UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-Q





(Mark
One)


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




For
the quarterly period ended June 30, 2009





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




For the
transition period from ________ to ________





Commission
File Number 000-50954





NESS
TECHNOLOGIES, INC.


(Exact
name of registrant as specified in its charter)





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





Ness
Tower


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)







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




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




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


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




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




As of
July 31, 2009, 38,451,090 shares of the issuer’s common stock, $0.01 par value
per share, were outstanding.












NESS
TECHNOLOGIES, INC. AND SUBSIDIARIES





INDEX




PART
      I – FINANCIAL INFORMATION
                                
                                3Item
      1. Financial Statements
                                
                                3Consolidated
      Balance Sheets – December 31, 2008 and June 30, 2009
      (Unaudited)
                                
                                3Consolidated
      Statements of Income – Three and six months ended June 30, 2008 and 2009
      (Unaudited)
                                
                                5Consolidated
      Statements of Cash Flows – Six months ended June 30, 2008 and 2009
      (Unaudited)
                                
                                6Notes
      to Interim Consolidated Financial Statements – June 30, 2009
      (Unaudited)
                                
                                8Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                                
                                20Overview
                                
                                20Recent
      Developments
                                
                                21Consolidated
      Results of Operations
                                
                                21Three
      Months Ended June 30, 2009 Compared to the Three Months Ended June 30,
      2008
                                
                                22Six
      Months Ended June 30, 2009 Compared to the Six Months Ended June 30,
      2008
                                
                                24Results
      by Business Segment
                                
                                27Liquidity
      and Capital Resources
                                
                                28Forward-Looking
      Statements and Risk Factors
                                
                                30Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                                
                                31Item
      4. Controls and Procedures
                                
                                31Evaluation
      of Disclosure Controls and Procedures
                                
                                31Changes
      in Internal Control Over Financial Reporting
                                
                                32PART
      II – OTHER INFORMATION
                                
                                33Item
      1. Legal Proceedings
                                
                                33Item
      1A. Risk Factors
                                
                                33Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                                
                                33Item
      3. Defaults upon Senior Securities
                                
                                33Item
      4. Submission of Matters to a Vote of Security Holders
                                
                                33Item
      5. Other Information
                                
                                34Item
      6. Exhibits
                                
                                34SIGNATURES
                                
                                35EXHIBIT
      INDEX
                                
                                36









PART
I – FINANCIAL INFORMATION




Item
1. Financial Statements




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Interim
Consolidated Balance Sheets


U.S.
dollars in thousands





December
                  31,
      2008
              
              
              June
      30,
                  2009(Unaudited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              50,659
              
              
              $
              36,055Restricted
      cash
              
              
              2,331
              
              
              
              2,398Short-term
      bank deposits
              
              
              5,703
              
              
              
              20,775Trade
      receivables, net of allowance for doubtful accounts of $4,287 at December
      31, 2008 and $4,184 at June 30, 2009
              
              
              200,118
              
              
              
              153,710Unbilled
      receivables
              
              
              35,585
              
              
              
              33,713Other
      accounts receivable and prepaid expenses
              
              
              31,344
              
              
              
              34,864Work
      in progress
              
              
              1,532
              
              
              
              2,808Total
      current assets
              
              
              327,272
              
              
              
              284,323LONG-TERM
      ASSETS:Long-term
      prepaid expenses and other assets
              
              
              6,806
              
              
              
              6,998Unbilled
      receivables
              
              
              9,220
              
              
              
              8,553Deferred
      income taxes, net
              
              
              8,356
              
              
              
              7,338Severance
      pay fund
              
              
              46,478
              
              
              
              46,910Property
      and equipment, net
              
              
              36,733
              
              
              
              34,999Intangible
      assets, net
              
              
              22,073
              
              
              
              18,271Goodwill
              
              
              290,055
              
              
              
              290,654Total
      long-term assets
              
              
              419,721
              
              
              
              413,723Total
      assets
              
              $
              746,993
              
              
              $
              698,046





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




– 3
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Interim
Consolidated Balance Sheets


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





December
                  31,
      2008
              
              
              June
      30,
                  2009(Unaudited)LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Short-term
      bank credit
              
              $
              18,072
              
              
              $
              11,265Current
      maturities of long-term debt
              
              
              7,089
              
              
              
              18,928Trade
      payables
              
              
              47,072
              
              
              
              27,935Advances
      from customers and deferred revenues
              
              
              33,280
              
              
              
              31,571Other
      accounts payable and accrued expenses
              
              
              124,697
              
              
              
              88,620Total
      current liabilities
              
              
              230,210
              
              
              
              178,319LONG-TERM
      LIABILITIES:Long-term
      debt, net of current maturities
              
              
              60,973
              
              
              
              61,999Other
      long-term liabilities
              
              
              6,444
              
              
              
              6,469Deferred
      income taxes
              
              
              2,673
              
              
              
              1,991Accrued
      severance pay
              
              
              55,014
              
              
              
              53,512Total
      long-term liabilities
              
              
              125,104
              
              
              
              123,971COMMITMENTS
      AND CONTINGENT LIABILITIESSTOCKHOLDERS’
      EQUITY:Common
      stock of $0.01 par value –
                Authorized:
      76,500,000 shares at December 31, 2008 and at June 30, 2009;
                Issued:
      39,628,994 at December 31, 2008 and 39,628,994 at June 30,
      2009;
                Outstanding
      39,087,253 at December 31, 2008 and 38,451,090 at June 30,
      2009
              
              
              396
              
              
              
              396Additional
      paid-in capital
              
              
              330,128
              
              
              
              331,803Accumulated
      other comprehensive income
              
              
              4,614
              
              
              
              6,483Retained
      earnings
              
              
              58,930
              
              
              
              61,500Treasury
      stock, at cost (541,741 shares at December 31, 2008 and 1,177,904 at June
      30, 2009)
              
              
              (2,389
              )
              
              
              (4,426
              )Total
      stockholders’ equity
              
              
              391,679
              
              
              
              395,756Total
      liabilities and stockholders’ equity
              
              $
              746,993
              
              
              $
              698,046





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




– 4
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Interim
Consolidated Statements of Income


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





Three
      months ended
                  June
      30,
              
              
              Six
      months ended
                  June
      30,2008
              
              
              2009
              
              
              2008
              
              
              2009(Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)Revenues
              
              $
              170,586
              
              
              $
              137,243
              
              
              $
              330,318
              
              
              $
              273,677Cost
      of revenues
              
              
              117,995
              
              
              
              99,839
              
              
              
              232,385
              
              
              
              201,433Gross
      profit
              
              
              52,591
              
              
              
              37,404
              
              
              
              97,933
              
              
              
              72,244Selling
      and marketing
              
              
              14,538
              
              
              
              11,792
              
              
              
              27,746
              
              
              
              22,953General
      and administrative
              
              
              26,817
              
              
              
              23,474
              
              
              
              48,922
              
              
              
              48,931Insurance
      settlement related to 2007 arbitration expense, net of related
      expenses
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (2,610
              )Commissions
      related to the sale of Israeli SAP sales and distribution
      operations
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (2,534
              )Total
      operating expenses
              
              
              41,355
              
              
              
              35,266
              
              
              
              76,668
              
              
              
              66,740Operating
      income
              
              
              11,236
              
              
              
              2,138
              
              
              
              21,265
              
              
              
              5,504Financial
      expenses, net
              
              
              (1,032
              )
              
              
              (647
              )
              
              
              (2,448
              )
              
              
              (2,032
              )Income
      before taxes on income
              
              
              10,204
              
              
              
              1,491
              
              
              
              18,817
              
              
              
              3,472Taxes
      on income
              
              
              2,114
              
              
              
              449
              
              
              
              3,833
              
              
              
              902Net
      income
              
              $
              8,090
              
              
              $
              1,042
              
              
              $
              14,984
              
              
              $
              2,570Basic
      net earnings per share
              
              $
              0.21
              
              
              $
              0.03
              
              
              $
              0.38
              
              
              $
              0.07Diluted
      net earnings per share
              
              $
              0.21
              
              
              $
              0.03
              
              
              $
              0.38
              
              
              $
              0.07





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




Three
      months ended
                  June
      30,
              
              
              Six
      months ended
                  June
      30,2008
              
              
              2009
              
              
              2008
              
              
              2009(Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)Cost
      of revenues
              
              $
              63
              
              
              $
              57
              
              
              $
              145
              
              
              $
              120Selling
      and marketing
              
              
              58
              
              
              
              46
              
              
              
              114
              
              
              
              103General
      and administrative
              
              
              527
              
              
              
              725
              
              
              
              1,280
              
              
              
              1,533





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




– 5
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Interim
Consolidated Statements of Cash Flows


U.S.
dollars in thousands





Six
      months ended
                  June
      30,2008
              
              
              2009(Unaudited)
              
              
              (Unaudited)Cash flows from operating
      activities:Net
      income
              
              $
              14,984
              
              
              $
              2,570Adjustments
      required to reconcile net income to net cash provided by operating
      activities:Stock-based
      compensation-related expenses
              
              
              1,539
              
              
              
              1,756Currency
      fluctuation of long-term debt
              
              
              5
              
              
              
              —Depreciation
      and amortization
              
              
              8,426
              
              
              
              9,281Arbitration
      settlement and related charges
              
              
              (9,452
              )
              
              
              —Loss
      (gain) on sale of property and equipment
              
              
              6
              
              
              
              (280
              )Loss
      from impairment of cost investments
              
              
              —
              
              
              
              75Commissions
      related to the sale of Israeli SAP sales and distribution
      operations
              
              
              —
              
              
              
              (2,534
              )Decrease
      in trade receivables, net
              
              
              5,967
              
              
              
              42,292Decrease
      (increase) in unbilled receivables
              
              
              (6,519
              )
              
              
              2,181Increase
      in other accounts receivable and prepaid expenses
              
              
              (971
              )
              
              
              (1,838
              )Increase
      in work-in-progress
              
              
              (2,861
              )
              
              
              (355
              )Decrease
      (increase) in long-term prepaid expenses
              
              
              926
              
              
              
              (210
              )Deferred
      income taxes, net
              
              
              3,674
              
              
              
              145Increase
      (decrease) in trade payables
              
              
              268
              
              
              
              (15,467
              )Increase
      (decrease) in advances from customers and deferred
revenues
              
              
              7,498
              
              
              
              (683
              )Increase
      in other long-term liabilities
              
              
              341
              
              
              
              293Decrease
      in other accounts payable and accrued expenses
              
              
              (7,191
              )
              
              
              (17,340
              )Decrease
      in accrued severance pay, net
              
              
              (1,748
              )
              
              
              (1,542
              )Net
      cash provided by operating activities
              
              
              14,892
              
              
              
              18,344Cash flows from investing
      activities:Additional
      payments in connection with acquisitions of subsidiaries in prior
      periods
              
              
              (5,973
              )
              
              
              (16,203
              )Proceeds
      from maturity of (investment in) short-term bank deposits,
    net
              
              
              2,655
              
              
              
              (15,920
              )Proceeds
      from sale of property and equipment
              
              
              102
              
              
              
              703Purchase
      of property and equipment and capitalization of software developed for
      internal use
              
              
              (6,539
              )
              
              
              (5,045
              )Net
      cash used in investing activities
              
              
              (9,755
              )
              
              
              (36,465
              )Cash flows from financing
      activities:Exercise
      of options
              
              
              165
              
              
              
              —Repurchase
      of shares
              
              
              —
              
              
              
              (2,037
              )Acquired
      subsidiary’s dividend to its former shareholder
              
              
              (10,048
              )
              
              
              (683
              )Short-term
      bank loans and credit, net
              
              
              4,523
              
              
              
              (6,361
              )Proceeds
      from long-term debt
              
              
              25,090
              
              
              
              15,000Principal
      payments of long-term debt
              
              
              (1,972
              )
              
              
              (2,161
              )Net
      cash provided by financing activities
              
              
              17,758
              
              
              
              3,758








– 6
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Interim
Consolidated Statements of Cash Flows


U.S.
dollars in thousands





Six
      months ended
                  June
      30,2008
              
              
              2009(Unaudited)
              
              
              (Unaudited)Effect
      of exchange rate changes on cash and cash equivalents
              
              
              (1,525
              )
              
              
              (241
              )Increase
      (decrease) in cash and cash equivalents
              
              
              21,370
              
              
              
              (14,604
              )Cash
      and cash equivalents at the beginning of the period
              
              
              43,097
              
              
              
              50,659Cash
      and cash equivalents at the end of the period
              
              $
              64,467
              
              
              $
              36,055








Non-cash
      activityGain
      (loss) from mark-to-market of foreign exchange forward contracts and
      interest rate swap
                
                $
                (5,370
                )
                
                $
                326





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




– 7
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


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




Note
1: General




Ness
Technologies, Inc. was incorporated under the laws of the State of Delaware in
March 1999. We operate through our subsidiaries in North America, Europe, Israel
and Asia Pacific.




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




Note
2: Significant Accounting Policies




a.
            Unaudited Interim
      Financial Information




The
accompanying consolidated balance sheet as of June 30, 2009, the consolidated
statements of income for the three and six months ended June 30, 2008 and 2009
and the consolidated statements of cash flows for the six months ended June 30,
2008 and 2009 are unaudited. These unaudited interim consolidated financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles for interim financial information. In the opinion of
management, the unaudited interim consolidated financial statements include all
adjustments of a normal recurring nature necessary for a fair presentation of
our consolidated financial position as of June 30, 2009, our consolidated
results of operations for the three and six months ended June 30, 2008 and 2009
and our consolidated cash flows for the six months ended June 30, 2008 and
2009.




The
balance sheet at December 31, 2008 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements.




These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes for the year ended
December 31, 2008 included in our Annual Report on Form 10-K filed with the U.S.
Securities and Exchange Commission (“SEC”) on March 16, 2009.




Results
for the three and six months ended June 30, 2009 are not necessarily indicative
of results that may be expected for the year ending December 31,
2009.




Unless
otherwise noted, all references to “dollars” or “$” are to United States
dollars.




b.
            Reclassification




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




c.
            Use of
      estimates




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




– 8
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


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





d.
            Principles of
      consolidation




Our
consolidated financial statements include the accounts of the company and its
wholly and majority owned subsidiaries, 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.
            Fair
      value




In
February 2008, the Financial Accounting Standards Board (“FASB”) approved FASB
Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157”
(“FSP FAS 157-2”), which allows companies to elect a one-year delay in applying
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS 157”), to certain fair value measurements, primarily
related to non-financial instruments. We elected the delayed adoption date for
the portions of SFAS 157 impacted by FSP FAS 157-2. The partial adoption of SFAS
157 was prospective and did not have a significant effect on our consolidated
financial statements.




Assets
and liabilities measured at fair value under SFAS 157 on a recurring basis as of
June 30, 2009 were presented on our consolidated balance sheets as follows (in
thousands):




Total
                  
                  
                  Quoted
                      Prices
      in
                      Active
                      Markets
                      for
                      Identical
                      Assets
                      (Level
      1)
                  
                  
                  Significant
                      Other
                      Observable
                      Inputs
                      (Level
      2)
                  
                  
                  Significant
                      Unobservable
                      Inputs
                      (Level
      3)Derivative
      instruments
                  
                  $
                  35
                  
                  
                  $
                  —
                  
                  
                  $
                  35
                  
                  
                  $
                  —Total
      assets
                  
                  $
                  35
                  
                  
                  $
                  —
                  
                  
                  $
                  35
                  
                  
                  $
                  —Derivative
      instruments
                  
                  $
                  788
                  
                  
                  $
                  —
                  
                  
                  $
                  788
                  
                  
                  $
                  —Total
      liabilities
                  
                  $
                  788
                  
                  
                  $
                  —
                  
                  
                  $
                  788
                  
                  
                  $
                  —




f.
            Impact of recently
      issued accounting
pronouncements




In April
2009, the FASB issued three related staff positions: (i) FSP No. 157-4,
“Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability have Significantly Decreased and Identifying Transactions That Are Not
Orderly” (“FSP 157-4”), (ii) FSP No. 115-2 and FSP No. 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments” (“FSP 115-2” and “FSP 124-2”),
and (iii) FSP No. 107-1 and APB No. 28-1, “Interim Disclosures about Fair Value
of Financial Instruments” (“FSP 107” and “APB 28-1”), which are effective for
interim and annual periods ending after June 15, 2009. FSP 157-4 provides
guidance on how to determine the fair value of assets and liabilities under SFAS
157 in the current economic environment and reemphasizes that the objective of a
fair value measurement remains an exit price. If a company concludes that there
has been a significant decrease in the volume and level of activity of an asset
or liability in relation to normal market activities, quoted market values may
not be representative of fair value and the company may conclude that a change
in valuation technique or the use of multiple valuation techniques is
appropriate. FSP 115-2 and FSP 124-2 modify the requirements for recognizing
other-than-temporarily impaired debt securities and revise the existing
impairment model for such securities, by modifying the current intent and
ability indicator in determining whether a debt security is
other-than-temporarily impaired. FSP 107 and APB 28-1 enhance the disclosure of
instruments under the scope of SFAS 157 for both interim and annual periods. The
adoption of these FSPs did not have an impact on our financial
statements.




– 9
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


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





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165
is intended to establish general standards of accounting for, and disclosure of,
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for
selecting that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. SFAS 165 is
effective for interim or annual financial periods ending after June 15, 2009.
The adoption of SFAS 165 did not have a material effect on our financial
statements. We have evaluated the potential impact of subsequent events on the
accompanying interim condensed consolidated financial statements through August
6, 2009, the filing date of this Quarterly Report on Form 10-Q.




In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS 168”).
SFAS 168 establishes the FASB Accounting Standards Codification, which will
become the source of authoritative U.S. GAAP recognized by the FASB to be
applied by non-governmental entities. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
U.S. GAAP for SEC registrants. SFAS 168 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The
adoption of SFAS 168 will not have a material impact on our financial
statements.




Note
3: Acquisitions




a.
            Goodwill




In the
six months ended June 30, 2009, we increased our goodwill by $599, which
consisted of adjustments with respect to prior-year acquisitions of $2,540
partially offset by translation adjustments of $1,941.




Under
SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and intangible
assets deemed to have indefinite lives are tested for impairment annually, or
between annual tests in certain circumstances, and written down when impaired.
Goodwill is tested for impairment at the reporting unit level by comparing the
fair value of the reporting unit with its carrying value. We perform our annual
impairment analysis of goodwill as of December 31 of each year, or more often if
there are indicators of impairment present. As of December 31, 2008, we
performed our annual impairment test and determined that goodwill was not
impaired. Due to the further decline in our market capitalization and changes in
our assumptions related to future cash flows and market conditions during the
six months ended June 30, 2009, we updated our analysis and performed an
impairment test as of June 30, 2009. In performing the test, we compared the
fair value of each reporting unit to its carrying value. In such a test, if the
fair value exceeds the carrying value of the net assets, goodwill is considered
not impaired, and we are not required to perform further testing. We determined
the fair value of each reporting unit using the Income Approach, which utilizes
a discounted cash flow model, as this approach best approximates the reporting
unit’s fair value at this time. Judgments and assumptions related to revenues,
operating income, future short-term and long-term growth rates, weighted average
cost of capital, interest, capital expenditures, cash flows, and market
conditions are inherent in developing the discounted cash flow model. We
corroborated the fair values using the Market Approach. As a result of the
analysis, we concluded that goodwill was not impaired.




– 10
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements





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




b.
            Pro Forma Financial
      Information




The
following table presents certain combined unaudited statements of income data
for the three and six months ended June 30, 2008 as if our 2008 acquisition of
Logos, a.s. had occurred on January 1, 2008, after giving effect to purchase
accounting adjustments, including amortization of identifiable intangible
assets:




Three
                    months
                    ended
                
                
                Six
                    months
                    endedJune
      30, 2008(Unaudited)
                
                
                (Unaudited)Revenues
                
                $
                184,168
                
                
                $
                357,378Net
      income
                
                $
                6,810
                
                
                $
                13,456Earnings
      per share:Basic
                
                $
                0.17
                
                
                $
                0.34Diluted
                
                $
                0.17
                
                
                $
                0.34




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




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




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




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




Note
6: Accounting for stock-based compensation




During
the six months ended June 30, 2009, we granted options to purchase 193,750
shares of our common stock, at a weighted average fair value of $1.36 per
option, and 40,450 restricted stock units under our 2007 Stock Incentive Plan.
The options were granted at an exercise price of $4.53 per share. The options
and restricted stock units vest over the requisite service period of the award.
No options or restricted stock units were granted during the three months ended
June 30, 2009.




We
estimate the fair value of stock options granted using the Black-Scholes-Merton
option pricing model for service options and the Monte Carlo option pricing
model for performance condition options. The option-pricing models require a
number of assumptions, of which the most significant are the expected stock
price volatility and the expected option term. Expected volatility is calculated
based upon actual historical stock price movements. The expected term of options
granted represents the period of time that options granted are expected to be
outstanding, and is determined based on the simplified method in accordance with
SAB No. 110. Upon the adoption of SFAS 123(R), we elected to use the simplified
method to estimate the expected option term. We continue to use the simplified
method as we have determined that sufficient data is not available to develop an
estimate of the expected option term based upon historical participant behavior.
The risk-free interest rate is based on the yield from U.S. treasury bonds with
an equivalent term. We have historically not paid dividends and we have no
foreseeable plans to pay dividends. The fair value was estimated at the date of
grant using the following weighted average assumptions for the Black-Scholes
model and the following assumptions for the Monte Carlo model:




– 11
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 
 U.S.
dollars in thousands (except share and per share data)
(Unaudited)




Black-Scholes
                
                Monte CarloThree months ended
                    June 30,
                
                Six months ended
                    June 30,
                
                Three and six months
                    ended June 30,2008
                
                2009
                
                2008
                
                2009
                
                2008 and 2009(Unaudited)
                
                (Unaudited)
                
                (Unaudited)
                
                (Unaudited)
                
                (Unaudited)Dividend
      yield
                
                0%
                
                —
                
                0%
                
                0%
                
                0%Expected
      volatility
                
                31.50%
                
                —
                
                31.33%
                
                38%
                
                29
      – 31%Risk-free
      interest
                
                2.82%
                
                —
                
                2.38%
                
                1.44%
                
                3.05
      – 4.95%Expected
      life (in years)
                
                3.50
                
                —
                
                3.17
                
                4.6
                
                N/A




As of
June 30, 2009, options to purchase 4,967,445 shares were outstanding with a
weighted average exercise price of $10.48 per share, and 505,950 restricted
stock units were outstanding. Options, restricted stock and restricted stock
units to purchase 2,047,761 shares were available for future grants as of June
30, 2009.




Total
stock-based compensation expense was $648 and $1,539 for the three and six
months ended June 30, 2008 and $828 and $1,756 for the three and six months
ended June 30, 2009, and the total recognized tax benefit was $48, $95, $82 and
$175, respectively.




As of
June 30, 2009, $5,859 of total unrecognized compensation cost related to
stock-based compensation was expected to be recognized over a weighted average
period of 1.7 years. The total unrecognized stock-based compensation cost to be
recognized in future periods as of June 30, 2009 does not consider the effect of
stock options that may be issued in subsequent periods.




Note
7: Derivatives




SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS
133”), requires companies to recognize all of their derivative instruments as
either assets or liabilities in the statement of financial position at fair
value. For derivative instruments that are designated and qualify as a fair
value hedge (i.e., they hedge the exposure to changes in the fair value of an
asset or a liability or an identified portion thereof that is attributable to a
particular risk), the gain or loss on the derivative instrument as well as the
offsetting loss or gain on the hedged item attributable to the hedged risk are
recognized in current earnings during the period of the change in fair values.
Derivatives that are designated and qualify as hedges of forecasted transactions
(i.e., cash flow hedges) are carried at fair value with the effective portion of
a derivative’s gain or loss recorded in other comprehensive income and
subsequently recognized in earnings in the same period or periods in which the
hedged forecasted transaction affects earnings. For derivative instruments that
are not designated and qualified as hedging instruments under SFAS 133, the
gains or losses on the derivative instruments are recognized in current earnings
during the period of the change in fair values.




– 12
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 
 U.S.
dollars in thousands (except share and per share data)
(Unaudited)




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




Cash
Flow Hedging Strategy:




At June
30, 2009, we held interest rate swap derivatives to convert certain
floating-rate debts to fixed-rate debts. The interest rate swap derivatives
involve an agreement to pay fixed-rate interest and receive floating-rate
interest, at specified intervals, calculated on agreed notional amounts that
match the amounts of the original loans and paid on the same installments and
maturity dates. At June 30, 2009, the aggregate notional amount of the interest
rate swaps was $27,000 and there was no ineffectiveness related to these
derivatives for the six months ended June 30, 2009, with all unrealized losses
being deferred in accumulated other comprehensive income. The liability is
presented within other long-term liabilities on the balance sheet at June 30,
2009, as the interest rate swap derivatives expire in November 2012 through
April 2013.




We enter
into foreign exchange forward contracts to hedge against the effect of exchange
rate fluctuations on forecasted cash flows denominated in Indian Rupees. At June
30, 2009, the notional amount of foreign exchange forward contracts we entered
into was $33,700 and there was no ineffectiveness related to these foreign
exchange forward contracts for the six months ended June 30, 2009, with all
unrealized losses being deferred in accumulated other comprehensive
income.




Derivatives
Instruments Not Designated as Hedging Strategy:




We enter
into foreign exchange forward contracts to hedge a portion of our trade payables
and receivables for a period of one to three months. The purpose of our foreign
currency hedging activities is to protect the fair value of our trade payables
and receivables due to foreign exchange rates.




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




Fair Values of Derivative InstrumentsAssets
                  
                  LiabilitiesBalance Sheet Item
                  
                  June 30,
                      2009
                  
                  Balance Sheet Item
                  
                  June 30,
                      2009(Unaudited)
                  
                  
                  
                  (Unaudited)Cash
      flow hedging:Foreign
      exchange forward contracts
                  
                  “Other
      accounts receivable and prepaid expenses”
                  
                  $
                  35
                  
                  “Other
      accounts payable and accrued expenses”
                  
                  $
                  216Interest
      rate swap
                  
                  
                  
                  
                  —
                  
                  “Other
      long-term liabilities”
                  
                  
                  402Total
      cash flow hedging
                  
                  
                  
                  $
                  35
                  
                  
                  
                  $
                  618Derivatives
      not designated as hedging:Foreign
      exchange forward contracts
                  
                  
                  
                  
                  —
                  
                  “Other
      accounts payable and accrued expenses”
                  
                  
                  170Total
      derivatives
                  
                  
                  
                  $
                  35
                  
                  
                  
                  $
                  788




– 13
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 
 U.S.
dollars in thousands (except share and per share data)
(Unaudited)


Loss
      (Gain) Recognized in Statements of IncomeLoss
      Recognized in
                            Other
                            Comprehensive
                            Income
                        
                        
                        
                        Three
                            months
                            ended
                            June
      30,
                            2009
                        
                        
                        Six
                            months
                            ended
                            June
      30,
                            2009June
      30, 2009
                        
                        Statements
      of Income Item(Unaudited)
                        
                        
                        
                        (Unaudited)
                        
                        
                        (Unaudited)Cash
      flow hedging:Foreign
      exchange forward contracts
                        
                        $
                        216
                        
                        “Cost
      of revenues” and
                          “Total
      operating expenses”
                        
                        $
                        1,093
                        
                        
                        $
                        2,953Interest
      rate swap
                        
                        
                        402
                        
                        “Financial
      expenses, net”
                        
                        
                        66
                        
                        
                        
                        103Total
      cash flow hedging
                        
                        $
                        618
                        
                        
                        
                        $
                        1,159
                        
                        
                        $
                        3,056Derivatives
      not designated as hedging:Foreign
      exchange forward contracts
                        
                        
                        
                        
                        “Financial
      expenses, net”
                        
                        
                        (420
                        )
                        
                        
                        553Total
      derivatives
                        
                        
                        
                        
                        
                        
                        $
                        739
                        
                        
                        $
                        3,609




Note
8: Commitments and Contingent Liabilities




a.
            Litigation




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




One of
our Israeli subsidiaries is currently involved in legal proceedings with the
Israeli Ministry of Justice (the “MOJ”). The legal proceedings relate to a
contract for the provision of an information system for the MOJ, executed in
November 2005 (the “MOJ Contract”). Following continued disputes, correspondence
and discussions, on February 9, 2009 we filed a claim with the Israeli District
Court located in Jerusalem claiming, among other things, a breach of the MOJ
Contract by the MOJ, including in connection with the MOJ’s demands for
revisions and changes to the software that were not contemplated in the MOJ
Contract. Our claim is for damages in the amount of NIS 20.7 million, or
approximately $5.3 million, using the exchange rate prevailing at the end of the
quarter. On February 11, 2009, the MOJ filed a claim against our Israeli
subsidiary in the Israeli District Court located in Jerusalem claiming, among
other things, that our Israeli subsidiary breached the MOJ Contract and failed
to fulfill its undertakings and obligations set forth therein. The MOJ’s claim
is for damages in the amount of NIS 79.5 million, or approximately $20.3
million, using the exchange rate prevailing at the end of the quarter. The MOJ
and our subsidiary have filed answers to the respective claims. We believe that
we have a substantial legal basis for our claim and valid defenses with respect
to the MOJ’s claim. While we intend to vigorously prosecute our claim and defend
against the MOJ’s claim, we cannot at this point predict the outcome of the
litigation. Adverse decisions in these legal proceedings may materially
adversely affect our financial condition.




– 14
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 
 U.S.
dollars in thousands (except share and per share data)
(Unaudited)




b.
            Guarantees




Guarantees
are contingent commitments issued by us generally to guarantee our performance
in different projects to our customers, such as tenders. The term of a guarantee
generally is equal to the term of the related projects, which can be as short as
30 days or as long as 8 years. The maximum potential amount of future payments
we could be required to make under our guarantees at December 31, 2008 and June
30, 2009 is $48,146 and $43,119, respectively. We do not hold collateral to
support guarantees except when deemed necessary.




c.
            Liens and
      charges




In order
to obtain loans, credits or other banking services from certain commercial
banks, we signed a negative pledge agreement with these banks. With the consent
of the banks, we recorded a fixed charge on deposits in the amount of $2.4
million held by our Indian subsidiary related to the mark-to-market of foreign
exchange forward contracts.




Note
9: Stockholders’ Equity




a.
            Total comprehensive
      income:




Three months ended
                      June 30,
                  
                  
                  Six months ended
                      June 30,2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)Net
      income
                  
                  $
                  8,090
                  
                  
                  $
                  1,042
                  
                  
                  $
                  14,984
                  
                  
                  $
                  2,570Foreign
      currency translation adjustments, net
                  
                  
                  8,364
                  
                  
                  
                  21,366
                  
                  
                  
                  25,298
                  
                  
                  
                  (1,513
                  )Unrealized
      income (losses) on foreign exchange forward contracts and interest rate
      swap
                  
                  
                  (3,733
                  )
                  
                  
                  3,004
                  
                  
                  
                  (4,457
                  )
                  
                  
                  3,382Comprehensive
      income
                  
                  $
                  12,721
                  
                  
                  $
                  25,412
                  
                  
                  $
                  35,825
                  
                  
                  $
                  4,439




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




Six months ended
                    June 30,2008
                
                
                2009(Unaudited)
                
                
                (Unaudited)Balance
      at the beginning of the period
                
                $
                —
                
                
                $
                4,000Mark
      to market of foreign exchange forward contracts and interest rate
      swap
                
                
                5,370
                
                
                
                (326
                )Loss
      recognized in earnings during the period
                
                
                (913
                )
                
                
                (3,056
                )Balance
      at the end of the period
                
                $
                4,457
                
                
                $
                618




c.
            Option
      exercises:




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




– 15
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 
 U.S.
dollars in thousands (except share and per share data)
(Unaudited)




d.
            Treasury
      stock:




During
the three and six months ended June 30, 2009, we repurchased 247,441 and 636,163
shares of our common stock, respectively, on the open market for an aggregate
purchase price of $820 and $2,037, respectively.




Note
10: Segment Reporting




Our
segment information has been prepared in accordance with SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information.” Operating
segments are defined as components of an enterprise engaging in business
activities about which separate financial information is available that is
evaluated regularly by our chief operating decision-maker in deciding how to
allocate resources and assess performance. Our chief operating decision-maker is
our chief executive officer, who evaluates our performance and allocates
resources based on segment revenues and operating profit.




In
October 2008, we reorganized our operating segments to correspond to our three
primary service lines, in line with changes made in the company’s management
structure. Segment data for prior periods has been restated to reflect the
current organization of the segments.




Our
operating segments are:




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




2.
            System Integration and
      Application Development, in which we offer a broad set of IT
      services to our clients in the areas of system integration, application
      development and consulting. We provide these services in 18 countries
      throughout North America, Europe, Israel and Asia Pacific. We deliver the
      services through a global delivery model that includes local teams as well
      as offshore and near-shore resources. We provide these services for a wide
      range of clients in many verticals, including utilities and government,
      financial services, defense and homeland security, life sciences &
      healthcare, manufacturing and transportation, retail, and
      others.




3.
            Software Distribution,
      in which, through our NessPRO business unit, we market and sell enterprise
      software licenses of third-party software vendors to corporate clients in
      geographic areas that are partially or totally uncovered by the software
      vendors’ own sales forces. We also provide a range of implementation,
      customization and support services related to those licenses. We resell
      products mostly in Israel, Italy, Spain and Portugal for over 30
      third-party software vendors.




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




– 16
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 
 U.S.
dollars in thousands (except share and per share data)
(Unaudited)




The table
below presents financial information for our reportable segments:




Three months ended June 30, 2008Software
                    Product
                    Engineering
                
                
                System
                    Integration &
                    Application
                    Development
                
                
                Software
                    Distribution
                
                
                Unallocated
                    Expenses
                
                
                Total(Unaudited)Revenues
      from external customers
                
                $
                24,739
                
                
                $
                126,547
                
                
                $
                19,300
                
                
                $
                —
                
                
                $
                170,586Operating
      income (loss)
                
                $
                2,061
                
                
                $
                8,409
                
                
                $
                4,082
                
                
                $
                (3,316
                )
                
                
                11,236Financial
      expenses, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,032
                )Income
      before taxes on income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                10,204





Three months ended June 30, 2009Software
                    Product
                    Engineering
                
                
                System
                    Integration &
                    Application
                    Development
                
                
                Software
                    Distribution
                
                
                Unallocated
                    Expenses
                
                
                Total(Unaudited)Revenues
      from external customers
                
                $
                25,688
                
                
                $
                104,145
                
                
                $
                7,410
                
                
                $
                —
                
                
                $
                137,243Operating
      income (loss)
                
                $
                4,096
                
                
                $
                2,445
                
                
                $
                (510
                )
                
                $
                (3,893
                )
                
                
                2,138Financial
      expenses, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (647
                )Income
      before taxes on income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                1,491





Six months ended June 30, 2008Software
                    Product
                    Engineering
                
                
                System
                    Integration &
                    Application
                    Development
                
                
                Software
                    Distribution
                
                
                Unallocated
                    Expenses
                
                
                Total(Unaudited)Revenues
      from external customers
                
                $
                45,268
                
                
                $
                251,120
                
                
                $
                33,930
                
                
                $
                —
                
                
                $
                330,318Operating
      income (loss)
                
                $
                3,262
                
                
                $
                18,516
                
                
                $
                5,049
                
                
                $
                (5,562
                )
                
                
                21,265Financial
      expenses, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,448
                )Income
      before taxes on income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                18,817





Six months ended June 30, 2009Software
                    Product
                    Engineering
                
                
                System
                    Integration &
                    Application
                    Development
                
                
                Software
                    Distribution
                
                
                Unallocated
                    Expenses
                
                
                Total(Unaudited)Revenues
      from external customers
                
                $
                50,654
                
                
                $
                207,570
                
                
                $
                15,453
                
                
                $
                —
                
                
                $
                273,677Operating
      income (loss)
                
                $
                8,210
                
                
                $
                4,633
                
                
                $
                1,710
                
                
                $
                (9,049
                )
                
                
                5,504Financial
      expenses, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,032
                )Income
      before taxes on income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                3,472




– 17
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 
 U.S.
dollars in thousands (except share and per share data)
(Unaudited)




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




The
following tables present total revenues for the three and six months ended June
30, 2008 and 2009, and long-lived assets as of December 31, 2008 and June 30,
2009:




Three months ended
                    June 30,
                
                
                Six months ended
                    June 30,2008
                
                
                2009
                
                
                2008
                
                
                2009(Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)Revenues
      from sales to unaffiliated customers:Israel
                
                $
                59,979
                
                
                $
                42,371
                
                
                $
                120,502
                
                
                $
                87,641North
      America
                
                
                45,006
                
                
                
                43,544
                
                
                
                86,920
                
                
                
                86,023Europe
      (except Czech Republic)
                
                
                42,688
                
                
                
                26,398
                
                
                
                79,650
                
                
                
                52,984Czech
      Republic
                
                
                15,680
                
                
                
                18,698
                
                
                
                28,949
                
                
                
                35,136Asia
      and the Far East
                
                
                7,233
                
                
                
                6,232
                
                
                
                14,297
                
                
                
                11,893$
                170,586
                
                
                $
                137,243
                
                
                $
                330,318
                
                
                $
                273,677




December
                    31, 2008
                
                
                June 30,
                    2009(Unaudited)Long-lived
      assets:Israel
                
                $
                20,030
                
                
                $
                20,535Europe
                
                
                6,731
                
                
                
                5,340North
      America
                
                
                2,245
                
                
                
                2,173Asia
      and the Far East
                
                
                7,727
                
                
                
                6,951$
                36,733
                
                
                $
                34,999




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




Note
11: Income Taxes




As of
June 30, 2009 the total of our unrecognized tax benefits was $3,532, which, if
recognized, would affect our effective tax rates in future periods. Included in
that amount are accrued interest and penalties resulting from such unrecognized
tax benefits of $611 at June 30, 2009. During the six months ended June 30,
2009, we recorded $81 for interest and penalties expenses with respect to
uncertain tax positions. A reconciliation of the beginning and ending amounts of
unrecognized tax benefits as of June 30, 2009 is as follows:




Balance
      as of January 1, 2009
                  
                  $
                  3,177Reductions
      related to changes in interest rates and foreign currency exchange
      rates
                  
                  
                  (159
                  )Additions
      related to tax positions taken during the period
                  
                  
                  186Balance
      as of March 31, 2009
                  
                  
                  3,204Reductions
      related to changes in interest rates and foreign currency exchange
      rates
                  
                  
                  156Additions
      related to tax positions taken during the period
                  
                  
                  172Balance
      as of June 30, 2009
                  
                  $
                  3,532




– 18
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 
 U.S.
dollars in thousands (except share and per share data)
(Unaudited)




The
amount of income taxes we pay is subject to ongoing audit by federal, state and
foreign tax authorities, which often results in proposed assessments. Management
performs a comprehensive review of our global tax positions on a quarterly basis
and accrues amounts for contingent tax liabilities. Based on these reviews, the
result of discussions and resolutions of matters with certain tax authorities
and the closure of tax years subject to tax audit, reserves are adjusted as
necessary. However, future results may include favorable or unfavorable
adjustments to estimated tax liabilities in the period the assessments are
determined or resolved. Additionally, the jurisdictions in which earnings and/or
deductions are realized may differ from current estimates. We are no longer
subject to U.S. federal, state and local, or non-U.S. income tax examination for
years before 1998.




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




Note
12: Basic and Diluted Net Earnings per Share




Basic net
earnings per share are computed based on the weighted average number of shares
of common stock outstanding during each period. Diluted net earnings per share
are computed based on the weighted average number of shares of common stock
outstanding during each period, plus dilutive potential shares of common stock
considered outstanding during the period, in accordance with SFAS No. 128,
“Earnings per Share.”




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




Three months ended
                    June 30,
                
                
                Six months ended
                    June 30,2008
                
                
                2009
                
                
                2008
                
                
                2009(Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)Numerator:Net
      income, numerator for basic and diluted per share
                
                $
                8,090
                
                
                $
                1,042
                
                
                $
                14,984
                
                
                $
                2,570Denominator:Weighted
      average number of shares of common stock
                
                
                39,214
                
                
                
                38,590
                
                
                
                39,208
                
                
                
                38,755Effect
      of dilutive securities:Employee
      stock options and restricted stock units
                
                
                212
                
                
                
                559
                
                
                
                254
                
                
                
                578Denominator
      for diluted net earnings per share - weighted average assuming exercise of
      options and restricted stock units
                
                
                39,426
                
                
                
                39,149
                
                
                
                39,462
                
                
                
                39,333




The total
weighted average number of shares related to the outstanding options excluded
from the calculations of diluted net earnings per share, as they would have been
anti-dilutive for all periods presented, was 4,670,562 and 4,731,431,
respectively, for the three and six months ended June 30, 2008 and 4,930,543 and
4,979,304, respectively, for the three and six months ended June 30,
2009.




– 19
–




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




You
should read the following discussion and analysis together with our unaudited
consolidated financial statements and the accompanying notes. This discussion
contains forward-looking statements, within the meaning of Section 27A of
Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation
Reform Act of 1995, including statements regarding our expected financial
position, business and financing plans. These statements involve risks and
uncertainties. Our actual results could differ materially from the results
described in or implied by these forward-looking statements as a result of
various factors, including those discussed below and elsewhere in our Annual
Report on Form 10-K filed with the SEC on March 16, 2009, particularly under the
headings “Disclosure Statement” and “Risk Factors.”




Overview




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




We have
operations in 18 countries across North America, Europe, Israel and Asia
Pacific. We combine our deep vertical expertise and strong technical
capabilities to provide a complete range of high quality services on a global
scale. By integrating our local and international personnel in focused business
and project teams, we leverage our corporate knowledge and experience,
intellectual property and global infrastructure to develop innovative solutions
for clients across the geographic areas and verticals we serve. Through our
global delivery model, which includes lower-cost offshore and near-shore
delivery capabilities, we can achieve meaningful cost reductions or other
benefits for our clients.




Our
revenues decreased to $137.2 million and $273.7 million for the three and six
months ended June 30, 2009, from $170.6 million and $330.3 million for the three
and six months ended June 30, 2008, respectively. Net income decreased to $1.0
million and $2.6 million for the three and six months ended June 30, 2009 from
$8.1 million and $15.0 million for the three and six months ended June 30, 2008,
respectively.




The
dollar strengthened by an average of 19% and 15% against the New Israeli Shekel,
or NIS, and by an average of 26% and 27% against the Euro and other relevant
European currencies in the three and six months ended June 30, 2009 compared to
the three and six months ended June 30, 2008, respectively. Approximately 65% of
our revenues and 80% of our expenses are denominated in non-dollar
currencies.  We estimate that our revenues were $19.1 million and
$35.3 million lower in the three and six months ended June 30, 2009 as a result
of changes in foreign currency exchange rates versus their average rates for the
three and six months ended June 30, 2008, respectively. There was no material
effect on our operating income in the three and six months ended June 30, 2009
as a result of changes in foreign currency exchange rates versus their average
rates for the three and six months ended June 30, 2008,
respectively.




Our
client base is diverse, and we are not dependent on any single client. In the
three and six months ended June 30, 2009, no client accounted for more than
approximately 5% of our revenues and our largest twenty clients together
accounted for approximately 36% and 35% of our revenues, respectively. For the
three and six months ended June 30, 2009, the percentage of our revenues derived
in aggregate from agencies of the government of Israel was approximately 12%.
Existing clients from prior years generated more than 85% of our revenues in the
three and six months ended June 30, 2009.




Our
backlog as of June 30, 2009 was $682 million compared to $799 million as of June
30, 2008, representing a year-over-year backlog decline of $63 million plus a
reduction in the dollar value of our non-U.S. backlog due to the stronger dollar
of $54 million. We achieve backlog through new signings of IT services projects
and outsourcing contracts, including for new and repeat customers. We recognize
backlog as revenue when we perform the services related to backlog.




– 20
–




For the
three and six months ended June 30, 2009, the percentage of our revenues derived
from clients in Europe was 33% and 32%, respectively; in Israel, 31% and 32%,
respectively; in North America, 32% and 31%, respectively; and in Asia Pacific,
5% and 4%, respectively.




As of
June 30, 2009, we had approximately 7,800 employees, including approximately
6,645 IT professionals. Of the 7,800 employees, approximately 2,765 were in
India, 2,555 were in Israel, 1,580 were in Europe, 515 were in North America and
385 were in Asia Pacific.




Recent
Developments




None.




Consolidated
Results of Operations




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




Three months ended
                    June 30,
                
                
                Six months ended
                    June 30,2008
                
                
                2009
                
                
                2008
                
                
                2009Revenues
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %Cost
      of revenues
                
                
                69.2
                
                
                
                72.7
                
                
                
                70.4
                
                
                
                73.6Gross
      profit
                
                
                30.8
                
                
                
                27.3
                
                
                
                29.6
                
                
                
                26.4Operating
      expenses:Selling
      and marketing
                
                
                8.5
                
                
                
                8.6
                
                
                
                8.4
                
                
                
                8.4General
      and administrative
                
                
                15.7
                
                
                
                17.1
                
                
                
                14.8
                
                
                
                17.9Insurance
      settlement related to 2007 arbitration expense, net of related
      expenses
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (1.0
                )Commissions
      related to the sale of Israeli SAP sales and distribution
      operations
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (0.9
                )Total
      operating expenses
                
                
                24.2
                
                
                
                25.7
                
                
                
                23.2
                
                
                
                24.4Operating
      income
                
                
                6.6
                
                
                
                1.6
                
                
                
                6.4
                
                
                
                2.0Financial
      expenses, net
                
                
                (0.6
                )
                
                
                (0.5
                )
                
                
                (0.7
                )
                
                
                (0.7
                )Income
      before taxes on income
                
                
                6.0
                
                
                
                1.1
                
                
                
                5.7
                
                
                
                1.3Taxes
      on income
                
                
                1.2
                
                
                
                0.3
                
                
                
                1.2
                
                
                
                0.3Net
      income
                
                
                4.7
                
                
                
                0.8
                
                
                
                4.5
                
                
                
                0.9




– 21
–




Three
Months Ended June 30, 2009 Compared to the Three Months Ended June 30,
2008




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




Three months ended
                    June 30,
                
                
                Decrease2008
                
                
                2009
                
                
                $
                
                
                %Revenues
                
                $
                170,586
                
                
                $
                137,243
                
                
                
                (33,343
                )
                
                
                (19.5
                )Cost
      of revenues
                
                
                117,995
                
                
                
                99,839
                
                
                
                (18,156
                )
                
                
                (15.4
                )Gross
      profit
                
                $
                52,591
                
                
                $
                37,404
                
                
                
                (15,187
                )
                
                
                (28.9
                )Gross
      margin
                
                
                30.8
                %
                
                
                27.3
                %




Revenues




Our
revenues decreased from $170.6 million in the three months ended June 30, 2008
to $137.2 million in the three months ended June 30, 2009, representing a
decrease of $33.3 million, or 19.5%. This decrease was primarily due to foreign
currency translation effects on our non-dollar revenues attributable to the
stronger dollar, representing $19.1 million, a sales downturn in our System
Integration and Application Development segment, primarily in Central and
Eastern Europe and in Israel, representing $12.9 million, lost revenue from the
sale in August 2008 of our Israeli SAP sales and distribution operations,
representing $5.7 million, and reduced sales in our Software Distribution
segment, representing $5.0 million, offset by acquisitions, representing $8.0
million, and growth in our Software Product Engineering segment, representing
$1.3 million.




Cost
of revenues




Our cost
of revenues, including salaries, wages and other direct and indirect costs,
decreased from $118.0 million in the three months ended June 30, 2008 to $99.8
million in the three months ended June 30, 2009, representing a decrease of
$18.2 million, or 15.4%. The decrease was due primarily to foreign currency
translation effects on non-dollar expenses attributable to the stronger dollar,
representing $14.2 million, a reduction in our delivery staff in response to our
decrease in revenues, representing $7.1 million, and the sale in August 2008 of
our Israeli SAP sales and distribution operations, representing $1.9 million,
offset by acquisitions, representing $6.5 million.


Gross
Profit
  Our gross
profit (revenues less cost of revenues) decreased from $52.6 million in the
three months ended June 30, 2008 to $37.4 million in the three months ended June
30, 2009, representing a decrease of $15.2 million, or 28.9%. The decrease was
due primarily to the reduction in our revenues, net of lower personnel costs,
representing $9.6 million, foreign currency translation effects on our
non-dollar gross profits attributable to the stronger dollar, representing $4.8
million, and lost gross profit from the sale in August 2008 of our Israeli SAP
sales and distribution operations, representing $3.7 million, offset by
acquisitions, representing $1.6 million. Gross margin declined from 30.8% in the
three months ended June 30, 2008 to 27.3% in the three months ended June 30,
2009 largely as a result of slowdowns in our Central and Eastern European system
integration business and our Software Distribution segment, partially offset by
the improved gross margin in our Software Product Engineering
segment.
  – 22
–
  The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
  Three
      months ended
                      June
      30,
                  
                  
                  Decrease2008
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  
                  %Selling
      and marketing
                  
                  $
                  14,538
                  
                  
                  $
                  11,792
                  
                  
                  
                  (2,746
                  )
                  
                  
                  (18.9
                  )General
      and administrative
                  
                  
                  26,817
                  
                  
                  
                  23,474
                  
                  
                  
                  (3,343
                  )
                  
                  
                  (12.5
                  )Total
      operating expenses
                  
                  
                  41,355
                  
                  
                  
                  35,266
                  
                  
                  
                  (6,089
                  )
                  
                  
                  (14.7
                  )Operating
      income
                  
                  $
                  11,236
                  
                  
                  $
                  2,138
                  
                  
                  
                  (9,098
                  )
                  
                  
                  (81.0
                  )
  Selling
and marketing
  Selling
and marketing expenses decreased from $14.5 million in the three months ended
June 30, 2008 to $11.8 million in the three months ended June 30, 2009,
representing a decrease of $2.7 million, or 18.9%. This decrease was due
primarily to a reduction in our sales and marketing staff in response to our
decrease in revenues, representing $2.1 million, and foreign currency
translation effects on our non-dollar expenses attributable to the stronger
dollar, representing $1.7 million, offset by the inclusion of marketing and
sales expenses from acquisitions, representing $1.5 million.
  General
and administrative
  General
and administrative expenses decreased from $26.8 million in the three months
ended June 30, 2008 to $23.5 million in the three months ended June 30, 2009,
representing a decrease of $3.3 million, or 12.5%. This decrease was due
primarily to foreign currency translation effects on non-dollar expenses
attributable to the stronger dollar, representing $3.4 million, and cost
reductions, representing $2.0, offset by increases in our Center of Excellence,
IT, Human Resources and Finance organizations throughout 2008 needed to support
internal initiatives, together representing $1.9 million, and acquisitions,
representing $0.6 million.
  Operating
Income
  Operating
income decreased from $11.2 million in the three months ended June 30, 2008 to
$2.1 million in the three months ended June 30, 2009, representing a decrease of
$9.1 million, or 81.0%. The major factors contributing to this decrease were a
drop in operating income of our System Integration and Application Development
segment, representing $4.9 million, a drop in operating income of our Software
Distribution segment due to reduced sales, representing $2.6 million, a decrease
in operating income of our Software Distribution segment due to the August 2008
sale of our Israeli SAP sales and distribution operations, representing $2.1
million, and an increase in unallocated expenses, representing $1.0 million,
offset by an increase in operating income of our Software Product Engineering
segment, representing $2.0 million. See also “—Results by Business
Segment.”
  The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
  Three
      months ended
                      June
      30,
                  
                  
                  Decrease2008
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  %Operating
      income
                  
                  $
                  11,236
                  
                  
                  $
                  2,138
                  
                  
                  
                  (9,098
                  )
                  
                  
                  (81.0
                  )Financial
      expenses, net
                  
                  
                  (1,032
                  )
                  
                  
                  (647
                  )
                  
                  
                  (385
                  )
                  
                  
                  (37.3
                  )Income
      before taxes on income
                  
                  
                  10,204
                  
                  
                  
                  1,491
                  
                  
                  
                  (8,713
                  )
                  
                  
                  (85.4
                  )Taxes
      on income
                  
                  
                  2,114
                  
                  
                  
                  449
                  
                  
                  
                  (1,665
                  )
                  
                  
                  (78.8
                  )Net
      income
                  
                  $
                  8,090
                  
                  
                  $
                  1,042
                  
                  
                  
                  (7,048
                  )
                  
                  
                  (87.1
                  )
  – 23
–
  Financial
expenses, net
  Financial
expenses, net, decreased from $1.0 million in the three months ended June 30,
2008 to $0.6 million in the three months ended June 30, 2009, representing a
decrease of $0.4 million, or 37.3%. This decrease was due primarily to the
favorable impact of exchange rate differences, representing $0.3 million. Our
average net debt changed from $22.5 million in the three months ended June 30,
2008 to $38.8 million in the three months ended June 30, 2009.
  Taxes
on income
  Our taxes
on income decreased from $2.1 million in the three months ended June 30, 2008 to
$0.4 million in the three months ended June 30, 2009, representing a decrease of
$1.7 million, or 78.8%. This decrease was due primarily to the decrease in our
taxable income. Our effective tax rate in the three months ended June 30, 2009
was 30.1%, compared to 20.7% in the three months ended June 30,
2008.
  Net
Income
  Net
income decreased from $8.1 million in the three months ended June 30, 2008 to
$1.0 million in the three months ended June 30, 2009, representing a decrease of
$7.0 million, or 87.1%. The decrease was due primarily to our decrease in
operating income of $9.1 million partially offset by our decrease in financial
expenses, representing $0.4 million, and our decrease in taxes, representing
$1.7 million.
  Six
Months Ended June 30, 2009 Compared to the Six Months Ended June 30,
2008
  The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
  Six
      months ended
                      June
      30,
                  
                  
                  Decrease2008
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  %Revenues
                  
                  $
                  330,318
                  
                  
                  $
                  273,677
                  
                  
                  
                  (56,641
                  )
                  
                  
                  (17.1
                  )Cost
      of revenues
                  
                  
                  232,385
                  
                  
                  
                  201,433
                  
                  
                  
                  (30,952
                  )
                  
                  
                  (13.3
                  )Gross
      profit
                  
                  $
                  97,933
                  
                  
                  $
                  72,244
                  
                  
                  
                  (25,689
                  )
                  
                  
                  (26.2
                  )Gross
      margin
                  
                  
                  29.6
                  %
                  
                  
                  26.4
                  %
  Revenues
  Our
revenues decreased from $330.3 million in the six months ended June 30, 2008 to
$273.7 million in the six months ended June 30, 2009, representing a decrease of
$56.6 million, or 17.1%. This decrease was primarily due to foreign currency
translation effects on our non-dollar revenues attributable to the stronger
dollar, representing $35.3 million, a sales downturn in our System Integration
and Application Development segment, primarily in Central and Eastern Europe,
representing $24.4 million, lost revenue from the sale in August 2008 of our
Israeli SAP sales and distribution operations, representing $10.3 million, and
reduced sales in our Software Distribution segment, representing $5.9 million,
offset by acquisitions, representing $13.3 million, and growth in our Software
Product Engineering segment, representing $5.9 million.
  Cost
of revenues
  Our cost
of revenues, including salaries, wages and other direct and indirect costs,
decreased from $232.4 million in the six months ended June 30, 2008 to $201.4
million in the six months ended June 30, 2009, representing a decrease of $31.0
million, or 13.3%. The decrease was due primarily to foreign currency
translation effects on non-dollar expenses attributable to the stronger dollar,
representing $26.0 million, a reduction in our delivery staff in response to our
decrease in revenues, representing $10.3 million, and the sale in August 2008 of
our Israeli SAP sales and distribution operations, representing $4.4 million,
offset by acquisitions, representing $11.0 million, and severance expenses in
the six months ended June 30, 2009, mainly in Europe, representing $1.0
million.
  – 24
–




Gross
Profit




Our gross
profit (revenues less cost of revenues) decreased from $97.9 million in the six
months ended June 30, 2008 to $72.2 million in the six months ended June 30,
2009, representing a decrease of $25.7 million, or 26.2%. The decrease was due
primarily to the reduction in our revenues, net of lower personnel costs,
representing $14.0 million, lost gross profit from the sale in August 2008 of
our Israeli SAP sales and distribution operations, representing $5.9 million,
foreign currency translation effects on our non-dollar gross profits
attributable to the stronger dollar, representing $9.3 million, and severance
expenses, representing $1.0 million, offset by acquisitions, representing $2.4
million. Gross margin declined from 29.6% in the six months ended June 30, 2008
to 26.4% in the six months ended June 30, 2009 largely as a result of slowdowns
in our Central and Eastern European system integration business and our Software
Distribution segment, the continued sales and pricing pressure on our U.S.-based
financial services business and severance expenses, partially offset by the
improved gross margin in our Software Product Engineering segment.




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




Six months ended
                    June 30,
                
                
                Increase
                    (Decrease)2008
                
                
                2009
                
                
                $
                
                
                
                %Selling
      and marketing
                
                $
                27,746
                
                
                $
                22,953
                
                
                
                (4,793
                )
                
                
                (17.3
                )General
      and administrative
                
                
                48,922
                
                
                
                48,931
                
                
                
                9
                
                
                
                0.0Insurance
      settlement related to 2007 arbitration expense, net of related
      expenses
                
                
                —
                
                
                
                (2,610
                )
                
                
                (2,610
                )
                
                
                N/ACommissions
      related to the sale of Israeli SAP sales and distribution
      operations
                
                
                —
                
                
                
                (2,534
                )
                
                
                (2,534
                )
                
                
                N/ATotal
      operating expenses
                
                
                76,668
                
                
                
                66,740
                
                
                
                (9,928
                )
                
                
                (12.9
                )Operating
      income
                
                $
                21,265
                
                
                $
                5,504
                
                
                
                (15,761
                )
                
                
                (74.1
                )




Selling
and marketing




Selling
and marketing expenses decreased from $27.7 million in the six months ended June
30, 2008 to $23.0 million in the six months ended June 30, 2009, representing a
decrease of $4.8 million, or 17.3%. This decrease was due primarily to a
reduction in our sales and marketing staff in response to our decrease in
revenues, representing $3.4 million, and foreign currency translation effects on
our non-dollar expenses attributable to the stronger dollar, representing $3.3
million, offset by the inclusion of marketing and sales expenses from
acquisitions, representing $3.2 million.




General
and administrative




General
and administrative expenses were $48.9 million in the six months ended June 30,
2009 compared to $48.9 million in the six months ended June 30, 2008. The
primary factors included were an increase in severance expenses, representing
$1.7 million, increases in our Center of Excellence, IT, Human Resources and
Finance organizations throughout 2008 needed to support internal initiatives,
together representing $4.3 million, and acquisitions, representing $1.0 million,
offset by foreign currency effects on non-dollar expenses attributable to the
stronger dollar, representing $6.1 million and cost reductions, representing
$2.0 million.




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




In the
six months ended June 30, 2009, we recorded income of $2.6 million, net of
related expenses, representing an insurance settlement we received from our
liability insurance provider related to the arbitration settlement we recognized
in the fourth quarter of 2007. There was no corresponding income in the six
months ended June 30, 2008.




– 25
–




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




In the
six months ended June 30, 2009, we recorded income of $2.5 million, representing
commissions related to the sale of our SAP sales and distribution operations in
Israel to SAP AG in August 2008, in connection with meeting certain performance
criteria for 2008. There was no corresponding income in the six months ended
June 30, 2008.




Operating
Income




Operating
income decreased from $21.3 million in the six months ended June 30, 2008 to
$5.5 million in the six months ended June 30, 2009, representing a decrease of
$15.8 million, or 74.1%. The major factors contributing to this decrease were a
drop in operating income of our System Integration and Application Development
segment, representing $13.2 million, an increase in unallocated expenses,
representing $4.3 million, a decrease in operating income of our Software
Distribution segment due to the August 2008 sale of our Israeli SAP sales and
distribution operations, representing $3.1 million, a drop in operating income
of our Software Distribution segment due to reduced sales, representing $3.0
million, and acquisitions, representing $1.9 million, offset by an increase in
operating income of our Software Product Engineering segment, representing $4.7
million, income from an insurance settlement, net of related expenses,
recognized by our System Integration and Application Development segment related
to our 2007 arbitration expense, representing $2.6 million, and commissions
recognized by our Software Distribution segment related to the August 2008 sale
of our Israeli SAP sales and distribution operations, representing $2.5 million.
See also “—Results by Business Segment.”




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




Six months ended
                    June 30,
                
                
                Decrease2008
                
                
                2009
                
                
                $
                
                
                
                %Operating
      income
                
                $
                21,265
                
                
                $
                5,504
                
                
                
                (15,761
                )
                
                
                (74.1
                )Financial
      expenses, net
                
                
                (2,448
                )
                
                
                (2,032
                )
                
                
                (416
                )
                
                
                (17.0
                )Income
      before taxes on income
                
                
                18,817
                
                
                
                3,472
                
                
                
                (15,345
                )
                
                
                (81.5
                )Taxes
      on income
                
                
                3,833
                
                
                
                902
                
                
                
                (2,931
                )
                
                
                (76.5
                )Net
      income
                
                $
                14,984
                
                
                $
                2,570
                
                
                
                (12,414
                )
                
                
                (82.8
                )




Financial
expenses, net




Financial
expenses, net, decreased from $2.4 million in the six months ended June 30, 2008
to $2.0 million in the six months ended June 30, 2009, representing a decrease
of $0.4 million, or 17.0%. This decrease was due primarily to the favorable
impact of exchange rate differences, representing $0.3 million. Our average net
debt changed from $19.1 million in the six months ended June 30, 2008 to $35.0
million in the six months ended June 30, 2009.




Taxes
on income




Our taxes
on income decreased from $3.8 million in the six months ended June 30, 2008 to
$0.9 million in the six months ended June 30, 2009, representing a decrease of
$2.9 million, or 76.5%. This decrease was due primarily to the decrease in our
taxable income. Our effective tax rate in the six months ended June 30, 2009 was
26.0%, compared to 20.4% in the six months ended June 30, 2008.




Net
Income




Net
income decreased from $15.0 million in the six months ended June 30, 2008 to
$2.6 million in the six months ended June 30, 2009, representing a decrease of
$12.4 million, or 82.8%. The decrease was due primarily to our decrease in
operating income of $15.8 million, partially offset by our decrease in financial
expenses, representing $0.4 million, and our decrease in taxes, representing
$2.9 million.




– 26
–


Results
by Business Segment




Our
segment information has been prepared in accordance with SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information.” Operating
segments are defined as components of an enterprise engaging in business
activities about which separate financial information is available that is
evaluated regularly by our chief operating decision-maker in deciding how to
allocate resources and assess performance. Our chief operating decision-maker is
our chief executive officer, who evaluates our performance and allocates
resources based on segment revenues and operating profit.




In
October 2008, we reorganized our operating segments to correspond to our three
primary service lines, in line with changes made in the company’s management
structure. Segment data for prior periods has been restated to reflect the
current organization of the segments.




Our
operating segments are:




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




2.
            System Integration and
      Application Development, in which we offer a broad set of IT
      services to our clients in the areas of system integration, application
      development and consulting. We provide these services in 18 countries
      throughout North America, Europe, Israel and Asia Pacific. We deliver the
      services through a global delivery model that includes local teams as well
      as offshore and near-shore resources. We provide these services for a wide
      range of clients in many verticals, including utilities and government,
      financial services, defense and homeland security, life sciences &
      healthcare, manufacturing and transportation, retail, and
      others.




3.
            Software Distribution,
      in which, through our NessPRO business unit, we market and sell enterprise
      software licenses of third-party software vendors to corporate clients in
      geographic areas that are partially or totally uncovered by the software
      vendors’ own sales forces. We also provide a range of implementation,
      customization and support services related to those licenses. We resell
      products mostly in Israel, Italy, Spain and Portugal for over 30
      third-party software vendors.




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


– 27
–




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




Three months ended
                    June 30,
                
                
                Six months ended
                    June 30,Segment Data (1):
                
                2008
                
                
                2009
                
                
                2008
                
                
                2009Revenues:Software
      Product Engineering
                
                $
                24,739
                
                
                $
                25,688
                
                
                $
                45,268
                
                
                $
                50,654System
      Integration and Application Development
                
                
                126,547
                
                
                
                104,145
                
                
                
                251,120
                
                
                
                207,570Software
      Distribution
                
                
                19,300
                
                
                
                7,410
                
                
                
                33,930
                
                
                
                15,453$
                170,586
                
                
                $
                137,243
                
                
                $
                330,318
                
                
                $
                273,677Operating
      Income (Loss):Software
      Product Engineering
                
                $
                2,061
                
                
                $
                4,096
                
                
                $
                3,262
                
                
                $
                8,210System
      Integration and Application Development
                
                
                8,409
                
                
                
                2,445
                
                
                
                18,516
                
                
                
                4,633Software
      Distribution
                
                
                4,082
                
                
                
                (510
                )
                
                
                5,049
                
                
                
                1,710Unallocated
      Expenses
                
                
                (3,316
                )
                
                
                (3,893
                )
                
                
                (5,562
                )
                
                
                (9,049
                )$
                11,236
                
                
                $
                2,138
                
                
                $
                21,265
                
                
                $
                5,504




Liquidity
and Capital Resources




Overview




As of
June 30, 2009, we had cash and cash equivalents, restricted cash and short-term
bank deposits of $59.2 million compared to $58.7 million as of December 31,
2008. The funds held at locations outside of the United States are for future
operating expenses and capital expenditures, and we have no intention of
repatriating those funds. We are not, however, restricted in repatriating those
funds back to the United States, if necessary. While we expect that cash
generated by our non-U.S. subsidiaries will be reinvested locally to support
expansion of our business, to the extent that funds were remitted to the United
States in the form of dividend payments, those payments may be subject to
withholding taxes in their respective countries, and would be subject to tax in
the United States.




Cash
Flows




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




Six months ended
                    June 30,2008
                
                
                2009(Unaudited)
                
                
                (Unaudited)Net
      cash provided by operating activities
                
                $
                14,892
                
                
                $
                18,344Net
      cash used in investing activities
                
                
                (9,755
                )
                
                
                (36,465
                )Net
      cash provided by financing activities
                
                
                17,758
                
                
                
                3,758Effect
      of exchange rate changes on cash and cash equivalents
                
                
                (1,525
                )
                
                
                (241
                )Increase
      (decrease) in cash and cash equivalents
                
                
                21,370
                
                
                
                (14,604
                )Cash
      and cash equivalents at the beginning of the period
                
                
                43,097
                
                
                
                50,659Cash
      and cash equivalents at the end of the period
                
                $
                64,467
                
                
                $
                36,055




– 28
–




Six
months ended June 30, 2009 compared to the six months ended June 30,
2008


Net cash
provided by operating activities was $18.3 million in the six months ended June
30, 2009, compared to $14.9 million in the six months ended June 30, 2008. The
major factors contributing to the increase were a larger decrease in our total
trade receivables, representing $36.3 million, a $9.5 million payment made in
the first quarter of 2008 in respect of a 2007 arbitration settlement with a
former customer for which there was no corresponding amount in the six months
ended June 30, 2009, and a decrease in unbilled receivables in the six months
ended June 30, 2009 compared to an increase in the six months ended June 30,
2008, representing $8.7 million, offset by a decrease in trade payables in the
six months ended June 30, 2009 compared to an increase in the six months ended
June 30, 2008, representing $15.7 million, lower net income, representing $12.4
million, a larger decrease in other accounts payable and accrued expenses,
representing $10.1 million, and a decrease in advances from customers and
deferred revenues in the six months ended June 30, 2009 compared to an increase
in the six months ended June 30, 2008, representing $8.2 million.




Net cash
used in investing activities was $36.5 million in the six months ended June 30,
2009, compared to $9.8 million in the six months ended June 30, 2008. The major
factors contributing to the increase were investments in short-term bank
deposits in the six months ended June 30, 2009 compared to proceeds from
maturity of short-term bank deposits in the six months ended June 30, 2008,
representing $18.6 million, and higher payments in connection with acquisitions
in prior periods, representing $10.2 million.




Net cash
provided by financing activities was $3.8 million in the six months ended June
30, 2009, compared to $17.8 million in the six months ended June 30, 2008. The
major factors contributing to the decrease were proceeds from short-term bank
credit in the six months ended June 30, 2008 compared to repayments of
short-term bank credit in the six months ended June 30, 2009, representing $10.9
million, lower proceeds from new long-term bank loans, representing $10.1
million, and the repurchase of shares in the six months ended June 30, 2009 as
part of our share repurchase plan, for which there was no corresponding amount
in the six months ended June 30, 2008, representing $2.0 million, offset by
lower dividends paid by an acquired subsidiary to its former shareholder,
representing $9.4 million.




The
effect of exchange rate changes on cash and cash equivalents was $(0.2) million
in the six months ended June 30, 2009, compared to ($1.5) million in the six
months ended June 30, 2008. The change was primarily due to the effect of
translation adjustments on our net current assets.




Long-term
and Short-term Debt




At June
30, 2009, we had a short-term loan in the amount of $3.4 million from a
commercial bank, bearing an interest rate of 2.3% and maturing in July 2009. In
addition, at June 30, 2009, we had three long-term loans taken in 2007 to fund
acquisitions: a long-term loan from a commercial bank in the amount of €9.0
million, or $12.7 million, to fund the acquisition of NessPRO Italy S.p.A.,
taken in September 2007; a long-term loan from a commercial bank in the amount
of €13.9 million, or $19.7 million, to fund the acquisition of FMC Consulting
and Informatics Ltd., taken in November 2007; and a long-term loan from a
commercial bank in the amount of $12.0 million to fund the acquisition of MS9
Consulting LLC, taken in November 2007. In addition, we had a long-term loan
from a commercial bank in the amount of €12.0 million, or $17.0 million, taken
in March 2008 and a long-term loan from a commercial bank in the amount of $15.0
million, taken in April 2009. The $15.0 million loan matures over four years
with principal payments commencing in the first year. All of the other long-term
loans mature over five years from the inception of each loan with principal
payments commencing in the third year. Each long-term loan bears interest at
fixed or variable rates, or a combination thereof, and is paid quarterly. The
long-term loans contain covenants which, among other things, require a certain
ratio of total financial obligations to consolidated EBITDA and of total
consolidated assets to consolidated stockholders’ equity, and place limitations
on our ability to merge or transfer assets to third parties. Our failure to
comply with the covenants could lead to an event of default under the agreements
governing some or all of this indebtedness, permitting the applicable lender to
accelerate all borrowings under the applicable agreement. As of June 30, 2009,
we were in compliance and expect to remain in compliance with these covenants.
In connection with the above-mentioned covenants, we received the consent of the
commercial banks during 2008 to record a fixed charge on deposits in the amount
of $2.4 million held by our Indian subsidiary related primarily to the
mark-to-market of foreign exchange forward contracts into which we entered to
hedge against the effect of exchange rate fluctuations on cash flows denominated
in Indian Rupees.


– 29
–


In
addition, at June 30, 2009, one of our Israeli subsidiaries had a long-term loan
of NIS 15.8 million, or $4.0 million, from a commercial bank, taken in March
2008, bearing interest at a fixed rate and maturing over five years, with
principal and interest paid quarterly; and a short-term loan of NIS 30.0
million, or $7.7 million, from a commercial bank, taken in October 2008, bearing
interest at a fixed rate and maturing over one year, paid semi-annually. These
loans and bank guarantees obtained by this Israeli subsidiary contain covenants
which, among other things, require a minimum stockholders’ equity of this
Israeli subsidiary, and place limitations on its ability to merge, transfer or
pledge assets to third parties. Our failure to comply with the covenants could
lead to an event of default under the agreements governing some or all of this
indebtedness, permitting the applicable lender to accelerate all borrowings
under the applicable agreement and to foreclose on any collateral. As of June
30, 2009, we were in compliance and expect to remain in compliance with these
covenants.




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




Anticipated
Needs




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




In order
to achieve our strategic business objectives, we may be required to seek
additional financing. For example, future acquisitions may require additional
equity and/or debt financing. In addition, we may require further capital to
continue to enhance our infrastructure and for working capital purposes. These
financings may not be available on acceptable terms, or at all.




Critical
Accounting Estimates




Preparation
of our financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. We believe the most complex and sensitive judgments, because of
their significance to our consolidated financial statements, result primarily
from the need to make estimates about the effects of matters that are inherently
uncertain. Management’s Discussion and Analysis and Note 2 to the consolidated
financial statements presented in our 2008 Annual Report on Form 10-K, filed
with the SEC on March 16, 2009, describe the significant accounting estimates
and policies used in preparation of our consolidated financial statements.
Actual results in these areas could differ from management’s estimates. There
were no significant changes in our critical accounting estimates during the six
months ended June 30, 2009.




Contractual
Obligations




As of
June 30, 2009, except for the short-term and long-term loans obtained through
June 30, 2009, as described in the long-term and short-term debt section above,
there have been no material changes to the contractual obligations we disclosed
in our 2008 Annual Report on Form 10-K, filed with the SEC on March 16,
2009.




Forward-Looking
Statements and Risk Factors




This
Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements often are proceeded by words such as
“believes,” “expects,” “may,” “anticipates,” “plans,” “intends,” “assumes,”
“will” or similar expressions. Forward-looking statements reflect management’s
current expectations, as of the date of this report, and involve certain risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward looking statements as a result of various factors.
Some of the factors that could cause future results to materially differ from
the recent results or those projected in forward-looking statements include the
“Risk Factors” described in our 2008 Annual Report on Form 10-K filed with the
SEC on March 16, 2009. We are under no obligation, and expressly disclaim any
obligation, to update or alter such forward-looking statements, whether as a
result of such changes, new information, subsequent events or
otherwise.


– 30
–




Item
3. Quantitative and Qualitative Disclosures About Market Risk




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




As an
example, a decrease of 10% in the value of the New Israeli Shekel relative to
the U.S. dollar in the six months ended June 30, 2009 would have resulted in an
increase in the U.S. dollar reporting value of our operating income of $0.4
million for that period, while an increase of 10% in the value of the New
Israeli Shekel relative to the U.S. dollar in the six months ended 2009 would
have resulted in a decrease in the U.S. dollar reporting value of our operating
income of $0.5 million for that period. A decrease of 10% in the value of the
Euro relative to the U.S. dollar in the six months ended June 30, 2009 would
have resulted in an increase in the U.S. dollar reporting value of our operating
income of $0.5 million for that period, while an increase of 10% in the value of
the Euro relative to the U.S. dollar in the six months ended June 30, 2009 would
have resulted in a decrease in the U.S. dollar reporting value of our operating
income of $0.5 million for that period.




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




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




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




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




Item
4. Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




As of the
end of the period covered by this report, our principal executive officer and
principal financial officer evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). Based on their evaluation of our disclosure controls and
procedures, our principal executive officer and principal financial officer,
with the participation of our management, have concluded that our disclosure
controls and procedures were effective as of June 30, 2009 to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is (a) recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms and (b)
accumulated and communicated to management, including our principal executive
officer and principal financial officer, as appropriate to allow for timely
decisions regarding required disclosure.




It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events. Given these and
other inherent limitations of control systems, there is only reasonable
assurance that our controls will succeed in achieving their stated goals under
all potential future conditions. Our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures
were effective at the reasonable assurance level as of June 30,
2009.


– 31
–




Changes
in Internal Control Over Financial Reporting




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


– 32
–


PART
II – OTHER INFORMATION




Item
1. Legal Proceedings




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




One of
our Israeli subsidiaries is currently involved in legal proceedings with the
Israeli Ministry of Justice (the “MOJ”). The legal proceedings relate to a
contract for the provision of an information system for the MOJ, executed in
November 2005 (the “MOJ Contract”). Following continued disputes, correspondence
and discussions, on February 9, 2009 we filed a claim with the Israeli District
Court located in Jerusalem claiming, among other things, a breach of the MOJ
Contract by the MOJ, including in connection with the MOJ’s demands for
revisions and changes to the software that were not contemplated in the MOJ
Contract. Our claim is for damages in the amount of NIS 20.7 million, or
approximately $5.3 million, using the exchange rate prevailing at the end of the
quarter. On February 11, 2009, the MOJ filed a claim against our Israeli
subsidiary in the Israeli District Court located in Jerusalem claiming, among
other things, that our Israeli subsidiary breached the MOJ Contract and failed
to fulfill its undertakings and obligations set forth therein. The MOJ’s claim
is for damages in the amount of NIS 79.5 million, or approximately $20.3
million, using the exchange rate prevailing at the end of the quarter. The MOJ
and our subsidiary have filed answers to the respective claims. We believe that
we have a substantial legal basis for our claim and valid defenses with respect
to the MOJ’s claim. While we intend to vigorously prosecute our claim and defend
against the MOJ’s claim, we cannot at this point predict the outcome of the
litigation. Adverse decisions in these legal proceedings may materially
adversely affect our financial condition.




Item
1A. Risk Factors




There are
no material changes in the risk factors previously disclosed in our Annual
Report on Form 10-K filed with the SEC on March 16, 2009.




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




On
November 3, 2008, we announced that our board of directors had authorized a
stock repurchase program, under which we may repurchase up to 4,000,000 shares
of our common stock, or approximately 10% of the outstanding shares, in the
succeeding twelve months. During the three months ended June 30, 2009, we
purchased a total of 247,441 shares at an average price of $3.32 per share, for
an aggregate purchase price of $820,332. As of June 30, 2009, the remaining
authorized number of shares that may be repurchased under the plan was
2,822,096.




Period
                
                Total
                    Number of
                    Shares
                    Repurchased
                
                
                Average
                    Price Paid
                    per Share
                
                
                Total Number of Shares
                    Purchased as Part of
                    Publicly Announced
                    Plans or Programs
                
                
                Maximum Number of
                    Shares that May Yet Be
                    Purchased Under the
                    Plans or ProgramsApril
      1-30, 2009
                
                
                —
                
                
                $
                —
                
                
                
                —
                
                
                
                3,069,537May
      1-31, 2009
                
                
                247,441
                
                
                $
                3.32
                
                
                
                247,441
                
                
                
                2,822,096June
      1-30, 2009
                
                
                —
                
                
                $
                —
                
                
                
                —
                
                
                
                2,822,096Total
                
                
                247,441
                
                
                $
                3.32
                
                
                
                247,441
                
                
                
                2,822,096




Item
3. Defaults upon Senior Securities




None.




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




The
following matters were submitted to a vote of the stockholders at our 2009
Annual Meeting of Stockholders held on June 15, 2009 (the “Annual Meeting”): (1)
election of seven directors and (2) ratification of the appointment of Kost
Forer Gabbay & Kasierer, a member of Ernst & Young Global, as our
independent registered public accounting firm for the fiscal year ending
December 31, 2009. The number of shares of common stock outstanding and eligible
to vote as of the record date of April 16, 2009 was 38,698,531.


– 33
–




Each of
these matters was approved by the requisite vote of our stockholders. Set forth
below is the number of votes cast for, against or withheld, as well as the
number of abstentions and broker non-votes as to the respective matters,
including a separate tabulation with respect to each nominee for
director:




Nominee
                  
                  For
                  
                  
                  WithheldAharon
      Fogel
                  
                  
                  36,135,612
                  
                  
                  
                  1,241,206Sachi
      Gerlitz
                  
                  
                  36,962,054
                  
                  
                  
                  414,764Morris
      Wolfson
                  
                  
                  34,456,169
                  
                  
                  
                  2,920,649Dr.
      Satyam C. Cherukuri
                  
                  
                  36,737,312
                  
                  
                  
                  639,506Dan
      S. Suesskind
                  
                  
                  36,715,021
                  
                  
                  
                  661,797P.
      Howard Edelstein
                  
                  
                  36,485,283
                  
                  
                  
                  891,535Gabriel
      Eichler
                  
                  
                  36,942,556
                  
                  
                  
                  434,262





Proposal
                  
                  For
                  
                  
                  Against
                  
                  
                  Abstain
                  
                  
                  Broker
                    Non-Vote2.
      Ratification of Auditors
                  
                  
                  36,935,126
                  
                  
                  
                  439,692
                  
                  
                  
                  2,000
                  
                  
                  
                  0




Item
5. Other Information




We
entered into an employment agreement with Aharon Fogel, our chairman of the
board, effective August 1, 2009. Under the agreement, Mr. Fogel is required to
devote sufficient time and energy to the company to faithfully perform his
duties and responsibilities as our chairman of the board and as chairman of our
subsidiary, Ness A.T. Ltd. Mr. Fogel’s annual base compensation, which is
payable in NIS, is approximately $149,000, and our Compensation Committee also
granted him an annual cash incentive award for 2009 with a target of
approximately $115,000, based on the achievement of certain goals relating to
the performance of the company, using the dollar-to-NIS exchange rate of August
1, 2009. The agreement does not specify a term of service, but we may terminate
the agreement for any reason by giving twelve months’ prior written notice,
immediately for cause (as defined in the agreement) or by reason of death or
disability. In addition, if the board of directors does not nominate Mr. Fogel
for re-election to the board of directors or if our stockholders do not re-elect
Mr. Fogel to the board of directors, such event will be considered a termination
of Mr. Fogel’s employment, which shall take effect twelve months after the board
nominates a slate of directors or the date the company’s stockholders vote not
to elect Mr. Fogel to the board, as the case may be. Mr. Fogel may terminate the
agreement at any time for any reason by giving up to 12 months’ prior written
notice. In the event of termination for any reason, Mr. Fogel will be entitled
to his base annual compensation through the applicable termination date, and he
will be entitled to receive all amounts deposited in his favor in any pension
funds, including payments made for severance purposes. The agreement also
contains customary confidentiality, non-competition and non-solicitation
provisions. The non-competition and non-solicitation provisions apply during the
term of the agreement and for one year thereafter.




Item
6. Exhibits




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




Exhibit Number
                            
                            Description10.1
                            
                            Employment
      Agreement, dated as of August 1, 2009, between the Registrant and Aharon
      Fogel.31.1
                            
                            Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                            
                            Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                            
                            Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
                            
                            Certification
      of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


– 34
–


SIGNATURES




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





NESS
      TECHNOLOGIES, INC.(Registrant)Date:
      August 6,
      2009
                  By:
                  /s/Issachar
      GerlitzIssachar
      GerlitzChief
      Executive Officer, President, Director(principal
      executive officer)Date:
      August 6,
      2009
                  By:
                  /s/Ofer
      SegevOfer
      SegevExecutive
      Vice President and Chief Financial Officer(principal
      financial and accounting
officer)


– 35
–


EXHIBIT
INDEX




Exhibit Number
                  
                  Description10.1
                  
                  Employment
      Agreement, dated as of August 1, 2009, between the Registrant and Aharon
      Fogel.31.1
                  
                  Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                  
                  Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                  
                  Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
                  
                  Certification
      of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.