**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

**ý****                ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly periodended September 30, 2004**

 

**o****                ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from               to               **

 

**Commission File Number000-50954**

 

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**NESS TECHNOLOGIES, INC.**

**(Exact name of registrant asspecified in its charter)**

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

 

**Ness Tower**

**Atidim High-Tech IndustrialPark**

**Building 4**

**Tel Aviv 61580, Israel**

**Telephone: +972 (3) 766-6800**

**(Address of registrant’sprincipal executive offices and registrant’s telephone number, including areacode)**

 

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

 

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

 

Indicated below is the number of shares outstanding of the registrant’sstock at November 1, 2004:

 

| **Title of Class**            | ** ** | **Number of Shares Outstanding** |
|-------------------------------|------------|----------------------------------|
| Common Stock, $0.01 par value |       | 32,772,578                       |

 

 

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**NESS TECHNOLOGIES, INC. ANDSUBSIDIARIES**

 

**INDEX**

 
| PART I – FINANCIAL INFORMATION                                                                                 |   |   |
|---------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                |   |   |
| Item 1. Financial Statements                                                                                        |   |   |
|                                                                                                                |   |   |
| Consolidated Balance Sheets - December 31,  2003 and September 30, 2004 (Unaudited)                                 |   |   |
| Consolidated Statements of Operations -  Three months and nine months ended September 30, 2003 and 2004 (Unaudited) |   |   |
| Consolidated Statements of Cash Flows -  Nine months ended September 30, 2003 and 2004 (Unaudited)                  |   |   |
| Notes to Consolidated Financial Statements  - September 30, 2004 (Unaudited)                                        |   |   |
|                                                                                                                |   |   |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations                 |   |   |
|                                                                                                                |   |   |
| Overview                                                                                                            |   |   |
| Recent Developments                                                                                                 |   |   |
| Three Months Ended September 30, 2004 Compared to the Three Months  Ended September 30, 2003                        |   |   |
| Nine  Months Ended September 30, 2004 Compared to the Nine Months Ended September  30, 2003                         |   |   |
| Liquidity and Capital Resources                                                                                     |   |   |
| Forward-Looking Statements and Risk Factors                                                                         |   |   |
|                                                                                                                |   |   |
| Item 3. Quantitative and Qualitative  Disclosure about Market Risk                                                  |   |   |
|                                                                                                                |   |   |
| Item 4. Controls and Procedures                                                                                     |   |   |
|                                                                                                                |   |   |
| Evaluation of disclosure controls and  procedures                                                                   |   |   |
| Changes in internal control                                                                                         |   |   |
|                                                                                                                |   |   |
| PART II – OTHER INFORMATION                                                                                    |   |   |
|                                                                                                                |   |   |
| Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases  of Equity Securities                           |   |   |
|                                                                                                                |   |   |
| Item 4. Submission of Matters to a Vote of Security Holders                                                         |   |   |
|                                                                                                                |   |   |
| Item 6. Exhibits                                                                                                    |   |   |
|                                                                                                                |   |   |
| SIGNATURES                                                                                                          |   |   |
|                                                                                                                |   |   |
| EXHIBIT  INDEX                                                                                                      |   |   |

2

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# **PART I – FINANCIALINFORMATION**

 

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

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

### **INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS**

**U.S. dollars in thousands**

** **
| ** **                                                                                                                                              | ** ** | **December 31,  2003** | ** ** | **September 30,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                              | ** ** | ** **             | ** ** | **(Unaudited)**         | ** ** |
| ASSETS                                                                                                                                                  |       |                   |       |                    |       |
|                                                                                                                                                    |       |                   |       |                    |       |
| CURRENT ASSETS:                                                                                                                                         |       |                   |       |                    |       |
| Cash and cash equivalents                                                                                                                               |       | $                      | 46,004     |                    | $          | 40,707 |   |
| Short-term bank deposits                                                                                                                                |       | 3,248                  |       | 237                     |       |
| Marketable securities                                                                                                                                   |       | 368                    |       | 340                     |       |
| Trade receivables (net of allowance for  doubtful accounts of $1,785 and $1,888 at December 31, 2003 and September 30,  2004 (unaudited), respectively) |       | 61,067                 |       | 71,601                  |       |
| Unbilled receivables                                                                                                                                    |       | 14,921                 |       | 19,041                  |       |
| Other accounts receivable and prepaid  expenses                                                                                                         |       | 8,442                  |       | 11,306                  |       |
| Work-in-progress                                                                                                                                        |       | 1,348                  |       | 969                     |       |
| Total assets attributed to discontinued  operations                                                                                                     |       | 1,314                  |       | 36                      |       |
|                                                                                                                                                    |       |                   |       |                    |       |
| Total current assets                                                                                                                                    |       | 136,712                |       | 144,237                 |       |
|                                                                                                                                                    |       |                   |       |                    |       |
| LONG-TERM ASSETS:                                                                                                                                       |       |                   |       |                    |       |
| Long-term prepaid expenses                                                                                                                              |       | 2,067                  |       | 3,361                   |       |
| Marketable securities                                                                                                                                   |       | 144                    |       | 84                      |       |
| Deferred income taxes                                                                                                                                   |       | 5,626                  |       | 4,380                   |       |
| Severance pay fund                                                                                                                                      |       | 30,421                 |       | 31,480                  |       |
|                                                                                                                                                    |       |                   |       |                    |       |
| Total long-term assets                                                                                                                                  |       | 38,258                 |       | 39,305                  |       |
|                                                                                                                                                    |       |                   |       |                    |       |
| PROPERTY AND EQUIPMENT, NET                                                                                                                             |       | 14,436                 |       | 18,200                  |       |
|                                                                                                                                                    |       |                   |       |                    |       |
| OTHER INTANGIBLE ASSETS, NET                                                                                                                            |       | 2,485                  |       | 3,671                   |       |
|                                                                                                                                                    |       |                   |       |                    |       |
| GOODWILL                                                                                                                                                |       | 147,592                |       | 144,256                 |       |
|                                                                                                                                                    |       |                   |       |                    |       |
| Total assets                                                                                                                                            |       | $                      | 339,483    |                    | $          | 349,669 |   |

 

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

 

3

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

### **INTERIMCONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                                                                                                                                                                    | ** ** | **December 31,  2003** | ** ** | **September 30,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                    | ** ** | ** **             | ** ** | **(Unaudited)**         | ** ** |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                                                                     |       |                   |       |                    |       |
|                                                                                                                                                                                                                                                                                                          |       |                   |       |                    |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                                                          |       |                   |       |                    |       |
| Short-term bank loans and credit                                                                                                                                                                                                                                                                              |       | $                      | 8,898      |                    | $          | 18,608 |   |
| Current maturities of long-term debt (Note  3)                                                                                                                                                                                                                                                                |       | 21,703                 |       | 28,588                  |       |
| Trade payables                                                                                                                                                                                                                                                                                                |       | 29,802                 |       | 30,398                  |       |
| Advances from customers                                                                                                                                                                                                                                                                                       |       | 3,940                  |       | 3,419                   |       |
| Other accounts payable and accrued expenses                                                                                                                                                                                                                                                                   |       | 54,604                 |       | 60,419                  |       |
| Total liabilities attributed to  discontinued operations                                                                                                                                                                                                                                                      |       | 995                    |       | —                  |       |
|                                                                                                                                                                                                                                                                                                          |       |                   |       |                    |       |
| Total current liabilities                                                                                                                                                                                                                                                                                     |       | 119,942                |       | 141,432                 |       |
|                                                                                                                                                                                                                                                                                                          |       |                   |       |                    |       |
| LONG-TERM LIABILITIES:                                                                                                                                                                                                                                                                                        |       |                   |       |                    |       |
| Long-term debt, net of current maturities  (Note 3)                                                                                                                                                                                                                                                           |       | 59,852                 |       | 39,988                  |       |
| Excess of losses over investment in  affiliate                                                                                                                                                                                                                                                                |       | 286                    |       | 294                     |       |
| Accrued severance pay                                                                                                                                                                                                                                                                                         |       | 32,912                 |       | 34,538                  |       |
| Minority interests                                                                                                                                                                                                                                                                                            |       | 136                    |       | 199                     |       |
|                                                                                                                                                                                                                                                                                                          |       |                   |       |                    |       |
| Total long-term liabilities                                                                                                                                                                                                                                                                                   |       | 93,186                 |       | 75,019                  |       |
|                                                                                                                                                                                                                                                                                                          |       |                   |       |                    |       |
| COMMITMENTS AND CONTINGENT LIABILITIES  (Note 4)                                                                                                                                                                                                                                                              |       |                   |       |                    |       |
|                                                                                                                                                                                                                                                                                                          |       |                   |       |                    |       |
| STOCKHOLDERS’ EQUITY (Note 5):                                                                                                                                                                                                                                                                           |       |                   |       |                    |       |
| Common stock of $0.01 par value -                                                                                                                                                                                                                                                                             |       | 164                    |       | 166                     |       |
| Authorized: 46,500,000 shares at December  31, 2003 and September 30, 2004 (unaudited);  issued and outstanding: 16,460,138 at December 31, 2003 and 16,658,462 at  September 30, 2004 (unaudited)                                                                                                            |       |                   |       |                    |       |
| Class B Convertible Preferred stock of  $0.01 par value -                                                                                                                                                                                                                                                     |       | 47                     |       | 47                      |       |
| Authorized: 4,676,986 shares at December  31, 2003 and September 30, 2004 (unaudited); issued and outstanding:  4,676,986 shares at December 31, 2003 and September 30, 2004 (unaudited);  aggregate liquidation preference of $44,545 at December 31, 2003 and  September 30, 2004 (unaudited)               |       |                   |       |                    |       |
| Class C Convertible Preferred stock of  $0.01 par value -                                                                                                                                                                                                                                                     |       | 34                     |       | 34                      |       |
| Authorized: 3,500,000 shares at December 31, 2003 and September 30, 2004 (unaudited);  issued and outstanding: 3,352,654 shares at December 31, 2003 and September  30, 2004 (unaudited); aggregate liquidation preference of $43,585 at December 31, 2003 and  September 30, 2004 (unaudited) |       |                   |       |                    |       |
| Preferred stock of $0.01 par value -                                                                                                                                                                                                                                                                          |       | —                 |       | —                  |       |
| Authorized: 323,014 shares at  December 31, 2003 and September 30, 2004 (unaudited); issued and  outstanding: no shares at December 31, 2003 and September 30, 2004 (unaudited)                                                                                                                     |       |                   |       |                    |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                    |       | 171,786                |       | 171,859                 |       |
| Deferred stock compensation                                                                                                                                                                                                                                                                                   |       | (365                   | )          | (206                    | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                                          |       | (4,111                 | )          | (6,500                  | )          |
| Accumulated deficit                                                                                                                                                                                                                                                                                           |       | (41,200                | )          | (32,182                 | )          |
|                                                                                                                                                                                                                                                                                                          |       |                   |       |                    |       |
| Total stockholders’ equity                                                                                                                                                                                                                                                                               |       | 126,355                |       | 133,218                 |       |
|                                                                                                                                                                                                                                                                                                          |       |                   |       |                    |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                               |       | $                      | 339,483    |                    | $          | 349,669 |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

4

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

### **INTERIM CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**U.S. dollars in thousands (except per sharedata)**

 
|                                                                         |   | **Three months ended  September 30,** |   | **Nine months ended  September 30,** |   |
|------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                         |   | **2003**                              |   | **2004**                             |   | **2003** |   | **2004** |   |
|                                                                         |   | **(Unaudited)**                       |   |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Revenues (Note 6)                                                            |   | $                                     | 64,327 |                                 | $      | 77,152 |   | $ | 156,689 |   | $ | 222,177 |   |
| Cost of revenues                                                             |   | 45,288                                |   | 53,969                               |   | 110,319 |   | 154,602 |   |
| Provision for losses (reverse of losses) on  uncompleted contracts           |   | 224                                   |   | 26                                   |   | 547 |   | (459 | ) |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Gross profit                                                                 |   | 18,815                                |   | 23,157                               |   | 45,823 |   | 68,034 |   |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Operating expenses:                                                          |   |                                  |   |                                 |   |   |   |   |   |
| Selling and marketing                                                        |   | 5,634                                 |   | 6,822                                |   | 15,424 |   | 18,952 |   |
| General and administrative                                                   |   | 11,263                                |   | 10,945                               |   | 24,633 |   | 34,142 |   |
| Research and development, net                                                |   | 37                                    |   | —                               |   | 1,153 |   | — |   |
| Other                                                                        |   | 460                                   |   | —                               |   | 460 |   | — |   |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Total operating expenses                                                     |   | 17,394                                |   | 17,767                               |   | 41,670 |   | 53,094 |   |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Operating income                                                             |   | 1,421                                 |   | 5,390                                |   | 4,153 |   | 14,940 |   |
| Financial expenses, net                                                      |   | (1,820                                | )      | (1,177                               | )      | (1,496 | ) | (4,327 | ) |
| Other income (expenses), net                                                 |   | 536                                   |   | (16                                  | )      | 280 |   | 79 |   |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Income before taxes on income                                                |   | 137                                   |   | 4,197                                |   | 2,937 |   | 10,692 |   |
| Taxes on income (tax benefit)                                                |   | (2                                    | )      | 473                                  |   | (35 | ) | 958 |   |
| Equity in net earnings (losses) of  affiliates                               |   | 18                                    |   | (3                                   | )      | 57 |   | (651 | ) |
| Minority interests in losses (earnings) of a  subsidiary                     |   | 74                                    |   | (30                                  | )      | 286 |   | (65 | ) |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Income from continuing operations                                            |   | 231                                   |   | 3,691                                |   | 3,315 |   | 9,018 |   |
| Loss from discontinued operations                                            |   | (42                                   | )      | —                               |   | (746 | ) | — |   |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Net income                                                                   |   | $                                     | 189    |                                 | $      | 3,691 |   | $ | 2,569 |   | $ | 9,018 |   |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Allocation of undistributed earnings on  Class B Convertible Preferred stock |   | $                                     | (29    | )                                    | $      | (554 | ) | $ | (1,360 | ) | $ | (1,356 | ) |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Net income after allocation of  undistributed earnings                       |   | $                                     | 160    |                                 | $      | 3,137 |   | $ | 1,209 |   | $ | 7,662 |   |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Net earnings per share (Note 7):                                             |   |                                  |   |                                 |   |   |   |   |   |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Basic net earnings per share from  continuing operations                     |   | $                                     | 0.01   |                                 | $      | 0.16 |   | $ | 0.13 |   | $ | 0.40 |   |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Basic net loss per share from discontinued  operations                       |   | $                                     | — | (*)                                  | $      | — |   | $ | (0.05 | ) | $ | — |   |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Basic net earnings per share                                                 |   | $                                     | 0.01   |                                 | $      | 0.16 |   | $ | 0.08 |   | $ | 0.40 |   |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Diluted net earnings per share from  continuing operations                   |   | $                                     | 0.01   |                                 | $      | 0.14 |   | $ | 0.13 |   | $ | 0.36 |   |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Diluted net loss per share from  discontinued operations                     |   | $                                     | — | (*)                                  | $      | — |   | $ | (0.05 | ) | $ | — |   |
|                                                                         |   |                                  |   |                                 |   |   |   |   |   |
| Diluted net earnings per share                                               |   | $                                     | 0.01   |                                 | $      | 0.14 |   | $ | 0.08 |   | $ | 0.36 |   |

 

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(*)  Represents an amount less than $0.01.

 

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

 

5

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

### **INTERIMCONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**U.S. dollars in thousands**

 
| ** **                                                                                            | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                            | ** ** | **2003**                             | ** ** | **2004** | ** ** |
| ** **                                                                                            | ** ** | **(Unaudited)**                      | ** ** |
| Cash flows from operating activities:                                                                 |       |                                 |       |   |   |
| Net income                                                                                            |       | $                                    | 2,569      |   | $ | 9,018 |   |
| Adjustments required to reconcile net  income to net cash provided by (used in) operating activities: |       |                                 |       |   |   |
| Amortization of deferred stock compensation  related to Ness GSG acquisition                          |       | 52                                   |       | 159 |   |
| Stock based compensation related to  warrants granted to banks and options granted to consultants     |       | 33                                   |       | 32 |   |
| Equity in net (earnings) losses of  affiliates                                                        |       | (57                                  | )          | 651 |   |
| Minority interests in losses (earnings) of  a subsidiary                                              |       | (286                                 | )          | 65 |   |
| Currency fluctuation of long-term debt                                                                |       | (87                                  | )          | 1,882 |   |
| Accrued interest on long-term debt                                                                    |       | (3,018                               | )          | (542 | ) |
| Depreciation and amortization                                                                         |       | 1,914                                |       | 3,691 |   |
| Deferred income taxes, net                                                                            |       | (2,747                               | )          | (784 | ) |
| Loss (gain) on sale of property and  equipment                                                        |       | (66                                  | )          | 31 |   |
| Trading marketable securities, net                                                                    |       | —                               |       | 19 |   |
| Decrease (increase) in trade receivables                                                              |       | 3,225                                |       | (11,590 | ) |
| Increase in unbilled receivables                                                                      |       | (7,622                               | )          | (4,589 | ) |
| Increase in other accounts receivable and  prepaid expenses                                           |       | (1,633                               | )          | (770 | ) |
| Decrease (increase) in work in progress                                                               |       | (56                                  | )          | 370 |   |
| Decrease (increase) in long-term prepaid  expenses                                                    |       | 2,020                                |       | (1,337 | ) |
| Increase (decrease) in trade payables                                                                 |       | (824                                 | )          | 1,174 |   |
| Decrease in advances from customers                                                                   |       | (1,209                               | )          | (428 | ) |
| Increase (decrease) in other accounts  payable and accrued expenses                                   |       | (2,165                               | )          | 7,126 |   |
| Increase in accrued severance pay, net                                                                |       | 527                                  |       | 742 |   |
|                                                                                                  |       |                                 |       |   |   |
| Net cash provided by (used in) operating  activities                                                  |       | (9,430                               | )          | 4,920 |   |
|                                                                                                  |       |                                 |       |   |   |
| Cash flows from investing activities:                                                                 |       |                                 |       |   |   |
| Net cash paid for acquisitions of  consolidated subsidiaries (a)                                      |       | (9,007                               | )          | (168 | ) |
| Proceeds from sale of short-term bank  deposits                                                       |       | 8,277                                |       | 2,920 |   |
| Proceeds from sale of property and  equipment                                                         |       | 467                                  |       | 540 |   |
| Purchase of property and equipment and  capitalization of software developed for internal use         |       | (1,856                               | )          | (8,491 | ) |
| Capitalization of software development  costs                                                         |       | —                               |       | (2,030 | ) |
| Other                                                                                                 |       | (406                                 | )          | (61 | ) |
|                                                                                                  |       |                                 |       |   |   |
| Net cash used in investing activities                                                                 |       | (2,525                               | )          | (7,290 | ) |
|                                                                                                       |            |                                      |            |  |  |  |  |

 

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

 

6

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** **

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

### **INTERIMCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**U.S. dollars in thousands**

 
|                                                              |                                                                                                                                                                | **Nine months ended  September 30,** |   |
|-------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------|--------|
|                                                              |                                                                                                                                                                | **2003**                             |   | **2004** |   |
|                                                              |                                                                                                                                                                | **(Unaudited)**                      |   |
| Cash flows from financing activities:                             |                                                                                                                                                                |                                 |   |   |   |
| Exercise of options and warrants                                  |                                                                                                                                                                | $                                    | — |   | $ | 43 |   |
| Short-term bank loans and credit, net                             |                                                                                                                                                                | 1,356                                |   | 10,214 |   |
| Proceeds from long-term debt                                      |                                                                                                                                                                | 7,154                                |   | 10,765 |   |
| Principal payment of long-term debt                               |                                                                                                                                                                | (14,446                              | )      | (23,158 | ) |
|                                                              |                                                                                                                                                                |                                 |   |   |   |
| Net cash used in financing activities                             |                                                                                                                                                                | (5,936                               | )      | (2,136 | ) |
|                                                              |                                                                                                                                                                |                                 |   |   |   |
| Effect of exchange rate changes on cash and  cash equivalents     |                                                                                                                                                                | 980                                  |   | (791 | ) |
|                                                              |                                                                                                                                                                |                                 |   |   |   |
| Decrease in cash and cash equivalents                             |                                                                                                                                                                | (16,911                              | )      | (5,297 | ) |
| Cash and cash equivalents at the beginning  of the period         |                                                                                                                                                                | 43,494                               |   | 46,004 |   |
|                                                              |                                                                                                                                                                |                                 |   |   |   |
| Cash and cash equivalents at the end of the  period               |                                                                                                                                                                | $                                    | 26,583 |   | $ | 40,707 |   |
|                                                              |                                                                                                                                                                |                                 |   |   |   |
| (a)                                                               | In  conjunction with the acquisitions, the fair values of the assets acquired and  liabilities assumed  at the dates of related  acquisitions were as follows: |                                 |   |   |   |   |
|                                                              |                                                                                                                                                                |                                 |   |   |   |
| Working capital, net (excluding cash and  cash equivalents)       |                                                                                                                                                                | $                                    | 16,929 | (*) | $ | 1,571 |   |
| Long-term  receivables                                            |                                                                                                                                                                | 1,193                                | (*)    | — |   |
| Property and  equipment                                           |                                                                                                                                                                | 2,401                                |   | (487 | ) |
| Long-term  loans and convertible loan                             |                                                                                                                                                                | (1,524                               | )(*)   | — |   |
| Accrued  severance pay                                            |                                                                                                                                                                | —                               |   | 129 |   |
| Goodwill                                                          |                                                                                                                                                                | 44,150                               |   | — |   |
| Customer  related intangible assets                               |                                                                                                                                                                | 1,514                                |   | — |   |
| Investment  in a subsidiary                                       |                                                                                                                                                                | —                               |   | (1,045 | ) |
|                                                              |                                                                                                                                                                |                                 |   |   |   |
| Issuance of  shares                                               |                                                                                                                                                                | (55,656                              | )      | — |   |
|                                                              |                                                                                                                                                                |                                 |   |   |   |
| Net cash  provided from acquisitions of consolidated subsidiaries |                                                                                                                                                                | $                                    | 9,007  |   | $ | 168 |   |
|                                                              |                                                                                                                                                                |                                 |   |   |   |
| Supplemental  disclosures of cash flows information:              |                                                                                                                                                                |                                 |   |   |   |
|                                                              |                                                                                                                                                                |                                 |   |   |   |
| Cash paid  during the period for:                                 |                                                                                                                                                                |                                 |   |   |   |
| Interest                                                          |                                                                                                                                                                | $                                    | 3,687  |   | $ | 2,573 |   |
|                                                              |                                                                                                                                                                |                                 |   |   |   |
| Taxes                                                             |                                                                                                                                                                | $                                    | 428    |   | $ | 661 |   |
|                                                                   |                                                                                                                                                                     |                                      |        |  |  |  |  |  |

 

----

(*) Reclassified

 

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

 

7

----

 

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

### **NOTES TOINTERIM CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**U.S. dollars in thousands (information as of September 30, 2004 and forthe three month and nine month periods ended September 30, 2003 and 2004 isunaudited)**

 

#### ***Note1: General***

 

Ness Technologies, Inc. was incorporated under the laws of the State ofDelaware, in March 1999.  We operatethrough our subsidiaries in Israel, the United States, Europe and Asia.

 

We are a global provider of information technology services andsolutions designed to help clients improve their competitiveness andeffectiveness. Our portfolio of solutions and services includes system integrationand application development, outsourcing, software and consulting, and qualityassurance and training. Offshore services and development are a significantcomponent of each of these categories. We and our subsidiaries primarily servethe following vertical markets: defense and government, financial services,life sciences and healthcare, telecommunications and utilities, and independentsoftware vendors.

 

#### ***Note2: Significant Accounting Policies***

 

a.               UnauditedInterim Financial Information

 

The accompanying condensed consolidated balance sheet as of September30, 2004, the condensed consolidated statements of operations for the three andnine months ended September 30, 2003 and 2004, and the condensed consolidatedstatements of cash flows for the nine months ended September 30, 2003 and 2004are unaudited. These unaudited interim condensed consolidated financialstatements have been prepared in accordance with United States generallyaccepted accounting principles for interim financial information. In the opinionof management, the unaudited interim condensed consolidated financialstatements include all adjustments of a normal recurring nature necessary for afair presentation of our consolidated financial position as of September 30,2004, our consolidated results of operations for the three and nine monthsended September 30, 2003 and 2004, and our consolidated cash flows for the ninemonths ended September 30, 2003 and 2004.

 

The balance sheet at December 31, 2003 has been derived from theaudited consolidated financial statements at that date but does not include allof the information and footnotes required by generally accepted accountingprinciples for complete financial statements.

 

These consolidated financial statements should be read in conjunctionwith the audited consolidated financial statements and accompanying notes forthe year ended December 31, 2003 included in our registration statement on FormS-1 dated May 7, 2004, as amended (File No. 333-115260).

 

Results for the three months and nine months ended September 30, 2004are not necessarily indicative of results that may be expected for the yearending December 31, 2004.

 

Unless otherwise noted, (1) all references to “dollars” or “$” are toUnited States dollars and all references to “NIS” are to New Israeli Shekelsand (2) all references to shares of our common stock and per share informationhave been adjusted to reflect the 0.7193-for-one reverse stock split effectedon September 20, 2004.

 

b.              Useof estimates

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

 

8

----

 

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

### **NOTES TOINTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**U.S. dollars in thousands (information as of September 30, 2004 and forthe three month and nine month periods ended September 30, 2003 and 2004 isunaudited)**

 

c.               Financialstatements in U.S. dollars

 

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

 

For those foreign subsidiaries whose functional currency has beendetermined to be their local currency, assets and liabilities are translated atperiod-end exchange rates and statement of operations items are translated ataverage exchange rates prevailing during that period. Such translationadjustments are recorded as a separate component of accumulated othercomprehensive income (loss) in stockholders’ equity.

 

The financial statements of affiliates reported using the equity methodof accounting, whose functional currency has been determined to be their localcurrency, have been translated into dollars. All balance sheet accounts havebeen translated using the exchange rates in effect at the balance sheet date.Statement of operations amounts have been translated using the average exchangerate for the period. The resulting aggregate translation adjustments arereported as a separate component of accumulated other comprehensive income(loss) in stockholders’ equity.

 

d.     Principles ofconsolidation

 

Our consolidated financial statements include our accounts and theaccounts of our 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.               Acquisitionof Ness GSG Inc.

 

Effective June 30, 2003, we acquired through merger all of theoutstanding stock of Ness GSG Inc. (formerly, Apar Holding Corp.), or Ness GSG,for the purpose of expanding our information technology services capabilities.Ness GSG was incorporated under the laws of the Commonwealth of Pennsylvania,with operations, through its subsidiaries, in Asia, the United States andEurope. The Ness GSG subsidiaries specialize in hardware and softwareconsulting. Some of our principal stockholders, who owned approximately 53% ofthe outstanding common stock of Ness GSG prior to the acquisition, received3,955,169 shares of our common stock upon the closing of the merger.

 

The total consideration of $67,650 (including $1,542 of transactioncosts) for the merger consisted of (i) the issuance of 6,221,712 shares of ourcommon stock valued at the fair value of $52,677, (ii) the assumption ofoptions to purchase 540,121 shares of our common stock at a weighted averageexercise price of $3.64 per share valued at the fair value of $2,979 of which$548 was allocated to deferred stock compensation and (iii) $11,000 in cash.The value of the options issued was determined based on the Black-Scholesoption pricing model. Pursuant to the merger agreement, we agreed to issueadditional shares of common stock to the stockholders of Ness GSG if and whenwe issue shares of common stock in exchange for the remaining shares of NessU.S.A.. We agreed to issue the number of shares necessary to preserve theownership percentage of the former stockholders of Ness GSG at the samepercentage ownership they held prior to the issuance of such shares to the NessU.S.A. remaining stockholders, in

 

9

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

### **NOTES TOINTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**U.S. dollars in thousands (information as of September 30, 2004 and forthe three month and nine month periods ended September 30, 2003 and 2004 isunaudited)**

 

exchange for their Ness U.S.A. shares. These shareswill be recorded at their par value and reduced from additional paid incapital, when and if issued. The transaction was accounted for by the purchasemethod of accounting according to Statement of Financial Accounting StandardsNo. 141 “Business Combinations” (“SFAS 141”). The results of Ness GSGoperations have been included in our consolidated financial statements sinceJuly 1, 2003.

 

Based upon a valuation of tangible and intangible assets acquired, weallocated the total cost of the acquisition to Ness GSG’s assets andliabilities as follows:

 
| ** **                                                  | ** ** | **At June  30, 2003** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|
| Cash and cash equivalents                                   |       | $                     | 3,423      |   |
| Short-term investments                                      |       | 9,707                 |       |
| Trade receivables                                           |       | 11,807                |       |
| Unbilled receivables                                        |       | 1,327                 |       |
| Employee advances and other current assets                  |       | 1,668                 |       |
| Other long-term tangible assets                             |       | 1,193                 |       |
| Property and equipment                                      |       | 2,373                 |       |
| Total tangible assets acquired                              |       | 31,498                |       |
|                                                        |       |                  |       |
| Customer related intangible asset (five  years useful life) |       | 1,514                 |       |
| Goodwill                                                    |       | 43,524                |       |
| Total intangible assets acquired                            |       | 45,038                |       |
|                                                        |       |                  |       |
| Total tangible and intangible assets  acquired              |       | 76,536                |       |
|                                                        |       |                  |       |
| Accounts payable                                            |       | (3,426                | )          |
| Other account payable                                       |       | (3,936                | )          |
| Long-term debt                                              |       | (1,524                | )          |
| Total liabilities assumed                                   |       | (8,886                | )          |
|                                                        |       |                  |       |
| Net assets acquired                                         |       | $                     | 67,650     |   |

 

Goodwill includes but is not limited to the synergistic value andpotential competitive benefits that could be realized by us from theacquisition, as well as Ness GSG’s skilled and specialized workforce. Thegoodwill is not deductible for tax purposes.

 

In accordance with Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets” (“SFAS 142”), goodwill arising fromacquisitions will not be amortized.

 

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

 

i.                  Ness GSG’s current assetsand liabilities are recorded at their carrying amounts. The carrying amounts ofthe current assets and liabilities were reasonable proxies for their marketvalues due to their short-term maturity. Property and equipment are presentedat current replacement cost. Long-term debt is presented at present value ofamounts to be paid determined at appropriate current interest rates.

 

ii.               The value assigned to thecustomer-related intangibles amounted to $1,514. The fair value of Ness GSG’s customerbase was determined using the Income Approach.

 

10

----

** **

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

### **NOTES TOINTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**U.S. dollars in thousands (information as of September 30, 2004 and forthe three month and nine month periods ended September 30, 2003 and 2004 isunaudited)**

 

Pro forma results:

 

The followingunaudited pro forma information does not purport to represent what our resultsof operations would have been had the acquisition been consummated on January1, 2003, nor does it purport to represent our results of operations for anyfuture period.

 

Pro forma results ofoperations for the period:

 
| ** **                                                                                                                                   | ** ** | **Nine  months ended  September 30, 2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **(Unaudited)**                            | ** ** |
|                                                                                                                                         |       |                                       |       |
| Revenues                                                                                                                                     |       | $                                          | 187,374    |   |
| Net income                                                                                                                                   |       | 970                                        |       |
| Allocation of undistributed earnings on  Class B Convertible Preferred Stock                                                                 |       | (1,043                                     | )          |
| Net loss after allocation of undistributed  earnings                                                                                         |       | $                                          | (73        | ) |
| Basic and diluted net loss per share                                                                                                         |       | —                                     | (*)        |
| Weighted average number of shares of common  and Preferred stock used in computation of basic and diluted net loss per  share (in thousands) |       | 16,854                                     |       |
|                                                                                                                                              |            |                                            |            |  |  |

 

----

(*) Represents an amountless than $0.01.

 

 

Effective August 1, 2004, Ness GSG was merged with and into us, and, asa result, the Ness GSG operating subsidiaries are direct, rather than indirect,subsidiaries.

 

f.                 Goodwill

 

We have elected to perform our analysis of goodwill during the fourthquarter of the year. No indications of impairment were identified during thenine months ended September 30, 2004.

 

g.              Accountingfor stock-based compensation

 

We have elected to follow Accounting Principles Board Opinion No. 25 “Accountingfor Stock Issued to Employees” (“APB 25”) and Interpretation No. 44 “Accountingfor Certain Transactions Involving Stock Compensation” (“FIN 44”) in accountingfor our employee stock option plans. Under APB 25, when the exercise price ofour stock options is less than the market price of the underlying shares on thedate of grant, compensation expense is recognized.

 

We adopted the disclosure provisions of Statement of FinancialAccounting Standards No. 148, “Accounting for Stock-Based Compensation -transition and disclosure” (“SFAS 148”), which amended certain provisions ofStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”), to provide alternative methods oftransition for an entity that voluntarily changes to the fair value basedmethod of accounting for stock-based employee compensation, effective as of thebeginning of the fiscal year. We continue to apply the provisions of APB 25 inaccounting for stock-based compensation.

 

Pro forma information regarding our net income (loss) and net earnings(loss) per share is required by SFAS 123 and has been determined as if we hadaccounted for our employee stock options under the fair value method prescribedby SFAS 123.

 

The fair value for options granted in 2001, 2002 and 2003 and in thethree month and nine month periods ended September 30, 2003 and 2004 isamortized over their vesting period and estimated at the date of grant usingthe Black-Scholes option pricing model with the following weighted averageassumptions:

 
| ** **                        | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                        | ** ** | **2003**                              | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                        | ** ** | **(Unaudited)**                       | ** ** |
| Dividend yield                    |       | 0                                     | %          | 0                                    | %          | 0 | % | 0 | % |
| Expected volatility               |       | 0.42                                  |       | 0.52                                 |       | 0.42 |   | 0.52 |   |
| Risk-free interest                |       | 3.1                                   |       | 2.5                                  |       | 3.1 |   | 2.5 |   |
| Expected life of up to (in years) |       | 4                                     |       | 4                                    |       | 4 |   | 4 |   |

 

11

----

 

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

### **NOTES TOINTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**U.S. dollars in thousands (information as of September 30, 2004 and forthe three month and nine month periods ended September 30, 2003 and 2004 isunaudited)**

 

Pro forma information under SFAS 123 is as follows:

 
| ** **                                                                                     | ** ** | **Three months ended  September 30,** | ** **       | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------------|--------------------------------------|------------|
| ** **                                                                                     | ** ** | **2003**                              | ** **       | **2004**                             | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                                                                     | ** ** | **(Unaudited)**                       | ** **       |
| Net income available to common stock after  allocation of undistributed earnings, as reported  |       | $                                     |  160        |                                 | $          | 3,137 |   | $ | 1,209 |   | $ | 7,662 |   |
| Add: Allocation of undistributed earnings  on Class B Convertible Preferred Stock, as reported |       | 29                                    |             | 554                                  |       | 1,360 |   | 1,356 |   |
| Deduct: Pro forma allocation of  undistributed earnings on Class B Convertible Preferred Stock |       | —                                |             | (441                                 | )          | (1,090 | ) | (1,022 | ) |
| Add: Stock-based employee compensation –  intrinsic value                                 |       | 52                                    |             | 54                                   |       | 52 |   | 159 |   |
| Deduct: Stock-based employee compensation –  fair value                                   |       | (430                                  | )                | (805                                 | )          | (1,738 | ) | (2,362 | ) |
| Pro forma net income (loss)                                                                    |       | $                                     |  (189       | )                                    | $          | 2,499 |   | $ |  (207 | ) | $ | 5,793 |   |
|                                                                                           |       |                                  |             |                                 |       |   |   |   |   |
| Basic net earnings per share, as reported                                                      |       | $                                     |   0.01 |                                 | $          |  0.16 |   | $ |   0.08 |   | $ |  0.40 |   |
| Diluted net earnings per share, as reported                                                    |       | $                                     |   0.01 |                                 | $          |  0.14 |   | $ |   0.08 |   | $ |  0.36 |   |
|                                                                                           |       |                                  |             |                                 |       |   |   |   |   |
| Pro forma basic net earnings (losses) per  share                                               |       | $                                     | (0.01            | )                                    | $          | 0.13 |   | $ | (0.01 | ) | $ |  0.31 |   |
| Pro forma diluted net earnings (losses) per  share                                             |       | $                                     | (0.01            | )                                    | $          | 0.11 |   | $ | (0.01 | ) | $ |  0.27 |   |

 

h.              Impactof recently issues accounting pronouncements

 

In March 2004, the EITF reached a consensus on Issue No. 03-06, “ParticipatingSecurities and the two-Class Method under FASB Statements No. 128” (“EITF 03-06”), related to “participating securities” and the application of the “two-classmethod” under Statement of Financial Accounting Standards No. 128, “Earningsper Share” (“SFAS 128”). EITF 03-06 provides guidance in determining when asecurity participates in dividends such that the two-class method must be usedto calculate earnings per share. The consensuses of EITF 03-06 should beapplied retroactively beginning with the first reporting period (annual orinterim) beginning after March 31, 2004. The adoption of EITF 03-06 is notexpected to have a significant impact on our financial statements.

 

i.                  Reclassification

 

Certain prior period amounts have been reclassified to conform to thecurrent period presentation.

 

#### ***Note3: Long-Term Debt***

#### *** ***

a.               Composition

 

Our long-term debt is composed as follows:

 
| ** **                                                                                                           | ** ** | **December  31, 2003** | ** ** | **September  30, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                                                                           | ** ** | ** **             | ** ** | **(Unaudited)**         | ** ** |
| Banks (1)                                                                                                            |       | $                      | 78,805     |                    | $          | 65,204 |   |
| Loan from stockholders                                                                                               |       | 1,000                  |       | 1,000                   |       |
| Convertible loan from stockholders                                                                                   |       | 1,000                  |       | 1,000                   |       |
|                                                                                                                 |       | 80,805                 |       | 67,204                  |       |
| Less current maturities                                                                                              |       | 21,703                 |       | 28,588                  |       |
|                                                                                                                 |       | 59,102                 |       | 38,616                  |       |
| Promissory note with respect to acquisition  cost                                                                    |       | 750                    |       | 750                     |       |
| Other                                                                                                                |       | —                 |       | 622                     |       |
|                                                                                                                 |       | $                      | 59,852     |                    | $          | 39,988 |   |
| Balances with related parties:                                                                                       |       |                   |       |                    |       |
| Long-term loan and convertible loan from  related party (interest accumulated is included in other accounts payable) |       | $                      | 2,079      |                    | $          | 2,134 |   |

 

12

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** **

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

### **NOTES TOINTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**U.S. dollars in thousands (information as of September 30, 2004 and forthe three month and nine month periods ended September 30, 2003 and 2004 isunaudited)**

 

----

(1) The long-term loans default upon thefailure of any of our subsidiaries named as borrowers under the loans tosatisfy certain conditions and comply with covenants.  As of December 31, 2003 and September 30,2004, management believes that the subsidiaries are in compliance with suchconditions and covenants. The weighted average interest rate on the bank loansas of December 31, 2003 is 5%. The loan repayments will be carried outprimarily over the next five years.

 

b.              Classification

 

Classified by currency, linkage terms and interest rates, the totalamount of the liabilities (before deduction of current maturities) is asfollows:

 
| ** **              | ** ** | **Interest rate (%)**  | ** ** | **Amount**              | ** ** |
|-------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **              | ** ** | **December 31,  2003** | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** | **September 30,  2004** | ** ** |
| ** **              | ** ** | ** **             | ** ** | **(Unaudited)**         | ** ** | ** ** | ** ** | **(Unaudited)** | ** ** |
| In, or linked to dollar |       | 3-5                    |       | 3-6                     |       | $ | 47,514 |   | $ | 41,170 |   |
| In NIS - linked to CPI  |       | 6-8                    |       | 6-8                     |       | 33,291 |   | 26,034 |   |
|                    |       |                   |       |                    |       | $ | 80,805 |   | $ | 67,204 |   |

 

c.     Maturities

 

The liabilities mature as follows:

 

| **As of December 31,**  | ** ** | ** ** | ** ** |
|-------------------------|------------|------------|------------|
| 2004 (current maturity) |       | $          | 21,703     |   |
| 2005                    |       | 22,323     |       |
| 2006                    |       | 18,878     |       |
| 2007                    |       | 12,716     |       |
| 2008                    |       | 5,185      |       |
|                    |       | $          | 80,805     |   |
|                         |            |            |            |  |  |

 

#### ***Note4: Commitments and Contingent Liabilities***

#### *** ***

a.               Litigation

 

In 2003 and the nine-month period ended September 30, 2004, severalemployees filed lawsuits against subsidiaries of ours claiming payments due tothem in the total amount of $40. Our management and our legal advisor believethat the provision in the consolidated financial statements is adequate tocover probable costs arising from these matters.

 

b.              Guarantees

 

Guarantees are contingent commitments issued by us generally toguarantee our performance in different projects to our customers, such astenders. The term of a guarantee generally is equal to the term of the relatedprojects, which can be as short as 30 days or as long as 5 years. The maximumpotential amount of future payments we could be required to make under ourguarantees at December 31, 2003 and September 30, 2004, is $19,480 and $19,682,respectively.  We do not hold collateralto support guarantees when deemed necessary.

 

c.               Liensand charges

 

To secure our liabilities, we and our subsidiaries recorded fixed andfloating charges on our holdings in subsidiaries, and on our and oursubsidiaries’ property and equipment, share capital and goodwill.

 

13

----

 

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

### **NOTES TOINTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**U.S. dollars in thousands (information as of September 30, 2004 and forthe three month and nine month periods ended September 30, 2003 and 2004 isunaudited)**

 

#### ***Note5: Stockholders’ Equity***

 

a.               Our Board of Directors andour stockholders approved on September 2, 2004 a 0.7193-for-1 reverse split ofour shares of common stock, to be effected on the effective date of filing anamendment to our certificate of incorporation in respect of the reverse split.Such filing became effective on September 20, 2004. All common shares, options,warrants and per share data included in these financial statements for allperiods presented as well as the exchange ratios for the Preferred shares andconvertible loan from stockholders have been retroactively adjusted to reflectthis 0.7193-for-1 reverse split.

 

b.              Our Board of Directorsapproved and resolved on April 1, 2004 to recommend that holders of the Class BPreferred stock convert accumulated dividends on our Class B Preferred stock(approximately $9,474) to common stock at a conversion price of $18.07 pershare. On September 20, 2004, the Class B convertible Preferred stockcertificate of designations was amended to reflect such change. Our Board ofDirectors also approved and resolved on April 1, 2004 to recommend that holdersof our Class C Preferred stock waive their redemption right upon an initialpublic offering, or IPO, and that the ratchet protection granted to holders ofour Class C Preferred stock be reduced to $18.07 per share.

 

c.               Additionally, our Board ofDirectors and our stockholders approved and resolved on September 2, 2004 anamendment to our Class C Convertible Preferred stock certificate ofdesignation. Such amendment became effective on September 20, 2004.Accordingly, if we consummated an IPO prior to December 31, 2004 at a pricebelow $19.44, the conversion ratio of each share of Class C Preferred stockwould be revised to the quotient obtained in accordance with the followingformula: 18.07/(IPO price/1.075); provided, that if less than all of the sharesof common stock underlying our Class C Convertible Preferred Stock is not soldin such IPO, the conversion ratio applicable to such shares would be calculatedaccording to the following formula: 18.07/(IPO price/1.15). If we hadconsummated an IPO subsequent to January 1, 2005 at a price below $20.78, theconversion ratio would have been calculated according to the following formula:18.07/(IPO price/1.15).

 

d.              On September 2, 2004, ourBoard of Directors and our stockholders approved an increase of 400,000 optionsto the U.S. 2003 Stock Option Plan and 600,000 options to the 2003 IsraeliStock Option Plan.

 

e.               Total comprehensive income (loss):

 
| ** **                                                         | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                         | ** ** | **2003**                              | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | **(Unaudited)**                       | ** ** |
|                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Net income                                                         |       | $                                     | 189        |                                 | $          | 3,691 |   | $ | 2,569 |   | $ | 9,018 |   |
| Foreign currency translation adjustment,  net                      |       | 4,676                                 |       | 533                                  |       | 1,915 |   | (2,354 | ) |
| Net unrealized losses on available-for-sale  marketable securities |       | 90                                    |       | (3                                   | )          | (14 | ) | (35 | ) |
| Comprehensive income                                               |       | $                                     | 4,955      |                                 | $          | 4,221 |   | $ | 4,470 |   | $ | 6,629 |   |

 

#### ***Note6: Geographic Information***

 

We adopted Statement of Financial Accounting Standards No. 131, “Disclosuresabout Segments of an Enterprise and Related Information” (“SFAS 131”). Weoperate in one reportable segment. Our total revenues are attributed togeographic areas based on the location of the end customer.

 

The following presents total revenues for the three month and ninemonth periods ended September 30, 2003 and 2004 and long-lived assets as ofSeptember 30, 2003 and 2004:

 
| ** **                                      | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                      | ** ** | **2003**                              | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(Unaudited)**                       | ** ** |
| Revenues from sales to unaffiliated  customers: |       |                                  |       |                                 |       |   |   |   |   |
| Israel                                          |       | $                                     | 36,745     |                                 | $          | 43,175 |   | $ | 110,244 |   | $ | 127,636 |   |
| United States                                   |       | 13,966                                |       | 19,486                               |       | 20,550 |   | 53,697 |   |
| Europe                                          |       | 10,314                                |       | 9,671                                |       | 22,593 |   | 28,188 |   |
| Asia and the Far East                           |       | 3,302                                 |       | 4,105                                |       | 3,302 |   | 10,720 |   |
| Others                                          |       | —                                |       | 715                                  |       | — |   | 1,936 |   |
|                                            |       | $                                     | 64,327     |                                 | $          | 77,152 |   | $ | 156,689 |   | $ | 222,177 |   |

 

14

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

### **NOTES TOINTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**U.S. dollars in thousands (information as of September 30, 2004 and forthe three month and nine month periods ended September 30, 2003 and 2004 isunaudited)**

 
| ** **            | ** ** | **September 30,** | ** ** |
|-----------------------|------------|-------------------|------------|
| ** **            | ** ** | **2003 (*)**      | ** ** | **2004 (*)** | ** ** |
| ** **            | ** ** | **(Unaudited)**   | ** ** |
| Long-lived assets:    |       |              |       |   |   |
| Israel                |       | $                 | 97,429     |   | $ | 98,888 |   |
| United States         |       | 57,848            |       | 56,397 |   |
| Europe                |       | 2,376             |       | 2,633 |   |
| Asia and the Far East |       | 1,992             |       | 8,203 |   |
| Others                |       | 5                 |       | 6 |   |
|                  |       | $                 | 159,650    |   | $ | 166,127 |   |

 

----

(*) reclassified

 

#### ***Note7: Basic and Diluted Net Earnings (Loss) Per Share***

#### *** ***

Basic net earnings (losses) per share are computed based on theweighted average number of shares of common stock outstanding during eachperiod, plus dilutive Convertible Preferred stock considered outstanding duringeach period, in accordance with the guidance of Emerging Issues Task Force No.D-95 “Effect of Participating Convertible Securities on the Computation ofBasic Earnings per Share” (“EITF D-95”). Diluted net earnings per share arecomputed based on the weighted average number of shares of common stockoutstanding during each period, plus dilutive potential shares of common stockconsidered outstanding during the period, in accordance with SFAS 128.

 

The total weighted average number of shares related to the outstandingoptions, warrants, Convertible Preferred stock and convertible loan fromstockholders excluded from the calculations of diluted net earnings (losses)per share, as they would have been anti-dilutive for all periods presented, was4,870,696, 160,386, 104,386, 3,788,774 and 116,053 for the year ended December31, 2003 and the three months ended September 30, 2003 and 2004 and the ninemonths ended September 30, 2003 and 2004, respectively.

 

The following table sets forth the computation of basic and diluted netearnings per share of common stock (in thousands, except share data):

 
| ** **                                                                                                                                  | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **2003**                              | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                  | ** ** | **(Unaudited)**                       | ** ** |
| Numerator:                                                                                                                                  |       |                                  |       |                                 |       |   |   |   |   |
| Net income from continuing operations as  reported                                                                                          |       | 231                                   |       | 3,691                                |       | 3,315 |   | 9,018 |   |
| Allocation of undistributed earnings on  Class B Convertible Preferred Stock                                                                |       | (29                                   | )          | (554                                 | )          | (1,360 | ) | (1,356 | ) |
| Net income from continuing operations after  allocation of undistributed earnings on Class B Convertible Preferred Stock                    |       | 202                                   |       | 3,137                                |       | 1,955 |   | 7,662 |   |
| Losses from discontinued operations                                                                                                         |       | (42                                   | )          | —                               |       | (746 | ) | — |   |
| Net income after allocation of  undistributed earnings on Class B Convertible Preferred Stock                                               |       | 160                                   |       | 3,137                                |       | 1,209 |   | 7,662 |   |
|                                                                                                                                        |       |                                  |       |                                 |       |   |   |   | ** ** |
| Denominator:                                                                                                                                |       |                                  |       |                                 |       |   |   |   | ** ** |
| Weighted average number of shares of common  stock                                                                                          |       | 16,077                                |       | 16,654                               |       | 11,911 |   | 16,537 | ** ** |
| Weighted average number of shares of  preferred stock                                                                                       |       | 2,412                                 |       | 2,412                                |       | 2,412 |   | 2,412 |   |
| Denominator for basic net earnings per  share                                                                                               |       | 18,489                                |       | 19,066                               |       | 14,323 |   | 18,949 |   |
| Effect of dilutive securities:                                                                                                              |       |                                  |       |                                 |       |   |   |   |   |
| Employee stock options and warrants                                                                                                         |       | 1,393                                 |       | 2,936                                |       | 1,183 |   | 2,550 |   |
| Denominator for diluted net earnings per  share – adjusted weighted average assuming conversions and exercise of  options and warrants |       | 19,882                                |       | 22,002                               |       | 15,506 |   | 21,499 |   |

 

15

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** **

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

### **NOTES TOINTERIM CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**U.S. dollars in thousands (information as of September 30, 2004 and forthe three month and nine month periods ended September 30, 2003 and 2004 is unaudited)**

 

#### ***Note8: Subsequent Events***

 

a.               On September29, 2004, the Securities and Exchange Commission declared effective ourregistration statement in respect of our IPO. The closing of our IPO occurredon October 4, 2004. Upon the closing, we received from the underwriters of theIPO a net amount of $73,129 and issued 6,552,774 new shares of common stock.Certain shareholders sold 5,119,226 shares of common stock for a net sum of$57,131.  Upon the closing, all the sharesof preferred stock were converted to shares of common stock, and we appointedthree new directors.  On October 5, 2004,the underwriters exercised in full the over-allotment option granted to themand purchased, on October 12, 2004, from us an additional 1,750,800 shares ofcommon stock, for which we received the additional net sum of $19,539.

 

b.              Our ExecutiveCommittee approved and resolved on August 31, 2004 to provide to certainoptionees (specifically, those who exchanged their options in two previouslypublic entities acquired by us for our options) the right to redeem thoseoptions for a cash payment. The grant date occurred during the fourth quarterof 2004. The total number of redeemable options, all of which are currentlyvested, is 391,499, and the aggregate redemption value as of September 30, 2004is $3.4 million.

 

Theredemption right is exercisable from October 1, 2004 until May 31, 2006. Eachoption subject to the redemption right may be transferred by the employee to usfor a cash payment that is linked, at the employee’s sole discretion, either tothe Israeli Consumer Price Index and shall bear NIS interest at the rate of 5%per year, or to the U.S. dollar with dollar interest at the rate of 6% peryear, calculated from the original option grant date of September 23, 1999 orOctober 3, 1999, up to the redemption date.

 

Eachof 283,893 options may be exercised to acquire one share of our common stock ata price of $3.49 and are redeemable at the NIS equivalent amount of $9.19 peroption as of September 30, 2004.  Each of107,607 options may be exercised to acquire one share of our common stock at aprice of $7.45, and are redeemable at the NIS equivalent amount of $6.92 peroption as of September 30, 2004. The exercise prices and redemption amounts aresubject to adjustments for stock splits, dividends, recapitalizations and thelike, as set forth in our share option plan to which each option is subject.

 

Wewill account for the rights following the guidance of FASB Interpretation No.28, “Accounting for Stock Appreciation Rights and Other Variable Stock Optionor Award Plans”, (“FIN 28”), relating to tandem awards and Emerging Issues TaskForce No. 00-23 “Issues Related to the Accounting for Stock Compensation underAPB Opinion No. 25 and FASB Interpretation No. 44”, (“EITF 00-23). Accordingly,once we believe it is likely that the rights would be exercised in the future,a liability will be recorded at the then value of the redemption rights, with acorresponding charge to compensation expense. The liability will be accreted periodicallyto equal the amount that would be payable if the awards were redeemed at eachbalance sheet date.

 

16

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## ***Item 2***.Management’s Discussion and Analysis of Financial Condition and Results ofOperations

 

*You should read the following discussion and analysis together with ourunaudited consolidated financial statements and the accompanying notes.  This discussion contains forward-lookingstatements, within the meaning of Section 27A of Securities Act of 1933, asamended, Section 21E of the Securities Exchange Act of 1934, as amended, andthe Private Securities Litigation Reform Act of 1995, including statementsregarding our expected financial position, business and financing plans.  These statements involve risks anduncertainties. Our actual results could differ materially from the resultsdescribed in or implied by these forward-looking statements as a result ofvarious factors, including those discussed below and elsewhere in ourProspectus dated September 29, 2004, as filed with the Securities and ExchangeCommission, particularly under the headings “Risk Factors” and “Special NoteRegarding Forward-Looking Statements.”*

 

### **Overview**

 

We are a global provider of information technology, or IT, services andend-to-end business solutions designed to help clients improve theircompetitiveness and effectiveness. End-to-end business solutions encompass allstages of a client’s business process and incorporate all technologies and ITservices related to that process. Our portfolio of solutions and servicesincludes outsourcing, system integration and application development, softwareand consulting, and quality assurance and training. The primary industries, orverticals, we serve include government and defense, financial services, lifesciences and healthcare, telecommunications and utilities, and independentsoftware vendors, or ISVs.

 

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

 

Our revenues increased to $77.2 million and $222.2 million for thethree and nine months ended September 30, 2004, respectively, from $64.3million and $156.7 million for the three and nine months ended September 30,2003, respectively.  Net income increasedto $3.7 million and $9.0 million for the three and nine months ended September30, 2004, respectively, from $0.2 million and $2.6 million for the three andnine months ended September 30, 2003, respectively.

 

Our revenue growth is attributable to a number of factors, includingacquisition we made, increases in the number and size of projects for existingclients, and the addition of new clients. Our client base is diverse, and weare not dependent on any single client. In the three and nine months endedSeptember 30, 2004, no client accounted for more than 4% and 3% of ourrevenues, respectively, and our largest twenty clients together accounted forapproximately 36% and 40% of our revenues, respectively. For the same periods,the percentage of our revenues generated by public and private clients inIsrael was 56% and 57% respectively, and the percentage of our revenuesderived, in aggregate, from agencies of the government of Israel for the sametime periods was 10% and 12% respectively. Existing clients from prior yearsgenerated more than 80% of our revenues in the nine months ended September 30,2004.

 

Our backlog as of September 30, 2004 was $354 million compared to $219million as of September 30, 2003. This $135 million increase in our backlog wasdue exclusively to new bookings. We achieve backlog through new signings of ITservices projects and outsourcing contracts, including for new and repeatcustomers. We recognize backlog as revenue when we perform the services relatedto backlog. We believe that our increased focus on outsourcing and multi-yearoffshore contracts will contribute further to our backlog growth.

 

17

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As of September 30, 2004, we had 4,856 employees, includingapproximately 4,180 IT professionals.  Ofour 4,856 employees, approximately 2,505 were in Israel, 1,295 were in India,390 were in North America, 375 were in Europe and 295 were in the Asia Pacific region.

 

### **Recent Developments**

 

In October 2004, we completed an initial public offering of shares ofour common stock. In connection with the offering, we offered and sold8,303,574 shares of our common stock and certain selling stockholders offeredand sold an additional 5,119,226 shares at a price of $12.00 per share. Our netproceeds from the initial public offering, after deducting underwritingdiscounts, commissions, and estimated offering related expenses payable by uswere approximately $89.7 million.  Weintend to use approximately $40 million of the proceeds of this offering toreduce long-term debt and to apply the balance of the proceeds to fund businessgrowth and expansion and for working capital and general corporate purposes,including approximately $5.0 million for expansion of our infrastructure andfacilities in India. We may also use a portion of the net proceeds foracquisitions of additional businesses, assets and technologies or theestablishment of joint ventures.

 

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

 
| ** **                                                         | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                         | ** ** | **2003**                              | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2004** | ** ** |
| Revenues                                                           |       | 100.0                                 | %          | 100.0                                | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                                                   |       | 70.5                                  |       | 70.0                                 |       | 70.4 |   | 69.6 |   |
| Provision for losses (reverse of losses) on  uncompleted contracts |       | 0.3                                   |       | 0.0                                  |       | 0.4 |   | (0.2 | ) |
| Gross profit                                                       |       | 29.2                                  |       | 30.0                                 |       | 29.2 |   | 30.6 |   |
|                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Operating expenses:                                                |       |                                  |       |                                 |       |   |   |   |   |
| Selling and marketing                                              |       | 8.7                                   |       | 8.8                                  |       | 9.8 |   | 8.5 |   |
| General and administrative                                         |       | 17.5                                  |       | 14.2                                 |       | 15.7 |   | 15.4 |   |
| Research and development, net                                      |       | 0.1                                   |       | —                               |       | 0.7 |   | — |   |
| Other                                                              |       | 0.7                                   |       | —                               |       | 0.3 |   | — |   |
| Total operating expenses                                           |       | 27.0                                  |       | 23.0                                 |       | 26.5 |   | 23.9 |   |
|                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Operating income                                                   |       | 2.2                                   |       | 7.0                                  |       | 2.7 |   | 6.7 |   |
| Financial expenses, net                                            |       | (2.8                                  | )          | (1.6                                 | )          | (1.0 | ) | (1.9 | ) |
| Other income (expenses), net                                       |       | 0.8                                   |       | (0.0                                 | )          | 0.2 |   | 0.0 |   |
| Income before taxes on income                                      |       | 0.2                                   |       | 5.4                                  |       | 1.9 |   | 4.8 |   |
|                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Taxes on income (tax benefit)                                      |       | (0.0                                  | )          | 0.6                                  |       | (0.0 | ) | 0.4 |   |
| Equity in net earnings (losses) of affiliate                       |       | 0.0                                   |       | (0.0                                 | )          | 0.0 |   | (0.3 | ) |
| Minority interests in losses (earnings) of  subsidiary             |       | 0.1                                   |       | (0.0                                 | )          | 0.2 |   | (0.0 | ) |
| Income from continuing operations                                  |       | 0.3                                   |       | 4.8                                  |       | 2.1 |   | 4.1 |   |
|                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Loss from discontinued operations                                  |       | (0.0                                  | )          | —                               |       | (0.5 | ) | — |   |
| Net income                                                         |       | 0.3                                   |       | 4.8                                  |       | 1.6 |   | 4.1 |   |

 

18

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### **Three Months Ended** September 30, 2004 Compared to the Three Months EndedSeptember 30, 2003

 

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

 
| ** **                                     | ** ** | **Three months ended  September 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|--------------------------|------------|
| ** **                                     | ** ** | **2003**                              | ** ** | **2004**                 | ** ** | **$** | ** ** | **%** | ** ** |
| Revenues                                       |       | $                                     | 64,327     |                     | $          | 77,152 |   | 12,825 |   | 19.9 |   |
| Cost of revenues                               |       | 45,288                                |       | 53,969                   |       | 8,681 |   | 19.2 |   |
| Provision for losses on uncompleted  contracts |       | 224                                   |       | 26                       |       | (198 | ) | (88.4 | ) |
| Gross profit                                   |       | $                                     | 18,815     |                     | $          | 23,157 |   | 4,342 |   | 23.1 |   |
| Gross margin                                   |       | 29.2                                  | %          | 30.0                     | %          |   |   |   |   |

 

#### ***Revenues***

 

Our revenues increased from $64.3 million in thethree months ended September 30, 2003 to $77.2 million in the three monthsended September 30, 2004, representing an increase of $12.8 million, or 19.9%.  Our $12.8 million revenue increase wasprimarily due to growth in outsourcing and offshore engagements, representing$8.4 million, while $4.4 million was attributable to growth in our otherofferings, comprised of system integration and application development,software and consulting, and quality assurance and training. Revenues fromoutsourcing and offshore services increased as a result of volume growth due toour sales initiatives related to these offerings, including the hiring of keypersonnel and aligning of our organizational structure, and expansion intogeographical areas in which we currently do business but previously had notoffered outsourcing and offshore services.

 

#### ***Cost of revenues andprovision for losses on uncompleted contracts***

 

Our cost of revenues, including salaries, wages andother direct costs, increased from $45.3 million in the three months endedSeptember 30, 2003 to $54.0 million in the three months ended September 30,2004, representing an increase of $8.7 million, or 19.2%. The increase wasattributable to growth in our delivery staff needed to support our increasedrevenues.  The change in our provision forlosses on uncompleted contracts decreased from $0.2 million in the three monthsended September 30, 2003 to $26,000 in the three months ended September 30,2004, as a result of net changes in our fixed price project loss provisions.

 

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

 

Our gross profit (revenues less cost of revenues andprovision for losses on uncompleted contracts) increased from $18.8 million inthe three months ended September 30, 2003 to $23.2 million in the three monthsended September 30, 2004, representing an increase of 23.1%. The increase wasprimarily related to our increase in revenues, representing $3.7 million, andan increase in our gross margin. Gross margin for the three months endedSeptember 30, 2004 was 30.0%, compared to 29.2% in the three months endedSeptember 30, 2003. The increase in gross margin resulted primarily from anincrease in billable utilization, representing approximately $0.6 million.  We define billable utilization as the totalbillable hours in a period divided by the total available hours of ourprofessionals in that period.

 

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

 
| ** **                    | ** ** | **Three months ended  September 30,** | ** **  | **Increase  (Decrease)** | ** ** |
|-------------------------------|------------|---------------------------------------|-------------|--------------------------|------------|
| ** **                    | ** ** | **2003**                              | ** **  | **2004**                 | ** ** | **$** | ** ** | **%** | ** ** |
| Selling and marketing         |       | $                                     | 5,634       |                     | $          | 6,822 |   | 1,188 |   | 21.1 |   |
| General and administrative    |       | 11,263                                |        | 10,945                   |       | (318 | ) | (2.8 | ) |
| Research and development, net |       | 37                                    |        | —                   |       | (37 | ) | (100.0 | ) |
| Other                         |       | 460                                   |        | —                   |       | (460 | ) | (100.0 | ) |
| Total operating expenses      |       | 17,394                                |        | 17,767                   |       | 373 |   | 2.1 |   |
| Operating income              |       | $                                     |  1,421 |                     | $          |  5,390 |   | 3,969 |   | 279.3 |   |

 

19

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

 

Selling and marketing expenses increased from $5.6million in the three months ended September 30, 2003 to $6.8 million in thethree months ended September 30, 2004, representing an increase of 21.1%. Thisincrease was due primarily increased marketing expenses, representing $1.1million, and a $0.1 million increase in client-based asset amortization. Theseother marketing expenses related primarily to our efforts to enhance our brandrecognition. The increase in client-based asset amortization was due primarilyto an increased cumulative cost of amortization of client-based assets that weacquired in connection with the Apar acquisition.

 

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

 

General and administrative expenses decreased from$11.3 million in the three months ended September 30, 2003 to $10.9 million inthe three months ended September 30, 2004, representing a decrease of 2.8%.This decrease was due primarily to increased efficiency in our operations.

 

#### ***Research and development,net***

 

Research and development expenses decreased from$37,000 in the three months ended September 30, 2003 to no expenses in thethree months ended September 30, 2004. These expenses were comprised solely of thedevelopment of Ness ISI’s dbMotion system. Following the January 1, 2004issuance of preferred shares by Ness ISI that reduced our share ownership to anon-controlling interest, we no longer consolidate Ness ISI’s results in ourfinancial statements.

 

#### ***Other***

 

Other expenses decreased from $0.5 million in thethree months ended September 30, 2003 to no expenses in the three months endedSeptember 30, 2004.  The expense in thethird quarter of 2003 resulted from the consolidation of certain corporate andbranch administrative services in the United States.

 

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

 
| ** **                                             | ** ** | **Three months ended  September 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|--------------------------|------------|
| ** **                                             | ** ** | **2003**                              | ** ** | **2004**                 | ** ** | **$** | ** ** | **%** | ** ** |
| Operating income                                       |       | $                                     | 1,421      |                     | $          | 5,390 |   | 3,969 |   | 279.3 |   |
| Financial expenses, net                                |       | (1,820                                | )          | (1,177                   | )          | 643 |   | (35.3 | ) |
| Other income (expenses), net                           |       | 536                                   |       | (16                      | )          | (552 | ) | N/A |   |
| Income before taxes on income                          |       | 137                                   |       | 4,197                    |       | 4,060 |   | 2,963.5 |   |
| Taxes on income (tax benefit)                          |       | (2                                    | )          | 473                      |       | 475 |   | N/A |   |
| Equity in net earnings (losses) of  affiliates         |       | 18                                    |       | (3                       | )          | (21 | ) | N/A |   |
| Minority interests in losses (earnings) of  subsidiary |       | 74                                    |       | (30                      | )          | (104 | ) | N/A |   |
| Income from continuing operations                      |       | 231                                   |       | 3,691                    |       | 3,460 |   | 1,497.8 |   |
| Loss from discontinued operations                      |       | (42                                   | )          | —                   |       | 42 |   | (100.0 | ) |
| Net income                                             |       | $                                     |  189  |                     | $          | 3,691 |   | 3,502 |   | 1,852.9 |   |

 

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

 

Financial expenses, net, decreased from $1.8 millionin the three months ended September 30, 2003 to $1.2 million in the three monthsended September 30, 2004, representing a decrease of 35.3%. The change was dueprimarily to fluctuations in the exchange rate of the dollar against the NIS.

 

#### ***Other income (expenses),net***

 

Other income (expenses), net, changed from income of$0.5 million in the three months ended September 30, 2003 to expenses of$16,000 in the three months ended September 30, 2004. The income in the thirdquarter of

 

20

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2003 was primarily extraordinary income from BlueflameInc. receivables realized in excess of the value assessed at the acquisition byour subsidiary, Ness U.S.A. Inc., of the assets of Blueflame in November 2001.

 

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

 

Our taxes on income (tax benefit) changed from abenefit of $2,000 in the three months ended September 30, 2003 to taxes of $0.5million in the three months ended September 30, 2004. This change wasattributable to the increase in our income before taxes and the depletion ofour net operating loss carry forwards in Israel.

 

#### ***Equity in net earnings(losses) of affiliates***

 

Equity in net earnings (losses) of affiliateschanged from earnings of $18,000 for the three months ended September 30, 2003to losses of $3,000 in the three months ended September 30, 2004. This changewas not significant.

 

#### ***Minority interests inlosses (earnings) of subsidiary***

 

Minority interests in losses (earnings) ofsubsidiary changed from earnings of $0.1 million in the three months endedSeptember 30, 2003 to losses of $30,000 in the three months ended September 30,2004. This change was insignificant.

 

#### ***Income from continuingoperations***

 

Income from continuing operations increased from$0.2 million in the three months ended September 30, 2003 to $3.7 million inthe three months ended September 30, 2004, representing an increase of 1,498%.The increase in net income was due primarily to our increase in operatingincome of $4.0 million and our decrease in financial expenses of $0.6 million,partially offset by our decrease in other income of $0.6 million and theincrease in our income taxes of $0.5 million.

 

#### ***Loss from discontinuedoperations***

 

In the three months ended September 30, 2003, werecognized a net loss after taxes of $42,000, compared to no loss for the threemonths ended September 30, 2004. The loss was attributable to the closing of aninsignificant line of business.

 

#### ***Net income***

 

Net income increased from $0.2 million in the threemonths ended September 30, 2003 to $3.7 million in the three months endedSeptember 30, 2004, representing an increase of 1,853%. The increase in netincome was due primarily to our increase in operating income of $4.0 million,our decrease in financial expenses of $0.6 million and the retirement onDecember 31, 2003 of losses from discontinued operations of $42,000, partiallyoffset by our decrease in other income of $0.6 million and the increase in ourincome taxes of $0.5 million.

 

21

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### **Nine Months Ended** September 30, 2004 Compared to the Nine Months EndedSeptember 30, 2003

 

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

 
| ** **                                                         | ** ** | **Nine months ended  September 30,** | ** **   | **Increase  (Decrease)** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------|--------------|--------------------------|------------|
| ** **                                                         | ** ** | **2003**                             | ** **   | **2004**                 | ** ** | **$** | ** ** | **%** | ** ** |
| Revenues                                                           |       | $                                    | 156,689      |                     | $          | 222,177 |   | 65,488 |   | 41.8 |   |
| Cost of revenues                                                   |       | 110,319                              |         | 154,602                  |       | 44,283 |   | 40.1 |   |
| Provision for losses (reverse of losses) on  uncompleted contracts |       | 547                                  |         | (459                     | )          | (1,006 | ) | N/A |   |
| Gross profit                                                       |       | $                                    |  45,823 |                     | $          |  68,034 |   | 22,211 |   | 48.5 |   |
| Gross margin                                                       |       | 29.2                                 | %            | 30.6                     | %          |   |   |   |   |

 

#### ***Revenues***

 

Our revenues increased from $156.7 million in the nine months endedSeptember 30, 2003 to $222.2 million in the nine months ended September 30,2004, representing an increase of $65.5 million, or 41.8%. The increase was dueprimarily to the inclusion of $40.0 million of revenues attributable to theacquisition of Apar, effective September 30, 2003, with the remaining $25.5million attributable to an increase in sales.  The $25.5 million sales increase was primarilydue to growth in outsourcing and offshore engagements, representing $16.9million, while $8.6 million was attributable to growth in our other offerings,comprised of system integration and application development, software andconsulting, and quality assurance and training. Revenues from outsourcing andoffshore services increased as a result of volume growth due to our salesinitiatives related to these offerings, including the hiring of key personneland aligning of our organizational structure, and expansion into geographicalareas in which we currently do business but previously had not offeredoutsourcing and offshore services.

 

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

 

Our cost of revenues, including salaries, wages andother direct costs, increased from $110.3 million in the nine months endedSeptember 30, 2003 to $154.6 million in the nine months ended September 30,2004, representing an increase of 40.1%. The increase was due primarily to theacquisition of Apar, representing $28.4 million, and other costs of revenues,representing $14.9 million.  The othercosts of revenues are attributable primarily to growth in delivery staff neededto support our increased revenues. The change in our provision for losses(reverse of losses) on uncompleted contracts decreased from $0.5 million in thenine months ended September 30, 2003 to ($0.5) million in the nine months endedSeptember 30, 2004, as a result of net changes in our fixed price project lossprovisions.

 

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

 

Our gross profit (revenues less cost of revenues and provision forlosses (reverse of losses) on uncompleted contracts) increased from $45.8million in the nine months ended September 30, 2003 to $68.0 million in thenine months ended September 30, 2004, representing an increase of 48.5%. Theincrease was primarily due to the inclusion of $11.6 million of gross profitfrom the Apar acquisition, the increase in our revenues, representing $6.7million, and an increase in our gross margin. Gross margin for the nine monthsended September 30, 2004 was 30.6%, compared to 29.2% in the nine months endedSeptember 30, 2003. The increase in gross margin resulted primarily from anincrease in billable utilization, representing approximately $3.1 million.  We define billable utilization as the totalbillable hours in a period divided by the total available hours of ourprofessionals in that period.

 

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

 
| ** **                    | ** ** | **Nine months ended  September 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|--------------------------|------------|
| ** **                    | ** ** | **2003**                             | ** ** | **2004**                 | ** ** | **$** | ** ** | **%** | ** ** |
| Selling and marketing         |       | $                                    | 15,424     |                     | $          | 18,952 |   | 3,528 |   | 22.9 |   |
| General and administrative    |       | 24,633                               |       | 34,142                   |       | 9,509 |   | 38.6 |   |
| Research and development, net |       | 1,153                                |       | —                   |       | (1,153 | ) | (100.0 | ) |
| Other                         |       | 460                                  |       | —                   |       | (460 | ) | (100.0 | ) |
| Total operating expenses      |       | 41,670                               |       | 53,094                   |       | 11,424 |   | 27.4 |   |
| Operating income              |       | $                                    | 4,153      |                     | $          | 14,940 |   | 10,787 |   | 259.7 |   |

 

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

 

Selling and marketing expenses increased from $15.4 million in the ninemonths ended September 30, 2003 to $19.0 million in the nine months endedSeptember 30, 2004, representing an increase of 22.9%. This increase was dueprimarily to the inclusion of $1.4 million of expenses attributable to the Aparacquisition, a $1.1 million increase in marketing expenses, other increases inour sales expenses of $0.7 million, and a $0.3 million increase in client-basedasset amortization. The increase in marketing expenses related primarily to ourefforts to enhance our brand recognition. The increase in client-based asset amortization was due primarily to anincreased cumulative cost of amortization of client-based assets that we acquiredin connection with the Apar acquisition.

 

#### ***General and administrative***

 

General and administrative expenses increased from$24.6 million in the nine months ended September 30, 2003 to $34.1 million inthe nine months ended September 30, 2004, representing an increase of 38.6%.This increase was due primarily to inclusion of $8.3 million of expensesattributable to the Apar acquisition and other general and administrativeexpenses of $1.2 million. These other general and administrative expenses werenecessary to support our revenue growth.

 

#### ***Research and development, net***

 

Research and development expenses decreased from$1.2 million in the nine months ended September 30, 2003 to no expenses in thenine months ended September 30, 2004. These expenses were comprised solely ofthe development of Ness ISI’s dbMotion system. Following the January 1, 2004issuance of preferred shares by Ness ISI that reduced our share ownership to anon-controlling interest, we no longer consolidate Ness ISI’s results in ourfinancial statements.

 

#### ***Other***

 

Other expenses decreased from $0.5 million in thenine months ended September 30, 2003 to no expenses in the nine months endedSeptember 30, 2004.  The expense in thenine months ended September 30, 2003 resulted from the consolidation of certaincorporate and branch administrative services in the United States.

 

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

 
| ** **                                             | ** ** | **Nine months ended  September 30,** | ** **  | **Increase  (Decrease)** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|-------------|--------------------------|------------|
| ** **                                             | ** ** | **2003**                             | ** **  | **2004**                 | ** ** | **$** | ** ** | **%** | ** ** |
| Operating income                                       |       | $                                    |  4,153 |                     | $          | 14,940 |   | 10,787 |   | 259.7 |   |
| Financial expenses, net                                |       | (1,496                               | )           | (4,327                   | )          | (2,831 | ) | 189.2 |   |
| Other income, net                                      |       | 280                                  |        | 79                       |       | (201 | ) | (71.8 | ) |
| Income before taxes on income                          |       | 2,937                                |        | 10,692                   |       | 7,755 |   | 264.0 |   |
| Taxes on income (tax benefit)                          |       | (35                                  | )           | 958                      |       | 993 |   | N/A |   |
| Equity in net earnings (losses) of  affiliates         |       | 57                                   |        | (651                     | )          | (708 | ) | N/A |   |
| Minority interests in losses (earnings) of  subsidiary |       | 286                                  |        | (65                      | )          | (351 | ) | N/A |   |
| Income from continuing operations                      |       | 3,315                                |        | 9,018                    |       | 5,703 |   | 172.0 |   |
| Loss from discontinued operations                      |       | (746                                 | )           | —                   |       | 746 |   | (100.0 | ) |
| Net income                                             |       | $                                    |  2,569 |                     | $          |  9,018 |   | 6,449 |   | 251.0 |   |

 

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

 

Financial expenses, net, increased from $1.5 millionin the nine months ended September 30, 2003 to $4.3 million in the nine monthsended September 30, 2004, representing an increase of 189.2%. The increase wasdue primarily to an increase in interest expense on long-term bank loans of$2.4 million and other financial expenses of $0.4 million. These otherfinancial expenses related primarily to the higher exchange rate for the dollaragainst the NIS.

 

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

 

Other income, net, decreased from $0.3 million inthe nine months ended September 30, 2003 to $0.1 million in the nine monthsended September 30, 2004. Termination of property in 2003, which resulted in acapital loss, representing an estimated $0.4 million, was the primary expensein the nine months ended September 30, 2003.

 

#### ***Taxes on income (tax benefit)***

 

Our taxes on income (tax benefit) changed from abenefit of $35,000 in the nine months ended September 30, 2003 to taxes of $1.0million in the nine months ended September 30, 2004. This change was due to theincrease in our income before taxes and the depletion of our net operating losscarry forwards in Israel.

 

#### ***Equity in net earnings (losses) of affiliates***

 

Equity in net earnings (losses) of affiliateschanged from earnings of $0.1 million for the nine months ended September 30,2003 to losses of $0.7 million in the nine months ended September 30, 2004.This change was due to the losses of our affiliate, Ness ISI (now known asdbMotion Ltd.), in 2003. Following the January 1, 2004 issuance of preferredshares by Ness ISI that reduced our share ownership to a non-controllinginterest, we no longer consolidate Ness ISI’s results in our financialstatements.

 

#### ***Minority interests in losses (earnings) of subsidiary***

 

Minority interests in losses (earnings) ofsubsidiary changed from earnings of $0.3 million in the nine months endedSeptember 30, 2003 to losses of $0.1 million in the nine months ended September30, 2004. This change was insignificant.

 

#### ***Income from continuing operations***

 

Income from continuing operations increased from$3.3 million in the nine months ended September 30, 2003 to $9.0 million in thenine months ended September 30, 2004, representing an increase of 172%. Theincrease in net income was due primarily to our increase in operating income of$10.8 million, partially offset by our increased financial expenses of $2.8million, the increase in our income taxes of $1.0 million and our decrease inequity in net earnings (losses) of affiliates of $0.7 million.

 

#### ***Loss from discontinued operations***

 

In the nine months ended September 30, 2003, werecognized a net loss after taxes of $0.7 million, compared to no loss for the ninemonths ended September 30, 2004. The loss was attributable to the closing of aninsignificant line of business.

 

#### ***Net income***

 

Net income increased from $2.6 million in the ninemonths ended September 30, 2003 to $9.0 million in the nine months ended September30, 2004, representing an increase of 251%. The increase in net income was dueprimarily to our increase in operating income of $10.8 million and theretirement on December 31, 2003 of losses

 

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from discontinued operations of $0.7 million,partially offset by our increased financial expenses of $2.8 million, theincrease in our income taxes of $1.0 million and our decrease in equity in netearnings (losses) of affiliates of $0.7 million.

 

### **Liquidity and Capital Resources**

 

#### ***Overview***

 

As of September 30, 2004, we had cash and cashequivalents amounting to $40.7 million compared to $46.0 million as of December31, 2003. The funds held at locations outside of the United States are forfuture operating expenses, and we have no intention of repatriating thosefunds. We are not, however, restricted in repatriating those funds back to theUnited States, if necessary. While we expect that cash generated by ournon-U.S. subsidiaries will be reinvested in their respective countries tosupport expansion of our business, to the extent that funds were remitted tothe United States in the form of dividend payments, those payments would besubject to a withholding tax.

 

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

 

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

 
| ** **                                                    | ** ** | **Nine months ended  September 30,** | ** **   |
|---------------------------------------------------------------|------------|--------------------------------------|--------------|
| ** **                                                    | ** ** | **2003**                             | ** **   | **2004** | ** ** |
| Net cash provided by (used in) operating  activities          |       | $                                    |  (9,430 | ) | $ | 4,920 |   |
| Net cash used in investing activities                         |       | (2,525                               | )            | (7,290 | ) |
| Net cash used in financing activities                         |       | (5,936                               | )            | (2,136 | ) |
| Effect of exchange rate changes on cash and  cash equivalents |       | 980                                  |         | (793 | ) |
| Decrease in cash and cash equivalents                         |       | (16,911                              | )            | (5,297 | ) |
| Cash and cash equivalents at the beginning  of the period     |       | 43,494                               |         | 46,004 |   |
| Cash and cash equivalents at the end of the  period           |       | $                                    | 26,583       |   | $ | 40,707 |   |

 

Nine monthsended September 30, 2004 compared to the nine months ended September 30, 2003

 

Net cash provided by operating activities was $4.9million in the nine months ended September 30, 2004, compared to net cash usedof $9.4 million in the nine months ended September 30, 2003. The major factorscontributing to the change in net cash provided by operating activities were anincrease in our net income, representing $6.4 million, and a significantadvance from a customer, representing $3.2 million.

 

Net cash used in investing activities was $7.3million in the nine months ended September 30, 2004, compared with $2.5 millionin the nine months ended September 30, 2003. This increase was primarily due tohigher capital spending on property and equipment, mainly in India,representing $6.6 million, partially offset by the sale of short term bankdeposits, representing $5.4 million.

 

Net cash used in financing activities was $2.1 millionin the nine months ended September 30, 2004, compared with $5.9 million in thenine months ended September 30, 2003. The decrease was primarily due to anincrease in short term loans and credit, representing $8.9 million, partiallyoffset by payment of long term loans, net, representing $5.1 million.

 

The effect of exchange rate changes on cash and cashequivalents was ($0.8) million in the nine months ended September 30, 2004,compared to $1.0 million in the nine months ended September 30, 2003. The changewas

 

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primarily due to the steady exchange rate for thedollar during the nine months ended September 30, 2004 compared to thedeclining exchange rate for the dollar during the nine months ended September30, 2003.

 

#### ***Long-term and Short-term Debt***

 

At September 30, 2004, we had aggregate short-termand long-term bank borrowings of $87.2 million, consisting of various notesdenominated in dollars, Euros and NIS with interest rates (in variouscurrencies and linked to various indices) ranging from approximately 3% to 8%and a weighted average interest rate of approximately 5%, with maturities ofone to four years. These aggregate bank borrowings included $32.9 million fromBank Hapoalim, with interest rates of approximately 3% to 4% and maturities oftwo to four years; $21.1 million from Israel Discount Bank, with interest ratesof approximately 3% to 8% and maturities of one to five years; and $33.2million from seven other lenders, in amounts ranging from $2.6 million to $6.9million, with interest rates of approximately 3% to 8% and maturities of up tofive years. The maximum interest rate for our dollar-linked borrowings isapproximately 6%, and for NIS-linked borrowings is approximately 8%.

 

#### ***Anticipated Capital Expenditures***

 

We intend to use approximately $40 million of theproceeds of our initial public offering to reduce long-term debt and anadditional approximately $5.0 million for expansion of our infrastructure andfacilities in India. Following the use of proceeds, our only materialindebtedness will be amounts owed by Ness Technologies Holdings Ltd., one ofour subsidiaries, to Bank Hapoalim and Israel Discount Bank. The shares of twoof our Israeli subsidiaries are pledged to these banks as security forborrowings under the agreements. The relevant debt instruments containcustomary restrictive covenants relating to the borrower and our wholly-owned subsidiaryNess A.T. Ltd., including the following:

 

•                  limitations onincurring debt;

•                   prohibition onpledging assets;

•                  prohibition ondistributing dividends;

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

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

•                  limitations onmerging or transferring assets.

 

In addition, the Israel Discount Bank agreementrequires that the net cash and liquid assets of the borrower must not be lowerthan $18.0 million. As of September 30, 2004, we are in compliance and expectto remain in compliance with all of our covenants. Our failure to comply withthese covenants could lead to an event of default under the agreementsgoverning some or all of the indebtedness, permitting the applicable lender toaccelerate all borrowings under the applicable agreement, and to foreclose onany collateral.

 

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

 

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

 

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

 

This Quarterly Report on Form 10-Q, includingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, contains forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995.  Forward-looking statements often areproceeded by words such as

 

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“believes,” “expects,” “may,” “anticipates,” “plans,”“intends,” “assumes,” “will” or similar expressions. Forward-looking statementsreflect management’s current expectations, as of the date of this report, andinvolve certain risks and uncertainties. Our actual results could differmaterially from those anticipated in these forward looking statements as aresult of various factors. Some of the factors that could cause future resultsto materially differ from the recent results or those projected inforward-looking statements include the “Risk Factors” described in ourProspectus dated September 29, 2004, as filed with the Securities and ExchangeCommission.

 

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

 

We do not engage in trading market-risk instrumentsor purchasing hedging or “other than trading” instruments that are likely toexpose us to market risk, whether interest rate, commodity price or equityprice risk. We have not purchased options or entered into swaps or forward orfutures contracts. We do not use derivative financial instruments forspeculative trading purposes.

 

We have direct operations in 14 different countriesand relationships in many other parts of the world. Our foreign operationscontract with clients in their applicable local currencies or dollars. As aresult, we are subject to adverse movements in foreign currency exchange ratesin those countries where we conduct business. We may in the future enter intoforward foreign currency exchange or other derivatives contracts to hedge ourexposure to foreign currency exchange rates. We do not currently hedge anyforeign currency exposure to offset the effects of changes in exchange rates.

 

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

 

## ***Item 4. Controls and Procedures***

 

### **Evaluation of disclosurecontrols and procedures**

 

As of September 30, 2004, our chief executiveofficer and chief financial officer evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934, as amended). Based on theirevaluation of our disclosure controls and procedures, our chief executiveofficer and chief financial officer, with the participation of our management,have concluded that our disclosure controls and procedures are effectivelydesigned to ensure that information required to be disclosed by us in thereports that we file or submit under the Securities Exchange Act of 1934, asamended, is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms and areoperating in an effective manner.

 

### **Changes in internal control**

 

As of September 30, 2004, there were no significantchanges in our internal controls over financial reporting or in other factorsthat could significantly affect these controls.

 

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# **PART II – OTHER INFORMATION**

 

## ***Item 2.Changes in Securitie***s, Use of Proceeds andIssuer Purchases of Equity Securities

 

On September 29, 2004, the Securities and ExchangeCommission declared effective our registration statement on Form S-1, asamended (File No. 333-115260), pursuant to which 11,672,000 shares of ourcommon stock, $0.01 par value per share, were offered and sold in our initialpublic offering.  An additional 1,750,800shares were subject to the underwriters’ over-allotment option.  At the closing of our initial public offeringon October 4, 2004, we offered and sold 6,552,774 shares of our common stockand certain selling shareholders offered and sold 5,119,226 shares of ourcommon stock at a price of $12.00 per share for aggregate offering prices of$73.1 million and $57.1 million, respectively. On October 12, 2004, we offered and sold 1,750,800 additional shares ofour common stock at a price of $12.00 per share, for an aggregate offeringprice of $21.0 million, pursuant to the underwriters’ over-allotmentoption.  The managing underwriters inthis offering were Lehman Brothers, Inc., Merrill Lynch, Pierce, Fenner &Smith Incorporated, Friedman, Billings, Ramsey & Co. and Piper Jaffray& Co.

 

Our portion of the net proceeds from the initialpublic offering was approximately $92.7 million. In connection with theoffering, we paid underwriting discounts and commissions of approximately $7.0million and expect to pay approximately $3.0 million in offering expenses. Wedid not receive any proceeds for the sale of the 5,119,226 shares sold byselling shareholders. The proceeds were invested in interest bearing short termsecurities.

 

## ***Item 4.Submission of Matters*** to a Vote of SecurityHolders

 

On September 2, 2004, certain of our stockholderstook action by written consent in lieu of a special meeting of the stockholderspursuant to Section 228 of the Delaware General Corporation Law. In thatwritten consent, our stockholders approved a 0.7193-for-one reverse split ofour common stock, amendments to the dividend provisions of the Certificate ofDesignations of our Class B Convertible Preferred Stock and amendments to theanti-dilution provisions of the Certificate of Designations of our Class CConvertible Preferred Stock, each of which was effected on September 20,2004.  Additionally, our stockholdersadopted our amended and restated certificate of incorporation and our amendedand restated by-laws, which became effective as of the closing of the initialpublic offering, and approved certain matters in respect of our stock optionplans. Holders of 3,196,501 of our then outstanding Class B ConvertiblePreferred Stock, 2,533,205 shares of our then outstanding Class C ConvertiblePreferred Stock, and 14,276,620 shares of our then outstanding common stockapproved the foregoing matters. Holders of 1,480,485 shares of our thenoutstanding Class B Convertible Preferred Stock, 819,449 shares of our thenoutstanding Class B Convertible Preferred Stock and 8,882,705 shares of ourthen outstanding common stock did not sign the consent but received writtennotice of the actions taken pursuant to Section 228 of the Delaware GeneralCorporation Law.

 

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

 

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

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                      |
|--------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| *3.1               |       | Amended and Restated  Certificate of Incorporation of Ness Technologies, Inc.                                                                        |
| *3.2               |       | Amended and Restated  Bylaws of Ness Technologies, Inc.                                                                                              |
| 31.1               |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                 |
| 31.2               |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                 |
| 32.1               |       | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2               |       | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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*   Incorporatedby reference to the Registrant’s Registration Statement on Form S-4 (CommissionFile No. 333-120389) filed with the Commission on November 12, 2004.

 

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# **SIGNATURES**

 

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

 

 
| NESS TECHNOLOGIES, INC. |                   |   |
|-------------------------|------------------------|--------|
| (Registrant)            |                   |   |
|                    |                   |   |
|                    |                   |   |   |
| Date:                   | November 15, 2004 | By:    | /s/ Raviv Zoller |
|                    |                   |   | Raviv Zoller |
|                    |                   |   | Chief Executive Officer, President, Director |
|                    |                   |   | (Principal executive officer) |
|                    |                   |   |   |
|                    |                   |   |   |
| Date:                   | November 15, 2004 | By:    | /s/ Yaron Garmazi |
|                    |                   |   | Yaron Garmazi |
|                    |                   |   | Chief Financial Officer |
|                    |                   |   | (Principal financial and accounting officer) |

 

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# **EXHIBIT INDEX**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                      |
|--------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| *3.1               |       | Amended and Restated  Certificate of Incorporation of Ness Technologies, Inc.                                                                        |
| *3.2               |       | Amended and Restated  Bylaws of Ness Technologies, Inc.                                                                                              |
| 31.1               |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                 |
| 31.2               |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                 |
| 32.1               |       | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2               |       | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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*                 Incorporated by reference tothe Registrant’s Registration Statement on Form S-4 (Commission File No. 333-120389)filed with the Commission on November 12, 2004.

 

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