounts of the company and its
wholly and majority owned subsidiaries, referred to herein as the group.
Inter-company transactions and balances, including profit from inter-company
sales not yet realized outside the group, have been eliminated in
consolidation.




e.
            Fair value
      measurements




We
categorize the fair value of our financial assets and liabilities according to
the hierarchy established by the Financial Accounting Standards Board (“FASB”),
which prioritizes the inputs to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). The three levels
of the fair value hierarchy are described as follows:




Level 1
              Valuations
      based on quoted prices in active markets for identical assets or
      liabilities that we have the ability to directly
      access.
 Level 2
                  Valuations
      based on quoted prices for similar assets or liabilities; valuations for
      interest-bearing securities based on non-daily quoted prices in active
      markets; quoted prices in markets that are not active; or other inputs
      that are observable or can be corroborated by observable data for
      substantially the full term of the assets or
      liabilities.
 Level 3
                  Valuations
      based on inputs that are supported by little or no market activity and
      that are significant to the fair value of the assets or
      liabilities.





A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to its fair value
measurement.




In
circumstances in which a quoted price in an active market for the identical
liability is not available, we are required to use the quoted price of the
identical liability when traded as an asset, quoted prices for similar
liabilities, or quoted prices for similar liabilities when traded as assets. If
these quoted prices are not available, then we are required to use another
valuation technique, such as an income approach or a market
approach.




Assets
and liabilities measured at fair value under Accounting Standards Codification
(“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), as of
June 30, 2010 were presented on our Consolidated Balance Sheet as
follows:


– 9
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


U.S.
dollars in thousands (except share and per share data) (Unaudited)




Total
                  
                  
                  Quoted
                      Prices
      in
                      Active
                      Markets
                      for
                      Identical
                      Assets
                      (Level 1)
                  
                  
                  Significant
                      Other
                      Observable
                      Inputs
                      (Level 2)
                  
                  
                  Significant
                      Unobservable
                      Inputs
                      (Level 3)Derivative
      instruments (recurring basis)
                  
                  $
                  7
                  
                  
                  $
                  —
                  
                  
                  $
                  7
                  
                  
                  $
                  —Goodwill
      and intangible assets, net (non-recurring basis)
                  
                  $
                  276,711
                  
                  
                  
                  
                  
                  
                  $
                  —
                  
                  
                  $
                  276,711Total
      assets
                  
                  $
                  276,718
                  
                  
                  $
                  —
                  
                  
                  $
                  7
                  
                  
                  $
                  276,711Derivative
      instruments (recurring basis)
                  
                  $
                  1,106
                  
                  
                  $
                  —
                  
                  
                  $
                  1,106
                  
                  
                  $
                  —Total
      liabilities
                  
                  $
                  1,106
                  
                  
                  $
                  —
                  
                  
                  $
                  1,106
                  
                  
                  $
                  —




Assets
and liabilities measured at fair value under ASC 820 as of December 31, 2009
were presented on our Consolidated Balance Sheet as follows:




Total
                
                
                Quoted
                    Prices in
                    Active
                    Markets
                    for
                    Identical
                    Assets
                    (Level 1)
                
                
                Significant
                    Other
                    Observable
                    Inputs
                    (Level 2)
                
                
                Significant
                    Unobservable
                    Inputs
                    (Level 3)Derivative
      instruments (recurring basis)
                
                $
                1,221
                
                
                $
                —
                
                
                $
                1,221
                
                
                $
                —Goodwill
      and intangible assets, net (non-recurring basis)
                
                $
                273,557
                
                
                $
                —
                
                
                $
                —
                
                
                $
                273,557Total
      assets
                
                $
                274,778
                
                
                $
                —
                
                
                $
                1,221
                
                
                $
                273,557Derivative
      instruments (recurring basis)
                
                $
                665
                
                
                $
                —
                
                
                $
                665
                
                
                $
                —Total
      liabilities
                
                $
                665
                
                
                $
                —
                
                
                $
                665
                
                
                $
                —




The fair
value of long-term debt is estimated by discounting the future cash flows using
current interest rates for loans of similar terms and maturities. The carrying
amount of the long-term debt approximates its fair value.




In
addition to the assets and liabilities described above, our financial
instruments also include cash, trade receivables, other accounts receivable,
related party receivables, trade payables, accrued expenses and other payables.
The fair value of these financial instruments was not materially different from
their carrying value at June 30, 2010 and December 31, 2009 due to the
short-term maturity of these instruments.


– 10
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


U.S.
dollars in thousands (except share and per share data) (Unaudited)




f.
            Impact of recently
      issued and adopted accounting
  pronouncements




In
October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue
Arrangements (amendments to FASB ASC Topic 605, Revenue Recognition)” (“ASU
2009-13”), and ASU No. 2009-14, “Certain Arrangements That Include Software
Elements (amendments to FASB ASC Topic 985, Software)” (“ASU 2009-14”). ASU
2009-13 requires entities to allocate revenue in an arrangement using estimated
selling prices of the delivered goods and services based on a selling price
hierarchy. The amendments eliminate the residual method of revenue allocation
and require revenue to be allocated using the relative selling price method. ASU
2009-14 removes tangible products from the scope of software revenue guidance
and provides guidance on determining whether software deliverables in an
arrangement that includes a tangible product are covered by the scope of the
software revenue guidance. As a result of the amendments included in ASU
2009-14, many tangible products and services that rely on software will be
accounted for under the multiple-element arrangements revenue recognition
guidance rather than under the software revenue recognition guidance. ASU
2009-14 also provides guidance on how to allocate transaction consideration when
an arrangement contains both deliverables within the scope of software revenue
guidance (software deliverables) and deliverables not within the scope of that
guidance (non-software deliverables). ASU 2009-13 and ASU 2009-14 are to be
applied on a prospective basis for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with
early adoption permitted. We are currently evaluating the impact of this
standard on our consolidated results of operations and financial
condition.




In
January 2010, the FASB issued ASU No. 2010-06 which amends ASC Topic 820-10,
“Fair Value Measurements and Disclosures – Overall” (“ASC 820-10”). The update
requires a gross presentation of activities within the Level 3 roll-forward and
adds a new requirement to disclose transfers in and out of Level 1 and 2
measurements. The update further clarifies the existing disclosure requirements
in ASC 820-10 regarding: i) the level of disaggregation of fair value
measurements; and ii) the disclosures regarding inputs and valuation techniques.
The update was effective for our fiscal year beginning January 1, 2010 except
for the gross presentation of the Level 3 roll-forward information, which is
effective for our fiscal year beginning January 1, 2011. The principal impact
from this update will be expanded disclosures regarding our fair value
measurements.




In July
2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses,” which amends FASB
ASC Topic 310, “Receivables.” The update enhances disclosures about the credit
quality of financing receivables and the allowance for credit losses. We are
currently evaluating the impact of these standards on our consolidated financial
statements.




Note
3: Acquisitions




a.
            Gilon Business Insight
      Ltd.




On March
25, 2010, we signed a definitive agreement to acquire all of the outstanding
capital stock of Gilon Business Insight Ltd. (“Gilon”), a privately-held,
leading Israeli provider of business intelligence consulting and implementation
solutions and services, for cash consideration of NIS 65 million, or $17,218,
and related acquisition and integration costs of $728. The related acquisition
and integration costs were recognized as expenses in our operating expenses. An
additional payment of up to NIS 9 million, or approximately $2,400, may be made
during the two-year period following the closing of the agreement should Gilon
achieve certain performance and retention goals. As of the acquisition
date, in anticipation of full achievement of the performance goals, we provided
for a present value of $1,292 with respect to the potential additional payment;
and the remaining amount consists of retention expenses, which will be recorded
during the next two years. The purchase closed on May 4, 2010 and we
consolidated the results of Gilon commencing April 1, 2010 due to immateriality.
The acquisition of Gilon increases our market share in Israel and further
positions us as a provider of enterprise solutions, with a blend of enterprise
resource planning (“ERP”), business intelligence (“BI”) and customer
relationship management (“CRM”) capabilities. We intend to utilize Gilon’s
capabilities to help fulfill the demand for business intelligence applications,
solutions and services around the world. Following our acquisition of Gilon, it
became part of Ness Israel under our System Integration and Application
Development segment.


– 11
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


U.S.
dollars in thousands (except share and per share data) (Unaudited)




This
acquisition was accounted for under the purchase method of accounting and,
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their relative fair values as of the acquisition
date, using the exchange rate prevailing on that date, as follows:




Cash
      and cash equivalents
                  
                  $
                  959Current
      assets, excluding cash and cash equivalents
                  
                  
                  9,498Property
      and equipment
                  
                  
                  113Customer
      relations
                  
                  
                  4,477Backlog
                  
                  
                  313Goodwill
                  
                  
                  14,305Current
      liabilities
                  
                  
                  (8,116
                  )Accrual
      for additional consideration to be paid subsequent to the balance sheet
      date
                  
                  
                  (1,292
                  )Long-term
      deferred tax liability
                  
                  
                  (3,039
                  )Total
      purchase price
                  
                  $
                  17,218




The value
assigned to the tangible assets, intangible assets and liabilities has been
determined as follows:




a.
            Gilon’s
      current assets and liabilities were recorded at their carrying amounts.
      The carrying amounts of the current assets and liabilities were reasonable
      proxies for their market values due to their short-term
      maturity.




b.
            The
      value assigned to the customer-related intangibles amounted to $4,790. The
      fair value of Gilon’s customer-related intangibles were determined using
      the Income Approach. Customer-related intangibles are amortized over their
      estimated useful lives, which are nine years for customer relations and
      one year for backlog.




c.
            Included
      in deferred tax liability is a liability of $1,079 recorded by the Company
      for the difference between the assigned values and the tax bases of the
      customer-related intangibles
acquired.




d.
            Goodwill
      represents the excess of the purchase price over the fair value of the net
      tangible and amortizable intangible assets
  acquired.




b.
            Goodwill




In the
six months ended June 30, 2010, we increased our goodwill by $14,305 due to the
Gilon acquisition and decreased our goodwill by $12,807 on account of
translation adjustments.




Goodwill
and intangible assets deemed to have indefinite lives are tested for impairment
annually, or between annual tests in certain circumstances, and written down
when impaired. Goodwill is tested for impairment at the reporting unit level by
comparing the fair value of the reporting unit with its carrying value. We
perform our annual impairment analysis of goodwill as of December 31 of each
year, or more often if there are indicators of impairment present. As of
December 31, 2009, we performed our annual impairment test and recorded goodwill
impairment of $28,531. As our market capitalization is lower than our
stockholders’ equity and in response to changes in our assumptions related to
future cash flows and market conditions during the six months ended June 30,
2010, we updated our analysis and performed an impairment test as of June 30,
2010. As a result of the analysis, we concluded that goodwill was not
impaired.


– 12
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


U.S.
dollars in thousands (except share and per share data) (Unaudited)




In
accordance with ASC Topic 350, “Intangibles – Goodwill and Other,” each time we
performed the test, we compared the fair value of each reporting unit to its
carrying value. In such a test, if the fair value exceeds the carrying value of
the net assets, goodwill is considered not impaired, and we are not required to
perform further testing. We determined the fair value of each reporting unit
using the Income Approach, which utilizes a discounted cash flow model, as this
approach best approximates the reporting unit’s fair value at this time.
Judgments and assumptions related to revenues, operating income, future
short-term and long-term growth rates, weighted average cost of capital,
interest, capital expenditures, cash flows, and market conditions are inherent
in developing the discounted cash flow model. We considered historical rates and
current market conditions when determining the discount and growth rates to use
in our analyses. We corroborated the fair values using the Market Approach. If
the carrying value of the net assets exceeds the fair value, then we must
perform the second step of the impairment test in order to determine the implied
fair value of goodwill. Determining the fair value of our net assets and our
off-balance sheet intangibles would require us to make judgments that involve
the use of significant estimates and assumptions. If these estimates or their
related assumptions change in the future, we may be required to record
impairment charges for our goodwill.




c.
            Pro Forma Financial
      Information




The
following table presents certain combined unaudited statements of income data
for the six months ended June 30, 2009 and 2010 as if our 2010 acquisition of
Gilon had occurred on January 1of each respective year, after giving effect to
purchase accounting adjustments, including amortization of identifiable
intangible assets:




Six months ended
                    June 30,2009
                
                
                2010(Unaudited)
                
                
                (Unaudited)Revenues
                
                $
                263,385
                
                
                $
                278,784Net
      earnings (loss)
                
                $
                2,162
                
                
                $
                (4,884
                )Earnings
      (loss) per share:Basic
                
                $
                0.06
                
                
                $
                (0.13
                )Diluted
                
                $
                0.05
                
                
                $
                (0.13
                )




Note
4: Discontinued operations




On
January 15, 2010, we closed a share purchase agreement with a privately-held
Dutch company to sell the shares of our indirectly wholly-owned subsidiary Ness
Benelux for a total of €1.2 million, or $1,711. Prior to the sale, Ness Benelux
operated as part of Ness Europe under our System Integration and Application
Development segment and was engaged primarily in providing IT professional
services in the Netherlands.


– 13
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


U.S.
dollars in thousands (except share and per share data) (Unaudited)




On
February 1, 2010, our board of directors resolved to sell our operations in the
Asia Pacific region, and on April 24, 2010, we signed a definitive asset
transfer agreement with the buyer. Ness Asia Pacific operates as part of our
System Integration and Application Development segment and is engaged primarily
in providing IT professional services in Singapore, Thailand and Malaysia. The
sale, which is expected to close during the third quarter of 2010, will be
effective as of April 1, 2010.




On March
29, 2010, our board of directors resolved to sell our NessPRO operations in
Europe, and we are currently seeking a buyer for these operations. NessPRO
Europe operates as part of our former Software Distribution segment and is
engaged primarily in selling and distributing licenses to third-party enterprise
software products in Italy, Spain and Portugal.




In
connection with the acquisition of Gilon, our board of directors resolved to
sell its Turkish subsidiary. Therefore, the results of operations of Gilon
Turkey were initially classified as discontinued operations. Summary revenue and
expenses for this discontinued operation are not presented due to their
immateriality.




The
results of operations for Ness Asia Pacific and NessPRO Europe for the three and
six months ended June 30, 2010, and the results of operations for Ness Benelux,
Ness Asia Pacific and NessPRO Europe for the three and six months ended June 30,
2009, including revenues and operating expenses, have been reclassified in the
accompanying income statements as discontinued operations in accordance with ASC
Topic 205-20, “Presentation of Financial Statements – Discontinued Operations”
(“ASC 205-20”). In addition, our balance sheets at December 31, 2009 and June
30, 2010 have been reclassified to reflect the assets and liabilities of these
operations as assets and liabilities of discontinued operations within current
assets and current liabilities; and our statements of cash flows for the six
months ended June 30, 2009 and 2010 have been reclassified to reflect the cash
flows used in or provided by discontinued operations.




The
results of operations for Ness Asia Pacific for the three and six months ended
June 30, 2009 and 2010, which were reported separately as discontinued
operations in the consolidated statements of income, are summarized as
follows:




Three months ended
                        June 30,
                    
                    
                    Six months ended
                        June 30,2009
                    
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010(Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)Revenues
                    
                    $
                    3,861
                    
                    
                    $
                    —
                    
                    
                    $
                    7,463
                    
                    
                    $
                    4,783Operating
      loss
                    
                    $
                    (435
                    )
                    
                    $
                    (386
                    )
                    
                    $
                    (1,096
                    )
                    
                    $
                    (2,672
                    )Net
      loss from discontinued operations
                    
                    $
                    (368
                    )
                    
                    $
                    (386
                    )
                    
                    $
                    (1,132
                    )
                    
                    $
                    (2,691
                    )Basic
      and diluted net loss per share from discontinued
      operations
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.03
                    )
                    
                    $
                    (0.07
                    )




The
results of operations for NessPRO Europe for the three and six months ended June
30, 2009 and 2010, which were reported separately as discontinued operations in
the consolidated statements of income, are summarized as
follows:


– 14
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


U.S.
dollars in thousands (except share and per share data) (Unaudited)




Three months ended
                      June 30,
                  
                  
                  Six months ended
                      June 30,2009
                  
                  
                  2010
                  
                  
                  2009
                  
                  
                  2010(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)Revenues
                  
                  $
                  4,870
                  
                  
                  $
                  4,026
                  
                  
                  $
                  9,793
                  
                  
                  $
                  7,813Operating
      loss
                  
                  $
                  (1,001
                  )
                  
                  $
                  (376
                  )
                  
                  $
                  (1,358
                  )
                  
                  $
                  (3,367
                  )Net
      loss from discontinued operations
                  
                  $
                  (958
                  )
                  
                  $
                  (459
                  )
                  
                  $
                  (1,235
                  )
                  
                  $
                  (3,541
                  )Basic
      and diluted net loss per share from discontinued
      operations
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.09
                  )




The
results of operations for Ness Benelux for the three and six months ended June
30, 2009, which were reported separately as discontinued operations in the
consolidated statements of income, are summarized as follows:




Three months
                      ended
                  
                  
                  Six months
                      endedJune 30, 2009
                  
                  
                  June 30, 2009(Unaudited)
                  
                  
                  (Unaudited)Revenues
                  
                  $
                  1,625
                  
                  
                  $
                  3,253Operating
      income
                  
                  $
                  143
                  
                  
                  $
                  258Net
      income from discontinued operations
                  
                  $
                  140
                  
                  
                  $
                  238Basic
      net earnings per share from discontinued operations
                  
                  $
                  0.00
                  
                  
                  $
                  0.01Diluted
      net earnings per share from discontinued operations
                  
                  $
                  0.00
                  
                  
                  $
                  0.01




Note
5: Insurance settlement related to 2007 arbitration expense, net of related
expenses




On March
31, 2009, we received a settlement payment of $2,610, net of related expenses,
from our liability insurance provider related to the arbitration settlement,
which we recognized in the fourth quarter of 2007 using the exchange rate
prevailing on the payment date. No further payments from our insurance provider
are expected related to this matter.




Note
6: Commissions related to the sale of Israeli SAP sales and distribution
operations




In the
six months ended June 30, 2009, we recorded income of $2,534, representing
commissions related to the sale of our SAP sales and distribution operations in
Israel to SAP AG in August 2008, in connection with meeting certain performance
criteria for 2008.




Note
7: Derivative Instruments




ASC Topic
815, “Derivatives and Hedging,” requires companies to recognize all of their
derivative instruments as either assets or liabilities in the statement of
financial position at fair value. For derivative instruments that are designated
and qualify as a fair value hedge (i.e., they hedge the exposure to changes in
the fair value of an asset or a liability or an identified portion thereof that
is attributable to a particular risk), the gain or loss on the derivative
instrument as well as the offsetting loss or gain on the hedged item
attributable to the hedged risk are recognized in current earnings during the
period of the change in fair values. Derivatives that are designated and qualify
as hedges of forecasted transactions (i.e., cash flow hedges) are carried at
fair value with the effective portion of a derivative’s gain or loss recorded in
other comprehensive income and subsequently recognized in earnings in the same
period or periods in which the hedged forecasted transaction affects earnings.
For derivative instruments that are not designated and qualified as hedging
instruments, the gains or losses on the derivative instruments are recognized in
current earnings during the period of the change in fair
values.


– 15
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


U.S.
dollars in thousands (except share and per share data) (Unaudited)




The
derivative instruments we use are designed to reduce the market risk associated
with the exposure of our underlying transactions, assets and liabilities to
fluctuations in currency exchange rates or interest rates. We believe that there
is no significant risk of nonperformance by these counterparties because we
monitor the credit ratings of counterparties with whom we have outstanding
contracts with a significant mark-to-market positive amount, and we limit our
financial exposure with any one financial institution.




Cash
Flow Hedging Strategy:




At June
30, 2010, we held interest rate swap derivatives to convert certain
floating-rate debts to fixed-rate debts. The interest rate swap derivatives
involve an agreement to pay fixed-rate interest and receive floating-rate
interest, at specified intervals, calculated on agreed notional amounts that
match the amounts of the original loans and paid on the same installments and
maturity dates and as such there was no ineffectiveness related to these
derivatives for the six months ended June 30, 2010. At June 30, 2010, the
aggregate notional amount of the interest rate swaps was $20,481, with all
unrealized losses being deferred in accumulated other comprehensive income. The
liability is presented within other long-term liabilities on the balance sheet
at June 30, 2010, as the interest rate swap derivatives expire in November 2012
through April 2013.




We enter
into foreign exchange forward contracts to hedge against the effect of exchange
rate fluctuations on forecasted cash flows denominated in Indian Rupees. At June
30, 2010, the notional amount of foreign exchange forward contracts we entered
into was $49,500 and there was no ineffectiveness related to these foreign
exchange forward contracts for the six months ended June 30, 2010, with all
unrealized losses being deferred in accumulated other comprehensive income. The
liability is presented within other accounts receivable and prepaid expenses on
the balance sheet at June 30, 2010, as foreign exchange forward contracts expire
through June 30, 2011.




Derivatives
Instruments Not Designated as Hedging Strategy:




We enter
into foreign exchange forward contracts to hedge a portion of our trade payables
and receivables for a period of one to three months. The purpose of the foreign
currency instruments is to protect the fair value of our trade payables and
receivables due to foreign exchange rates. All gains and losses related to such
derivative instrument are recorded in financial expenses, net.




The
following tables present fair value amounts and gains and losses of derivative
instruments and related hedged items:


– 16
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


U.S.
dollars in thousands (except share and per share data) (Unaudited)




Fair
      Values of Derivative InstrumentsAssets
                
                LiabilitiesBalance
      Sheet
                    Item
                
                December
                    31,
      2009
                
                
                June
      30,
                    2010
                
                Balance
      Sheet
                    Item
                
                December
                    31,
      2009
                
                
                June
      30,
                    2010(Unaudited)
                
                
                
                
                
                
                (Unaudited)Cash
      flow hedging:Foreign
      exchange forward contracts
                “Other
      accounts receivable and prepaid expenses”
                
                $
                928
                
                
                $
                —
                
                “Other
      accounts payable and accrued expenses”
                
                $
                77
                
                
                $
                440Interest
      rate swap
                
                
                
                —
                
                
                
                —
                
                “Other
      long-term liabilities”
                
                
                480
                
                
                
                484Total
      cash flow hedging
                
                
                $
                928
                
                
                $
                —
                
                
                
                $
                557
                
                
                $
                924Derivatives
      not designated as hedging:Foreign
      exchange forward contracts
                “Other
      accounts receivable and prepaid expenses”
                
                
                293
                
                
                
                7
                
                “Other
      accounts payable and accrued expenses”
                
                
                108
                
                
                
                182Total
      derivatives
                
                
                $
                1,221
                
                
                $
                7
                
                
                
                $
                665
                
                
                $
                1,106


Loss
                                                                                          Recognizedin
                                                                                          Other
                                                                                        
                                                                                        
                                                                                        
                                                                                        Gain (loss) Recognized in Statements of IncomeComprehensive
                                                                                        
                                                                                        
                                                                                        
                                                                                        Three months ended
                                                                                        
                                                                                        
                                                                                        Six months endedIncome
                                                                                        
                                                                                        Statementsof
                                                                                        
                                                                                        June 30,
                                                                                        
                                                                                        
                                                                                        June 30,June 30,2010
                                                                                        
                                                                                        IncomeItem
                                                                                        
                                                                                        2009
                                                                                        
                                                                                        
                                                                                        2010
                                                                                        
                                                                                        
                                                                                        2009
                                                                                        
                                                                                        
                                                                                        2010(Unaudited)
                                                                                        
                                                                                        
                                                                                        
                                                                                        (Unaudited)
                                                                                        
                                                                                        
                                                                                        (Unaudited)
                                                                                        
                                                                                        
                                                                                        (Unaudited)
                                                                                        
                                                                                        
                                                                                        (Unaudited)Cash
      flow hedging:Foreign
      exchange forward contracts
                                                                                        
                                                                                        $
                                                                                        (277
                                                                                        )
                                                                                        “Cost
      of revenues” and
                                                                                          “Total
      operating expenses”
                                                                                        
                                                                                        $
                                                                                        (1,093
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        793
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (2,953
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        1,546Interest
      rate swap
                                                                                        
                                                                                        
                                                                                        (240
                                                                                        )
                                                                                        “Financial
      expenses, net”
                                                                                        
                                                                                        
                                                                                        (66
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (116
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (103
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (247
                                                                                        )Total
      cash flow hedging
                                                                                        
                                                                                        $
                                                                                        (517
                                                                                        )
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (1,159
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        677
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (3,056
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        1,299Derivatives
      not designated as hedging:Foreign
      exchange forward contracts
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        “Financial
      expenses, net”
                                                                                        
                                                                                        
                                                                                        420
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,198
                                                                                        
                                                                                        
                                                                                        
                                                                                        (553
                                                                                        )
                                                                                        
                                                                                        
                                                                                        218Total
      derivatives
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (739
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        1,875
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (3,609
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        1,517


– 17
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


U.S.
dollars in thousands (except share and per share data) (Unaudited)




Note
8: Commitments and Contingent Liabilities




a.
            Litigation




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




One of
our Israeli subsidiaries is currently involved in legal proceedings with the
Israeli Ministry of Justice (the “MOJ”). The legal proceedings relate to a
contract for the provision of an information system for the MOJ, executed in
November 2005 (the “MOJ Contract”). Following continued disputes, correspondence
and discussions, on February 9, 2009 we filed a claim with the Israeli District
Court located in Jerusalem claiming, among other things, a breach of the MOJ
Contract by the MOJ, including in connection with the MOJ’s demands for
revisions and changes to the software that were not contemplated in the MOJ
Contract. Our claim is for damages in the amount of NIS 20.7 million, or
approximately $5,300, using the exchange rate prevailing at June 30, 2010. On
February 11, 2009, the MOJ filed a claim against our Israeli subsidiary in the
Israeli District Court located in Jerusalem claiming, among other things, that
our Israeli subsidiary breached the MOJ Contract and failed to fulfill its
undertakings and obligations set forth therein. The MOJ’s claim is for damages
in the amount of NIS 79.5 million, or approximately $20,500, using the exchange
rate prevailing at June 30, 2010. The MOJ and our subsidiary have filed answers
to the respective claims. Both claims were transferred to the Israeli District
Court located in Tel Aviv and the first pretrial hearing for both claims is set
for September 7, 2010. We believe that we have a substantial basis with respect
to our claim and valid defenses with respect to the MOJ’s claim. While we intend
to vigorously prosecute our claim and defend against the MOJ’s claim, we cannot
at this point predict the outcome of either claim. Adverse decisions on these
claims may materially adversely affect our financial condition.




b.
            Guarantees




Guarantees
are contingent commitments issued by us generally to guarantee our performance
in different projects to our customers, such as tenders. The term of a guarantee
generally is equal to the term of the related projects, which can be as short as
30 days or as long as 8 years. The maximum potential amount of future payments
we could be required to make under our guarantees at December 31, 2009 and June
30, 2010 is $36,650 and $34,490, respectively. We do not hold collateral to
support guarantees except when deemed necessary.




c.
            Liens and
      charges




In order
to obtain loans, credits or other banking services from certain commercial
banks, we signed a negative pledge agreement with these banks. With the consent
of the banks, we recorded a fixed charge on deposits in the amount of
approximately $2,474 held by our Indian subsidiary related to the mark-to-market
of foreign exchange forward contracts.




d.
            Covenants




Long-term
loans and bank guarantees contain customary restrictive covenants as further
discussed below. Failure to comply with the 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.


– 18
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


U.S.
dollars in thousands (except share and per share data) (Unaudited)





1.
            Long-term
      loans denominated in dollars and euros contain covenants which, among
      other things, require us to maintain positive operating income in the last
      four quarters; require a certain ratio of total financial obligations to
      EBITDA and of total stockholders’ equity to total consolidated assets; and
      place limitations on our ability to merge or transfer assets to third
      parties. As of December 31, 2009, we were not in compliance with covenants
      under certain long-term loans requiring positive operating income and a
      certain ratio of total financial obligations to EBITDA. We received a
      waiver from the banks with respect to the covenants as of December 31,
      2009, and the banks agreed to provide, as substitutes, less stringent
      covenants to apply through September 30, 2010. As of June 30, 2010, we
      were in compliance and expect to remain in compliance with these
      covenants.




2.
            A
      long-term loan and bank guarantees denominated in NIS contain covenants
      which, among other things, require our Israeli subsidiary to maintain
      positive annual net income in a fiscal year; require a certain ratio of
      total stockholders’ equity to total consolidated assets and minimum
      stockholders’ equity; and place limitations on its ability to merge,
      transfer or pledge assets to third parties. As of June 30, 2010, we were
      in compliance and expect to remain in compliance with these
      covenants.




Note
9: Stockholders’ Equity




a.
            Total comprehensive
      income:




Three months ended
                      June 30,
                  
                  
                  Six months ended
                      June 30,2009
                  
                  
                  2010
                  
                  
                  2009
                  
                  
                  2010(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)Net
      income (loss)
                  
                  $
                  1,042
                  
                  
                  $
                  43
                  
                  
                  $
                  2,570
                  
                  
                  $
                  (4,646
                  )Foreign
      currency translation adjustments, net
                  
                  
                  21,220
                  
                  
                  
                  (13,475
                  )
                  
                  
                  (1,513
                  )
                  
                  
                  (14,957
                  )Unrealized
      income (loss) on foreign exchange forward contracts and interest rate
      swap
                  
                  
                  3,150
                  
                  
                  
                  (1,760
                  )
                  
                  
                  3,382
                  
                  
                  
                  (966
                  )Comprehensive
      income (loss)
                  
                  $
                  25,412
                  
                  
                  $
                  (15,192
                  )
                  
                  $
                  4,439
                  
                  
                  $
                  (20,569
                  )




b.
            Changes in accumulated
      other gain (loss) due to cash flow hedging
      strategy:




Six months ended
                    June 30,2009
                
                
                2010(Unaudited)
                
                
                (Unaudited)Balance
      at the beginning of the period
                
                $
                (4,000
                )
                
                $
                449Mark
      to market of foreign exchange forward contracts and interest rate
      swap
                
                
                326
                
                
                
                333Loss
      (gain) recognized in earnings during the period
                
                
                3,056
                
                
                
                (1,299
                )Balance
      at the end of the period
                
                $
                (618
                )
                
                $
                (517
                )




c.
            Option
      exercises:




In the
six months ended June 30, 2009 and 2010, no options to purchase our common stock
were exercised.


– 19
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


U.S.
dollars in thousands (except share and per share data) (Unaudited)




d.
            Treasury
      stock:




During
the six months ended June 30, 2009 and 2010, we repurchased 636,163 and 398,200
shares of our common stock on the open market for an aggregate purchase price of
$2,037 and $2,169, respectively.




Note
10: Segment Reporting




Our
segment information has been prepared in accordance with ASC Topic 280, “Segment
Reporting.” Operating segments are defined as components of an enterprise
engaging in business activities about which separate financial information is
available that is evaluated regularly by our chief operating decision-maker in
deciding how to allocate resources and assess performance. Our chief operating
decision-maker is our chief executive officer, who evaluates our performance and
allocates resources based on segment revenues and operating profit.




We no
longer report a separate Software Distribution segment, as we reclassified our
European software distribution operations as discontinued operations and we
reclassified our Israeli software distribution operations to our System
Integration and Application Development segment, effective as of January 1,
2010, as a result of the resolution of our board of directors to sell our
European software distribution operations. Segment data for prior periods has
been restated to reflect the current organization of the segments.




Our
operating segments are:




1.
            Software Product
      Engineering, in which, through our Software Product Labs business
      unit, we offer software product research and development services. We set
      up these labs for clients and operate them on an ongoing basis, enabling
      us to collaborate with our clients’ engineering teams to extend their
      capacity and budgets throughout the software product life cycle. We locate
      our Software Product Labs predominantly in India and in Central and
      Eastern Europe and we operate them across multiple locations as needed to
      optimize global delivery. They primarily serve customers in North America
      and Europe, and may include team members local to the
    client.




2.
            System Integration and
      Application Development, in which we offer a broad set of IT
      services to our clients in the areas of system integration, application
      development, consulting and software distribution. We provide these
      services to customers in over 20 countries throughout North America,
      Europe, Israel and Asia Pacific. We deliver the services through a global
      delivery model that includes local teams as well as offshore and
      near-shore resources. We provide these services for a wide range of
      clients in many verticals, including utilities and government, financial
      services, defense and homeland security, life sciences and healthcare,
      manufacturing and transportation, retail, and
  others.




Segment
operating profit is defined as income from operations, excluding unallocated
headquarters costs. Expenses included in segment operating profit consist
principally of direct selling, general, administrative and delivery costs.
Certain general and administrative expenses, stock-based compensation and a
portion of depreciation are not allocated to specific segments as management
believes they are not directly attributable to any specific segment.
Accordingly, these expenses are categorized as “Unallocated Expenses” and
adjusted against our total income from operations. Additionally, our management
has determined that it is not practical to allocate certain identifiable assets
by segment when such assets are used interchangeably among the
segments.


– 20
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


U.S.
dollars in thousands (except share and per share data) (Unaudited)




The table
below presents financial information for our reportable segments:




Three
      months ended June 30, 2010Software
                    Product
                    Engineering
                
                
                System
                    Integration
      &
                    Application
                    Development
                
                
                Unallocated
                    Expenses
                
                
                Total(Unaudited)Revenues
      from external customers
                
                $
                28,060
                
                
                $
                111,641
                
                
                $
                —
                
                
                $
                139,701Operating
      income (loss)
                
                $
                4,388
                
                
                $
                2,746
                
                
                $
                (4,097
                )
                
                
                3,037Financial
      expenses, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (442
                )Income
      before taxes on income
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                2,595Three
      months ended June 30, 2009Software
                    Product
                    Engineering
                
                
                System
                    Integration
      &
                    Application
                    Development
                
                
                Unallocated
                    Expenses
                
                
                Total(Unaudited)Revenues
      from external customers
                
                $
                25,688
                
                
                $
                101,199
                
                
                $
                —
                
                
                $
                126,887Operating
      income (loss)
                
                $
                4,096
                
                
                $
                3,228
                
                
                $
                (3,893
                )
                
                
                3,431Financial
      expenses, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (666
                )Income
      before taxes on income
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                2,765Six
      months ended June 30, 2010Software
                    Product
                    Engineering
                
                
                System
                    Integration
      &
                    Application
                    Development
                
                
                Unallocated
                    Expenses
                
                
                Total(Unaudited)Revenues
      from external customers
                
                $
                54,457
                
                
                $
                218,577
                
                
                $
                —
                
                
                $
                273,034Operating
      income (loss)
                
                $
                8,241
                
                
                $
                5,973
                
                
                $
                (8,760
                )
                
                
                5,454Financial
      expenses, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (651
                )Income
      before taxes on income
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                4,803Six
      months ended June 30, 2009Software
                    Product
                    Engineering
                
                
                System
                    Integration
      &
                    Application
                    Development
                
                
                Unallocated
                    Expenses
                
                
                Total(Unaudited)Revenues
      from external customers
                
                $
                50,654
                
                
                $
                202,514
                
                
                $
                —
                
                
                $
                253,168Operating
      income (loss)
                
                $
                8,210
                
                
                $
                8,539
                
                
                $
                (9,049
                )
                
                
                7,700Financial
      expenses, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,822
                )Income
      before taxes on income
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                5,878


– 21
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


U.S.
dollars in thousands (except share and per share data) (Unaudited)




Our total
revenues are attributed to geographic areas based on the location of the end
customer.




The
following tables present total revenues for the three and six months ended June
30, 2009 and 2010, and long-lived assets as of December 31, 2009 and June 30,
2010:




Three months ended
                          June 30,
                      
                      
                      Six months ended
                          June 30,2009
                      
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010(Unaudited)
                      
                      
                      (Unaudited)
                      
                      
                      (Unaudited)
                      
                      
                      (Unaudited)Revenues
      from sales to unaffiliated customers:Israel
                      
                      $
                      42,371
                      
                      
                      $
                      51,327
                      
                      
                      $
                      87,641
                      
                      
                      $
                      98,966North
      America
                      
                      
                      43,544
                      
                      
                      
                      48,381
                      
                      
                      
                      86,023
                      
                      
                      
                      93,630Europe
      (excluding Czech Republic)
                      
                      
                      19,903
                      
                      
                      
                      20,986
                      
                      
                      
                      39,939
                      
                      
                      
                      41,082Czech
      Republic
                      
                      
                      18,698
                      
                      
                      
                      17,178
                      
                      
                      
                      35,135
                      
                      
                      
                      36,083Asia
      Pacific
                      
                      
                      2,371
                      
                      
                      
                      1,829
                      
                      
                      
                      4,430
                      
                      
                      
                      3,273$
                      126,887
                      
                      
                      $
                      139,701
                      
                      
                      $
                      253,168
                      
                      
                      $
                      273,034




December
                        31,
      2009
                    
                    
                    June
      30,
                        2010(Unaudited)Long-lived
      assets:Israel
                    
                    $
                    21,983
                    
                    
                    $
                    21,857India
                    
                    
                    6,812
                    
                    
                    
                    6,198Europe
                    
                    
                    4,184
                    
                    
                    
                    3,376North
      America
                    
                    
                    2,760
                    
                    
                    
                    2,588$
                    35,739
                    
                    
                    $
                    34,019




Other
than as disclosed in the tables above, the revenues and long-lived assets
attributable to individual foreign countries are not material.




Note
11: Income Taxes




As of
June 30, 2010 the total of our unrecognized tax benefits was $4,455, which, if
recognized, would affect our effective tax rates in future periods. Included in
that amount are accrued interest and penalties resulting from such unrecognized
tax benefits of $722 at June 30, 2010. During the six months ended June 30,
2010, we recorded $128 for interest and penalties expenses with respect to
uncertain tax positions. A reconciliation of the beginning and ending amounts of
unrecognized tax benefits as of June 30, 2010 is as follows:




Balance
      as of January 1, 2010
                        
                        $
                        3,892Reductions
      related to changes in interest rates and foreign currency exchange
      rates
                        
                        
                        (288
                        )Additions
      related to tax positions taken during the period
                        
                        
                        851Balance
      as of June 30, 2010
                        
                        $
                        4,455




The
amount of income taxes we pay is subject to ongoing audit by federal, state and
foreign tax authorities, which often results in proposed assessments. Management
performs a comprehensive review of our global tax positions on a quarterly basis
and accrues amounts for contingent tax liabilities. Based on these reviews, the
result of discussions and resolutions of matters with certain tax authorities
and the closure of tax years subject to tax audit, reserves are adjusted as
necessary. However, future results may include favorable or unfavorable
adjustments to estimated tax liabilities in the period the assessments are
determined or resolved. Additionally, the jurisdictions in which earnings and/or
deductions are realized may differ from current estimates. We are no longer
subject to U.S. federal, state and local, or non-U.S. income tax examination for
years before 2004 with respect to our primary locations.


– 22
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


U.S.
dollars in thousands (except share and per share data) (Unaudited)




The
effective tax rate used in computing the provision for income taxes is based on
our projected fiscal year income before taxes, including estimated income by tax
jurisdiction. The difference between the effective tax rate and the statutory
tax rate is due primarily to foreign tax holidays, foreign subsidiaries with
different tax rates and non-deductible expenses.




Note
12: Basic and Diluted Net Earnings per Share




Basic net
earnings per share are computed based on the weighted average number of shares
of common stock outstanding during each period. Diluted net earnings per share
are computed based on the weighted average number of shares of common stock
outstanding during each period, plus dilutive potential shares of common stock
considered outstanding during the period, in accordance with ASC Topic 260,
“Earnings per Share.”




The
following table sets forth the computation of basic and diluted net earnings per
share of common stock:




Three months ended
                          June 30,
                      
                      
                      Six months ended
                          June 30,2009
                      
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010(Unaudited)
                      
                      
                      (Unaudited)
                      
                      
                      (Unaudited)
                      
                      
                      (Unaudited)Numerator:Net
      income from continuing operations, numerator for basic and diluted
      earnings per share from continuing operations
                      
                      $
                      2,228
                      
                      
                      $
                      888
                      
                      
                      $
                      4,699
                      
                      
                      $
                      1,586Denominator:Weighted
      average number of shares of common stock, denominator for basic net
      earnings per share from continuing operations, denominator for basic net
      earnings (loss) per share, denominator for diluted net loss per
      share
                      
                      
                      38,590
                      
                      
                      
                      38,161
                      
                      
                      
                      38,755
                      
                      
                      
                      38,230Effect
      of dilutive securities:Employee
      stock options and restricted stock units
                      
                      
                      559
                      
                      
                      
                      431
                      
                      
                      
                      578
                      
                      
                      
                      442Denominator
      for diluted net earnings per share from continuing operations, denominator
      for diluted net earnings per share – weighted average assuming exercise of
      options and restricted stock units
                      
                      
                      39,149
                      
                      
                      
                      38,592
                      
                      
                      
                      39,333
                      
                      
                      
                      38,672




The total
weighted average number of shares related to the outstanding options excluded
from the calculations of diluted net earnings per share from continuing
operations and diluted net earnings per share, as they would have been
anti-dilutive for all periods presented, was 4,930,543 and 4,979,304,
respectively, for the three and six months ended June 30, 2009 and 4,443,119 and
4,401,509, respectively, for the three and six months ended June 30,
2010.


– 23
–




Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations




The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited consolidated
financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q.




Forward-Looking
Statements




This
quarterly report on Form 10-Q contains “forward-looking statements” that involve
risks and uncertainties, as well as assumptions that, if they never materialize
or prove incorrect, could cause our results to differ materially from those
expressed or implied by such forward-looking statements. The statements
contained in this Quarterly Report on Form 10-Q that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are
often identified by the use of words such as, but not limited to, “anticipate,”
“believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,”
“will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and
similar expressions or variations intended to identify forward-looking
statements. These statements are based on the beliefs and assumptions of our
management based on information currently available to management. Such
forward-looking statements are subject to risks, uncertainties and other
important factors that could cause actual results and the timing of certain
events to differ materially from future results expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below, and those
discussed in the section titled “Risk Factors” included in our Annual Report on
Form 10-K for the year ended December 31, 2009 filed with the SEC on March 15,
2010. Furthermore, such forward-looking statements speak only as of the date of
this report. Except as required by law, we undertake no obligation to update any
forward-looking statements to reflect events or circumstances after the date of
such statements.




Overview




We are a
global provider of information technology, or IT, and business services and
solutions with specialized expertise in software product engineering; system
integration, application development, consulting and software distribution. We
deliver our portfolio of services and solutions using a global delivery model
combining offshore, near-shore and local teams. The primary industries, or
verticals, we serve include high-tech companies and independent software
vendors, or ISVs; utilities and public sector; financial services; defense and
homeland security; and life sciences and healthcare.




We have
operations in North America, Europe, Israel and India, serving customers in over
20 countries. We combine our deep expertise in the verticals we serve 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, we leverage our corporate knowledge and experience,
intellectual property and global infrastructure to develop innovative solutions
for clients across the geographic areas and verticals we serve. Through our
global delivery model, which includes lower-cost offshore and near-shore
delivery capabilities, we can achieve meaningful cost reductions or other
benefits for our clients.




Our
revenues increased to $139.7 million and $273.0 million for the three and six
months ended June 30, 2010, from $126.9 million and $253.2 million for the three
and six months ended June 30, 2009, respectively. Net income from continuing
operations decreased to $0.9 million and $1.6 million for the three and six
months ended June 30, 2010 from $2.2 million and $4.7 million for the three and
six months ended June 30, 2009, respectively.




The
dollar weakened by an average of 7% against the NIS in the three and six months
ended June 30, 2010 compared to the three and six months ended June 30, 2009,
strengthened by an average of 4% against the euro and other relevant European
currencies in the three months ended June 30, 2010 compared to the three months
ended June 30, 2009 and weakened by an average of 3% against the euro and other
relevant European currencies in the six months ended June 30, 2010 compared to
the six months ended June 30, 2009. Since approximately 60% of our revenues and
80% of our expenses are denominated in non-dollar currencies, we estimate that
our revenues were $2.8 million and $10.6 million higher, and our operating
income was $0.1 million and $0.5 million lower, in the three and six months
ended June 30, 2010 as a result of changes in foreign currency exchange rates
versus their average rates for the three and six months ended June 30, 2009,
respectively.


– 24
–


Our
client base is diverse, and we are not dependent on any single client. In the
three and six months ended June 30, 2010, no client accounted for more than 5%
and 6% of our revenues and our largest twenty clients together accounted for
approximately 38% and 40% of our revenues, respectively. For the three and six
months ended June 30, 2010, the percentage of our revenues derived in aggregate
from agencies of the government of Israel was approximately 19% and 17%,
respectively. Existing clients from prior years generated more than 85% of our
revenues in the three and six months ended June 30, 2010.




Our
backlog from continuing operations as of June 30, 2010 was $658 million,
compared to $647 million as of June 30, 2009. The difference represents a
year-over-year backlog increase for continuing operations of $13 million plus an
increase due to our Gilon acquisition of $12 million, offset by a decrease in
the dollar value of our non-U.S. backlog due to the stronger dollar of $14
million. We achieve backlog through new signings of IT services projects and
outsourcing contracts, including for new and repeat customers, including
estimations of backlog associated with ongoing time and materials engagements.
We recognize backlog as revenue when we perform the services related to the
backlog.




For the
three and six months ended June 30, 2010, the percentage of our revenues derived
from clients in Europe was 27% and 28%, respectively; clients in Israel, 37% and
36%, respectively; clients in North America, 35% and 34%, respectively; and
clients in Asia Pacific, 1% and 1%, respectively.




As of
June 30, 2010, we had approximately 7,765 employees related to continuing
operations, including approximately 6,715 IT professionals. Of the 7,765
employees, approximately 3,015 were in India, 2,800 were in Israel, 1,375 were
in Europe, 530 were in North America and 45 were in Asia Pacific.




Consolidated
Results of Operations




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




Three months ended
                  June 30,
              
              
              Six months ended
                  June 30,2009
              
              
              2010
              
              
              2009
              
              
              2010Revenues
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %Cost
      of revenues
              
              
              72.9
              
              
              
              73.2
              
              
              
              73.8
              
              
              
              72.8Gross
      profit
              
              
              27.1
              
              
              
              26.8
              
              
              
              26.2
              
              
              
              27.2Selling
      and marketing
              
              
              7.6
              
              
              
              7.0
              
              
              
              7.5
              
              
              
              7.3General
      and administrative
              
              
              16.7
              
              
              
              17.6
              
              
              
              17.7
              
              
              
              17.9Insurance
      settlement related to 2007 arbitration expense, net of related
      expenses
              
              
              —
              
              
              
              —
              
              
              
              (1.0
              )
              
              
              —Commissions
      related to the sale of Israeli SAP sales and distribution
      operations
              
              
              —
              
              
              
              —
              
              
              
              (1.0
              )
              
              
              —Total
      operating expenses
              
              
              24.4
              
              
              
              24.6
              
              
              
              23.1
              
              
              
              25.2Operating
      income
              
              
              2.7
              
              
              
              2.2
              
              
              
              3.0
              
              
              
              2.0Financial
      expenses, net
              
              
              (0.5
              )
              
              
              (0.3
              )
              
              
              (0.7
              )
              
              
              (0.2
              )Income
      before taxes on income
              
              
              2.2
              
              
              
              1.9
              
              
              
              2.3
              
              
              
              1.8Taxes
      on income
              
              
              0.4
              
              
              
              1.2
              
              
              
              0.5
              
              
              
              1.2Net
      income from continuing operations
              
              
              1.8
              
              
              
              0.6
              
              
              
              1.9
              
              
              
              0.6Net
      loss from discontinued operations
              
              
              (0.9
              )
              
              
              (0.6
              )
              
              
              (0.8
              )
              
              
              (2.3
              )Net
      income (loss)
              
              
              0.8
              
              
              
              0.0
              
              
              
              1.0
              
              
              
              (1.7
              )


– 25
–




Three
Months Ended June 30, 2010 Compared to the Three Months Ended June 30,
2009




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




Three months ended
                        June 30,
                    
                    
                    Increase2009
                    
                    
                    2010
                    
                    
                    $
                    
                    
                    %Revenues
                    
                    $
                    126,887
                    
                    
                    $
                    139,701
                    
                    
                    
                    12,814
                    
                    
                    
                    10.1Cost
      of revenues
                    
                    
                    92,542
                    
                    
                    
                    102,275
                    
                    
                    
                    9,733
                    
                    
                    
                    10.5Gross
      profit
                    
                    $
                    34,345
                    
                    
                    $
                    37,426
                    
                    
                    
                    3,081
                    
                    
                    
                    9.0Gross
      margin
                    
                    
                    27.1
                    %
                    
                    
                    26.8
                    %




Revenues




Our
revenues increased from $126.9 million in the three months ended June 30, 2009
to $139.7 million in the three months ended June 30, 2010, representing an
increase of $12.8 million, or 10.1%. Approximately $5.3 million of the increase
was attributable to our acquisition of Gilon. The remaining increase was due
primarily to an increase in the other revenues of our System Integration and
Application Development segment compared to the three months ended June 30,
2009, representing $2.3 million, an increase in revenues of our Software Product
Engineering segment, representing $2.4 million, and foreign currency translation
effects on our non-dollar revenues attributable to the weaker dollar,
representing $2.8 million.




Cost
of revenues




Our cost
of revenues, including salaries, wages and other direct and indirect costs,
increased from $92.5 million in the three months ended June 30, 2009 to $102.3
million in the three months ended June 30, 2010, representing an increase of
$9.7 million, or 10.5%. Approximately $4.5 million of the increase was
attributable to our Gilon acquisition, and the remaining increase was due
primarily to growth in our delivery staff needed to support our increased
revenues, representing $3.4 million, and foreign currency translation effects on
non-dollar expenses attributable to the weaker dollar, representing $1.7
million.




Gross
Profit




Our gross
profit (revenues less cost of revenues) increased from $34.3 million in the
three months ended June 30, 2009 to $37.4 million in the three months ended June
30, 2010, representing an increase of $3.1 million, or 9.0%. Approximately $0.8
million of the increase was attributable to our Gilon acquisition, and the
remaining increase is attributed to our other revenue growth, representing $1.3
million, and foreign currency translation effects on our non-dollar gross
profits attributable to the weaker dollar, representing $1.1 million. Gross
margin decreased from 27.1% in the three months ended June 30, 2009 to 26.8% in
the three months ended June 30, 2010.




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




Three months ended
                        June 30,
                    
                    
                    Increase
                        (Decrease)2009
                    
                    
                    2010
                    
                    
                    $
                    
                    
                    %Selling
      and marketing
                    
                    $
                    9,681
                    
                    
                    $
                    9,838
                    
                    
                    
                    157
                    
                    
                    1.6General
      and administrative
                    
                    
                    21,233
                    
                    
                    
                    24,551
                    
                    
                    
                    3,318
                    
                    
                    15.6Total
      operating expenses
                    
                    
                    30,914
                    
                    
                    
                    34,389
                    
                    
                    
                    3,475
                    
                    
                    11.2Operating
      income
                    
                    $
                    3,431
                    
                    
                    $
                    3,037
                    
                    
                    
                    (394
                    )
                    
                    (11.5
                    )


– 26
–




Selling
and marketing




Selling
and marketing expenses increased from $9.7 million in the three months ended
June 30, 2009 to $9.8 million in the three months ended June 30, 2010,
representing an increase of $0.2 million, or 1.6%. The increase was due
primarily to the inclusion of selling and marketing expenses from our Gilon
acquisition, representing $0.4 million.




General
and administrative




General
and administrative expenses increased from $21.2 million in the three months
ended June 30, 2009 to $24.6 million in the three months ended June 30, 2010,
representing an increase of $3.3 million, or 15.6%. The increase was due
primarily to foreign currency translation effects on non-dollar expenses
attributable to the weaker dollar, representing $1.1 million, acquisition and
integration costs of our Gilon acquisition, representing $0.7 million, and the
inclusion of general and administrative expenses from the acquisition,
representing $0.7 million.




Operating
Income




Operating
income decreased from $3.4 million in the three months ended June 30, 2009 to
$3.0 million in the three months ended June 30, 2010, representing a decrease of
$0.4 million, or 11.5%. The major factors contributing to this decrease were
acquisition and integration costs of our Gilon acquisition, representing $0.7
million, retention expenses related to prior acquisitions, representing $0.5
million, and foreign currency translation effects on non-dollar operating income
attributable to the weaker dollar, representing $0.1 million, offset by an
increase in operating income of our System Integration and Application
Development segment, representing $0.8 million, and a decrease in unallocated
expenses, representing $0.2 million. See also “—Results by Business
Segment.”




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




Three months ended
                        June 30,
                    
                    
                    Increase
                        (Decrease)2009
                    
                    
                    2010
                    
                    
                    $
                    
                    
                    %Operating
      income
                    
                    $
                    3,431
                    
                    
                    $
                    3,037
                    
                    
                    
                    (394
                    )
                    
                    
                    (11.5
                    )Financial
      expenses, net
                    
                    
                    (666
                    )
                    
                    
                    (442
                    )
                    
                    
                    224
                    
                    
                    
                    (33.6
                    )Income
      before taxes on income
                    
                    
                    2,765
                    
                    
                    
                    2,595
                    
                    
                    
                    (170
                    )
                    
                    
                    (6.1
                    )Taxes
      on income
                    
                    
                    537
                    
                    
                    
                    1,707
                    
                    
                    
                    1,170
                    
                    
                    
                    217.9Net
      income from continuing operations
                    
                    
                    2,228
                    
                    
                    
                    888
                    
                    
                    
                    (1,340
                    )
                    
                    
                    (60.1
                    )Net
      loss from discontinued operations
                    
                    
                    (1,186
                    )
                    
                    
                    (845
                    )
                    
                    
                    341
                    
                    
                    
                    (28.8
                    )Net
      income
                    
                    $
                    1,042
                    
                    
                    $
                    43
                    
                    
                    
                    (999
                    )
                    
                    
                    (95.9
                    )




Financial
expenses, net




Financial
expenses, net, decreased from $0.7 million in the three months ended June 30,
2009 to $0.4 million in the three months ended June 30, 2010, representing a
decrease of $0.2 million, or 33.6%. This decrease was due primarily to a
reduction in our average net debt, representing $0.2 million, and lower interest
rates on our long-term debt, representing $0.1 million. Our average net debt
changed from $38.8 million in the three months ended June 30, 2009 to $17.5
million in the three months ended June 30, 2010.




Taxes
on income




Our taxes
on income increased from $0.5 million in the three months ended June 30, 2009 to
$1.7 million in the three months ended June 30, 2010, representing an increase
of $1.2 million, or 217.9%. This increase was due primarily to our inability to
utilize existing deferred tax assets or create new deferred tax assets in
certain jurisdictions where we are still experiencing losses, representing $1.2
million. Our effective tax rate in the three months ended June 30, 2010 was
65.8%, compared to 19.4% in the three months ended June 30, 2009 mainly as a
result of this factor.


– 27
–




Net
income from continuing operations




Net
income from continuing operations decreased from $2.2 million in the three
months ended June 30, 2009 to $0.9 million in the three months ended June 30,
2010, representing a decrease of $1.3 million, or 60.1%. The decrease was due
primarily to our increase in taxes on income, representing $1.2 million, and our
decrease in operating income of $0.4 million, offset by a decrease in financial
expenses, net, representing $0.2 million.




Net
loss from discontinued operations




Our net
loss from discontinued operations decreased from $1.2 million in the three
months ended June 30, 2009 to $0.8 million in the three months ended June 30,
2010, representing a decrease of $0.3 million, or 28.8%. The decrease was due
primarily to a decrease in the net loss of our NessPRO Europe operations,
representing $0.5 million, offset by the exclusion of our Ness Benelux
subsidiary, which we sold to a third party on January 15, 2010, representing
$0.1 million. The results of NessPRO Europe were reclassified as discontinued
operations following our March 29, 2010 resolution to sell the operations. Also
included in discontinued operations are our Ness Asia Pacific operations, which
our board of directors resolved on February 1, 2010 to sell and in respect of
which we signed a definitive asset transfer agreement with the buyer on April
24, 2010.




Net
income




Net
income decreased from $1.0 million in the three months ended June 30, 2009 to
$43,000 in the three months ended June 30, 2010, representing a decrease of $1.0
million, or 95.9%. The decrease was due primarily to our decrease in operating
income, representing $0.4 million, and our increase in taxes on income,
representing $1.2 million, offset by our reduction in the net loss from
discontinued operations, representing $0.3 million, and a decrease our financial
expenses, representing $0.2 million.




Six
Months Ended June 30, 2010 Compared to the Six Months Ended June 30,
2009




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




Six months ended
                        June 30,
                    
                    
                    Increase2009
                    
                    
                    2010
                    
                    
                    $
                    
                    
                    %Revenues
                    
                    $
                    253,168
                    
                    
                    $
                    273,034
                    
                    
                    
                    19,866
                    
                    
                    7.8Cost
      of revenues
                    
                    
                    186,901
                    
                    
                    
                    198,796
                    
                    
                    
                    11,895
                    
                    
                    6.4Gross
      profit
                    
                    $
                    66,267
                    
                    
                    $
                    74,238
                    
                    
                    
                    7,971
                    
                    
                    12.0Gross
      margin
                    
                    
                    26.2
                    %
                    
                    
                    27.2
                    %




Revenues




Our
revenues increased from $253.2 million in the six months ended June 30, 2009 to
$273.0 million in the six months ended June 30, 2010, representing an increase
of $19.9 million, or 7.8%. Approximately $5.3 million of the increase was
attributable to our acquisition of Gilon. The remaining increase was due
primarily to foreign currency translation effects on our non-dollar revenues
attributable to the weaker dollar, representing $10.6 million, and increase in
revenues of our Software Product Engineering segment, representing $3.8
million.




Cost
of revenues




Our cost
of revenues, including salaries, wages and other direct and indirect costs,
increased from $186.9 million in the six months ended June 30, 2009 to $198.8
million in the six months ended June 30, 2010, representing an increase of $11.9
million, or 6.4%. Approximately $4.5 million of the increase was attributable to
our Gilon acquisition, and the balance was due primarily to foreign currency
translation effects on non-dollar expenses attributable to the weaker dollar,
representing $7.7 million, and growth in our delivery staff needed to support
our increased revenues, representing $1.4 million.


– 28
–




Gross
Profit




Our gross
profit (revenues less cost of revenues) increased from $66.3 million in the six
months ended June 30, 2009 to $74.2 million in the six months ended June 30,
2010, representing an increase of $8.0 million, or 12.0%. Approximately $0.8
million of the increase was attributable to our Gilon acquisition, and the
remaining increase was due primarily to the increase in our other revenues,
representing $2.5 million, and foreign currency translation effects on our
non-dollar gross profits attributable to the weaker dollar, representing $2.9
million. Gross margin increased from 26.2% in the six months ended June 30, 2009
to 27.2% in the six months ended June 30, 2010 as a result of these
factors.




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




Six months ended
                      June 30,
                  
                  
                  Increase
                      (Decrease)2009
                  
                  
                  2010
                  
                  
                  $
                  
                  
                  %Selling
      and marketing
                  
                  $
                  18,893
                  
                  
                  $
                  19,891
                  
                  
                  
                  998
                  
                  
                  5.3General
      and administrative
                  
                  
                  44,818
                  
                  
                  
                  48,893
                  
                  
                  
                  4,075
                  
                  
                  9.1Insurance
      settlement related to 2007 arbitration expense, net of related
      expenses
                  
                  
                  (2,610
                  )
                  
                  
                  —
                  
                  
                  
                  2,610
                  
                  
                  (100.0
                  )Commissions
      related to the sale of Israeli SAP sales and distribution
      operations
                  
                  
                  (2,534
                  )
                  
                  
                  —
                  
                  
                  
                  2,534
                  
                  
                  (100.0
                  )Total
      operating expenses
                  
                  
                  58,567
                  
                  
                  
                  68,784
                  
                  
                  
                  10,217
                  
                  
                  17.4Operating
      income
                  
                  $
                  7,700
                  
                  
                  $
                  5,454
                  
                  
                  
                  (2,246
                  )
                  
                  (29.2
                  )




Selling
and marketing




Selling
and marketing expenses increased from $18.9 million in the six months ended June
30, 2009 to $19.9 million in the six months ended June 30, 2010, representing an
increase of $1.0 million, or 5.3%. The increase was due primarily to foreign
currency translation effects on our non-dollar expenses attributable to the
weaker dollar, representing $0.8 million, and the inclusion of selling and
marketing expenses from our Gilon acquisition, representing $0.4
million.




General
and administrative




General
and administrative expenses increased from $44.8 million in the six months ended
June 30, 2009 to $48.9 million in the six months ended June 30, 2010,
representing an increase of $4.1 million, or 9.1%. The increase was due
primarily to foreign currency translation effects on non-dollar expenses
attributable to the weaker dollar, representing $2.6 million, retention expenses
related to prior acquisitions, representing $1.0 million, acquisition and
integration costs of our Gilon acquisition, representing $0.7 million, and the
inclusion of general and administrative expenses from the acquisition,
representing $0.7 million, offset by severance expenses in the six months ended
June 30, 2009 for which there were no corresponding expenses in the six months
ended June 30, 2010, representing $1.7 million.




Insurance
settlement related to 2007 arbitration expense, net of related
expenses




In the
six months ended June 30, 2009, we recorded income of $2.6 million, net of
related expenses, representing an insurance settlement we received from our
liability insurance provider related to the arbitration settlement we recognized
in the fourth quarter of 2007. There was no corresponding income in the six
months ended June 30, 2010.


– 29
–




Commissions
related to the sale of Israeli SAP sales and distribution
operations




In the
six months ended June 30, 2009, we recorded income of $2.5 million, representing
commissions earned from SAP AG in connection with meeting certain performance
criteria for 2008. There was no corresponding income in the six months ended
June 30, 2010.




Operating
Income




Operating
income decreased from $7.7 million in the six months ended June 30, 2009 to $5.5
million in the six months ended June 30, 2010, representing a decrease of $2.2
million, or 29.2%. The major factors contributing to this decrease were income
in the six months ended June 30, 2009 from an insurance settlement, net of
related expenses, recognized by our System Integration and Application
Development segment related to our 2007 arbitration expense, representing $2.6
million, commissions recognized in the six months ended June 30, 2009 by NessPRO
Israel (at that time a part of our former Software Distribution segment and now
part of our System Integration and Application Development segment) related to
the August 2008 sale of our SAP sales and distribution operations, representing
$2.5 million, acquisition and integration costs of our Gilon acquisition,
representing $0.7 million, retention expenses related to prior acquisitions,
representing $1.0 million, and foreign currency translation effects on
non-dollar operating income attributable to the weaker dollar, representing $0.5
million, offset by an increase in operating income of our System Integration and
Application Development segment, representing $5.3 million, and a decrease in
unallocated expenses, representing $1.1 million. See also “—Results by Business
Segment.”




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




Six months ended
                        June 30,
                    
                    
                    Increase
                        (Decrease)2009
                    
                    
                    2010
                    
                    
                    $
                    
                    
                    %Operating
      income
                    
                    $
                    7,700
                    
                    
                    $
                    5,454
                    
                    
                    
                    (2,246
                    )
                    
                    (29.2
                    )Financial
      expenses, net
                    
                    
                    (1,822
                    )
                    
                    
                    (651
                    )
                    
                    
                    1,171
                    
                    
                    (64.3
                    )Income
      before taxes on income
                    
                    
                    5,878
                    
                    
                    
                    4,803
                    
                    
                    
                    (1,075
                    )
                    
                    (18.3
                    )Taxes
      on income
                    
                    
                    1,179
                    
                    
                    
                    3,217
                    
                    
                    
                    2,038
                    
                    
                    172.9Net
      income from continuing operations
                    
                    
                    4,699
                    
                    
                    
                    1,586
                    
                    
                    
                    (3,113
                    )
                    
                    (66.2
                    )Net
      loss from discontinued operations
                    
                    
                    (2,129
                    )
                    
                    
                    (6,232
                    )
                    
                    
                    (4,103
                    )
                    
                    192.7Net
      income (loss)
                    
                    $
                    2,570
                    
                    
                    $
                    (4,646
                    )
                    
                    
                    (7,216
                    )
                    
                    N/A




Financial
expenses, net




Financial
expenses, net, decreased from $1.8 million in the six months ended June 30, 2009
to $0.7 million in the six months ended June 30, 2010, representing a decrease
of $1.2 million, or 64.3%. This decrease was due primarily to the favorable
impact of exchange rate differences, representing $0.6 million, a reduction in
our average net debt, representing $0.4 million, and lower interest rates on our
long-term debt, representing $0.2 million. Our average net debt changed from
$35.0 million in the six months ended June 30, 2009 to $8.4 million in the six
months ended June 30, 2010.




Taxes
on income




Our taxes
on income increased from $1.2 million in the six months ended June 30, 2009 to
$3.2 million in the six months ended June 30, 2010, representing an increase of
$2.0 million, or 172.9%. This increase was due primarily to our inability to
utilize existing deferred tax assets or create new deferred tax assets in
certain jurisdictions where we are still experiencing losses, representing $2.6
million, offset by a decrease of $0.5 million resulting from our lower taxable
income. Our effective tax rate in the six months ended June 30, 2010 was 67.0%,
compared to 20.1% in the six months ended June 30, 2009 as a result of these
factors.


– 30
–




Net
income from continuing operations




Net
income from continuing operations decreased from $4.7 million in the six months
ended June 30, 2009 to $1.6 million in the six months ended June 30, 2010,
representing a decrease of $3.1 million, or 66.2%. The decrease was due
primarily to our decrease in operating income of $2.2 million, and our increase
in taxes on income, representing $2.0 million, partially offset by our decrease
in financial expenses, net, representing $1.2 million.




Net
loss from discontinued operations




Our net
loss from discontinued operations increased from $2.1 million in the six months
ended June 30, 2009 to $6.2 million in the six months ended June 30, 2010,
representing an increase of $4.1 million, or 192.7%. The increase was due
primarily to additional restructuring expenses in our NessPRO Europe and Asia
Pacific operations, representing $3.2 million. The results of NessPRO Europe
were reclassified as discontinued operations following our March 29, 2010
resolution to sell the operations. Also included in discontinued operations are
our Ness Asia Pacific operations, which our board of directors resolved on
February 1, 2010 to sell and in respect of which we signed a definitive asset
transfer agreement with the buyer on April 24, 2010, and our Ness Benelux
subsidiary, which we sold to a third party on January 15, 2010.




Net
income (loss)




Net
income changed from $2.6 million in the six months ended June 30, 2009 to a net
loss of $4.6 million in the six months ended June 30, 2010, representing a
change of $7.2 million. The change was due primarily to our larger net loss from
discontinued operations, representing $4.1 million, our decrease in operating
income, representing $2.2 million, and our increase in taxes on income,
representing $2.0 million, partially offset by our decrease in financial
expenses, representing $1.2 million.




Results
by Business Segment




Operating
segments are defined as components of an enterprise engaging in business
activities about which separate financial information is available that is
evaluated regularly by our chief operating decision-maker in deciding how to
allocate resources and assess performance. Our chief operating decision-maker is
our chief executive officer, who evaluates our performance and allocates
resources based on segment revenues and operating profit.




We no
longer report a separate Software Distribution segment, as we reclassified our
European software distribution operations as discontinued operations and we
reclassified our Israeli software distribution operations to our System
Integration and Application Development segment, effective as of January 1,
2010, as a result of the resolution of our board of directors to sell our
European software distribution operations. Segment data for prior periods has
been restated to reflect the current organization of the segments.




Our
operating segments are:




1.
            Software Product
      Engineering, in which, through our Software Product Labs business
      unit, we offer software product research and development services. We set
      up these labs for clients and operate them on an ongoing basis, enabling
      us to collaborate with our clients’ engineering teams to extend their
      capacity and budgets throughout the software product life cycle. We locate
      our Software Product Labs predominantly in India and in Central and
      Eastern Europe and we operate them across multiple locations as needed to
      optimize global delivery. They primarily serve customers in North America
      and Europe, and may include team members local to the
    client.




2.
            System Integration and
      Application Development, in which we offer a broad set of IT
      services to our clients in the areas of system integration, application
      development, consulting and software distribution. We provide these
      services to customers in over 20 countries throughout North America,
      Europe, Israel and Asia Pacific. We deliver the services through a global
      delivery model that includes local teams as well as offshore and
      near-shore resources. We provide these services for a wide range of
      clients in many verticals, including utilities and government, financial
      services, defense and homeland security, life sciences and healthcare,
      manufacturing and transportation, retail, and
  others.


– 31
–


Segment
operating profit is defined as income from operations, excluding unallocated
headquarters costs. Expenses included in segment operating profit consist
principally of direct selling, general, administrative and delivery costs.
Certain general and administrative expenses, stock-based compensation and a
portion of depreciation are not allocated to specific segments as management
believes they are not directly attributable to any specific segment.
Accordingly, these expenses are categorized as “Unallocated Expenses” and
adjusted against our total income from operations. Additionally, our management
has determined that it is not practical to allocate certain identifiable assets
by segment when such assets are used interchangeably among the
segments.




The table
below presents financial information for our reportable segments (dollars in
thousands):




Three months ended
                    June 30,
                
                
                Six months ended
                    June 30,Segment
      Data:
                
                2009
                
                
                2010
                
                
                2009
                
                
                2010Revenues:Software
      Product Engineering
                
                $
                25,688
                
                
                $
                28,060
                
                
                $
                50,654
                
                
                $
                54,457System
      Integration and Application Development
                
                
                101,199
                
                
                
                111,641
                
                
                
                202,514
                
                
                
                218,577$
                126,887
                
                
                $
                139,701
                
                
                $
                253,168
                
                
                $
                273,034Operating
      Income (Loss):Software
      Product Engineering
                
                $
                4,096
                
                
                $
                4,388
                
                
                $
                8,210
                
                
                $
                8,241System
      Integration and Application Development
                
                
                3,228
                
                
                
                2,746
                
                
                
                8,539
                
                
                
                5,973Unallocated
      Expenses
                
                
                (3,893
                )
                
                
                (4,097
                )
                
                
                (9,049
                )
                
                
                (8,760
                )$
                3,431
                
                
                $
                3,037
                
                
                $
                7,700
                
                
                $
                5,454




Liquidity
and Capital Resources




Overview




As of
June 30, 2010, we had cash and cash equivalents, restricted cash and short-term
bank deposits of $53.1 million compared to $68.6 million as of December 31,
2009. The funds held at locations outside of the United States are for future
operating expenses and capital expenditures. We are not 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 geographic areas to support expansion of our business, to the
extent that funds were repatriated to the United States in the form of dividend
payments, those payments may be subject to withholding taxes in their respective
countries, and would be subject to tax in the United States.




Cash
Flows




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




Six months ended
                    June 30,2009
                
                
                2010Net
      cash provided by (used in) operating activities
                
                $
                17,455
                
                
                $
                (106
                )Net
      cash used in investing activities
                
                
                (36,142
                )
                
                
                (10,887
                )Net
      cash provided by financing activities
                
                
                5,559
                
                
                
                8,855Effect
      of exchange rate changes on cash and cash equivalents
                
                
                (1,101
                )
                
                
                (2,987
                )Decrease
      in cash and cash equivalents
                
                
                (14,229
                )
                
                
                (5,125
                )Cash
      and cash equivalents at the beginning of the period
                
                
                44,585
                
                
                
                40,218Cash
      and cash equivalents at the end of the period
                
                $
                30,356
                
                
                $
                35,093


– 32
–




Six
months ended June 30, 2010 compared to the six months ended June 30,
2009




Net cash
used in operating activities was $0.1 million in the six months ended June 30,
2010, compared to net cash provided of $17.5 million in the six months ended
June 30, 2009. The major factors contributing to the change were an increase in
our trade receivables and unbilled receivables in the six months ended June 30,
2010 compared to a decrease in the six months ended June 30, 2009, representing
$52.0 million, and lower net income from continuing operations, representing
$3.1 million, offset by an increase in our trade payables in the six months
ended June 30, 2010 compared to a decrease in the six months ended June 30,
2009, representing $24.9 million, a smaller decrease in other accounts payable
and accrued expenses, representing $6.4 million, a decrease in other accounts
receivable and prepaid expenses in the six months ended June 30, 2010 compared
to an increase in the six months ended June 30, 2009, representing $3.4 million,
and commissions in the six months ended June 30, 2009 related to the 2008 sale
of our Israeli SAP sales and distribution operations, representing $2.5 million,
for which there was no corresponding income in the six months ended June 30,
2010.




Net cash
used in investing activities was $10.9 million in the six months ended June 30,
2010, compared to $36.1 million in the six months ended June 30, 2009. The major
factors contributing to the decrease were proceeds from maturity of short-term
bank deposits in the six months ended June 30, 2010 compared to investment in
short-term bank deposits in the six months ended June 30, 2009, representing
$26.6 million, and lower payments in connection with acquisitions of
subsidiaries in prior periods, representing $13.1 million, offset by net cash
paid for the acquisition of Gilon, representing $16.3 million.




Net cash
provided by financing activities was $8.9 million in the six months ended June
30, 2010, compared to $5.6 million in the six months ended June 30, 2009. The
major factors contributing to the increase were net proceeds from short-term
bank credit in the six months ended June 30, 2010 compared to net repayments of
short-term bank credit in the six months ended June 30, 2009, representing $10.9
million, offset by greater principal payments of long-term debt, representing
$6.5 million, and lower proceeds from long-term debt, representing $1.6
million.




The
effect of exchange rate changes on cash and cash equivalents was ($1.1) million
in the six months ended June 30, 2010, compared to ($3.0) million in the six
months ended June 30, 2009. The change was primarily due to the effect of
translation adjustments on our net current assets.




Long-term
and Short-term Debt




At June
30, 2010, we had a short-term loan in the amount of $5.0 million from a
commercial bank, bearing a variable interest rate and maturing in June 2011.
Additionally, at June 30, 2010, we had the following long-term loans outstanding
in connection with the funding of acquisitions: (i) a long-term loan from a
commercial bank in the amount of €6.2 million, or $7.6 million, taken in
September 2007 to fund the acquisition of NessPRO Italy S.p.A.; (ii) a long-term
loan from a commercial bank in the amount of €10.7 million, or $13.1 million,
taken in November 2007 to fund the acquisition of FMC Consulting and Informatics
Ltd.; (iii) a long-term loan from a commercial bank in the amount of $9.2
million, taken in November 2007 to fund the acquisition of MS9 Consulting LLC;
and (iv) two long-term loans from commercial banks in the amounts of NIS 30
million, or $7.7 million, and NIS 20 million, or $5.2 million, taken by one of
our Israeli subsidiaries in April and May 2010 to fund the acquisition of Gilon.
At June 30, 2010, we also had outstanding a long-term loan from a commercial
bank in the amount of €10.2 million, or $12.5 million, taken in March 2008, and
a long-term loan from a commercial bank in the amount of $11.3 million, taken in
April 2009. The NIS 30 million and NIS 20 million loans taken to fund the
acquisition of Gilon mature over six years with principal payments commencing in
the first year. The $11.3 million loan taken in April 2009 matures over four
years with principal payments commencing in the first year. Each of the other
long-term loans matures over five years from the inception of the loan with
principal payments commencing in the third year. Each long-term loan bears
interest at fixed or variable rates, and is paid quarterly. The long-term loans
contain covenants which, among other things: require positive operating income
in the last four quarters; require a certain ratio of total financial
obligations to consolidated EBITDA and of total stockholders’ equity to total
consolidated assets; and place limitations on our ability to merge or transfer
assets to third parties. Our failure to comply with the covenants could lead to
an event of default under the agreements governing some or all of this
indebtedness, permitting the applicable lender to accelerate all borrowings
under the applicable agreement. As of December 31, 2009, we were not in
compliance with covenants under certain long-term loans requiring positive
operating income and a certain ratio of total financial obligations to EBITDA.
We received a waiver from the banks with respect to the covenants as of December
31, 2009, and the banks agreed to provide, as substitutes, less stringent
covenants to apply through September 30, 2010. As of June 30, 2010, we were in
compliance and expect to remain in compliance with these covenants. In
connection with the above-mentioned covenants, we received the consent of the
commercial banks during 2008 to record a fixed charge on deposits in the amount
of $2.5 million held by our Indian subsidiary related primarily to the
mark-to-market of foreign exchange forward contracts into which we entered to
hedge against the effect of exchange rate fluctuations on cash flows denominated
in Indian Rupees.


– 33
–


In
addition, at June 30, 2010, one of our Israeli subsidiaries had a long-term loan
of NIS 11.6 million, or $3.0 million, from a commercial bank, taken in March
2008, bearing interest at a fixed rate and maturing over five years, with
principal and interest paid quarterly. This loan and bank guarantees obtained by
this Israeli subsidiary contain covenants which, among other things: require
positive annual net income in a fiscal year; require a certain ratio of total
stockholders’ equity to total consolidated assets and a minimum stockholders’
equity of this Israeli subsidiary; and place limitations on its ability to
merge, transfer or pledge assets to third parties. Our failure to comply with
the covenants could lead to an event of default under the agreements governing
some or all of this indebtedness, permitting the applicable lender to accelerate
all borrowings under the applicable agreement and to foreclose on any
collateral. As of June 30, 2010, we were in compliance and expect to remain in
compliance with these covenants.




We
anticipate funding a portion of our global growth through financing from
commercial banks.




Anticipated
Needs




We intend
to fund future growth through future cash flow from operations and available
bank borrowings. We believe the borrowings and future cash flow from operations
will be sufficient to fund continuing operations for the foreseeable
future.




However,
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 enhance our infrastructure and for working capital
purposes. These financings may not be available on acceptable terms, or at
all.




Critical
Accounting Policies and Estimates




Preparation
of our financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. We believe the most complex and sensitive judgments, because of
their significance to our consolidated financial statements, result primarily
from the need to make estimates about the effects of matters that are inherently
uncertain. Management’s Discussion and Analysis and Note 2 to the consolidated
financial statements presented in our 2009 Annual Report on Form 10-K, filed
with the SEC on March 15, 2010, describe the significant accounting estimates
and policies used in preparation of our consolidated financial statements.
Actual results in these areas could differ from management’s estimates. There
were no significant changes in our critical accounting estimates during the
three months ended June 30, 2010.




Contractual
Obligations




As of
June 30, 2010, except for the short-term and long-term loans obtained through
June 30, 2010, as described in the long-term and short-term debt section above,
there have been no material changes to the contractual obligations we disclosed
in our 2009 Annual Report on Form 10-K, filed with the SEC on March 15,
2010.


– 34
–




Item
3. Quantitative and Qualitative Disclosures About Market Risk




We have
operations in 18 different countries and commercial relationships in many other
parts of the world. Our foreign operations contract with clients using
applicable local currencies, euros or dollars. As a result, we are subject to
adverse movements in foreign currency exchange rates in countries in which we
conduct business. Our earnings are predominantly affected by fluctuations in the
value of the dollar as compared to the New Israeli Shekel, the Indian Rupee, the
Czech Crown and the euro; and to some extent by fluctuations in intra-European
currency rates.




As an
example, a decrease of 10% in the value of the euro relative to the U.S. dollar
in the six months ended June 30, 2010 would have resulted in an increase in the
U.S. dollar reporting value of our operating income of $0.3 million for that
period, while an increase of 10% in the value of the euro relative to the U.S.
dollar in the six months ended June 30, 2010 would have resulted in a decrease
in the U.S. dollar reporting value of our operating income of $0.3 million for
that period.




In order
to reduce the effect of such movements on our earnings, we utilize certain
foreign exchange forward contracts to hedge our exposure against the Indian
Rupee. In the future, we may enter into additional forward foreign currency
exchange or other derivatives contracts to further hedge our exposure to foreign
currency exchange rates.




We
utilize interest rate swap derivatives to convert certain floating-rate debt to
fixed-rate debt. Our interest rate swap derivatives involve an agreement to pay
a fixed-rate interest and receive a floating-rate interest, at specified
intervals, calculated on an agreed notional amount that matches the amount of
the original loan and paid on the same installments and maturity
dates.




Other
than as described above, we do not engage in trading market risk sensitive
instruments or purchase hedging or “other than trading” instruments that are
likely to expose us to market risk, whether interest rate, commodity price or
equity price risk, nor have we purchased options or entered into swaps or
forward or futures contracts, nor do we use derivative financial instruments for
speculative trading purposes.




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




Item
4. Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




As of the
end of the period covered by this report, our principal executive officer and
principal financial officer evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). Based on their evaluation of our disclosure controls and
procedures, our principal executive officer and principal financial officer,
with the participation of our management, have concluded that our disclosure
controls and procedures were effective as of June 30, 2010 to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is (a) recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms and (b)
accumulated and communicated to management, including our principal executive
officer and principal financial officer, as appropriate to allow for timely
decisions regarding required disclosure.




It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events. Given these and
other inherent limitations of control systems, there is only reasonable
assurance that our controls will succeed in achieving their stated goals under
all potential future conditions. Our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures
were effective at the reasonable assurance level as of June 30,
2010.


– 35
–




Changes
in Internal Control Over Financial Reporting




As of the
end of the period covered by this report, there were no changes in our internal
controls over financial reporting, or in other factors that could significantly
affect these controls, that materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.


– 36
–


PART
II – OTHER INFORMATION




Item
1. Legal Proceedings




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




One of
our Israeli subsidiaries is currently involved in legal proceedings with the
Israeli Ministry of Justice (the “MOJ”). The legal proceedings relate to a
contract for the provision of an information system for the MOJ, executed in
November 2005 (the “MOJ Contract”). Following continued disputes, correspondence
and discussions, on February 9, 2009 we filed a claim with the Israeli District
Court located in Jerusalem claiming, among other things, a breach of the MOJ
Contract by the MOJ, including in connection with the MOJ’s demands for
revisions and changes to the software that were not contemplated in the MOJ
Contract. Our claim is for damages in the amount of NIS 20.7 million, or
approximately $5.3 million, using the exchange rate prevailing at June 30, 2010.
On February 11, 2009, the MOJ filed a claim against our Israeli subsidiary in
the Israeli District Court located in Jerusalem claiming, among other things,
that our Israeli subsidiary breached the MOJ Contract and failed to fulfill its
undertakings and obligations set forth therein. The MOJ’s claim is for damages
in the amount of NIS 79.5 million, or approximately $20.5 million, using the
exchange rate prevailing at June 30, 2010. The MOJ and our subsidiary have filed
answers to the respective claims. Both claims were transferred to the Israeli
District Court located in Tel Aviv and the first pretrial hearing for both
claims is set for September 7, 2010. We believe that we have a substantial basis
with respect to our claim and valid defenses with respect to the MOJ’s claim.
While we intend to vigorously prosecute our claim and defend against the MOJ’s
claim, we cannot at this point predict the outcome of either claim. Adverse
decisions on these claims may materially adversely affect our financial
condition.




Item
1A. Risk Factors




There are
no material changes from the risk factors previously disclosed in our Annual
Report on Form 10-K filed with the SEC on March 15, 2010.




Item
2. Unregistered Sales of Equity Securities and Use of Proceeds




On
October 30, 2008, our board of directors authorized a stock repurchase program,
under which we could repurchase up to 4,000,000 shares of our common stock, or
approximately 10% of the outstanding shares, in the succeeding twelve months. On
November 1, 2009, our board of directors approved a 12-month extension of the
stock repurchase plan.




During
the three months ended June 30, 2010, we purchased a total of 281,500 shares at
an average price of $5.53 per share, for an aggregate purchase price of
$1,557,866. The remaining authorized number of shares that may be repurchased
under the plan as of June 30, 2010 is 2,372,096.




Period
                  
                  Total
                      Number
      of
                      Shares
                      Repurchased
                  
                  
                  Average
                      Price
      Paid
                      per
      Share
                  
                  
                  Total
      Number of Shares
                      Purchased
      as Part of
                      Publicly
      Announced
                      Plans
      or Programs
                  
                  
                  Maximum
      Number of
                      Shares
      that May Yet Be
                      Purchased
      Under the
                      Plans
      or ProgramsApril
      1-30, 2010
                  
                  
                  19,523
                  
                  
                  $
                  6.27
                  
                  
                  
                  19,523
                  
                  
                  
                  2,634,073May
      1-31, 2010
                  
                  
                  161,977
                  
                  
                  $
                  6.03
                  
                  
                  
                  161,977
                  
                  
                  
                  2,472,096June
      1-30, 2010
                  
                  
                  100,000
                  
                  
                  $
                  4.58
                  
                  
                  
                  100,000
                  
                  
                  
                  2,372,096Total
                  
                  
                  281,500
                  
                  
                  $
                  5.53
                  
                  
                  
                  281,500
                  
                  
                  
                  2,372,096




Item
3. Defaults upon Senior Securities




None.


– 37
–




Item
4. (Removed and Reserved)




Item
5. Other Information




On August
5, 2010, we amended our employment agreement with Effi Kotek, the president of
Ness Israel. Effective August 5, 2010, Mr. Kotek is entitled to receive nine
months’ prior notice if we terminate or choose not to renew his employment
agreement, and he must provide nine months’ prior notice if he terminates or
chooses not to renew the agreement. The amendment is filed herewith as Exhibit
10.1.




Item
6. Exhibits




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




Exhibit Number
                            
                            Description10.1
                            
                            Amendment
      to Employment Agreement, dated August 5, 2010, between the Registrant and
      Effi Kotek.31.1
                            
                            Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                            
                            Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                            
                            Certification
      of Principal Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
                            
                            Certification
      of Principal Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002.


– 38
–


SIGNATURES




Pursuant
to the requirements 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.





NESS
      TECHNOLOGIES, INC.(Registrant)Date:   
      August 5, 2010
                
                By:
                /s/
      Issachar GerlitzIssachar
      GerlitzChief
      Executive Officer, President and Director(principal
      executive officer)Date:   
      August 5, 2010
                
                By:
                /s/
      Ofer SegevOfer
      SegevExecutive
      Vice President and Chief Financial Officer(principal
      financial and accounting
officer)


– 39
–


EXHIBIT
INDEX




Exhibit Number
                      
                      Description10.1
                      
                      Amendment
      to Employment Agreement, dated August 5, 2010, between the Registrant and
      Effi Kotek.31.1
                      
                      Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                      
                      Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                      
                      Certification
      of Principal Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
                      
                      Certification
      of Principal Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002.


– 40
–