**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**(MarkOne)**

 

**ý****                  ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the quarterlyperiod ended March 31, 2005**

 

** ̈****                  ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from               to               **

 

**Commission File Number 000-50954**

 

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**NESS TECHNOLOGIES, INC.**

**(Exactname of registrant as specified in its charter)**

 

| **Delaware**                                                                                                                 | ** ** | **98-0346908**                           |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                                                              |       | (I.R.S. Employer  Identification Number) |
|                                                                                                                         |       |                                     |
| **Ness Tower**                                                                                                               |
| **Atidim High-Tech  Industrial Park**                                                                                        |
| **Building 4**                                                                                                               |
| **Tel Aviv 61580,  Israel**                                                                                                  |
| **Telephone: +972  (3) 766-6800**                                                                                            |
| **(Address  of registrant’s principal executive offices and registrant’s telephone  number, including area code)** |

 

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Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  ý Yes  o No

 

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

 

Indicated below is the number of shares outstanding ofthe registrant’s stock at April 20, 2005:

 
| **Title of Class**             | ** ** | **Number of  Shares Outstanding** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| Common Stock,  $0.01 par value |       | 34,532,770                        |       |

 

 

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**NESS TECHNOLOGIES, INC. AND SUBSIDIARIES**

 

**INDEX**

 
| PART I – FINANCIAL  INFORMATION                                                                       |   |
|------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                       |   |
| Item 1. Financial  Statements                                                                              |   |
|                                                                                                       |   |
| Consolidated  Balance Sheets – December 31, 2004 and March 31, 2005 (Unaudited)             |   |
| Consolidated  Statements of Income – Three months ended March 31, 2004 and 2005(Unaudited)       |   |
| Consolidated  Statements of Cash Flows – Three months ended March 31, 2004 and 2005  (Unaudited) |   |
| Notes  to Interim Condensed Consolidated Financial Statements – March 31, 2005  (Unaudited)      |   |
|                                                                                                       |   |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations       |   |
|                                                                                                       |   |
| Overview                                                                                                   |   |
| Recent Developments                                                                                        |   |
| Consolidated Results  of Operations                                                                        |   |
| Three  Months Ended March 31, 2005 Compared to the Three Months Ended March 31,  2004            |   |
| Liquidity and Capital  Resources                                                                           |   |
| Forward-Looking  Statements and Risk Factors                                                               |   |
|                                                                                                       |   |
| Item  3. Quantitative and Qualitative Disclosure about Market Risk                                         |   |
|                                                                                                       |   |
| Item 4. Controls and  Procedures                                                                           |   |
|                                                                                                       |   |
| Evaluation  of Disclosure Controls and Procedures                                                          |   |
| Changes in Internal Control                                                                                |   |
|                                                                                                       |   |
| PART II – OTHER INFORMATION                                                                           |   |
|                                                                                                       |   |
| Item 1. Legal Proceedings                                                                                  |   |
|                                                                                                       |   |
| Item  2. Unregistered Sales of Equity Securities and Use of Proceeds                                       |   |
|                                                                                                       |   |
| Item 3.  Defaults upon Senior Securities                                                                   |   |
|                                                                                                       |   |
| Item  4. Submission of Matters to a Vote of Security Holders                                               |   |
|                                                                                                       |   |
| Item 5. Other Information                                                                                  |   |
|                                                                                                       |   |
| Item 6. Exhibits                                                                                           |   |
|                                                                                                       |   |
| SIGNATURES                                                                                                 |   |
|                                                                                                       |   |
| EXHIBIT INDEX                                                                                              |   |

 

2

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# **PART I – FINANCIAL INFORMATION**

 

## ***Item 1.*** Financial Statements

 

**NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**

### **Interim Condensed ConsolidatedBalance Sheets**

**U.S.dollars in thousands**

 
| ** **                                                                                                                                                     | ** ** | **December 31,  2004** | ** ** | **March 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                     | ** ** | ** **                  | ** ** | **(Unaudited)**          | ** ** |
| ASSETS                                                                                                                                                         |       |                        |       |                     |       |
|                                                                                                                                                           |       |                        |       |                     |       |
| CURRENT ASSETS:                                                                                                                                                |       |                        |       |                     |       |
| Cash and cash equivalents                                                                                                                                      |       | $                           | 104,229    |                     | $          | 108,723 |   |
| Marketable securities                                                                                                                                          |       | 383                         |       | 378                      |       |
| Trade receivables (net of allowance for doubtful  accounts of $2,154 and $2,116 at December 31, 2004, and March 31,  2005 (unaudited), respectively) |       | 75,183                      |       | 77,808                   |       |
| Unbilled receivables                                                                                                                                           |       | 20,327                      |       | 24,887                   |       |
| Other accounts receivable and prepaid expenses                                                                                                                 |       | 9,127                       |       | 11,030                   |       |
| Inventories                                                                                                                                                    |       | 1,168                       |       | 668                      |       |
|                                                                                                                                                           |       |                        |       |                     |       |
| Total current assets                                                                                                                                           |       | 210,417                     |       | 223,494                  |       |
|                                                                                                                                                           |       |                        |       |                     |       |
| LONG-TERM ASSETS:                                                                                                                                              |       |                        |       |                     |       |
| Long-term prepaid expenses                                                                                                                                     |       | 3,655                       |       | 5,391                    |       |
| Marketable securities                                                                                                                                          |       | 69                          |       | 169                      |       |
| Deferred income taxes                                                                                                                                          |       | 4,823                       |       | 5,208                    |       |
| Severance pay fund                                                                                                                                             |       | 33,558                      |       | 33,533                   |       |
|                                                                                                                                                           |       |                        |       |                     |       |
| Total long-term assets                                                                                                                                         |       | 42,105                      |       | 44,301                   |       |
|                                                                                                                                                           |       |                        |       |                     |       |
| PROPERTY AND EQUIPMENT, NET                                                                                                                                    |       | 18,879                      |       | 19,040                   |       |
|                                                                                                                                                           |       |                        |       |                     |       |
| OTHER INTANGIBLE ASSETS, NET                                                                                                                                   |       | 4,262                       |       | 4,893                    |       |
|                                                                                                                                                           |       |                        |       |                     |       |
| GOODWILL                                                                                                                                                       |       | 149,090                     |       | 150,661                  |       |
|                                                                                                                                                           |       |                        |       |                     |       |
| Total assets                                                                                                                                                   |       | $                           | 424,756    |                     | $          | 442,389 |   |

 

The accompanyingnotes are an integral part of the interim condensed consolidated financialstatements.

 

3

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**NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**

**Interim Condensed Consolidated Balance Sheets**

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

 
| ** **                                                                                                                                                                                                                      | ** ** | **December 31,  2004** | ** ** | **March 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                                                                                      | ** ** | ** **                  | ** ** | **(Unaudited)**          | ** ** |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                       |       |                        |       |                     |       |
|                                                                                                                                                                                                                            |       |                        |       |                     |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                            |       |                        |       |                     |       |
| Short-term bank credit                                                                                                                                                                                                          |       | $                           | 1,275      |                     | $          | 1,335 |   |
| Current maturities of long-term debt                                                                                                                                                                                            |       | 13,364                      |       | 17,564                   |       |
| Trade payables                                                                                                                                                                                                                  |       | 31,280                      |       | 32,942                   |       |
| Advances from customers                                                                                                                                                                                                         |       | 7,679                       |       | 7,689                    |       |
| Other accounts payable and accrued expenses                                                                                                                                                                                     |       | 64,271                      |       | 68,349                   |       |
|                                                                                                                                                                                                                            |       |                        |       |                     |       |
| Total current liabilities                                                                                                                                                                                                       |       | 117,869                     |       | 127,879                  |       |
|                                                                                                                                                                                                                            |       |                        |       |                     |       |
| LONG-TERM LIABILITIES:                                                                                                                                                                                                          |       |                        |       |                     |       |
| Long-term debt, net of current maturities                                                                                                                                                                                       |       | 36,918                      |       | 31,336                   |       |
| Excess of losses over investment in affiliates                                                                                                                                                                                  |       | 306                         |       | 302                      |       |
| Accrued severance pay                                                                                                                                                                                                           |       | 36,888                      |       | 37,412                   |       |
| Minority interests                                                                                                                                                                                                              |       | 295                         |       | —                   |       |
|                                                                                                                                                                                                                            |       |                        |       |                     |       |
| Total long-term liabilities                                                                                                                                                                                                     |       | 74,407                      |       | 69,050                   |       |
|                                                                                                                                                                                                                            |       |                        |       |                     |       |
| COMMITMENTS AND CONTINGENT LIABILITIES                                                                                                                                                                                          |       |                        |       |                     |       |
|                                                                                                                                                                                                                            |       |                        |       |                     |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                                                      |       |                        |       |                     |       |
| Common stock of $0.01 par value -                                                                                                                                                                                               |       |                        |       |                     |       |
| Authorized: 76,500,000 shares at December 31,  2004 and at March 31, 2005 (unaudited);  issued and outstanding: 32,772,578 shares at December 31, 2004 and  34,417,148 shares at March 31, 2005 (unaudited) |       | 328                         |       | 344                      |       |
| Additional paid-in capital                                                                                                                                                                                                      |       | 270,967                     |       | 282,678                  |       |
| Deferred stock compensation                                                                                                                                                                                                     |       | (152                        | )          | (102                     | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                            |       | (2,045                      | )          | (5,769                   | )          |
| Accumulated deficit                                                                                                                                                                                                             |       | (36,618                     | )          | (31,691                  | )          |
|                                                                                                                                                                                                                            |       |                        |       |                     |       |
| Total stockholders’ equity                                                                                                                                                                                                 |       | 232,480                     |       | 245,460                  |       |
|                                                                                                                                                                                                                            |       |                        |       |                     |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                 |       | $                           | 424,756    |                     | $          | 442,389 |   |

 

The accompanyingnotes are an integral part of the interim condensed consolidated financialstatements.

 

4

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**NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**

### **Interim Condensed ConsolidatedStatements of Income**

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

 
| ** **                                                                   | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| ** **                                                                   | ** ** | **(Unaudited)**                        | ** ** |
|                                                                         |       |                                   |       |   |   |
| Revenues                                                                     |       | $                                      | 71,146     |   | $ | 88,405 |   |
| Cost of revenues (*)                                                         |       | 48,848                                 |       | 62,395 |   |
| Provision for losses (reverse of losses) on  uncompleted contracts           |       | (442                                   | )          | 85 |   |
|                                                                         |       |                                   |       |   |   |
| Gross profit                                                                 |       | 22,740                                 |       | 25,925 |   |
|                                                                         |       |                                   |       |   |   |
| Operating expenses:                                                          |       |                                   |       |   |   |
| Selling and marketing                                                        |       | 6,086                                  |       | 7,031 |   |
| General and administrative (*)                                               |       | 11,397                                 |       | 12,428 |   |
| Stock-based compensation                                                     |       | 51                                     |       | 611 |   |
|                                                                         |       |                                   |       |   |   |
| Total operating expenses                                                     |       | 17,534                                 |       | 20,070 |   |
|                                                                         |       |                                   |       |   |   |
| Operating income                                                             |       | 5,206                                  |       | 5,855 |   |
| Financial expenses, net                                                      |       | (2,369                                 | )          | (426 | ) |
| Other income, net                                                            |       | 84                                     |       | — |   |
|                                                                         |       |                                   |       |   |   |
| Income before taxes on income                                                |       | 2,921                                  |       | 5,429 |   |
| Taxes on income (tax benefit)                                                |       | (111                                   | )          | 602 |   |
| Equity in net losses of affiliates                                           |       | (615                                   | )          | (2 | ) |
| Minority interests in losses of a subsidiary                                 |       | —                                 |       | 101 |   |
|                                                                         |       |                                   |       |   |   |
| Net income                                                                   |       | $                                      | 2,417      |   | $ | 4,926 |   |
|                                                                         |       |                                   |       |   |   |
| Allocation of undistributed earnings on Class B  Convertible Preferred stock |       | $                                      | (366       | ) | $ | — |   |
|                                                                         |       |                                   |       |   |   |
| Net income after allocation of undistributed  earnings                       |       | $                                      | 2,051      |   | $ | 4,926 |   |
|                                                                         |       |                                   |       |   |   |
| Basic net earnings per share                                                 |       | $                                      | 0.11       |   | $ | 0.15 |   |
|                                                                         |       |                                   |       |   |   |
| Diluted net earnings per share                                               |       | $                                      | 0.10       |   | $ | 0.14 |   |

 

----

(*)              Expenses excluding stock-based compensation asfollows:

 
| ** **                 | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **(Unaudited)**                        | ** ** |
| Cost of revenues           |       | $                                      | —     |   | $ | 98 |   |
| General and administrative |       | 51                                     |       | 513 |   |
|                            |            |                                        |            |  |  |  |  |

 

The accompanyingnotes are an integral part of the interim condensed consolidated financialstatements.

 

5

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**NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**

### **Interim Condensed ConsolidatedStatements of Cash Flows**

**U.S. dollars in thousands**

 
| ** **                                                                                                                     | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                     | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| ** **                                                                                                                     | ** ** | **(Unaudited)**                        | ** ** |
| Cash flows from operating activities:                                                                                          |       |                                   |       |   |   |
| Net income                                                                                                                     |       | $                                      | 2,417      |   | $ | 4,926 |   |
| Adjustments required to reconcile net income to net  cash provided by (used in) operating activities:                          |       |                                   |       |   |   |
| Amortization of deferred stock compensation related  to Ness GSG acquisition                                                   |       | 51                                     |       | 50 |   |
| Stock-based compensation related to warrants granted  to banks                                                                 |       | 11                                     |       | 11 |   |
| Stock-based compensation related to redeemable  options                                                                        |       | —                                 |       | 531 |   |
| Equity in net losses of affiliates                                                                                             |       | 615                                    |       | 2 |   |
| Minority interests in losses of a subsidiary                                                                                   |       | —                                 |       | (101 | ) |
| Currency fluctuation of long-term debt                                                                                         |       | 2,348                                  |       | 1,096 |   |
| Accrued interest on long-term debt                                                                                             |       | (1,057                                 | )          | (1,251 | ) |
| Depreciation and amortization                                                                                                  |       | 1,290                                  |       | 1,495 |   |
| Deferred income taxes, net                                                                                                     |       | (778                                   | )          | (1,432 | ) |
| Loss (gain) on sale of property and equipment                                                                                  |       | (23                                    | )          | 6 |   |
| Trading marketable securities, net                                                                                             |       | (6                                     | )          | — |   |
| Increase in trade receivables                                                                                                  |       | (9,120                                 | )          | (3,536 | ) |
| Increase in unbilled receivables                                                                                               |       | (2,878                                 | )          | (4,810 | ) |
| Increase in other accounts receivable and prepaid  expenses                                                                    |       | (534                                   | )          | (270 | ) |
| Decrease (increase) in inventories                                                                                             |       | (308                                   | )          | 486 |   |
| Increase in long-term prepaid expenses                                                                                         |       | (94                                    | )          | (1,781 | ) |
| Increase in trade payables                                                                                                     |       | 28                                     |       | 2,043 |   |
| Increase (decrease) in advances from customers                                                                                 |       | (1,758                                 | )          | 103 |   |
| Increase in other accounts payable and accrued  expenses                                                                       |       | 7,167                                  |       | 4,223 |   |
| Increase in accrued severance pay, net                                                                                         |       | 846                                    |       | 590 |   |
|                                                                                                                           |       |                                   |       |   |   |
| Net cash provided by (used in) operating activities                                                                            |       | (1,783                                 | )          | 2,381 |   |
|                                                                                                                           |       |                                   |       |   |   |
| Cash flows from investing activities:                                                                                          |       |                                   |       |   |   |
| Proceeds from decrease in investment in a  subsidiary, net of cash in the subsidiary at the time it ceased being  consolidated |       | (168                                   | )          | — |   |
| Acquisition of minority interest in a subsidiary (a)                                                                           |       | —                                 |       | — |   |
| Purchase of short-term bank deposits                                                                                           |       | (118                                   | )          | — |   |
| Proceeds from sale of property and equipment                                                                                   |       | 143                                    |       | 137 |   |
| Purchase of property and equipment and  capitalization of software developed for internal use                                  |       | (1,851                                 | )          | (1,564 | ) |
| Capitalization of software development costs                                                                                   |       | (354                                   | )          | (924 | ) |
| Other                                                                                                                          |       | (96                                    | )          | — |   |
|                                                                                                                           |       |                                   |       |   |   |
| Net cash used in investing activities                                                                                          |       | (2,444                                 | )          | (2,351 | ) |
|                                                                                                                                |            |                                        |            |  |  |  |  |

 

The accompanyingnotes are an integral part of the interim condensed consolidated financialstatements.

 

6

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**NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**

### **Interim Condensed Consolidated Statements of CashFlows**

**U.S. dollars in thousands**

 
| ** **                                                    | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **(Unaudited)**                        | ** ** |
| Cash flows from financing activities:                         |       |                                   |       |   |   |
| Exercise of options and warrants                              |       | $                                      | 31         |   | $ | 7,659 |   |
| Short-term bank credit, net                                   |       | (184                                   | )          | 76 |   |
| Proceeds from long-term debt                                  |       | 6,251                                  |       | — |   |
| Principal payment of long-term debt                           |       | (15,282                                | )          | (1,253 | ) |
|                                                          |       |                                   |       |   |   |
| Net cash provided by (used in) financing activities           |       | (9,184                                 | )          | 6,482 |   |
|                                                          |       |                                   |       |   |   |
| Effect of exchange rate changes on cash and cash  equivalents |       | (696                                   | )          | (2,018 | ) |
|                                                          |       |                                   |       |   |   |
| Increase (decrease) in cash and cash equivalents              |       | (14,107                                | )          | 4,494 |   |
| Cash and cash equivalents at the beginning of the  period     |       | 46,004                                 |       | 104,229 |   |
|                                                          |       |                                   |       |   |   |
| Cash and cash equivalents at the end of the period            |       | $                                      | 31,897     |   | $ | 108,723 |   |
|                                                          |       |                                   |       |   |   |
| Supplemental disclosures of cash flows information:           |       |                                   |       |   |   |
|                                                          |       |                                   |       |   |   |
| Cash paid during the period for:                              |       |                                   |       |   |   |
| Interest                                                      |       | $                                      | 917        |   | $ | 435 |   |
|                                                          |       |                                   |       |   |   |
| Taxes                                                         |       | $                                      | 280        |   | $ | 174 |   |

 

(a)                In conjunction with the acquisition of theminority interest in a subsidiary, the fair values of the assets acquired andliabilities assumed at the date of acquisition were as follows:

 
| Capital  deficiency, net (excluding cash and cash equivalents) | ** ** | $      | (82        | )      |
|----------------------------------------------------------------|------------|--------|------------|--------|
| Other long-term  tangible assets                               | ** ** | 20     | ** ** |
| Property and equipment                                         |       | 18     |       |
| Goodwill                                                       |       | 3,323  |       |
| Customer related intangible assets                             |       | 139    |       |
|                                                           |       |   |       |
|                                                           |       | 3,418  |       |
| Less issuance of shares                                        |       | (3,418 | )          |
|                                                           |       |   |       |
| Net cash provided from acquisition of minority  interest       |       | $      | —     |   |

 

The accompanyingnotes are an integral part of the interim condensed consolidated financialstatements.

 

7

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**NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**

### **Notes to InterimCondensed Consolidated Financial Statements**

**U.S.dollars in thousands (information as of March 31, 2005 and for the threemonth periods ended March 31, 2004 and 2005 is unaudited)**

 

#### ***Note 1: General***

#### *** ***

Ness Technologies, Inc. was incorporated under thelaws of the State of Delaware, in March 1999.  We operate through our subsidiaries inIsrael, the United States, Europe and Asia.

 

We are a global provider of information technologyservices and solutions designed to help clients improve their competitivenessand effectiveness. Our portfolio of solutions and services includes systemintegration and application development, outsourcing, software and consulting,and quality assurance and training. Offshore services and development are asignificant component of each of these categories. We and our subsidiariesprimarily serve the following vertical markets: defense and government,financial services, life sciences and healthcare, telecommunications andutilities, and independent software vendors.

 

#### ***Note 2: SignificantAccounting Policies***

 

a.               UnauditedInterim Financial Information

 

The accompanying condensed consolidated balance sheetas of March 31, 2005, the condensed consolidated statements of income forthe three months ended March 31, 2004 and 2005, and the condensedconsolidated statements of cash flows for the three months ended March 31,2004 and 2005 are unaudited. These unaudited interim condensed consolidatedfinancial statements have been prepared in accordance with United Statesgenerally accepted accounting principles for interim financial information. Inthe opinion of management, the unaudited interim condensed consolidatedfinancial statements include all adjustments of a normal recurring naturenecessary for a fair presentation of our consolidated financial position as of March 31,2005, our consolidated results of operations for the three months ended March 31,2004 and 2005, and our consolidated cash flows for the three months ended March 31,2004 and 2005.

 

The balance sheet at December 31, 2004 has beenderived from the audited consolidated financial statements at that date butdoes not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.

 

These consolidated financial statements should be readin conjunction with the audited consolidated financial statements andaccompanying notes for the year ended December 31, 2004 included in ourAnnual Report on Form 10-K dated March 31, 2005.

 

Results for the three months ended March 31, 2005are not necessarily indicative of results that may be expected for the yearending December 31, 2005.

 

Unless otherwise noted, (1) all references to “dollars”or “$” are to United States dollars and all references to “NIS” are to NewIsraeli Shekels and (2) all references to shares of our common stock and pershare information have been adjusted to reflect the 0.7193-for-one reversestock split effected on September 20, 2004.

 

b.              Useof estimates

 

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from thoseestimates.

 

8

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**NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**

### **Notes to Interim Condensed Consolidated FinancialStatements**

**U.S. dollars in thousands(information as of March 31, 2005 and for the three month periods ended March 31,2004 and 2005 is unaudited)**

 

c.               Financialstatements in U.S. dollars

 

Our subsidiaries’ transactions are recorded in localcurrencies. We have designated the U.S. dollar as the primary functional currencyof our operations in the United States, the NIS as the primary functionalcurrency of our subsidiaries’ operations in Israel, and local currencies as theprimary functional currencies of our operations elsewhere. Accordingly, for allsubsidiaries of which the dollar is the functional currency, monetary accountsmaintained in other currencies are re-measured into U.S. dollars, in accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 52 “ForeignCurrency Translation.” All transaction gains and losses of the re-measuredmonetary balance sheet items are reflected in the statement of income asfinancial income or expenses, as appropriate.

 

For those foreign subsidiaries whose functionalcurrency has been determined to be their local currency, assets and liabilitiesare translated at period-end exchange rates and statement of operations itemsare translated at average exchange rates prevailing during that period. Suchtranslation adjustments are recorded as a separate component of accumulatedother comprehensive income (loss) in stockholders’ equity.

 

The financial statements of affiliates reported usingthe equity method of accounting, whose functional currency has been determinedto be their local currency, have been translated into dollars. All balancesheet accounts have been translated using the exchange rates in effect at thebalance sheet date. Statement of operations amounts have been translated usingthe average exchange rate for the period. The resulting aggregate translationadjustments are reported as a separate component of accumulated othercomprehensive income (loss) in stockholders’ equity.

 

d.              Principlesof consolidation

 

Our consolidated financial statements include theaccounts of the company and its wholly and majorityowned subsidiaries, or 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.               Acquisitionof Subsidiaries

 

1.               Ness U.S.A. Inc. (“Ness U.S.A.”)

 

On October 25, 2001, we and other investorsincorporated Ness U.S.A., a corporation incorporated under the laws of theState of Delaware, for the purpose of acquiring certain assets and assumingcertain liabilities of Blueflame Inc. (“Blueflame”) out of Blueflame’s chapter11 bankruptcy proceeding. On the date of incorporation, we held 68% of theoutstanding common stock of Ness U.S.A. and other investors held the remaining32% of the outstanding common stock of Ness U.S.A. On November 1, 2001,Ness U.S.A. acquired these assets with a fair market value of approximately $6,656for cash consideration and related purchase costs totaling approximately $5,140.The transaction was accounted for by the purchase method of accountingaccording to SFAS No. 141 “Business combinations.”

 

Ness U.S.A. is a full-service business and advancedtechnology solutions provider to the life sciences, financial services,telecommunications and other industries. Ness U.S.A. offers technical andmanagement consulting services intended to create business improvements bybuilding integrated business process and technology solutions to strategicproblems.

 

9

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**NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**

### **Notes to Interim Condensed Consolidated FinancialStatements**

**U.S. dollars in thousands(information as of March 31, 2005 and for the three month periods ended March 31,2004 and 2005 is unaudited)**

 

In addition to the consideration paid at closing, weagreed to the following contingent payments:

 

a)              An amount equal to 50% of the pre-closingaccounts receivable actually collected by us in excess of $6,000 net ofprepayments.

 

b)             Payment of a contingent promissory notein the amount of $750, following the occurrence of the earlier of the followingtwo events:

 

(1)          The sum of $750, if Ness U.S.A.’s annualEBITDA, as defined in the asset purchase agreement relating to the acquisition,in each of any two calendar years during the period commencing on January 1,2002 and ending December 31, 2005 exceeds $5,000; or

 

(2)          Upon the sale or liquidation of NessU.S.A., or its merger with an unrelated party, whereby:

 

(i)                     if the qualifying transaction occurredperiod to December 31, 2003, the contingent payment would have been equalto the aggregate consideration in excess of $4,500, but not more than $750.

 

(ii)                  if the qualifying transaction occursafter December 31, 2003 but prior to January 1, 2005, the contingentpayment will be equal to $650, unless the consideration for such qualifyingtransaction is in excess of $6,600, in which case the contingent payment willbe equal to $750.

 

(iii)               if the qualifying transaction occurs after December 31,2004 but prior to January 1, 2006, the contingent payment will be equal to$550, unless the consideration for such qualifying transaction is equal to orin excess of $750.

 

As the purchase price was lower than the fair marketvalue of the net assets acquired, but is subject to contingent payment, werecorded at the date of acquisition, the lesser of the maximum amount ofcontingent consideration or the excess over cost as if it were a liability,until the consideration contingency is resolved.

 

In respect of the contingent promissory note, aliability in the amount of $750 was recorded among long-term liabilities and asof December 31, 2004 and March 31, 2005, the liability was classifiedin current liabilities.

 

On December 27, 2002, we acquired additionalstock of Ness U.S.A. from certain of the employees and other private investorsso that, as of December 31, 2003, we held 86% of Ness U.S.A.’s commonstock. The acquisition was accounted for under the purchase method ofaccounting according to SFAS No. 141. The total consideration of $5,001(including $323 in transaction costs) for the shares purchased consisted of theissuance of 647,170 shares of our common stock, valued at a fair value of $4,678.

 

Under the securities exchange agreement, we agreed tooffer the remaining stockholders of Ness U.S.A. shares of common stock inexchange for their shares of Ness U.S.A. at the same exchange ratio used in theDecember 2002 exchange on the earliest date practicable after receiving ano-action

 

10

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**NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**

### **Notes to Interim Condensed Consolidated FinancialStatements**

**U.S. dollars in thousands(information as of March 31, 2005 and for the three month periods ended March 31,2004 and 2005 is unaudited)**

 

letter from the Securities and Exchange Commission orcompleting an initial public offering of our common stock.

 

On November 12, 2004, we filed a Form S-4 RegistrationStatement in respect of an exchange offer for the remaining shares Ness U.S.A.The offer commenced on January 31, 2005 and ended on February 28,2005. 96 of 98 offerees accepted the offer bringing our holdings in Ness U.S.A.following the offer to 99.9%. On March 1, 2005, we issued 260,316 sharesto the offerees, for the consideration of $3,531 (including $113 of transactioncost). The acquisition was accounted for under the purchase method ofaccounting according to SFAS No. 141.

 

Basedupon a preliminary valuation of tangible and intangible assets acquired, we haveallocated the total cost of the acquisition to Ness U.S.A.’s assets andliabilities as follows:

 
| ** **                                                  | ** ** | **March 1, 2005** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                  | ** ** | ** **             | ** ** |
| Cash and cash equivalents                                   |       | $                      | 426        |   |
| Trade receivables                                           |       | 277                    |       |
| Unbilled receivable                                         |       | 185                    |       |
| Other accounts receivable                                   |       | 64                     |       |
| Other long-term tangible assets                             |       | 20                     |       |
| Property and equipment                                      |       | 18                     |       |
| Total tangible assets acquired                              |       | 990                    |       |
|                                                        |       |                   |       |
| Customer related intangible asset (five years useful  life) |       | 139                    |       |
| Goodwill                                                    |       | 3,323                  |       |
| Total intangible assets acquired                            |       | 3,462                  |       |
|                                                        |       |                   |       |
| Total tangible and intangible assets acquired               |       | 4,452                  |       |
|                                                        |       |                   |       |
| Accounts payable                                            |       | (148                   | )          |
| Other accounts payable                                      |       | (280                   | )          |
| Related parties, net                                        |       | (492                   | )          |
|                                                        |       |                   |       |
| Total liabilities assumed                                   |       | (920                   | )          |
|                                                        |       |                   |       |
| Net assets acquired                                         |       | $                      | 3,532      |   |

 

The allocation of the purchase price reflected in the March 31,2005 condensed consolidated balance sheet is preliminary. We have arranged toobtain a valuation of Ness U.S.A.’s current assets, current liabilities,property and equipment and intangible assets. Management expects to obtain suchcompleted report during the third quarter of 2005.

 

11

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**NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**

### **Notes to Interim Condensed Consolidated FinancialStatements**

**U.S. dollars in thousands(information as of March 31, 2005 and for the three month periods ended March 31,2004 and 2005 is unaudited)**

 

2.               Ness GSG Inc.

 

Effective June 30, 2003, we acquired throughmerger all of the outstanding stock of Ness GSG Inc. (formerly, Apar HoldingCorp.), or Ness GSG, for the purpose of expanding our information technologyservices capabilities. Ness GSG was incorporated under the laws of the Commonwealthof Pennsylvania, with operations, through its subsidiaries, in Asia, the UnitedStates and Europe. The Ness GSG subsidiaries specialize in hardware andsoftware consulting. Some of our principal stockholders, who ownedapproximately 53% of the outstanding common stock of Ness GSG prior to theacquisition, received 3,955,169 shares of our common stock upon the closing ofthe merger.

 

Pursuant to the merger agreement, we agreed to issueadditional shares of common stock to the stockholders of Ness GSG if and whenwe issued shares of common stock in exchange for the remaining shares of NessU.S.A. We agreed to issue the number of shares of our common stock necessary topreserve the ownership percentage of the former stockholders of Ness GSG at thesame percentage ownership they held prior to the issuance of such shares to theNess U.S.A. remaining stockholders, in exchange for their Ness U.S.A. shares. Subsequentto the completion of Ness U.S.A. exchange offer, on March 2, 2005, weissued to the former stockholders of Ness GSG 89,305 additional shares of ourcommon stock pursuant to the terms of the merger agreement. These shares wererecorded at their aggregate par value, or $1, and reduced additional paid incapital in the same amount, at the date issued.

 

f.                 Goodwill

 

We have elected to perform our analysis of goodwillduring the fourth quarter of the year. No indications of impairment wereidentified during the three months ended March 31, 2005.

 

g.              Accountingfor stock-based compensation

 

We have elected to follow Accounting Principles BoardOpinion (“APB”) No. 25 “Accounting for Stock Issued to Employees” and FASB Interpretation(“FIN”) No. 44 “Accounting for Certain Transactions Involving StockCompensation” in accounting for our employee stock option plans. Under APB No. 25,when the exercise price of our stock options is less than the market price ofthe underlying shares on the date of grant, compensation expense is recognized.

 

We adopted the disclosure provisions of SFAS No. 148, “Accountingfor Stock-Based Compensation - transition and disclosure,” which amendedcertain provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,”to provide alternative methods of transition for an entity that voluntarilychanges to the fair value based method of accounting for stock-based employeecompensation, effective as of the beginning of the prior fiscal year. Wecontinue to apply the provisions of APB No. 25 in accounting for stock-basedcompensation.

 

Pro forma information regarding our net income and netearnings per share is required by SFAS No. 123 and has been determined as if wehad accounted for our employee stock options under the fair value methodprescribed by SFAS No. 123.

 

12

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**NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**

### **Notes to Interim Condensed Consolidated FinancialStatements**

**U.S. dollars in thousands(information as of March 31, 2005 and for the three month periods ended March 31,2004 and 2005 is unaudited)**

 

The fair value for options granted in the three monthperiod ended March 31, 2004 is amortized over their vesting period andestimated at the date of grant using the Black-Scholes option pricing modelwith the following weighted average assumptions:

 
| ** **                        | ** ** | **Three months ended  March 31, 2004** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|
| ** **                        | ** ** | **(Unaudited)**                             | ** ** |
| Dividend yield                    |       | 0                                           | %          |   |
| Expected volatility               |       | 0.52                                        |       |   |
| Risk-free interest                |       | 2.5                                         | %          |   |
| Expected life of up to (in years) |       | 4                                           |       |   |

 

During the first quarter of 2005 no new options weregranted.

 

Pro forma information under SFAS No. 123 is asfollows:

 
| ** **                                                                                     | ** ** | **Three months ended  March 31,** | ** **  |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|
| ** **                                                                                     | ** ** | **2004**                               | ** **  | **2005** | ** ** |
| ** **                                                                                     | ** ** | **(Unaudited)**                        | ** **  |
| Net income available to common stock, as reported                                              |       | $                                      |  2,051 |   | $ | 4,926 |   |
| Add: Allocation of undistributed earnings on Class B  Convertible Preferred Stock, as reported |       | 366                                    |        | — |   |
| Deduct: Pro forma allocation of undistributed  earnings on Class B Convertible Preferred Stock |       | (259                                   | )           | — |   |
| Add: Stock-based employee compensation – intrinsic  value                                 |       | 51                                     |        | 611 |   |
| Deduct: Stock-based employee compensation – fair  value                                   |       | (752                                   | )           | (2,565 | ) |
| Pro forma net income                                                                           |       | $                                      | 1,457       |   | $ | 2,972 |   |
|                                                                                           |       |                                   |        |   |   |
| Basic net earnings per share, as reported                                                      |       | $                                      | 0.11        |   | $ | 0.15 |   |
| Diluted net earnings per share, as reported                                                    |       | $                                      | 0.10        |   | $ | 0.14 |   |
|                                                                                           |       |                                   |        |   |   |
| Pro forma basic net earnings per share                                                         |       | $                                      | 0.08        |   | $ | 0.09 |   |
| Pro forma diluted net earnings per share                                                       |       | $                                      | 0.07        |   | $ | 0.08 |   |

 

h.              Impactof recently issued accounting pronouncements

 

On December 16, 2004, the FASB issued SFAS No.123R (revised 2004), “Share-Based Payment,” which is a revision of SFAS No.123, “Accounting for Stock-Based Compensation,” which requires companies torecognize in the statement of income, all share-based payments to employees,including grants of employee stock options, based on their fair values.Accounting for share-based compensation transactions using the intrinsic methodsupplemented by pro forma disclosures will no longer be permissible. The newstatement will be effective for public entities no later than the beginning ofthe first fiscal year beginning after June 15, 2005. We will adopt the newstatement on January 1, 2006. We have not yet completed our analysis ofthe impact of adopting SFAS 123R and are therefore currently unable to quantifythe effect on our financial statements. However, the adoption of this newstatement will have an impact on our results of operations and net earnings pershare as we will be required to expense the fair value of all share-basedpayments.

 

13

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**NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**

### **Notes to Interim Condensed Consolidated FinancialStatements**

**U.S. dollars in thousands(information as of March 31, 2005 and for the three month periods ended March 31,2004 and 2005 is unaudited)**

 

i.                  Reclassification

 

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

 

#### ***Note 3: Long-Term Debt***

 

a.               Composition

 

Our long-term debt is composed as follows:

 
| ** **              | ** ** | **December 31,  2004** | ** ** | **March 31,  2005** | ** ** |
|-------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **              | ** ** | **(Unaudited)**             | ** ** |
| Banks (1)               |       | $                           | 48,292     |                     | $          | 46,845 |   |
| Loan from stockholders  |       | 1,000                       |       | 1,000                    |       |
| Loans from others       |       | 990                         |       | 1,055                    |       |
|                    |       | 50,282                      |       | 48,900                   |       |
| Less current maturities |       | 13,364                      |       | 17,564                   |       |
|                    |       | $                           | 36,918     |                     | $          | 31,336 |   |

 

----

(1)               The long-term loans default upon thefailure of any of our subsidiaries named as borrowers under the loans tosatisfy certain conditions and comply with covenants. As of December 31,2004 and March 31, 2005, management believes that the subsidiaries are incompliance with foregoing conditions. The weighted average interest rate on thebank loans as of December 31, 2004 is 6%.

 

b.              Classification

 

Classified by currency, linkage terms and interestrates, the total amount of the liabilities (before deduction of current maturities)is as follows:

 
| ** **              | ** ** | **Interest rate (%)**       | ** ** | **Amount**              | ** ** |
|-------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **              | ** ** | **December 31,  2004** | ** ** | **March 31  2005** | ** ** | **December 31,  2004** | ** ** | **March 31,  2005** | ** ** |
| ** **              | ** ** | ** **                  | ** ** | **(Unaudited)**         | ** ** | ** ** | ** ** | **(Unaudited)** | ** ** |
| In, or linked to dollar |       | 5-8                         |       | 5-8                     |       | $ | 33,027 |   | $ | 33,398 |   |
| In NIS - linked to CPI  |       | 6-8                         |       | 6-8                     |       | 17,255 |   | 15,502 |   |
|                    |       |                        |       |                    |       | $ | 50,282 |   | $ | 48,900 |   |

 

c.               Maturities

 

The liabilities mature as follows:

 
| **As of December 31,** | ** ** | ** ** | ** ** |
|-----------------------------|------------|------------|------------|
| 2005 (current  maturity)    | ** ** | $          | 13,364     | ** ** |
| 2006                        |       | 16,438     |       |
| 2007                        |       | 13,700     |       |
| 2008                        |       | 5,243      |       |
| 2009                        |       | 1,537      |       |
|                        |       | $          | 50,282     |   |

 

14

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** **

**NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**

### **Notes to Interim Condensed Consolidated FinancialStatements**

**U.S.dollars in thousands (information as of March 31, 2005 and for the threemonth periods ended March 31, 2004 and 2005 is unaudited)**

 

#### ***Note 4: Commitments andContingent Liabilities***

 

a.               Litigation

 

In 2004 and the three-month period ended March 31,2005, several employees filed lawsuits against subsidiaries of ours claimingpayments due to them in the total amount of $73. Our management and our legaladvisor believe that the provision in our consolidated financial statements isadequate to cover probable costs arising from these matters.

 

Our Israeli subsidiary currently has a dispute inrespect of an outsourcing contract in which it has provided services as asubcontractor to the Israeli Ministry of Environment. The Israeli Ministry ofEnvironment submitted a claim for approximately $1,100 and our subsidiarysubmitted two counterclaims amounting aggregately to $660. The dispute iscurrently discussed through arbitration. Our management and our legal advisorare unable to determine with any certainty the ultimate outcome of the disputeand, accordingly, no accrual was provided for.

 

b.              Guarantees

 

Guarantees are contingent commitments issued by usgenerally 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 therelated projects, which can be as short as 30 days or as long as 5 years. Themaximum potential amount of future payments we could be required to make underour guarantees at December 31, 2004 and March 31, 2005, is $21,948and $20,647, respectively.  We do nothold collateral to support guarantees when deemed necessary.

 

c.               Liensand charges

 

To secure our liabilities, we and our subsidiariesrecorded fixed and floating charges on our holdings in subsidiaries, and on ourand our subsidiaries’ property and equipment, share capital and goodwill.

 

#### ***Note 5: Stockholders’Equity***

 

a.               Redeemableoptions:

 

Our Executive Committee approved and resolved on August 31,2004 to provide to certain optionees (specifically, those who exchanged theiroptions in two previously public entities acquired by us for options in Ness)the right to redeem 391,499 of their options, all of which were vested at thetime of grant, for a cash payment. The grant date occurred in the fourthquarter of 2004. During the first quarter of 2005, certain optionees exercisedtheir options and one optionee exercised his redemption rights and had his optionsredeemed.  Accordingly, as of March 31,2005, the total number of shares of common stock for which these redeemableoptions are exercisable is 370,957, and the aggregate redemption value is $3.3million. The redemption right is exercisable from October 1, 2004 untilMay 31, 2006. Each option subject to the redemption right may be transferred bythe employee to us for a cash payment that is linked, at the employee’s solediscretion, either to the Israeli CPI and shall bear an NIS interest at therate of 5% per year, or to the dollar with interest at the rate of 6% per year,calculated from the original option grant date of September 23, 1999 or October 3,1999, up to the redemption date. Each of 280,917 options (“Group A”) may beexercised to acquire one share of our common stock at a price of $3.49 and areredeemable at the NIS equivalent of $9.46 per option as of March 31, 2005.Each of 90,040 options (“Group B”) may be exercised to acquire one share of ourcommon stock at a price of $7.45, and are redeemable at the NIS equivalent of$7.12 per option as of March 31, 2005. The exercise prices and

 

15

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** **

**NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**

### **Notes to Interim Condensed Consolidated FinancialStatements**

**U.S.dollars in thousands (information as of March 31, 2005 and for the threemonth periods ended March 31, 2004 and 2005 is unaudited)**

 

redemption amounts are subject to adjustments forstock splits, dividends, recapitalizations and the like, as set forth in ourshare option plan to which each option is subject. We account for the rightsfollowing the guidance of FIN No. 28, “Accounting for Stock Appreciation Rightsand Other Variable Stock Option or Award Plans,” relating to tandem awards and EmergingIssues Task Force (“EITF”) No. 00-23 “Issues Related to the Accounting forStock Compensation under APB No. 25 and FIN No. 44.” Accordingly, once webelieve it is likely that the rights would be exercised in the future, aliability is recorded at the then value of the redemption rights, with acorresponding charge to compensation expense. The liability will be accretedperiodically to equal the amount that would be payable if the awards wereredeemed at each balance sheet date.

 

As of March 31,2005, we believed it was likely that the rights in respect of Group B would beexercised, and accordingly, we recorded a liability in that respect in thetotal amount of $641, included in other accounts payable and accrued expenses,reflecting the value of the redemption rights at March 31, 2005. Relatedstock based compensation expense was recorded in the statement of income in thetotal amount of $346, net of taxes.

 

b.              Totalcomprehensive income (loss):

 
| ** **                                                         | ** ** | **Three months ended March 31** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                             | ** ** | **2005** | ** ** |
| ** **                                                         | ** ** | **(Unaudited)**                      | ** ** |
| Net income                                                         |       | $                                    | 2,417      |   | $ | 4,926 |   |
| Foreign currency translation adjustment, net                       |       | (3,322                               | )          | (3,791 | ) |
| Net unrealized losses on available-for-sale  marketable securities |       | (21                                  | )          | 67 |   |
| Comprehensive income (loss)                                        |       | $                                    | (926       | ) | $ | 1,202 |   |

 

#### ***Note 6: Geographic Information***

 

We adopted SFAS No. 131, “Disclosures about Segmentsof an Enterprise and Related Information.”  We operate in one reportable segment. Ourtotal revenues are attributed to geographic areas based on the location of theend customer.

 

The following present total revenues for the threemonth periods ended March 31, 2004 and 2005, and long-lived assets as of March 31,2004 and 2005:

 
| ** **                                     | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(Unaudited)**                        | ** ** |
| Revenues from sales to unaffiliated customers: |       |                                   |       |   |   |
| Israel                                         |       | $                                      | 41,587     |   | $ | 51,708 |   |
| United States                                  |       | 16,235                                 |       | 20,752 |   |
| Europe                                         |       | 9,872                                  |       | 10,377 |   |
| Asia and the Far East                          |       | 2,888                                  |       | 4,356 |   |
| Others                                         |       | 564                                    |       | 1,212 |   |
|                                           |       | $                                      | 71,146     |   | $ | 88,405 |   |

 

16

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**NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**

### **Notes to Interim Condensed Consolidated FinancialStatements**

**U.S.dollars in thousands (information as of March 31, 2005 and for the threemonth periods ended March 31, 2004 and 2005 is unaudited)**

 
| ** **            | ** ** | **March 31,** | ** ** |
|-----------------------|------------|--------------------|------------|
| ** **            | ** ** | **2004**           | ** ** | **2005** | ** ** |
| ** **            | ** ** | **(Unaudited)**    | ** ** |
| Long-lived assets:    |       |               |       |   |   |
| Israel                |       | $                  | 96,313     |   | $ | 103,351 |   |
| United States         |       | 56,006             |       | 60,283 |   |
| Europe                |       | 2,508              |       | 2,730 |   |
| Asia and the Far East |       | 4,549              |       | 8,222 |   |
| Others                |       | 8                  |       | 8 |   |
|                  |       | $                  | 159,384    |   | $ | 174,594 |   |

 

#### ***Note 7: Basic and DilutedNet Earnings per Share***

 

Basic net earnings per share are computed based on theweighted average number of shares of common stock outstanding during eachperiod, plus dilutive Convertible Preferred stock considered outstanding duringeach period, in accordance with the guidance of EITF No. D-95 “Effect ofParticipating Convertible Securities on the Computation of Basic Earnings perShare.” Diluted net earnings per share are computed based on the weightedaverage number of shares of common stock outstanding during each period, plusdilutive potential shares of common stock considered outstanding during theperiod, in accordance with SFAS No. 128, “Earnings per Share.”

 

The total weighted average number of shares related tothe outstanding options, warrants, Convertible Preferred stock and convertibleloan from stockholders excluded from the calculations of diluted net earningsper share, as they would have been anti-dilutive for all periods presented, was186,401, 155,521 and 19,755 for the year ended December 31, 2004 and the threemonths ended March 31, 2004 and 2005, respectively.

 

The following table sets forth the computation ofbasic and diluted net earnings per share of common stock (in thousands):

 
| ** **                                                                                                                                     | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| ** **                                                                                                                                     | ** ** | **(Unaudited)**                        | ** ** |
| Numerator:                                                                                                                                     |       |                                   |       |   |   |
| Net income                                                                                                                                     |       | $                                      | 2,417      |   | $ | 4,926 |   |
| Allocation of undistributed earnings on Class B  Convertible Preferred Stock                                                                   |       | (366                                   | )          | — |   |
| Numerator for basic and diluted per share data: Net  income after allocation of undistributed earnings on Class B Convertible Preferred  Stock |       | $                                      | 2,051      |   | $ | 4,926 |   |
|                                                                                                                                           |       |                                   |       |   |   |
| Denominator:                                                                                                                                   |       |                                   |       |   |   |
| Weighted average number of shares of common stock                                                                                              |       | 16,478                                 |       | 33,755 |   |
| Weighted average number of shares of preferred stock                                                                                           |       | 2,412                                  |       | — |   |
| Denominator for basic net earnings per share                                                                                                   |       | 18,890                                 |       | 33,755 |   |
| Effect of dilutive securities:                                                                                                                 |       |                                   |       |   |   |
| Employee stock options and warrants                                                                                                            |       | 2,401                                  |       | 1,790 |   |
| Denominator for diluted net earnings per share –  adjusted weighted average assuming conversions and exercise of options and  warrants    |       | 21,291                                 |       | 35,545 |   |

 

#### ***Note 8: Subsequent Events***

 

On April 1, 2005, we completed the acquisition ofRadix Company SA (“Radix”), a privately held leading provider of IT servicesand solutions based in Romania. The purchase price in the all-cash transactionwas €4 million, or approximately $5.2 million. In addition, should Radixachieve certain performance goals over the next two years, we will pay anadditional amount of up to €3 million, or approximately $3.9 million. Uponcompletion of the acquisition, Radix Company SA changed its name to NessRomania and it now operates as a wholly-owned subsidiary of our Dutchsubsidiary, Ness Technologies, B.V.

 

17

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## ***Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

 

*You should read the followingdiscussion and analysis together with our unaudited consolidated financialstatements and the accompanying notes. This discussion contains forward-looking statements, within the meaningof Section 27A of Securities Act of 1933, as amended, Section 21E ofthe Securities Exchange Act of 1934, as amended, and the Private SecuritiesLitigation Reform Act of 1995, including statements regarding our expectedfinancial position, business and financing plans.  These statements involve risks anduncertainties. Our actual results could differ materially from the resultsdescribed in or implied by these forward-looking statements as a result ofvarious factors, including those discussed below and elsewhere our AnnualReport on Form 10-K dated March 31, 2005, as filed with the Securities andExchange Commission, particularly under the headings “Disclosure Statement” and“Risk Factors.”*

 

### **Overview**

 

We are a global provider of information technology, orIT, services and end-to-end business solutions designed to help clients improvetheir competitiveness and effectiveness. End-to-end business solutionsencompass all stages of a client’s business process and incorporate alltechnologies and IT services related to that process. Our portfolio ofsolutions and services includes outsourcing, system integration and applicationdevelopment, software and consulting, and quality assurance and training. Theprimary industries, or verticals, we serve include government and defense,financial services, life sciences and healthcare, telecommunications andutilities, and independent software vendors, or ISVs.

 

We have operations in 15 countries across NorthAmerica, Europe and Asia. We combine our deep vertical expertise and strongtechnical capabilities to provide a complete range of high quality services ona global scale. By integrating our local and international personnel in focusedbusiness and project teams, this global delivery model leverages our corporateknowledge and experience, intellectual property and global infrastructure todevelop innovative solutions for clients across the geographies and verticalswe serve. We complement this global delivery model with our offshore deliverycapabilities to achieve meaningful cost reductions or other benefits for ourclients.

 

Our revenues increased to $88.4 million for the threemonths ended March 31, 2005 from $71.1 million for the three months ended March 31,2004.  Net income increased to $4.9 millionfor the three months ended March 31, 2005 from $2.4 million for the threemonths ended March 31, 2004.

 

Our revenue growth is attributable to a number offactors, increases in the number and size of projects for existing clients, andthe addition of new clients. Our client base is diverse, and we are notdependent on any single client. In the three months ended March 31, 2005,no client accounted for more than 5% of our revenues and our largest twentyclients together accounted less than approximately 35% of our revenues. For thethree months ended March 31, 2005, the percentage of our revenuesgenerated by public and private clients in Israel was 58%, and the percentageof our revenues derived, in aggregate, from agencies of the government ofIsrael was 13%. Existing clients from prior years generated more than 85% ofour revenues in the three months ended March 31, 2005.

 

Our backlog as of March 31, 2005 was $412 millioncompared to $314 million as of March 31, 2004. This $98 million increasein our backlog was due exclusively to new bookings. We achieve backlog throughnew signings of IT services projects and outsourcing contracts, including fornew and repeat customers. We recognize backlog as revenue when we perform theservices related to backlog.

 

For the three months ended March 31, 2005, thepercentage of our revenues derived from clients in Israel was 58%; in theUnited States, 23%; in Europe, 12%; in Asia and the Far East, 5%; and in othercountries, 1%.  For the three monthsended March 31, 2005, we derived 30% of our revenues from system integrationand application development; 47% from outsourcing (including offshoredevelopment); 14% from software and consulting; 6% from quality assurance and training;and 4% from our other offerings.

 

18

----

 

As of March 31, 2005, we had approximately 5,170 employees,including approximately 4,515 IT professionals. Of the 5,170 employees, approximately 2,760 were in Israel, 1,325 werein India, 360 were in North America, 410 were in Europe and 315 were in theAsia Pacific region.

 

### **Recent Developments**

 

On April 1, 2005, we completed the acquisition ofRadix Company SA, a privately held leading provider of IT services andsolutions based in Romania. The purchase price in the all cash transaction was€4 million, or approximately $5.2 million. In addition, should Radix achievecertain performance goals over the next two years, we will pay an additionalamount of up to €3 million, or approximately $3.9 million.  For the full year 2004, Radix Company SAgenerated revenues in excess of $12 million and was profitable.  Radix Company SA is one of the leadingRomanian IT services and solutions providers and is expected to providesynergies with Ness’ current operations in Central and Eastern Europe. Upon completionof the acquisition, Radix Company SA changed its name to Ness Romania and itnow operates as a wholly-owned subsidiary of our Dutch subsidiary, NessTechnologies, B.V.

 

### **ConsolidatedResults of Operations**

 

The following table sets forth the items in ourconsolidated statement of operations as a percentage of revenues for theperiods presented.

 
| ** **                                                         | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| Revenues                                                           |       | 100.0                                  | %          | 100.0 | % |
| Cost of revenues                                                   |       | 68.7                                   |       | 70.6 |   |
| Provision for losses (reverse of losses) on uncompleted  contracts |       | (0.6                                   | )          | 0.1 |   |
| Gross profit                                                       |       | 32.0                                   |       | 29.3 |   |
|                                                               |       |                                   |       |   |   |
| Operating expenses:                                                |       |                                   |       |   |   |
| Selling and marketing                                              |       | 8.6                                    |       | 8.0 |   |
| General and administrative                                         |       | 16.0                                   |       | 14.1 |   |
| Stock-based compensation                                           |       | 0.1                                    |       | 0.7 |   |
| Total operating expenses                                           |       | 24.6                                   |       | 22.7 |   |
|                                                               |       |                                   |       |   |   |
| Operating income                                                   |       | 7.3                                    |       | 6.6 |   |
| Financial expenses, net                                            |       | (3.3                                   | )          | (0.5 | ) |
| Other income, net                                                  |       | 0.1                                    |       | 0.0 |   |
| Income before taxes on income                                      |       | 4.1                                    |       | 6.1 |   |
|                                                               |       |                                   |       |   |   |
| Taxes on income (tax benefit)                                      |       | (0.2                                   | )          | 0.7 |   |
| Equity in net losses of affiliates                                 |       | (0.9                                   | )          | 0.0 |   |
| Minority interests in losses of a subsidiary                       |       | —                                 |       | 0.1 |   |
| Net income                                                         |       | 3.4                                    |       | 5.6 |   |

 

### **Three Months EndedMarch 31, 2005 Compared to the Three Months Ended March 31, 2004**

 

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

 

19

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| ** **                                                         | ** ** | **Three months ended  March 31,** | ** ** | **Increase  (Decrease)** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------|------------|
| ** **                                                         | ** ** | **2004**                               | ** ** | **2005**                 | ** ** | **$** | ** ** | **%** | ** ** |
| Revenues                                                           |       | $                                      | 71,146     |                     | $          | 88,405 |   | 17,259 |   | 24.3 |   |
| Cost of revenues                                                   |       | 48,848                                 |       | 62,395                   |       | 13,547 |   | 27.7 |   |
| Provision for losses (reverse of losses) on  uncompleted contracts |       | (442                                   | )          | 85                       |       | 527 |   | N/A |   |
| Gross profit                                                       |       | $                                      | 22,740     |                     | $          | 25,925 |   | 3,185 |   | 14.0 |   |
| Gross margin                                                       |       | 32.0                                   | %          | 29.3                     | %          |   |   |   |   |
|                                                                    |            |                                        |            |                          |            |  |  |  |  |  |  |  |  |

 

#### ***Revenues***

 

Our revenues increased from $71.1 million in the threemonths ended March 31, 2004 to $88.4 million in the three months ended March 31,2005, representing an increase of $17.3 million, or 24.3%.  Our $17.3 million revenue increase wasprimarily due to growth in outsourcing and offshore engagements, representing $7.8million, while $9.5 million was attributable to growth in our other offerings,comprised of system integration and application development, software andconsulting, and quality assurance and training. Revenues from outsourcing andoffshore services increased as a result of volume growth due to our salesinitiatives related to these offerings, including the hiring of key personneland aligning of our organizational structure, and expansion into geographicalareas in which we currently do business but previously had not offered outsourcingand offshore services. There was no significant change in our billing rates, orprices, from the three months ended March 31, 2004 to the three monthsended March 31, 2005.

 

#### ***Cost of revenues andprovision for losses (reverse of losses) on uncompleted contracts***

 

Our cost of revenues, including salaries, wages andother direct costs, increased from $48.8 million in the three months ended March 31,2004 to $62.4 million in the three months ended March 31, 2005, representingan increase of $13.5 million, or 27.7 %. The increase was attributable togrowth in our delivery staff needed to support our increased revenues.  The change in our provision for losses (reverseof losses) on uncompleted contracts changed from ($0.4) million in the threemonths ended March 31, 2004 to $0.1 million in the three months ended March 31,2005, as a result of net changes in our fixed price project loss provisions.

 

#### ***Gross Profit***

 

Our gross profit (revenues less cost of revenues andprovision for losses (reverse of losses) on uncompleted contracts) increasedfrom $22.7 million in the three months ended March 31, 2004 to $25.9million in the three months ended March 31, 2005, representing an increaseof $3.2 million, or 14.0 %. The increase was primarily related to our increasein revenues, representing $5.6 million, offset by a decrease in our grossmargin, representing approximately ($2.4) million. Gross margin for the threemonths ended March 31, 2005 was 29.3%, compared to 32.0% in the three monthsended March 31, 2004. The decrease in gross margin resulted primarily fromhigher than planned contract setup costs associated with new outsourcing andoffshore engagements attributable to our greater than anticipated revenuegrowth in the quarter and from an increase in our use of subcontractors andvendors in order to meet certain delivery commitments.

 

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

 
| ** **                 | ** ** | **Three months ended  March 31,** | ** ** | **Increase  (Decrease)** | ** ** |
|----------------------------|------------|----------------------------------------|------------|--------------------------|------------|
| ** **                 | ** ** | **2004**                               | ** ** | **2005**                 | ** ** | **$** | ** ** | **%** | ** ** |
| Selling and marketing      |       | $                                      | 6,086      |                     | $          | 7,031 |   | 945 |   | 15.5 |   |
| General and administrative |       | 11,397                                 |       | 12,428                   |       | 1,031 |   | 9.0 |   |
| Stock-based compensation   |       | 51                                     |       | 611                      |       | 560 |   | 1,098 |   |
| Total operating expenses   |       | 17,534                                 |       | 20,070                   |       | 2,536 |   | 14.4 |   |
| Operating income           |       | $                                      | 5,206      |                     | $          | 5,855 |   | 649 |   | 12.5 |   |

 

20

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#### ***Selling and marketing***

 

Selling and marketing expenses increased from $6.1million in the three months ended March 31, 2004 to $7.0 million in thethree months ended March 31, 2005, representing an increase of $0.9 million,or 15.5%. This increase was due primarily to a $0.8 million increase inmarketing expenses, especially in Europe, and increases in our salescommissions and other sales expenses of $0.1 million. These other marketingexpenses are related primarily to our efforts to enhance our brand recognition.

 

#### ***General andadministrative***

 

General and administrative expenses increased from $11.4million in the three months ended March 31, 2004 to $12.4 million in thethree months ended March 31, 2005, representing an increase of $1.0 million,or 9.0%. This increase was due primarily to increased general andadministrative expenses necessary to support our revenue growth, representing $0.3million, and certain additional expenses associated with being a publiccompany, including implementation of compliance measures required by theSarbanes-Oxley Act, representing $0.6 million.

 

#### ***Stock-based compensation***

 

Non-cash stock-based compensation expenses increasedfrom $0.1 million in the three months ended March 31, 2004 to $0.6 millionin the three months ended March 31, 2005, representing an increase of $0.6million. This increase was due primarily to a charge to compensation expense inrespect of redeemable options, representing $0.5 million, described in note5(a) to our interim condensed consolidated financial statements – March 31,2005.

 

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

 
| ** **                                   | ** ** | **Three months ended  March 31,** | ** ** | **Increase  (Decrease)** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|--------------------------|------------|
| ** **                                   | ** ** | **2004**                               | ** ** | **2005**                 | ** ** | **$** | ** ** | **%** | ** ** |
| Operating income                             |       | $                                      | 5,206      |                     | $          | 5,855 |   | 649 |   | 12.5 |   |
| Financial expenses, net                      |       | (2,369                                 | )          | (426                     | )          | 1,943 |   | (82.0 | ) |
| Other income, net                            |       | 84                                     |       | —                   |       | (84 | ) | (100.0 | ) |
| Income before taxes on income                |       | 2,921                                  |       | 5,429                    |       | 2,508 |   | 85.9 |   |
| Taxes on income (tax benefit)                |       | (111                                   | )          | 602                      |       | 713 |   | N/A |   |
| Equity in net losses of affiliates           |       | (615                                   | )          | (2                       | )          | 613 |   | (99.7 | ) |
| Minority interests in losses of a subsidiary |       | —                                 |       | 101                      |       | 101 |   | N/A |   |
| Net income                                   |       | $                                      | 2,417      |                     | $          | 4,926 |   | 2,509 |   | 103.8 |   |

 

#### ***Financial expenses, net***

 

Financial expenses, net, decreased from $2.4 millionin the three months ended March 31, 2004 to $0.4 million in the threemonths ended March 31, 2005, representing a decrease of $1.9 million, or 82.3%.The decrease was due primarily to investment income from the proceeds of ourinitial public offering and reduced debt service expenses following ourreduction of net long-term debt in the fourth quarter of 2004.

 

#### ***Other income, net***

 

Other income, net, changed from income of $0.1 millionin the three months ended March 31, 2004 to no expenses in the threemonths ended March 31, 2005. This change was not significant.

 

#### ***Taxes on income (taxbenefit)***

 

Our taxes on income (tax benefit) changed from a benefitof $0.1 million in the three months ended March 31, 2004 to taxes of $0.6 millionin the three months ended March 31, 2005. This change was attributable tothe increase in our income before taxes and the depletion of our net operatingloss carry forwards in Israel and the United States.

 

21

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#### ***Equity in net losses ofaffiliates***

 

Equity in net losses of affiliates decreased from $0.6million for the three months ended March 31, 2004 to $2,000 in the three monthsended March 31, 2005. This change was due to a one-time capital lossrelated to our reduced ownership of our affiliate, Ness ISI (now known asdbMotion Ltd.), in 2004. Following the January 1, 2004 issuance ofpreferred shares by Ness ISI that reduced our share ownership to anon-controlling interest, we no longer consolidate Ness ISI’s results in ourfinancial statements.

 

#### ***Minority interests inlosses of a subsidiary***

 

Minority interests in losses of a subsidiary changedfrom zero in the three months ended March 31, 2004 to earnings of $0.1 millionin the three months ended March 31, 2005. This change was not significant.

 

#### ***Net Income***

 

Net income increased from $2.4 million in the threemonths ended March 31, 2004 to $4.9 million in the three months ended March 31,2005, representing an increase of $2.5 million, or 103.8%. The increase in netincome was due primarily to our increase in operating income of $0.6 million,our decrease in financial expenses of $1.9 million and our decrease in equityin net losses of affiliates of $0.6 million, partially offset by the increasein our income taxes of $0.7 million and an increase in non-cash stock-basedcompensation of $0.5 million.

 

### **Liquidity andCapital Resources**

 

#### ***Overview***

 

As of March 31, 2005, we had cash and cashequivalents amounting to $108.7 million compared to $104.2 million as of December 31,2004. The funds held at locations outside of the United States are for futureoperating expenses. We have no intention of repatriating those funds. We arenot, however, restricted in repatriating those funds back to the United States,if necessary. While we expect that cash generated by our non-U.S. subsidiarieswill be reinvested in their respective countries to support expansion of ourbusiness, to the extent that funds were remitted to the United States in theform of dividend payments, those payments would be subject to a withholdingtax.

 

#### ***Cash Flows***

 

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

 
| ** **                                                    | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| Net cash provided by (used in) operating activities           |       | $                                      | (1,783     | ) | $ | 2,381 |   |
| Net cash used in investing activities                         |       | (2,444                                 | )          | (2,351 | ) |
| Net cash provided by (used in) financing activities           |       | (9,184                                 | )          | 6,482 |   |
| Effect of exchange rate changes on cash and cash  equivalents |       | (696                                   | )          | (2,018 | ) |
| Increase (decrease) in cash and cash equivalents              |       | (14,107                                | )          | 4,494 |   |
| Cash and cash equivalents at the beginning of the  period     |       | 46,004                                 |       | 104,229 |   |
| Cash and cash equivalents at the end of the period            |       | $                                      | 31,897     |   | $ | 108,723 |   |

 

Three months ended March 31, 2005 compared to thethree months ended March 31, 2004

 

Net cash provided by operating activities was $2.4 millionin the three months ended March 31, 2005, compared to net cash used of $1.8million in the three months ended March 31, 2004. The major factorcontributing to the change in net cash provided by operating activities was anincrease in our net income, representing $2.5 million.

 

22

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Net cash used in investing activities was $2.4 millionin the three months ended March 31, 2005, compared with $2.4 million in thethree months ended March 31, 2004. This change was not significant.

 

Net cash provided by financing activities was $6.5 millionin the three months ended March 31, 2005, compared with net cash used of $9.2million in the three months ended March 31, 2004. The change was primarilydue to the proceeds from employee exercises of stock options, representing $7.7million, and a reduction of $7.7 million in the payment of long term loans,net.

 

The effect of exchange rate changes on cash and cashequivalents was ($2.0) million in the three months ended March 31, 2005,compared to ($0.7) million in the three months ended March 31, 2004. Thechange was primarily due to long-term inter-company balances, representing $1million.

 

#### ***Long-term and Short-termDebt***

#### *** ***

At March 31, 2005, we had aggregate short-termand long-term bank borrowings of $48.9 million, consisting of various notesdenominated in dollars and NIS with interest rates (in various currencies andlinked to various indices) ranging from approximately 5% to 8% and a weightedaverage interest rate of approximately 6%, with maturities of two to fiveyears. These aggregate bank borrowings included $25.3 million from BankHapoalim, with an interest rate of approximately 5.5% and maturity of threeyears; $14.5 million from Israel Discount Bank, with interest rates ofapproximately 5% to 8% and maturities of two to four years; and $9.1 millionfrom five other lenders, in amounts ranging from $1.0 million to $3.0 million,with interest rates of approximately 5% to 7% and maturities of up to threeyears. The maximum interest rate for our dollar-linked borrowings isapproximately 5.5%, and for NIS-linked borrowings is approximately 8%.

 

#### ***Anticipated CapitalExpenditures***

#### *** ***

In the first quarter of 2005, we used $1.3 million ofthe proceeds of our initial public offering to further reduce net debt beyondthe net debt reduction of $35.6 million accomplished in the fourth quarter of2004, in line with our previously announced $40 million debt reduction plan.Following the use of proceeds, our only material indebtedness is amounts owedby Ness Technologies Holdings Ltd., one of our subsidiaries, to Bank Hapoalim andIsrael Discount Bank. The shares of two of our Israeli subsidiaries are pledgedto these banks as security for borrowings under the agreements. The relevantdebt instruments contain customary restrictive covenants relating to theborrower and our wholly-owned subsidiary Ness A.T. Ltd., including thefollowing:

 

•                  limitations on incurring debt;

•                  prohibition on pledging assets;

•                  prohibition on distributing dividends;

•                  stockholders’ equity must not be less than 30% of its total assets;

•                  EBITDA must not be less than 9.5% of revenues and not less than NIS 34million; and

•                  limitations on merging or transferring assets.

 

In addition, the Israel Discount Bank agreementrequires that the net cash and liquid assets of the borrower must not be lowerthan $18.0 million. As of March 31, 2005, we are in compliance and expectto remain in compliance with all of our covenants. Our failure to comply withthese covenants could lead to an event of default under the agreementsgoverning some or all of the indebtedness, permitting the applicable lender toaccelerate all borrowings under the applicable agreement, and to foreclose onany collateral.

 

#### ***Anticipated Needs***

 

We intend to fund future growth through cash flow fromoperations, available bank borrowings and the net proceeds of our initialpublic offering. We believe the proceeds of our initial public offering,together with borrowings and cash flow from operations, will be sufficient tofund continuing operations for the foreseeable future. In order to achieve ourstrategic business objectives, we may be required to seek additional financing.For example, future acquisitions may require additional equity and/or debtfinancing. In addition, we may require

 

23

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further capital to continue to develop our technologyand infrastructure and for working capital purposes. These financings may notbe available on acceptable terms, or at all.

 

### **Forward-LookingStatements and Risk Factors**

### ** **

This Quarterly Report on Form 10-Q, includingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, contains forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995.  Forward-looking statements often areproceeded by words such as “believes,” “expects,” “may,” “anticipates,” “plans,”“intends,” “assumes,” “will” or similar expressions. Forward-looking statementsreflect management’s current expectations, as of the date of this report, andinvolve certain risks and uncertainties. Our actual results could differmaterially from those anticipated in these forward looking statements as aresult of various factors. Some of the factors that could cause future resultsto materially differ from the recent results or those projected inforward-looking statements include the “Risk Factors” described in our AnnualReport on Form 10-K dated March 31, 2005, as filed with the Securities andExchange Commission.

 

## ***Item 3.Quantitative and Qualitative Disclosure about Market Risk***

## *** ***

We do not engage in trading market-risk instruments orpurchase hedging or “other than trading” instruments that are likely to exposeus to market risk, whether interest rate, commodity price or equity price risk.We have not purchased options or entered into swaps or forward or futurescontracts. We do not use derivative financial instruments for speculativetrading purposes.

 

We have direct operations in 15 different countriesand relationships in many other parts of the world. Our foreign operationscontract with clients in their applicable local currencies or dollars. As aresult, we are subject to adverse movements in foreign currency exchange ratesin those countries where we conduct business. We may in the future enter intoforward foreign currency exchange or other derivatives contracts to hedge ourexposure to foreign currency exchange rates. We do not currently hedge anyforeign currency exposure to offset the effects of changes in exchange rates.

 

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

 

## ***Item 4. Controlsand Procedures***

## *** ***

### **Evaluation ofDisclosure Controls and Procedures**

### ** **

As of the end of the period covered by this report,our chief executive officer and chief financial officer evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended).Based on their evaluation of our disclosure controls and procedures, our chiefexecutive officer and chief financial officer, with the participation of ourmanagement, have concluded that our disclosure controls and procedures areeffectively designed to ensure that information required to be disclosed by usin the reports that we file or submit under the Securities Exchange Act of1934, as amended, is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms and are operating in an effective manner.

 

It should be noted that any system of controls,however well designed and operated, can provide only reasonable, and notabsolute, assurance that the objectives of the system are met.  In addition, the design of any control systemis based in part upon certain assumptions about the likelihood of futureevents.  Given these and other inherentlimitations of control systems, there is only reasonable assurance that ourcontrols will succeed in achieving their stated goals under all potentialfuture conditions.

 

### **Changes inInternal Control**

### ** **

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

 

24

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# **PART II – OTHER INFORMATION**

# ** **

## ***Item 1. LegalProceedings***

 

We are periodically a party to routine litigationincidental to our business. We do not believe that we are a party to anypending legal proceeding that is likely to have a material adverse effect onour business, financial condition or results of operations.

 

## ***Item 2. UnregisteredSales of Equity Securities and Use of Proceeds***

 

Pursuant to the terms of the merger agreement, datedMay 12, 2003, by which we acquired Apar Holding Corp., the parent of AparInfoTech, resulting in Apar becoming our wholly-owned subsidiary, and inconnection with our Ness U.S.A. Exchange Offer filed on Form S-4, dated November 12,2004, as amended (File No. 333-120389), which closed on February 28, 2005,we issued to the former stockholders of Apar 89,305 shares of our common stockon March 2, 2005.  In the Aparmerger agreement we agreed to issue additional shares of our common stock tothe stockholders of Apar to the extent necessary to preserve their ownership percentagesin Ness prior to the Ness U.S.A. exchange.

 

In the first quarter of 2005, we used $1.3 million ofthe proceeds of our initial public offering, which closed on October 4,2004, to further reduce net debt beyond the net debt reduction of $35.6 millionaccomplished in the fourth quarter of 2004, in line with our previouslyannounced $40 million debt reduction plan. We intend to apply the balance of the proceeds to fund business growthand expansion and for working capital and general corporate purposes.  We may also use a portion of the net proceedsfor acquisitions of additional businesses, assets and technologies or theestablishment of joint ventures.

 

## ***Item 3. Defaultsupon Senior Securities.***

 

None.

 

## ***Item 4. Submissionof Matters to a Vote of Security Holders***

## *** ***

No matters were submitted to a vote of securityholders during the first quarter of 2005.

 

## ***Item 5. OtherInformation***

## *** ***

None.

 

## ***Item 6. Exhibits***

 

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

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                           |
| 10.1                |       | Employment  Agreement, dated as of April 1, 2001, between Ness I.N.G. Ltd. and  Shachar Efal (English translation).                                       |
|                |       |                                                                                                                                                           |
| 10.2                |       | Termination  Agreement, dated as of April 20, 2005, between the Registrant and Yaron  Garmazi.                                                            |
|                |       |                                                                                                                                                           |
| 10.3                |       | Employment  Agreement, dated as of April 21, 2005, between the Registrant and Ytzhak  Edelman.                                                            |
|                |       |                                                                                                                                                           |
| 31.1                |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                     |
|                |       |                                                                                                                                                           |
| 31.2                |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                     |
|                |       |                                                                                                                                                           |
| 32.1                |       | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|                |       |                                                                                                                                                           |
| 32.2                |       | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

25

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# **SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, as amended, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
| NESS  TECHNOLOGIES, INC.                          |
|---------------------------------------------------|
| (Registrant)                                      |
|                                              |   |   |
|                                              |   |   |
| Date:       May 15, 2005 | By: | /s/ RAVIV ZOLLER |   |
|                                              |   | Raviv Zoller |
|                                              |   | Chief Executive  Officer, President, Director |
|                                              |   | (Principal  executive officer) |
|                                              |
|                                              |
| Date:       May 16, 2005 | By: | /s/ YARON GARMAZI |   |
|                                              |   | Yaron Garmazi |
|                                              |   | Chief Financial  Officer |
|                                              |   | (Principal  financial and accounting officer) |

 

26

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# **EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                           |
| 10.1                |       | Employment  Agreement, dated as of April 1, 2001, between Ness I.N.G. Ltd. and  Shachar Efal (English translation).                                       |
|                |       |                                                                                                                                                           |
| 10.2                |       | Termination  Agreement, dated as of April 20, 2005, between the Registrant and Yaron  Garmazi.                                                            |
|                |       |                                                                                                                                                           |
| 10.3                |       | Employment  Agreement, dated as of April 21, 2005, between the Registrant and Ytzhak  Edelman.                                                            |
|                |       |                                                                                                                                                           |
| 31.1                |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                     |
|                |       |                                                                                                                                                           |
| 31.2                |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                     |
|                |       |                                                                                                                                                           |
| 32.1                |       | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|                |       |                                                                                                                                                           |
| 32.2                |       | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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