**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
  
  **FORM
        10-Q**
 
 (Mark
        One)
  x
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
  **For
        the quarterly period ended June 30, 2007**
  o
              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
                incorporation
                  or organization)
              
              (I.R.S.
                  Employer
                Identification
                  Number)
 
 **Ness
        Tower**
 **Atidim
        High-Tech Industrial Park**
 **Building
        4**
 **Tel
        Aviv 61580, Israel**
 **Telephone:
        +972 (3) 766-6800**
 (Address
        of registrant’s principal executive offices and registrant’s telephone number,
        including area code)


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 is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
 Large
        accelerated filer o Accelerated
        filer x Non-accelerated
        filer  ̈
  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
        July 31, 2007, 39,192,916 shares of common stock, $0.01 par value per share,
        were outstanding.
  
  
  **NESS
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 
 **INDEX**
  PART
                  I - FINANCIAL INFORMATION
              3Item
                  1. Financial Statements
              3Condensed
                  Consolidated Balance Sheets –
                  December
                  31, 2006 and June 30, 2007 (Unaudited)
              3Condensed
                  Consolidated Statements of Income – Three and six months ended June 30,
                  2006 and 2007 (Unaudited)
              5Condensed
                  Consolidated Statements of Cash Flows – Six months ended June 30, 2006 and
                  2007 (Unaudited)
              6Notes
                  to Interim Condensed Consolidated Financial Statements – June 30, 2007
                  (Unaudited)
              8Item
                  2. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations
              17Overview
              17Recent
                  Developments
              18Consolidated
                  Results of Operations
              18Three
                  Months Ended June 30, 2007 Compared to the Three Months Ended June
                  30,
                  2006
              19Six
                  Months Ended June 30, 2007 Compared to the Six Months Ended June
                  30,
                  2006
              21Results
                  by Business Segment
              23Liquidity
                  and Capital Resources
              24Forward-Looking
                  Statements and Risk Factors
              27Item
                  3. Quantitative and Qualitative Disclosure about Market
                  Risk
              27Item
                  4. Controls and Procedures
              27Evaluation
                  of Disclosure Controls and Procedures
              27Changes
                  in Internal Control
              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
  –
2
            –
  **PART
        I**–**FINANCIAL INFORMATION**
  ***Item
        1. Financial Statements***
 **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Interim
        Condensed Consolidated Balance Sheets**
 
 **U.S.
        dollars in thousands**
 
 **December
                  31,**
                **2006**
              
              **June
                  30,**
                **2007****(Unaudited)**ASSETSCURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              46,675
              
              $
              32,724Restricted
                  cash
              
              
              518
              
              
              582Short-term
                  bank deposits
              
              
              1,509
              
              
              520Trade
                  receivables (net of allowance for doubtful accounts of $2,812 and
                  $2,386
                  at December 31, 2006 and June 30, 2007, respectively)
              
              
              136,952
              
              
              136,902Unbilled
                  receivables
              
              
              28,846
              
              
              41,857Other
                  accounts receivable and prepaid expenses
              
              
              15,862
              
              
              23,573Inventories
              
              
              177
              
              
              1,116Total
                  current assets
              
              
              230,539
              
              
              237,274LONG-TERM
                  ASSETS:Long-term
                  prepaid expenses and other assets
              
              
              6,480
              
              
              7,451Investments
                  at cost
              
              
              1,193
              
              
              1,251Unbilled
                  receivables
              
              
              14,985
              
              
              9,540Deferred
                  income taxes, net
              
              
              7,529
              
              
              5,911Severance
                  pay fund
              
              
              42,321
              
              
              42,670Total
                  long-term assets
              
              
              72,508
              
              
              66,823PROPERTY
                  AND EQUIPMENT, NET
              
              
              28,279
              
              
              29,733INTANGIBLE
                  ASSETS, NET
              
              
              8,336
              
              
              7,449GOODWILL
              
              
              201,718
              
              
              204,143Total
                  assets
              
              $
              541,380
              
              $
              545,422
   The
        accompanying notes are an integral part of the interim condensed consolidated
        financial statements.
  –
3
            –
  **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Interim
        Condensed Consolidated Balance Sheets**
 
 **U.S.
        dollars in thousands (except share and par value data)**
 **December
                      31,**
                    **2006**
                  
                  **June
                      30,**
                    **2007****(Unaudited)**LIABILITIES
                      AND STOCKHOLDERS' EQUITYCURRENT
                      LIABILITIES:Short-term
                      bank credit
                  
                  $
                  4,477
                  
                  $
                  8,023Current
                      maturities of long-term debt
                  
                  
                  4,420
                  
                  
                  3,684Trade
                      payables
                  
                  
                  42,602
                  
                  
                  35,865Advances
                      from customers and deferred revenues
                  
                  
                  30,364
                  
                  
                  33,079Other
                      accounts payable and accrued expenses
                  
                  
                  76,128
                  
                  
                  64,867Total
                      current liabilities
                  
                  
                  157,991
                  
                  
                  145,518LONG-TERM
                      LIABILITIES:Long-term
                      debt and other liabilities, net of current maturities
                  
                  
                  3,703
                  
                  
                  4,323Accrued
                      severance pay
                  
                  
                  47,031
                  
                  
                  48,226Total
                      long-term liabilities
                  
                  
                  50,734
                  
                  
                  52,549COMMITMENTS
                      AND CONTINGENT LIABILITIESSTOCKHOLDERS'
                      EQUITY:Common
                      Stock of $0.01 par value -
                    Authorized:
                      76,500,000 shares at December 31, 2006 and at June 30, 2007;Issued and outstanding: 38,638,682 shares at December 31, 2006
                      and
                      39,176,244 shares at June 30, 2007
                  
                  
                  387
                  
                  
                  392Additional
                      paid-in capital
                  
                  
                  317,799
                  
                  
                  321,323Accumulated
                      other comprehensive income (loss)
                  
                  
                  (415
                  )
                  
                  2,378Retained
                      earnings
                  
                  
                  14,884
                  
                  
                  23,262Total
                      stockholders' equity
                  
                  
                  332,655
                  
                  
                  347,355Total
                      liabilities and stockholders' equity
                  
                  $
                  541,380
                  
                  $
                  545,422
  The
        accompanying notes are an integral part of the interim condensed consolidated
        financial statements.
  –
4
            –
  **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Interim
        Condensed Consolidated Statements of Income**
 
 **U.S.
        dollars in thousands (except per share data)**
 
 **Three
                  months ended**
                **June
                  30,**
              
              **Six
                  months ended**
                **June
                  30,****2006**
              
              **2007**
              
              **2006**
              
              **2007****(Unaudited)**
              
              **(Unaudited)**Revenues
              
              $
              116,614
              
              $
              125,762
              
              $
              223,656
              
              $
              251,540Cost
                  of revenues (*)
              
              
              83,981
              
              
              89,677
              
              
              159,697
              
              
              179,353Gross
                  profit
              
              
              32,633
              
              
              36,085
              
              
              63,959
              
              
              72,187Operating
                  expenses:Selling
                  and marketing (*)
              
              
              8,733
              
              
              9,293
              
              
              17,224
              
              
              18,765General
                  and administrative (*)
              
              
              16,426
              
              
              21,367
              
              
              31,356
              
              
              41,281Total
                  operating expenses
              
              
              25,159
              
              
              30,660
              
              
              48,580
              
              
              60,046Operating
                  income
              
              
              7,474
              
              
              5,425
              
              
              15,379
              
              
              12,141Financial
                  income (expenses), net
              
              
              (577
              )
              
              (74
              )
              
              (638
              )
              
              315Other
                  income (expenses), net
              
              
              483
              
              
              (62
              )
              
              444
              
              
              (56
              )Income
                  before taxes on income
              
              
              7,380
              
              
              5,289
              
              
              15,185
              
              
              12,400Taxes
                  on income
              
              
              1,340
              
              
              1,126
              
              
              2,808
              
              
              2,522Equity
                  in net losses of an affiliate
              
              
              (90
              )
              
              —
              
              
              (90
              )
              
              —Net
                  income
              
              $
              5,950
              
              $
              4,163
              
              $
              12,287
              
              $
              9,878Basic
                  net earnings per share
              
              $
              0.17
              
              $
              0.11
              
              $
              0.35
              
              $
              0.25Diluted
                  net earnings per share
              
              $
              0.16
              
              $
              0.11
              
              $
              0.34
              
              $
              0.25
  
 (*)  Includes
        stock-based compensation to employees, as follows:
  **Three
                  months ended**
                **June
                  30,**
              
              **Six
                  months ended**
                **June
                  30,****2006**
              
              **2007**
              
              **2006**
              
              **2007****(Unaudited)**
              
              **(Unaudited)**Cost
                  of revenues
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              85Selling
                  and marketing
              
              
              —
              
              
              17
              
              
              —
              
              
              39General
                  and administrative
              
              
              146
              
              
              211
              
              
              318
              
              
              480
  The
        accompanying notes are an integral part of the interim condensed consolidated
        financial statements.
  –
5
            –
  **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Interim
        Condensed Consolidated Statements of Cash Flows**
 
 **U.S.
        dollars in thousands**
  **Six
                  months ended**
                **June
                  30,****2006**
              
              **2007****(Unaudited)**Cash
                  flows from operating activities:Net
                  income
              
              $
              12,287
              
              $
              9,878Adjustments
                  required to reconcile net income to net cash used in operating
                  activities:Stock-based
                  compensation-related expenses
              
              
              318
              
              
              604Equity
                  in net losses of an affiliate
              
              
              90
              
              
              —Currency
                  fluctuation of long-term debt
              
              
              88
              
              
              24Depreciation
                  and amortization
              
              
              5,641
              
              
              5,853Deferred
                  income taxes, net
              
              
              (586
              )
              
              454Loss
                  (gain) on sale of property and equipment
              
              
              (139
              )
              
              101Excess
                  tax benefits related to exercise of options
              
              
              —
              
              
              (308
              )Decrease
                  (increase) in trade receivables, net
              
              
              (3,622
              )
              
              421Increase
                  in unbilled receivables
              
              
              (11,581
              )
              
              (7,194
              )Decrease
                  (increase) in other accounts receivable and prepaid expenses
              
              
              332
              
              
              (8,940
              )Decrease
                  (increase) in inventories
              
              
              2,080
              
              
              (945
              )Increase
                  in long-term prepaid expenses and other assets
              
              
              (614
              )
              
              (771
              )Decrease
                  in trade payables
              
              
              (13,844
              )
              
              (7,191
              )Increase
                  in advances from customers and deferred revenues
              
              
              2,802
              
              
              2,633Decrease
                  in other accounts payable and accrued expenses
              
              
              (12,141
              )
              
              (1,302
              )Increase
                  (decrease) in accrued severance pay, net
              
              
              (242
              )
              
              877Net
                  cash used in operating activities
              
              
              (19,131
              )
              
              (5,806
              )Cash
                  flows from investing activities:Net
                  cash paid for acquisition of a consolidated subsidiary
              
              
              (13,683
              )
              
              (2,495
              )Proceeds
                  from sale of cost investment, net
              
              
              —
              
              
              1,866Additional
                  payments in connection with acquisitions of subsidiaries in prior
                  periods
              
              
              (5,277
              )
              
              (10,241
              )Proceeds
                  from maturity of (investment in) short-term bank deposits
              
              
              16,089
              
              
              1,036Proceeds
                  from sale of available-for-sale marketable securities
              
              
              2,779
              
              
              —Proceeds
                  from sale of property and equipment
              
              
              651
              
              
              222Purchase
                  of property and equipment and capitalization of software development
                  costs
                  for internal use
              
              
              (4,514
              )
              
              (4,980
              )Capitalization
                  of software development costs
              
              
              (255
              )
              
              —Net
                  cash used in investing activities
              
              
              (4,210
              )
              
              (14,592
              )
  The
        accompanying notes are an integral part of the interim condensed consolidated
        financial statements.
  –
6
            –
  **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Interim
        Condensed Consolidated Statements of Cash Flows**
 
 **U.S.
        dollars in thousands**
 **Six
                    months ended**
                  **June
                    30,****2006**
                
                **2007****(Unaudited)**Cash
                    flows from financing activities:Exercise
                    of options
                
                $
                5,954
                
                $
                2,273Excess
                    tax benefits related to exercise of options
                
                
                —
                
                
                308Short-term
                    bank loans and credit, net
                
                
                20,014
                
                
                3,587Principal
                    payments of long-term debt
                
                
                (1,487
                )
                
                (1,821
                )Net
                    cash provided by financing activities
                
                
                24,481
                
                
                4,347Effect
                    of exchange rate changes on cash and cash equivalents
                
                
                (1,898
                )
                
                2,100Decrease
                    in cash and cash equivalents
                
                
                (758
                )
                
                (13,951
                )Cash
                    and cash equivalents at the beginning of the period
                
                
                33,579
                
                
                46,675Cash
                    and cash equivalents at the end of the period
                
                $
                32,821
                
                $
                32,724
  
 *Non-cash
                    financing activity*
 Receivables
                    for exercise of options granted to employees
                
                $
                —
                
                $
                457Reclassification
                    to equity of redeemable options accrual upon partial exercise
                    of
                    options
                
                $
                1,868
                
                $
                —
 The
        accompanying notes are an integral part of the interim condensed consolidated
        financial statements.
  –
7
            –
  **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
        to Interim Condensed 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 Israel, the United States,
        Europe and Asia.
  We
        are a
        global provider of information technology (“IT”) services and solutions designed
        to help clients improve their competitiveness and effectiveness. Our portfolio
        of solutions and services includes system integration and application
        development, outsourcing, software and consulting, and quality assurance
        and
        training. Offshore services and development are a significant component of
        each
        of these categories. We and our subsidiaries primarily serve the following
        vertical markets: government and defense, financial services, life sciences
        and
        healthcare, telecommunications and utilities, and independent software
        vendors.
  ***Note
        2: Significant Accounting Policies***
  a.
              Unaudited
                  Interim Financial Information
  The
        accompanying condensed consolidated balance sheet as of June 30, 2007, the
        condensed consolidated statements of income for the three and six months
        ended
        June 30, 2006 and 2007, and the condensed consolidated statements of cash
        flows
        for the six months ended June 30, 2006 and 2007 are unaudited. These unaudited
        interim condensed 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
        condensed consolidated financial statements include all adjustments of a
        normal
        recurring nature necessary for a fair presentation of our consolidated financial
        position as of June 30, 2007, our consolidated results of operations for
        the
        three and six months ended June 30, 2006 and 2007, and our consolidated cash
        flows for the six months ended June 30, 2006 and 2007.
  The
        balance sheet at December 31, 2006 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, 2006 included in our Annual Report on Form 10-K filed with the
        U.S.
        Securities and Exchange Commission (“SEC”) on March 14, 2007.
  Results
        for the three and six months ended June 30, 2007 are not necessarily indicative
        of results that may be expected for the year ending December 31,
        2007.
  Unless
        otherwise noted, all references to “dollars” or “$” are to United States dollars
        and all references to “NIS” are to New Israeli Shekels.
  b.
              Reclassification
  Certain
        prior period amounts have been reclassified to conform to the current period
        presentation.
 –
8
            –
  **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
        to Interim Condensed Consolidated Financial
        Statements**
 
 **U.S.
        dollars in thousands (except share and per share data)
        (Unaudited)**
 c.
                Use
                    of estimates
  The
          preparation of financial statements in conformity with generally accepted
          accounting principles requires management to make estimates and assumptions
          that
          affect the amounts reported in the financial statements and accompanying
          notes.
          Actual results could differ from those estimates.
 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.
              Acquisition
                  of subsidiaries
 1.
                NessPRO
                    Thailand
 On
        May
        15, 2007, we acquired all of the outstanding shares of Advanced Industrial
        Management Company Limited (“AIM”), a privately-held software distributor in
        Thailand, for a purchase price of $2,400 in cash and related purchase costs
        of
        $192. Additional payments totaling $1,350 may be made in 2008 and 2009, should
        AIM achieve certain business goals by the end of 2007 and 2008, respectively.
        AIM became a wholly-owned subsidiary of our U.S. subsidiary, NessPRO Inc.
        Upon
        completion of the acquisition, AIM changed its name to NessPRO Thailand
        Ltd.
  The
        purchase price was allocated to tangible and intangible assets acquired and
        liabilities assumed based on their respective fair value. As part of the
        allocation, $1,905 was allocated to goodwill and workforce and $766 was
        allocated to amortizable intangible assets, license agreement and customer
        relations, that are being amortized over their estimated useful lives of
        five
        and six years, respectively. The goodwill related to the acquisition is
        nondeductible for tax purposes. The results of the aforementioned acquisition
        are included in our consolidated financial statements for the period subsequent
        to the acquisition date. Significant liabilities assumed included accounts
        payable and other accrued expenses in a total amount of approximately $542.
        We
        also recorded a deferred tax liability of $260 for the difference between
        the
        assigned values and the tax bases of the license agreement and customer
        relations acquired. The acquisition does not have a material effect on pro
        forma
        financial data.
  2.
              The
                  following table presents certain combined unaudited statements
                  of income
                  data for the three and six months ended June 30, 2006 as if the
                  acquisitions of Ness IBS and NessPRO Spain had occurred on January
                  1,
                  2006, after giving effect to purchase accounting adjustments, including
                  amortization of identifiable intangible
                  assets:
  **Three
                  months ended****June
                  30, 2006**
              
              **Six
                  months ended****June
                  30, 2006****(unaudited)**
              
              **(unaudited)**Revenues
              
              $
              117,985
              
              $
              231,975Net
                  income
              
              $
              5,884
              
              $
              11,734Earnings
                  per share:Basic
              
              $
              0.17
              
              $
              0.33Diluted
              
              $
              0.16
              
              $
              0.32
 
 –
9
            –
   **NESS
          TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
          to Interim Condensed Consolidated Financial
          Statements**
 
 **U.S.
          dollars in thousands (except share and per share data)
          (Unaudited)**
 f.
                Goodwill
  On
          January 1, 2007 we realigned our segments slightly (see Note 5). There
          was no
          significant effect on the allocation of goodwill between the
          segments.
 In
        the
        six month period ended June 30, 2007, we recorded additional goodwill and
        workforce resulting from the acquisition of NessPRO Thailand representing
        $1,905.
  g.
              Accounting
                  for stock-based compensation
  During
        the six months ended June 30, 2007, we granted options to purchase 1,041,200
        shares of our Common Stock under our U.S. and Israeli 2003 Stock Option Plans
        and our 2007 Stock Option Plan at a weighted average exercise price of $13.84
        per share and a weighted average fair value of $5.03 per share.
  Included
        are 666,000 options granted to our senior management. These options vest
        in
        accordance with certain performance conditions through April 1, 2010. From
        April
        1, 2010 to April 30, 2010, the grantees have the right to redeem the vested
        unexercised options outstanding on April 1, 2010 at the price of $4.50 per
        each
        outstanding option. Given the specific characteristics of the options, we
        used a
        Monte Carlo simulation in order to estimate their fair value. We believe
        this
        valuation technique produces a better estimate of fair values than the closed
        form option pricing model, considering the guidance provided in FASB 123(R).
        We
        accounted for these options as tandem awards. The fair value assigned to
        the
        redemption feature will be marked to market in each reporting period. During
        the
        six months ended June 30, 2007, $113 of
        stock-based compensation expense related to these options was recorded
        against liability.
  At
        June
        30, 2007, options to purchase 3,371,294 shares are outstanding with a weighted
        average exercise price of $11.85 per share and options to purchase 2,709,038
        shares are available for future grants.
  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 was
        calculated based upon actual historical stock price movements. The expected
        term
        of options granted is based upon historical experience and represents the
        period
        of time that options granted are expected to be outstanding. 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 have no foreseeable plans
        to
        pay dividends. The fair value was estimated at the date of grant using the
        following assumptions:
  **Black-Scholes**
              
              **Monte
                  Carlo****Three
                  months ended**
                **June
                  30, 2007**
              
              **Six
                  months ended**
                **June
                  30, 2007**
              
              **Three
                  months ended**
                **June
                  30, 2007**
              
              **Six
                  months ended**
                **June
                  30, 2007****(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**Dividend
                  yield
              
              
              0%
              
              
              0%
              
              
              0%
              
              
              0%Expected
                  volatility
              
              
              31%
              
              
              31%
              
              
              29%-31%
              
              
              29%-31%Risk-free
                  interest
              
              
              5.10%
              
              
              4.63%
                  - 5.10%
              
              
              4.61%-4.95%
              
              
              4.61%-4.95%Expected
                  life (in years)
              
              
              3.5
              
              
              2
–
                  3.5
              
              
              N/A
              
              
              N/A
  In
        the
        three and six months ended June 30, 2006, no options were granted.
  As
        of
        June 30, 2007, approximately $2,609 of total unrecognized compensation cost
        related to stock-based compensation is expected to be recognized over a period
        of 3 years. The total unrecognized stock-based compensation cost to be
        recognized in future periods as of June 30, 2007 does not consider the effect
        of
        stock options that may be issued in subsequent periods.
  –
10
            –
   **NESS
            TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
            to Interim Condensed Consolidated Financial
            Statements**
 
 **U.S.
            dollars in thousands (except share and per share data)
            (Unaudited)**
  ***Note
        3: Commitments and Contingent Liabilities***
  a.
              Litigation
  We
        are
        periodically a party to routine litigation incidental to our business. 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 in a dispute with one of its clients,
        an
        Israeli insurance company, regarding the terms and conditions of a software
        development contract (the “Contract”). The insurance company claims that we have
        materially breached the Contract by not timely delivering the required software.
        The insurance company issued a contract termination notice on September 21,
        2006, collected autonomous guarantees provided by our subsidiary in the amount
        of approximately $2.1 million on November 23, 2006, and is demanding payment
        of
        amounts it claims to have paid so far of approximately $4.1 million (excluding
        VAT), as well as damages of approximately $18.7 million. Furthermore, this
        termination could affect our reputation and impair our relations with another
        client as well as with additional prospects for the software. We believe
        that we
        have not materially breached the Contract and that the delays were caused
        by the
        insurance company's actions. However, we do not contest the insurance company’s
        right to terminate the contract for convenience, subject to certain provisions
        including proper settlement of payments, as per the Contract. The Contract
        provides for mandatory arbitration, which commenced in January 2007, in which
        we
        intend to vigorously defend our position. The insurance company and our
        subsidiary have both issued their respective claims to the arbitrator, as
        well
        as responses to the other party’s claims. The total scope of the project is
        approximately $9.2 million. With respect to this contract, approximately
        $5.3
        million (excluding VAT) is included in our trade
        receivables and other accounts receivable and prepaid expenses. We can
        give no assurance at the present time of the exposure, if any, for these
        claims.
        We can give no assurance that our liability insurance policy, which has a
        cap of
        $5.0 million per claim, will cover such exposure. At this stage we can not
        estimate the result of the arbitration and we expect that the arbitration
        process may be protracted. If the outcome of the dispute is not in our favor
        and
        not in line with our position described above, it may adversely affect our
        financial position, results of operations and cash flows.
  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, 2006 and
        June
        30, 2007, is $37,336 and $39,657, respectively. We do not hold collateral
        to
        support guarantees except when deemed necessary.
  c.
              Liens
                  and charges
  To
        secure
        our liabilities, we and our subsidiaries recorded fixed and floating charges
        on
        our holdings in subsidiaries, and on our and our subsidiaries’ property and
        equipment and goodwill.
  –
11
            –
   **NESS
            TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
            to Interim Condensed Consolidated Financial
            Statements**
 
 **U.S.
            dollars in thousands (except share and per share data)
            (Unaudited)**
  ***Note
        4: Stockholders’ Equity***
  a.
              Total
                  comprehensive income:
  **Three
                  months ended**
                **June
                  30,**
              
              **Six
                  months ended**
                **June
                  30,****2006**
              
              **2007**
              
              **2006**
              
              **2007****(Unaudited)**
              
              **(Unaudited)**Net
                  income
              
              $
              5,950
              
              $
              4,163
              
              $
              12,287
              
              $
              9,878Foreign
                  currency translation adjustments, net
              
              
              6,350
              
              
              (60
              )
              
              3,535
              
              
              2,793Net
                  unrealized gains on available-for-sale marketable
                  securities
              
              
              39
              
              
              —
              
              
              (21
              )
              
              —Comprehensive
                  income
              
              $
              12,339
              
              $
              4,103
              
              $
              15,801
              
              $
              12,671
 
  b.
              Option
                  exercises:
  In
        the
        three and six months ended June 30, 2007, a total of 157,943 and 537,562
        options, respectively, were exercised into common stock for aggregate
        consideration of $1,430 and $2,730, respectively.
   ***Note
        5: 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.
  On
        January 1, 2007, we expanded our Managed Strategic Services (MSS) segment
        to
        include the non-financial services portions of Ness IBS (formerly Innova),
        a
        component of our “Other” segment, and we changed the name of MSS to Ness North
        America; and we moved our Ness UK organization from our “Other” segment to our
        Ness Europe segment. 2006 data for these three segments is reclassified to
        reflect the current organization of the segments.
  Our
        operating segments are:
  1. **Ness
        North America (Ness NA)** ,
        which
        includes India-based offshore services as well as system integration and
        application development and consulting services. Verticals served by this
        segment are: independent software vendors, life sciences and healthcare and
        others.
  2. **Technologies
        & Systems Group (TSG)** ,
        which
        includes system integration and application development, real-time systems
        development, consulting and outsourcing services for the defense, government
        and
        homeland security vertical, as well as systems for the telecommunications
        vertical.
  3. **Ness
        Europe** ,
        which
        includes system integration and application development, outsourcing and
        software and consulting for Eastern European and Western European customers,
        including near-shore services from Eastern Europe for Western European
        customers. Verticals served by this segment are: telecommunications and
        utilities, financial services and others.
  4. **Ness
        Israel** ,
        which
        includes system integration and application development, outsourcing, software
        and consulting and quality assurance and training for customers in Israel
        within
        the following verticals: financial services, government, life sciences and
        healthcare, manufacturing, retail, transportation and others.
   –
12
            –
  **NESS
            TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
            to Interim Condensed Consolidated Financial
            Statements**
 
 **U.S.
            dollars in thousands (except share and per share data)
            (Unaudited)**
  5. **Other** , which
        comprises operations representing, individually, less than 10% of our
        consolidated revenues and operating profit. These include our operations
        in Asia
        Pacific, the financial services component of Ness IBS division (formerly
        Innova)
        as well as the recently acquired NessPRO Spain (formerly Selesta España) and
        NessPRO Thailand (formerly AIM).
  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 and a portion of depreciation
        and
        amortization are not specifically allocated to specific segments as management
        believes they are not directly attributable to any specific segment.
        Accordingly, these expenses are categorized as “Unallocated Expenses” and
        adjusted against our total income from operations. Additionally, our management
        has determined that it is not practical to allocate certain identifiable
        assets
        by segment, when such assets are used interchangeably among the
        segments.
  The
        table
        below presents financial information for our five reportable
        segments:
 **Three
                    months ended June 30, 2006****Ness**
                  **NA**
                
                **TSG**
                
                **Ness**
                  **Europe**
                
                **Ness**
                  **Israel**
                
                **Other**
                
                **Unallocated**
                
                **Total****(Unaudited)**Revenues
                    from external customers
                
                $
                26,323
                
                $
                12,635
                
                $
                23,949
                
                $
                44,255
                
                $
                9,452
                
                
                —
                
                $
                116,614Operating
                    income (loss)
                
                $
                3,567
                
                $
                1,331
                
                $
                2,654
                
                $
                1,401
                
                $
                311
                
                $
                (1,790
                )
                $
                7,474Financial
                    income, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (577
                )Other
                    income, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                483Income
                    before taxes on income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                7,380
  **Three
                    months ended June 30, 2007****Ness**
                  **NA**
                
                **TSG**
                
                **Ness**
                  **Europe**
                
                **Ness**
                  **Israel**
                
                **Other**
                
                **Unallocated**
                
                **Total****(Unaudited)**Revenues
                    from external customers
                
                $
                26,313
                
                $
                13,212
                
                $
                24,350
                
                $
                49,169
                
                $
                12,718
                
                
                —
                
                $
                125,762Operating
                    income (loss)
                
                $
                2,126
                
                $
                1,404
                
                $
                1,737
                
                $
                2,557
                
                $
                815
                
                $
                (3,214
                )
                $
                5,425Financial
                    income, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (74
                )Other
                    income, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (62
                )Income
                    before taxes on income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                5,289
 **Six
                    months ended June 30, 2006****Ness**
                  **NA**
                
                **TSG**
                
                **Ness**
                  **Europe**
                
                **Ness**
                  **Israel**
                
                **Other**
                
                **Unallocated**
                
                **Total****(Unaudited)**Revenues
                    from external customers
                
                $
                47,121
                
                $
                27,419
                
                $
                45,035
                
                $
                88,314
                
                $
                15,767
                
                
                —
                
                $
                223,656Operating
                    income (loss)
                
                $
                6,151
                
                $
                3,192
                
                $
                4,336
                
                $
                4,537
                
                $
                412
                
                $
                (3,249
                )
                $
                15,379Financial
                    income, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (638
                )Other
                    income, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                444Income
                    before taxes on income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                15,185
  –
13
            –
   **NESS
            TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
            to Interim Condensed Consolidated Financial
            Statements**
 
 **U.S.
            dollars in thousands (except share and per share data)
            (Unaudited)**
  **Six
                    months ended June 30, 2007****Ness**
                  **NA**
                
                **TSG**
                
                **Ness**
                  **Europe**
                
                **Ness**
                  **Israel**
                
                **Other**
                
                **Unallocated**
                
                **Total****(Unaudited)**Revenues
                    from external customers
                
                $
                52,414
                
                $
                27,365
                
                $
                47,224
                
                $
                99,769
                
                $
                24,768
                
                
                —
                
                $
                251,540Operating
                    income (loss)
                
                $
                4,129
                
                $
                3,774
                
                $
                3,188
                
                $
                5,646
                
                $
                1,408
                
                $
                (6,004
                )
                $
                12,141Financial
                    income, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                315Other
                    income, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (56
                )Income
                    before taxes on income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                12,400
  Our
        total
        revenues are attributed to geographic areas based on the location of the
        end
        customer.
  The
        following presents total revenues for the three and six months ended June
        30,
        2006 and 2007, and long-lived assets as of December 31, 2006 and June 30,
        2007:
  **Three
                  months ended**
                **June
                  30,**
              
              **Six
                  months ended**
                **June
                  30,****2006**
              
              **2007**
              
              **2006**
              
              **2007****(Unaudited)**
              
              **(Unaudited)**Revenues
                  from sales to unaffiliated customers:Israel
              
              $
              52,577
              
              $
              63,307
              
              $
              105,502
              
              $
              123,940North
                  America
              
              
              34,989
              
              
              29,368
              
              
              63,315
              
              
              63,756Europe
              
              
              24,603
              
              
              27,407
              
              
              45,879
              
              
              52,708Asia
                  and the Far East
              
              
              4,445
              
              
              5,680
              
              
              8,960
              
              
              11,136$
              116,614
              
              $
              125,762
              
              $
              223,656
              
              $
              251,540
  **December
                    31,**
                  **2006**
                
                **June
                    30,2007****(Unaudited)**Long-lived
                    assets:Israel
                
                $
                111,634
                
                $
                110,839North
                    America
                
                
                81,755
                
                
                84,480Europe
                
                
                34,567
                
                
                35,666Asia
                    and the Far East
                
                
                10,377
                
                
                10,340$
                238,333
                
                $
                241,325
 –
14
            –






**NESS
          TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
          to Interim Condensed Consolidated Financial Statements**
 **U.S.
          dollars in thousands (except share and per share data)
          (Unaudited)**
  ***Note
        6: Income taxes***
  In
        June
        2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
        No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) - an
        interpretation of FASB Statement No. 109, “Accounting for Income Taxes.” The
        Interpretation addresses the determination of whether tax benefits claimed
        or
        expected to be claimed on a tax return should be recorded in the financial
        statements. Under FIN 48, we may recognize the tax benefit from an uncertain
        tax
        position only if it is more likely than not that the tax position will be
        sustained on examination by the taxing authorities, based on the technical
        merits of the position. The tax benefits recognized in the financial statements
        from such a position should be measured based on the largest benefit that
        has a
        greater than fifty percent likelihood of being realized upon ultimate
        settlement. FIN 48 also provides guidance on derecognizing, classification,
        interest and penalties on income taxes and accounting in interim periods,
        and
        requires increased disclosures. As a result of the adoption we recorded
        approximately $1.5 million of reserve as of January 1, 2007 for uncertain
        tax
        positions which, if recognized, would affect the effective tax rate. This
        amount
        includes accrued interest expense and penalties related to the unrecognized
        tax
        benefits. We recognize accrued interest related to unrecognized tax benefits
        in
        interest expenses. Penalties are recognized as a component of income tax
        expense.
  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 its 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 our estimated tax liabilities in the period the assessments
        are
        determined or resolved. Additionally, the jurisdictions in which our 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 2001.
  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 preliminary to foreign tax holidays, foreign subsidiaries
        with
        different tax rates, non-deductible expenses and deferred taxes on losses
        for
        which valuation allowance was provided.
  ***Note
        7: Basic and Diluted Net Earnings per Share***
  Basic
        net
        earnings per share are computed based on the weighted average number of shares
        of common stock outstanding during each period. Diluted net earnings per
        share
        are computed based on the weighted average number of shares of common stock
        outstanding during each period, plus dilutive potential shares of common
        stock
        considered outstanding during the period, in accordance with SFAS No. 128,
        “Earnings per Share.”
  The
        total
        weighted average number of shares related to the outstanding options and
        warrants excluded from the calculations of diluted net earnings per share,
        as
        they would have been anti-dilutive for all periods presented, was 2,381,833,
        1,081,955, 2,381,833 and 896,455 for the three months ended June 30, 2006
        and
        2007 and the six months ended June 30, 2006 and 2007, respectively.
  –
15
            –
  **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
        to Interim Condensed 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**
                **June
                  30,**
              
              **Six
                  months ended**
                **June
                  30,****2006**
              
              **2007**
              
              **2006**
              
              **2007****(Unaudited)**
              
              **(Unaudited)**Numerator:Net
                  income, numerator for basic and diluted per share
              
              $
              5,950
              
              $
              4,163
              
              $
              12,287
              
              $
              9,878Denominator:Weighted
                  average number of shares of common stock
              
              
              35,602
              
              
              39,041
              
              
              35,239
              
              
              38,957Effect
                  of dilutive securities:Employee
                  stock options and warrants
              
              
              1,116
              
              
              273
              
              
              1,096
              
              
              368Denominator
                  for diluted net earnings per share - weighted average assuming
                  exercise of
                  options
              
              
              36,718
              
              
              39,314
              
              
              36,335
              
              
              39,325
  ***Note
        8: Subsequent Events***
  On
        July
        26, 2007, our Board of Directors approved the exercise of an option granted
        to
        us on October 25, 2006 to purchase all of the outstanding shares of Selesta
        S.p.A., a privately-held IT software distribution and systems integration
        company based in Italy, and its wholly-owned subsidiary Selesta Security
        Systems
        S.p.A. (together - "Selesta Italia"), subject to the closing of a Share Purchase
        Agreement signed between the parties on March 19, 2007. The purchase price
        will
        be €9.0 million. An additional payment of up to €9.0 million will be made during
        2008 and 2009 based on the achievement of certain operating income milestones
        in
        2007 and 2008.
  –
16
            –
  ***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, 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 14, 2007, particularly under the headings “Disclosure Statement”
and “Risk Factors.”*
  **Overview**
  We
        are a
        global provider of information technology, or IT, services and end-to-end
        business solutions designed to help clients improve their competitiveness
        and
        effectiveness. End-to-end business solutions encompass all stages of a client’s
        business process and incorporate all technologies and IT services related
        to
        that process. Our portfolio of solutions and services includes outsourcing,
        system integration and application development, software and consulting,
        and
        quality assurance and training. The primary industries, or verticals, we
        serve
        include government and defense, financial services, life sciences and
        healthcare, telecommunications and utilities, and independent software vendors,
        or ISVs.
  We
        have
        operations in 16 countries across North America, Europe and Asia. 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, this global
        delivery model leverages our corporate knowledge and experience, intellectual
        property and global infrastructure to develop innovative solutions for clients
        across the geographies and verticals we serve. We complement this global
        delivery model with our offshore delivery capabilities to achieve meaningful
        cost reductions or other benefits for our clients.
  Our
        revenues increased to $125.8 million and $251.5 million for the three and
        six
        months ended June 30, 2007, from $116.6 million and $223.7 million for the
        three
        and six months ended June 30, 2006, respectively. Net income decreased to
        $4.2
        million and $9.9 million for the three and six months ended June 30, 2007,
        from
        $6.0 million and $12.3 million for the three and six months ended June 30,
        2006,
        respectively, primarily as a result of exceptional expenses related to our
        management transitions of $0.8 million and $2.6 million, respectively, and
        losses from our United Kingdom operations of $0.5 million and $1.3 million,
        respectively.
  Our
        revenue growth is attributable to a number of factors, including acquisitions
        we
        made, increases in the number and size of projects for existing clients,
        and the
        addition of new clients. Our client base is diverse, and we are not dependent
        on
        any single client. In the three and six months ended June 30, 2007, no client
        accounted for more than 5% of our revenues and our largest twenty clients
        together accounted for approximately 33% and 31% of our revenues, respectively.
        For the three and six months ended June 30, 2007, the percentage of our revenues
        derived in aggregate from agencies of the government of Israel was 14% and
        12%,
        respectively. Existing clients from prior years generated more than 85% of
        our
        revenues in the three and six months ended June 30, 2007.
  Our
        backlog as of June 30, 2007 was $650 million compared to $532 million as
        of June
        30, 2006. This $118 million increase in our backlog was due primarily to
        new
        bookings. 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 and six months ended June 30, 2007, the percentage of our revenues
        derived
        from clients in Israel was 50% and 49%, respectively; in North America, 23%
        and
        25%, respectively; in Europe, 22% and 21%, respectively; and in Asia and
        the Far
        East, 5% and 4%, respectively.
  –
17
            –
  For
        the
        three and six months ended June 30, 2007, we derived 44% and 43%, respectively,
        of our revenues from outsourcing (including offshore development); 31% and
        30%,
        respectively, from system integration and application development; 17% and
        17%,
        respectively, from software and consulting; 7% and 7%, respectively, from
        quality assurance and training; and 1% and 2%, respectively, from our other
        offerings.
  As
        of
        June 30, 2007, we had approximately 7,460 employees, including approximately
        6,505 IT professionals. Of the 7,460 employees, approximately 3,320 were
        in
        Israel, 2,310 were in India, 555 were in North America, 880 were in Europe
        and
        395 were in the Asia Pacific region.
  **Recent
        Developments**
  On
        May
        15, 2007, we acquired all of the outstanding shares of Advanced Industrial
        Management Company Limited (“AIM”), a privately-held software distributor in
        Thailand, for a purchase price of $2,400 in cash and related purchase costs
        of
        $192. Additional payments totaling $1,350 may be made in 2008 and 2009, should
        AIM achieve certain business goals by the end of 2007 and 2008, respectively.
        AIM employs 35 people and for the year 2006 was profitable. AIM became part
        of
        NessPRO, our software product distribution business, currently operating
        in
        Israel, Spain, Portugal, Singapore and Thailand. AIM is expected to strengthen
        our current operations in Asia Pacific. Upon completion of the acquisition,
        AIM
        changed its name to NessPRO Thailand Ltd.
  On
        July
        26, 2007, our Board of Directors approved the exercise of an option granted
        to
        us on October 25, 2006 to purchase all of the outstanding shares of Selesta
        S.p.A., a privately-held IT software distribution and systems integration
        company based in Italy, and its wholly-owned subsidiary Selesta Security
        Systems
        S.p.A. (together - "Selesta Italia"), subject to the closing of a Share Purchase
        Agreement signed between the parties on March 19, 2007. The purchase price
        will
        be €9.0 million. An additional payment of up to €9.0 million will be made during
        2008 and 2009 based on the achievement of certain operating income milestones
        in
        2007 and 2008. Selesta Italia employs about 110 people and will become part
        of
        NessPRO. Selesta Italia is expected to strengthen our current operations
        in
        Europe. Upon closing of the acquisition, Selesta Italia will change its name
        to
        NessPRO Italy.
  **Consolidated
        Results of Operations**
  The
        following table sets forth the items in our consolidated statements of income
        as
        a percentage of revenues for the periods presented.
  **Three
                  months ended**
                **June
                  30,**
              
              **Six
                  months ended**
                **June
                  30,****2006**
              
              **2007**
              
              **2006**
              
              **2007**Revenues
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %Cost
                  of revenues
              
              
              72.0
              
              
              71.3
              
              
              71.4
              
              
              71.3Gross
                  profit
              
              
              28.0
              
              
              28.7
              
              
              28.6
              
              
              28.7Operating
                  expenses:Selling
                  and marketing
              
              
              7.5
              
              
              7.4
              
              
              7.7
              
              
              7.5General
                  and administrative
              
              
              14.1
              
              
              17.0
              
              
              14.0
              
              
              16.4Total
                  operating expenses
              
              
              21.6
              
              
              24.4
              
              
              21.7
              
              
              23.9Operating
                  income
              
              
              6.4
              
              
              4.3
              
              
              6.9
              
              
              4.8Financial
                  income (expenses), net
              
              
              (0.5
              )
              
              (0.1
              )
              
              (0.3
              )
              
              0.1Other
                  income (expenses), net
              
              
              0.4
              
              
              0.0
              
              
              0.2
              
              
              0.0Income
                  before taxes on income
              
              
              6.3
              
              
              4.2
              
              
              6.8
              
              
              4.9Taxes
                  on income
              
              
              1.1
              
              
              0.9
              
              
              1.3
              
              
              1.0Equity
                  in net losses of an affiliate
              
              
              (0.1
              )
              
              —
              
              
              0.0
              
              
              —Net
                  income
              
              
              5.1
              
              
              3.3
              
              
              5.5
              
              
              3.9
  –
18
            –
  **Three
        Months Ended June 30, 2007 Compared to the Three Months Ended June 30,
        2006**
  The
        following table summarizes certain line items from our consolidated statements
        of income (dollars in thousands):
  **Three
                  months ended**
                **June
                  30,**
              
              **Increase****2006**
              
              **2007**
              
              **$**
              
              %Revenues
              
              $
              116,614
              
              $
              125,762
              
              
              9,148
              
              
              7.8Cost
                  of revenues
              
              
              83,981
              
              
              89,677
              
              
              5,696
              
              
              6.8Gross
                  profit
              
              $
              32,633
              
              $
              36,085
              
              
              3,452
              
              
              10.6Gross
                  margin
              
              
              28.0
              %
              
              28.7
              %
  ***Revenues***
  Our
        revenues increased from $116.6 million in the three months ended June 30,
        2006
        to $125.8 million in the three months ended June 30, 2007, representing an
        increase of $9.1 million, or 7.8%. Approximately $2.7 million of this increase
        was attributable to acquisitions. Of the $9.1 million increase in revenues,
        $4.7
        million represents growth in software and consulting services and $4.4 million
        represents growth in our other offerings, comprised of outsourcing and offshore
        engagements, system integration and application development, and quality
        assurance and training. There was no significant change in our billing rates,
        or
        prices, from the three months ended June 30, 2006 to the three months ended
        June
        30, 2007.
  ***Cost
        of revenues***
  Our
        cost
        of revenues, including salaries, wages and other direct and indirect costs,
        increased from $84.0 million in the three months ended June 30, 2006 to $89.7
        million in the three months ended June 30, 2007, representing an increase
        of
        $5.7 million, or 6.8%. Approximately $1.1 million of this increase was
        attributable to acquisitions, and $4.6 million was due to normal growth in
        our
        delivery staff needed to support our increased revenues.
  ***Gross
        Profit***
  Our
        gross
        profit (revenues less cost of revenues) increased from $32.6 million in the
        three months ended June 30, 2006 to $36.1 million in the three months ended
        June
        30, 2007, representing an increase of $3.5 million, or 10.6 %. The increase
        was
        primarily due to our increase in revenues. Approximately $1.6 million of
        the
        increase was attributable to acquisitions, and $1.9 million was related to
        our
        other revenue growth. Gross margin for the three months ended June 30, 2007
        was
        28.7%, compared to 28.0% in the three months ended June 30, 2006.
  The
        following table summarizes certain line items from our consolidated statements
        of income (dollars in thousands):
  **Three
                  months ended**
                **June
                  30,**
              
              **Increase**
                **(decrease)****2006**
              
              **2007**
              
              **$**
              
              **%**Selling
                  and marketing
              
              $
              8,733
              
              $
              9,293
              
              
              560
              
              
              6.4General
                  and administrative
              
              
              16,426
              
              
              21,367
              
              
              4,941
              
              
              30.1Total
                  operating expenses
              
              
              25,159
              
              
              30,660
              
              
              5,501
              
              
              21.9Operating
                  income
              
              $
              7,474
              
              $
              5,425
              
              
              (2,049
              )
              
              (27.4
              )
  ***Selling
        and marketing***
  Selling
        and marketing expenses increased from $8.7 million in the three months ended
        June 30, 2006 to $9.3 million in the three months ended June 30, 2007,
        representing an increase of $0.6 million, or 6.4%. This increase was due
        primarily to the inclusion of marketing and sales expenses from our
        acquisitions, representing $0.6 million.
  –
19
            –
  ***General
        and administrative***
  General
        and administrative expenses increased from $16.4 million in the three months
        ended June 30, 2006 to $21.4 million in the three months ended June 30, 2007,
        representing an increase of $4.9 million, or 30.1%. This increase was due
        primarily to exceptional expenses associated with our management transitions,
        representing $0.8 million, increases in salary expenses and related benefits,
        representing $0.6 million, doubtful accounts expenses in the three months
        ended
        June 30, 2007 compared to collection of doubtful debts in the three months
        ended
        June 30, 2006, representing $0.5 million, and acquisitions, representing
        $0.2
        million.
  ***Operating
        Income***
  Operating
        income decreased from $7.5 million in the three months ended June 30, 2006
        to
        $5.4 million in the three months ended June 30, 2007, representing a decrease
        of
        $2.0 million, or 27.4%. The decrease was mainly attributable to the increase
        in
        our general and administrative expenses.
  The
        following table summarizes certain line items from our consolidated statements
        of income (dollars in thousands):
  **Three
                  months ended**
                **June
                  30,**
              
              **Increase**
                **(Decrease)****2006**
              
              **2007**
              
              **$**
              
              **%**Operating
                  income
              
              $
              7,474
              
              $
              5,425
              
              
              (2,049
              )
              
              (27.4
              )Financial
                  expenses, net
              
              
              (577
              )
              
              (74
              )
              
              503
              
              
              (87.2
              )Other
                  income (expenses), net
              
              
              483
              
              
              (62
              )
              
              (545
              )
              
              N/AIncome
                  before taxes on income
              
              
              7,380
              
              
              5,289
              
              
              (2,091
              )
              
              (28.3
              )Taxes
                  on income
              
              
              1,340
              
              
              1,126
              
              
              (214
              )
              
              (16.0
              )Equity
                  in net losses of an affiliate
              
              
              (90
              )
              
              —
              
              
              90
              
              
              (100.0
              )Net
                  income
              
              $
              5,950
              
              $
              4,163
              
              
              (1,787
              )
              
              (30.0
              )
  ***Financial
        expenses, net***
  Financial
        expenses, net, decreased from $0.6 million in the three months ended June
        30,
        2006 to $0.1 million in the three months ended June 30, 2007, representing
        a
        decrease of $0.5 million. The decrease is primarily due to the increase in
        our
        average net cash from $2.0 million to $13.8 million, which allowed us to
        generate higher interest income, net, representing $0.2 million, along with
        the
        repayment of relatively expensive loans and favorable foreign currency exchange
        effects, together representing $0.3 million.
  ***Other
        income (expenses), net***
  Other
        income (expenses), net changed from income of $0.5 million in the three months
        ended June 30, 2006 to expenses of $0.1 million in the three months ended
        June
        30, 2007. This change was primarily due to consideration received for a third
        party transaction, representing $0.4 million, net of expenses, in the three
        months ended June 30, 2006.
  ***Taxes
        on income***
  Our
        taxes
        on income decreased from $1.3 million in the three months ended June 30,
        2006 to
        $1.1 million in the three months ended June 30, 2007, representing a decrease
        of
        $0.2 million, or 16.0%. This decrease is due primarily to the decrease in
        our
        income before taxes, partially offset by the utilization of tax loss
        carry-forwards in the United States and Israel. We
        expect our tax rate for the remainder of the year to be above 20%, due to
        the
        utilization of those tax loss carry-forwards by certain of our European
        subsidiaries and the changes in the tax rates in India.
  ***Equity
        in net losses of an affiliate***
  Equity
        in
        net losses of an affiliate changed from losses of $0.1 million in the three
        months ended June 30, 2006 to zero in the three months ended June 30, 2007,
        reflecting the fact that we no longer have the affiliate.
 –
20
            –
  ***Net
        Income***
  Net
        income decreased from $6.0 million in the three months ended June 30, 2006
        to
        $4.2 million in the three months ended June 30, 2007, representing a decrease
        of
        $1.8 million, or 30.0%. The decrease in net income was due primarily to our
        decrease in operating income of $2.0 million, partially offset by the decrease
        in taxes on income, of $0.2 million.
  **Six
        Months Ended June 30, 2007 Compared to the Six Months Ended June 30,
        2006**
  The
        following table summarizes certain line items from our consolidated statements
        of income (dollars in thousands):
  **Six
                  months ended**
                **June
                  30,**
              
              **Increase****2006**
              
              **2007**
              
              **$**
              
              **%**Revenues
              
              $
              223,656
              
              $
              251,540
              
              
              27,884
              
              
              12.5Cost
                  of revenues
              
              
              159,697
              
              
              179,353
              
              
              19,656
              
              
              12.3Gross
                  profit
              
              $
              63,959
              
              $
              72,187
              
              
              8,228
              
              
              12.9Gross
                  margin
              
              
              28.6
              %
              
              28.7
              %
  ***Revenues***
  Our
        revenues increased from $223.7 million in the six months ended June 30, 2006
        to
        $251.5 million in the six months ended June 30, 2007, representing an increase
        of $27.9 million, or 12.5%. Approximately $11.6 million of this increase
        was
        attributable to acquisitions, a significant portion of which was due to
        post-acquisition growth resulting from synergies with Ness. Of the $27.9
        million
        increase in revenues, $10.4 million represents growth in software and
        consulting, $7.8 million represent growth in outsourcing and offshore
        engagements and $9.7 million represents growth in our other offerings, comprised
        of system integration and application development and quality assurance and
        training. There was no significant change in our billing rates, or prices,
        from
        the six months ended June 30, 2006 to the six months ended June 30,
        2007.
  ***Cost
        of revenues***
  Our
        cost
        of revenues, including salaries, wages and other direct and indirect costs,
        increased from $159.7 million in the six months ended June 30, 2006 to $179.4
        million in the six months ended June 30, 2007, representing an increase of
        $19.7
        million, or 12.3%. Approximately $7.1 million of this increase was attributable
        to acquisitions, a significant portion of which was due to growth in our
        delivery staff needed to support post-acquisition revenue growth resulting
        from
        synergies with Ness, and $12.6 million was due to normal growth in our delivery
        staff needed to support our increased revenues.
  ***Gross
        Profit***
  Our
        gross
        profit (revenues less cost of revenues) increased from $64.0 million in the
        six
        months ended June 30, 2006 to $72.2 million in the six months ended June
        30,
        2007, representing an increase of $8.2 million, or 12.9%. The increase was
        primarily due to our increase in revenues. Approximately $4.5 million of
        the
        increase was attributable to acquisitions, a significant portion of which
        was
        due to post-acquisition revenue growth resulting from synergies with Ness,
        and
        $3.7 million was related to our other revenue growth. Gross margin for the
        six
        months ended June 30, 2007 was 28.7%, compared to 28.6% in the six months
        ended
        June 30, 2006. This increase in gross margin was not significant.
  –
21
            –
  The
        following table summarizes certain line items from our consolidated statements
        of income (dollars in thousands):
  **Six
                  months ended**
                **June
                  30,**
              
              **Increase**
                **(decrease)****2006**
              
              **2007**
              
              **$**
              
              **%**Selling
                  and marketing
              
              $
              17,224
              
              $
              18,765
              
              
              1,541
              
              
              8.9General
                  and administrative
              
              
              31,356
              
              
              41,281
              
              
              9,925
              
              
              31.7Total
                  operating expenses
              
              
              48,580
              
              
              60,046
              
              
              11,466
              
              
              23.6Operating
                  income
              
              $
              15,379
              
              $
              12,141
              
              
              (3,238
              )
              
              (21.1
              )
  ***Selling
        and marketing***
  Selling
        and marketing expenses increased from $17.2 million in the six months ended
        June
        30, 2006 to $18.8 million in the six months ended June 30, 2007, representing
        an
        increase of $1.5 million, or 8.9%. This increase was due primarily to the
        inclusion of marketing and sales expenses from our acquisitions, representing
        $1.2 million.


***General
        and administrative***
  General
        and administrative expenses increased from $31.4 million in the six months
        ended
        June 30, 2006 to $41.3 million in the six months ended June 30, 2007,
        representing an increase of $9.9 million, or 31.7%. This increase was due
        primarily to exceptional expenses associated with our management transitions,
        representing $2.6 million, our acquisitions, representing $1.9 million,
        increases in salary expenses and related benefits, representing $0.9
        million, and doubtful accounts expenses in the six months ended June 30,
        2007
        compared to collection of doubtful debts in the six months ended June 30,
        2006,
        representing $0.5 million.
  ***Operating
        Income***
  Operating
        income decreased from $15.4 million in the six months ended June 30, 2006
        to
        $12.1 million in the six months ended June 30, 2007, representing a decrease
        of
        $3.2 million, or 21.1%. The decrease was mainly attributable to the increase
        in
        our general and administrative expenses.
  The
        following table summarizes certain line items from our consolidated statements
        of income (dollars in thousands):
 **Six months ended**
                  **June 30,**
                
                **Increase**
                  **(Decrease)****2006**
                
                **2007**
                
                $
                
                %Operating
                    income
                
                $
                15,379
                
                $
                12,141
                
                
                (3,238
                )
                
                (21.1
                )Financial
                    income (expenses), net
                
                
                (638
                )
                
                315
                
                
                953
                
                
                N/AOther
                    income (expenses), net
                
                
                444
                
                
                (56
                )
                
                (500
                )
                
                N/AIncome
                    before taxes on income
                
                
                15,185
                
                
                12,400
                
                
                (2,785
                )
                
                (18.3
                )Taxes
                    on income
                
                
                2,808
                
                
                2,522
                
                
                (286
                )
                
                (10.2
                )Equity
                    in net losses of an affiliate
                
                
                (90
                )
                
                —
                
                
                90
                
                
                (100.0
                )Net
                    income
                
                $
                12,287
                
                $
                9,878
                
                
                (2,409
                )
                
                (19.6
                )
  ***Financial
        income (expenses), net***
  Financial
        income (expenses), net, changed from expenses of $0.6 million in the six
        months
        ended June 30, 2006 to income of $0.3 million in the six months ended June
        30,
        2007, representing an increase of $1.0 million. The increase is primarily
        due to
        the increase in our average net cash from $13.1 million to $21.9 million,
        which
        allowed us to generate higher interest income, net, representing $0.4 million,
        along with the repayment of relatively expensive loans and favorable foreign
        currency exchange effects, together representing $0.6 million.
  ***Other
        income (expenses), net***
  Other
        income (expenses), net changed from income of $0.4 million in the six months
        ended June 30, 2006 to expenses of $0.1 million in the six months ended June
        30,
        2007. This change was primarily due to consideration received
        for a third party transaction, representing $0.4 million, net of expenses,
        in
        the six months ended June 30, 2006.
  –
22
            –
  ***Taxes
        on income***
  Our
        taxes
        on income decreased from $2.8 million in the six months ended June 30, 2006
        to
        $2.5 million in the six months ended June 30, 2007, representing a decrease
        of
        $0.3 million, or 10.2%. This decrease is due primarily to the decrease in
        our
        income before taxes, partially offset by the utilization of tax loss
        carry-forwards in the United States and Israel.
  ***Equity
        in net losses of an affiliate***
  Equity
        in
        net losses of an affiliate changed from losses of $0.1 million in the six
        months
        ended June 30, 2006 to zero in the six months ended June 30, 2007, reflecting
        the fact that we no longer have the affiliate.
  ***Net
        Income***
  Net
        income decreased from $12.3 million in the six months ended June 30, 2006
        to
        $9.9 million in the six months ended June 30, 2007, representing a decrease
        of
        $2.4 million, or 19.6%. The decrease in net income was due primarily to our
        decrease in operating income of $3.2 million, partially offset by the increase
        in financial income (expenses), net, of $0.9 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.
  On
        January 1, 2006 we completed the reorganization of our operations into operating
        segments. Our chief operating decision-maker is our chief executive officer,
        who
        evaluates our performance and allocates resources based on segment revenues
        and
        operating profit.
  On
        January 1, 2007, we expanded our Managed Strategic Services (MSS) segment
        to
        include the non-financial services portions of Ness IBS (formerly Innova),
        a
        component of our “Other” segment, and we changed the name of MSS to Ness North
        America; and we moved our Ness UK organization from our “Other” segment to our
        Ness Europe segment. 2006 data for these three segments is reclassified to
        reflect the current organization of the segments.
  Our
        operating segments are:
  1.
              **Ness
                  North America**,
                  which includes India-based offshore services as well as system
                  integration
                  and application development and consulting services. Verticals
                  served by
                  this segment are: independent software vendors, life sciences and
                  healthcare and others.
  2.
              **Technologies
                  & Systems Group**,
                  which includes system integration and application development,
                  real-time
                  systems development, consulting and outsourcing services for the
                  defense,
                  government and homeland security vertical, as well as systems for
                  the
                  telecommunications vertical.
  3.
              **Ness
                  Europe**,
                  which includes system integration and application development,
                  outsourcing
                  and software and consulting for Eastern European and Western European
                  customers, including near-shore services from Eastern Europe for
                  Western
                  European customers. Verticals served by this segment are:
                  telecommunications and utilities, financial services and
                  others.
  –
23
            –
  4.
              **Ness
                  Israel**,
                  which includes system integration and application development,
                  outsourcing, software and consulting and quality assurance and
                  training
                  for customers in Israel within the following verticals: financial
                  services, government, life sciences and healthcare, manufacturing,
                  retail,
                  transportation and others.
  5.
              **Other**,
                  which comprises operations representing, individually, less than
                  10% of
                  our consolidated revenues and operating profit. These include our
                  operations in Asia Pacific, the financial services component of
                  Ness IBS
                  division (formerly Innova) as well as the recently acquired NessPRO
                  Spain
                  (formerly Selesta España) and NessPRO Thailand (formerly
                  AIM).
  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 and a portion of depreciation
        and
        amortization are not specifically allocated to specific segments as management
        believes they are not directly attributable to any specific segment.
        Accordingly, these expenses are categorized as “Unallocated Expenses” and
        adjusted against our total income from operations. Additionally, our management
        has determined that it is not practical to allocate certain identifiable
        assets
        by segment, when such assets are used interchangeably among the
        segments.
  The
        table
        below presents financial information for our five reportable segments (dollars
        in thousands):
 **Three months ended**
                
                **Six months ended**
                
                **Three months ended****June 30,**
                
                **June 30,**
                
                **September 30,**
                
                **December 31,****2006**
                **2007**
                
                **2006**
                **2007**
                
                **2006**
                
                **2006****Segment
                    Data:**
                
                **(unaudited)**
                
                **(unaudited)**
                
                **(unaudited)**
                
                **(unaudited)****Revenues
                    from external customers:**Ness
                    North America
                
                $
                26,323
                
                $
                26,313
                
                $
                47,121
                
                $
                52,414
                
                $
                22,627
                
                $
                23,611Technologies
                    & Systems Group (TSG)
                
                
                12,635
                
                
                13,212
                
                
                27,419
                
                
                27,365
                
                
                14,538
                
                
                14,434Ness
                    Europe
                
                
                23,949
                
                
                24,350
                
                
                45,035
                
                
                47,224
                
                
                22,015
                
                
                31,031Ness
                    Israel
                
                
                44,255
                
                
                49,169
                
                
                88,314
                
                
                99,769
                
                
                50,652
                
                
                51,043Other
                
                
                9,452
                
                
                12,718
                
                
                15,767
                
                
                24,768
                
                
                9,303
                
                
                11,408$
                116,614
                
                $
                125,762
                
                $
                223,656
                
                $
                251,540
                
                $
                119,135
                
                $
                131,527**Operating
                    Income (Loss):**Ness
                    North America
                
                $
                3,567
                
                $
                2,126
                
                $
                6,151
                
                $
                4,129
                
                $
                2,653
                
                $
                2,335Technologies
                    & Systems Group (TSG)
                
                
                1,331
                
                
                1,404
                
                
                3,192
                
                
                3,774
                
                
                2,275
                
                
                1,462Ness
                    Europe
                
                
                2,654
                
                
                1,737
                
                
                4,336
                
                
                3,188
                
                
                1,364
                
                
                2,255Ness
                    Israel
                
                
                1,401
                
                
                2,557
                
                
                4,537
                
                
                5,646
                
                
                4,621
                
                
                4,996Other
                
                
                311
                
                
                815
                
                
                412
                
                
                1,408
                
                
                589
                
                
                (351
                )Unallocated
                    Expenses
                
                
                (1,790
                )
                
                (3,214
                )
                
                (3,249
                )
                
                (6,004
                )
                
                (1,342
                )
                
                (2,625
                )$
                7,474
                
                $
                5,425
                
                $
                15,379
                
                $
                12,141
                
                $
                10,160
                
                $
                8,072
  **Liquidity
        and Capital Resources**
  ***Overview***
  As
        of
        June 30, 2007, we had cash, cash equivalents, restricted cash and short-term
        bank deposits of $33.8 million compared to $48.7 million as of December 31,
        2006. 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 in their respective
        geographies 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.
  –
24
            –
  ***Cash
        Flows***
  The
        following table summarizes our cash flows for the periods presented (dollars
        in
        thousands):
  **Six months ended**
                **June 30,****2006**
              
              **2007**Net
                  cash used in operating activities
              
              $
              (19,131
              )
              $
              (5,806
              )Net
                  cash used in investing activities
              
              
              (4,210
              )
              
              (14,592
              )Net
                  cash provided by financing activities
              
              
              24,481
              
              
              4,347Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              (1,898
              )
              
              2,100Decrease
                  in cash and cash equivalents
              
              
              (758
              )
              
              (13,951
              )Cash
                  and cash equivalents at the beginning of the period
              
              
              33,579
              
              
              46,675Cash
                  and cash equivalents at the end of the period
              
              $
              32,821
              
              $
              32,724
 
 *Six
        months ended June 30, 2007 compared to the six months ended June 30,
        2006*
  Net
        cash
        used in operating activities was $5.8 million in the six months ended June
        30,
        2007, compared to $19.1 million in the six months ended June 30, 2006. The
        major
        factor contributing to the change was tax payments in the six months ended
        June
        30, 2006 to the Israeli Tax Authority related to prior periods for which
        there
        was no corresponding amount in the six months ended June 30, 2007, representing
        $10.3 million.
  Net
        cash
        used in investing activities was $14.6 million in the six months ended June
        30,
        2007, compared with $4.2 million in the six months ended June 30, 2006. The
        major factors contributing to the increase were a decrease in proceeds from
        the
        maturity of short term bank deposits and the sale of marketable securities
        from
        an aggregate amount of $18.9 million in the first six months of 2006 to an
        aggregate amount of $1.0 million in the first six months of 2007, offset
        by a
        decrease in payments in respect of acquisitions and contingent consideration,
        representing $6.3 million, and receipt of the remaining net proceeds from
        the
        sale of our interest in dbMotion, representing $1.9 million.
  Net
        cash
        provided by financing activities was $4.3 million in the six months ended
        June
        30, 2007, compared with $24.5 million in the six months ended June 30, 2006.
        The
        decrease was primarily due to a lower utilization of short-term bank loans
        and
        credit, representing $16.4 million, and a decrease in the exercise of options,
        representing $3.7 million. In the six months ended June 30, 2006 and 2007,
        cash
        flows from the exercise of options amounted to $6.0 million and $2.3 million,
        respectively.
  The
        effect of exchange rate changes on cash and cash equivalents was $2.1 million
        in
        the six months ended June 30, 2007, compared to ($1.9) million in the six
        months
        ended June 30, 2006. The change was primarily due to the effect of translation
        adjustments on trade and unbilled receivables, representing $4.7 million
        in
        aggregate, offset by long-term inter-company balances, representing $0.8
        million.
  ***Long-term
        and Short-term Debt***
  At
        June
        30, 2007, our Israeli subsidiaries had long-term and short-term bank borrowings
        of $8.0 million consisting of various long-term notes denominated in NIS
        (linked
        to index) aggregating to $4.3 million and on-call borrowings aggregating
        to $3.7
        million. The long-term notes bear interest rates ranging from approximately
        6.50% to 7.55% and a weighted average interest rate of approximately 6.96%,
        with
        maturities of up to one year and a half. These aggregate bank borrowings
        included $3.8 million from Israel Discount Bank, with interest rates of
        approximately 6.96% and maturities of up to one year and a half; and $0.5
        million from Mizrahi Bank, with interest rates of approximately 7.0% and
        maturities of two months. The on-call borrowings bear interest rate of
        4.30%.
  Our
        only
        material indebtedness is amounts owed by Ness A.T. Ltd., one of our
        subsidiaries, to Israel Discount Bank. The relevant debt instruments contain
        customary restrictive covenants relating to the borrower, including the
        following:
   –
25
            –
  ·
              a
                  negative pledge;
 ·
              stockholders’
                  equity must not be less than 30% of its total assets;
                  and
 ·
              limitations
                  on merging or transferring assets.
  As
        of
        June 30, 2007, we are in compliance and expect to remain in compliance with
        all
        of our covenants. Our failure to comply with these 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.
  At
        June
        30, 2007, our non-Israeli subsidiaries had short-term borrowings denominated
        in
        dollars and Euros aggregating to $4.2 million with interest rates ranging
        from
        approximately 6.50% to 9.75%.
  We
        anticipate funding the global growth of our NessPRO line of business, which
        sells enterprise software licenses of third-party software vendors to corporate
        clients along with related implementation, customization and support services,
        as well as other planned acquisitions, through a credit facility from commercial
        banks. Funds advanced from the credit facility will convert automatically
        to
        long-term loans, with an interest rate of approximately 7% and a term of
        up to
        seven years.
  ***Anticipated
        Needs***
  We
        intend
        to fund future growth through future cash flow from operations, available
        bank
        borrowings and the remaining net proceeds of our initial public offering.
        We
        believe the remaining balance of the proceeds of our initial public offering,
        together with 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 1 to the consolidated
        financial statements presented in our 2006 Annual Report on Form 10-K, filed
        with the SEC on March 14, 2007, 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. As
        discussed below and in Note 6 to the condensed consolidated financial
        statements, we adopted the provisions of FIN 48, “Accounting for Uncertainty in
        Income Taxes” on January 1, 2007. Other than this change, there have been no
        significant changes in our critical accounting estimates during the first
        six
        months of 2007.
  In
        the
        ordinary course of business there is inherent uncertainty in quantifying
        our
        income tax positions. We assess our income tax positions and record tax benefits
        for all years subject to examination based upon management’s evaluation of the
        facts, circumstances, and information available at the reporting date. For
        those
        tax positions where it is more likely than not that a tax benefit will be
        sustained, we have recorded the largest amount of tax benefit with a greater
        than 50 percent likelihood of being realized upon ultimate settlement with
        a
        taxing authority that has full knowledge of all relevant information. For
        those
        income tax positions where it is not more likely than not that a tax benefit
        will be sustained, no tax benefit has been recognized in the financial
        statements. Where applicable, associated interest has also been
        recognized.
  ***Contractual
        Obligations***
  In
        our
        2006 Annual Report on Form 10-K, filed with the SEC on March 14, 2007, we
        disclosed contractual obligations. At June 30, 2007, there have been no material
        changes to our contractual obligations.
  –
26
            –
  **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 2006 Annual Report on Form 10-K filed with the
        SEC on March 14, 2007. Ness is under no obligation to, and expressly disclaims
        any obligation to, update or alter its forward-looking statements, whether
        as a
        result of such changes, new information, subsequent events or
        otherwise.
  ***Item
        3. Quantitative and Qualitative Disclosure about Market
        Risk***
  We
        do not
        engage in trading market-risk 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. We have not purchased
        options or entered into swaps or forward or futures contracts and do not
        use
        derivative financial instruments for speculative trading purposes.
  We
        have
        direct operations in 16 different countries and commercial relationships
        in many
        other parts of the world. Our foreign operations contract with clients in
        their
        applicable local currencies or dollars. As a result, we are subject to adverse
        movements in foreign currency exchange rates in those countries where we
        conduct
        business. In order to minimize the effect of such movements, we entered into
        certain forward foreign currency exchange contracts to hedge our exposure
        against foreign currencies which differ from the local functional currencies.
        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.
  In
        the
        future, we may be subject to interest rate risk on our investments, 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 Securities
        Exchange Act of 1934, as amended). 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 are effectively designed to ensure that
        information required to be disclosed by us in the reports that we file or
        submit
        under the Securities Exchange Act of 1934, as amended, is recorded, processed,
        summarized and reported within the time periods specified in the Securities
        and
        Exchange Commission’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**
  As
        of the
        end of the period covered by this report, there were no significant changes
        in
        our internal controls over financial reporting or in other factors that could
        significantly affect these controls.
  –
28
            –
  **PART
        II – OTHER INFORMATION**
  ***Item
        1. Legal Proceedings***
  One
        of
        our Israeli subsidiaries is currently in a dispute with one of its clients,
        an
        Israeli insurance company, regarding the terms and conditions of a software
        development contract (the “Contract”). The insurance company claims that we have
        materially breached the Contract by not timely delivering the required software.
        The insurance company issued a contract termination notice on September 21,
        2006, collected autonomous guarantees provided by our subsidiary in the amount
        of approximately $2.1 million on November 23, 2006, and is demanding payment
        of
        amounts it claims to have paid so far of approximately $4.1 million (excluding
        VAT), as well as damages of approximately $18.7 million. Furthermore, this
        termination could affect our reputation and impair our relations with another
        client as well as with additional prospects for the software. We believe
        that we
        have not materially breached the Contract and that the delays were caused
        by the
        insurance company's actions. However, we do not contest the insurance company’s
        right to terminate the contract for convenience, subject to certain provisions
        including proper settlement of payments, as per the Contract. The Contract
        provides for mandatory arbitration, which commenced in January 2007, in which
        we
        intend to vigorously defend our position. The insurance company and our
        subsidiary have both issued their respective claims to the arbitrator, as
        well
        as responses to the other party’s claims. The total scope of the project is
        approximately $9.2 million. With respect to this contract, approximately
        $5.3
        million (excluding VAT) is included in our trade
        receivables and other accounts receivable and prepaid expenses. We can
        give no assurance at the present time of the exposure, if any, for these
        claims.
        We can give no assurance that our liability insurance policy, which has a
        cap of
        $5.0 million per claim, will cover such exposure. At this stage we can not
        estimate the result of the arbitration and we expect that the arbitration
        process may be protracted. If the outcome of the dispute is not in our favor
        and
        not in line with our position described above, it may adversely affect our
        financial position, results of operations and cash flows.
  ***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 14, 2007.
  ***Item
        2. Unregistered Sales of Equity Securities and Use of
        Proceeds***
  Not
        applicable.
  ***Item
        3. Defaults upon Senior Securities.***
  None.
  ***Item
        4. Submission of Matters to a Vote of Security
        Holders***
  The
        following matters were submitted to a vote of the stockholders at our 2007
        Annual Meeting of Stockholders held on June 13, 2007 (the “Annual Meeting”): (1)
        election of directors, (2) ratification of the appointment of Kost Forer
        Gabbay
& Kasierer, a member of Ernst & Young Global, as our independent
        registered public accounting firm for the year ending December 31, 2006 and
        (3)
        approval of the 2007 Stock Option Plan. The number of shares of common stock
        outstanding and eligible to vote as of the record date of April 19, 2007
        was
        39,021,540.
  –
29
            –
  Each
        of
        these matters was approved by the requisite vote of our stockholders. Set
        forth
        below is the number of votes cast for, against or withheld, as well as the
        number of abstentions and broker non-votes as to the respective matters,
        including a separate tabulation with respect to each nominee for
        director:
  **Nominee**
                **For**
                **Withheld**Aharon
                    Fogel
                33,353,801
                894,691Sachi
                    Gerlitz
                33,908,335
                340,157Dr.
                    Henry Kressel
                33,906,345
                342,147Morris
                    Wolfson
                32,453,006
                1,795,486Dr.
                    Satyam C. Cherukuri
                33,907,835
                340,657Dan
                    S. Suesskind
                33,906,095
                342,397Dr.
                    Kenneth A. Pickar
                33,908,335
                340,157**Proposal**
                **For**
                **Against**
                **Abstain**
                **Broker**
                  **Non-Vote**2.
                    Ratification of Auditors
                33,482,743
                758,574
                7,174
                03.
                    Approval of 2007 Stock Option Plan
                20,660,101
                5,436,931
                47,958
                8,103,503
  ***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 Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.31.2
              
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.32.1
              
              Certification
                  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
              
              Certification
                  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
  –
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:August
                    8,
                    2007
                By:
                /s/
                    ISSACHAR
                    GERLITZIssachar
                    GerlitzChief
                    Executive Officer, President, Director(Principal
                    executive officer)Date:  
                     August 8, 2007
                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 Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.31.2
              
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.32.1
              
              Certification
                  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
              
              Certification
                  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 –
32
            –