UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)




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




For
the quarterly period ended March 31, 2009




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




For the
transition period from ________ to ________





Commission
File Number 000-50954









NESS
TECHNOLOGIES, INC.


(Exact
name of registrant as specified in its charter)




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




Ness
Tower


Atidim
High-Tech Industrial Park


Building
4


Tel
Aviv 61580, Israel


Telephone:
+972 (3) 766-6800


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










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




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




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




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




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




As of
April 30, 2009, 38,698,531 shares of the issuer’s common stock, $0.01 par value
per share, were outstanding.










NESS
TECHNOLOGIES, INC. AND SUBSIDIARIES





INDEX




PART
      I – FINANCIAL INFORMATION
                3Item
      1. Financial Statements
                3Consolidated
      Balance Sheets – December 31, 2008 and March 31, 2009
      (Unaudited)
                3Consolidated
      Statements of Income – Three months ended March 31, 2008 and 2009
      (Unaudited)
                5Consolidated
      Statements of Cash Flows – Three months ended March 31, 2008 and 2009
      (Unaudited)
                6Notes
      to Interim Consolidated Financial Statements – March 31, 2009
      (Unaudited)
                8Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                19Overview
                19Recent
      Developments
                20Consolidated
      Results of Operations
                20Three
      Months Ended March 31, 2009 Compared to the Three Months Ended March 31,
      2008
                20Results
      by Business Segment
                23Liquidity
      and Capital Resources
                24Forward-Looking
      Statements and Risk Factors
                26Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                27Item
      4. Controls and Procedures
                27Evaluation
      of Disclosure Controls and Procedures
                27Changes
      in Internal Control Over Financial Reporting
                28PART
      II – OTHER INFORMATION
                29Item
      1. Legal Proceedings
                29Item
      1A. Risk Factors
                29Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                29Item
      3. Defaults upon Senior Securities
                29Item
      4. Submission of Matters to a Vote of Security Holders
                29Item
      5. Other Information
                30Item
      6. Exhibits
                30SIGNATURES
                31EXHIBIT
      INDEX
                32





PART
I – FINANCIAL INFORMATION




Item
1. Financial Statements




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Interim
Consolidated Balance Sheets


U.S.
dollars in thousands





December31,
                  2008
              
              
              March 31,
                  2009(Unaudited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              50,659
              
              
              $
              39,415Restricted
      cash
              
              
              2,331
              
              
              
              2,254Short-term
      bank deposits
              
              
              5,703
              
              
              
              16,353Trade
      receivables, net of allowance for doubtful accounts of $4,287 and $3,976
      at December 31, 2008 and March 31, 2009, respectively
              
              
              200,118
              
              
              
              160,410Unbilled
      receivables
              
              
              35,585
              
              
              
              30,088Other
      accounts receivable and prepaid expenses
              
              
              31,344
              
              
              
              28,654Work
      in progress
              
              
              1,532
              
              
              
              1,997Total
      current assets
              
              
              327,272
              
              
              
              279,171LONG-TERM
      ASSETS:Long-term
      prepaid expenses and other assets
              
              
              6,806
              
              
              
              6,693Unbilled
      receivables
              
              
              9,220
              
              
              
              9,818Deferred
      income taxes, net
              
              
              8,356
              
              
              
              7,656Severance
      pay fund
              
              
              46,478
              
              
              
              41,524Property
      and equipment, net
              
              
              36,733
              
              
              
              33,657Intangible
      assets, net
              
              
              22,073
              
              
              
              18,872Goodwill
              
              
              290,055
              
              
              
              277,974Total
      long-term assets
              
              
              419,721
              
              
              
              396,194Total
      assets
              
              $
              746,993
              
              
              $
              675,365




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


– 3
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Interim
Consolidated Balance Sheets


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





December31,
                  2008
              
              
              March 31,
                  2009(Unaudited)LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Short-term
      bank credit
              
              $
              18,072
              
              
              $
              17,057Current
      maturities of long-term debt
              
              
              7,089
              
              
              
              10,024Trade
      payables
              
              
              47,072
              
              
              
              34,420Advances
      from customers and deferred revenues
              
              
              33,280
              
              
              
              28,516Other
      accounts payable and accrued expenses
              
              
              124,697
              
              
              
              104,374Total
      current liabilities
              
              
              230,210
              
              
              
              194,391LONG-TERM
      LIABILITIES:Long-term
      debt, net of current maturities
              
              
              60,973
              
              
              
              53,113Other
      long-term liabilities
              
              
              6,444
              
              
              
              6,117Deferred
      income taxes
              
              
              2,673
              
              
              
              2,212Accrued
      severance pay
              
              
              55,014
              
              
              
              49,172Total
      long-term liabilities
              
              
              125,104
              
              
              
              110,614COMMITMENTS
      AND CONTINGENT LIABILITIESSTOCKHOLDERS’
      EQUITY:Common
      stock of $0.01 par value –
                Authorized:
      76,500,000 shares at December 31, 2008 and at March 31, 2009;
                Issued:
      39,628,994 at December 31, 2008 and 39,628,994 at March 31,
      2009;
                Outstanding
      39,087,253 at December 31, 2008 and 38,698,531 at March 31,
      2009
              
              
              396
              
              
              
              396Additional
      paid-in capital
              
              
              330,128
              
              
              
              330,999Accumulated
      other comprehensive income (loss)
              
              
              4,614
              
              
              
              (17,887
              )Retained
      earnings
              
              
              58,930
              
              
              
              60,458Treasury
      stock, at cost (541,741 shares at December 31, 2008 and 930,463 at March
      31, 2009)
              
              
              (2,389
              )
              
              
              (3,606
              )Total
      stockholders’ equity
              
              
              391,679
              
              
              
              370,360Total
      liabilities and stockholders’ equity
              
              $
              746,993
              
              
              $
              675,365




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


– 4
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Interim
Consolidated Statements of Income


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





Three months ended
                  March 31,2008
              
              
              2009(Unaudited)
              
              
              (Unaudited)Revenues
              
              $
              159,732
              
              
              $
              136,434Cost
      of revenues
              
              
              114,390
              
              
              
              101,594Gross
      profit
              
              
              45,342
              
              
              
              34,840Selling
      and marketing
              
              
              13,208
              
              
              
              11,161General
      and administrative
              
              
              22,105
              
              
              
              25,457Insurance
      settlement related to 2007 arbitration expense, net of related
      expenses
              
              
              —
              
              
              
              (2,610
              )Commissions
      related to the sale of Israeli SAP sales and distribution
      operations
              
              
              —
              
              
              
              (2,534
              )Total
      operating expenses
              
              
              35,313
              
              
              
              31,474Operating
      income
              
              
              10,029
              
              
              
              3,366Financial
      expenses, net
              
              
              (1,416
              )
              
              
              (1,385
              )Income
      before taxes on income
              
              
              8,613
              
              
              
              1,981Taxes
      on income
              
              
              1,719
              
              
              
              453Net
      income
              
              $
              6,894
              
              
              $
              1,528Basic
      net earnings per share
              
              $
              0.18
              
              
              $
              0.04Diluted
      net earnings per share
              
              $
              0.18
              
              
              $
              0.04





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




Three months ended
                  March 31,2008
              
              
              2009(Unaudited)
              
              
              (Unaudited)Cost
      of revenues
              
              $
              81
              
              
              $
              63Selling
      and marketing
              
              
              56
              
              
              
              57General
      and administrative
              
              
              754
              
              
              
              808




The
accompanying notes are an integral part of the interim consolidated financial
statements.
  – 5
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Interim
Consolidated Statements of Cash Flows


U.S.
dollars in thousands





Three
      months ended
                  March
      31,2008
              
              
              2009(Unaudited)
              
              
              (Unaudited)Cash flows from operating
      activities:Net
      income
              
              $
              6,894
              
              
              $
              1,528Adjustments
      required to reconcile net income to net cash provided by operating
      activities:Stock-based
      compensation-related expenses
              
              
              891
              
              
              
              928Currency
      fluctuation of long-term debt
              
              
              5
              
              
              
              —Depreciation
      and amortization
              
              
              4,118
              
              
              
              4,623Arbitration
      settlement and related charges
              
              
              (9,452
              )
              
              
              —Loss
      on sale of property and equipment
              
              
              19
              
              
              
              173Loss
      from impairment of cost investments
              
              
              —
              
              
              
              75Commissions
      related to the sale of Israeli SAP sales and distribution
      operations
              
              
              —
              
              
              
              (2,534
              )Decrease
      in trade receivables, net
              
              
              10,782
              
              
              
              24,443Decrease
      (increase) in unbilled receivables
              
              
              (5,494
              )
              
              
              1,282Decrease
      (increase) in other accounts receivable and prepaid
    expenses
              
              
              (2,376
              )
              
              
              1,727Decrease
      (increase) in work-in-progress
              
              
              (768
              )
              
              
              31Decrease
      (increase) in long-term prepaid expenses
              
              
              895
              
              
              
              (244
              )Deferred
      income taxes, net
              
              
              1,667
              
              
              
              (1,210
              )Decrease
      in trade payables
              
              
              (2,984
              )
              
              
              (6,532
              )Increase
      (decrease) in advances from customers and deferred
revenues
              
              
              5,341
              
              
              
              (1,675
              )Increase
      in other long-term liabilities
              
              
              428
              
              
              
              153Decrease
      in other accounts payable and accrued expenses
              
              
              (6,812
              )
              
              
              (13,998
              )Decrease
      in accrued severance pay, net
              
              
              (1,243
              )
              
              
              (176
              )Net
      cash provided by operating activities
              
              
              1,911
              
              
              
              8,594Cash flows from investing
      activities:Investment
      in short-term bank deposits, net
              
              
              (1,626
              )
              
              
              (11,148
              )Proceeds
      from sale of property and equipment
              
              
              47
              
              
              
              171Purchase
      of property and equipment and capitalization of software developed for
      internal use
              
              
              (3,504
              )
              
              
              (3,145
              )Net
      cash used in investing activities
              
              
              (5,083
              )
              
              
              (14,122
              )Cash flows from financing
      activities:Exercise
      of options
              
              
              142
              
              
              
              —Repurchase
      of shares
              
              
              —
              
              
              
              (1,217
              )Acquired
      subsidiary’s dividend to its former shareholder
              
              
              (5,714
              )
              
              
              —Short-term
      bank loans and credit, net
              
              
              7,196
              
              
              
              (35
              )Proceeds
      from long-term debt
              
              
              24,961
              
              
              
              —Principal
      payments of long-term debt
              
              
              (1,457
              )
              
              
              (1,731
              )Net
      cash provided by (used in) financing activities
              
              
              25,128
              
              
              
              (2,983
              )


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


– 6
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Interim
Consolidated Statements of Cash Flows


U.S.
dollars in thousands





Three months ended
                  March 31,2008
              
              
              2009(Unaudited)
              
              
              (Unaudited)Effect
      of exchange rate changes on cash and cash equivalents
              
              
              730
              
              
              
              (2,733
              )Increase
      (decrease) in cash and cash equivalents
              
              
              22,686
              
              
              
              (11,244
              )Cash
      and cash equivalents at the beginning of the period
              
              
              43,097
              
              
              
              50,659Cash
      and cash equivalents at the end of the period
              
              $
              65,783
              
              
              $
              39,415





Non-cash
      activityAccrual
      for additional consideration for acquisitions
                  
                  $
                  —
                  
                  
                  $
                  2,984Mark-to-market
      of foreign exchange forward contracts and interest rate
    swap
                  
                  $
                  724
                  
                  
                  $
                  232




The
accompanying notes are an integral part of the interim consolidated financial
statements.
  – 7
–


NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


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




Note
1: General




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




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




Note
2: Significant Accounting Policies




a.
            Unaudited Interim
      Financial Information




The
accompanying consolidated balance sheet as of March 31, 2009, the consolidated
statements of income and the consolidated statements of cash flows for the three
months ended March 31, 2008 and 2009 are unaudited. These unaudited interim
consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles for interim financial information. In
the opinion of management, the unaudited interim consolidated financial
statements include all adjustments of a normal recurring nature necessary for a
fair presentation of our consolidated financial position as of March 31, 2009,
our consolidated results of operations and consolidated cash flows for the three
months ended March 31, 2008 and 2009.




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




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




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




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




b.
            Reclassification




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




c.
            Use of
      estimates




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


– 8
–


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


d.
            Principles of
      consolidation




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




e.
            Fair
      value




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




Assets
and liabilities measured at fair value under SFAS 157 on a recurring basis as of
March 31, 2009 were presented on our consolidated balance sheets as follows (in
thousands):




Total
                
                
                Quoted
                    Pricesin
                    Active
                    Markets
                    for
                    Identical
                    Assets
                    (Level1)
                
                
                Significant
                    Other
                    Observable
                    Inputs
                    (Level2)
                
                
                Significant
                    Unobservable
                    Inputs
                    (Level3)Derivative
      instruments
                
                $
                105
                
                
                $
                —
                
                
                $
                105
                
                
                $
                —Total
assets
                
                $
                105
                
                
                $
                —
                
                
                $
                105
                
                
                $
                —Derivative
      instruments
                
                $
                5,072
                
                
                $
                —
                
                
                $
                5,072
                
                
                $
                —Total
      liabilities
                
                $
                5,072
                
                
                $
                —
                
                
                $
                5,072
                
                
                $
                —




f.
            Impact of recently
      issued accounting
pronouncements




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with U.S. generally accepted accounting principles. This
statement shall be effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting Principles.”
We do not expect the adoption of SFAS 162 to have a material impact on our
consolidated financial statements.




In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments,” which requires the fair value for all
financial instruments within the scope of SFAS No. 107, “Disclosures about Fair
Value of Financial Instruments,” to be disclosed in the interim periods as well
as in annual financial statements. This standard is effective for fiscal
quarters ending after June 15, 2009. We are currently assessing the potential
impact that adoption of this standard may have on our financial
statements.


– 9
–




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


In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly,” which clarifies the objective
and method of fair value measurement even when there has been a significant
decrease in market activity for the asset being measured. This standard is
effective for fiscal quarters ending after June 15, 2009. We are currently
assessing the potential impact that adoption of this standard may have on our
financial statements.




Note
3: Acquisitions




a.
            Goodwill




In the
three months ended March 31, 2009, we reduced our goodwill by $12,081, which
consisted of translation adjustments of $15,065 partially offset by adjustments
with respect to prior-year acquisitions of $2,984.




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




b.
            Pro Forma Financial
      Information




The
following table presents certain combined unaudited statements of income data
for the three months ended March 31, 2008 as if our 2008 acquisition of Logos,
a.s. had occurred on January 1, 2008, after giving effect to purchase accounting
adjustments, including amortization of identifiable intangible
assets:


– 10
–


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


Three months ended
                    March 31, 2008(Unaudited)Revenues
                
                $
                173,210Net
      income
                
                $
                6,646Earnings
      per share:Basic
                
                $
                0.17Diluted
                
                $
                0.17




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




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




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




In the
three months ended March 31, 2009, we recorded income of $2,534, representing
commissions related to the sale of our SAP sales and distribution operations in
Israel to SAP AG in August 2008, in connection with meeting certain performance
criteria for 2008.




Note
6: Accounting for stock-based compensation




During
the three months ended March 31, 2009, we granted options to purchase 193,750
shares of our common stock, at a weighted average fair value of $1.36 per share,
and 40,450 restricted stock units under our 2007 Stock Incentive Plan. The
options were granted at an exercise price of $4.53 per share. The options and
restricted stock units vest over the requisite service period of the
award.




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




– 11
–


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


Black-Scholes
                
                Monte CarloThree months ended
                    March 31,
                
                Three months ended
                    March 31,2008
                
                2009
                
                2008 and 2009(Unaudited)
                
                (Unaudited)
                
                (Unaudited)Dividend
      yield
                0%
                
                0%
                
                0%Expected
      volatility
                31%
                
                38%
                
                29
      – 31%Risk-free
      interest
                2.23%
                
                1.44%
                
                3.05
      – 4.95%Expected
      life (in years)
                3
                
                4.6
                
                N/A




As of
March 31, 2009, options to purchase 5,064,966 shares were outstanding with a
weighted average exercise price of $10.51 per share, and 509,150 restricted
stock units were outstanding. Options, restricted stock and restricted stock
units to purchase 1,947,040 shares were available for future grants as of March
31, 2009.




Total
stock-based compensation expense for the three months ended March 31, 2008 and
2009 was $891 and $928, and the total recognized tax benefit was $36 and $93,
respectively.




As of
March 31, 2009, $6,688 of total unrecognized compensation cost related to
stock-based compensation was expected to be recognized over a period of 1.9
years. The total unrecognized stock-based compensation cost to be recognized in
future periods as of March 31, 2009 does not consider the effect of stock
options that may be issued in subsequent periods.




Note
7: Derivatives




SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS
133”), requires companies to recognize all of their derivative instruments as
either assets or liabilities in the statement of financial position at fair
value. For derivative instruments that are designated and qualify as a fair
value hedge (i.e., they hedge the exposure to changes in the fair value of an
asset or a liability or an identified portion thereof that is attributable to a
particular risk), the gain or loss on the derivative instrument as well as the
offsetting loss or gain on the hedged item attributable to the hedged risk are
recognized in current earnings during the period of the change in fair values.
Derivatives that are designated and qualify as hedges of forecasted transactions
(i.e., cash flow hedges) are carried at fair value with the effective portion of
a derivative’s gain or loss recorded in other comprehensive income and
subsequently recognized in earnings in the same period or periods in which the
hedged forecasted transaction affects earnings.




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




At March
31, 2009, unrealized gains on the open hedging transactions included in other
accounts receivables and prepaid expenses were $105, and unrealized losses on
the open hedging transactions included in other account payables and accrued
expenses were $5,072.


– 12
–


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


Fair
Value Hedging Strategy:




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




Cash
Flow Hedging Strategy:




At March
31, 2009, we held an interest rate swap derivative to convert a certain
floating-rate debt to fixed-rate debt. The interest rate swap derivative
involves an agreement to pay a fixed-rate interest and receive a floating-rate
interest, at specified intervals, calculated on an agreed notional amount that
matches the amount of the original loan and paid on the same installments and
maturity dates. At March 31, 2009, the notional amount of the interest rate swap
was $12,000 and the fair value of the interest rate swap was a liability of
$499. There was no ineffectiveness related to this derivative for the three
months ended March 31, 2009, with all unrealized losses, representing $499,
being deferred in accumulated other comprehensive income (loss). The liability
is presented within other long-term liabilities on the balance sheet at March
31, 2009 as the interest rate swap expires in November 30, 2012.




We enter
into foreign exchange forward contracts to hedge against the effect of exchange
rate fluctuations on forecasted cash flows denominated in Indian Rupees. At
March 31, 2009, the notional amount of foreign exchange forward contracts we
entered into was $31,300 and the fair value of the foreign exchange forward
contracts was a liability of $3,121. There was no ineffectiveness related to
these foreign exchange forward contracts for the three months ended March 31,
2009, with all unrealized losses, representing $3,121, being deferred in
accumulated other comprehensive income (loss). The liability is presented within
other accounts payables and accrued expenses on the balance sheet at March 31,
2009 as the foreign exchange forward contracts mature through March 31, 2010.
During the three months ended March 31, 2009, we recognized loss of $1,860
related to these foreign exchange forward contracts, which were designated and
qualified as cash flow hedge, in our operating income.




Note
8: Commitments and Contingent Liabilities




a.
            Litigation




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




One of
our Israeli subsidiaries is currently involved in legal proceedings with the
Israeli Ministry of Justice (the “MOJ”). The legal proceedings relate to a
contract for the provision of an information system for the MOJ, executed in
November 2005 (the “MOJ Contract”). Following continued disputes, correspondence
and discussions, on February 9, 2009 we filed a claim with the Israeli District
Court located in Jerusalem claiming, among other things, a breach of the MOJ
Contract by the MOJ, including in connection with the MOJ’s demands for
revisions and changes to the software that were not contemplated in the MOJ
Contract. Our claim is for damages in the amount of NIS 20.7 million, or
approximately $4.9 million, using the exchange rate prevailing at the end of the
quarter. On February 11, 2009, the MOJ filed a claim against our Israeli
subsidiary in the Israeli District Court located in Jerusalem claiming, among
other things, that our Israeli subsidiary breached the MOJ Contract and failed
to fulfill its undertakings and obligations set forth therein. The MOJ’s claim
is for damages in the amount of NIS 79.5 million, or approximately $19.0
million, using the exchange rate prevailing at the end of the quarter. The MOJ
and our subsidiary have filed answers to the respective claims. We believe that
we have a substantial legal basis for our claim and valid defenses with respect
to the MOJ’s claim. While we intend to vigorously prosecute our claim and defend
against the MOJ’s claim, we cannot at this point predict the outcome of the
litigation. Adverse decisions in these legal proceedings may materially
adversely affect our financial condition.


– 13
–


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


b.
            Guarantees




Guarantees
are contingent commitments issued by us generally to guarantee our performance
in different projects to our customers, such as tenders. The term of a guarantee
generally is equal to the term of the related projects, which can be as short as
30 days or as long as 8 years. The maximum potential amount of future payments
we could be required to make under our guarantees at December 31, 2008 and March
31, 2009 is $48,146 and $50,917, respectively. We do not hold collateral to
support guarantees except when deemed necessary.




c.
            Liens and
      charges




In order
to obtain loans, credits or other banking services from certain commercial
banks, we signed a negative pledge agreement with these banks. With the consent
of the banks, we recorded a fixed charge on deposits in the amount of $2.3
million held by our Indian subsidiary related to the mark-to-market of foreign
exchange forward contracts.




Note
9: Stockholders’ Equity




a.
            Total comprehensive
      income:




Three months ended
                    March 31,2008
                
                
                2009(Unaudited)
                
                
                (Unaudited)Net
      income
                
                $
                6,894
                
                
                $
                1,528Foreign
      currency translation adjustments, net
                
                
                16,934
                
                
                
                (22,733
                )Unrealized
      income (losses) on foreign exchange forward contracts and interest rate
      swap
                
                
                (724
                )
                
                
                232Comprehensive
      income (loss)
                
                $
                23,104
                
                
                $
                (20,973
                )




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




Three months
                    ended
                    March 31,
                    2009Balance
      as of December 31, 2008
                  
                  $
                  4,000Foreign
      exchange forward contracts entered during the period
                  
                  
                  1,492Loss
      recognized in earnings during the period
                  
                  
                  (1,872
                  )Balance
      as of March 31, 2009
                  
                  $
                  3,620


– 14
–




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


c.
            Option
      exercises:




In the
three months ended March 31, 2009, no options to purchase our common stock were
exercised.




d.
            Treasury
      stock:




During
the three months ended March 31, 2009, we repurchased 388,722 shares of our
common stock on the open market for an aggregate purchase price of
$1,217.




Note
10: Segment Reporting




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




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




Our
operating segments are:




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




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




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




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


– 15
–


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


The table
below presents financial information for our reportable segments:




Three months ended March 31, 2009Software
                  Product
                  Engineering
              
              
              System
                  Integration &
                  Application
                  Development
              
              
              Software
                  Distribution
              
              
              Unallocated
                  Expenses
              
              
              Total(Unaudited)Revenues
      from external customers
              
              $
              24,966
              
              
              $
              103,425
              
              
              $
              8,043
              
              
              $
              —
              
              
              $
              136,434Operating
      income (loss)
              
              $
              4,114
              
              
              $
              2,188
              
              
              $
              2,220
              
              
              $
              (5,156
              )
              
              
              3,366Financial
      expenses, net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,385
              )Income
      before taxes on income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              1,981Three months ended March 31, 2008Software
                  Product
                  Engineering
              
              
              System
                  Integration &
                  Application
                  Development
              
              
              Software
                  Distribution
              
              
              Unallocated
                  Expenses
              
              
              Total(Unaudited)Revenues
      from external customers
              
              $
              20,529
              
              
              $
              124,573
              
              
              $
              14,630
              
              
              $
              —
              
              
              $
              159,732Operating
      income (loss)
              
              $
              1,201
              
              
              $
              10,107
              
              
              $
              967
              
              
              $
              (2,246
              )
              
              
              10,029Financial
      expenses, net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,416
              )Income
      before taxes on income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              8,613




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




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




Three months ended
                        March 31,2008
                    
                    
                    2009(Unaudited)
                    
                    
                    (Unaudited)Revenues
      from sales to unaffiliated customers:Europe
                    
                    $
                    50,231
                    
                    
                    $
                    43,024Israel
                    
                    
                    60,523
                    
                    
                    
                    45,270North
      America
                    
                    
                    41,914
                    
                    
                    
                    42,479Asia
      and the Far East
                    
                    
                    7,064
                    
                    
                    
                    5,661$
                    159,732
                    
                    
                    $
                    136,434


– 16
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


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




December
                    31, 2008
                
                
                March 31,
                    2009(Unaudited)Long-lived
      assets:Europe
                
                $
                117,185
                
                
                $
                110,862Israel
                
                
                125,332
                
                
                
                114,570North
      America
                
                
                98,617
                
                
                
                98,104Asia
      and the Far East
                
                
                7,727
                
                
                
                6,967$
                348,861
                
                
                $
                330,503




Note
11: Income Taxes




As of
March 31, 2009 the total of our unrecognized tax benefits was $3,204, which, if
recognized, would affect our effective tax rates in future periods. Included in
that amount are accrued interest and penalties resulting from such unrecognized
tax benefits of $550 at March 31, 2009. During the three months ended March 31,
2009, we recorded $54 for interest and penalties expenses with respect to
uncertain tax positions. A reconciliation of the beginning and ending amounts of
unrecognized tax benefits as of March 31, 2009 was as follows:




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




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




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




Note
12: Basic and Diluted Net Earnings per Share




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


– 17
–




NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES


Notes
to Interim Consolidated Financial Statements


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




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




Three months ended
                    March 31,2008
                
                
                2009(Unaudited)
                
                
                (Unaudited)Numerator:Net
      income, numerator for basic and diluted per share
                
                $
                6,894
                
                
                $
                1,528Denominator:Weighted
      average number of shares of common stock
                
                
                39,201
                
                
                
                38,922Effect
      of dilutive securities:Employee
      stock options and restricted stock units
                
                
                141
                
                
                
                593Denominator
      for diluted net earnings per share - weighted average assuming exercise of
      options and restricted stock units
                
                
                39,342
                
                
                
                39,515




The total
weighted average number of shares related to the outstanding options excluded
from the calculations of diluted net earnings per share, as they would have been
anti-dilutive for all periods presented, was 4,792,299 for the three months
ended March 31, 2008 and 5,028,064 for the three months ended March 31,
2009.


– 18
–


Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
  You
should read the following discussion and analysis together with our unaudited
consolidated financial statements and the accompanying notes. This discussion
contains forward-looking statements, within the meaning of Section 27A of
Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation
Reform Act of 1995, including statements regarding our expected financial
position, business and financing plans. These statements involve risks and
uncertainties. Our actual results could differ materially from the results
described in or implied by these forward-looking statements as a result of
various factors, including those discussed below and elsewhere in our Annual
Report on Form 10-K filed with the SEC on March 16, 2009, particularly under the
headings “Disclosure Statement” and “Risk Factors.”
  Overview
  We are a
global provider of information technology, or IT, and business services and
solutions with specialized expertise in software product engineering; system
integration, application development and consulting; and software distribution.
We deliver our portfolio of services and solutions using a global delivery model
combining offshore, near-shore and local teams. The primary industries, or
verticals, we serve include high-tech companies and independent software
vendors, or ISVs; utilities and government; financial services; defense and
homeland security; and life sciences and healthcare.
  We have
operations in 18 countries across North America, Europe, Israel and Asia
Pacific. We combine our deep vertical expertise and strong technical
capabilities to provide a complete range of high quality services on a global
scale. By integrating our local and international personnel in focused business
and project teams, we leverage our corporate knowledge and experience,
intellectual property and global infrastructure to develop innovative solutions
for clients across the geographic areas and verticals we serve. Through our
global delivery model, which includes lower-cost offshore and near-shore
delivery capabilities, we can achieve meaningful cost reductions or other
benefits for our clients.
  Our
revenues decreased to $136.4 million for the three months ended March 31, 2009,
from $159.7 million for the three months ended March 31, 2008. Net income
decreased to $1.5 million for the three months ended March 31, 2009 from $6.9
million for the three months ended March 31, 2008.
  The
dollar strengthened by an average of 12% against the New Israeli Shekel and by
an average of 28% against the Euro and other relevant European currencies in the
three months ended March 31, 2009 compared to the three months ended March 31,
2008. We estimate that our revenues were $15.5 million lower and our operating
income was $1.6 million higher in the three months ended March 31, 2009 as a
result of changes in foreign currency exchange rates versus their average rates
for the three months ended March 31, 2008.
  Our
client base is diverse, and we are not dependent on any single client. In the
three months ended March 31, 2009, no client accounted for more than 4% of our
revenues and our largest twenty clients together accounted for approximately 34%
of our revenues. For the three months ended March 31, 2009, the percentage of
our revenues derived in aggregate from agencies of the government of Israel was
13%. Existing clients from prior years generated more than 85% of our revenues
in the three months ended March 31, 2009.
  Our
backlog as of March 31, 2009 was $684 million compared to $791 million as of
March 31, 2008, representing a year-over-year backlog decline of $44 million, a
reduction in the dollar value of our non-U.S. backlog due to the stronger dollar
of $55 million, and the divestiture of a business unit in 2008 with its
associated backlog of $8 million. We achieve backlog through new signings of IT
services projects and outsourcing contracts, including for new and repeat
customers. We recognize backlog as revenue when we perform the services related
to backlog.
  For the
three months ended March 31, 2009, the percentage of our revenues derived from
clients in Europe was 32%; in Israel, 33%; in North America, 31%; and in Asia
Pacific, 4%.
  – 19
–
  As of
March 31, 2009, we had approximately 7,975 employees, including approximately
6,835 IT professionals. Of the 7,975 employees, approximately 2,665 were in
India, 2,655 were in Israel, 1,800 were in Europe, 550 were in North America and
305 were in Asia Pacific.
  Recent
Developments
  None.
  Consolidated
Results of Operations
  The
following table sets forth the items in our consolidated statements of income as
a percentage of revenues for the periods presented.
  Three
      months ended
                      March
      31,2008
                  
                  
                  2009Revenues
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %Cost
      of revenues
                  
                  
                  71.6
                  
                  
                  
                  74.5Gross
      profit
                  
                  
                  28.4
                  
                  
                  
                  25.5Operating
      expenses:Selling
      and marketing
                  
                  
                  8.3
                  
                  
                  
                  8.2General
      and administrative
                  
                  
                  13.8
                  
                  
                  
                  18.7Insurance
      settlement related to 2007 arbitration expense, net of related
      expenses
                  
                  
                  —
                  
                  
                  
                  (1.9
                  )Commissions
      related to the sale of Israeli SAP sales and distribution
      operations
                  
                  
                  —
                  
                  
                  
                  (1.9
                  )Total
      operating expenses
                  
                  
                  22.1
                  
                  
                  
                  23.1Operating
      income
                  
                  
                  6.3
                  
                  
                  
                  2.5Financial
      expenses, net
                  
                  
                  (0.9
                  )
                  
                  
                  (1.0
                  )Income
      before taxes on income
                  
                  
                  5.4
                  
                  
                  
                  1.5Taxes
      on income
                  
                  
                  1.1
                  
                  
                  
                  0.3Net
      income
                  
                  
                  4.3
                  
                  
                  
                  1.1
  Three
Months Ended March 31, 2009 Compared to the Three Months Ended March 31,
2008
  The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
  Three
      months ended
                      March
      31,
                  
                  
                  Increase
                      (Decrease)2008
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  %Revenues
                  
                  $
                  159,732
                  
                  
                  $
                  136,434
                  
                  
                  
                  (23,298
                  )
                  
                  
                  (14.6
                  )Cost
      of revenues
                  
                  
                  114,390
                  
                  
                  
                  101,594
                  
                  
                  
                  (12,796
                  )
                  
                  
                  (11.2
                  )Gross
      profit
                  
                  $
                  45,342
                  
                  
                  $
                  34,840
                  
                  
                  
                  (10,502
                  )
                  
                  
                  (23.2
                  )Gross
      margin
                  
                  
                  28.4
                  %
                  
                  
                  25.5
                  %
  Revenues
  Our
revenues decreased from $159.7 million in the three months ended March 31, 2008
to $136.4 million in the three months ended March 31, 2009, representing a
decrease of $23.3 million, or 14.6%. This decrease was primarily due to foreign
currency translation effects on our non-dollar revenues attributable to the
stronger dollar, representing $15.5 million, a sales downturn in our System
Integration and Application Development segment, primarily in Central and
Eastern Europe, representing $12.3 million, lost revenue from the sale in August
2008 of our Israeli SAP sales and distribution operations, representing $4.7
million, and reduced sales in our Software Distribution segment, representing
$0.8 million, offset by acquisitions, representing $5.3 million, and growth in
our Software Product Engineering segment, representing $4.7
million.
  – 20
–
  Cost
of revenues
  Our cost
of revenues, including salaries, wages and other direct and indirect costs,
decreased from $114.4 million in the three months ended March 31, 2008 to $101.6
million in the three months ended March 31, 2009, representing a decrease of
$12.8 million, or 11.2%. The decrease was due primarily to foreign currency
translation effects on non-dollar expenses attributable to the stronger dollar,
representing $12.8 million, a reduction in our delivery staff in response to our
decrease in revenues, representing $3.2 million, the sale in August 2008 of our
Israeli SAP sales and distribution operations, representing $2.5 million, offset
by acquisitions, representing $4.5 million, and severance expenses in the three
months ended March 31, 2009, mainly in Europe, representing $1.0
million.
  Gross
Profit
  Our gross
profit (revenues less cost of revenues) decreased from $45.3 million in the
three months ended March 31, 2008 to $34.8 million in the three months ended
March 31, 2009, representing a decrease of $10.5 million, or 23.2%. The decrease
was due primarily to the reduction in our revenues, net of lower personnel
costs, representing $5.2 million, foreign currency translation effects on our
non-dollar gross profits attributable to the stronger dollar, representing $2.6
million, lost gross profit from the sale in August 2008 of our Israeli SAP sales
and distribution operations, representing $2.2 million, and severance expenses,
representing $1.0 million, offset by acquisitions, representing $0.8 million.
Gross margin declined from 28.4% in the three months ended March 31, 2008 to
25.5% in the three months ended March 31, 2009 largely as a result of a slowdown
in our Central and Eastern European system integration business, the continued
sales and pricing pressure on our U.S.-based financial services business and
severance expenses.
  The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
  Three
      months ended
                      March
      31,
                  
                  
                  Increase
                      (Decrease)2008
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  %Selling
      and marketing
                  
                  $
                  13,208
                  
                  
                  $
                  11,161
                  
                  
                  
                  (2,047
                  )
                  
                  
                  (15.5
                  )General
      and administrative
                  
                  
                  22,105
                  
                  
                  
                  25,457
                  
                  
                  
                  3,352
                  
                  
                  
                  15.2Insurance
      settlement related to 2007 arbitration expense, net of related
      expenses
                  
                  
                  —
                  
                  
                  
                  (2,610
                  )
                  
                  
                  (2,610
                  )
                  
                  
                  N/ACommissions
      related to the sale of Israeli SAP sales and distribution
      operations
                  
                  
                  —
                  
                  
                  
                  (2,534
                  )
                  
                  
                  (2,534
                  )
                  
                  
                  N/ATotal
      operating expenses
                  
                  
                  35,313
                  
                  
                  
                  31,474
                  
                  
                  
                  (3,839
                  )
                  
                  
                  (10.9
                  )Operating
      income
                  
                  $
                  10,029
                  
                  
                  $
                  3,366
                  
                  
                  
                  (6,663
                  )
                  
                  
                  (66.4
                  )
  Selling
and marketing
  Selling
and marketing expenses decreased from $13.2 million in the three months ended
March 31, 2008 to $11.2 million in the three months ended March 31, 2009,
representing a decrease of $2.0 million, or 15.5%. This decrease was due
primarily to a reduction in our sales and marketing staff in response to our
decrease in revenues, representing $1.3 million, and foreign currency
translation effects on our non-dollar expenses attributable to the stronger
dollar, representing $1.6 million, offset by the inclusion of marketing and
sales expenses from acquisitions, representing $1.7 million.
  General
and administrative
  General
and administrative expenses increased from $22.1 million in the three months
ended March 31, 2008 to $25.5 million in the three months ended March 31, 2009,
representing an increase of $3.4 million, or 15.2%. This increase was due
primarily to severance expenses, representing $1.7 million, increases in our
centers of excellence, IT, human resources, chief delivery office and finance
organizations throughout 2008 needed to support internal initiatives,
representing $2.4 million, and acquisitions, representing $0.4 million, offset
by foreign currency effects on non-dollar expenses attributable to the stronger
dollar, representing $2.7 million.
  – 21
–
  Insurance
settlement related to 2007 arbitration expense, net of related
expenses
  In the
three months ended March 31, 2009, we recorded income of $2.6 million, net of
related expenses, representing an insurance settlement we received from our
liability insurance provider related to the arbitration settlement we recognized
in the fourth quarter of 2007. There was no corresponding income in the three
months ended March 31, 2008.
  Commissions
related to the sale of Israeli SAP sales and distribution
operations
  In the
three months ended March 31, 2009, we recorded income of $2.5 million,
representing commissions related to the sale of our SAP sales and distribution
operations in Israel to SAP AG in August 2008, in connection with meeting
certain performance criteria for 2008. There was no corresponding income in the
three months ended March 31, 2008.
  Operating
Income
  Operating
income decreased from $10.0 million in the three months ended March 31, 2008 to
$3.4 million in the three months ended March 31, 2009, representing a decrease
of $6.7 million, or 66.4%. The major factors contributing to this decrease were
a drop in operating income of our System Integration and Application Development
segment, representing $9.4 million, an increase in unallocated expenses,
representing $3.3 million, and a decrease in operating income of our Software
Distribution segment due to the August 2008 sale of our SAP sales and
distribution operations, representing $1.4 million, offset by an increase in
operating income of our Software Product Engineering segment, representing $1.9
million, income from an insurance settlement, net of related expenses,
recognized by our System Integration and Application Development segment related
to our 2007 arbitration expense, representing $2.6 million, commissions
recognized by our Software Distribution segment related to the August 2008 sale
of our SAP sales and distribution operations, representing $2.5 million, and
foreign currency translation effects on non-dollar operating income attributable
to the stronger dollar, representing $1.6 million. See also “—Results by
Business Segment.”
  The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
  Three
      months ended
                      March
      31,
                  
                  
                  Increase
                      (Decrease)2008
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  %Operating
      income
                  
                  $
                  10,029
                  
                  
                  $
                  3,366
                  
                  
                  
                  (6,663
                  )
                  
                  
                  (66.4
                  )Financial
      expenses, net
                  
                  
                  (1,416
                  )
                  
                  
                  (1,385
                  )
                  
                  
                  31
                  
                  
                  
                  (2.2
                  )Income
      before taxes on income
                  
                  
                  8,613
                  
                  
                  
                  1,981
                  
                  
                  
                  (6,632
                  )
                  
                  
                  (77.0
                  )Taxes
      on income
                  
                  
                  1,719
                  
                  
                  
                  453
                  
                  
                  
                  (1,266
                  )
                  
                  
                  (73.6
                  )Net
      income
                  
                  $
                  6,894
                  
                  
                  $
                  1,528
                  
                  
                  
                  (5,366
                  )
                  
                  
                  (77.8
                  )
  Financial
expenses, net
  Financial
expenses, net, were $1.4 million in the three months ended March 31, 2008
compared to $1.4 million in the three months ended March 31, 2009. There was no
significant change.
  Taxes
on income
  Our taxes
on income decreased from $1.7 million in the three months ended March 31, 2008
to $0.5 million in the three months ended March 31, 2009, representing a
decrease of $1.3 million, or 73.6%. This decrease was due primarily to the
decrease in our taxable income. Our effective tax rate in the three months ended
March 31, 2009 was 22.9%, compared to 20.0% in the three months ended March 31,
2008.
  – 22
–
  Net
Income
  Net
income decreased from $6.9 million in the three months ended March 31, 2008 to
$1.5 million in the three months ended March 31, 2009, representing a decrease
of $5.4 million, or 77.8%. The decrease was due primarily to our decrease in
operating income of $6.7 million, partially offset by our decrease in taxes,
representing $1.3 million.
  Results
by Business Segment
  Our
segment information has been prepared in accordance with SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information.” Operating
segments are defined as components of an enterprise engaging in business
activities about which separate financial information is available that is
evaluated regularly by our chief operating decision-maker in deciding how to
allocate resources and assess performance. Our chief operating decision-maker is
our chief executive officer, who evaluates our performance and allocates
resources based on segment revenues and operating profit.
  In
October 2008, we reorganized our operating segments to correspond to our three
primary service lines, in line with changes made in the company’s management
structure. Segment data for prior periods has been restated to reflect the
current organization of the segments.
  Our
operating segments are:
  1.
                Software Product
      Engineering, in which, through our Software Product Labs business
      unit, we offer software product research and development services. We set
      up these labs for clients and operate them on an ongoing basis, enabling
      us to collaborate with our clients’ engineering teams to extend their
      capacity and budgets throughout the software product life cycle. We locate
      our Software Product Labs predominantly in India and in Central and
      Eastern Europe and we operate them across multiple locations as needed to
      optimize global delivery. They primarily serve customers in North America
      and Europe, and may include team members local to the
    client.
  2.
                System Integration and
      Application Development, in which we offer a broad set of IT
      services to our clients in the areas of system integration, application
      development and consulting. We provide these services in 18 countries
      throughout North America, Europe, Israel and Asia Pacific. We deliver the
      services through a global delivery model that includes local teams as well
      as offshore and near-shore resources. We provide these services for a wide
      range of clients in many verticals, including utilities and government,
      financial services, defense and homeland security, life sciences &
      healthcare, manufacturing and transportation, retail, and
      others.
  3.
                Software Distribution,
      in which, through our NessPRO business unit, we market and sell enterprise
      software licenses of third-party software vendors to corporate clients in
      geographic areas that are partially or totally uncovered by the software
      vendors’ own sales forces. We also provide a range of implementation,
      customization and support services related to those licenses. We resell
      products mostly in Israel, Italy, Spain and Portugal for over 30
      third-party software vendors.
  Segment
operating profit is defined as income from operations, excluding unallocated
headquarters costs. Expenses included in segment operating profit consist
principally of direct selling, general, administrative and delivery costs.
Certain general and administrative expenses, stock-based compensation and a
portion of depreciation are not allocated to specific segments as management
believes they are not directly attributable to any specific segment.
Accordingly, these expenses are categorized as “Unallocated Expenses” and
adjusted against our total income from operations. Additionally, our management
has determined that it is not practical to allocate certain identifiable assets
by segment when such assets are used interchangeably among the
segments.
  – 23
–
  The table
below presents financial information for our reportable segments (dollars in
thousands):
  Three
      months ended
                        March
      31,Segment
      Data (1):
                    
                    2008
                    
                    
                    2009(Unaudited)Revenues:Software
      Product Engineering
                    
                    $
                    20,529
                    
                    
                    $
                    24,966System
      Integration and Application Development
                    
                    
                    124,573
                    
                    
                    
                    103,425Software
      Distribution
                    
                    
                    14,630
                    
                    
                    
                    8,043$
                    159,732
                    
                    
                    $
                    136,434Operating
      Income (Loss):Software
      Product Engineering
                    
                    $
                    1,201
                    
                    
                    $
                    4,114System
      Integration and Application Development
                    
                    
                    10,107
                    
                    
                    
                    2,188Software
      Distribution
                    
                    
                    967
                    
                    
                    
                    2,220Unallocated
      Expenses
                    
                    
                    (2,246
                    )
                    
                    
                    (5,156
                    )$
                    10,029
                    
                    
                    $
                    3,366
 (1)
                Effective
      October 1, 2008, the company reorganized its reportable segments to
      correspond to its three primary service lines. Prior period segment data
      has been reclassified to reflect the current organization of the
      segments.
  Liquidity
and Capital Resources
  Overview
  As of
March 31, 2009, we had cash and cash equivalents, restricted cash and short-term
bank deposits of $58.0 million compared to $58.7 million as of December 31,
2008. The funds held at locations outside of the United States are for future
operating expenses and capital expenditures, and we have no intention of
repatriating those funds. We are not, however, restricted in repatriating those
funds back to the United States, if necessary. While we expect that cash
generated by our non-U.S. subsidiaries will be reinvested locally to support
expansion of our business, to the extent that funds were remitted to the United
States in the form of dividend payments, those payments may be subject to
withholding taxes in their respective countries, and would be subject to tax in
the United States.
  Cash
Flows
  The
following table summarizes our cash flows for the periods presented (dollars in
thousands):
  Three
      months ended
                      March
      31,2008
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)Net
      cash provided by operating activities
                  
                  $
                  1,911
                  
                  
                  $
                  8,594Net
      cash used in investing activities
                  
                  
                  (5,083
                  )
                  
                  
                  (14,122
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  25,128
                  
                  
                  
                  (2,983
                  )Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  730
                  
                  
                  
                  (2,733
                  )Increase
      (decrease) in cash and cash equivalents
                  
                  
                  22,686
                  
                  
                  
                  (11,244
                  )Cash
      and cash equivalents at the beginning of the period
                  
                  
                  43,097
                  
                  
                  
                  50,659Cash
      and cash equivalents at the end of the period
                  
                  $
                  65,783
                  
                  
                  $
                  39,415
  – 24
–
  Three
months ended March 31, 2009 compared to the three months ended March 31,
2008
  Net cash
provided by operating activities was $8.6 million in the three months ended
March 31, 2009, compared to $1.9 million in the three months ended March 31,
2008. The major factors contributing to the increase were an improvement in our
cash collection efforts reflected in a larger decrease in our total trade
receivables, representing $13.7 million, a $9.5 million payment made in the
first quarter of 2008 in respect of a 2007 arbitration settlement with a former
customer for which there was no corresponding amount in the three months ended
March 31, 2009, and a decrease in unbilled receivables in the three months ended
March 31, 2009 compared to an increase in the three months ended March 31, 2008,
representing $6.8 million, offset by a larger decrease in other accounts payable
and accrued expenses, representing $7.2 million, a decrease in advances from
customers and deferred revenues in the three months ended March 31, 2009
compared to an increase in the three months ended March 31, 2008, representing
$7.0 million, lower net income, representing $5.4 million, and a larger decrease
in trade payables, representing $3.5 million.
  Net cash
used in investing activities was $14.1 million in the three months ended March
31, 2009, compared with $5.1 million in the three months ended March 31, 2008.
The major factor contributing to the increase was larger investments in
short-term bank deposits, representing $9.5 million.
  Net cash
used in financing activities was $3.0 million in the three months ended March
31, 2009, compared with net cash provided by financing activities of $25.1
million in the three months ended March 31, 2008. The major factors contributing
to the change were proceeds from new long-term bank loans and short-term bank
credit in the three months ended March 31, 2008 for which there were no
corresponding amounts in the three months ended March 31, 2009, representing
$25.0 million and $7.2 million, respectively, and the repurchase of shares in
the three months ended March 31, 2009 as part of our share repurchase plan, for
which there was no corresponding amount in the three months ended March 31,
2008, representing $1.2 million, offset by an acquired subsidiary’s dividends
paid to its former shareholder in the three months ended March 31, 2008 for
which there was no corresponding amount in the three months ended March 31,
2009, representing $5.7 million.
  The
effect of exchange rate changes on cash and cash equivalents was ($2.7) million
in the three months ended March 31, 2009, compared to $0.7 million in the three
months ended March 31, 2008. The change was primarily due to the effect of
translation adjustments on our net current assets.
  Long-term
and Short-term Debt
  At March
31, 2009, we had a short-term loan in the amount of $8.0 million from a
commercial bank, bearing an interest rate of Libor plus 2.3% and maturing on
April 30, 2009. In addition, at March 31, 2009, we had three long-term loans
taken in 2007 to fund acquisitions: a long-term loan from a commercial bank in
the amount of €9.0 million, or $12.0 million, to fund the acquisition of NessPRO
Italy S.p.A., taken in September 2007; a long-term loan from a commercial bank
in the amount of €13.9 million, or $18.5 million, to fund the acquisition of FMC
Consulting and Informatics Ltd., taken in November 2007; and a long-term loan
from a commercial bank in the amount of $12.0 million to fund the acquisition of
MS9 Consulting LLC, taken in November 2007; as well as a long-term loan from a
commercial bank in the amount of €12.0 million, or $16.0 million, taken in March
2008. The loans mature over five years with principal payments commencing in the
third year, and bear interest at fixed and variable rates paid quarterly. The
long-term loans contain covenants, which, among other things, require a certain
ratio of total financial obligations to consolidated EBITDA and of total
consolidated assets to consolidated stockholders’ equity, and which place
limitations on merging or transferring assets to third parties. Our failure to
comply with the covenants could lead to an event of default under the agreements
governing some or all of the indebtedness, permitting the applicable lender to
accelerate all borrowings under the applicable agreement. As of March 31, 2009,
we were in compliance and expect to remain in compliance with these covenants.
In connection with the above-mentioned covenants, we received the consent of the
commercial banks during 2008 to record a fixed charge on deposits in the amount
of $2.3 million held by our Indian subsidiary related primarily to the
mark-to-market of foreign exchange forward contracts into which we entered to
hedge against the effect of exchange rate fluctuations on cash flows denominated
in Indian Rupee.
  In
addition, one of our Israeli subsidiaries had a long-term loan of NIS 16.8
million, or $4.0 million, from a commercial bank, taken in March 2008, bearing
interest at a fixed rate and maturing over five years, with principal and
interest paid quarterly; and a short-term loan of NIS 30.0 million, or $7.2
million, from a commercial bank, taken in October 2008, bearing interest at a
fixed rate and maturing over one year, paid semi-annually. These loans and bank
guarantees obtained by this Israeli subsidiary contain covenants, which, among
other things, require a minimum stockholders’ equity of this Israeli subsidiary,
and which place limitations on merging, transferring or pledging assets to third
parties. Our failure to comply with the covenants could lead to an event of
default under the agreements governing some or all of the indebtedness,
permitting the applicable lender to accelerate all borrowings under the
applicable agreement and to foreclose on any collateral. As of March 31, 2009,
we were in compliance and expect to remain in compliance with these
covenants.
  – 25
–
  At March
31, 2009, one of our non-U.S. subsidiaries had short-term borrowings denominated
in Euros aggregating to $1.7 million with a weighted average interest rate of
5.97%.
  We
anticipate funding a portion of our global growth through financing from
commercial banks.
  Anticipated
Needs
  We intend
to fund future growth through future cash flow from operations and available
bank borrowings. We believe the borrowings and future cash flow from operations
will be sufficient to fund continuing operations for the foreseeable
future.
  In order
to achieve our strategic business objectives, we may be required to seek
additional financing. For example, future acquisitions may require additional
equity and/or debt financing. In addition, we may require further capital to
continue to enhance our infrastructure and for working capital purposes. These
financings may not be available on acceptable terms, or at all.
  Critical
Accounting Estimates
  Preparation
of our financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. We believe the most complex and sensitive judgments, because of
their significance to our consolidated financial statements, result primarily
from the need to make estimates about the effects of matters that are inherently
uncertain. Management’s Discussion and Analysis and Note 2 to the consolidated
financial statements presented in our 2008 Annual Report on Form 10-K, filed
with the SEC on March 16, 2009, describe the significant accounting estimates
and policies used in preparation of our consolidated financial statements.
Actual results in these areas could differ from management’s estimates. There
were no significant changes in our critical accounting estimates during the
three months ended March 31, 2009.
  Contractual
Obligations
  As of
March 31, 2009, except for the short-term and long-term loans obtained through
March 31, 2009, as described in the long-term and short-term debt section above,
there have been no material changes to the contractual obligations we disclosed
in our 2008 Annual Report on Form 10-K, filed with the SEC on March 16,
2009.
  Forward-Looking
Statements and Risk Factors
  This
Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements often are proceeded by words such as
“believes,” “expects,” “may,” “anticipates,” “plans,” “intends,” “assumes,”
“will” or similar expressions. Forward-looking statements reflect management’s
current expectations, as of the date of this report, and involve certain risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward looking statements as a result of various factors.
Some of the factors that could cause future results to materially differ from
the recent results or those projected in forward-looking statements include the
“Risk Factors” described in our 2008 Annual Report on Form 10-K filed with the
SEC on March 16, 2009. We are under no obligation, and expressly disclaim any
obligation, to update or alter such forward-looking statements, whether as a
result of such changes, new information, subsequent events or
otherwise.
  – 26
–
  Item
3. Quantitative and Qualitative Disclosures About Market Risk
  We have
operations in 18 different countries and commercial relationships in many other
parts of the world. Our foreign operations contract with clients using
applicable local currencies, Euros or dollars. As a result, we are subject to
adverse movements in foreign currency exchange rates in countries in which we
conduct business. Our earnings are predominantly affected by fluctuations in the
value of the U.S. dollar as compared to the New Israeli Shekel, the Indian
Rupee, the Euro and the Czech Crown; and to some extent by fluctuations in
intra-European currency rates.
  As an
example, a decrease of 10% in the value of the New Israeli Shekel relative to
the U.S. dollar in the first quarter of 2009 would have resulted in an increase
in the U.S. dollar reporting value of our operating income of $0.2 million for
that period, while an increase of 10% in the value of the New Israeli Shekel
relative to the U.S. dollar in the first quarter of 2009 would have resulted in
a decrease in the U.S. dollar reporting value of our operating income of $0.3
million for that period.
  In order
to reduce the effect of such movements on our earnings, we utilize certain
foreign exchange forward contracts to hedge our exposure against the Indian
Rupee. In the future, we may enter into additional forward foreign currency
exchange or other derivatives contracts to further hedge our exposure to foreign
currency exchange rates.
  During
the first quarter of 2008 we entered into an interest rate swap derivative to
convert a certain floating-rate debt to fixed-rate debt. Our interest rate swap
derivative involves an agreement to pay a fixed-rate interest and receive a
floating-rate interest, at specified intervals, calculated on an agreed notional
amount that matches the amount of the original loan and paid on the same
installments and maturity dates.
  Other
than as described above, we do not engage in trading market risk sensitive
instruments or purchase hedging or “other than trading” instruments that are
likely to expose us to market risk, whether interest rate, commodity price or
equity price risk, nor have we purchased options or entered into swaps or
forward or futures contracts, nor do we use derivative financial instruments for
speculative trading purposes.
  In the
future, we may be subject to interest rate risk on our investments and loans,
which would affect their carrying value.
  Item
4. Controls and Procedures
  Evaluation
of Disclosure Controls and Procedures
  As of the
end of the period covered by this report, our chief executive officer and chief
financial officer evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).
Based on their evaluation of our disclosure controls and procedures, our chief
executive officer and chief financial officer, with the participation of our
management, have concluded that our disclosure controls and procedures were
effective as of March 31, 2009 to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms and are operating in an effective
manner.
  It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events. Given these and
other inherent limitations of control systems, there is only reasonable
assurance that our controls will succeed in achieving their stated goals under
all potential future conditions.
  – 27
–
  Changes
in Internal Control Over Financial Reporting
  As of the
end of the period covered by this report, there were no changes in our internal
controls over financial reporting, or in other factors that could significantly
affect these controls, that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
  – 28
–
  PART
II – OTHER INFORMATION
  Item
1. Legal Proceedings
  We are
periodically a party to routine litigation incidental to our business. Other
than as disclosed below, we do not believe that we are a party to any pending
legal proceeding that is likely to have a material adverse effect on our
business, financial condition or results of operations.
  One of
our Israeli subsidiaries is currently involved in legal proceedings with the
Israeli Ministry of Justice (the “MOJ”). The legal proceedings relate to a
contract for the provision of an information system for the MOJ, executed in
November 2005 (the “MOJ Contract”). Following continued disputes, correspondence
and discussions, on February 9, 2009 we filed a claim with the Israeli District
Court located in Jerusalem claiming, among other things, a breach of the MOJ
Contract by the MOJ, including in connection with the MOJ’s demands for
revisions and changes to the software that were not contemplated in the MOJ
Contract. Our claim is for damages in the amount of NIS 20.7 million, or
approximately $4.9 million, using the exchange rate prevailing at the end of the
quarter. On February 11, 2009, the MOJ filed a claim against our Israeli
subsidiary in the Israeli District Court located in Jerusalem claiming, among
other things, that our Israeli subsidiary breached the MOJ Contract and failed
to fulfill its undertakings and obligations set forth therein. The MOJ’s claim
is for damages in the amount of NIS 79.5 million, or approximately $19.0
million, using the exchange rate prevailing at the end of the quarter. The MOJ
and our subsidiary have filed answers to the respective claims. We believe that
we have a substantial legal basis for our claim and valid defenses with respect
to the MOJ’s claim. While we intend to vigorously prosecute our claim and defend
against the MOJ’s claim, we cannot at this point predict the outcome of the
litigation. Adverse decisions in these legal proceedings may materially
adversely affect our financial condition.
  Item
1A. Risk Factors
  There are
no material changes in the risk factors previously disclosed in our Annual
Report on Form 10-K filed with the SEC on March 16, 2009.
  Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
  On
November 3, 2008, we announced that our board of directors had authorized a
stock repurchase program, under which we may repurchase up to 4,000,000 shares
of our common stock, or approximately 10% of the outstanding shares, in the
succeeding twelve months. During the quarter ended March 31, 2009, we purchased
a total of 388,722 shares at an average price of $3.13 per share, for an
aggregate purchase price of $1,217,317. As of March 31, 2009, the remaining
authorized number of shares that may be repurchased under the plan was
3,069,537.
  Period
                    
                    Total
                        Number
      of
                        Shares
                        Repurchased
                    
                    
                    Average
                        Price
      Paid
                        per
      Share
                    
                    
                    Total
      Number of Shares
                        Purchased
      as Part of
                        Publicly
      Announced
                        Plans
      or Programs
                    
                    
                    Maximum
      Number of
                        Shares
      that May Yet Be
                        Purchased
      Under the
                        Plans
      or ProgramsJanuary
      1-31, 2009
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,458,259February
      1-28, 2009
                    
                    
                    383,922
                    
                    
                    $
                    3.14
                    
                    
                    
                    383,922
                    
                    
                    
                    3,074,337March
      1-31, 2009
                    
                    
                    4,800
                    
                    
                    $
                    2.74
                    
                    
                    
                    4,800
                    
                    
                    
                    3,069,537Total
                    
                    
                    388,722
                    
                    
                    $
                    3.13
                    
                    
                    
                    930,463
                    
                    
                    
                    3,069,537
  Item
3. Defaults upon Senior Securities
  None.
  Item
4. Submission of Matters to a Vote of Security Holders
  None.
  – 29
–
  Item
5. Other Information
  None.
  Item
6. Exhibits
  The
following is a list of exhibits filed as part of this Form 10-Q:
  Exhibit Number
                  
                  Description31.1
                  
                  Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                  
                  Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                  
                  Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
                  
                  Certification
      of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.
  – 30
–
  SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
  NESS
      TECHNOLOGIES, INC.(Registrant)Date:
      May 8, 2009
                By:
                /s/ Issachar
      GerlitzIssachar
      GerlitzChief
      Executive Officer, President, Director(principal
      executive officer)Date:
      May 8, 2009
                By:
                /s/ Ofer
      SegevOfer
      SegevExecutive
      Vice President and Chief Financial Officer(principal
      financial and accounting
officer)
  – 31
–
  EXHIBIT
INDEX
  Exhibit Number
                  
                  Description31.1
                  
                  Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                  
                  Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                  
                  Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
                  
                  Certification
      of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.